UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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x☒ | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 20182021
OR
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o☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file number 1-4881
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AVON PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
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| New York | | 13-0544597 |
(State or other jurisdiction of
incorporation or organization)
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Identification No.)
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Building 6, Chiswick Park, London W4 5HRNunn Mills Road, Northampton NN1 5PA
United Kingdom
(Address of principal executive offices)
+44-1604-23242544-1904-232425
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | Trading Symbol(s): | Name of each exchange on which registered |
Common stock (par value $.25)None | None | New York Stock ExchangeNone |
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes xo No ox
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ox No xo
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Note: The registrant is a voluntary filer of reports required to be filed by certain companies under Sections 13 or 15(d) of the Securities Exchange Act of 1934.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller
reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. | | | | | | | | | | | | | | | | | | | | |
| Large accelerated filer | | o | | Accelerated filer | | o |
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| Non-accelerated filer | | x | | Smaller reporting company | | ☐ |
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Large accelerated filer | | x | | Accelerated filer | | o |
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Non-accelerated filer | | o
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| | | | Emerging growth company | | o☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o☐ No x
The aggregate market value of voting and non-voting Common Stock (par value $.25) held by non-affiliates at June 30, 20182021 (the last business day of our most recently completed second quarter) was $0.7 billion.nil.
The number of shares of Common Stock (par value $.25)$.01) outstanding at January 31, 2019,30, 2022, was 442,426,520101.34
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Documents Incorporated by Reference
Part III - PortionsThe registrant meets the conditions sets forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Form with the registrant’s Proxy Statement relating to the 2019 Annual Meeting of Shareholders.reduced disclosure format
Table of Contents
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| Item | | Page |
Item | | PagePart I |
Part I | | |
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| Item 1 | | |
| Item 1A | | |
| Item 1B | | |
| Item 2 | | |
| Item 3 | | |
| Item 4 | | |
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| Part II |
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| Item 5 | | |
| Item 6 | [Reserved] | | |
| Item 7 | | |
| Item 7A | | |
| Item 8 | | |
| Item 9 | | |
| Item 9A | | |
| Item 9B | | |
| Item 9C | | |
Part III | | |
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| Item 10 | | |
| Item 11 | | |
| Item 12 | | |
| Item 13 | | |
| Item 14 | | |
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| Part IV |
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| Item 15 | | |
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| Item 16 | | |
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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 & Grow and Avon Integration plans, stabilization strategies, digital 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.Representatives, and the anticipated impact of the evolving COVID-19 pandemic and related responses from governments and private sector participants on the Company, its supply chain, third-party suppliers, project development timelines, costs, revenue, margins, liquidity and financial condition, the anticipated timing, speed and magnitude of recovery from these COVID-19 pandemic related impacts and the Company’s planned actions and responses to this pandemic. 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:
•the COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, manufacturing, supply chains and distribution systems. There is uncertainty around the duration and breadth of the COVID-19 pandemic and the effectiveness of responses to it, including as a result of the emergence of new variants, the rollout of vaccination campaigns and uncertainty as to whether existing vaccines and treatments will be effective against these new variants. As a result, we cannot reasonably estimate at this time the continued impact, that COVID-19 may have on our business or operations. The extent to which COVID-19 impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact including on financial markets or otherwise. See also "Item 1A. Risk Factors—The COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, manufacturing, supply chains and distribution systems, and we have experienced and expect to continue to experience unpredictable negative effects associated with the pandemic."
•general economic and business conditions in our markets, including social, economic and political uncertainties, such as the ongoing military conflict between Ukraine and Russia or elsewhere, and any existing and potential sanctions, restrictions or responses to such conditions imposed by other markets in which we operate. See also “Item 1A. Risk Factors—Risks Related to Our International Operations— Our ability to conduct business in our international markets may be affected by economic, political, legal, tax and regulatory risks” and “Item 1A. Risk Factors—Risks Related to Our International Operations—The ongoing military conflict between Ukraine and Russia may have a material adverse effect on our business, financial condition and results of operations”;
•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 Open Up & Grow and Avon Integration plans, 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, digital 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 & Grow and Avon Integration plans, stabilization strategies, cost savings initiatives, or restructuring and other initiatives;
•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, Russia and the United Kingdom;
•our ability to improve working capital and effectively manage doubtful accounts and inventory and implement initiatives to reduce inventory levels, including through our recent structural reset of inventory processes, and 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 economic, 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, environmental rules and regulations in areas related to our activities, including with regard to climate change, 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;
•disruptions to our manufacturing operations, supply chains and distribution systems;
•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 securitycybersecurity 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 securitycybersecurity 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;
our ability to repurchase the series C preferred stock in connection with a change of control; and
•the risk of an adverse outcome in any material pending and future litigation or with respect to the legal status of Representatives.Representatives; and,
•other risks and uncertainties include the possibility that the expected synergies and value creation from the Transaction (as defined in “Item 7 Management’s Discussion And Analysis Of Financial Condition And Results Of Operations—Overview—Merger with Natura Cosméticos S.A.”) will not be realized or will not be realized within the expected time period; the risk that the businesses of the Company and Natura &Co Holding will not be integrated successfully; disruption from the Transaction making it more difficult to maintain business and operational relationships; the possibility that the intended accounting and tax treatments of the Transaction are not achieved; the effect of the consummation of the Transaction 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 Form 10-K for the year ended December 31, 2018,2021, and other reports and documents we file with the SEC. We undertake no obligation to update any such forward-looking statements.
PART I
ITEM 1. BUSINESS
(U.S. dollars in millions, except per share data)
When used in this report, the terms "Avon," "Company," "we," "our" or "us" mean, unless the context otherwise indicates, Avon Products, Inc. and its majority and wholly owned subsidiaries.
General
We are a global manufacturer and marketer of beauty and related products. We commenced operations in 1886 and were incorporated in the State of New York on January 27, 1916. We conduct our business in the highly competitive beauty industry and compete against other consumer packaged goods ("CPG") and direct-selling companies to create, manufacture and market beauty and non-beauty-related products. Our product categories are Beauty and Fashion & Home. Beauty consists of skincare, fragrance and color (cosmetics). Fashion & Home consists of fashion jewelry, watches, apparel, footwear, accessories, gift and decorative products, housewares, entertainment and leisure products, children’s products and nutritional products.
Our business is conducted primarily in one channel, direct selling. Ourselling, and our strategy is to expand to omnichannel. Since our merger with Natura Cosméticos S.A., we have updated our reportable segments areto align with how the business is currently operated and managed. We have identified two reportable segments based on geographic operations inoperations: Avon International and Avon Latin America. In prior periods, the Company reported four regions:segments: Europe, Middle East & Africa;and Africa, Asia Pacific, South Latin America;America and North Latin America; and Asia Pacific.America. Financial information relating to our reportable segments is included in "Segment Review" within Management’s Discussion and Analysis of Financial Condition and Results of Operations, which we refer to in this report as "MD&A," on pages 27 through 54 of this Annual Report on Form 10-K for the year ended December 31, 2018, which we refer to in this report as our "2018 Annual Report,", and in Note 15,14, Segment Information, to the Consolidated Financial Statements on pages F-50 through F-52 of our 2018 Annual Report.included herein. We refer to each of the Notes to the Consolidated Financial Statements in this 2018 Annual Reportincluded herein as a "Note." Information about geographic areas is included in Note 15,14, Segment Information on pages F-50 through F-52 of our 2018 Annual Report.to the Consolidated Financial Statements included herein. All of our consolidated revenue is derived from operations of subsidiaries outside of the United States ("U.S.").
In December 2015,May 2019 we and Natura Cosméticos S.A., a Brazilian corporation (sociedade anônima) ("Natura Cosméticos"), entered into definitive agreementsan Agreement and Plan of Mergers (the "Merger Agreement"), pursuant to which the Company and Natura Cosméticos were acquired by and became wholly-owned subsidiaries of Natura &Co, Holding S.A., a Brazilian corporation (sociedade anônima) ("Natura &Co") in January 2020. Natura has stock listed on the B3 S.A. - Brasil, Bolsa, Balcão stock exchange in Brazil and American Depositary Shares traded on the New York Stock Exchange ("NYSE"). With the completion of this transaction, our common stock was removed from trading on the NYSE, and we became a privately held company.
COVID-19
A novel strain of coronavirus (COVID-19) was first identified in Wuhan, China in December 2019, and subsequently declared a pandemic by the World Health Organization. Due to the uncertain and rapidly evolving nature of current conditions around the world, the impacts of COVID-19 most of which are beyond the Company’s control, continue to evolve, and the outcome is uncertain. We are therefore unable to predict accurately the impact that COVID-19 will have on our business going forward.
In 2020, the most significant impact of the COVID-19 pandemic was felt during the second quarter of 2020, as many markets were subject to lockdown restrictions to varying degrees, which limited our ability to recruit and enroll Representatives, operate manufacturing facilities and distribution centers and to process and deliver orders. The pandemic primarily resulted in reduced revenue, which in turn impacted profitability and cash generation. The third quarter of 2020 showed signs of recovery in most markets. The fourth quarter of 2020 has again been impacted by the new lockdown measures imposed in parts of Europe, although not to the extent felt during the second quarter of 2020 as we were able to continue normal operations in our manufacturing facilities and distribution centers.
In 2021, the economic disruption caused by the COVID-19 pandemic has resulted in inflationary pressures on the cost of certain raw materials used in the production of essential items due to the increased demand for these inputs worldwide. These inflationary pressures have been compounded by disruptions in global supply chains and climate events that hit electricity generation globally, among others. Moreover, novel strains and variants of COVID-19 emerged in 2021, and the rollout of vaccination programs worldwide have compromised the ability of certain countries to effectively contain the spread and the toll of the virus.
We continue to monitor the evolution of the Covid-19 pandemic in the markets in which we operate, especially with affiliatesregard to restrictive measures adopted by these jurisdictions. We continuously analyze the situation and act to minimize impacts on the operations and on the equity and financial position of Cerberus Capital Management L.P. ("Cerberus"), which included a $435 investment in Avon by an affiliatethe Company, with the objective of Cerberus throughimplementing appropriate measures, ensuring the purchasecontinuity of operations, hedge cash, improve liquidity and promote the health and safety of all.
In view of this scenario, we review the recoverability expectations of our convertible preferred stockfinancial and non-financial assets in the preparation of these financial statements, considering the most recent information available and reflected in the Company’s business plans. In addition, we also consider possible effects on the financial statements including revenues and the separationcontinued transition to the
digital environment, allowances for doubtful accounts receivable, impairment of non-financial assets, leases, liquidity and capital resources and going concern.
As of the North America business (including approximately $100date of cash, subjectthis report, we are unable to certain adjustments)estimate the long-term economic impact arising from Avon into New Avon LLC ("New Avon"), a privately-held company that is majority-owned and managed by an affiliate of Cerberus. These transactions closed in March 2016 and Avon retained approximately 20% ownership in New Avon. Our North America business had consistedefforts to curb the spread of the Company's operations in the U.S., Canada and Puerto Rico; this business was previously its own reportable segment, and has been presented as discontinued operations for all periods presented. Refer to Note 3, Discontinued Operations and Assets and Liabilities Held for Sale on pages F-24 through F-26 of our 2018 Annual Report and Note 4, Investment in New Avon on page F-26 of our 2018 Annual Report for additional information regarding the investment by an affiliate of CerberusCOVID-19 virus and the separationexpected reduction in activity on our business, results of operations and financial condition. We will continue to review our revenue, investments, expenses and cash outflows, as well as adjusting our relationships with suppliers. Furthermore, the North America business.actions outlined above are continuously being re-evaluated in light of global developments relating to COVID-19. See also “Item 1A. Risk Factors—The COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, manufacturing, supply chains and distribution systems, and we have experienced and expect to continue to experience unpredictable negative effects associated with the pandemic" and “Item 7 Management’s Discussion And Analysis Of Financial Condition And Results Of Operations—Overview— COVID-19 pandemic”.
Distribution
During 2018,2021, we had sales operations in 5654 countries and territories, and distributed our products in 2124 other countries and territories. At December 31, 2021, we had sales operations in 52 countries.
Unlike most of our CPG competitors, which sell their products through third-party retail establishments (e.g., drug stores and department stores), we primarily sell our products to the ultimate consumer through the direct-selling channel.channel, with a strategy to expand to omnichannel. Our priority in the omnichannel model is to accelerate digital social selling through Representative engagement, activation, training, direct customer delivery service, and e-commerce. In our case, sales of our products are made to the ultimate consumer principally through direct selling by Representatives, who are independent contractors and not our employees. As of December 31, 2018,On average we had approximately 5 million activeActive Representatives during the year ended December 31, 2021, 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. Representatives earn by purchasing products directly from us at a discount from a published brochure price and selling them to their customers, the ultimate consumer of our products. Representatives can start their Avon businesses for a nominal fee, or in some markets for no fee at all. We generally have no arrangements with end users of our products beyond the Representative, except as described below. No single Representative accounts for more than 10% of our net sales globally.
A Representative contacts their customers directly, selling primarily through our brochure (whether paper or online), which highlights new products and special promotions (or incentives) for each sales campaign. In this sense, the Representative, together with the brochure, are the "store" through which our products are sold. A brochure introducing a new sales campaign is typically generated every three to four weeks. A purchase order is processed and the products are picked at a distribution center and delivered to the Representative usually through a combination of local and national delivery companies. Generally, the Representative then delivers the merchandise and collects payment from the customer for her or his own account. Historically, the Representative then delivers the merchandise and collects payment from the customer for her own account. Several of our larger countries have begun to offer direct to customer delivery of the ordered products. A Representative generally receives a refund of the price the Representative paid for a product if the Representative chooses to return it.
We employ certain web-enabled systems to increase Representative support, which allow a Representative to run her or his business more efficiently and also allow us to improve our order-processing accuracy. For example, in many countries, Representatives can utilize the Internet to manage their business electronically, including order submission, order tracking, payment and communications with us. In addition, in many markets, Representatives can further build their own business through personalized web pages provided by us, enabling them to sell a complete line of our products online. Self-paced online training also is available in certain markets. We are actively deploying and training the Representatives on additional digital tools and sales methods to help increase herits customer reach.
While we continue to grow the penetration of our Representative mobile application, AvonON, we are proud to have increased the usage by 45% in one year, with more than 47% increase in returning users which will eventually lead to an increased number of Hybrid Representatives (who serve customers online & offline), we believe this will be key to our retention & growth of sellers’ segment at Avon since Hybrid Representatives have higher average sales and order more frequently.
In some markets, particularly in Asia Pacific, we use decentralized branches, satellite stores and independent retail operations (e.g., beauty boutiques) to serve Representatives and other customers. Representatives come to a branch to place and pick up product orders for their customers. The branches also create visibility of the Avon brand, and channel with consumers and help reinforce our beauty image. In certain markets, we allow our beauty centers and other retail-oriented and direct-to-consumer opportunities to reach new customers in complementary ways to direct selling. In the United Kingdom ("UK") and certain other markets, we also utilizeAvon increasingly utilizes e-commerce and market ourmarkets its products through consumer websites.
The recruiting or appointing and training of Representatives are the primary responsibilities of independent leaders supported by zone managers. Depending on the market and the responsibilities of the role, some of these individuals are our employees and some are independent contractors. Those who are employees are paid a salary and an incentive based primarily on the achievement of a sales objective in their district. Those who are independent contractors are rewarded primarily based on total sales achieved in their zones or downline team of recruited, trained and managed Representatives. Personal contacts, including
recommendations from current Representatives (including the sales leadership program), and local market advertising constitute the primary means of obtaining new Representatives. The sales leadership program is a multi-level compensation program which gives Representatives, known as independent leaders, the opportunity to earn discounts on their own sales of our products, as well as commissions based on the net sales made by Representatives they have recruited and trained. This program generally limits the number of levels on which commissions can be earned to three. The primary responsibilities of independent leaders are the prospecting, appointing, training and development of their downline Representatives while maintaining a certain level of their own sales. As described above, the Representative is the "store" through which we primarily sell our products and, given the high rate of turnover among Representatives, which is a common characteristic of direct selling, it is critical that we recruit, retain and service Representatives on a continuing basis in order to maintain and grow our business.
From time to time, local governments and others question the legal status of Representatives or impose burdens inconsistent with their status as independent contractors, often in regard to possible coverage under social benefit laws that would require us (and, in most instances, the Representatives) to make regular contributions to government social benefit funds. Although we have generally been able to address these questions in a satisfactory manner, these questions can be raised again following regulatory changes in a jurisdiction or can be raised in other jurisdictions. If there should be a final determination adverse to us in a country, the cost for future, and possibly past, contributions could be so substantial in the context of the volume and profitability of our business in that country that we would consider discontinuing operations in that country.
Promotion and Marketing
Sales promotion and sales development activities are directed at assisting Representatives, through sales aids such as brochures, product samples, demonstration products and demonstration products.training. In order to support the efforts of Representatives to reach new customers, specially designed sales aids, digital content and tools, promotional pieces, customer flyers and various forms of advertising may be used. In addition, we seek to motivate the Representatives through the use of special incentive programs that reward superior sales performance. Periodic sales meetings with Representatives are conducted by the district sales or zone managers. We believe that the training meetings are an integral part of enabling the Representatives to provide customers with the advice and tools to better service her customer base as well as teach sales techniques and provide recognition for sales performance.
We use a number of merchandising techniques, including promotional pricing for new products, combination offers, trial sizes and samples, and the promotion of products packaged as gift items. In most markets, for each sales campaign, we publish a distinctive brochure (whether paper or online), in which we introduce new products and special promotions on selected items or give particular prominence to a particular category. Key priorities for our merchandising include the delivering of product bundles and regimens that help improve average order size and the continued use of analytical tools to enable a deeper, fact-based understanding of the role and impact of pricing within our product portfolio.
Competitive Conditions
We face competition from various products and product lines. The beauty and beauty-related products industry is highly competitive and the number of competitors and degree of competition that we face in this industry varies widely from country to country. We compete against products sold to consumers in a number of distribution methods, including direct selling, through the Internet, and through the mass market retail and prestige retail channels.
Specifically, due to the nature of the direct-selling channel, we often compete on a country-by-country basis, with our direct-selling competitors. Unlike a typical CPG company which operates within a broad-based consumer pool, direct sellers compete for representative or entrepreneurial talent by providing a more competitive earnings opportunity or "better deal" than that offered by the competition as well as significant competition from other non-direct selling earnings opportunities for which the existing Representatives or potential Representatives could avail themselves. Providing a compelling earnings opportunity for the Representatives is as critical as developing and marketing new and innovative products. As a result, in contrast to a typical CPG company, we must first compete for a limited pool of Representatives before we reach the ultimate consumer.
Within the broader CPG industry, we principally compete against large and well-known cosmetics (color), fragrance and skincare companies that manufacture and sell broad product lines through various types of retail establishments and other channels, including through the Internet. In addition, we compete against many other companies that manufacture and sell more narrow beauty product lines sold through retail establishments and other channels, including through the Internet.
We also have many global branded and private label competitors in the accessories, apparel, housewares, and gift and decorative products industries, including retail establishments, principally department stores, mass merchandisers, gift shops and specialty retailers. Our principal competition in the fashion jewelry industry consists of a few large companies and many small companies that sell fashion jewelry through department stores, mass merchandisers, specialty retailers and e-commerce.
We believe that the personalized customer service offered by the Representatives; the Representatives’ earnings opportunity as well as the amount and type of field incentives we offer the Representatives on a market-by-market basis; the high quality, attractive designs and prices of our products; the high level of new and innovative products; our easily recognized brand namename; and our guarantee of product satisfaction are significant factors in helping to establish and maintain our competitive position.
International Operations
During 2018,2021, our international operations, outside of the U.S., were conducted primarily through subsidiaries in 5654 countries and territories. At December 31, 2021, this had reduced to 52 countries and territories. Outside of the U.S., our products were also distributed in 2023 other countries and territories. In March 2016, we separated from our North America business, which had consisted of the Company's operations in the U.S., Canada and Puerto Rico; this business has been presented as discontinued operations for all periods presented. As a result, all of our consolidated revenue is derived from operations of subsidiaries outside of the U.S. During 2018,2021, approximately 39%49% of our consolidated revenue was derived from South Latin America, approximately 38% was derived from Europe, Middle East & Africa, approximately 15% was derived from NorthAvon Latin America, and approximately 8%51% was derived from Asia Pacific.Avon International. Further, approximately 23%18% of our consolidated revenue during 20182021 was derived from Brazil, which is our largest market and is included within the SouthAvon Latin America reportable segment.
Our international operations are subject to risks inherent in conducting business abroad, including, but not limited to, the risk of adverse foreign currency fluctuations, foreign currency remittance restrictions, the ability to procure products, pandemic situations and unfavorable social, economic and political conditions.
See the sections "Risk Factors - Our ability to conduct business in our international markets may be affected by political, legal, tax and regulatory risks." and "Risk Factors - We are subject to financial risks as a result of our international operations, including exposure to foreign currency fluctuations and the impact of foreign currency restrictions." in Item 1A on pages 7 through 20 of our 2018 Annual Report for more information.
Manufacturing and Sourcing
We manufacture and package the majority of our Beauty products, which are formulated and designed by our staff of chemists, designers and artists. Raw materials, consisting chiefly of essential oils, chemicals, containers and packaging components required for our Beauty products are purchased from a range of third-party suppliers. The remainder of our Beauty products and all of our Fashion & Home products are purchased from various third-party manufacturers.
Our products are affected by the cost and availability of materials such as glass, plastics, chemicalsfragrance and fabrics.fuel. For the vast majority of items we have more than one source of supply available. We believe that we can continue to obtain sufficient raw materials and supplies to manufacture and produce our Beauty products for the foreseeable future.
Additionally, we design the brochures (whether paper or online) that are used by the Representatives to sell our products. The brochures are then produced on our behalf by a range of printing suppliers.
The loss of any one supplier would not have a material impact on our ability to source raw materials for the majority of our Beauty products or source products for the remainder of our Beauty products and all of our Fashion & Home products or paper for the brochures.
See Item 2, Properties on page 20 of our 2018 Annual Report for additional information regarding the location of our principal manufacturing facilities.
Product Categories
Both of our product categories individually account for 10% or more of consolidated net sales in 2018.2021. The following is the percentage of net sales by product category for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| Beauty | | 74 | % | | 74 | % | | 74 | % |
| Fashion & Home | | 26 | % | | 26 | % | | 26 | % |
|
| | | | | | | | | |
| | | 2018 | | 2017 | | 2016 |
| Beauty | | 74 | % | | 75 | % | | 74 | % |
| Fashion & Home | | 26 | % | | 25 | % | | 26 | % |
2018 was also2021 and 2019 were impacted by thecertain indirect tax items in Brazil IPI tax release, whichand is excluded from net sales in our calculation above. See "SOLA" within MD&A on pages 46 through 48Note 5: Revenue for more information.
Trademarks and Patents
Our business is not materially dependent on the existence of third-party patent, trademark or other third-party intellectual property rights, and we are not a party to any ongoing material licenses, franchises or concessions. We do seek to protect our key proprietary technologies by aggressively pursuing comprehensive patent coverage in major markets. We protect our Avon name and other major proprietary trademarks through registration of these trademarks in the relevant markets, monitoring the markets for infringement of such trademarks by others, and by taking appropriate steps to stop any infringing activities.
Seasonal Nature of Business
Our sales and earnings are typically affected by seasonal variations, a characteristic of many companies selling beauty, gift and
decorative products, apparel and fashion jewelry. For instance, our sales are generally highest during the fourth quarter due to
seasonal and holiday-related patterns. However, the sales volume of holiday gift items is, by its nature, difficult to forecast, and
taken as a whole, seasonality does not have a material impact on our financial results.
Research and Product Development Activities
New products are essential to growth in the highly competitive cosmetics industry. Our research and development ("R&D") department’s efforts are importantvital to developing new products, including formulating effectivehigh performing beauty treatmentsproducts relevant to women’s needs, and redesigning or reformulatingimproving existing products. As part of our Open Up Avon& Grow strategy and to improve our brand competitiveness, we have increasingly partnered with third party product development companies to help accelerate our development time and sustained our focusare focusing on developing breakthrough new technology and product innovation to deliver first-to-marketaccessible Beauty products that provide visible consumer benefits.benefits while also delivering the Company’s ambitious sustainability goals. R&D also works extensively with third party companies to bring in new ideas, help accelerate development time and deliver against local market trends.
Our global R&D facilityinnovation center is located in Suffern, NY. AThere is a team of expert scientists, researchers and technicians applyapplying the disciplines of science to the practical aspects ofdeveloping and bringing products to market around the world. Relationships with dermatologists, scientists and other specialists enhance our ability to deliver new formulas and ingredients to market. Additionally, we have R&D facilitiescenters located in Argentina, Brazil, China, Mexico, the Philippines, Poland, South Africa and the UK.
In 2018, our most significant product launches included: Eve Discovery Collection, Full Speed Nitro, Avon Life Color for Him and Her by Kenzo Takada, Anew Platinum and Anew Ultimate Instantly Smoothing Eye Gel, Clearskin O2 Fresh Micellar Cleansing Water, Avon Care Coconut Oil Collection, Encanto Energy Collection, Mark. Big & Extreme Mascara, Avon True Velvet Luminosity Lipstick and Avon True Flawless Finishing Pearls.
The amounts incurred on research activities relating to the development of new products and the improvement of existing products were $48.0$39.3 in 2018, $52.92021, $36.5 in 20172020 and $52.1$40.6 in 2016.2019. This research included the activities of product research and development and package design and development. Most of these activities were related to the design and development of Beauty products.
Environmental Matters
Compliance with environmental laws and regulations impacting our global operations has not had, and currently is not anticipated to have, a material adverse effect on our financial position, capital expenditures or competitive position. As part of the Natura &Co group, we are now in the process of working towards our B Corp accreditation; which we aim to achieve by 2023.
EmployeesHuman Capital Resources
At December 31, 2018, we2021, Avon employed approximately 23,00018,000 employees. Of these, approximately 500170 were employed in the U.S.U.S.. In Avon International Females constituted approximately 66% of our workforce and 62% of our managerial employees and in Avon Latin America Females constituted approximately 22,500 were employed58% of our workforce and 57% of our managerial employees.
At Avon, we’re the company that puts purpose, people and relationships at the heart of everything we do. As part of the Natura &Co family, we’re committed to being the best beauty company for the world by generating a positive environmental, economic and social impact for our communities across the globe.
We believe beauty is for everyone and that it’s beautiful to be you. We celebrate our differences, champion self-expression and are committed to inclusion for all. We embrace diversity and individuality to build a culture that represents our communities and enables everyone to bring their best self to work. Our Avon Expectations for all Associates and Management clearly outline a minimum standard for appropriate behaviour. Our employee resource groups enable Associates to have a safe space for learning, honest conversations, coaching and hold the business to account – highlighting areas for improvement and providing feedback on policy and decision-making.
Natura &Co’s Commitment to Life agenda has set out our bold targets for the next decade to step up our actions and tackle some of the world’s most pressing issues. At Avon we are committed to protecting human rights and being humankind. Our aim is to close the gender pay equity gap by 2023 ensuring that associates who perform the same role in the same location with the same responsibilities, experience and performance should be paid equally whatever their gender is. We also commit to 50% of women in senior management roles, which we are currently meeting. We are also committed to paying living wage or above to all our employees by 2023.
Lastly, we are working towards 30% inclusion, in management, of under-represented groups – racial or ethnic, sexual diversity and gender identity (LGBTI), socio economically disadvantaged, physical or mental disability. While this is a longer-term goal we have taken steps to ensure we are able to capture our first Associate Diversity and Inclusion demographic survey in Q1 2022 which will give us our first baseline. We also piloted a neurodiversity hiring scheme, partnering with the National Autistic Society UK which will continue with amplification in 2022.
We have remained focused on protecting our employees, our subcontractors and our customers through the continued Covid pandemic . These protocols include temporarily closing offices, significantly expanding the use of virtual interactions in all aspects of our business, including customer facing activities and for front line workers, social distancing measures enforced in
all operations consistently since the beginning of the pandemic, including reconfiguring work spaces where possible and delineating paths, entrances, and exits in factories and warehouses and enhanced cleaning protocols.
We have used our experience of working in different ways to re think work place flexibility and have moved to a hybrid way of work, where possible, with our employees working 2 to 3 days a week in the office. This has allowed us to further deliver on part of our Employee Value Proposition – “In a way that works for you”.
Avon International
In 2021, we continued focus on our Employee Value Proposition - ‘The beauty of doing good’, tracking progress every 6 months through our employee engagement survey, Glint. Developments over the last year include enhancing people manager capability through skill building and training, embedding a culture of feedback supported by renewed feedback functionality and supporting development through the launch of a new mentoring scheme. We have also continued to have a strong focus on building meaningful careers and saw great success through the running of our first virtual careers festival. This included 65 session of learning content, 3493 people signing up for the festival and each person spending an average of 6 hours at the event. This virtual event enabled people to create a tailored event schedule and helped to bring our global community together during a tough time of lockdowns and restrictions to focus on themselves and their development.
There has also been a strong focus on internal moves of talent with 44% of new roles in 2021 being filled by internal hires equating to 621 moves within Avon International. We are also starting to see movement across the Natura &Co. Group with Avon having exported the most talent into other countries.brands.
We have continued to invest in building leaders at all levels of the organization The “Leading with Heart” program for first -time people managers covers key concepts critical to being an effective and compassionate leader. Through the “Leading with Purpose” program, participants learn how to leverage their personal strengths while maximizing impact as senior leaders. We have invested in executive coaching for leaders stepping up into critical leadership roles and continue to support leadership teams with ongoing team development support.
We are really pleased that despite a year of people challenges, we have made progress against these key areas of focus. This has been reflected in our Glint scores, Feedback score up by 5 points, Manager up 4, Career up 2, Growth up 2, Equal Opportunity up 3. With continued focus across these areas, we hope to see these scores increasing further over the next year.
Avon Latin America
In 2021, the focus of Glint, was promoting a culture of continuous listening and ensuring actions are taken to increase engagement. We now have 2 surveys a year so we can get feedback on recent experiences and managers can take action through actionable insights.
There was a strong focus on internal movements of talent in managerial positions and above, with 66% of new roles in 2021 being filled by internal hires. We have launched in 2021 the program “Paths to Leadership” to invest in building leaders at all levels of the organization. It is focused on developing competences to help the leaders in the new group structure with Natura &Co, and to maximize synergies. We have invested in executive coaching for leaders stepping up into critical leadership roles and continue to support leadership teams with ongoing team development support.
Transformation Plan, and Open Up & Grow and Avon Integration
In January 2016, we announced a transformation plan (the "Transformation Plan") which was completed in 2018. In September 2018, we initiated a new strategy to return Avon to growth ("Open Up Avon"). In May 2020, the new leadership of Avon International refreshed our strategy ("Open Up & Grow") which aims to return Avon International to growth over the next three years.
In addition, subsequent to the merger of Natura and Avon in January 2020, an integration plan (the "Avon Integration") was established to create the right global infrastructure to support the future vision of the Natura &Co Group, while also identifying synergies primarily between Avon LATAM and Natura &Co Latin America.
See "Overview" within MD&A on pages 28 through 29 for more information on these items.
Acquisitions and Dispositions
In December 2015, we entered into definitive agreements with affiliates of Cerberus, which included the separation of the North America business from Avon into New Avon, a privately-held company that is majority-owned and managed by an affiliate of Cerberus. Avon retained approximately 20% ownership in New Avon. These transactions closed in March 2016. In August 2019 we and Cerberus finalized the sale of our respective interests in New Avon to LG Household & Health Care Ltd.
In May 2019 we and Natura Cosméticos, a Brazilian corporation entered into the Merger Agreement, pursuant to which the Company and Natura Cosméticos were acquired by and became wholly-owned subsidiaries of Natura &Co Holding, S.A.
("Natura &Co" or "Natura &Co Holding") in January 2020. With the completion of this transaction, our common stock was removed from trading on the NYSE, and we became a privately held company.
During 2021, 2020 and 2019, we disposed of businesses and assets as part of the Open up Avon strategy and later the Open Up & Grow strategy. In February, May and June 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.Ltd, Maximin Corporation Sdn Bhd ("Malaysia Maximin") and the Rye office, respectively. In April and August 2020, we completed the sale of the Hungary distribution center and the China Wellness Plant, respectively. In June, September, November and December 2021, we completed the sale of a branch of our Italian business, the Spanish distribution center, the manufacturing business in India and the business in Saudi Arabia, respectively.
On July 1, 2021, the Company sold Avon Luxembourg, including our Mexican business, to a subsidiary of Natura &Co Holding for $150, with the proceeds used to repay maturing loans of $150 borrowed under the $250 Revolving Credit Facility with a subsidiary of Natura &Co Holding.
Refer to Note 3, Discontinued Operations and Assets and Liabilities Held for Sale to the Consolidated Financial Statements included herein, for additional information.
Ongoing military conflict between Ukraine and Russia
On February 24, 2022, Russia launched a military invasion of Ukraine. The ongoing military conflict between Russia and Ukraine has provoked strong reactions from the United States, the UK, the European Union (the “EU”) and various other countries around the world, including the imposition of broad financial and economic sanctions against Russia.
As a result of the ongoing military conflict in Ukraine, our Ukraine operations are currently suspended for an indeterminate period.
Our Russian factory supplies our business not just in Russia but in Eastern Europe as well. [We are considering shifting production to Poland to supply these markets as necessary. However, shifting production away from our Russian factory entails short-term costs and could also result in more long-term increases in our costs of production which we may not be able to pass on pages F-24 through F-26to our customers] In addition, certain suppliers of raw ingredients and components to our Russian factory and of finished products to our Russian business may require us to take additional measures in order to continue supplying our Russian operations. Failure on our part to provide for such additional measures could impair the functioning of our 2018 Annual Report, for additional information regardingRussian factory and could also result in disruptions in supply to our Eastern European operations or our inability to source certain finished products to sell to customers in Russia. Any of these developments could have a material adverse effect on our wider Eastern European business.
Furthermore, the saleRussian ruble has depreciated significantly against the U.S. dollar in 2022 and is expected to continue to depreciate in the coming months as a result of the North Americaconflict. The same applies to the Ukrainian hryvnia. We expect that these depreciations, and in particular that of the Russian ruble given the scale of our operations in Russia, will have a material adverse effect on our results of operations and financial condition in these countries [as well as a resulting material adverse effect on our consolidated results of operations and financial condition].
While the precise effects of the ongoing military conflict and these sanctions on the Russian and global economies remain uncertain, they have already resulted in significant volatility in financial markets as well as in an increase in energy and commodity prices globally. Should the conflict continue or escalate, markets may face various economic and security consequences including, but not limited to, supply shortages of different kinds, further increases in prices of commodities, including piped gas, oil and agricultural goods, significant disruptions in logistics infrastructure, telecommunications services, the risk of unavailability of information technology systems and infrastructure, among others, given that Russia and Ukraine are significant exporters of commodities. The resulting impacts on financial markets, inflation, interest rates, unemployment and other matters could disrupt the global economy’s ongoing recovery following the COVID-19 pandemic. Other potential consequences include, but are not limited to, growth in the number of popular uprisings in the region, increased political discontent, especially in the regions most affected by the conflict or economic sanctions, increase in cyberterrorism activities and attacks, displacement of persons to regions close to the areas of conflict and an increase in the number of refugees fleeing across Europe, among other unforeseen social and humanitarian effects.
See also “Item 1A. Risk Factors—Risks Related to Our International Operations— Our ability to conduct business in our international markets may be affected by economic, political, legal, tax and the saleregulatory risks” and “Item 1A. Risk Factors—Risks Related to Our International Operations—The ongoing military conflict between Ukraine and Russia may have a material adverse effect on our business, financial condition and results of Avon Manufacturing (Guangzhou), Ltd.operations.”
Website Access to Reports
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, are, and have been throughout 2018, available without charge on our investor website (www.avoninvestor.com) as soon as reasonably practicable after they are filed with or furnished to the U.S. Securities and Exchange Commission (the "SEC"). We also make available on our website the charters of our Board Committees, our Corporate Governance Guidelines and our Code of Conduct. Copies of these SEC reports and other documents are also available, without charge, by sending a letter to Investor Relations, Avon Products, Inc., 1 Avon Place, Suffern, N.Y. 10901, by sending an email to investor.relations@avon.com or by calling (212) 282-5320. Information on our website does not constitute part of this report. Our filings with the SEC, including reports, proxy and information statements, and other information regarding the Company are also available on the SEC’s website at www.sec.gov free of charge as soon as reasonably practicable after we have filed or furnished the above-referenced reports.
ITEM 1A. RISK FACTORS
You should carefully consider each of the following risks associated with an investment in our publicly-traded securities and all of the other information in our 2018 Annual Report.Consolidated Financial Statements and Notes thereto contained herein. Our business may also be adversely affected by risks and uncertainties not presently known to us or that we currently believe to be immaterial. If any of the events contemplated by the following discussion of risks should occur, our business, prospects, financial condition, liquidity, results of operations and cash flows may be materially adversely affected.
Summary of Risk Factors
The following is a summary of the risk factors our business faces. The list below is not exhaustive, and investors should read this “Risk Factors” section in full. Some of the risks we face include:
Summary of Risks Related to UsCOVID-19
•The COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, manufacturing, supply chains and distribution systems, and we have experienced and expect to continue to experience unpredictable negative effects associated with the pandemic. If the COVID-19 pandemic continues to adversely affect the global economy and/or adversely affect our business, financial condition, liquidity or results of operations, it may also increase the likelihood and/or magnitude of other risks described in this “Risk Factors” section.
Summary of Risks Related to the Transaction
•The expected benefits from integrating our operations with Natura &Co’s operations may not be achieved. Even if our respective operations are successfully integrated, we may not realize the full benefits of the Transaction, within the expected time frame, if at all.
•Third parties may alter existing contracts or relationships with us as a result of the Transaction. Any loss or distraction of our customers, employees, Representatives, suppliers, vendors, distributors, landlords, lenders, licensors, joint venture partners and other business partners, could have a material adverse effect on our business.
Summary of Risks Related to Our Business Strategy
•Our ability to improve our financial and operational performance and implement our global business strategy is dependent upon a number of factors, and there can be no assurance if and when any of these initiatives will be successfully and fully executed or completed.
•We may experience difficulties, delays or unexpected costs in completing Open Up & Grow and Avon Integration and any other restructuring and cost-saving initiatives, including achieving any anticipated savings and benefits. If we are unable to realize these savings or benefits, or otherwise fail to invest in the growth initiatives, our business may be adversely affected.
•There can be no assurance that we will be able to improve revenue, margins and net income, or achieve profitable growth in the future, particularly in our largest markets and developing and emerging markets, such as Brazil, Mexico and Russia. We cannot assure that our broad-based geographic portfolio will be able to withstand an economic downturn, recession, cost or wage inflation, commodity cost pressures, economic or political instability, competitive pressures or other market pressures in one or more particular regions.
Summary of Risks Related to Our Business Model
•We face intense competition and can make no assurances about our ability to overcome our competitive challenges. If our advertising, promotional, merchandising or other marketing strategies are not successful, if we are unable to improve our product mix and offer new products that represent technological breakthroughs and are aligned with local preferences, if we do not successfully manage the timing of new product introductions or the profitability of these efforts, if we are unable to improve the Representative experience, or if for other reasons the Representatives or end customers perceive competitors’ products as having greater appeal, then our sales, results of operations and cash flows will be adversely affected.
•Third-party suppliers provide, among other things, the raw materials required for our Beauty products. The loss of these suppliers, a supplier’s inability to supply a raw material or a finished product or a disruption or interruption in the supply chain may adversely affect our business. We may be adversely affected by (i) fire, natural disasters, disease outbreaks or pandemics, such as COVID-19, shortages of goods, services or labor, delays in obtaining key supplies, strikes and stoppages, power shortages, failures in the systems, forest fires and deforestation, among others, where we are unable to otherwise service the affected region, (ii) significant disruptions in logistics infrastructure, and (iii) fluctuating fuel prices within our distribution network.
Summary of Risks Related to Our International Operations
•We are subject to financial risks as a result of our international operations, including exposure to foreign currency fluctuations and the impact of foreign currency restrictions. There can be no assurance that foreign currency fluctuations and restrictions will not have a material adverse effect on our business, assets, financial condition, liquidity, results of operations or cash flows.
•The ongoing military conflict between Ukraine and Russia has resulted in the interruption of our operations in Ukraine for an indeterminate period and we cannot assure you that our business in Russia will not be interrupted as well. In addition, the ongoing military conflict between Ukraine and Russia has provoked strong reactions from the United States, the UK, the EU and various other countries around the world, including the imposition of severe financial and economic sanctions on Russia which could have a material adverse effect on our business in that country. Furthermore, while the precise effect of the ongoing military conflict and the sanctions on the Russian and global economies remains uncertain, should tensions continue to increase, financial markets may continue to experience significant volatility as well as economic and security consequences including, but not limited to, supply shortages of different kinds, increases in prices of commodities, including piped gas, oil and agricultural goods, significant disruptions in logistics infrastructure, telecommunications services, the risk of unavailability of information technology systems and infrastructure, among others.
•Our ability to conduct business in our international markets may be affected by economic, political, legal, tax and regulatory risks. In the event that any jurisdiction in which we operate or plan to operate imposes any new laws, regulations, restrictions and/or other barriers to entry, our ability to expand may be limited and our growth and development may be adversely affected.
Summary of Risks Related to IT and Cybersecurity Matters
•A failure, disruption, cyberattack, other breach in the security of an IT system or infrastructure that we utilize could adversely affect our business and reputation and increase our costs. Our and our third-party service providers’ data, IT systems and infrastructure may be vulnerable.
•Unauthorized disclosure of sensitive or confidential Representative or customer information or our failure or the perception by our Representatives or customers that we failed to comply with privacy laws or properly address privacy concerns could materially harm our business and standing with our Representatives and customers. We cannot provide assurance that our security measures will prevent further security breaches.
Summary of Risks Related to Financial Matters
•Our credit ratings are below investment grade, which could limit our access to financing, affect the market price of our financing and increase financing costs. A downgrade in our credit ratings may adversely affect our access to liquidity.
•We may not effectively manage risks associated with the replacement of benchmark indices. Interest rates on our financial instruments tied to benchmark rates, as well as the expenses associated with those financial instruments, may be adversely affected.
Summary of Risks Related to Legal Matters
•We are involved, and may become involved in the future, in legal proceedings that, if adversely adjudicated or settled, could adversely affect our financial results.
•Government reviews, inquiries, investigations, and actions could harm our business or reputation. In addition, from time to time, we may conduct other investigations and reviews, the consequences of which could negatively impact our business or reputation.
Summary of General 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.
•Our success depends, in part, on our key personnel. We may not be able to attract, assimilate, develop or retain qualified personnel in the future, and our failure to do so could adversely affect our business, including the execution of our global business strategy.
Risks Related to COVID-19
The COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, manufacturing, supply chains and distribution systems, and we have experienced and expect to continue to experience unpredictable negative effects associated with the pandemic.
Public health officials worldwide have recommended and mandated precautions to mitigate the spread of COVID-19, including restrictions on manufacturing, distribution, and congregating in heavily populated areas and shelter-in-place orders or similar measures. As a result, manufacturing and distribution of our products may be negatively impacted . Our suppliers have been similarly impacted by disruptions in global supply chains and climate events that hit electricity generation globally, among other events, which further affect our ability to produce and distribute. Distribution has also been impacted by certain restrictions on import and export in various countries and such restrictions may continue in the future. These restrictions have contributed to inflationary pressures in the cost of certain raw materials used in the production of essential items due to the increased demand for these inputs worldwide, which may affect our ability to procure such raw materials at similar prices as we have prior to the COVID-19 pandemic. The pandemic has also led to challenges in recruiting Representatives, and enrollment of Representatives will likely occur at a slower pace. Additionally, there is a general risk that our employees or other workers could be exposed to the virus and that an incident of infection at one of our sites could result in “lock-down” measures for the whole site that could negatively impact our business.
Our results will continue to be adversely impacted by these public health restrictions and other actions taken to contain or mitigate the impact of COVID-19. Although there have been certain improvements in the restrictive measures being adopted to contain the impacts of the COVID-19 pandemic, there is still considerable uncertainty as to whether future restrictions might be required or enforced by the authorities in the future. In particular, new variants of the virus have emerged against which existing vaccines and acquired immunity may not be effective. The extent of the continued impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak and its impact on our Representatives, suppliers and employees, all of which are uncertain and cannot be predicted. COVID-19 also poses risks that our employees, contractors, suppliers, customers and other business partners may be prevented from conducting business activities for an indefinite period of time, including current or future shutdowns that may be requested or mandated by governmental authorities and could have a material adverse effect on our results of operations, financial condition and liquidity going forward. Furthermore, to the extent the COVID-19 pandemic adversely affects our business, results of operations, financial condition and liquidity, it may also have the effect of heightening many of the other risks to which we are exposed, such as those relating to our high level of indebtedness and our need to generate sufficient cash flows to service our indebtedness.
We expect some negative impact on revenue and profits from COVID-19 to continue in 2022, given the emergence of novel strains and variants across the world as well as continuing difficulties in the rollout of vaccination programs worldwide, which will, in turn, result in lower cash generation from and greater costs in our activities. If the downturn is deeper or for longer than we anticipate, the Company could take certain further actions to ease the pressure of certain cash outflows, such as reducing discretionary expenditure, selling non-core assets, accessing government pandemic initiatives or arranging borrowing facilities with third-party banks and affiliate companies. Our projections indicate that we should have sufficient liquidity to meet our obligations to parties other than Natura &Co and its affiliates for a period of not less than 12 months from the date of issuance of the Consolidated Financial Statements contained herein. The Company has received an irrevocable commitment from Natura &Co Holding that it will provide sufficient financial support if and when needed to enable the Company to meet its obligations as they come due in the normal course of business for a period of not less than 12 months from the date of issuance of the Consolidated Financial Statements contained herein. For further information see Note 1, Accounting Policies, to the Consolidated Financial Statements included herein.
There is uncertainty around the duration and breadth of the COVID-19 pandemic and the response to it. As a result the ultimate impact on our business, financial condition or operating results cannot be reasonably estimated at this time. While we expect the impacts of COVID-19 to continue to have an adverse effect on our business, financial condition and results of operations, we are unable to predict the extent or precise nature of these impacts at this time. If the pandemic or the resulting economic downturn continues to worsen, we could experience loss of business, which could have a material impact on our financial position and cash flows.
In addition, in the future, other regional and / or global outbreaks of communicable diseases may occur. If they occur, the effects that the Company will suffer may be similar or even greater than the effects it is suffering as a result of the COVID-19 pandemic.
If the COVID-19 pandemic continues to adversely affect the global economy and/or adversely affect our business, financial condition, liquidity or results of operations, it may also increase the likelihood and/or magnitude of other risks described in this “Risk Factors” section.
Risks Related to the Transaction
Now that the Transaction has been consummated, the expected benefits from integrating our operations with Natura & Co's operations may not be achieved.
The success of the Transaction depends, in part, on the ability of Natura &Co and its subsidiaries and businesses other than Avon (including Natura Cosméticos, Aesop, The Body Shop and their respective subsidiaries) and Avon to realize the expected benefits from integrating their respective operations. No assurance can be given that Natura &Co and Avon will be able to integrate their respective operations without encountering difficulties, which may include, among other things, the loss of key employees, diversion of management attention, the disruption of our respective ongoing businesses or possible inconsistencies in standards, procedures and policies. Additionally, Natura &Co and Avon may be required to make unanticipated capital expenditures or investments in order to maintain, integrate, improve or sustain our operations. Integrating our respective operations may involve additional unanticipated costs and financial risks, such as the incurrence of unexpected write-offs, the possible effect of adverse tax and accounting treatments and unanticipated or unknown liabilities relating to Natura &Co or Avon. All of these factors could decrease or delay the expected accretive effect of the Transaction.
Even if our respective operations are successfully integrated, we may not realize the full benefits of the Transaction, including the synergies, cost savings and growth opportunities, within the expected time frame, if at all. Natura &Co and Avon continue to evaluate the estimates of synergies to be realized from the Transaction. However, the actual cost savings, the costs required to realize the cost savings and the source of the cost savings could differ materially from the estimates of Natura &Co and Avon.
Further, Natura &Co and Avon may not achieve the targeted operating or long-term strategic benefits of the Transaction. In addition, Natura &Co and Avon may not accelerate growth by increasing investments in digital, product innovation and brand initiatives. If Natura &Co and Avon are unable to achieve the objectives, or are not able to achieve our objectives on a timely basis, the anticipated benefits of the Transaction may not be realized fully or at all. An inability to realize the full extent of, or any of, the anticipated benefits of the Transaction could have an adverse effect on the financial condition, results of operations and cash flows of Natura &Co and Avon and could limit Natura &Co’s and Avon’s ability to achieve the anticipated benefits of the Transaction.
In addition, the COVID-19 pandemic has created significant volatility, uncertainty and economic disruption, which may adversely affect the Natura &Co and Avon integration plans and may materially and adversely affect our results of operations, cash flows and financial position. For further information regarding the impacts of the COVID-19 pandemic on our operations, please also see "Item 1A. Risk Factors—The COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, manufacturing, supply chains and distribution systems, and we have experienced and expect to continue to experience unpredictable negative effects associated with the pandemic.
Third parties may alter existing contracts or relationships with us as a result of the Transaction.
We have contracts with customers, employees, Representatives, suppliers, vendors, distributors, landlords, lenders, licensors, joint venture partners and other business partners. As a result of the Transaction, parties with which we have business and operational relationships may experience uncertainty as to the future of such relationships and may delay or defer certain
business decisions, seek alternative relationships with third parties or seek to alter their present business relationships with us. Further, parties with whom we otherwise may have sought to establish business relationships may seek alternative relationships with third parties.
In addition, current and prospective employees and Representatives may experience uncertainty about their roles now that the Transaction has been consummated and such uncertainty may have an effect on our corporate culture. There can be no assurance we will be able to attract and retain key talent, including senior leaders, to the same extent that we have previously been able to attract and retain employees and sales representatives. Any loss or distraction of our customers, employees, Representatives, suppliers, vendors, distributors, landlords, lenders, licensors, joint venture partners and other business partners, could have a material adverse effect on our business, financial condition, operating results and cash flows and could limit our ability to achieve the anticipated benefits of the Transaction.
The combined company may not realize the cost savings, synergies and other benefits that the parties expect to achieve from the Transaction.
The combination of two independent companies is a complex, costly and time-consuming process. As a result, the combined company will be required to devote significant management attention and resources to integrating the business practices and operations of Natura &Co and Avon. The integration process may disrupt the business of either or both of the companies and, if implemented ineffectively, could preclude realization of the full benefits expected by Natura &Co and Avon from the Transaction. The failure of the combined company to meet the challenges involved in successfully integrating the operations of Natura &Co and Avon or otherwise to realize the anticipated benefits of the Transaction could cause an interruption of the activities of the combined company and could seriously harm its results of operations. In addition, the overall integration of the two companies may result in material unanticipated problems, expenses, liabilities, competitive responses, loss of client relationships and diversion of management’s attention, and may cause the combined company’s share price to decline. The difficulties of combining the operations of the companies include, among others:
• coordinating geographically separate organizations;
• the potential diversion of management focus and resources from other strategic opportunities and from operational matters;
• aligning and executing the strategy of the combined company;
• retaining existing independent beauty consultants and Sales Representatives and attracting new independent beauty consultants and Sales Representatives;
• retaining existing customers and attracting new customers;
• maintaining employee morale and retaining key management and other employees;
• integrating two unique business cultures, which may prove to be incompatible;
• the possibility of faulty assumptions underlying expectations regarding the integration process;
• consolidating corporate and administrative infrastructures and eliminating duplicative operations;
• coordinating distribution and marketing efforts;
• integrating information technology, communications and other systems;
• changes in applicable laws and regulations;
• managing tax costs or inefficiencies associated with integrating the operations of the combined company;
• unforeseen expenses or delays associated with the Transaction; and
• taking actions that may be required in connection with obtaining regulatory approvals.
Many of these factors are out of the combined company’s control and any one of them could result in increased costs, decreased revenues and diversion of management’s time and energy, which could materially affect the combined company’s business, financial condition and results of operations. In addition, even if the operations of Natura &Co and Avon are integrated successfully, the combined company may not realize the full benefits of the Transaction, including the synergies, cost savings or sales or growth opportunities that Natura &Co and Avon expect. These benefits may not be achieved within the anticipated time frame, or at all. As a result, we cannot assure you that the combination of Natura &Co and Avon will result in the realization of the full benefits anticipated from the Transaction.
The financial analyses and projections considered by Natura &Co and Avon prior to the Transaction may not be realized.
The financial analyses and projections considered by Natura &Co and Avon prior to the Transaction reflected numerous estimates and assumptions that were inherently uncertain with respect to industry performance and competition, general business, economic, market and financial conditions and matters specific to Natura &Co’s and Avon’s businesses, including the factors entitled “Forward-Looking Statements” and/or entitled “Item 3. Key Information—D. Risk Factors,” all of which are difficult to predict and many of which are beyond Natura &Co’s and Avon’s control. There can be no assurance that the financial analyses and projections considered by Natura &Co and Avon will be realized or that actual results will not materially vary from such financial analyses and projections. In addition, since the financial projections cover multiple years, such information by its nature becomes less predictive with each successive year.
The consummation of the Transaction limits our ability to utilize existing US tax credits and also could be further reduced pursuant to Sections 382 and 383 of the Code if an additional ownership change occurs in the future.
As of December 31, 2019, we had approximately $660 million of foreign tax and other credits available to offset future income for U.S. federal tax purposes. As a result of the ownership change resulting from the Transaction the ability to use these credits has been limited to a range of approximately $108 to $178 million. Our ability to utilize such credits to offset future income could be further limited, however, if the Company undergoes an additional “ownership change” within the meaning of Section 382 of the Code. In general, an ownership change will occur if there is a cumulative increase in ownership of our stock by 5% shareholders (as defined in the Code) that exceeds 50 percentage points over a rolling three-year period. If the 50 percentage points are exceeded, Section 382 establishes an annual limitation on the amount of deferred tax assets attributable to previously incurred credits that may be used to offset taxable income in future years. A number of complex rules apply in calculating this limitation, and any such limitation would depend in part on the market value of the Company at the time of the ownership change and prevailing interest rates at the time of calculation. As a result, the magnitude of any potential limitation on the use of our deferred tax assets and the effect of such limitation on the Company if an ownership change were to occur is difficult to assess. However, if all or a portion of our deferred tax assets were to become subject to this limitation, our tax liability could increase significantly and our future results of operations and cash flows could be adversely impacted. Prospectively if we were to undergo a further ownership change these remaining credits could be further reduced.
Risks Related to Our Business Strategy
Our success depends on our ability to improve our financial and operational performance and execute fully our global business strategy.
Our ability to improve our financial and operational performance and implement the key initiatives of our global business strategy is dependent upon a number of factors, including our ability to:
•implement Open Up & Grow and Avon Integration stabilization strategies, cost savings initiatives, restructuring and other initiatives, and achieve anticipated savings and benefits from such programs and initiatives;
•reverse declines in our market share and strengthen our brand image;
•implement appropriate pricing strategies and product mix that are more aligned with the preferences of local markets and achieve anticipated benefits from these strategies;
•reduce costs and effectively manage our cost structure, particularly selling, general and administrative ("(“SG&A"&A”) expenses;
•improve our business in the markets where we operate, including through improving field health;
•execute investments in information technology ("IT"(“IT”) infrastructure and realize efficiencies across our supply chain, marketing processes, sales model and organizational structure;
•implement and continue to innovate our digital strategies, Internet platform, technology strategies and customer service initiatives, including our ability to offer a more compelling social selling experience and the roll-out of e-commerce in certain markets;markets, especially where innovative platforms and technologies may lead to a disruption of our operations, both online and offline;
•effectively manage our outsourcing activities;
•improve our marketing and advertising, including our brochures and our social media presence;
•improve working capital, effectively manage inventory and implement initiatives to reduce inventory levels, including through our recent structural reset of inventory processes, and the potential impact on cash flows and obsolescence;
•secure financing at attractive rates, maintain appropriate capital investment, capital structure and cash flow levels and implement cash management, tax, foreign currency hedging and risk management strategies;
•reverse declines in Active Representatives and Representative satisfaction by successfully reducing campaign complexity and enhancing our sales leadership program, the Representative experience, retention and earnings potential, along with improving our brand image;
•increase the productivity of Representatives through successful implementation of segmentation, field activation programs and technology tools and enablers and other investments in the direct-selling channel;
•improve management of our businesses in developing markets, including improving local IT resources and management of local supply chains;
•increase the number of consumers served per Representative and their engagement online, as well as to reach new consumers through a combination of new brands, new businesses, new channels and pursuit of strategic opportunities such as joint ventures and alliances with other companies; and
comply with certain covenants in our revolving credit facility, which depends on our business results (including the impact of any adverse foreign exchange movements and significant restructuring charges), or undertake other alternatives to avoid noncompliance, such as obtaining additional amendments to our revolving credit facility or repurchasing certain debt, and address the impact any non-compliance with such covenants may have on our ability to secure financing with favorable terms; and
•estimate and achieve any financial projections concerning, for example, customer demand, future revenue, profit, cash flow, and operating margin increases and maintain an effective internal control environment as a result of any challenges associated with the implementation of our various plans, strategies and initiatives.
There can be no assurance if and when any of these initiatives will be successfully and fully executed or completed.
We may experience financial and strategic difficulties and delays or unexpected costs in completing Open Up & Grow and Avon Integration and any other restructuring and cost-savingscost-saving initiatives, including achieving any anticipated savings and benefits of these initiatives.
Subsequent to the merger of Natura and Avon in January 2020, an integration plan (the "Avon Integration") was established to create the right global infrastructure to support the future ambitions of the Natura &Co Group while also identifying synergies and opportunities to leverage our combined strength, scale and reach. Synergies will be derived mainly from procurement, manufacturing/distribution and administrative, as well as top line synergies, primarily between Avon LATAM and Natura &Co Latin America.
In September 2018, we initiated a new strategy in order to return Avon to growth (“("Open Up Avon”Avon"). As one elementThe Open Up Avon strategy is integral to our ability to return Avon to growth, built around the necessity of this plan, we are targeting pre-tax annualized cost savingsincorporating new approaches to various elements of approximately $400 million by 2021, to be generated from efficienciesour business, including increased utilization of third-party providers in manufacturing and sourcing, distribution, generaltechnology, seeking a better fit for purpose asset base, and administrative activities,an increased focus on enabling our Representatives to more easily interact with the company and back office functions, as well as through revenue management, interest and tax.achieve relevant earnings. These savings have been and are expected to continue to be achieved through restructuring actions (that have resulted, and may continue to 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. We initiatedIn January 2019, we announced significant advancements in this strategy, including a structural reset of inventory processes and a reduction in global workforce.
In May 2020, the new leadership of Avon International refreshed our strategy ("Open Up & Grow") which aims to return Avon International to growth over the next three years. Open Up & Grow replaces and builds on the success of the 2018 Open Up Avon strategy in order to enable usstrengthen competitiveness through enhancing the representative experience, improving brand position and relevance, accelerating digital expansion and improving costs. Over the next three years, savings are expected to achieve our goals of low-single-digit constant-dollar revenue growthcontinue to be achieved through restructuring actions (that may continue to result in charges related to severance, contract terminations and low double-digit operating margin by 2021. We plan to reinvest a portion of these cost savingsasset write-offs), as well as other cost-savings strategies that would not result in commercial initiatives, including training for Representatives, and digital and information technology infrastructure initiatives. See "Overview" within MD&A on pages 27 through 29 for more information on our Open Up Avon Strategy.restructuring charges.
As we work to right-size our cost structure, we may not realize anticipated savings or benefits from one or more of the various restructuring and cost-savingscost-saving initiatives we may undertake as part of these efforts in full or in part or within the time periods we expect. Other events and circumstances, such as financial and strategic difficulties and delays or unexpected costs, including the impact of foreign currency and inflationary pressures, may occur which could result in our not realizing our targets or in offsetting the financial benefits of reaching those targets. If we are unable to realize these savings or benefits, or otherwise fail to invest in the growth initiatives, our business may be adversely affected. In addition, any plans to invest these savings and benefits ahead of future growth means that such costs will be incurred whether or not we realize these savings and benefits. We are also subject to the risks of labor unrest, negative publicity and business disruption in connection with these initiatives, and the failure to realize anticipated savings or benefits from such initiatives could have a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows.
There can be no assurance that we will be able to improve revenue, margins and net income or to achieve profitable growth.
There can be no assurance that we will be able to improve revenue, margins and net income, or to achieve profitable growth in the future, particularly in our largest markets and developing and emerging markets, such as Brazil, Mexico and Russia. Our
revenue in 20182021 was $5,571.3$3,404.5 million, compared with $5,715.6$3,625.2 million in 20172020, and $5,717.7$4,763.2 million in 2016.2019. Improving revenue, margins and net income and achieving profitable growth will depend on our ability to improve financial and operational performance and execute our global business strategy, and there can be no assurance that we will be able to achieve these goals. Our ability to improve could be hindered by competing business priorities and projects.
To improve revenue, margins and net income and to achieve profitable growth, we also need to successfully implement certain initiatives, including Open Up & Grow and Avon Integration, and there can be no assurance that we will be able to do so. Our achievement of profitable growth is also subject to the strengths and weaknesses of our individual international markets, which are or may be impacted by global economic conditions. We cannot assure that our broad-based geographic portfolio will be able to withstand an economic downturn, recession, cost or wage inflation, commodity cost pressures, economic or political instability (including fluctuations in foreign exchange rates), competitive pressures or other market pressures in one or more particular regions.
Failure to improve revenue, margins and net income and to achieve profitable growth could have a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows.
Our business is conducted primarily in one channel, direct selling.selling, and our inability to retain our Representatives may materially adversely affect us
Our business is conducted primarily in the direct-selling channel. Sales are made to the ultimate consumer principally through direct selling by Representatives, who are independent contractors and not our employees. As of December 31, 2018,2021, we had an average of approximately 5.04 million active Representatives.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. There is a high rate of turnover among Representatives, which is a common characteristic of the direct-selling business. In order to reverse losses of Representatives and grow our business in the future, we need to recruit, retain and service Representatives on a continuing basis. Among other things, we need to create attractive Representative earning opportunities and transform the value chain, restore field health and sales force effectiveness, successfully implement other initiatives in the direct-selling channel, with a strategy to expand to omnichannel successfully execute our digital strategy, including e-commerce, improve our brochure and product offerings and improve our marketing and advertising. If we are unable to constantly update our product portfolio, our ability to retain our representatives could be materially adversely affected. There can be no assurance that we will be able to achieve these objectives.
Our direct-selling model contains an inherent risk of bad debt associated with providing Representatives with credit, which is exacerbated if the financial condition of the Representatives deteriorates. Additionally, consumer purchasing habits, including reducing purchases of beauty and related products generally, or reducing purchases from Representatives through direct selling by buying beauty and related products in other channels such as retail, could reduce our sales, impact our ability to execute our global business strategy or have a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows. Additionally, if we lose market share in the direct-selling channel, our business, prospects, financial condition, liquidity, results of operations and cash flows may be adversely affected.
Furthermore, if any government or regulatory body such as Brazil or the European Union, bans or severely restricts our business methods or operational/commercial model of direct selling, our business, prospects, financial condition, liquidity, results of operations and cash flows may be materially adversely affected. We may also be adversely affected by laws or regulations in the countries in which we operate that would characterize representatives as employees or otherwise oblige us to make social security contributions on their behalf.
Our ability to improve our financial performance depends on our ability to anticipate and respond to market trends and changes in consumer preferences.
Our ability to improve our financial performance depends on our ability to anticipate, gauge and react in a timely and effective manner to changes in consumer spending patterns and preferences for beauty and related products. We must continually work to develop, produce and market new products, maintain and enhance the recognition of our brands, achieve a favorable mix of products, and refine our approach as to how and where we market and sell our products. Consumer preferences and trends may change due to a variety of factors, such as changes in demographic trends, changes in the characteristics and ingredients of products, new market trends, climate, negative publicity from lawsuits against us or our peers, or a weak economy in one or
more of the markets in which we operate. In addition, consumers may switch to the products of competitors, or the demand for products in our segment as a whole could decline. If we are unable to anticipate changes in consumer preferences and trends, our business, financial condition and operating results could be materially adversely affected.
Furthermore, material shifts or decreases in market demand for our products, including as a result of changes in consumer spending patterns and preferences or incorrect forecasting of market demand, could result in us carrying inventory that cannot be sold at anticipated prices or increased product returns by the Representatives. Failure to maintain proper inventory levels or increased product returns by the Representatives could result in a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows.
Risks Related to Our Business Model
We face intense competition and can make no assurances about our ability to overcome our competitive challenges.
We face intense competition from competing products in each of our lines of business in the markets in which we operate. We compete against products sold to consumers in a number of distribution methods, including direct selling, through the Internet, and through mass market retail and prestige retail channels. We also face increasing direct-selling and retail competition in our developing and emerging markets, particularly Brazil and Russia.
Within the direct-selling channel, we often compete on country-by-country basis with our direct-selling competitors. There are a number of direct-selling companies that sell product lines similar to ours, some of which have worldwide operations and compete with us globally. Unlike a typical CPG company which operates within a broad-based consumer pool, direct sellers compete for representative or entrepreneurial talent by providing a more competitive earnings opportunity or “better deal” than that offered by the competition. Providing a compelling earnings opportunity for the Representatives is as critical as developing and marketing new and innovative products. Therefore, in contrast to typical CPG companies, we must first compete for a limited pool of Representatives before we reach the ultimate consumer.
Representatives are attracted to a direct seller by competitive earnings opportunities, often through what are commonly known as “field incentives” in the direct-selling industry. Competitors devote substantial effort to finding out the effectiveness of such incentives so that they can invest in incentives that are the most cost-effective or produce the better payback. As one of the largest and oldest beauty direct sellers globally, Avon's business model and strategies are often highly sought after, particularly by smaller and more nimble competitors who seek to capitalize on our investment and experience. As a result, we are subject to significant competition for the recruitment of Representatives from other direct-selling or network marketing organizations as well as significant competition from other non-direct selling earnings opportunities of which our existing Representatives or potential Representatives could avail themselves. Changes to our compensation models are sometimes necessary to be competitive but could have short-term negative impacts on our total number of Representatives. It is therefore continually necessary to innovate and enhance our direct-selling and service model as well as to recruit and retain new Representatives. If we are unable to do so, our business will be adversely affected.
Within the broader CPG industry, we principally compete against large and well-known cosmetics (color), fragrance and skincare companies that manufacture and sell broad product lines through various types of retail establishments and other channels, including through the Internet. In addition, we compete against many other companies that manufacture and sell more narrow beauty product lines sold through retail establishments and other channels, including through the Internet. This industry is highly competitive, and some of our principal competitors in the CPG industry are larger than we are and have greater resources than we do. Competitive activities on their part could cause our sales to suffer. We also have many highly competitive global branded and private label competitors in the accessories, apparel, housewares, and gift and decorative products industries, including retail establishments, principally department stores, mass merchandisers, gift shops and specialty retailers. Our principal competition in the highly competitive fashion jewelry industry consists of a few large companies and many small companies that sell fashion jewelry through department stores, mass merchandisers, specialty retailers and e-commerce.
The number of competitors and degree of competition that we face in the beauty and related products industry varies widely from country to country. If our advertising, promotional, merchandising or other marketing strategies are not successful, if we are unable to improve our product mix and offer new products that represent technological breakthroughs and are aligned with local preferences, if we do not successfully manage the timing of new product introductions or the profitability of these efforts, if we are unable to improve the Representative experience, or if for other reasons the Representatives or end customers perceive competitors' products as having greater appeal, then our sales, results of operations and cash flows will be adversely affected.
Third-party suppliers provide, among other things, the raw materials required for our Beauty products, and the loss of these suppliers, a supplier's inability to supply a raw material or a finished product or a disruption or interruption in the supply chain may adversely affect our business.
We manufacture and package the majority of our Beauty products, which are formulated and designed by our staff of chemists, designers and artists. Raw materials, consisting chiefly of essential oils, chemicals, containers and packaging components required for our Beauty products are purchased from a range of third-party suppliers. The remainder of our Beauty products and all of our Fashion & Home products are purchased from various third-party manufacturers. Our products are affected by the cost and availability of materials such as glass, fragrance and fuel. For the vast majority of items we have more than one source of supply available. We believe that we can continue to obtain sufficient raw materials and supplies to manufacture and produce our Beauty products for the foreseeable future. Additionally, we design the brochures that are used by the Representatives to sell our products. The brochures are then produced on our behalf by a range of printing suppliers.
The loss of any one supplier would not have a material impact on our ability to source raw materials for the majority of our Beauty products or source products for the remainder of our Beauty products and all of our Fashion & Home products or paper for the brochures. This risk may be exacerbated by our globally coordinated purchasing strategy, which leverages volumes. Regulatory action, such as restrictions on importation, may also disrupt or interrupt our supply chain. Furthermore, increases in the costs of raw materials or other commodities, restricted supply or, in a worst-case scenario, the impossibility of obtaining raw materials and packaging due to several factors over which we have no control, such as climate, agricultural production, legitimate access to genetic heritage and/or traditional associated knowledge, economic conditions, and transportation and processing costs, among others may adversely affect our profit margins if we are unable to pass along any higher costs in the form of price increases or otherwise achieve cost efficiencies in manufacturing and distribution, and may adversely affect our business if we are unable to satisfy demand for certain products or to produce paper brochures that our Representatives can use to sell our products. Moreover, if our suppliers fail to use ethical business practices and comply with applicable laws and regulations, such as any child labor laws and other human rights laws, our reputation could be harmed due to negative publicity and our ability to supply certain products may be disrupted.
In addition, our business depends on a supply chain facing inherent logistics-related risks beyond our control and that of our suppliers, such as ocean freight disruptions, which have negatively impacted us and may continue to adversely affect us in the future. We may be adversely affected in the event of (i) fire, natural disasters, disease outbreaks or pandemics, such as COVID-19, shortages of goods, services or labor, delays in obtaining key supplies, strikes and stoppages, power shortages, failures in the systems, forest fires and deforestation, among others, where we are unable to otherwise service the affected region, (ii) significant disruptions in logistics infrastructure, and (iii) fluctuating fuel prices within our distribution network.
The loss of, or a disruption in, our research and development, production and distribution operations could adversely affect our business, financial condition and results of operations.
Our principal properties consist of worldwide manufacturing facilities for the production of Beauty products, distribution centers where offices are located and where finished merchandise is packed and shipped to Representatives in fulfillment of their orders, and one principal research and development facility. Additionally, we use third-party manufacturers to manufacture certain of our products. Therefore, as a company engaged in manufacturing, distribution and research and development on a global scale, we are subject to the risks inherent in such activities, including industrial accidents, environmental events, fires, strikes and other labor or industrial disputes, disruptions in logistics or information systems (such as our ERP system), loss or impairment of key manufacturing or distribution sites, product quality control issues, safety concerns, licensing requirements and other regulatory or government issues, as well as natural disasters, pandemics, border disputes, acts of terrorism and other external factors over which we have no control. We could also experience a negative financial impact if we do not comply with minimum purchase commitments. These risks may be exacerbated by our efforts to increase facility consolidation covering our manufacturing, distribution and supply footprints, particularly if we are unable to successfully increase our resiliency to potential operational disruptions or enhance our disaster recovery planning. The loss of, or damage to, any of our facilities or centers, or those of our third-party manufacturers, could have a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows.
Our success depends, in part, on the quality, safety and efficacy of our products.
Our success depends, in part, on the quality, safety and efficacy of our products. If our products are found to be, or perceived to be, defective or unsafe, or if they otherwise fail to meet the Representatives’ or end customers’ standards, then our relationship with the Representatives or end customers could suffer, particularly where the impact of media coverage and new technologies such as social media may exert negative influence over perception of our products. We may need to recall some of our products and/or become subject to regulatory action, our reputation or the appeal of our brand could be diminished, we could lose market
share, and we could become subject to liability claims, any of which could result in a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows.
Risks Related to Our International Operations
We are subject to financial risks as a result of our international operations, including exposure to foreign currency fluctuations and the impact of foreign currency restrictions.
We operate globally, through operations in various locations around the world, and derive all of our consolidated revenue from operations outside of the U.S.
One risk associated with our international operations is that the functional currency for most of our international operations is their local currency. The primary foreign currencies for which we have significant exposures include 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. As the U.S. dollar strengthens relative to our foreign currencies, our revenues and profits are reduced when translated into U.S. dollars and our margins may be negatively impacted by country mix if our higher marginhigher-margin markets experience significant devaluation. In addition, our costs are more weighted to U.S. dollars while our sales are denominated in local currencies. Although we typically work to mitigate this negative foreign currency transaction impact through price increases and further actions to reduce costs, and by shifting costs to markets in which we generate revenue, we may not be able to fully offset the impact, if at all. Our success depends, in part, on our ability to manage these various foreign currency impacts and there can be no assurance that foreign currency fluctuations will not have a material adverse effect on our business, assets, financial condition, liquidity, results of operations or cash flows.
Another risk associated with our international operations is the possibility that a foreign government may tax or impose foreign currency remittance restrictions. Due to the possibility of government restrictions on transfers of cash out of the country and control of exchange rates, we may not be able to immediately repatriate cash. If this should occur, or if the exchange rates devalue, it may have a material adverse effect on our business, assets, financial condition, liquidity, results of operations or cash flows.
Inflation is another risk associated with our international operations. Gains and losses resulting from the remeasurement of the financial statements of subsidiaries operating in highly inflationary economies are recorded in earnings. High rates of inflation or the related devaluation of foreign currency may have a material adverse effect on our business, assets, financial condition,
liquidity and results of operations or cash flows. For example, Argentina has been designated asis considered to be a highly inflationary economy. See "Segment“Segment Review - SouthAvon Latin America"America” within MD&A on pages 47 of our 2018 Annual Report for additional information regarding Argentina. Brazil has also experienced a significant rise in inflation in 2021 and early 2022. Moreover, governmental measures to curb inflation and speculation about any such possible future governmental measures have contributed to the negative economic impact of inflation and have created general economic uncertainty and heightened volatility in the capital markets. In addition, there can be no assurance that other countries in which we operate will not become highly inflationary and that our revenue, operating profit and net income will not be adversely impacted as a result.
Our ability to improve our financial performance depends on our ability to anticipate and respond to market trends and changes in consumer preferences.
Our ability to improve our financial performance depends on our ability to anticipate, gauge and react in a timely and effective manner to changes in consumer spending patterns and preferences for beauty and related products. We must continually work to develop, produce and market new products, maintain and enhance the recognition of our brands, achieve a favorable mix of products, and refine our approach as to how and where we market and sell our products. Consumer spending patterns and preferences cannot be predicted with certainty and can change rapidly. In addition, certain market trends may be short-lived. There can be no assurance that we will be able to anticipate and respond to trends timely and effectively in the market for beauty and related products and changing consumer demands and improve our financial results.
Furthermore, material shifts or decreases in market demand for our products, including as a result of changes in consumer spending patterns and preferences or incorrect forecasting of market demand, could result in us carrying inventory that cannot be sold at anticipated prices or increased product returns by the Representatives. Failure to maintain proper inventory levels or increased product returns by the Representatives could result in a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows.
Our success depends, in part, on our key personnel.
Our success depends, in part, on our ability to retain our key personnel. The unexpected loss of or failure to retain one or more of our key employees could adversely affect our business. Our success also depends, in part, on our continuing ability to identify, hire, attract, train, develop and retain other highly qualified personnel. Competition for these employees can be intense and our ability to hire, attract and retain them depends on our ability to provide competitive compensation. We may not be able to attract, assimilate, develop or retain qualified personnel in the future, and our failure to do so could adversely affect our business, including the execution of our global business strategy. For example, there have been many changes to the Company's senior management, including a new chief executive officer in 2018, a new chief financial officer in 2015, 2017 and 2019 and other significant changes to senior management during 2017, 2018 and 2019. Such turnover creates a risk of business processes not being sustained if the turnover occurs with inadequate knowledge transfer. Any failure by our management team to perform as expected may have a material adverse effect on our business, prospects, financial condition, results of operations and cash flows. This risk may be exacerbated by the uncertainties associated with the implementation of Open Up Avon and any other stabilization strategies and restructuring and cost-savings initiatives we undertake from time to time.
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.
Current global macro-economic instability or a further downturn in the economies in which we sell our products, including any recession in one or more of our geographic regions or markets could adversely affect our business, our access to liquidity and capital, and our credit ratings. Economic events, including high unemployment levels and recession, as well as the tightening of credit markets, have resulted in challenges to our business and a heightened concern regarding further deterioration globally. In addition, as mentioned above, our business is conducted primarily in the direct-selling channel. We could experience declines in revenues, profitability and cash flow due to reduced orders, payment delays, supply chain disruptions or other factors caused by such economic, operational or business challenges. Any or all of these factors could potentially have a material adverse effect on our liquidity and capital resources and credit ratings, including our ability to access short-term financing, raise additional capital, reduce flexibility with respect to working capital, and maintain credit lines and offshore cash balances.
Consumer spending is also generally affected by a number of factors, including general economic conditions, inflation, interest rates, energy costs, gasoline prices and consumer confidence generally, all of which are beyond our control. Consumer purchases of discretionary items, such as beauty and related products, tend to decline during recessionary periods, when disposable income is lower, and may impact sales of our products. We may face continued economic challenges in 2019 because customers may continue to have less money for discretionary purchases as a result of job losses, bankruptcies, and reduced access to credit, among other things.
In addition, sudden disruptions in business conditions and consumer spending may result from acts of terror, natural disasters, adverse weather conditions, and pandemic situations or large-scale power outages, none of which are under our control.
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.
Nationally recognized credit rating organizations have issued credit ratings relating to our long-term debt. Our credit ratings have been downgraded at various points during the past several years, including in 2017. Our long-term credit ratings are: Moody’s ratings of Stable Outlook with B1 for corporate family debt, B3 for senior unsecured debt, and Ba1 for our Senior Secured Notes; S&P ratings of Stable Outlook with B for corporate family debt and senior unsecured debt and BB- for our Senior Secured Notes; and Fitch rating of Stable Outlook with B+, each of which are below investment grade. We do not believe these long-term credit ratings will have a material impact on our near-term liquidity. However, any rating agency reviews could result in a change in outlook or downgrade, which could further limit our access to new financing, particularly short-term financing, reduce our flexibility with respect to working capital needs, affect the market price of some or all of our outstanding debt securities, and likely result in an increase in financing costs, and less favorable covenants and financial terms under our financing arrangements. A further change in outlook or downgrade of our credit ratings may increase some of these risks and limit our access to such short-term financing in the future on favorable terms, if at all. See Note 8, Debt and Other Financing on pages F-30 through F-33 of our 2018 Annual Report for details about the terms of our existing debt and other financing arrangements.
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.
As of December 31, 2018, we had approximately $1.6 billion of indebtedness outstanding. We may also incur additional long-term indebtedness and working capital lines of credit to meet future financing needs, subject to certain restrictions under our indebtedness, including our revolving credit facility and our Senior Secured Notes (each, as described below), which would increase our total indebtedness. We may be unable to generate sufficient cash flow from operations and future borrowings and other financing may be unavailable in an amount sufficient to enable us to fund our current and future financial obligations or our other liquidity needs, which would have a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows. Our indebtedness could have material negative consequences on our business, prospects, financial condition, liquidity, results of operations and cash flows, including the following:
limitations on our ability to obtain additional debt or equity financing sufficient to fund growth, such as working capital and capital expenditures requirements or to meet other cash requirements, in particular during periods in which credit markets are weak;
a further downgrade in our credit ratings, as discussed above;
a limitation on our flexibility to plan for, or react to, competitive challenges in our business and the beauty industry;
the possibility that we are put at a competitive disadvantage relative to competitors with less debt or debt with more favorable terms than us, and competitors that may be in a more favorable position to access additional capital resources and withstand economic downturns;
limitations on our ability to execute business development activities to support our strategies or ability to execute restructuring as necessary; and
limitations on our ability to invest in recruiting, retaining and servicing the Representatives.
Our revolving credit facility and our Senior Secured Notes are secured by first-priority liens on and security interests in substantially all of the assets of Avon International Capital, p.l.c. (“AIC,” a wholly-owned foreign subsidiary) and the subsidiary guarantors and by certain assets of the Company, in each case, subject to certain exceptions and permitted liens. Both our revolving credit facility and our Senior Secured Notes contain customary covenants, including, among other things, limits on the ability of the Company, AIC or any restricted subsidiary to, subject to certain exceptions, incur liens, incur debt, make restricted payments, make investments or, with respect to certain entities, merge, consolidate or dispose of all or substantially all of its assets. Our revolving credit facility also contains a minimum interest coverage ratio and a maximum total leverage ratio. If we are unable to comply with these ratios as a result of our business results (including the impact of any adverse foreign exchange movements and significant restructuring charges), we would be limited in our ability to borrow under our revolving credit facility which could, as a result, restrict our operational flexibility. In addition, we could have difficulty undertaking other alternatives to avoid noncompliance, such as obtaining necessary waivers from compliance with, or necessary amendments to, the covenants contained in our revolving credit facility and our Senior Secured Notes or repurchasing certain debt, and we could have difficulty addressing the impact any non-compliance with these covenants may have on our ability to secure financing with favorable terms.
Our ability to conduct business in our international markets may be affected by economic, political, legal, tax and regulatory risks.
OurA significant deterioration in economic conditions in any of our important markets, including economic slowdowns or recessions, inflationary pressures and/or disruptions to credit and capital markets, could lead to decreased consumer confidence and consumer spending more generally, thus reducing demand for our products. In addition, our global operations are subject to adverse political, social or other developments, such as political or social unrest, potential health issues, natural disasters, disease outbreaks or pandemics, such as COVID-19, politically motivated violence and terrorist threats and/or act which may also occur in countries where we have operations.
In particular, our ability to achieve growth in our international markets, and to improve operations in our existing international markets, is exposed to various risks, including:
•the possibility that a foreign government might ban, halt or severely restrict our business, including our primary method of direct selling;
•the possibility that local civil unrest, economic or political instability, bureaucratic delays, changes in macro-economic conditions, changes in diplomatic or trade relationships (including any sanctions, restrictions and other responses, such as those related to the ongoing military conflict between Russia and Ukraine) or other uncertainties might disrupt our operations in an international market;
•the lack of well-established or reliable legal systems in certain areas where we operate;
•the adoption of new U.S. or foreign tax legislation including the 2017 U.S. federal income tax law discussed in detail below or exposure to additional tax liabilities, including exposure to tax assessments without prior notice or the opportunity to review the basis for any such assessments in certain jurisdictions;
•changes to tax rules in Brazil, where the tax system is highly complex and the interpretation of the tax laws and regulations is commonly controversial, and the Brazilian government regularly implements changes to tax regimes that may increase our tax burden, including modifications in the rate of assessments and the enactment of new or temporary taxes, the proceeds of which are earmarked for designated governmental purposes;
•electoral pressures in 2022 in Brazil, whereas, historically, in presidential election years, foreign investments in Brazil decrease and political uncertainty generates greater instability and volatility in the domestic market;
•the possibility that a government authority might impose legal, tax or other financial burdens on the Representatives, as direct sellers, or on Avon, due, for example, to the structure of our operations in various markets, or additional taxes on our products, including in Brazil;
•the possibility that a government authority might challenge the status of the Representatives as independent contractors or impose employment or social taxes on the Representatives; and
•those associated with data privacy regulation and the international transfer of personal data.
We are also subject to the adoption, interpretation and enforcement by governmental agencies abroad and in the U.S. (including on federal, state and local levels) of other laws, rules, regulations or policies, including any changes thereto, such as restrictions on trade, competition, manufacturing, license and permit requirements, import and export license requirements, privacy and data protection laws, anti-trust laws, anti-corruption laws, environmental laws, records and information management, tariffs and taxes, laws relating to the sourcing of "conflict minerals," health care reform requirements such as those required by the Patient Protection and Affordable Healthcare Act, and regulation of our brochures, product claims or ingredients, which may require us to adjust our operations and systems in certain markets where we do business.
For example, from time to time, local governments and others question the legal status of Representatives or impose burdens inconsistent with the Representative's status as independent contractors, often in regard to possible coverage under social benefit laws that would require us (and, in most instances, the Representatives) to make regular contributions to government social benefit funds.
At the end of 2021 and into 2022, Russia amassed large numbers of military forces and support personnel on the Ukraine-Russia border, leading to tensions between Ukraine and Russia as well as between the United States, its allies and Russia. On February 24, 2022, Russia launched a military invasion of Ukraine. As a result of these developments, our Ukrainian operations are currently suspended for an indeterminate period [and we cannot assure you that our Russian operations will not also be reduced or suspended.] Furthermore, the ongoing military conflict between Ukraine and Russia has resulted in the imposition of broad financial and economic sanctions against Russia by the United States and its allies, including the UK, the EU and other countries around the world, which could have a lasting impact on regional and global economies. Any further escalation of the military conflict between Ukraine and Russia, or any further increase in tensions between the United States, its allies and Russia could have a material adverse effect on us. See also “—The ongoing military conflict between Ukraine and Russia may have a material adverse effect on our business, financial condition and results of operations.”
If we are unable to address these matters in a satisfactory manner, or adhere to or successfully implement processes in response to changing regulatory requirements, our business, costs and/or reputation may be adversely affected. We cannot predict with certainty the outcome or the impact that pending or future legislative and regulatory changes may have on our business in the future. Further, in the event that any jurisdiction in which we operate or plan to operate imposes any new laws, regulations, restrictions and/or other barriers to entry, our ability to expand may be thereby limited and our growth and development may be adversely affected.
The ongoing military conflict between Ukraine and Russia may have a material adverse effect on our business, financial condition and results of operations.
On February 24, 2022, Russia launched a military invasion of Ukraine. The ongoing military conflict between Ukraine and Russia has provoked strong reactions from the United States, the UK, the EU and various other countries around the world, including the imposition of broad financial and economic sanctions against Russia.
We have sales operations in multiple countries including in Russia and Ukraine. While as of the date of this report there have not been any material impacts from the above mentioned matter in our consolidated financial statements, we are continuously monitoring the developments to assess any potential future impacts that may arise as a result of the ongoing crisis .
While the precise effects of the ongoing military conflict and these sanctions on the Russian and global economies remain uncertain, they have already resulted in significant volatility in financial markets, depreciation of the Russian ruble and the Ukrainian hryvnia against the U.S. dollar, as well as in an increase in energy and commodity prices globally. Should the
conflict continue or escalate, markets may face various economic and security consequences including, but not limited to, supply shortages of different kinds, further increases in prices of commodities, including piped gas, oil and agricultural goods, reduced consumer purchasing power, significant disruptions in logistics infrastructure, telecommunications services, the risk of unavailability of information technology systems and infrastructure, among others, given that Russia and Ukraine are significant exporters of commodities. The resulting impacts on financial markets, inflation, interest rates, unemployment and other matters could disrupt the global economy’s ongoing recovery following the COVID-19 pandemic. Other potential consequences include, but are not limited to, growth in the number of popular uprisings in the region, increased political discontent, especially in the regions most affected by the conflict or economic sanctions, increase in cyberterrorism activities and attacks, displacement of persons to regions close to the areas of conflict and an increase in the number of refugees fleeing across Europe, among other unforeseen social and humanitarian effects.
A protracted conflict between Ukraine and Russia, any escalation of that conflict, and the financial and economic sanctions and import and/or export controls imposed on Russia by the United States, the UK, the EU and others, and the above mentioned adverse effect on the wider global economy and market conditions could, in turn, have a material adverse effect on our business, financial condition and results of operations.
Our business is subject to a number of foreign laws and regulations in various jurisdictions governing data privacy and security.
We collect, use and store personal data of our employees, Representatives, customers and other third parties in the ordinary course of business, and webusiness. We are required to comply with increasingly complex and changing data privacy and security laws and regulations including with respect togoverning the collection, storage, use, transmission and protection of personal information and other data, including particularly the transfer of personal data between or among countries. In particular,May 2018, the EU has adopted robust data privacy regulations. Following recent developments such as the European Court of Justice’s 2015 ruling that the transfer of personal data from the EU to the U.S.regulations under the EU/U.S. Safe Harbor was an invalid mechanism of personal data transfer, the adoption of the EU-U.S. Privacy Shield as a replacement for the Safe Harbor, and the upcoming effectiveness of the EU’s General Data Protection Regulation (“GDPR”) in May 2018, along with the proposed. Further changes are likely to be introduced through a revised Regulation on Privacy and Electronic Communications (the “ePrivacy Regulation”), also on the horizon, data privacy and security compliance in the EU are increasingly complex and challenging.. The GDPR in particular has broad extraterritorial effect and imposes a robust data protection compliance regime with significant penalties for non-compliance. Other countries in which we operate are developing comparable regulations. Brazil enacted the Lei Geral de Proteção de Dados Pessoais (“LGPD”), which is broadly equivalent to GDPR and came into force in September 2020, except for the applicability of the law’s administrative sanctions, which came into force on August 1, 2021. In general, the GDPR and ePrivacy Regulation, and other local privacy laws, could also require adaptation of our technologies or practices to satisfy local privacy requirements and standards. We may also face audits or investigations by one or more domestic or foreign government agencies relating to our compliance with these regulations. An adverse outcome under any such investigation or audit could result in the issuance of stop processing orders, and/or subject us to fines penalties or orders to cease, delay or modify collection, use or transfers of personal data.and penalties. That or other circumstances related to our collection, use and transfer of personal data could cause a loss of reputation in the market or adversely affect our business.
The scope of data privacy and security regulations continues to evolve, and we believe that the adoption of increasingly restrictive regulations in this area may be likely within the jurisdictions in which we operate. Compliance with data privacy and security restrictionsrequirements could increase the cost of our operations and failure to comply with such restrictionsrequirements could subject us to business disruption, criminal and civil sanctions as well as other penalties.
The uncertainty surrounding the UK's decision to withdraw from the EU may adversely affect our business.
On June 23, 2016, the UK held a referendum in which voters approved an exit from the EU, commonly referred to as “Brexit.” As a result of the referendum, the UK parliament voted in March 2017 to trigger Article 50 of the Treaty on European Union, commencing the UK’s official withdrawal process from the EU and initiating negotiations with the EU in June 2017. In January 2020, the House of Commons (the lower chamber of the UK parliament) approved the terms of an agreement with the EU to determine the future terms of the parties’ relationship, including the terms of trade between the UK and the EU and other nations, following the UK’s exit from the EU on January 31, 2020.
The UK left the EU on January 31, 2020. A transition period, lasting until December 31, 2020, was put in place, during which the UK continued to (i) be subject to EU rules and (ii) remain a member of the single market. The UK-EU Trade and Cooperation Agreement (“TCA”) was signed on 30 December 2020, between the EU, the European Atomic Energy Community and the UK. It has been applied provisionally since 1 January 2021, when the transition period ended, and came into full force on May 1, 2021, after relevant EU institutions ratified the agreement. This trade agreement, in which there will be no tariffs or quotas on the movement of goods between UK and EU, means the UK has left the EU customs union and single market. While the TCA between the UK and EU provided much needed certainty on trade, naturally political and economic concerns remain as the true effects of the TCA and future trade agreements outside of the EU begin to unfold, which developments we continue to monitor.
Continued uncertainty around the terms of the UK’s relationship with the European Union and the lack of a fully comprehensive trade agreement may negatively impact the economic growth of both regions. Similarly, an adverse effect on the
UK and the EU may have an adverse effect on the wider global economy or market conditions and investor confidence. This could, in turn, have a material adverse effect on our operations, financial condition and prospects.
Furthermore, given that we conduct a substantial portion of our business in the EU and the UK, and our corporate headquarters has been relocated to the UK, any of these developments could have a material adverse effect on our business, financial position, liquidity and results of operations or cash flows. Changes in foreign currency exchange rates may have a material effect on our net sales, financial condition, profitability and/or cash flows and may reduce the reported value of our operating results.
During 2022 we will continue to monitor the implementation of new border controls (including any resulting delays), immigration policy (ability to recruit and maintain talent), regulatory changes and requirements to comply with new mandates, which may prove challenging and costly.
Risks Related to IT and Cybersecurity Matters
A failure, disruption, cyberattack, or other breach in the security of an IT system or infrastructure that we utilize could adversely affect our business and reputation and increase our costs.
We employ IT systems to support our business, including systems to support financial reporting, web-based tools, an enterprise resource planning ("ERP"(“ERP”) system,systems, and internal communication and data transfer networks. We also employ ITincreasingly rely on a variety of web-based systems and mobile applications to support Representatives in our markets, including electronic order collection, invoicing systems, shipping and box packing, social media tools, mobile applicationsRepresentative recruitment and on-lineonline training. We also have e-commerce and Internet sites including business-to-business websites to support Representatives.allow customers to purchase products directly. We use third-party service providers in many instances to provide or support these IT systems. Over the last several years, we have undertaken initiatives to increase our reliance on IT systems which has resulted in the outsourcing of certain services and functions, such as global human resources IT systems, call center support, Representative support services and other IT processes. Our IT systems and infrastructure, as well as the systems, infrastructure and services of those of third parties, are integral to our performance.
Any of our IT systems and infrastructure, or those of our third-party service providers, may be susceptible to outages, disruptions, destruction or corruption due to the complex landscape of localized applications and architectures as well as incidents related to legacy or unintegrated systems. These IT systems and infrastructure also may be susceptible to cybersecurity breaches, attacks, computer viruses, break-ins, including ransomware, other malware and phishing attacks, data corruption, fire, floods, power loss, telecommunications failures, terrorist attacks and similar events beyond our control. We rely on our employees, Representatives and third parties in our day-to-day and ongoing operations, who may, as a result of human error or malfeasance or failure, disruption, cyberattack or other security breach of third-party systems or infrastructure, expose us to risk. Furthermore, our ability to protect and monitor the practices of our third-party service providers is more limited than our ability to protect and monitor our own IT systems and infrastructure.
Moreover, as a result of the COVID-19 pandemic, we have increased the number of employees working remotely and expect to continue to allow remote work even after the pandemic comes to an end. This will require us to continue relying on remote-access information technology systems, which increases the risk of unavailability of our systems and infrastructure, disruption of telecommunications services, widespread system failures, and exposes us to increased vulnerability to cyberattacks. Any of these developments could adversely affect our ability to conduct our business may be adversely impacted.
Our IT systems, or those of our third-party service providers may be accessed by unauthorized users such as cyber criminals as a result of a failure, disruption, cyberattack or other security breach, exposing us to risk. As techniques used by cyber criminals change frequently, a failure, disruption, cyberattack or other security breach may go undetected for a long period of time. An actual or perceived failure, disruption, cyberattack or other security breach of our IT systems or infrastructure, or those of our third-party service providers, could result in the theft, transfer, unauthorized access to, disclosure, modification, misuse, loss, or destruction of Company, employee, Representative, customer, vendor, or other third-party data, including sensitive or confidential data, personal information and intellectual property and could be particularly harmful to our brand and reputation.
We are investingcontinue to invest in industry-standard solutions and protections and monitoring practices of our data and IT systems and infrastructure to reduce these risks and we continue to monitor our IT systems and infrastructure on an ongoing basis for any current or potential threats. We have also deployed additional employee security training and updated security policies for the Company and its third-party service providers. Such efforts and investments are costly, and as cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities. As a company that operates globally, we could also be impacted by commercial agreements between us and processing organizations, existing and proposed laws and regulations, and government policies and practices related to cybersecurity, privacy and data protection.
Despite our efforts, our and our third-party service providers’ data, IT systems and infrastructure may be vulnerable. There can be no assurance that our efforts will prevent a failure, disruption, cyberattack or other security breach of our or our third-party service providers’ IT systems or infrastructure, or that we will detect and appropriately respond if there is such a failure, disruption, cyberattack or other security breach. Our IT databases and systems have been, and will likely continue to be, subject to ransomware, denial of service and phishing attacks, none of which has been material to the Company to date.attacks. Any such failure, disruption, cyberattack or other security breach could adversely affect our business including our ability to expand our business, cause damage to our reputation, result in increased costs to address internal data, security, and personnel issues, and result in violations of applicable privacy laws and other laws and external financial obligations such as governmental fines, penalties, or regulatory proceedings, remediation efforts such as breach notification and identity theft monitoring, and third-party private litigation with potentially significant costs. In addition, it could result in deterioration in our employees', Representatives', customers', or vendors' confidence in us, which could cause them to discontinue doing business with us or result in other competitive disadvantages. In addition, there may be other challenges and risks as we upgrade, modernize, and standardize our IT systems globally.
See also “—We face intense competitionwere the target of a cybersecurity incident which disrupted our systems.”
Unauthorized disclosure of sensitive or confidential Representative or customer information or our failure or the perception by our Representatives or customers that we failed to comply with privacy laws or properly address privacy concerns could materially harm our business and can make no assurances aboutstanding with our ability to overcome our competitive challenges.Representatives and customers.
We face intense competition from competing productscollect, store, process, transmit and use certain personal information in eachthe ordinary course of our linesbusiness. We are required to comply with increasingly complex and changing data privacy and security laws and regulations governing personal information and other data, including the transfer of businesspersonal data between countries.We may face audits or investigations by one or more domestic or foreign government agencies relating to our compliance with these regulations. An adverse outcome under any such investigation or audit could result in the markets we operate.issuance of stop processing orders, subject us to fines, penalties or orders to cease, delay or modify collection, use or transfer of personal data. The perception of privacy concerns, whether or not valid, may adversely affect us. We compete against products soldrely on commercially available systems, software, tools and monitoring to consumers in a numberprovide secure processing, transmission and storage of distribution methods, including direct selling, through the Internet,confidential Representative and customer information.
through mass market retailOur facilities and prestige retail channels. We also face increasing direct-selling and retail competition in our developing and emerging markets, particularly Brazil and Russia.
Within the direct-selling channel, we often compete on country-by-country basis with our direct-selling competitors. There are a number of direct-selling companies that sell product lines similar to ours, some of which have worldwide operations and compete with us globally. Unlike a typical CPG company which operates within a broad-based consumer pool, direct sellers compete for representative or entrepreneurial talent by providing a more competitive earnings opportunity or "better deal" than that offered by the competition. Providing a compelling earnings opportunity for the Representatives is as critical as developing and marketing new and innovative products. Therefore, in contrast to typical CPG companies, we must first compete for a limited pool of Representatives before we reach the ultimate consumer.
Representatives are attracted to a direct seller by competitive earnings opportunities, often through what are commonly known as "field incentives" in the direct-selling industry. Competitors devote substantial effort to finding out the effectiveness of such incentives so that they can invest in incentives that are the most cost-effective or produce the better payback. As one of the largest and oldest beauty direct sellers globally, Avon's business model and strategies are often highly sought after, particularly by smaller and more nimble competitors who seek to capitalize on our investment and experience. As a result, we are subject to significant competition for the recruitment of Representatives from other direct-selling or network marketing organizationssystems, as well as significant competition fromthose of our third-party service providers, may be vulnerable to security breaches, fraud, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors, or other non-direct selling earnings opportunities for which our existing Representativessimilar events. Any security breach, or potential Representatives could avail themselves. Changes to our compensation models are sometimes necessary to be competitive but could have short-term negative impacts on our total numberany perceived failure involving the misappropriation, loss or other unauthorized disclosure of Representatives. It is therefore continually necessary to innovate and enhance our direct-selling and service modelconfidential information, as well as any failure or perceived failure to recruitcomply with laws, policies, legal obligations or industry standards regarding data privacy and retain new Representatives. Ifprotection, whether by us or vendors upon whose systems we are unablerely, could damage our reputation, expose us to do so,litigation risk and liability, reduce revenue, increase costs, subject us to negative publicity, disrupt our businessoperations and harm our business. We cannot provide assurance that our security measures will be adversely affected.prevent security breaches or that failure to prevent them will not have a material adverse effect on us.
Within
We were the broader CPG industry,target of a cybersecurity incident which disrupted our systems.
In June 2020, we principally compete against large and well-known cosmetics (color), fragrance and skincare companiesbecame aware that manufacture and sell broad product lines through various types of retail establishments and other channels, including through the Internet. In addition, we compete against many other companies that manufacture and sell more narrow beauty product lines sold through retail establishments and other channels, including through the Internet. This industry is highly competitive, andwere exposed to a cyber incident in our Information Technology (IT) environment which interrupted some of our principal competitorssystems and partially affected our operations. We engaged leading external cybersecurity and IT general controls specialists, launched a comprehensive containment and remediation effort and started a forensic investigation. By mid-August 2020, the Company had re-established all of its core business processes and resumed operations in the CPG industry are larger than we are and have greater resources than we do. Competitive activities on their part could cause our sales to suffer. We also have many highly competitive global branded and private label competitors in the accessories, apparel, housewares, and gift and decorative products industries,all of its markets, including retail establishments, principally department stores, mass merchandisers, gift shops and specialty retailers. Our principal competition in the highly competitive fashion jewelry industry consistsall of a few large companies and many small companies that sell fashion jewelry through department stores, mass merchandisers, specialty retailers and e-commerce.its distribution centers.
The number of competitors and degree of competition that we face in the beauty and related products industry varies widely from country to country. If our advertising, promotional, merchandising or other marketing strategies are not successful, if we are unable to improve our product mix and offer new products that represent technological breakthroughs and are aligned with local preferences, if we do not successfully manage the timing of new product introductions or the profitability of these efforts, if we are unable to improve the Representative experience, or if for other reasons the Representatives or end customers perceive competitors' products as having greater appeal, then our sales, results of operations and cash flows will be adversely affected.
Third-party suppliers provide, among other things, the raw materials required for our Beauty products, and the loss of these suppliers, a supplier's inability to supply a raw material or a finished product or a disruption or interruption in the supply chain may adversely affect our business.
We manufacture and package the majority of our Beauty products, which are formulated and designed by our staff of chemists, designers and artists. Raw materials, consisting chiefly of essential oils, chemicals, containers and packaging components required for our Beauty products are purchased from a range of third-party suppliers. The remainder of our Beauty products and all of our Fashion & Home products are purchased from various third-party manufacturers. Our products are affected by the cost and availability of materials such as glass, plastics, chemicals and fabrics. For the vast majority of items we have more than one source of supply available. We believe that we can continue to obtain sufficient raw materials and supplies to manufacture and produce our Beauty products for the foreseeable future. Additionally, we design the brochures that are used by the Representatives to sell our products. The brochures are then produced on our behalf by a range of printing suppliers.
The loss of any one supplier wouldcyber incident did not have a material impact on our abilityfull year 2020 revenue, although it resulted in a shift in revenue from the second quarter to source raw materials for the majoritythird quarter of 2020 as the Company fulfilled the order backlog created. The incremental expense incurred as a result of the cyber incident was not material.
Management concluded that controls related to our Beauty products IT environment had not been designed and/or source products foroperated effectively to prevent access and changes to our IT systems supporting financial information processing. Although we had no indication that the remainderaccuracy and completeness of any financial information was impacted as a result of the incident, and we performed extensive procedures immediately after discovering the incident to validate such accuracy and completeness, we believed that, if the incident had gone differently, it could have potentially resulted in a material impact to our Beauty productsfinancial statements, which led to the conclusion that the magnitude of these control deficiencies represented a material weakness in our IT general controls.
To remediate the material weakness, we strengthened procedures and controls with the support of external cyber security and IT general controls specialists and accelerated our investment in IT infrastructure to strengthen our cyber security controls. Based on testing performed by management, the implemented controls are designed and operating effectively and the material weakness was remediated at December 31, 2020.
As a result of the incident, we may be subject to litigation and investigations by regulators in the jurisdictions in which we operate. We may incur losses associated with potential claims by third parties or individuals, as well as fines, penalties and other sanctions imposed by regulators relating to or arising from the incident. We may also incur contingencies related to the incident. We are not able to reliably forecast all of the losses that may occur as a result of the incident, and such excess losses could have a material adverse effect on our Fashion & Home productsfinancial condition or paper forresults of operations in future periods.
Following the brochures. This risk mayincident, we have taken certain additional preventative measures to reduce cyber risks. However, we cannot provide assurance that our security frameworks and measures will be exacerbated by our globally-coordinated purchasing strategy, which leverages volumes. Regulatory action, such as restrictions on importation, may also disrupt or interrupt our supply chain. Furthermore, increasessuccessful in preventing future cybersecurity incidents. In addition, the costs of raw materials orsuch measures and management attention required may be significant.Further, the incident may have a negative impact on our reputation and cause customers, suppliers and other commodities may adversely affect our profit margins ifthird parties with whom we maintain relationships to lose confidence in us. We are unable to pass alongdefinitively determine the impact to these relationships and whether we will need to engage in any higher costs in the form of price increases or otherwise achieve cost efficiencies in manufacturing and distribution. In addition,activities to rebuild them.
Risks Related to Financial Matters
if our suppliers fail to use ethical business practices and comply with applicable laws and regulations, such as any child labor laws, our reputation could be harmed due to negative publicity.
The comprehensive U.S. tax reform legislation enacted on December 22, 2017 could adversely affect our business and financial condition.
On December 22, 2017, the Tax Cuts and Jobs Act was enacted that significantly revises the Internal Revenue Code of 1986 (the "Code"), as amended. The enacted federal income tax law contains significant changes to corporate taxation, including but not limited to, a reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, a limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), a one-time tax on offshore earnings at reduced rates regardless of whether the funds are physically repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate and various guidance, legislation and regulation published by the U.S. Federal, and various state taxing authorities, there continues to be uncertainty regarding interpretation of certain provisions of the new federal tax law and the State responses to the new federal tax law. These uncertainties and the ultimate interpretation of the federal and state provisions may adversely affect our business and financial condition.
Our abilitycredit ratings are below investment grade, which could limit our access to utilize our foreign tax and other U.S. credits to offset our future taxable income may be limited under Sections 382 and 383 of the Code.
As of December 31, 2018, we had approximately $833 million of foreign tax and other credits available to offset future income for U.S. federal tax purposes. Our ability to utilize such credits to offset future income could be limited, however, if the Company undergoes an “ownership change” within the meaning of Section 382 of the Code. In general, an ownership change will occur if there is a cumulative increase in ownership of our stock by 5% shareholders (as defined in the Code) that exceeds 50 percentage points over a rolling three-year period. If the 50 percentage points are exceeded, Section 382 establishes an annual limitation on the amount of deferred tax assets attributable to previously incurred credits that may be used to offset taxable income in future years. A number of complex rules apply in calculating this limitation, and any such limitation would depend in part on the market value of the Company at the time of the ownership change and prevailing interest rates at the time of calculation. As a result, the magnitude of any potential limitation on the use of our deferred tax assets and the effect of such limitation on the Company if an ownership change were to occur is difficult to assess. However, if all or a portion of our deferred tax assets were to become subject to this limitation, our tax liability could increase significantly and our future results of operations and cash flows could be adversely impacted.
We currently believe an ownership change has not occurred. However, in recent periods, we have experienced fluctuations infinancing, affect the market price of our stockfinancing and changesincrease financing costs. A downgrade in ownership by our 5% shareholders. In addition,credit ratings may adversely affect our access to liquidity.
Our long-term credit ratings are: Moody’s ratings of Ba3 with Stable Outlook for corporate family and senior unsecured debt; S&P ratings of BB with Stable Outlook for corporate family and senior unsecured debt; and Fitch ratings of BB with Positive Outlook for corporate family and unsecured debt. Our credit ratings remain below investment grade which may impact our ability to access financing transactions on favorable terms. We do not believe these long-term credit ratings will have a material impact on our near-term liquidity. However, any rating agency review could result in a change in outlook or downgrade, which could limit our access to new financing, reduce our flexibility with respect to working capital needs, affect the issuancemarket price of some or all of our outstanding debt securities and sale of perpetual convertible preferred stock to Cerberus Investor (as defined below) resultedcould result in an increase in financing costs. See Note 7, Debt and Other Financing to the Consolidated Financial Statements included herein, for details about the terms of our cumulative ownership changeexisting debt and other financing arrangements.
We may not effectively manage risks associated with the replacement of benchmark indices.
Interest rate, equity, foreign exchange rate and other types of indices which are deemed to be “benchmarks” are the subject of increased regulatory scrutiny. In March 2021, the United Kingdom’s Financial Conduct Authority, or the “FCA,” announced that most London interbank offered rate (“LIBOR”) benchmarks will cease to be available after 2021. Certain other alternative benchmark interest rates have been announced, such as the Federal Reserve Bank of New York’s Secured Overnight Financing Rate based on overnight U.S. Treasury repurchase agreement transactions, which has been recommended as the alternative to U.S. dollar LIBOR by the Alternative Reference Rates Committee convened by the Federal Reserve Board and the Federal Reserve Bank of New York.
These and other reforms may cause benchmarks to perform differently than in the past, or to disappear entirely, or have other consequences that cannot be fully anticipated, which introduces a number of risks for us including legal risks arising from potential changes required to documentation for new and existing transactions. Meaningful time and effort is required to transition to the use of new benchmark rates, including with respect to the negotiation and implementation of any necessary changes to existing contractual arrangements and the implementation of changes to our 5% shareholders.systems and processes. We are actively evaluating the operational and other impacts of such changes and managing transition efforts accordingly.
Moreover, there is a lack of clarity as to what methods of calculating a replacement benchmark will be established or adopted generally, or whether different industry bodies, such as the loan market and the derivatives market, will adopt the same methodologies. In addition, as part of the transition to a replacement benchmark, parties may seek to adjust the spreads relative to such benchmarks in underlying contractual arrangements. As a result, interest rates on financial instruments tied to benchmark rates, including those pursuant to which we borrow funds, as well as the expenses associated with those financial instruments, may be adversely affected.
Significant changes in pension fund investment performance, assumptions relating to pension costs or required legal changes in pension funding rules may have a material effect on the valuation of pension obligations, the funded status of pension plans and our pension cost.
Our 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. Our pension cost is materially affected by the discount rate used to measure pension obligations, the level of plan assets available to fund those obligations at the measurement date and the expected long-term rate of return on plan assets. Significant changes in investment performance or a change in the portfolio mix of invested assets can result in corresponding increases and decreases in the valuation of plan assets, including equity and debt securities and derivative instruments, or in a change of the expected rate of
return on plan assets. A change in the discount rate could result in a significant increase or decrease in the valuation of pension obligations, affecting the reported funded status of our pension plans as well as the net periodic pension cost in the following fiscal years. Similarly, changes in the expected rate of return on plan assets can result in significant changes in the net periodic pension cost. Please see "Critical“Critical Accounting Estimates - Pension and Postretirement Expense"Expense” within MD&A on pages 32 through 34 and Note 14,13, Employee Benefit Plans on pages F-42 through F-50 of our 2018 Annual Report,to the Consolidated Financial Statements included herein, for additional information regarding the impact of these factors on our pension plan obligations.
Any strategic alliances or divestitures may expose us to additional risks.
We evaluate potential strategic alliances that would complement our current product offerings, increase the size and geographic scope of our operations or otherwise offer growth and/or operating efficiency opportunities. Strategic alliances may entail numerous risks, including:
substantial costs, delays or other operational or financial difficulties, including difficulties in leveraging synergies among the businesses to increase sales and obtain cost savings or achieve expected results;
difficulties in assimilating acquired operations or products, including the loss of key employees from any acquired businesses and disruption to our direct-selling channel;
diversion of management’s attention from our core business;
adverse effects on existing business relationships with suppliers and customers;
risks of entering markets in which we have limited or no prior experience; and
reputational and other risks regarding our ability to successfully implement such strategic alliances, including obtaining financing which could dilute the interests of our shareholders, result in an increase in our indebtedness or both.
Our failure to successfully complete the integration of any new or acquired businesses could have a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows. In addition, there can be no assurance that we will be able to identify suitable candidates or consummate such transactions on favorable terms.
For divestitures, success is also dependent on effectively and efficiently separating the divested unit or business from the Company and reducing or eliminating associated overhead costs. In cases where a divestiture is not successfully implemented or completed, the Company's business, prospects, financial condition, liquidity, results of operations and cash flows could be adversely affected. Please see "RisksRisks Related to the Separation of North America and the Preferred Stock Investment in the Company" below for additional information regarding the risks associated with the separation of North America.Legal Matters
The loss of, or a disruption in, our manufacturing and distribution operations could adversely affect our business.
Our principal properties consist of worldwide manufacturing facilities for the production of Beauty products, distribution centers where offices are located and where finished merchandise is packed and shipped to Representatives in fulfillment of their orders, and one principal research and development facility. Additionally, we use third-party manufacturers to manufacture certain of our products. Therefore, as a company engaged in manufacturing, distribution and research and development on a global scale, we are subject to the risks inherent in such activities, including industrial accidents, environmental events, fires, strikes and other labor or industrial disputes, disruptions in logistics or information systems (such as our ERP system), loss or impairment of key manufacturing or distribution sites, product quality control issues, safety concerns, licensing requirements and other regulatory or government issues, as well as natural disasters, pandemics, border disputes, acts of terrorism and other external factors over which we have no control. We could also experience a negative financial impact if we do not comply with minimum purchase commitments. These risks may be exacerbated by our efforts to increase facility consolidation covering our manufacturing, distribution and supply footprints, particularly if we are unable to successfully increase our resiliency to potential operational disruptions or enhance our disaster recovery planning. The loss of, or damage to, any of our facilities or centers, or those of our third-party manufacturers, could have a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows.
Our success depends, in part, on the quality, safety and efficacy of our products.
Our success depends, in part, on the quality, safety and efficacy of our products. If our products are found to be, or perceived to be, defective or unsafe, or if they otherwise fail to meet the Representatives' or end customers' standards, then our relationship with the Representatives or end customers could suffer, we may need to recall some of our products and/or become subject to regulatory action, our reputation or the appeal of our brand could be diminished, we could lose market share, and we could become subject to liability claims, any of which could result in a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows.
If we are unable to protect our intellectual property rights, specifically patents and trademarks, our ability to compete could be adversely affected.
The market for our products depends to a significant extent upon the value associated with our product innovations and our brand equity. We own the material patents and trademarks used in connection with the marketing and distribution of our major products where such products are principally sold. Although most of our material intellectual property is registered in certain countries in which we operate, there can be no assurance with respect to the rights associated with such intellectual property in those countries. In addition, the laws of certain foreign countries, including many emerging markets, may not completely protect our intellectual property rights. The costs required to protect our patents and trademarks, especially in emerging markets, may be substantial. Please see "The licensing of our North America intellectual property rights, including trademarks that are fundamental to our brand, in connection with the Separation could adversely impact our reputation, our business generally, and our ability to enforce intellectual property rights used in both North America and international jurisdictions" below for additional information regarding the risks on our intellectual property rights associated with the separation of North America.
We are involved, and may become involved in the future, in legal proceedings that, if adversely adjudicated or settled, could adversely affect our financial results.
We are, and may in the future become, party to litigation, including, for example, claims alleging violation of the federal securities laws or claims relating to employee or employment matters, our products or advertising. In general, litigation claims can be expensive and time-consuming to bring or defend against and could result in settlements or damages that could significantly affect our financial results and the conduct of our business. We are currently vigorously contesting certain of these litigation claims. However, it is not possible to predict the final resolution of the litigation to which we currently are or may in the future become party, or to predict the impact of certain of these matters on our business, prospects, financial condition, liquidity, results of operations and cash flows. See Note 19,18, Contingencies on pages F-57 through F-59 of our 2018 Annual Reportto the Consolidated Financial Statements included herein, for a detailed discussion regarding certain legal proceedings in which we are a party.
Government reviews, inquiries, investigations, and actions could harm our business or reputation. In addition, from time to time, we may conduct other investigations and reviews, the consequences of which could negatively impact our business or reputation.
As we operate in various locations around the world, our operations in certain countries are subject to significant governmental scrutiny and may be harmed by the results of such scrutiny. The regulatory environment with regard to direct selling in emerging and developing markets where we do business is evolving, and government officials in such locations often exercise broad discretion in deciding how to interpret and apply relevant regulations. From time to time, we may receive formal and informal inquiries from various government regulatory authorities about our business and compliance with local laws and regulations. In addition, from time to time, we may conduct investigations and reviews. The consequences of such government reviews, inquiries, investigations, and actions or such investigations and reviews may adversely impact our business, prospects, reputation, financial condition, liquidity, results of operations or cash flows.
Additionally, any determination that our operations or activities, or, where local law mandates, the activities of the Representatives, including our licenses or permits, importing or exporting, or product testing or approvals are not, or were not, in compliance with existing laws or regulations could result in the imposition of substantial fines, civil and criminal penalties, interruptions of business, loss of supplier, vendor or other third-party, relationship, termination of necessary licenses and permits, modification of business practices and compliance programs, equitable remedies, including disgorgement, injunctive relief and other sanctions that we may take against our personnel or that may be taken against us or our personnel. Other legal or regulatory proceedings, as well as government investigations, which often involve complex legal issues and are subject to uncertainties, may also follow as a consequence. Further, other countries in which we do business may initiate their own investigations and impose similar sanctions. These proceedings or investigations could be costly and burdensome to our management, and could adversely impact our business, prospects, reputation, financial condition, liquidity, results of operations or cash flows. Even if an inquiry or investigation does not result in any adverse determinations, it potentially could create negative publicity and give rise to third-party litigation or action.
The uncertainty surrounding the UK's decision
If we are unable to withdraw from the EU may adversely affectprotect our business.
On June 23, 2016, the UK held a referendum in which voters approved an exit from the EU, commonly referred to as "Brexit." As a result of the referendum, the UK parliament voted in March 2017 to trigger Article 50 of the Treaty on European Union, commencing the UK's official withdrawal process from the EUintellectual property rights, specifically patents and initiating negotiations with the EU in June 2017. In November 2018, the UK negotiated the terms of an agreement with the EU to determine the future terms of the parties' relationship, including the terms of trade between the UK and the EU and other nations, following the UK's exit from the EU.
On January 15, 2019, the UK parliament, however, rejected the proposed agreement for the UK's withdrawal from the EU. As a result, there remains considerable uncertainty regarding the final terms of the negotiations and related regulatory changes. Failure to obtain parliamentary approval of a negotiated withdrawal agreement could mean that the UK would leave the EU on March 29, 2019, possibly with no agreement (referred to as a "no deal Brexit"). This uncertainty concerning the terms of the exit and the UK Parliament's approval of the UK's agreement with the EU has resulted in political, legislative and regulatory uncertainty throughout the region and could adversely affect business activity, restrict the movement of capital and the mobility of personnel and goods, and otherwise impair political stability and economic conditions in the UK, the Eurozone, the EU and elsewhere. Any of these developments could have a material adverse effect on business activity in the UK, the Eurozone, or the EU. Given that we conduct a substantial portion of our business in the EU and the UK, and our corporate headquarters has been relocated to the UK, any of these developments could have a material adverse effect on our business, financial position, liquidity and results of operations or cash flows.
The uncertainty concerning the terms of the exit could also have a negative impact on the growth of the UK and/or EU economies and has already caused significant volatility in global stock markets and greater volatility in foreign currency exchange rates, including the pound sterling, euro and/or other currencies. Changes in foreign currency exchange rates may have a material effect on our net sales, financial condition, profitability and/or cash flows and may reduce the reported value of our operating results.
Changes to UK border and immigration policy could likewise occur as a result of Brexit, affectingtrademarks, our ability to recruit and retain employees from outside the UK and resulting in possible delays in transportation of goods and increased custom duties. While the full scope of implementation of the referendum decision is still unclear, companies exposed to or with operations in the UK, such as ours, may face significant regulatory changes as a result of Brexit implementation, and complying with such new regulatory mandates may prove challenging and costly.compete could be adversely affected.
The market price offor our common stock could be subjectproducts depends to fluctuations as a result of many factors.
Factors that could affectsignificant extent upon the trading price ofvalue associated with our common stock includeproduct innovations and our brand equity. We own the following:
variations in operating results;
developmentsmaterial patents and trademarks used in connection with any investigations or litigations;
a changethe marketing and distribution of our major products where such products are principally sold. Although most of our material intellectual property is registered in certain countries in which we operate, there can be no assurance with respect to the rights associated with such intellectual property in those countries. In addition, the laws of certain foreign countries, including many emerging markets, may not completely protect our credit ratings;
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announcements or significant developmentsintellectual property rights. The costs required to protect our patents and trademarks, especially in emerging markets, may be substantial. Please see “The licensing of our North America intellectual property rights, including trademarks that are fundamental to our brand, in connection with the Separation could adversely impact our reputation, our business generally, and our ability to enforce intellectual property rights used in both North America and international jurisdictions”
below for additional information regarding the risks on our intellectual property rights associated with respect to beauty and related products or the beauty industry in general;separation of North America.
actual or anticipated variations in our quarterly or annual financial results;
unsolicited takeover proposals, proxy contests or other shareholder activism;
governmental policies and regulations;
estimates of our future performance or that of our competitors or our industries;
general economic, political, and market conditions;
market rumors; and
factors relating to competitors.
The trading price of our common stock has been, and could in the future continue to be, subject to significant fluctuations.
Risks Related to the Separation of North America and the Preferred Stock Investment in the Company
We may be exposed to claims and liabilities as a result of the separation of our North America business.
On March 1, 2016, Cleveland Apple Investor L.P. ("(“Cerberus Investor"Investor”) (an affiliate of Cerberus) contributed $170 million of cash into New Avon in exchange for 80.1% of its membership interests, and we contributed (i) assets primarily related to our North America business (including approximately $100 million of cash, subject to certain adjustments), (ii) certain assumed liabilities (primarily pension and postretirement liabilities) of our North America business and (iii) the employees of our North America business into New Avon in exchange for a 19.9% ownership interest of New Avon (collectively, the "Separation"). In August 2019, we and Cerberus finalized the sale of our respective interests in New Avon to LG Household & Health Care Ltd. In connection with the Separation, we entered into a Separation Agreement and various other agreements with New Avon to govern the separation and the relationship of the two companies going forward. These agreements provide for specific indemnity and liability obligations and could lead to disputes between us. The indemnity rights we have against New Avon under the agreements may not be sufficient to protect us. In addition, our indemnity obligations to New Avon may be significant and these risks could negatively affect our financial condition.
We or New Avon may fail to perform under the post-closing arrangements executed in connection with the Separation.
In connection with the Separation, we and New Avon entered into several agreements, including among others, an Intellectual Property License Agreement a Technical Support and Innovation Agreement and a Manufacturing and Supply Agreement. The Intellectual Property License Agreement provides New Avon with rights to use certain intellectual property rights that we used in the conduct of the North America business prior to the Separation. The Technical Support and Innovation Agreement provides that we will perform certain beauty product development services for New Avon. The Manufacturing and Supply Agreement provides that we and New Avon will manufacture, or cause to be manufactured, and supply certain products to each other. These agreements establish a bilateral relationship between New Avon and us. We will rely on New Avon to satisfy its performance and payment obligations under these agreements. If New Avon is unable to satisfy its obligations under these agreements, we could incur operational difficulties or losses that could have a material and adverse effect on our business, financial condition and results of operations.
The licensing of our North America intellectual property rights, including trademarks that are fundamental to our brand, in connection with the Separation could adversely impact our reputation, our business generally, and our ability to enforce intellectual property rights used in both North America and international jurisdictions.
In connection with the Separation, we granted New Avon a perpetual, irrevocable, royalty-free license, with the ability to sublicense, to certain intellectual property rights that we used in the conduct of our North America business prior to the Separation. The Intellectual Property License Agreement includes quality control provisions obligating New Avon and its sublicensees to remain in compliance with applicable law or, for certain of our brands, quality standards that we have provided
to New Avon, when selling products under certain trademarks that we have licensed to New Avon. However, there is a risk that failure by New Avon or its sublicensees to comply with such quality control provisions or other conduct by New Avon or its sublicensees associated with the trademarks licensed to New Avon, could adversely affect our reputation and our business globally. We have also granted New Avon enforcement rights to intellectual property licensed to New Avon in certain circumstances, which could adversely affect our position and options globally relating to enforcement of our intellectual property.
The issuance of 435,000 shares
General Risk Factors
A general economic downturn, a recession globally or in one or more of our series C preferred stock to Cerberus Investor dilutes the ownership of holders of our common stock andgeographic 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.
Current global macro-economic instability or a further downturn in the market priceeconomies in which we sell our products, including any recession in one or more of our common stock.
On March 1, 2016, we issued and sold to Cerberus Investor 435,000 shares of newly issued series C preferred stock for an aggregate purchase price of $435 million pursuant to an Investment Agreement between us and Cerberus Investor. Conversion of the series C preferred stock would dilute the ownership interest of existing holders of our common stock, and any sales in the public market of the common stock issuable upon conversion of the series C preferred stockgeographic regions or markets could adversely affect our business, our access to liquidity and capital, and our credit ratings. Economic events, including high unemployment levels and recession, have resulted in challenges to our business and a heightened concern regarding further deterioration globally. In addition, as mentioned above, our business is conducted primarily in the market pricedirect-selling channel. We could experience declines in revenues, profitability and cash flow due to reduced orders, payment delays, supply chain disruptions or other factors caused by such economic, operational or business challenges. Any or all of these factors could potentially have a material adverse effect on our common stock. We have granted Cerberus Investor registration rightsliquidity and capital resources and
credit ratings, including our ability to access short-term financing, reduce flexibility with respect to working capital, and maintain credit lines and offshore cash balances.
Consumer spending is also generally affected by a number of factors, including general economic conditions, inflation, interest rates, taxation, energy costs, gasoline prices and consumer confidence generally, all of which are beyond our control. Consumer purchases of discretionary items, such as beauty and related products, tend to decline during recessionary periods, when disposable income is lower, and may impact sales of our products. We may face continued economic challenges in 2022 because customers may continue to have less money for discretionary purchases as a result of job losses, bankruptcies, and reduced access to credit, among other things.
Moreover, our results of operations and financial condition have been, and will continue to be, affected by the shares of series C preferred stock and shares of common stock issued upon conversiongrowth rate of the series C preferred stock,GDP of the countries in which would facilitatewe operate. We cannot ensure that the resaleGDP of the countries in which we operate will increase or remain stable. Developments in the macroeconomic conditions of the countries in which we operate, including Brazil, which has been experiencing an economic slowdown since 2012, may affect such securities intocountries’ growth rates and, consequently, us.
In addition, sudden disruptions in business conditions and consumer spending may result from acts of terror, natural disasters, adverse weather conditions, and pandemic situations or large-scale power outages, none of which are under our control.
The COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, manufacturing, supply chains and distribution systems. There is uncertainty around the public market. On October 11, 2016,duration and breadth of the Company filedCOVID-19 pandemic and the response to it. As a registration statementresult, we cannot reasonably estimate at this time the continued impact, that COVID-19 may have on Form S-3ASRour business or operations. The extent to which COVID-19 impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact including on financial markets or otherwise. See also "Item 1A. Risk Factors—The COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, manufacturing, supply chains and distribution systems, and we have experienced and expect to continue to experience unpredictable negative effects associated with the SEC registering for sale by Cerberus Investor 435,000 sharespandemic.
Our success depends, in part, on our key personnel.
Our success depends, in part, on our ability to retain our key personnel. The unexpected loss of series C preferred stock, 142,800 shares of series D preferred stock and 113,311,940 shares (plus an additional unspecified number) of common stock. As of the date of this filing, Cerberus Investor had not made any sales in reliance on such Form S-3ASR. Sales by Cerberus Investor of a substantial number of sharesor failure to retain one or more of our common stockkey employees could adversely affect our business. Our success also depends, in part, on our continuing ability to identify, hire, attract, train, develop and retain other highly qualified personnel. Competition for these employees can be intense and our ability to hire, attract and retain them depends on our ability to provide competitive compensation. We may not be able to attract, assimilate, develop or retain qualified personnel in the public market,future, and our failure to do so could adversely affect our business, including the execution of our global business strategy. Any failure by our management team to perform as expected may have a material adverse effect on our business, prospects, financial condition, results of operations and cash flows, as well as on our ability to address the challenges arising from the COVID-19 pandemic and the response to it. This risk may be exacerbated by the uncertainties associated with the implementation of Open Up & Grow and Avon Integration and any other stabilization strategies and restructuring and cost-saving initiatives we undertake from time to time.
We are not insured against all risks affecting our activities and our insurance coverage may not be sufficient to
cover all losses and/or liabilities that may be incurred by our operations.
We cannot provide assurance that our insurance coverage will always be available or will always be sufficient to cover any damages resulting from any kind of claims. In addition, there are certain types of risks that may not be covered by our policies, such as war, force majeure or certain business interruptions. In addition, we cannot provide assurance that when our current insurance policies expire, we will be able to renew them at sufficient and favorable terms. Claims that are not covered by our policies or the perceptionfailure to renew our insurance policies may materially adversely affect us.
Any strategic alliances or divestitures may expose us to additional risks.
We evaluate potential strategic alliances that would complement our current product offerings, increase the size and geographic scope of our operations or otherwise offer growth and/or operating efficiency opportunities. Strategic alliances may entail numerous risks, including:
•substantial costs, delays or other operational or financial difficulties, including difficulties in leveraging synergies among the businesses to increase sales and obtain cost savings or achieve expected results;
•difficulties in assimilating acquired operations or products, including the loss of key employees from any acquired businesses and disruption to our direct-selling channel;
•diversion of management’s attention from our core business;
•adverse effects on existing business relationships with suppliers and customers;
•risks of entering markets in which we have limited or no prior experience; and
•reputational and other risks regarding our ability to successfully implement such sales might occur,strategic alliances, including obtaining financing which could result in an increase in our indebtedness.
Our failure to successfully complete the integration of any new or acquired businesses could have a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows. In addition, there can be no assurance that we will be able to identify suitable candidates or consummate such transactions on favorable terms.
For divestitures, success is also dependent on effectively and efficiently separating the pricedivested unit or business from the Company and reducing or eliminating associated overhead costs. In cases where a divestiture is not successfully implemented or completed, the Company's business, prospects, financial condition, liquidity, results of our common stock.
The series C preferred stock issued to Cerberus Investor has rights, preferencesoperations and privileges that are not held by, and are preferentialcash flows could be adversely affected. Please see “Risks Related to the rightsSeparation of holdersNorth America” for additional information regarding the risks associated with the separation of North America.
Climate change can create transition risks, physical risks and other risks that could adversely affect us.
Climate risk is a transversal risk that can be an aggravating factor for the types of traditional risks that we manage in the ordinary course of business, including without limitation the risks described in this “Risk Factors” section. Based on the classifications used by Task-Force on Climate-Related Financial Disclosures, we consider that there are two primary sources of climate change related financial risks: physical and transition.
Physical risks resulting from climate change can be event-driven (acute) or long-term shifts (chronic) in climate patterns:
•Acute physical risks include increased severity of extreme weather events, such as drought, hurricanes, or floods.
•Chronic physical risks include changes in precipitation patterns and extreme variability in weather patterns, rising mean temperatures, chronic heat waves or rising sea levels.
Transition risks refer to actions brought on to address mitigation and adaptation requirements related to climate change, and they can fall into various categories such as market, technology and market changes:
•Market risk may manifest through shifts in supply and demand for certain commodities, products, and services, as climate-related risks and opportunities are increasingly taken into account.
•Technology risk arises from improvements or innovations to support the transition to a lower-carbon, energy efficient economic system that can have a significant impact on companies to the extent that new technology displaces old systems and disrupts some parts of the existing economic system.
•Policy actions generally fall into two categories—those that attempt to constrain actions that contribute to the adverse effects of climate change and those that seek to promote adaptation to climate change. The risk associated with and the financial impact of policy changes depend on the nature and timing of the policy change.
We are already subject to certain regulatory environmental requirements that may increase going forward as a result of the increasing importance of environmental matters. This and other changes in regulations in international markets may expose us to increased compliance costs, limit our common stock. Such preferential rightsability to pursue certain business opportunities and provide certain products and services, each of which could adversely affect our liquidity, cash flows andbusiness, financial condition and may result in the interestsresults of Cerberus Investor differing from those of our common shareholders.operations.
The series C preferred stock ranks senior to the shares of our common stock with respect to dividend rights and rights on the distribution of assets on any liquidation, dissolution or winding up of our affairs. The series C preferred stock has a liquidation preference of $1,000 per share, representing an aggregate liquidation preference of $435 million upon issuance. Holders of series C preferred stock are entitled to participate on an as-converted basis in any dividends paid to the holders of shares of our common stock. In addition, cumulative preferred dividends accrue daily on the series C preferred stock and are payable at the rate of 1.25% per quarter (net of any dividends on our common stock and subject to a maximum rate of 5.00% per quarter if we breach certain obligations). Except to the extent not otherwise previously paid by us, preferred dividends are payable on the seventh anniversary of the issuance date of the series C preferred stock as and when declared by the Board of Directors and at the end of each quarter thereafter. Accrued and unpaid preferred dividends may be paid, at our option, (i) in cash, (ii) subject to certain conditions, in shares of our common stock or (iii) upon conversion of shares of series C preferred stock, in shares of our non-voting, non-convertible series D preferred stock, par value $1.00 per share. Any such shares of the series D preferred stock issued would have similar preferential rights.
Upon certain change of control events involving us, holders of series C preferred stock can require us to repurchase the series C preferred stock for an amount equal to the greater of (i) an amount in cash equal to 100% of the liquidation preference thereof plus all accrued but unpaid dividends or (ii) the consideration the holders would have received if they had converted their shares of series C preferred stock into common stock immediately prior to the change of control event.
Our obligations to pay dividends to the holders of series C preferred stock, and to repurchase the outstanding shares of series C preferred stock under certain circumstances, could impact our liquidity and reduce the amount of cash flows. Our obligations to the holders of series C preferred stock could also limit our ability to obtain additional financing or increase our borrowing costs, which could have an adverse effect on our financial condition. The preferential rights of holders of our series C preferred stock could also result in divergent interests between Cerberus Investor and those of our common shareholders.
Cerberus Investor is able to exercise significant influence over us, including through its ability to elect up to three members of our Board of Directors, including the Chairman.
Holders of series C preferred stock are entitled to vote generally with holders of our common stock on an as-converted basis (subject to an agreement to vote in favor of the slate of directors nominated by the Board of Directors, so long as the 25% Ownership Requirement (as defined below) is met and subject to certain exceptions). Therefore, the series C preferred stock issued to Cerberus Investor effectively reduces the relative voting power of the holders of our common stock. The shares of series C preferred stock owned by Cerberus Investor represents approximately 16.6% of the voting rights of our common stock on an as-converted basis. As a result, Cerberus Investor has the ability to significantly influence the outcome of any matter submitted for the vote of our shareholders. In addition, provided Cerberus Investor maintains certain levels of beneficial ownership of series C preferred stock and/or common stock, Cerberus Investor has consent rights over certain actions taken by
us, including increasing the size of the Board of Directors, reinstating our quarterly common stock dividend and incurring indebtedness in excess of certain thresholds.
In addition, Cerberus Investor has certain rights to designate directors to serve on our Board of Directors (one of whom will continue to act as the Chairman so long as the 50% Ownership Requirement (as defined below) continues to be met). Cerberus Investor will continue to be entitled to elect: (i) three directors to the Board of Directors, so long as Cerberus Investor continues to beneficially own shares of series C preferred stock and/or shares of common stock that represent, on an as-converted basis, at least 75% of Cerberus Investor’s initial shares of series C preferred stock on an as-converted basis, (ii) two directors to the Board of Directors, so long as Cerberus Investor continues to beneficially own shares of series C preferred stock and/or common stock that represent, on an as-converted basis, at least 50% but less than 75% of Cerberus Investor’s initial shares of series C preferred stock on an as-converted basis (the “50% Ownership Requirement”) and (iii) one director to the Board of Directors, so long as Cerberus Investor continues to beneficially own shares of series C preferred stock and/or common stock that represent, on an as-converted basis, at least 25% but less than 50% of Cerberus Investor’s initial shares of series C preferred stock on an as-converted basis (the “25% Ownership Requirement”). Until Cerberus Investor no longer meets the 25% Ownership Requirement, subject to certain exceptions and to satisfaction by such director designees of independence and other customary qualifications, Cerberus Investor has the right to have one of its director designees serve on each committee of the Board of Directors. Notwithstanding the fact that all directors are subject to fiduciary duties and applicable law, the interests of the directors appointed by Cerberus Investor may differ from the interests of holders of our common stock as a whole or of our other directors.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our principal properties worldwide consist of manufacturing facilities for the production of Beauty products, distribution centers where administrative offices are located and where finished merchandise is packed and shipped to Representatives in fulfillmentfulfilment of their orders, and one principal R&Dresearch and development facility located in Suffern, NY.
In October 2016, an office space at Chiswick Park in London, UK was leased, and beginning in
Since January 2017 is used for our principal executive officeoffices have been located in the UK, and an administrative office. Ourpresently are leased in Northampton, UK. All the floors of our previous principal executive and administrative office located in Rye, NY, has been substantially vacated and is in the process of being sold. Prior to that, our principal executive office was locatedlocation at 777 Third Avenue, New York, NY and has been vacated, with certain floors currently being subleased and certain floors currently in the process of being subleased. We moved our principal executive office to Londoncontinue to be in closer proximity to many of our commercial markets.subleased.
In addition, in December 2016,During 2021, we sold aour Mexican manufacturing and distribution center in connection with the U.S. which was inactive.sale of Avon Luxembourg. In addition we sold our Indian manufacturing facility in connection with the sale of the cosmetics manufacturing operation in India, and our Spanish distribution center. See Note 3, Discontinued Operations and Assets and Liabilities held for sale, to the Consolidated Financial Statements included herein.
In addition to the facilities noted above, other principal properties measuring 50,000 square feet or more include the following:
•three manufacturing facilities, nine distribution centers and three administrative offices in Avon International; and
•two manufacturing facilities in Europe, primarily servicing Europe, Middle East & Africa;
•twelve distribution centers and four administrative offices in Europe, Middle East & Africa;
•two manufacturing facilities, eight distribution centers and one administrative office in South Latin America;
one manufacturing facility, two distribution centers and one administrative office in North Latin America; and
four manufacturing facilities and fiveten distribution centers in Asia Pacific, of which one manufacturing facility is inactive.Avon Latin America.
We consider all of theseour principal properties to be in good repair, to adequately meet our needs and to operate at reasonable levels of productive capacity.
Of all the properties listed above, 2617 are owned and the remaining 1912 are leased. Many of our properties are used for a combination of manufacturing, distribution and administration. These properties are included in the above listing based on primary usage. The above listing includes properties in Rye, China, and Malaysia, which are classified as held for sale at December 31, 2018. Refer to Note 3, Discontinued Operations and Assets and Liabilities Held for Sale on pages F-24 through F-26 and Note 23, Subsequent Events on page F-62 of our 2018 Annual Report for more information on these properties.
ITEM 3. LEGAL PROCEEDINGS
Reference is made to Note 19,18, Contingencies on pages F-57 through F-59 of our 2018 Annual Report.
to the Consolidated Financial Statements included herein.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Avon’s Common Stock
Our common stock is listed on The New York Stock Exchange and trades under the AVP ticker symbol.
At December 31, 2018, there were 11,826 holders2021, Natura &Co Holding S.A. was the sole holder of record of our common stock. We believe that there are many additional shareholders who are not "shareholders of record" but who beneficially own and vote shares through nominee holders such as brokers and benefit plan trustees. High and low market prices and dividends per share of our common stock, in dollars, for 2018 and 2017 are listed below. As a part of the implementation of our Transformation Plan, we suspended the dividend on our common stock effective in the first quarter of 2016.
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| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2018 | | 2017 |
| Quarter | | High | | Low | | Dividends Declared and Paid | | High | | Low | | Dividends Declared and Paid |
| First | | $ | 2.93 |
| | $ | 2.11 |
| | $ | — |
| | $ | 5.93 |
| | $ | 4.21 |
| | $ | — |
|
| Second | | 2.92 |
| | 1.48 |
| | — |
| | 4.85 |
| | 3.35 |
| | — |
|
| Third | | 2.44 |
| | 1.42 |
| | — |
| | 3.75 |
| | 2.33 |
| | — |
|
| Fourth | | 2.18 |
| | 1.43 |
| | — |
| | 2.40 |
| | 1.87 |
| | — |
|
|
|
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN(1)
|
Among Avon Products, Inc., The S&P 500 Index and |
2018 Peer Group (2)
|
The Stock Performance Graph above assumes a $100 investment on December 31, 2013, in Avon’s common stock, the S&P 500 Index and the Peer Group. The dollar amounts indicated in the graph above and in the chart below are as of December 31 or the last trading day in the year indicated.
|
| | | | | | | | | | | | | | | | | | |
| | | 2013 |
| | 2014 |
| | 2015 |
| | 2016 |
| | 2017 |
| | 2018 |
|
| Avon | | 100.0 |
| | 55.5 |
| | 25.1 |
| | 31.3 |
| | 13.3 |
| | 9.4 |
|
| S&P 500 | | 100.0 |
| | 113.7 |
| | 115.3 |
| | 129.1 |
| | 157.2 |
| | 150.3 |
|
Peer Group(2) | | 100.0 |
| | 107.1 |
| | 116.2 |
| | 110.7 |
| | 135.0 |
| | 121.5 |
|
| |
(1) | Total return assumes reinvestment of dividends at the closing price at the end of each quarter. |
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(2) | The Peer Group includes The Clorox Company, Colgate–Palmolive Company, Coty Inc., Estée Lauder Companies, Inc., Herbalife Ltd., Kimberly Clark Corp., Revlon, Inc. and Tupperware Brands Corp. |
The Stock Performance Graph above shall not be deemed to be "soliciting material" or to be "filed" with the SEC or subject to the liabilities of Section 18 under the Securities Exchange Act of 1934 as amended (the "Exchange Act"). In addition, it shall
not be deemed incorporated by reference by any statement that incorporates this annual report on Form 10-K by reference into any filing under the Securities Act of 1933 (the "Securities Act") or the Exchange Act, except to the extent that we specifically incorporate this information by reference.
Issuer Purchases of Equity Securities
The following table provides information about our purchases of our common stock during the quarterly period ended December 31, 2018:
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| | | | | | | | | | | |
| | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program |
| 10/1/18 – 10/31/18 | | — |
| | $ | — |
| | * | | * |
| 11/1/18 – 11/30/18 | | — |
| | — |
| | * | | * |
| 12/1/18 – 12/31/18 | | 4,388 |
| (1) | 2.12 |
| | * | | * |
| Total | | 4,388 |
| | $ | 2.12 |
| | * | | * |
| |
* | These amounts are not applicable as the Company does not have a share repurchase program in effect. |
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(1) | All shares were repurchased by the Company in connection with employee elections to use shares to pay withholding taxes upon the vesting of their restricted stock units and performance restricted stock units. |
Some of these share repurchases may reflect a brief delay from the actual transaction date.
ITEM 6. SELECTED FINANCIAL DATA[RESERVED]
(U.S. dollars in millions, except per share data)
We derived the following selected financial data from our audited Consolidated Financial Statements. The following data should be read in conjunction with our MD&A and our Consolidated Financial Statements and related Notes contained in our 2018 Annual Report.
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| | | | | | | | | | | | | | | | | | | | |
| | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Statement of Operations Data | | | | | | | | | | |
Total revenue(1) | | $ | 5,571.3 |
| | $ | 5,715.6 |
| | $ | 5,717.7 |
| | $ | 6,160.5 |
| | $ | 7,648.0 |
|
Operating profit(2) | | 235.2 |
| | 281.3 |
| | 323.8 |
| | 165.0 |
| | 434.3 |
|
(Loss) income from continuing operations, net of tax(2) | | (21.8 | ) | | 20.0 |
| | (93.4 | ) | | (796.5 | ) | | (344.5 | ) |
| Diluted (loss) earnings per share from continuing operations | | $ | (.10 | ) | | $ | .00 |
| | $ | (.25 | ) | | $ | (1.81 | ) | | $ | (.79 | ) |
| Cash dividends per share | | $ | .00 |
| | $ | .00 |
| | $ | .00 |
| | $ | .24 |
| | $ | .24 |
|
| Balance Sheet Data | | | | | | | | | | |
| Total assets* | | $ | 3,010.0 |
| | $ | 3,697.9 |
| | $ | 3,418.9 |
| | $ | 3,770.4 |
| | $ | 5,485.2 |
|
| Debt maturing within one year | | 12.0 |
| | 25.7 |
| | 18.1 |
| | 55.2 |
| | 121.7 |
|
| Long-term debt | | 1,581.6 |
| | 1,872.2 |
| | 1,875.8 |
| | 2,150.5 |
| | 2,417.1 |
|
| Total debt | | 1,593.6 |
| | 1,897.9 |
| | 1,893.9 |
| | 2,205.7 |
| | 2,538.8 |
|
| Total shareholders’ (deficit) equity | | (896.8 | ) | | (714.7 | ) | | (836.2 | ) | | (1,056.4 | ) | | 305.3 |
|
| |
* | Total assets at December 31, 2015 and 2014 in the table above exclude the $100.0 receivable from continuing operations that was presented within current assets of discontinued operations. |
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(1) | The Brazil IPI tax release in 2018 impacts the comparability of our revenue. See Note 19, Contingencies on pages F-57 through F-59 of our 2018 Annual Report, "Results Of Operations - Consolidated" within MD&A on pages 35 through 43, and Segment Review - South Latin America within MD&A on page 47 for more information. |
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(2) | A number of items, shown below, impact the comparability of our operating profit and (loss) income from continuing operations, net of tax. See Note 19, Contingencies on pages F-57 through F-59 of our 2018 Annual Report, Segment Review - South Latin America within MD&A on page 47, Note 17, Restructuring Initiatives on pages F-53 through F-56 of our 2018 Annual Report, Note 14, Employee Benefit Plans on pages F-42 through F-50 of our 2018 Annual Report, Note 15, Segment Information on pages F-50 through F-52 of our 2018 Annual Report, Note 1, Description of the Business and Summary of Significant Accounting Policies on pages F-11 through F-19 of our 2018 Annual Report, "Venezuela Discussion" within MD&A on pages 42 through 43, "Results Of Operations - Consolidated" within MD&A on pages 35 through 43, Note 20, Goodwill on page F-60 of our 2018 Annual Report, Note 3, Discontinued Operations and Assets and |
Liabilities Held for Sale on pages F-24 through F-26 of our 2018 Annual Report, Note 8, Debt and Other Financing on pages F-30 through F-33 of our 2018 Annual Report and Note 10, Income Taxes on pages F-33 through F-37 of our 2018 Annual Report for more information on these items.
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| | | | | | | | | | | | | | | | | | | | |
| | | Impact on Operating Profit |
| | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
Brazil IPI tax release(3) | | $ | 168.4 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Costs to implement restructuring initiatives(4) | | $ | (89.7 | ) | | (60.2 | ) | | (77.4 | ) | | (49.1 | ) | | (86.6 | ) |
Loss contingency(5) | | — |
| | (18.2 | ) | | — |
| | — |
| | — |
|
Legal settlement(6) | | — |
| | — |
| | 27.2 |
| | — |
| | — |
|
Venezuelan special items(7) | | — |
| | — |
| | — |
| | (120.2 | ) | | (137.1 | ) |
FCPA accrual(8) | | — |
| | — |
| | — |
| | — |
| | 46.0 |
|
Pension settlement charge(9) | | — |
| | — |
| | — |
| | (7.3 | ) | | (9.5 | ) |
Other items(10) | | — |
| | — |
| | — |
| | (3.1 | ) | | — |
|
Asset impairment and other charges(11) | | — |
| | — |
| | — |
| | (6.9 | ) | | — |
|
In addition to the items impacting operating profit identified above, loss from continuing operations, net of tax during 2018 was impacted by:
one-time tax reserves of approximately $18 associated with our uncertain tax positions, and an expense of approximately $3 associated with the ownership transfer of certain operational assets within the consolidated group.
In addition to the items impacting operating profit identified above, income from continuing operations, net of tax during 2017 was impacted by:
a $29.9 net tax benefit recognized as a result of the enactment of the Tax Cuts and Jobs Act in the U.S., a release of valuation allowances of $25.5 associated with a number of markets in Europe, Middle East & Africa as a result of a business model change related to the move of the Company's headquarters from the U.S. to the UK, and a $10.4 benefit as a result of a favorable court decision in Brazil, partially offset by a charge of $16.0 associated with valuation allowances to adjust deferred tax assets in Mexico.
In addition to the items impacting operating profit identified above, loss from continuing operations, net of tax during 2016 was impacted by:
the deconsolidation of our Venezuelan operations. As a result of the change to the cost method of accounting, in the first quarter of 2016 we recorded a loss of $120.5 before and after tax in other expense, net. The loss was comprised of $39.2 in net assets of the Venezuelan business and $81.3 in accumulated foreign currency translation adjustments within accumulated other comprehensive income (loss) ("AOCI") associated with foreign currency movements before Venezuela was accounted for as a highly inflationary economy;
a net gain on extinguishment of debt of $1.1 before and after tax associated with the repayment of certain of our debt in 2016; and
the release of a valuation allowance associated with Russia of $7.1 and an income tax benefit of $29.3 recognized as the result of the implementation of foreign tax planning strategies, partially offset by a charge for valuation allowances for deferred tax assets outside of the U.S. of $8.6.
See "Venezuela Discussion" within MD&A on pages 42 through 43, Note 1, Description of the Business and Summary of Significant Accounting Policies on pages F-11 through F-19 of our 2018 Annual Report, Note 8, Debt and Other Financing on pages F-30 through F-33 of our 2018 Annual Report, and Note 10, Income Taxes on pages F-33 through F-37 of our 2018 Annual Report for more information.
In addition to the items impacting operating profit identified above, loss from continuing operations, net of tax during 2015 was impacted by:
the gain on sale of Liz Earle of $44.9 before tax ($51.6 after tax);
a loss on extinguishment of debt of $5.5 before and after tax caused by the make-whole premium and the write-off of debt issuance costs and discounts, associated with the prepayment of our 2.375% Notes due March 15, 2016 and a charge of $2.5 before and after tax associated with the write-off of issuance costs related to our previous $1 billion revolving credit facility;
an aggregate income tax charge of $685.1. This was primarily due to additional valuation allowances for U.S. deferred tax assets of $669.7 which were due to the continued strengthening of the U.S. dollar against currencies of some of our key markets and the impact on the benefits from our tax planning strategies associated with the realization of our deferred tax assets. In addition, the charge was due to valuation allowances for deferred tax assets outside of the U.S. of $15.4, primarily in Russia, which was largely due to lower earnings, which were significantly impacted by foreign exchange losses on working capital balances; and
an income tax benefit of $18.7, which was recorded in the fourth quarter of 2015, recognized as a result of the implementation of the initial stages of foreign tax planning strategies.
See Note 3, Discontinued Operations and Assets and Liabilities Held for Sale on pages F-24 through F-26 of our 2018 Annual Report, Note 8, Debt and Other Financing on pages F-30 through F-33 of our 2018 Annual Report, and Note 10, Income Taxes on pages F-33 through F-37 of our 2018 Annual Report for more information.
In addition to the items impacting operating profit identified above, loss from continuing operations, net of tax during 2014 was impacted by:
an income tax charge of $404.9. This was primarily due to a valuation allowance of $383.5 to reduce our deferred tax assets to an amount that is "more likely than not" to be realized, which was recorded in the fourth quarter of 2014; and
the $18.5 net tax benefit recorded in the fourth quarter of 2014 related to the finalization of the Foreign Corrupt Practices Act ("FCPA") settlements.
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(3) | During 2018, our operating profit and operating margin benefited from the release of the liability related to IPI tax on cosmetics in Brazil. The release was recorded in net sales and other (income) expense, net in the amounts of approximately $168 and approximately $27, respectively. The Brazil IPI tax release also includes approximately $66 recorded in income taxes. See Note 19, Contingencies on pages F-57 through F-59 of our 2018 Annual Report, "Results Of Operations - Consolidated" within MD&A on pages 35 through 43, and Segment Review - South Latin America within MD&A on page 47 for more information. |
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(4) | During all periods presented, our operating profit and operating margin was negatively impacted by costs to implement restructuring initiatives. Refer to Note 17, Restructuring Initiatives on pages F-53 through F-56 of our 2018 Annual Report, for additional information. |
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(5) | During 2017, our operating profit and operating margin were negatively impacted by a charge of $18.2 for a loss contingency related to a non-U.S. pension plan, for which an amendment to the plan that occurred in a prior year may not have been appropriately implemented. See Note 14, Employee Benefit Plans on pages F-42 through F-50 of our 2018 Annual Report for more information. |
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(6) | During 2016, our operating profit and operating margin benefited from the net proceeds of $27.2 before and after tax recognized as a result of settling claims relating to professional services that had been provided to the Company prior to 2013 in connection with a previously disclosed legal matter. See Note 15, Segment Information on pages F-50 through F-52 of our 2018 Annual Report for more information. |
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(7) | During 2015 and 2014, our operating profit and operating margin were negatively impacted by devaluations of the Venezuelan currency, combined with Venezuela being designated as a highly inflationary economy. |
In February 2015, the Venezuelan government announced the creation of a new foreign exchange system referred to as the SIMADI exchange ("SIMADI"), which represented the rate which better reflected the economics of Avon Venezuela's business activity, in comparison to the other then available exchange rates; as such, we concluded that we should utilize the SIMADI exchange rate to remeasure our Venezuelan operations. The change to the SIMADI rate caused the recognition of a devaluation of approximately 70% as compared to the exchange rate we had used previously. As a result of using the historical U.S. dollar cost basis of non-monetary assets, such as inventories, these assets continued to be remeasured, following the change to the SIMADI rate, at the applicable rate at the time of their acquisition. The remeasurement of non-monetary assets at the historical U.S. dollar cost basis caused a disproportionate expense as these assets were consumed in operations, negatively impacting operating profit and net income by $18.5 during 2015. Also as a result of the change to the SIMADI rate, we determined that an adjustment of $11.4 to cost of sales was needed to reflect certain non-monetary assets, primarily inventories, at their net realizable value, which was recorded in the first quarter of 2015. In addition, we reviewed Avon Venezuela's long-lived assets to determine whether the carrying amount of the assets was recoverable. Based on our expected cash flows associated with the asset group, we determined that the carrying amount of the assets, carried at their historical U.S. dollar cost basis, was not recoverable. As such, an impairment charge of $90.3 to SG&A expenses was needed to reflect the write-down of the long-lived assets to estimated fair value of $15.7, which was recorded in the first quarter of 2015. In addition to the negative impact to operating profit, as a result of the devaluation of Venezuelan currency, during 2015, we recorded an after-tax benefit of $3.4 (a benefit of $4.2 in other expense, net, and a
loss of $.8 in income taxes) in the first quarter of 2015, primarily reflecting the write-down of net monetary assets. See discussion of our Venezuelan operations in "Venezuela Discussion" within MD&A on pages 42 through 43 and Note 1, Description of the Business and Summary of Significant Accounting Policies on pages F-11 through F-19 of our 2018 Annual Report for more information.
In February 2014, the Venezuelan government announced a foreign exchange system which began operating in March 2014, referred to as the SICAD II exchange ("SICAD II"). As SICAD II represented the rate which better reflected the economics of Avon Venezuela's business activity, in comparison to the other then available exchange rates, we concluded that we should utilize the SICAD II exchange rate to remeasure our Venezuelan operations effective March 31, 2014. The change to the SICAD II rate caused the recognition of a devaluation of approximately 88% as compared to the official exchange rate we used previously. As a result of using the historical U.S. dollar cost basis of non-monetary assets, such as inventories, these assets continued to be remeasured, following the change to the SICAD II rate, at the applicable rate at the time of their acquisition. The remeasurement of non-monetary assets at the historical U.S. dollar cost basis caused a disproportionate expense as these assets are consumed in operations, negatively impacting operating profit and net income by $21.4 during 2014. Also as a result, we determined that an adjustment of $115.7 to cost of sales was needed to reflect certain non-monetary assets, primarily inventories, at their net realizable value, which was recorded in the first quarter of 2014. In addition to the negative impact to operating profit, as a result of the devaluation of Venezuelan currency, during 2014, we recorded an after-tax loss of $41.8 ($53.7 in other expense, net, and a benefit of $11.9 in income taxes), primarily reflecting the write-down of net monetary assets.
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(8) | During 2014, our operating profit and operating margin were negatively impacted by the additional $46 accrual, and during 2013, our operating profit and operating margin were negatively impacted by the $89 accrual, both recorded for the settlements related to the FCPA investigations. See Note 19, Contingencies on pages F-57 through F-59 of our 2018 Annual Report for more information. |
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(9) | During 2015, our operating profit and operating margin were negatively impacted by settlement charges associated with the U.S. defined benefit pension plan. As a result of the lump-sum payments made to former employees who were vested and participated in the U.S. defined benefit pension plan, in the third quarter of 2015, we recorded a settlement charge of $23.8 (before and after tax). Because the settlement threshold was exceeded in the third quarter of 2015, a settlement charge of $4.1 (before and after tax) was also recorded in the fourth quarter of 2015, as a result of additional payments from our U.S. defined benefit pension plan. These settlement charges were allocated between Global ($7.3) and Discontinued Operations ($20.6). See Note 14, Employee Benefit Plans on pages F-42 through F-50 of our 2018 Annual Report for a further discussion. |
During 2014, our operating profit and operating margin were negatively impacted by settlement charges associated with the U.S. defined benefit pension plan. As a result of the lump-sum payments made to former employees who were vested and participated in the U.S. defined benefit pension plan, in the second quarter of 2014, we recorded a settlement charge of $23.5 (before and after tax). Because the settlement threshold was exceeded in the second quarter of 2014, settlement charges of $5.4 and $7.5 (both before and after tax) were also recorded in the third and fourth quarters of 2014, respectively, as a result of additional payments from our U.S. defined benefit pension plan. These settlement charges were allocated between Global ($9.5) and Discontinued Operations ($26.9).
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(10) | During 2015, our operating profit and operating margin were negatively impacted by transaction-related costs of $3.1 before and after tax associated with the planned separation of North America that were included in continuing operations. |
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(11) | During 2015, our operating profit and operating margin were negatively impacted by a non-cash impairment charge of $6.9 (before and after tax) associated with goodwill of our Egypt business. See Note 20, Goodwill on page F-60 of our 2018 Annual Report for more information on Egypt. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ("MD&A")
(U.S. dollars in millions, except per share and share data)
You should read the following discussion of the results of operations and financial condition of Avon Products, Inc. and its majority and wholly owned subsidiaries in conjunction with the information contained in the Consolidated Financial Statements and related Notes thereto contained in our 2018 Annual Report.herein. 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.
See "Non-GAAP Financial Measures" on pages 29 through 30 of this MD&A for a description of how constant dollar ("Constant $") growth rates (a Non-GAAP financial measure) are determined and see "Performance Metrics" on page 29 of this MD&A for definitions of our performance metrics (Change in Active Representatives, Change in units sold, Change in Ending Representatives and Change in Average Order).
Overview
We are a global manufacturer and marketer of beauty and related products. Our business is conducted primarily in the direct-selling channel.channel, with a strategy to expand to omnichannel. During 2018,2021, we had sales operations in 5654 countries and territories, and distributed products in 2124 more. At December 31, 2021, we had sales operations in 52 countries. All of our consolidated revenue is derived from operations of subsidiaries outside of the United States ("U.S."). Our reportable segments are based on geographic operations in four regions: Europe, Middle East & Africa; Southtwo regions, Avon International and Avon Latin America; North Latin America; and Asia Pacific.America. Our product categories are Beauty and Fashion & Home. Beauty consists of skincare, fragrance and color (cosmetics). Fashion & Home consists of fashion jewelry, watches, apparel, footwear, accessories, gift and decorative products, housewares entertainment and leisure products, children’s products and nutritional products. Sales are made to the ultimate consumer principally through direct selling by Representatives, who are independent contractors and not our employees.
As of December 31, 2018,On average we had approximately 5 million activeActive Representatives during the year ended December 31, 2021, 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 our business is highly dependent on recruiting, retaining and servicing our Representatives.
During 2018,Total revenue declined 3%decreased 6% compared to the prior-year period.period, impacted by certain indirect taxes recognized in Brazil. Excluding the Brazil IPI release,these items, Adjusted revenue was down 5%7%, primarily due towith the unfavorable impact of foreign exchange.exchange being broadly neutral as the weakening of the U.S. dollar relative to the South African rand, the British pound and the Mexican peso was offset by the strengthening of the U.S. dollar relative to the Turkish lira and the Brazilian real.
On a Constant $ basis, Adjusted revenue increased 1%. Revenuedecreased 6% year on year in 2021, driven by a 4% decrease in Avon International and Constant $ Adjusted revenue included a benefit of approximately 4% due to the impact of adopting the new revenue recognition standard. The 4% benefit was9% decrease in Avon Latin America, mostly driven primarily by the reclassification of fees paid by Representatives for brochures, late payments and payment processing, and income from appointment kits, from SG&A. The impact of timing of revenue recognition for sales incentives was negligible.
Constant $ Adjusted revenue was impacted by declines primarily in Brazil, which continued to be negatively impacted by competitive pressures against a backdrop of a challenging macroeconomic environment and lower consumptionchanges in the market, as well as lower appointments, partly due toseverity of COVID-19 restrictions in many markets and the applicationsale of strict credit requirements for the acceptance of new Representatives. To a lesser extent, Constant $ Adjusted revenue was also impacted by declines in the United Kingdom, South Africa and Russia, as well as lower revenue from the closure of Australia and New Zealand during 2018. These declines were partially offset by improved revenue growth management, including inflationary, pricing in Argentina.Avon Luxembourg on July 1, 2021. Revenue and Constant $ Adjusted revenue were impacted by a 10% increase in Average Representative Sales offset by a decrease in Active Representatives of 5%, which was primarily driven15% in multiple markets and across both Avon International and Avon Latin America and also impacted by Brazil, anda reduction in the frequency of campaign cycles as part of our strategy to simplify our business, with all markets now on a lesser extent, Russia. Average order in monthly campaign cycle.
Constant $ increased 2%, including a benefit of approximately 4% due toAdjusted revenue excluding the impact of adopting the new revenue recognition standard. sale of Avon Luxembourg decreased by 1% as a 15% increase in Average Representative Sales was offset by an 15% decrease in Active Representatives.
Units sold decreased 6%, driven by a decline in Brazil.
Ending Representatives declined 8%, primarily driven by declines in Russia and Brazil.
The16% or decreased 13% excluding the impact of the new revenue recognition standard was primarilysale of Avon Luxembourg driven by the following accounting changes effective as of January 1, 2018:
Certain of our sales incentivesdecreases in both Avon International and prospective discounts are now considered to be a separate deliverable, thus initially revenue is deferred generally until delivery of the incentive prize to the Representative or future discounts are realized, and at that time the associated cost is recognized in cost of sales. Historically, the cost of sales incentives was recognized in SG&A over the period that the sales incentive was earned; and
Fees paid by Representatives to the Company for brochures, late payments and payment processing are now reflected as revenue, rather than reflected as a reduction of SG&A. The associated cost for brochures that are sold is now recognized in cost of sales rather than in SG&A. Further, the fees and costs associated with brochures are now recognized upon delivery to the Representatives, rather than recognized over the campaign length.
See Note 1, Description of the Business and Summary of Significant Accounting Policies, and Note 2, New Accounting Standards, to the Consolidated Financial Statements included herein for additional information on the new revenue recognition standard.Avon Latin America.
See "Segment Review" in this MD&A for additional information related to changes in revenue by segment.
TransformationMerger with Natura Cosméticos S.A.
On May 22, 2019, we entered into an Agreement and Plan of Mergers 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"), and two subsidiaries of Natura &Co Holding S.A. ("Natura &Co") pursuant to which, in a series of transactions, Avon and Natura Cosméticos became direct wholly owned subsidiaries of Natura &Co (the "Transaction"). For additional information see Note 21, Agreement and Plan of Mergers with Natura Cosméticos S.A., to the Consolidated Financial Statements included herein. On January 3, 2020, the Company consummated the Transaction and became a fully owned subsidiary of Natura &Co Holding. In connection with the consummation of the Transaction, the Company notified the New York Stock Exchange ("NYSE") that trading of their stock should be suspended, the Company's common stock was subsequently delisted and deregistered.
COVID-19 pandemic
A novel strain of coronavirus (COVID-19) was first identified in Wuhan, China in December 2019, and subsequently declared a pandemic by the World Health Organization. Due to the uncertain and rapidly evolving nature of current conditions around the
world, the impacts of COVID-19 most of which are beyond the Company’s control, continue to evolve, and the outcome is uncertain. We are therefore unable to predict accurately the impact that COVID-19 will have on our business going forward.
In 2020, the most significant impact of the COVID-19 pandemic was felt during the second quarter of 2020, as many markets were subject to lockdown restrictions to varying degrees, which limited our ability to recruit and enroll Representatives, operate manufacturing facilities and distribution centers and to process and deliver orders. The pandemic primarily resulted in reduced revenue, which in turn impacted profitability and cash generation. The third quarter of 2020 showed signs of recovery in most markets. The fourth quarter of 2020 has again been impacted by the new lockdown measures imposed in parts of Europe, although not to the extent felt during the second quarter of 2020 as we were able to continue normal operations in our manufacturing facilities and distribution centers.
In 2021, the economic disruption caused by the COVID-19 pandemic has resulted in inflationary pressures on the cost of certain raw materials used in the production of essential items due to the increased demand for these inputs worldwide. These inflationary pressures have been compounded by disruptions in global supply chains and climate events that hit electricity generation globally, among others. Moreover, novel strains and variants of COVID-19 emerged in 2021, and the rollout of vaccination programs worldwide have compromised the ability of certain countries to effectively contain the spread and the toll of the virus.
We continue to monitor the evolution of the Covid-19 pandemic in the markets in which we operate, especially with regard to restrictive measures adopted by these jurisdictions. We continuously analyze the situation and act to minimize impacts on the operations and on the equity and financial position of the Company, with the objective of implementing appropriate measures, ensuring the continuity of operations, hedge cash, improve liquidity and promote the health and safety of all.
In view of this scenario, we review the recoverability expectations of our financial and non-financial assets in the preparation of these financial statements, considering the most recent information available and reflected in the Company’s business plans. In addition, we also consider possible effects on the financial statements including revenues and the continued transition to the digital environment, allowances for doubtful accounts receivable, impairment of non-financial assets, leases, liquidity and capital resources and going concern (see below).
As of the date of this report, we are unable to estimate the long-term economic impact arising from efforts to curb the spread of the COVID-19 virus and the expected reduction in activity on our business, results of operations and financial condition. We will continue to review our revenue, investments, expenses and cash outflows, as well as adjusting our relationships with suppliers. Furthermore, the actions outlined above are continuously being re-evaluated in light of global developments relating to COVID-19. See also “Item 1A. Risk Factors—The COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, manufacturing, supply chains and distribution systems, and we have experienced and expect to continue to experience unpredictable negative effects associated with the pandemic".
Cyber incident
In June 2020, the Company became aware that it was exposed to a cyber incident in its Information Technology ("IT") environment which interrupted some systems and partially affected the Company's operations. We engaged leading external cyber security and IT general controls specialists, launched a comprehensive containment and remediation effort and started a forensic investigation. By mid-August, the Company had re-established all of its core business processes and resumed operations in all of its markets, including all of its distribution centers.
The cyber incident did not have a material impact on our full year 2020 revenue, although it resulted in a shift in revenue from the second quarter to the third quarter of 2020 as the Company fulfilled the order backlog created. The incremental expense incurred as a result of the cyber incident was not material.
Although we had no indication that the accuracy and completeness of any financial information was impacted as a result of the incident, the Company performed extensive procedures immediately after discovering the incident to validate such accuracy and completeness.
Natura &Co - Avon Integration
Subsequent to the merger of Natura and Avon in January 2020, an integration plan (the "Avon Integration") was established to create the right global infrastructure to support the future ambitions of the Natura &Co Group while also identifying synergies and opportunities to leverage our combined strength, scale and reach. Synergies will be derived mainly from procurement, manufacturing/distribution and administrative, as well as top line synergies, primarily between Avon LATAM and Natura &Co Latin America.
Open Up Avon, Open Up & Grow and 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 $ revenue growth and low double-digit operating margin. The Transformation Plan included three pillars: invest in growth, reduce costs in an effort to continue to improve our cost structure and improve our financial resilience. Under this plan, we had targeted pre-tax annualized cost savings of approximately $350 after three years, which were expected to be achieved through restructuring actions, as well as other cost-savings strategies that would not result in restructuring charges. 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 that are approved will operate under our new Open Up Avon plan described below.
In September 2018, we initiated a new strategy in order to return Avon to growth (“("Open Up Avon”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 earningsThese savings have been and thereby retention. Elements of the Representative facing 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 pre-tax 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 expectedcontinue to be achieved through restructuring actions (that have may continue to 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 an aggregate 18%a reduction in global workforce. The structural reset
In May 2020, the new leadership of inventory processes includes a 15% reduction in inventory levelsAvon International refreshed our strategy ("Open Up & Grow") which aims to return Avon International to growth over the next three years. Open Up & Grow replaces and 25% reduction in Stock Keeping Units (SKUs). The structural resetbuilds on the success 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. In addition, the global workforce will be reduced in 2019 by approximately 10% 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. We expect to incur a restructuring charge of approximately $100 in 2019 relating to the global workforce reduction, which wasn't approved by the Board of Directors until January 2019. We initiated the Open Up Avon strategy, launched in 2018 to enable usstrengthen competitiveness through enhancing the representative experience, improving brand position and relevance, accelerating digital expansion and improving costs. Over the next three years, savings are expected to achieve our goals of low-single-digit Constant $ revenue growth and low double-digit operating margin by 2021. We plancontinue to reinvest a portion of these cost savings in commercial initiatives, including training for Representatives, and digital and information technology infrastructure initiatives.
During 2018, we estimate that webe achieved total cost savings of approximately $110 before taxes, of which approximately $40 is attributable to Open Up Avon and approximately $70 is attributable to the Transformation Plan. The estimated $40 of savings attributable to Open Up Avon primarily relates to tax and interest, when compared to our costs in 2017. As it relates to the Transformation Plan, we exceeded our cost savings target of $65 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 withthrough restructuring actions (that may continue to result in charges related to severance, contract terminations and fromasset write-offs), as well as other cost-savings strategies that didwould not result in restructuring charges. As a result of restructuring actions and other cost-savings strategies taken to-date, as it relates to the Transformation Plan, we exited 2018 with run-rate savings in excess of our total cumulative cost savings target of $350.
In connection with the actions and associated savings discussed above, we have incurred costs to implement ("CTI") restructuring initiatives of approximately $205 before taxes to-date associated with the Transformation Plan and approximately $143 before taxes to-date associated with Open Up Avon, which includes $88 relating to the structural reset of inventory. Of these costs, approximately $38 and approximately $143 was recorded during 2018 associated with the Transformation Plan and Open Up Avon, respectively. The additional charges not yet incurred associated with the restructuring actions approved as at December 31, 2018 relate to Open Up Avon and are negligible. At December 31, 2018, we have liabilities of approximately $59 associated with our restructuring actions, primarily associated with our Transformation Plan. The majority of future cash payments associated with these restructuring liabilities are expected to be made during 2019.
For additional details on restructuring initiatives, see Note 17,16, Restructuring Initiatives, to the Consolidated Financial Statements included herein.
Sale of Avon Luxembourg Holdings S.à r.l On July 1, 2021, the Company sold Avon Luxembourg, including our Mexican business, to a subsidiary of Natura &Co Holding for $150, with the proceeds used to repay maturing loans of $150 borrowed under the $250 Revolving Credit Facility with a subsidiary of Natura &Co Holding.
The sale was accounted for as a transaction under common control in accordance with ASC805 - Business Combinations, with the resulting gain of $148 representing the difference between the proceeds, the net assets of Avon Luxembourg on the date of sale, and the cumulative foreign currency translation adjustment, taken directly to retained earnings. For additional information, see the Consolidated Statements of Changes in Shareholders' Deficit.
New Accounting Standards
Information relating to new accounting standards is included in Note 2, New Accounting Standards, on pages F-19 through F-24 of our 2018 Annual Report.to the Consolidated Financial Statements included herein.
Performance Metrics
Within this MD&A, in addition to our key financial metrics of revenue, operating profit and operating margin, we utilize the performance metrics defined below to assist in the evaluation of our business.
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| Performance Metrics | | Definition |
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| Change in Active Representatives | | This metric is a measure of Representative activity based on the number of unique Representatives submitting at least one order in a sales campaign, totaled for all campaigns in the related period. To determine the change in Active Representatives, this calculation is compared to the same calculation in the corresponding period of the prior year. Orders in China are excluded from this metric as our business in China is predominantly retail.
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Change in units sold | | This metric is based on the gross number of pieces of merchandise sold during a period, as compared to the same number in the same period of the prior year. Units sold include samples sold and products contingent upon the purchase of another product (for example, gift with purchase or discount purchase with purchase), but exclude free samples. |
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Change in Ending Representatives | | This metric is based on the total number of Representatives who were eligible to place an order in the last sales campaign in the related period as a result of being on an active roster. To determine the Change in Ending Representatives, this calculation is compared to the same calculation in the corresponding period of the prior year. Change in Ending Representatives may be impacted by a combination of factors such as our requirements to become and/or remain a Representative, our practices regarding minimum order requirements and our practices regarding reinstatement of Representatives. We believe this may be an indicator of future revenue performance. |
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Change in Average OrderRepresentative Sales | | This metric is a measure of Representative productivity. The calculation is the difference of the year-over-year change in revenue on a Constant $ basis and the Change in Active Representatives. Change in Average OrderRepresentative Sales may be impacted by a combination of factors such as inflation, units, product mix, and/or pricing. |
Non-GAAP Financial Measures
To supplement our financial results presented in accordance with generally accepted accounting principles in the U.S. ("GAAP"), we disclose 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. We refer to these adjusted financial measures as Constant $ items, which are Non-GAAP financial measures. We believe these measures provide investors 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, we
calculate current-year results and prior-year results at constant exchange rates, which are updated on an annual basis usually in October, as part of our budgeting process. Foreign currency impact is determined as the difference between actual growth rates and Constant $ growth rates.
We also present revenue, gross margin, SG&A expenses as a percentage of revenue, operating profit, operating margin and income (loss) before taxes income taxes and effective tax rate on a Non-GAAP basis. We refer to these Non-GAAP financial measures as "Adjusted." We have provided a quantitative reconciliation of the difference between the Non-GAAP financial measures to the most directly comparableand financial measures calculated and reported in accordance with GAAP. See "Reconciliation of Non-GAAP Financial Measures" within "Results of Operations - Consolidated" on pages 35 through 43 in this MD&A for this quantitative reconciliation.
The Company uses the 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. The Company believes investors 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 the Company's financial results in any particular period. The Company believes that it is meaningful for investors to be made aware of the impacts of 1) certain Brazil indirect taxes; 2) CTI restructuring initiatives; 2) the Brazil IPI tax release; 3) a charge for a loss contingency related to a non-U.S. pension plan
("Loss contingency"); 4) the net proceeds recognized as a result of settling claims relating to professional services ("Legal settlement"); 5) chargescosts related to the deconsolidation of our Venezuelan operations as of March 31, 2016, combined with Venezuela being designated as a highly inflationary economy ("Venezuelan special items"); 6) various other itemsTransaction; 4) costs associated with debt-related charges ("Other items");the early termination of debt and as it relates to our effective tax rate discussion, 7) specialcredit facilities; and 5) one-time tax items that are not associated with uncertain tax positions and the ownership transfer of certain operational assets within the consolidated group, which were recognized in 2018, the net income tax benefit as a result of the enactment of the Tax Cuts and Jobs Act in the U.S., a release of valuation allowances associated with a number of markets in Europe, Middle East & Africa, and a benefit as a result of a favorable court decision in Brazil, partially offset by a charge associated with valuation allowances to adjust deferred tax assets in Mexico, which were recognized in 2017, income tax benefits realized in 2016 as a result of tax planning strategies, an income tax benefit in the second quarter of 2016 primarily due to the release of a valuation allowance associated with Russia and the adjustments associated with our deferred tax assets recorded in 2016recurring, normal operations ("Special tax items"). which are provided below.
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(1) | CTI restructuring initiatives includes the impact on the Consolidated Statement of Operations for all periods presented of net charges incurred on approved restructuring initiatives. |
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(2) | The Brazil IPI tax release includes the impact on the Consolidated Statement of Operations during the third quarter of 2018 of the release of the liability related to IPI tax on cosmetics in Brazil. The release was recorded in net sales and other (income) expense, net in the amounts of approximately $168 and approximately $27, respectively. The Brazil IPI tax release also includes approximately $66 recorded in income taxes. |
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(3) | The Loss contingency includes the impact on our Consolidated Statements of Operations during the second quarter of 2017 caused by a charge of approximately $18 for a loss contingency related to a non-U.S. pension plan, for which an amendment to the plan that occurred in a prior year may not have been appropriately implemented. |
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(4) | The Legal settlement includes the impact on our Consolidated Statements of Operations during the third quarter of 2016 associated with the net proceeds of approximately $27 recognized as a result of settling claims relating to professional services that had been provided to the Company prior to 2013 in connection with a previously disclosed legal matter. |
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(5) | The Venezuelan special items include the impact on our Consolidated Statements of Operations during the first quarter of 2016 caused by the deconsolidation of our Venezuelan operations for which we recorded a loss of approximately $120 in other expense, net. The loss was comprised of approximately $39 in net assets of the Venezuelan business and approximately $81 in accumulated foreign currency translation adjustments within accumulated other comprehensive loss ("AOCI") associated with foreign currency changes before Venezuela was accounted for as a highly inflationary economy. |
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(6) | The Other items include the impact on our Consolidated Statements of Operations during the third quarter of 2016 due to a net gain on extinguishment of debt associated with the cash tender offers in August 2016, the debt repurchases in October and December 2016, and the prepayment of the remaining principal amount of our 4.20% Notes due July 15, 2018 and our 5.75% Notes due March 1, 2018 in November 2016. |
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(7) | In addition, the effective tax rate discussion includes Special tax items, including the impact on the provision for income taxes in our Consolidated Statements of Operations during 2018 due to one-time tax reserves of approximately $18 associated with our uncertain tax positions, and an expense of approximately $3 associated with the ownership transfer of certain operational assets within the consolidated group. Special tax items also include the impact on the provision for income taxes in our Consolidated Statements of Operations during 2017 due to an approximate $30 net benefit recognized as a result of the enactment of the Tax Cuts and Jobs Act in the U.S., a release of valuation allowances of approximately $26 associated with a number of markets in Europe, Middle East & Africa, and an approximate $10 benefit as a result of a favorable court decision in Brazil, partially offset by a charge of approximately $16 associated with valuation allowances to adjust deferred tax assets in Mexico. Special tax items also include the impact on the provision for income taxes in our Consolidated Statements of Operations during the fourth quarter of 2016 due to the charge of approximately $9 associated with valuation allowances to adjust certain non-U.S. deferred tax assets to an amount that is "more likely than not" to be realized. Special tax items also include the impact on the provision for income taxes in our Consolidated Statements of Operations during the second quarter of 2016 primarily due to the release of a valuation allowance associated with Russia of approximately $7. Special tax items also include the impact on the provision for income taxes in our Consolidated Statements of Operations during the first quarter of 2016 due to income tax benefits of approximately $29 recognized as the result of the implementation of foreign tax planning strategies. |
(1) 2021 includes the impact of certain Brazil indirect taxes, which were recorded in product sales and selling, general and administrative expenses, net in the amounts of approximately $21 and approximately $2, respectively. The corresponding tax impact was approximately $7. 2020 includes the impact of certain Brazil indirect taxes, which were recorded in selling, general and administrative expenses, net in the amounts of approximately $11. The corresponding tax impact was approximately $4. 2019 included the impact of certain Brazil indirect taxes, which were recorded in product sales and other income (expense), net in the amounts of approximately $68 and approximately $50, respectively, in our Consolidated Income Statements. The corresponding tax impact was approximately $23. See Note 20, Supplemental Balance Sheet Information, to the Consolidated Financial Statements contained herein for further information.
(2) CTI restructuring initiatives includes the impact on the Consolidated Statements of Operations for all periods presented of net charges incurred on approved restructuring initiatives. See Note 16, Restructuring Initiative, to the Consolidated Financial Statements contained herein for further information.
(3) During 2020, the Company recorded approximately $86 of costs related to the Transaction, primarily including professional fees incurred of approximately $46, severance payments of approximately $25 and acceleration of share based compensation of approximately $10 relating to these terminations triggered by change in control provisions. During 2019, the Company recorded approximately $64 of costs related to the Transaction, primarily including professional fees and impairment losses on assets. See Note 21, Agreement and Plan of Mergers with Natura Cosméticos S.A., to the Consolidated Financial Statements contained herein and "Agreement and Plan of Mergers with Natura Cosméticos S.A.," in this MD&A for further information.
(4) During 2020, the Company incurred costs of $38 associated with the early termination of debt and credit facilities. During 2019, the Company incurred costs of $9 associated with the early termination of debt.
See Note 19,18, Contingencies, on pages F-57 through F-59 of our 2018 Annual Report, Note 17,16, Restructuring Initiatives, on pages F-53 through F-56 of our 2018 Annual Report, Note 14, Employee Benefit Plans on pages F-42 through F-50 of our 2018 Annual Report, Note 15, Segment Information, on pages F-50 through F-52 of our 2018 Annual Report, "Results Of Operations - Consolidated" below, Note 1, Description of the Business and Summary of Significant Accounting Policies, on pages F-11 through F-19 of our 2018 Annual Report, "Venezuela Discussion" below, Note 8,7, Debt and Other Financing, on pages F-30 through F-33 of our 2018 Annual Report,and Note 10,9, Income Taxes, on pages F-33 through F-37 of our 2018 Annual Report andto the Consolidated Financial Statements included herein. See also "Effective Tax Rate" on pages 39 in this MD&A, and "Results Of Operations - Consolidated" below, for more information on these items.
Sale of Avon Luxembourg Holdings S.à r.l
On July 1, 2021, the Company sold Avon Luxembourg, including our Mexican business, to a subsidiary of Natura &Co Holding for $150, with the proceeds used to repay maturing loans of $150 borrowed under the $250 Revolving Credit Facility with a subsidiary of Natura &Co Holding. The sale was accounted for as a transaction under common control in accordance with ASC805 - Business Combinations, with the resulting gain of $148 representing the difference between the proceeds, the net assets of Avon Luxembourg on the date of sale, and the cumulative foreign currency translation adjustment, taken directly to Retained Earnings. For additional information, see the Consolidated Statements of Changes in Shareholders' Deficit.
The sale did not qualify for accounting as a discontinued operation in accordance with ASC805 - Business Combinations on the basis that it did not represent a strategic shift having a major effect on the Company's operations and, as a result, the results of operations in prior periods include the results of Avon Luxembourg Holdings S.à r.l. and its subsidiaries. While not a non-GAAP measure, in order to better evaluate the ongoing operating performance of the remaining group, the tables below also identify the prior period impacts of the sale of Avon Luxembourg Holdings S.à r.l. and its subsidiaries, including our Mexican business.
Critical Accounting Estimates
We believe the accounting policies described below represent our critical accounting policies due to the estimation processes involved in each. See Note 1, Description of the Business and Summary of Significant Accounting Policies, on pages F-11 through F-219 of our 2018 Annual Reportto the 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 (“VAT”) collected for taxing authorities.
Our contracts with Representatives often include multiple promises to transfer products and/or services to the Representative and determining which of these products and/or services are considered distinct performance obligations that should be accounted for separately. 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 ("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 we expect to be returned and re-sold, each of these based on historical experience. The estimate of sales returns as well as the measurement of the returns asset and the refund liability is updated at the end of each month for changes in expectations regarding the amount of salvageable returns, reconditioning costs and any additional decreases in the value of the returned products. Late payment fees are recorded when the uncertainty associated with collecting such fees are resolved (i.e., when collected).
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 we do not sell the product or service separately, including for certain sales incentives, we determine the SSP using information that may include market prices and other observable inputs.
The new standard related to revenue recognition had a material impact in our consolidated financial statements. See Note 1, Description of the Business and Summary of Significant Accounting Policies pages F-12 through F-14 of our 2018 Annual Report for more information on our revenue recognition accounting policy.
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-weekmonth in 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. We record an estimate of an allowance for doubtful accounts on receivable balances based on an analysis of historical data and, as applicable, current circumstances,conditions and reasonable and supportable forecasts that affect collectability, including seasonality and changing trends.trends and the impact of COVID-19. Over the past three years, annual bad debt expense was $162$62 in 2018, $2222021, $78 in 20172020 and $191$115 in 2016,2019, or approximately 3%2% of total revenue in 2018, approximately 4% of total revenue in 2017,2021, 2020 and approximately 3% of total revenue in 2016.2019. 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 end user of our products beyond the Representative. We have 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. We record a provision for estimated sales returns based on historical experience with product returns. Over the past three years, annual sales returns were $172$76 for 2018, $1982021, $101 for 20172020 and $187$133 for 2016,2019, or approximately 3%2-4% of total revenue in each year, which has been generally in line with our expectations.
If the historical data we use 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
We record 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, we classify inventory into various categories based upon its stage in the product life cycle, future marketing sales plans and the disposition process. We assign a degree of obsolescence risk to products based on this classification to estimate the level of obsolescence provision. 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 $114$27 in 2018, $372021, $38 in 20172020 and $37 in 2016,2019, or 2% of total revenue in 2018, and less thanapproximately 1% of total revenue in 20172021, 2020 and 2016. As discussed in the Overview section, 2018 includes inventory obsolescence charges of $88 related to our inventory reset program.2019.
Pension and Postretirement Expense
We maintain defined benefit pension plans, the most significant of which are in the UK, Germany and the U.S. However, our 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, 2013.2013 and closed to employees hired on or after September 30, 2006. Additionally, we have unfunded supplemental pension benefit plans for some current and retired executives and provide retiree health care benefits subject to certain limitations to certain retired employees in the U.S. and certain foreign countries. See Note 14,13, Employee Benefit Plans, on pages F-42 through F-50 of our 2018 Annual Reportto the Consolidated Financial Statements included herein for more information on our benefit plans.
Pension and postretirement expense and the requirements for funding our 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, interest crediting rates, price inflation, cost-of-living adjustments, mortality rates and certain other demographic assumptions, and other factors. We use a December 31 measurement date for all of our employee benefit plans.
For 2018,2021, the weighted average assumed rate of return on all pension plan assets was 5.23%2.45%, as compared with 5.12%2.74% for 2017.2020. In determining the long-term rates of return, we consider the nature of the plans’ investments, an expectation for the plans’ investment strategies, historical rates of return and current economic forecasts. We generally evaluate the expected long-term rates of return annually and adjust as necessary.
In some of our defined benefit pension plans, we have adopted investment strategies which are designed to match the movements in the pension liability through an increased allocation towards debt securities. In addition, we also utilize derivative instruments in our UK defined benefit pension plans to achieve the desired market exposures or 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 our pension plan assets relate to the UK defined benefit pension plan. The assumed rate of return for determining 20182021 net periodic benefit cost for the UK defined benefit pension plan was 5.20%2.10%. In addition, the 20182021 rate of return assumption for the UK defined benefit pension plan was based on an asset allocation of approximately 80%76% in corporate and government bonds and mortgage-backed securities (which are expected to earnliability driven investments, approximately 2% to 4% in the long-term) and approximately 20%24% in equity securities, emerging market debt and high yield securities (which are expected to earn approximately 5% to 9% in the long-term).securities. In addition to the physical assets, the asset portfolio for the UK defined benefit pension plan has derivative instruments which increase our exposure to fixed income (in order to better match liabilities) and, to a lesser extent, impact our equity exposure.. The rate of return on the plan assets in the UK was approximately -4%3.4% in 20182021 and approximately 9%11.4% in 2017.
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 we transferred $499.6 of pension liabilities under the U.S. defined benefit pension plan associated with current and former employees of the North America business and certain other former Avon employees, along with $355.9 of assets held by the U.S. defined benefit pension plan, to a defined benefit pension plan sponsored by New Avon. We also transferred $60.4 of other postretirement liabilities (namely, retiree medical and supplemental pension liabilities) in respect of such employees and former employees. See Note 3, Discontinued Operations and Assets and Liabilities Held for Sale on pages F-24 through F-26 of our 2018 Annual Report. We continue to retain certain U.S. pension and other postretirement liabilities primarily associated with employees who are actively employed by Avon in the U.S. providing services other than with respect to the North America business.Prior to this separation, our net periodic benefit costs for the U.S. pension and postretirement benefit plans were allocated between Discontinued Operations and Global as the plan included
both North America and U.S. Corporate Avon associates, and as such, our ongoing net periodic benefit costs within Global were not materially impacted by the separation of the North America business.
The assumed rate of return for determining 2018 net periodic benefit cost for the U.S. defined benefit pension plan was 5.50%, which was based on an asset allocation of approximately 70% in corporate and government bonds (which are expected to earn approximately 3% to 5% in the long-term) and approximately 30% in equity securities (which are expected to earn approximately 6% to 8% in the long-term). The rate of return on the plan assets in the U.S. was approximately -6% in 2018 and approximately 15% in 2017.2020.
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 our more significant plans, including our UK defined benefit pension plan and our 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 3.06%2.15% at December 31, 2018,2021, and 2.66%1.53% at December 31, 2017.2020. For the determination of the expected rates of return on assets and the discount rates, we take external actuarial and investment advice into consideration.
Effective as of January 1, 2018, we changed the method we use to estimate the service and interest cost components of net periodic benefit cost for the U.S. defined benefit pension plan and the majority of our significant non-U.S. pension plans, including the UK defined benefit pension plan. Historically, including in 2017, we estimated the service and interest cost components using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. Beginning in 2018, we elected to use a full yield curve approach in the estimation of these components of net periodic benefit cost by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. We made this change to improve the correlation between projected benefit cash flows and the corresponding yield curve spot rates, which we believe will result in a more precise measurement of service and interest costs. We accounted for this change in estimate on a prospective basis beginning in 2018.
Our funding requirements may be impacted by standards and regulations or interpretations thereof. Our 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, 2018,2021, we had pretax actuarial losses and prior service credits totaling approximately $33$15 for the U.S. defined benefit pension and postretirement plans and approximately $175$125 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 we believe that the assumptions used are reasonable, differences in actual experience or changes in assumptions may materially affect our pension and postretirement obligations and future expense. For 2019,
2022, our assumption for the expected rate of return on assets is 5.5%4.6% for our U.S. defined benefit pension plan and 5.3%2.19% for our non-U.S. defined benefit pension plans (which includes 5.20%1.9% for our UK defined benefit pension plan). Our assumptions are generally reviewed and determined on an annual basis.
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 20182021 pension expense and the pension benefit obligation at December 31, 2018:2021:
| | | | | Increase/(Decrease) in Pension Expense | | Increase/(Decrease) in Pension Obligation | | Increase/(Decrease) in
Pension Expense | | Increase/(Decrease) in
Pension Obligation |
| | | 50 Basis Point | | 50 Basis Point | | | 50 Basis Point | | 50 Basis Point |
| | | Increase | | Decrease | | Increase | | Decrease | | | Increase | | Decrease | | Increase | | Decrease |
| Rate of return on assets | | $ | (3.4 | ) | | $ | 3.4 |
| | N/A |
| | N/A |
| Rate of return on assets | | $ | (3.7) | | | $ | 3.7 | | | N/A | | N/A |
| Discount rate | | (.7 | ) | | .6 |
| | $ | (52.9 | ) | | $ | 58.7 |
| Discount rate | | .5 | | | (.9) | | | $ | (53.5) | | | $ | 57.8 | |
| Rate of compensation increase | | .6 |
| | (.6 | ) | | 2.4 |
| | (2.3 | ) | Rate of compensation increase | | .5 | | | (.5) | | | 2.5 | | | (2.4) | |
Restructuring Reserves
We record the estimated expense for our 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 our best estimate, but require assumptions about the programs that may change over time, including attrition rates. Estimates are evaluated periodically to determine whether an adjustment is required.
Taxes
We record a valuation allowance to reduce our 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 the Company in order to determine whether all or some portion of the deferred tax assets will not be realized. In performing this analysis, the Company’s forecasted U.S. and foreign taxable income, and the existence of potential prudent and feasible tax planning strategies that would enable the Company to utilize some or all of its excess foreigndeferred tax credits,assets, are taken into consideration. At December 31, 2018,2021, we had net deferred tax assets of approximately $193$121 (net of valuation allowances of approximately $3,258$815 and deferred tax liabilities of $85)$2).
With respect toWe monitor the realizability of our deferred tax assets at December 31, 2018, we had recognizedon a continuous basis. Should macroeconomic and socio-political conditions change or our business operations do not improve, approximately $67 of deferred tax assets of approximately $2,144 relatingcould potentially need to foreign and state tax loss carryforwards, for whichbe offset with the recording of a valuation allowance of approximately $2,073 has been provided. At December 31, 2018, we had recognizedduring the next 12 months. The deferred tax assets of approximately $831 primarily relating to excess U.S. foreign tax and other U.S. general business credit carryforwards for whichare associated with Avon subsidiary operations that suffered a valuation allowance of approximately $813 had been provided. We have a history of U.S. source losses, and our 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 our ability to credit foreign taxes or utilize the general business credits which we generate.
Our ability to realize our U.S. deferredearnings before tax assets, such as our foreign tax and general business credit carryforwards, is dependent on future U.S. taxable income within the carryforward period. At December 31, 2018, we would need to generate approximately $4.0 billion of excess net foreign source income in order to realize the U.S. foreign tax and general business credits before they expire.during 2021.
At December 31, 2018,2021, we continue to assert that substantially all of our foreign earnings are not indefinitely reinvested. Accordingly, we adjusted our deferred tax liability each period to account for our undistributed earnings of foreign subsidiaries and forAt December 31, 2021 the tax effect of earnings that were actually repatriated during the year. The net impact on the deferred tax liability associated with the Company’s undistributed earnings is a decrease of approximately $5, resulting in a deferred tax liability balance of approximately $17 related to the incremental tax cost on approximately $1.1 billion ofcompany’s undistributed foreign earnings at December 31, 2018.is approximately $1.2 billion and would generate an approximate $7.9 of income tax if repatriated from the local subsidiaries.
With respect to our uncertain tax positions, we recognize the benefit of a tax position, if that position is more likely than not of being sustained on examination by the taxing authorities, based on the technical merits of the position. We believe that our assessment of more likely than not is reasonable, but because of the subjectivity involved and the unpredictable nature of the subject matter at issue, our assessment may prove ultimately to be incorrect, which could materially impact our Consolidated Financial Statements.
We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. In 2019, 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 our tax positions are ultimately upheld or denied, it is possible that the 2019 provision for income taxes, as well as tax related cash receipts or payments, may be impacted.
Loss Contingencies
We determine whether to disclose and/or accrue for loss contingencies based on an assessment of whether the risk of loss is remote, reasonably possible or probable. We record loss contingencies when it is probable that a liability has been incurred and the amount of loss is reasonably estimable. Our assessment is developed in consultation with our outside counsel and other advisors 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. We believe that our 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, our assessment may prove ultimately to be incorrect, which could materially impact our Consolidated Financial Statements.
Impairment of Assets
Plant, Property and Equipment and Capitalized Software
We evaluate our 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
We test goodwill for impairment annually, and more frequently if circumstances warrant, using various fair value methods. We completed our annual goodwill impairment assessment for 20182021 in December and determined that the estimated fair values were considered substantially in excess of the carrying values of each of our reporting units.
The impairment analyses performed for goodwill require several estimates in computing the estimated fair value of a reporting unit. As part of our goodwill impairment analysis, we typically use a discounted cash flow ("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 we would generally expect a market participant would use. In estimating the fair value of our reporting units utilizing a DCF approach, we typically forecast revenue and the resulting cash flows for periods of five to ten years and include an estimated terminal value at the end of the forecasted period. When determining the appropriate forecast period for the DCF approach, we consider the amount of time required before the reporting unit achieves what we consider a normalized, sustainable level of cash flows. The estimation of fair value utilizing a DCF approach includes numerous uncertainties which require significant judgment when making assumptions of expected growth rates and the selection of discount rates, as well as assumptions regarding general economic and business conditions, and the structure that would yield the highest economic value, among other factors.
The majority of our goodwill is held in our business in Colombia. The key assumptions supporting the impairment analysis for this business were forecast cash flows based on 2022 budgets, a discount rate of 12.2% and a long-term growth rate of nil. Using these assumptions we determined that the estimated fair value of our business in Colombia was approximately 35% higher than its carrying value. The forecast cash flows are driven by assumptions around operating margin and are particularly sensitive to the business’ ability to achieve its 2022 budget, which, in turn, is dependent on the business being able to return margins to historic levels achieved prior to 2020. If in isolation, either the forecast operating margin were to decrease by 200 basis points or the discount rate was increased by 470 basis points then headroom would be eroded to nil.
Results Of Operations - Consolidated | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31 | | Percentage/Basis Point Change | | |
| | 2021 | | 2020 | | 2019 | | 2021 vs.
2020 | | 2020 vs.
2019 | | |
| Select Consolidated Financial Information | | | | | | | | | | | | |
| Total revenue | | $ | 3,404.5 | | $ | 3,625.2 | | $ | 4,763.2 | | (6) | % | | (24) | % | | |
| Cost of sales | | (1,439.1) | | (1,588.6) | | (2,010.1) | | (9) | % | | (21) | % | | |
| Cost of sales from affiliates of Natura &Co | | (22.4) | | (5.9) | | — | | * | | * | | |
| SG&A expenses | | (2,001.4) | | (2,152.9) | | (2,627.5) | | (7) | % | | (18) | % | | |
| Operating (loss) profit | | (58.4) | | (122.2) | | 125.6 | | (52) | % | | * | | |
| Interest expense | | (63.5) | | (119.6) | | (127.6) | | (47) | % | | (6) | % | | |
| Interest expense on Loan from affiliates of Natura &Co | | (50.6) | | (7.5) | | — | | * | | * | | |
| Loss on extinguishment of debt | | — | | (37.7) | | (11.6) | | * | | * | | |
| Interest income | | 2.2 | | 2.1 | | 7.7 | | 5 | % | | (73) | % | | |
| Gain on sale of business / assets | | 9.9 | | 1.5 | | 50.1 | | * | | (97) | % | | |
| Other income (expense), net | | 1.6 | | (20.2) | | 94.2 | | * | | * | | |
| (Loss) Income from continuing operations, before taxes | | (158.8) | | (303.6) | | 138.4 | | (48) | % | | * | | |
| (Loss) Income from continuing operations, net of tax | | (175.0) | | (337.6) | | 35.3 | | (48) | % | | * | | |
| Net loss attributable to Avon | | $ | (192.1) | | $ | (362.8) | | $ | (.3) | | (47) | % | | * | | |
| | | | | | | | * | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Advertising expenses(1) | | $ | 67.8 | | | $ | 59.9 | | | $ | 72.9 | | | 13 | % | | (18) | % | | |
| | | | | | | | | | | | |
| Reconciliation of Non-GAAP Financial Measures | | | | | | | | | | | | |
| Total revenue | | $ | 3,404.5 | | | $ | 3,625.2 | | | $ | 4,763.2 | | | (6) | % | | (24) | % | | |
| Certain Brazil taxes | | (21.5) | | | — | | | (67.7) | | | | | | | |
| Adjusted revenue | | $ | 3,383.0 | | | $ | 3,625.2 | | | $ | 4,695.5 | | | (7) | % | | (23) | % | | |
| | | | | | | | | | | | |
| Avon Luxembourg | | (249.2) | | | (431.8) | | | (509.4) | | | * | | (15) | % | | |
| Adjusted revenue excluding Avon Luxembourg | | 3,133.8 | | | $ | 3,193.4 | | | $ | 4,186.1 | | | (2) | % | | (24) | % | | |
| | | | | | | | | | | | |
| Gross margin | | 57.1 | % | | 56.0 | % | | 57.8 | % | | 110 | | | (180) | | | |
| Certain Brazil taxes | | (.3) | | | — | | | (.6) | | | (30) | | | 60 | | | |
| CTI restructuring | | — | | | — | | | .3 | | | — | | | (30) | | | |
| Adjusted gross margin | | 56.8 | % | | 56.0 | % | | 57.5 | % | | 80 | | | (150) | | | |
| | | | | | | | | | | | |
| Avon Luxembourg | | .5 | % | | .8 | % | | 1.0 | % | | (30) | | | (20) | | | |
| Adjusted gross margin excluding Avon Luxembourg | | 57.3 | % | | 56.8 | % | | 58.5 | % | | 50 | | | (170) | | | |
| | | | | | | | | | | | |
| SG&A as a % of total revenue | | 58.8 | % | | 59.4 | % | | 55.2 | % | | (60) | | | 420 | | | |
| Certain Brazil taxes | | .3 | | | .3 | | | .7 | | | — | | | (40) | | | |
| CTI restructuring | | (2.0) | | | (.7) | | | (2.7) | | | (130) | | | 200 | | | |
| Costs related to the Transaction | | — | | | (2.4) | | | (1.3) | | | 240 | | | (110) | | | |
| | | | | | | | | | | | |
| Adjusted SG&A as a % of total revenue | | 57.1 | % | | 56.6 | % | | 51.9 | % | | 50 | | | 470 | | | |
| | | | | | | | | | | | |
| Avon Luxembourg | | 1.2 | % | | 1.7 | % | | 1.1 | % | | (50) | | | 60 | | | |
| Adjusted selling, general and administrative expenses as a % of total revenue excluding Avon Luxembourg | | 58.3 | % | | 58.3 | % | | 53.0 | % | | — | | | 530 | | | |
| | | | | | | | | | | | |
| Operating (loss) profit | | $ | (58.4) | | | $ | (122.2) | | | $ | 125.6 | | | (52) | % | | * | | |
| Certain Brazil taxes | | (19.8) | | | (10.6) | | | (67.7) | | | | | | | |
| CTI restructuring | | 68.7 | | | 23.7 | | | 139.3 | | | | | | | |
| Costs related to the Transaction | | — | | | 85.8 | | | 64.3 | | | | | | | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | |
| | | Years ended December 31 | | Basis Point Change |
| | | 2018 | | 2017 | | 2016 | | 2018 vs. 2017 | | 2017 vs.
2016 |
| Select Consolidated Financial Information | | | | | | | | | | |
| Total revenue | | $ | 5,571.3 |
| | $ | 5,715.6 |
| | $ | 5,717.7 |
| | (3 | )% | | — | % |
| Cost of sales | | 2,364.0 |
| | 2,203.3 |
| | 2,257.0 |
| | 7 | % | | (2 | )% |
| SG&A expenses | | 2,972.1 |
| | 3,231.0 |
| | 3,136.9 |
| | (8 | )% | | 3 | % |
| Operating profit | | 235.2 |
| | 281.3 |
| | 323.8 |
| | (16 | )% | | (13 | )% |
| Interest expense | | 134.6 |
| | 140.8 |
| | 136.6 |
| | (4 | )% | | 3 | % |
| Loss (gain) on extinguishment of debt | | 0.7 |
| | — |
| | (1.1 | ) | | * |
| | * |
|
| Interest income | | (15.3 | ) | | (14.8 | ) | | (15.8 | ) | | 3 | % | | (6 | )% |
| Other expense, net | | 7.1 |
| | 34.6 |
| | 172.9 |
| | (79 | )% | | (80 | )% |
| Income from continuing operations, before taxes | | 108.1 |
| | 120.7 |
| | 31.2 |
| | (10 | )% | | * |
|
| Income (loss) from continuing operations, net of tax | | (21.8 | ) | | 20.0 |
| | (93.4 | ) | | * |
| | * |
|
| Net income (loss) attributable to Avon | | $ | (19.5 | ) | | $ | 22.0 |
| | $ | (107.6 | ) | | * |
| | * |
|
| | | | | | | | | | | |
| Diluted income (loss) per share from continuing operations | | $ | (.10 | ) | | $ | (.00 | ) | | $ | (.25 | ) | | * |
| | * |
|
| Diluted income (loss) per share attributable to Avon | | $ | (.10 | ) | | $ | (.00 | ) | | $ | (.29 | ) | | * |
| | * |
|
| | | | | | | | | | | |
Advertising expenses(1) | | $ | 127.6 |
| | $ | 118.4 |
| | $ | 108.9 |
| | 8 | % | | 9 | % |
| | | | | | | | | | | |
| Reconciliation of Non-GAAP Financial Measures | | | | | | | | | | |
| Total revenue | | $ | 5,571.3 |
| | $ | 5,715.6 |
| | $ | 5,717.7 |
| | (3 | )% | | — | % |
| Brazil IPI tax release | | (168.4 | ) | | — |
| | — |
| | | | |
| Adjusted revenue | | 5,402.9 |
| | 5,715.6 |
| | 5,717.7 |
| | (5 | )% | | — | % |
| | | | | | | | | | | |
| Gross margin | | 57.6 | % | | 61.5 | % | | 60.5 | % | | (3.9 | ) | | 1.0 |
|
| Brazil IPI tax release | | (1.3 | ) | | — |
| | — |
| | (1.3 | ) | | — |
|
| CTI restructuring | | 1.6 |
| | — |
| | — |
| | 1.6 |
| | — |
|
| Adjusted gross margin | | 57.9 | % | | 61.5 | % | | 60.5 | % | | (3.6 | ) | | 1.0 |
|
| | | | | | | | | | | |
| SG&A expenses as a % of total revenue | | 53.3 | % | | 56.5 | % | | 54.9 | % | | (3.2 | ) | | 1.6 |
|
| Brazil IPI tax release | | 1.7 |
| | — |
| | — |
| | 1.7 |
| | — | % |
| CTI restructuring | | (1.6 | ) | | (1.0 | ) | | (1.3 | ) | | (.6 | ) | | .3 |
|
| Loss contingency | | — |
| | (.3 | ) | | — |
| | .3 |
| | (.3 | ) |
|
| | | | | | | | | | | | | | | | | | |
| | | Years ended December 31 | | Basis Point Change |
| | | 2018 | | 2017 | | 2016 | | 2018 vs. 2017 | | 2017 vs.
2016 |
| Legal settlement | | — |
| | — |
| | .5 |
| | — |
| | (.5 | ) |
| Adjusted SG&A expenses as a % of total revenue | | 53.4 | % | | 55.2 | % | | 54.0 | % | | (1.8 | ) | | 1.2 |
|
| | | | | | | | | | | |
| Operating profit | | $ | 235.2 |
| | $ | 281.3 |
| | $ | 323.8 |
| | (16 | )% | | (13 | )% |
| Brazil IPI tax release | | (168.4 | ) | | — |
| | — |
| | | | |
| CTI restructuring | | 180.5 |
| | 60.2 |
| | 77.4 |
| |
| |
|
| Loss contingency | | — |
| | 18.2 |
| | — |
| |
| | |
| Legal settlement | | — |
| | — |
| | (27.2 | ) | | | |
|
| Adjusted operating profit | | $ | 247.3 |
| | $ | 359.7 |
| | $ | 374.0 |
| | (31 | )% | | (4 | )% |
| | | | | | | | | | | |
| Operating margin | | 4.2 | % | | 4.9 | % | | 5.7 | % | | (.7 | ) | | (.8 | ) |
| Brazil IPI tax release | | (2.8 | ) | | — |
| | — |
| | | | |
| CTI restructuring | | 3.2 |
| | 1.1 |
| | 1.4 |
| | 2.1 |
| | (.3 | ) |
| Loss contingency | | — |
| | .3 |
| | — |
| | (.3 | ) | | .3 |
|
| Legal settlement | | — |
| | — |
| | (.5 | ) | | — |
| | .5 |
|
| Adjusted operating margin | | 4.6 | % | | 6.3 | % | | 6.5 | % | | (1.7 | ) | | (.2 | ) |
| | | | | | | | | | | |
Change in Constant $ Adjusted operating margin(2) | | | | | | | | (140 | ) | | (40 | ) |
| | | | | | | | | | | |
| Income before taxes | | 108.1 |
| | 120.7 |
| | 31.2 |
| | (10 | )% | | * |
|
| Brazil IPI tax release | | (194.7 | ) | | — |
| | — |
| | | | |
| CTI restructuring | | 180.5 |
| | 60.2 |
| | 77.4 |
| | | | |
| Loss contingency | | — |
| | 18.2 |
| | — |
| | | | |
| Legal settlement | | — |
| | — |
| | (27.2 | ) | | | | |
| Venezuelan special items | | — |
| | — |
| | 120.5 |
| | | | |
| Other items | | — |
| | — |
| | (1.1 | ) | | | | |
| Adjusted income before taxes | | 93.9 |
| | 199.1 |
| | 200.8 |
| | (53 | )% | | (1 | )% |
| | | | | | | | | | | |
| Income taxes | | (129.9 | ) | | (100.7 | ) | | (124.6 | ) | | 29 | % | | (19 | )% |
| Brazil IPI tax release | | 66.2 |
| | — |
| | — |
| | | | |
| CTI restructuring | | (17.4 | ) | | (1.7 | ) | | (13.5 | ) | | | | |
| Special tax items | | 21.1 |
| | (49.8 | ) | | (27.8 | ) | | | | |
| Adjusted income taxes | | (60.0 | ) | | (152.2 | ) | | (165.9 | ) | | (61 | )% | | (8 | )% |
| | | | | | | | | | | |
| Effective tax rate | | 120.2 | % | | 83.4 | % | | * |
| | | | |
| Adjusted effective tax rate | | 63.9 | % | | 76.4 | % | | 82.6 | % | | | | |
| | | | | | | | | | | |
| Performance Metrics | | | | | | | | | | |
| Change in Active Representatives | | | | | | | | (5 | )% | | (3 | )% |
| Change in units sold | | | | | | | | (6 | )% | | (4 | )% |
| Change in Ending Representatives | | | | | | | | (8 | )% | | — | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31 | | Percentage/Basis Point Change | | |
| | 2021 | | 2020 | | 2019 | | 2021 vs.
2020 | | 2020 vs.
2019 | | |
| Adjusted operating (loss) profit | | $ | (9.5) | | | $ | (23.3) | | | $ | 261.5 | | | (59) | % | | * | | |
| | | | | | | | | | | | |
| Avon Luxembourg | | (21.3) | | | (27.6) | | | (32.9) | | | * | | (16) | % | | |
| Adjusted operating (loss) profit excluding Avon Luxembourg | | $ | (30.8) | | | $ | (50.9) | | | $ | 228.6 | | | (39) | % | | * | | |
| | | | | | | | | | | | |
| Operating margin | | (1.7) | % | | (3.4) | % | | 2.6 | % | | 170 | | | (600) | | | |
| Certain Brazil taxes | | (.6) | | | (.3) | | | (1.2) | | | (30) | | | 90 | | | |
| CTI restructuring | | 2.0 | | | .7 | | | 2.9 | | | 130 | | | (220) | | | |
| Costs related to the Transaction | | — | | | 2.4 | | | 1.3 | | | (240) | | | 110 | | | |
| | | | | | | | | | | | |
| Adjusted operating margin | | (.3) | % | | (.6) | % | | 5.6 | % | | 30 | | | (620) | | | |
| | | | | | | | | | | | |
| Avon Luxembourg | | (.7) | % | | (1.0) | % | | (.1) | % | | 30 | | | (90) | | | |
| Adjusted operating margin excluding Avon Luxembourg | | (1.0) | % | | (1.6) | % | | 5.5 | % | | 60 | | | (710) | | | |
| | | | | | | | | | | | |
Change in Constant $ Adjusted operating margin(2) | | | | | | | | 100 | | | (540) | | | |
| | | | | | | | | | | | |
| (Loss) income before taxes | | $ | (158.8) | | | $ | (303.6) | | | $ | 138.4 | | | (48) | % | | * | | |
| Certain Brazil taxes | | (23.6) | | | (10.6) | | | (118.3) | | | | | | | |
| CTI restructuring | | 58.8 | | | 22.2 | | | 116.0 | | | | | | | |
| Costs related to the Transaction | | — | | | 85.8 | | | 64.3 | | | | | | | |
| Loss on extinguishment of debt and credit facilities | | — | | | 37.7 | | | 8.9 | | | | | | | |
| Adjusted (loss) income before taxes | | $ | (123.6) | | | $ | (168.5) | | | $ | 209.3 | | | (27) | % | | * | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Effective tax rate | | (10.2) | % | | (11.2) | % | | 74.5 | % | | | | | | |
| Adjusted effective tax rate | | (9.3) | % | | (18.8) | % | | 44.0 | % | | | | | | |
| | | | | | | | | | | | |
| Performance Metrics | | | | | | | | | | | | |
| Change in Active Representatives | | | | | | | | (15) | % | | (14) | % | | |
| Change in units sold | | | | | | | | (16) | % | | (14) | % | | |
Amounts in the table above may not necessarily sum due to rounding.
* Calculation not meaningful
| |
(1) | Advertising expenses are recorded in SG&A expenses.
|
| |
(2) | Change in Constant $ Adjusted operating margin for all years presented is calculated using the current-year Constant $ rates. |
2018(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.
2021 Compared to 20172020
Revenue
During 2018,Total revenue declined 3%decreased 6% compared to the prior-year period.period, impacted by certain indirect taxes recognized in Brazil. Excluding the Brazil IPI release,these items, Adjusted revenue was down 5%7%, primarily due towith the unfavorable impact of foreign exchange.exchange being broadly neutral as the weakening of the U.S. dollar relative to the South African rand, the British pound and the Mexican peso was offset by the strengthening of the U.S. dollar relative to the Turkish lira and the Brazilian real.
On a Constant $ basis, Adjusted revenue increased 1%. Revenuedecreased 6% year on year driven by a 4% decrease in Avon International and Constant $ Adjusted revenue included a benefit of approximately 4% due to the impact of adopting the new revenue recognition standard. The 4% benefit was9% decrease in Avon Latin America, mostly driven primarily by the reclassification of fees paid by Representatives for brochures,
late payments and payment processing, and income from appointment kits, from SG&A. The impact of timing of revenue recognition for sales incentives was negligible.
Revenue and constant $ Adjusted revenue was impacted by declines primarily in Brazil, which continued to be negatively impacted by competitive pressures against a backdrop of a challenging macroeconomic environment and lower consumptionchanges in the market, as well as lower appointments due toseverity of COVID-19 restrictions in many markets and the applicationsale of strict credit requirements for the acceptance of new Representatives. To a lesser extent, Constant $ Adjusted revenue was also impacted by declines in the UK, South Africa and Russia, as well as lower revenue from the closure of Australia and New Zealand during 2018. These declines were partially offset by improved revenue growth management including inflationary pricing in Argentina.Avon Luxembourg on July 1, 2021. Revenue and Constant $ Adjusted revenue were impacted by a 10% increase in Average Representative Sales offset by a decrease in Active Representatives of 5%, which was primarily driven15% in multiple markets and across both Avon International and Avon Latin America and also impacted by Brazil, anda reduction in the frequency of campaign cycles as part of our strategy to simplify our business, with all markets now on a lesser extent, Russia. Average order in monthly campaign cycle.
Constant $ increased 2%, including a benefit of approximately 4% due toAdjusted revenue excluding the impact of adopting the new revenue recognition standard. sale of Avon Luxembourg decreased by 1% as a 15% increase in Average Representative Sales was offset by an 15% decrease in Active Representatives.
Units sold decreased 6%,16% or decreased 13% excluding the impact of the sale of Avon Luxembourg driven by a declinedecreases in Brazil.
Ending Representatives declined 8%, primarily driven by declines in Russiaboth Avon International and Brazil.
On a category basis, our net sales from reportable segments and associated growth rates were as follows:Avon Latin America.
|
| | | | | | | | | | | | | |
| | Years ended December 31 | | % Change |
| | 2018 | | 2017 | | US$ | | Constant $ |
| Beauty: | | | | | | | |
| Skincare | $ | 1,474.7 |
| | $ | 1,606.4 |
| | (8 | )% | | (3 | )% |
| Fragrance | 1,428.1 |
| | 1,547.2 |
| | (8 | ) | | (1 | ) |
| Color | 845.3 |
| | 968.0 |
| | (13 | ) | | (7 | ) |
| Total Beauty | 3,748.1 |
| | 4,121.6 |
| | (9 | ) | | (3 | ) |
| Fashion & Home: | | | | | | | |
| Fashion | 750.8 |
| | 812.5 |
| | (8 | ) | | (4 | ) |
| Home | 561.3 |
| | 587.2 |
| | (4 | ) | | 5 |
|
| Total Fashion & Home | 1,312.1 |
| | 1,399.7 |
| | (6 | ) | | — |
|
| Brazil IPI tax release | 168.4 |
| | — |
| | | | |
| Net sales from reportable segments | 5,228.6 |
| | 5,521.3 |
| | (5 | ) | | (2 | ) |
| Net sales from Other operating segments and business activities | 19.1 |
| | 43.8 |
| | (56 | ) | | (57 | ) |
| Net sales | $ | 5,247.7 |
| | $ | 5,565.1 |
| | (6 | ) | | (3 | ) |
See "Segment Review" in this MD&A for additional information related to changes in revenue by segment.
Operating Margin
Operating margin decreased 70increased 170 basis points, significantly benefiting from costs related to the Natura transaction in the prior-year period and an increase in receipts of certain Brazil taxes in the current year, partially offset by increased restructuring expenses in the current year. Excluding these items, Adjusted operating margin decreased 170increased 30 basis points compared to 2017, including a benefit of 10 basis points due to the prior-year period. The impact of adopting the new revenue recognition standard. The benefit of 10 basis pointsforeign exchange on Adjusted operating margin was broadly neutral and Constant $ Adjusted Operating Margin improved slightly mostly driven by the net positive contribution to operating margin of fourth quarter 2017 sales incentives satisfied during 2018 and sales incentives deferred during the period, impacted by the mix of products.increase in gross margin. The changesmovements in operating margin and Adjusted operating margin include the benefits associated with the Transformation Plan, primarily reductions in headcount, as well as other cost reductions. These savings were partially offset by the inflationary impact on costs. Operating margin and Adjusted operating margin drivers are discussed further below in "Gross Margin" and "SG&A Expenses.""Selling, General and Administrative Expenses".
Gross Margin
Gross margin decreased 390 basis points and Adjusted gross margin decreased 360increased 80 basis points compared to the same period of 2017, including a decline of 350 basis points due to2020 as the positive impact of adopting the new revenue recognition standard. The 350 basis point decline was driven by the reclassification of sales incentive costs from SG&A to cost of sales, partiallyprice/mix more than offset by the reclassification of fees paid by Representatives for late payments, payment processing and brochures from SG&A to other revenue and the reclassification of income from appointment kits from SG&A to net sales.
Gross margin and Adjusted gross margin were primarily impacted by the following:
a decrease of 80 basis points due to higher supply chain costs, driven by higher material costs primarily in South Latin America;
a decrease of 20 basis points due to the net unfavorable impact of foreign currency transaction lossesmovements and foreign currency translation;higher supply chain costs.
Selling, General and
a decrease of 20 basis points due to the unfavorable impact as a result of hyperinflationary accounting in Argentina effective July 1, 2018, primarily due to inventory being accounted for at its historical dollar cost.
This item was partially offset by the following:
an increase of 110 basis points due to the favorable net impact of mix and pricing, driven by inflationary pricing in Argentina.
Administrative Expenses ("SG&A Expenses&A")
SG&A as a percentage of total revenue which decreased 32060 basis points, benefited 170 basis points fromsignificantly impacted by costs related to the Brazil IPI releaseNatura transaction in the third quarter of 2018 and 30 basis points from a loss contingency recorded in the prior-year period related to a non-U.S. pension plan,prior year period. This benefit was partially offset by 60 basis point from higher CTI restructuring.increased restructuring expenses in the current year. Excluding these items, Adjusted SG&A as a percentage of Adjusted revenue decreased 180increased 50 basis points, compared to the same period of 2017. SG&A2020, as a percentage of total revenuelower bad debt and Adjusted SG&A as a percentage of Adjusted revenue include a benefit of 350 basis points due to the impact of adopting the new revenue recognition standard. The 350 basis point benefit was driven by the reclassification of sales incentive costs from SG&A to cost of sales, partially offset by the reclassification of fees paid by Representatives for late payments, payment processing and brochures from SG&A to other revenue and the reclassification of income from appointment kits from SG&A to net sales.
SG&A as a percentage of total revenue and Adjusted SG&A as a percentage of Adjusted revenue were primarily impacted by the following:
an increase of 50 basis points due to higher Representative, sales leader and field expense, primarily in Brazil due to investments aimed at recovering activity levels that were disruptedoffset by the national transportation strike in the second quarter of 2018, as well as increased focus on Representatives training in the second half of 2018;
an increase of 40 basis points from higher advertising expense primarily due to increased investments in Europe, Middle East & Africa;
an increase of 40 basis points from higher transportation costs, mainly in Brazil primarily driven by inefficiencies caused byexpenses and the national transportation strike and an increase in fuel prices, in Europe, Middle East & Africa driven by further increases in delivery rates in Russia and increased flexibility in order processing in the UK and in Mexico due to an increase in fuel prices;
an increase of approximately 40 basis points due to the net unfavorable impact of foreign currency transaction losses and foreign currency translation;
an increase of 40 basis points due to higher net brochure expense primarily due to an increaselower revenues, which resulted in brochure volumes in Brazil; and
a decrease of 50 basis points from lower bad debt expense, primarily in Brazil due to improved credit control and collections processes.
See Note 15, Segment Information on pages F-50 through F-52deleveraging of our 2018 Annual Report for more information on the legal settlement, Note 14, Employee Benefit Plans on pages F-42 through F-50 of our 2018 Annual Report for more information on the loss contingency related to a non-U.S. pension plan and Note 17, Restructuring Initiatives on pages F-53 through F-56 of our 2018 Annual Report for more information on CTI restructuring.fixed expenses.
Other Expenses
Interest expense decreased by approximately $6,$13 and interest income remained relatively unchanged compared to 2020.
Other income, net, of $2 increased by approximately $22 compared to other expense, net of $20 in the prior-year period, primarily dueattributable to interest savings associated with prepayment oflower foreign exchange losses and lower pension and postretirement plan costs in the $237.8 principal amount of our 6.50% Notes due March 2019. Refer to Note 8, Debt and Other Financing on pages F-30 through F-33 of our 2018 Annual Report for additional information.current year period.
A lossLoss on extinguishment of debt ofand credit facilities was nil in 2021 compared to approximately $1 was comprised of a loss of approximately $3 associated with$38 in 2020, as we did not redeem, repurchase or terminate debt in 2021 while in 2020 we redeemed the prepaymentremaining principal amounts of our 6.50%2016 Notes partially offset bydue August 15, 2022 and our 2019 Notes due August 15, 2022 in November 2020, repurchased a gainportion of approximatelyour 6.95% Notes due March 15, 2043 in September 2020, and terminated our 2019 revolving credit facility in January 2020.
Gain on sale of business/assets in 2021 of $10 related primarily to the sale of the Spanish Distribution Center in September 2021. Gain on sale of business/assets in 2020 of $2 associated withrelated primarily to the debt repurchasessale of the China Wellness Plant in the fourth quarter of 2018.August 2020. Refer to Note 8, Debt3, Discontinued Operations and Other Financing on pages F-30 through F-33 of our 2018 Annual ReportAssets and Liabilities Held for additional information.
Interest income increased by $1 comparedSale, to the prior-year period.
Other expense, net, decreased by approximately $28 compared to the prior-year period, including the impact of the Brazil IPI tax release of $27. Other expense, net, was positively impacted by lower expenses associated with employee benefit plans of $12, primarily related to the UK and including the impact of a $3 settlement charge recorded in the third quarter of 2017, and approximately $12 recorded for our proportionate share of New Avon's losses during the nine months ended September 30, 2017. As the recorded investment balance in New Avon was zero at the end of the third quarter of 2017, we have not recorded
any additional losses associated with New Avon since the third quarter of 2017. These benefits were partially offset by foreign exchange net losses, which increased by approximately $19 compared to the prior-year period, and other miscellaneous unfavorable impacts totaling $4 See Note 4, Investment in New Avon on page F-26 of our 2018 Annual ReportConsolidated Financial Statements contained herein, for more information on New Avon.relating to these disposals.
Effective Tax Rate
The Adjusted effective tax rates and the effective tax rates in 20182021 and 20172020 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 Adjusted effective tax rates and the effective tax rates in 20182021 and 20172020 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
The Adjusted effective tax ratesrate and the effective tax rate in 20182021 were impacted by an approximate net $6.4 benefit recognized due to a $10.8 reduction of uncertain tax positions offset with a net charge of approximately $3.7 associated with an increase in valuation allowances and 2017.
approximately $.7 of other various taxes associated with changes in tax estimates. The effective tax rate in 20182021 was also impacted by CTI restructuring and debt extinguishments for which tax benefits cannot currently be claimed in all affected jurisdictions.
The Adjusted effective tax rate and the effective tax rate in 2020 were impacted by an approximate net $25$3 benefit recognized primarily due to Avon's interpretationa $13 reduction of case law and/or guidance provided during 2018 in the U.S. and Latin America and the release of valuation allowances of approximately $5 associateduncertain tax positions offset with improved profitability of certain Markets partially offset by a net charge of approximately $11 primarily$4 associated with an increase in reserves for uncertainvaluation allowances and approximately $6 of other various taxes associated with changes in tax positions.estimates. The effective tax rate in 20182020 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.
The effective tax rate in 2017 was impacted by an approximate net $30 benefit recognized as a result of the enactment of the Tax Cuts and Jobs Act in U.S., a release of valuation allowances of approximately $26 associated with a number of markets in Europe, Middle East & Africa as a result of a business model change related to the headquarters move, and an approximate $10 benefit as a result of a favorable court decision in Brazil, partially offset by a charge of approximately $16 associated with valuation allowances to adjust deferred tax assets in Mexico. The effective tax rate in 2017 was also impacted by a loss contingency related to a non-U.S. pension plan and CTI restructuring, both for which tax benefits cannot currently be claimed.
In addition, the Adjusted effective tax rates and the Adjusted effective tax rates in 20182021 and 20172020 were negatively impacted by the country mix of earnings.
See Note 10, Income Taxes on pages F-33 through F-37 of our 2018 Annual Report for more information on tax items, Note 14, Employee Benefit Plans on pages F-42 through F-50 of our 2018 Annual Report for more information on the loss contingency related to a non-U.S. pension plan, Note 17, Restructuring Initiatives on pages F-53 through F-56 of our 2018 Annual Report for more information on CTI restructuring and "Venezuela Discussion" in this MD&A and Note 1, Description of the Business and Summary of Significant Accounting Policies on pages F-11 through F-19 of our 2018 Annual Report for more information for further discussion of our Venezuelan operations.
Impact of Foreign Currency
As compared to the prior-year period, foreign currency in 20182021 impacted our consolidated financial results in the form of:
•foreign currency transaction net losses as compared to net gains in the prior year (classified within cost of sales and SG&A expenses)in our Consolidated Statements of Operations), which had an unfavorable impact to operating profit and Adjusted operating profit of an estimated $30,approximately $25, or approximately 50 basis points to both operating margin and Adjusted operating margin;
•foreign currency translation, which had an unfavorable impact as compared to a favorable impact in the prior year, to operating profit and Adjusted operating profit of approximately $75 and approximately $35, respectively,$5, or approximately 80less than 50 basis points and approximately 30 basis points, respectively, toon both operating margin and Adjusted operating margin; and
higher •foreign exchange net lossesgains, on our working capital (classified within other expense, net)income (expense), net in our Consolidated Statements of Operations) as compared to net gainslosses in the prior year, resulting in a year-over-year unfavorablefavorable impact of approximately $20$5 before tax on both a reported and Adjusted basis.
20172020 Compared to 20162019
Revenue
During 2017,Total revenue decreased 24% compared to the prior-year period, impacted by certain indirect taxes recognized in Brazil in the prior year. Excluding these items, Adjusted revenue was down 23%, unfavorably impacted by foreign exchange, which was driven by the strengthening of the U.S. dollar relative to multiple currencies, primarily the Brazilian real. Adjusted Constant $ Revenue decreased 14%.
Revenue and Constant $ Adjusted revenue were impacted by a decrease in Active Representatives of 14%, across all markets. Average Representative Sales decreased 10% on a reported basis, unfavorably impacted by foreign exchange, and Constant $ Adjusted Average Representative Sales remained flat. Revenue and Constant $ Adjusted revenue were affected by the COVID-19 pandemic, which negatively impacted the initial signs of recovery from a lower Representative base in 2019. The third quarter showed improving trends across most markets and resulted in revenue growth in Brazil and Mexico which continued in the fourth quarter, while Avon International has again been impacted by the new COVID-19 restrictions imposed in parts of Europe, although not to the extent felt during the second quarter as we were able to continue with normal operations in our manufacturing facilities and distribution centers.
Units sold decreased 14%, across all markets, with Brazil relatively unchanged compared to the prior-year period, partially benefiting from foreign exchange, while Constant $ revenue decreased 2%. Our Constant $ revenue decline was primarily driven by declines in Brazil, Russia and the UK, partially offset by growth in Argentina and South Africa. The decline in revenue and Constant $ revenue was primarily due to a 3% decrease in Active Representatives, which was partially offset by higher average order. The decrease in Active Representatives was impacted by declines in all reportable segments, most significantly in South Latin America (driven by Brazil) and Europe, Middle East & Africa. The net impact of price and mix increased 2%, primarily due to the inflationary impact on pricing in Argentina, Russia and Mexico. Units sold decreased 4%, primarily due to declines in Russia, Brazil,
Mexico and the UK. The revenue performance was negatively impacted most significantly by a decline in Color sales, as we experienced issues in some markets while we segmented our Color category into three distinct brands. The timing of innovation also impacted the decline in Color sales.
Ending Representatives were relatively unchanged. Ending Representatives at December 31, 2017 as compared to the prior-year period benefited from growth in Russia, which was offset by a decline in Brazil.
On a category basis, our net sales from reportable segments and associated growth rates were as follows:
|
| | | | | | | | | | | | | |
| | Years ended December 31 | | % Change |
| | 2017 | | 2016 | | US$ | | Constant $ |
| Beauty: | | | | | | | |
| Skincare | $ | 1,606.4 |
| | $ | 1,589.0 |
| | 1 | % | | (2 | )% |
| Fragrance | 1,547.2 |
| | 1,504.8 |
| | 3 |
| | 1 |
|
| Color | 968.0 |
| | 984.2 |
| | (2 | ) | | (4 | ) |
| Total Beauty | 4,121.6 |
| | 4,078.0 |
| | 1 |
| | (1 | ) |
| Fashion & Home: | | | | | | | |
| Fashion | 812.5 |
| | 838.8 |
| | (3 | ) | | (5 | ) |
| Home | 587.2 |
| | 589.5 |
| | — |
| | (2 | ) |
| Total Fashion & Home | 1,399.7 |
| | 1,428.3 |
| | (2 | ) | | (3 | ) |
| Net sales from reportable segments | 5,521.3 |
| | 5,506.3 |
| | — |
| | (2 | ) |
| Net sales from Other operating segments and business activities | 43.8 |
| | 72.5 |
| | (40 | ) | | * |
| Net sales | $ | 5,565.1 |
| | $ | 5,578.8 |
| | — |
| | (2 | ) |
See "Segment Review" in this MD&A for additional information related to changes in revenue by segment.
Operating Margin
Operating margin decreased 600 basis points, impacted by costs related to the Natura transaction in both the current and prior year and by higher CTI restructuring charges in the prior year. Excluding these items, Adjusted operating margin decreased 80620 basis points, and 20 basis points, respectively, comparedmostly due to 2016. The decreases in operating margin and Adjusted operating margin include the benefits associated with the Transformation Plan, primarily reductions in headcount,impact of lower revenue on SG&A expenses as well as other cost reductions. These savings were largely offset by the inflationary impact on costs outpacing revenue growth.a decline in gross margin. The decreasesmovements in operating margin and Adjusted operating margin are discussed further below in "Gross Margin" and "SG&A"Selling, General and Administrative Expenses."
Gross Margin
Gross margin anddecreased 180 basis points, impacted by certain indirect tax items recognized in Brazil in the prior year. Excluding these items, Adjusted gross margin both increased 100decreased 150 basis points compared to 2016, in each caseas the positive impact of price/mix did not fully offset the impact of higher supply chain costs, primarily due to an increase of 120 basis points from the favorable net impact of mixlower volume on fixed overhead costs and pricing, driven by inflationary pricing in South Latin America.
SG&A Expenses
SG&A expenses for 2017 increased approximately $94 compared to 2016. This increase is primarily due tomaterial costs, and the unfavorable impact of foreign currency. The unfavorable impact of foreign currency translation, as the weakening of the U.S. dollar against many of our foreign currencies resultedis largely due to currency devaluations in higher reported Brazil and Argentina.
Selling, General and Administrative Expenses ("SG&A")
SG&A expenses. as a percentage of total revenue increased 420 basis points, impacted by costs related to the Natura transaction in the current and prior year and higher CTI restructuring charges in the prior year. Adjusted SG&A as a percentage of Adjusted revenue increased 470 basis points, compared to the same period of 2019.
The increase in SG&A expenses is alsoas a percentage of total revenue and Adjusted SG&A as a percentage of Adjusted revenue were largely due to the approximate $27impact of net proceeds recognized as a resultCOVID-19, which caused deleverage of a legal settlement in 2016, higher bad debt expense, higher transportation costs, the loss contingency related to a non-U.S. pension plan and higher Representative, sales leader and field expense. Partially offsetting the increase in SG&A expenses was lower expenses associated with employee incentive compensation plans and lower CTI restructuring.
SG&Aour fixed expenses as a percentage of lower revenue. In addition, SG&A as a percentage of total revenue and Adjusted SG&A expenses as a percentage of revenue increased 160 basis points and 120 basis points, respectively, compared to 2016. The SG&A expenses as a percentage of revenue comparison was negatively impacted by:
approximately 50 basis points for the approximate $27 of net proceeds recognized as a result of a legal settlement in the 2016; and
approximately 30 basis points for a loss contingency related to a non-U.S. pension plan.
These items were partially offset by:
approximately 30 basis points for lower CTI restructuring.
The remaining increase in SG&A expenses as a percentage of revenue and the increase of 120 basis points in Adjusted SG&A expenses as a percentage of revenue were in each case, primarily due to the following:
an increase of 50 basis points from higher bad debt expense, driven by Brazil due to the lower than anticipated collection of receivables, primarily impacted by the macroeconomic environment,increased investment in sales leaders and field to maintain engagement in response to COVID-19, drive productivity and accelerate revenue recovery, as well as resulting from an adjustmentincreased distribution costs across multiple markets, including enhanced safety actions relating to COVID-19.
Other Expenses
Interest expense decreased by approximately $1 and interest income decreased by approximately $6 compared to 2019.
Loss on extinguishment of debt and credit terms available to new Representatives during 2016;
an increasefacilities of 50 basis pointsapproximately $38 in 2020 is primarily comprised of the costs of redemption of the remaining principal amounts of our 2016 Notes due to higher Representative, sales leaderAugust 15, 2022 and field expense, most significantlyour 2019 Notes due August 15, 2022 in Brazil to support efforts to activateNovember 2020, the fieldrepurchase of a portion of our 6.95% Notes due March 15, 2043 in September 2020 and improve Representative recruitment, as well asthe costs of termination of our 2019 revolving credit facility in January 2020. Loss on extinguishment of debt and credit facilities of approximately $12 in 2019 consists primarily of the costs of termination of a portion of the 2020 bonds repaid in the Philippines;third and fourth quarters of 2019. Refer to Note 7, Debt, to the Consolidated Financial Statements included herein for more information relating to these extinguishments of debt and credit facilities.
an increaseOther expense, net, of 40 basis points from higher transportation costs, most significantly$20 decreased by approximately $114 compared to other income, net of $94 in Russia whichthe prior-year period. The prior period income was driven by new delivery rates; and
an increase of 20 basis points primarily dueattributable to the impact of the Constant $ revenue decline causing deleverageinterest on certain indirect tax items recognized in Brazil of our fixed expenses, partially offset by lower fixed expenses. Fixed expenses include the benefits associated with the Transformation Plan, primarily reductions in headcount, as well as other cost reductions. These savings were largely offset by the inflationary impact on costs outpacing revenue growth.
These items were partially offset by the following:
a decrease of 30 basis points due to lower expenses associated with employee incentive compensation plans;approximately $50 and
a decrease of approximately 20 basis points due to the favorable impact of foreign currency translation and foreign currency transaction losses.
See Note 15, Segment Information on pages F-50 through F-52 of our 2018 Annual Report for more information on the legal settlement, Note 14, Employee Benefit Plans on pages F-42 through F-50 of our 2018 Annual Report for more information on the loss contingency related to a non-U.S. pension plan and Note 17, Restructuring Initiatives on pages F-53 through F-56 of our 2018 Annual Report for more information on CTI restructuring.
Other Expenses
Interest expense increased by approximately $4 compared to the prior-year period, primarily due to the interest associated with $500 principal amount of 7.875% Senior Secured Notes issued in August 2016 and lower amortization of gains associated with the termination of interest rate swaps. These items were partially offset by the interest savings associated with the repayment of certain of our debt in 2016 and lower interest due to a reduction of the international debt balances. Refer to Note 8, Debt and Other Financing on pages F-30 through F-33 of our 2018 Annual Report and Note 11, Financial Instruments and Risk Management on pages F-37 through F-38 of our 2018 Annual Report for additional information.
Gain on extinguishment of debt in 2016 of approximately $1 was comprised of a gain of approximately $4 associated with the cash tender offers in August 2016 and a gain of approximately $1 associated with the debt repurchases in December 2016, partially offset by a loss of approximately $3 associated with the prepayment of the remaining principal amount of our 4.20% Notes and 5.75% Notes in November 2016 and a loss of approximately $1 associated with the debt repurchases in October 2016. Refer to Note 8, Debt and Other Financing on pages F-30 through F-33 of our 2018 Annual Report for additional information.
Interest income decreased by approximately $1 compared to the prior-year period.
Other expense, net, decreased by approximately $138 compared to the prior-year period, primarily due to the deconsolidation of our Venezuelan operations, as we recorded a loss of approximately $120 in the first quarter of 2016. In addition, other expense, net was positively impacted by foreign exchange net gains in the current year as2019 compared to net losses in 2020.
Gain on sale of business/assets in 2020 of $2 related primarily to the prior year, resultingsale of the China Wellness Plant in a year-over-year benefitAugust 2020. Gain on sale of approximately $28. The amounts recorded forbusiness/assets in 2019 related to 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 proportionate share of New Avon's losses was approximately $12 in both 2017 and 2016. As the recorded investment balance in New Avon was zero atin August 2019. Refer to Note 3, Discontinued Operations and Assets and Liabilities Held for Sale, to the end of the third quarter of 2017, we have not recorded any additional losses associated with New Avon since the third quarter of 2017. See "Venezuela Discussion" in this MD&A and Note 1, Description of the Business and Summary of Significant Accounting Policies on pages F-11 through F-19 of our 2018 Annual Report for further discussion of our Venezuelan operations. See Note 4, Investment in New Avon on page F-26 of our 2018 Annual ReportConsolidated Financial Statements contained herein, for more information on New Avon.relating to these disposals.
Effective Tax Rate
The Adjusted effective tax rates and the effective tax rates in 20172020 and 20162019 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 Adjusted effective tax rates and the effective tax rates in 20172020 and 20162019 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
The Adjusted effective tax ratesrate and the effective tax rate in 20172020 were impacted by an approximate net $3 benefit recognized due to a $13 reduction of uncertain tax positions offset with a net charge of approximately $4 associated with an increase in valuation allowances and 2016.
approximately $6 of other various taxes associated with changes in tax estimates. The effective tax rate in 2017 was impacted by an approximate net $30 benefit recognized as a result of the enactment of the Tax Cuts and Jobs Act in U.S., a release of valuation allowances of approximately $26 associated with a number of markets in Europe, Middle East & Africa as a result of a business model change related to the headquarters move, and an approximate $10 benefit as a result of a favorable court decision in Brazil, partially offset by a charge of approximately $16 associated with valuation allowances to adjust deferred tax assets in Mexico. The effective tax rate in 20172020 was also impacted by a loss contingency related to a non-U.S. pension plan and CTI restructuring bothand debt extinguishments for which tax benefits cannot currently be claimed.claimed in all affected jurisdictions.
The Adjusted effective tax rate and the effective tax rate in 2019 were impacted by an approximate net $13 benefit recognized primarily due to reduced costs of repatriating subsidiary earnings and approximately $7 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 $5 primarily associated with an increase in valuation allowances. The effective tax rate in 20162019 was also impacted by the deconsolidationaccrual of our Venezuelan operations, valuation allowances for deferrednon-taxable income associated with indirect tax assets outside of the U.S. of approximately $9refunds and CTI restructuring partially offset by a benefit of approximately $29 as a result of the implementation of foreignfor which tax planning strategies, a net benefit of approximately $7 primarily due to the release of a valuation allowance associated with Russia and a benefit from the net proceeds recognized as a result of a legal settlement.benefits cannot currently be claimed in all affected jurisdictions.
In addition, the Adjusted effective tax rates and the Adjusted effective tax rates in 20172020 and 20162019 were negatively impacted by the country mix of earnings.
See Note 10, Income Taxes on pages F-33 through F-37 of our 2018 Annual Report for more information on tax items, Note 14, Employee Benefit Plans on pages F-42 through F-50 of our 2018 Annual Report for more information on the loss contingency related to a non-U.S. pension plan, Note 17, Restructuring Initiatives on pages F-53 through F-56 of our 2018 Annual Report for more information on CTI restructuring and "Venezuela Discussion" in this MD&A and Note 1, Description of the Business and Summary of Significant Accounting Policies on pages F-11 through F-19 of our 2018 Annual Report for more information for further discussion of our Venezuelan operations.
Impact of Foreign Currency
As compared to the prior-year period, foreign currency in 20172020 impacted our consolidated financial results in the form of:
•foreign currency transaction net gainslosses (classified within cost of sales, and SG&A expenses), which had an immaterialunfavorable impact to operating profit and Adjusted operating profit andof an estimated $60 or approximately 130 basis points to operating margin and Adjusted operating margin;
•foreign currency translation, which had a favorablean unfavorable impact to operating profit and Adjusted operating profit of approximately $20,$35 and $30 respectively, or approximately 30110 basis points and 80 basis points, respectively, to operating margin and approximately 20 basis points to Adjusted operating margin; and
•foreign exchange net gainslosses on our working capital (classified within other expense, net)income (expense), net in our Consolidated Statements of Operations) as compared to net lossesgains in the prior year, resulting in a year-over-year benefitan unfavorable impact of approximately $28$45 before tax on both a reported and Adjusted basis.
Discontinued Operations
There were no amounts recorded in discontinued operations for the year ended December 31, 2017. Loss from discontinued operations, net of tax was approximately $14 for the year ended December 31, 2016. See Note 3, Discontinued Operations and Assets and Liabilities Held for Sale on pages F-24 through F-26 of our 2018 Annual Report for further discussion.
Venezuela Discussion
Avon Venezuela operates in the direct-selling channel offering Beauty and Fashion & Home products. Avon Venezuela has a manufacturing facility that produces the Beauty products that it sells. Avon Venezuela imports many of its Fashion & Home products and raw materials and components needed to manufacture its Beauty products.
Currency restrictions enacted by the Venezuelan government since 2003 impacted the ability of Avon Venezuela to obtain foreign currency to pay for imported products. In 2010, we began accounting for our operations in Venezuela under accounting guidance associated with highly inflationary economies. Under U.S. GAAP, the financial statements of a foreign entity operating in a highly inflationary economy are required to be remeasured as if the functional currency is the company’s reporting currency, the U.S. dollar. This generally results in translation adjustments, caused by changes in the exchange rate, being reported in earnings currently for monetary assets (e.g., cash, accounts receivable) and liabilities (e.g., accounts payable, accrued expenses) and requires that different procedures be used to translate non-monetary assets (e.g., inventories, fixed assets). Non-monetary assets and liabilities are remeasured at the historical U.S. dollar cost basis. This diverges significantly from the application of accounting rules prior to designation as highly inflationary accounting, where such gains and losses would have been recognized only in other comprehensive income (loss) (shareholders' deficit).
Venezuela's restrictive foreign exchange control regulations and our Venezuelan operations' increasingly limited access to U.S. dollars resulted in lack of exchangeability between the Venezuelan bolivar and the U.S. dollar, and restricted our Venezuelan operations' ability to pay dividends and settle intercompany obligations. The severe currency controls imposed by the Venezuelan government significantly limited our ability to realize the benefits from earnings of our Venezuelan operations and
access the resulting liquidity provided by those earnings. We expected that this lack of exchangeability would continue for the foreseeable future, and as a result, we concluded that, effective March 31, 2016, this condition was other-than-temporary and we no longer met the accounting criteria of control in order to continue consolidating our Venezuelan operations. As a result, since March 31, 2016, we account for our Venezuelan operations using the cost method of accounting.
As a result of the change to the cost method of accounting, in the first quarter of 2016 we recorded a loss of approximately $120 in other expense, net. The loss was comprised of approximately $39 in net assets of the Venezuelan business and approximately $81 in accumulated foreign currency translation adjustments within AOCI associated with foreign currency movements before Venezuela was accounted for as a highly inflationary economy. The net assets of the Venezuelan business were comprised of inventories of approximately $24, property, plant and equipment, net of approximately $15, other assets of approximately $11, accounts receivable of approximately $5, cash of approximately $4, and accounts payable and accrued liabilities of approximately $20. Our Consolidated Balance Sheets no longer include the assets and liabilities of our Venezuelan operations. We no longer include the results of our Venezuelan operations in our Consolidated Financial Statements, and will include income relating to our Venezuelan operations only to the extent that we receive cash for dividends or royalties remitted by Avon Venezuela.
Other Comprehensive (Loss) Income
Other comprehensive loss,income, net of taxes was approximately $104$50 in 20182021 compared with other comprehensive incomeloss of approximately $108$94 in 2017.2020. The year-over-year comparison was unfavorablyfavorably impacted by a small foreign currency translation loss, compared to losses of $163 in the prior year. In addition there were actuarial gains of approximately $67, compared to losses of approximately $7 in the prior year. This was partially offset by the unfavorable impact of unrealized losses on the revaluation of long-term intercompany balances of $58$21 compared to unrealized gains of $62$68 in the prior-year period.prior year. These long-termimpacts relate to certain intercompany balancesloans of a long term nature for which foreign currency transaction gains and losses are denominated in Brazilian real and the British Pound. Foreign currencyaccounted for as translation adjustments unfavorably impacted other comprehensive loss by approximately $69 as compared to 2017, primarily due to the unfavorable year-over-year comparison of movements of the Polish zloty and Argentinian peso for the first half of 2018, before highly inflationary accounting was applied for our Argentinian subsidiary from July 1, 2018.in equity.
Other comprehensive income,loss, net of taxes was approximately $108$94 in 20172020 compared with other comprehensive loss of approximately $333$9 in 2016.2019. The year-over-year comparison was unfavorably impacted by the recognition of losses of $259 from other comprehensive income into our Consolidated Statements of Operations in 2016 as a result of the separation of the North America business, primarily related to unamortized losses associated with the employee benefit plans, and the approximate $82 impact of the deconsolidation of Venezuela. The remaining approximate $116 benefit to the year-over-year comparison was primarily due to foreign currency translation adjustments, which benefited bylosses of approximately $117 as$163 compared to 2016 primarily due tolosses of $1 in the favorable year-over-year comparison of movements of the Polish zloty and Mexican peso,prior year. This was partially offset by the unfavorable year-over-year comparisonfavorable impact of movements of the Brazilian real.
See Note 3, Discontinued Operations and Assets and Liabilities Held for Sale on pages F-24 through F-26 of our 2018 Annual Report for more informationunrealized gains on the separationrevaluation of long-term intercompany balances of $68 compared to losses of $6 in the North America business, see "Venezuela Discussion"prior year. These impacts relate to certain intercompany loans of a long term nature for which foreign currency transaction gains and losses are accounted for as translation adjustments in this MD&A and Note 1, Description ofequity. Gains in the Business and Summary of Significant Accounting Policies on pages F-11 through F-19 of our 2018 Annual Report forcurrent year were primarily attributable to a further discussion of our Venezuelan operations, and Note 14, Employee Benefit Plans on pages F-42 through F-50 of our 2018 Annual Report for more information on our benefit plans.long-term euro denominated intercompany loan receivable held by an entity with a U.S. dollar functional currency.
Segment Review
The Company has updated its reportable segments to align with how the business is operated and managed since the merger
with Natura, we have identified two reportable segments based on geographic operations: Avon International and Avon Latin
America.
We determine segment profit by deducting the related costs and expenses from segment revenue. In order to ensure comparability between periods, segment profit includes an allocation of global marketing expenses based on actual revenues. Segment profit excludes certain global expenses, other than the allocation of marketing, CTI restructuring initiatives, certain significant asset impairment charges, and other items, which are not allocated to a particular segment, if applicable.segment. This is consistent with the manner in which we assess our performance and allocate resources. See Note 15,14, Segment Information, on pages F-50 through F-52 of our 2018 Annual Reportto the Consolidated Financial Statements included herein for a reconciliation of segment profit to operating profit.
Summarized financial information concerning our reportable segments was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years ended December 31 | | 2021 | | 2020 | | 2019 |
| | | Total revenue | | Segment profit | | Total revenue | | Segment profit | | Total revenue | | Segment profit |
| Avon International | | $ | 1,724.6 | | | $ | 49.9 | | | $ | 1,772.6 | | | $ | 27.4 | | | $ | 2,234.3 | | | $ | 170.9 | |
| Avon Latin America | | 1,654.7 | | | (10.9) | | | 1,845.9 | | | (39.1) | | | 2,528.9 | | | 194.1 | |
| Total from reportable segments | | $ | 3,379.3 | | | $ | 39.0 | | | $ | 3,618.5 | | | $ | (11.7) | | | $ | 4,763.2 | | | $ | 365.0 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Years ended December 31 | | 2018 | | 2017 | | 2016 |
| | | Total revenue | | Segment profit | | Total revenue | | Segment profit | | Total revenue | | Segment profit |
| Europe, Middle East & Africa | | $ | 2,093.8 |
| | $ | 267.5 |
| | $ | 2,126.5 |
| | $ | 329.6 |
| | $ | 2,138.2 |
| | $ | 322.8 |
|
| South Latin America | | 2,146.9 |
| | 314.6 |
| | 2,222.4 |
| | 195.7 |
| | 2,145.9 |
| | 201.1 |
|
| North Latin America | | 809.3 |
| | 70.4 |
| | 811.8 |
| | 83.4 |
| | 829.9 |
| | 116.1 |
|
| Asia Pacific | | 470.8 |
| | 42.0 |
| | 471.9 |
| | 50.8 |
| | 494.0 |
| | 62.5 |
|
| Total from reportable segments | | $ | 5,520.8 |
| | $ | 694.5 |
| | $ | 5,632.6 |
| | $ | 659.5 |
| | $ | 5,608.0 |
| | $ | 702.5 |
|
Below is an analysis of the key factors affecting revenue and segment profit by reportable segment for each of the years in the three-year period ended December 31, 2018.2021. Foreign currency impact is determined as the difference between actual growth rates and Constant $ growth rates. Refer to "Non-GAAP Financial Measures" in this MD&A for more information.
Europe, Middle East & AfricaAvon International – 20182021 Compared to 20172020
|
| | | | | | | | | | | | | | |
| | | | | | | %/Point Change |
| | | 2018 | | 2017 | | US$ | | Constant $ |
| Total revenue | | $ | 2,093.8 |
| | $ | 2,126.5 |
| | (2 | )% | | (1 | )% |
| Segment profit | | 267.5 |
| | 329.6 |
| | (19 | )% | | (18 | )% |
| | | | | | | | | |
| Segment margin | | 12.8 | % | | 15.5 | % | | (270 | ) | | (280 | ) |
| | | | | | | | | |
| Change in Active Representatives | | | | | | | | (4 | )% |
| Change in units sold | | | | | | | | (5 | )% |
| Change in Ending Representatives | | | | | | | | (10 | )% |
Amounts in the table above may not necessarily sum due to rounding.
Total revenue decreased 2% compared to the prior-year period, unfavorably impacted by foreign exchange. On a Constant $ basis, revenue decreased 1%. Revenue and Constant $ revenue includeda benefit of approximately 3% due to the impact of adopting the new revenue recognition standard. Revenue and Constant $ revenue were negatively impacted primarily by a decrease in Active Representatives, partially offset by higher average order. The decrease in Ending Representatives was driven primarily by declines in Russia.
In Russia, revenue decreased 6%, unfavorably impacted by foreign exchange. On a Constant $ basis, Russia's revenue increased 1%. Russia's revenue and Constant $ revenue included a benefit of approximately 4% due to the impact of adopting the new revenue recognition standard. Revenue and Constant $ revenue in Russia were negatively impacted by a decrease in Active Representatives, partially offset by higher average order. Revenue and Constant $ revenue in Russia was also negatively impacted by lower consumption in the market.
In the UK, revenue decreased 6%, despite the favorable impact of foreign exchange. On a Constant $ basis, the UK's revenue decreased 9%. The UK's revenue and Constant $ revenue included a benefit of approximately 4% due to the impact of adopting the new revenue recognition standard. Revenue and Constant $ revenue in the UK were negatively impacted by a decrease in Active Representatives, driven by underlying field issues and temporary service issues in the fourth quarter of 2018, partially offset by higher average order.
In South Africa, revenue decreased 4%, despite the favorable impact of foreign exchange. On a Constant $ basis, South Africa's revenue decreased 5%. South Africa's revenue and Constant $ revenue included a benefit of approximately 2% due to the impact of adopting the new revenue recognition standard. Revenue and Constant $ revenue in South Africa were negatively impacted by a decrease in Active Representatives, resulting from the challenging macroeconomic environment and the application of strict credit requirements for the acceptance of new Representatives as compared to the requirements in the prior year.
Segment margin decreased 270 basis points, or 280 basis points on a Constant $ basis, including a decline of approximately 30 basis points due to the impact of the new revenue recognition standard. The decrease in reported and Constant $ segment margin was primarily as a result of:
a decline of 70 basis points from higher advertising expense, primarily due to increased investments in the UK, South Africa and Russia;
a decline of 50 basis points from higher rep and sales leader investments primarily in Russia and Poland and Turkey;
a decline of 50 basis points due to higher fixed expenses, primarily due to the impact of the Constant $ Adjusted revenue decline causing deleverage of our fixed expenses;
a decline of 40 basis points from higher transportation costs, driven by further increases in delivery rates in Russia and increased flexibility in order processing in the UK;
a decline of 40 basis points from higher variable distribution cost primarily relating to increased flexibility in order processing in the UK; and
a benefit of 40 basis points due to lower net bad debt expense, driven by Russia, South Africa and the UK. Bad debt expense in Russia in the prior-period was negatively impacted by a payment facilitation agency that had not remitted to us the funds it received from certain Representatives. The year-over-year bad debt expense comparison in South Africa and the UK benefited from improved credit control and enhancement of collections processes.
Europe, Middle East & Africa – 2017 Compared to 2016
|
| | | | | | | | | | | | | | |
| | | | | | | %/Point Change |
| | | 2017 | | 2016 | | US$ | | Constant $ |
| Total revenue | | $ | 2,126.5 |
| | $ | 2,138.2 |
| | (1 | )% | | (4 | )% |
| Segment profit | | 329.6 |
| | 322.8 |
| | 2 | % | | (3 | )% |
| | | | | | | | | |
| Segment margin | | 15.5 | % | | 15.1 | % | | 40 |
| | — |
|
| | | | | | | | | |
| Change in Active Representatives | | | | | | | | (2 | )% |
| Change in units sold | | | | | | | | (7 | )% |
| Change in Ending Representatives | | | | | | | | 3 | % |
Amounts in the table above may not necessarily sum due to rounding.
Total revenue decreased 1% compared to the prior-year period, despite the favorable impact of foreign exchange which was primarily driven by the weakening of the U.S. dollar relative to the Russian ruble and to a lesser extent, the South African rand, partially offset by the strengthening of the U.S. dollar relative to the Turkish lira and the British pound. On a Constant $ basis, revenue decreased 4%, most significantly impacted by declines in Russia and the UK, partially offset by growth in South Africa. The segment's Constant $ revenue decline was primarily driven by a decrease in Active Representatives and lower average order. The increase in Ending Representatives was primarily driven by increases in Russia, Turkey and South Africa, partially offset by a decline in the UK.
In Russia, revenue increased 5%, benefiting significantly from the favorable impact of foreign exchange. On a Constant $ basis, Russia's revenue declined 8%, primarily due to lower average order along with a decrease in Active Representatives. During the first half of 2017, the Constant $ revenue decline in Russia was impacted by the comparison to strong volume growth in the prior-year period, which benefited primarily from a pricing lag during an inflationary period. The Constant $ revenue decline in Russia was also impacted by competitive pressures, innovation issues and a continued difficult macroeconomic environment, primarily in the second half of 2017. These issues also negatively impacted Active Representatives, despite the increase in Ending Representatives.
In the UK, revenue declined 14%, which was unfavorably impacted by foreign exchange. On a Constant $ basis, the UK's revenue declined 11%, primarily due to a decrease in Active Representatives, and to a lesser extent, lower average order.
In South Africa, revenue grew 20%, which was favorably impacted by foreign exchange. On a Constant $ basis, South Africa’s revenue grew 9%, primarily due to an increase in Active Representatives, partially offset by lower average order.
Segment margin increased 40 basis points, or was relatively unchanged on a Constant $ basis, in each case primarily as a result of:
a decline of 70 basis points from higher transportation costs, driven primarily by new delivery rates in Russia;
a decline of 70 basis points primarily due to the impact of the Constant $ revenue decline causing deleverage of our fixed expenses, partially offset by lower fixed expenses. Fixed expenses benefited from lower expenses associated with employee incentive compensation plans, which were partially offset by higher other administrative costs;
a decline of 40 basis points from higher bad debt expense, primarily in South Africa and Russia. Higher bad debt expense in South Africa was driven primarily by lower collection of receivables as a result of deteriorating economic conditions, and in Russia was driven primarily by a payment facilitation agency that has not remitted to us the funds it received from certain Representatives;
a decline of 30 basis points primarily related to the net impact of declining revenue with respect to Representative, sales leader and field expense; and
a benefit of 180 basis points due to higher gross margin caused primarily by 100 basis points from the favorable net impact of mix and pricing primarily driven by Russia, and 70 basis points due to lower supply chain costs. Supply chain costs benefited primarily from lower material and distribution costs, partially due to productivity initiatives.
South Latin America – 2018 Compared to 2017
|
| | | | | | | | | | | | | | |
| | | | | | | %/Point Change |
| | | 2018 | | 2017 | | US$ | | Constant $ |
| Total revenue | | $ | 2,146.9 |
| | $ | 2,222.4 |
| | (3 | )% | | 13 | % |
| Brazil IPI tax release | | (168.4 | ) | | — |
| | | | |
| Adjusted revenue | | 1,978.5 |
| | 2,222.4 |
| | (11 | )% | | 3 | % |
| | | | | | | | | |
| Segment profit | | 314.6 |
| | 195.7 |
| | 61 | % | | 101 | % |
| Brazil IPI tax release | | (168.4 | ) | | | | | | |
| Adjusted segment profit | | 146.2 |
| | 195.7 |
| | (25 | )% | | (10 | )% |
| | | | | | | | | |
| | | | | | | | | |
| Segment margin | | 14.7 | % | | 8.8 | % | | 590 |
| | 690 |
|
| Brazil IPI tax release | | 7.3 |
| | — |
| | | | |
| Adjusted segment margin | | 7.4 | % | | 8.8 | % | | (140 | ) | | (110 | ) |
| | | | | | | | | |
| Change in Active Representatives | | | | | | | | (6 | )% |
| Change in units sold | | | | | | | | (8 | )% |
| Change in Ending Representatives | | | | | | | | (9 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | %/Point Change |
| | | 2021 | | 2020 | | US$ | | Constant $ |
| Total revenue | | $ | 1,724.6 | | | $ | 1,772.6 | | | (3) | % | | (4) | % |
| Segment profit | | 49.9 | | | 27.4 | | | 82 | % | | 131 | % |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Segment margin | | 2.9 | % | | 1.5 | % | | 140 | | | 200 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Change in Active Representatives | | | | | | | | (15) | % |
| Change in units sold | | | | | | | | (10) | % |
Amounts in the table above may not necessarily sum due to rounding.
Total revenue decreased 3% compared to the prior-year period. Excluding the Brazil IPI release, Adjusted revenue for the region was down 11%, unfavorably impacted by foreign exchange, which was primarily driven by the strengthening of the U.S. dollar relative to the Argentinian peso and the Brazilian real. On a Constant $ basis, Adjusted revenue increased 3%. Revenue and Constant $ Adjusted revenue included a benefit of approximately 6% due to the impact of adopting the new revenue recognition standard. Revenue and Constant $ Adjusted revenue were negatively impacted by a decrease in Active Representatives primarily driven by a decline in Brazil, partially offset by higher average order driven by Argentina. The decrease in Ending Representatives was driven primarily by declines in Brazil.
Revenue in Brazil remained relatively unchanged. Excluding the Brazil IPI release, Adjusted revenue in Brazil decreased 13%, unfavorably impacted by foreign exchange. Brazil's Constant $ Adjusted revenue decreased 1%. Brazil's revenue and Constant $ Adjusted revenue included a benefit of approximately 9% due to the impact of adopting the new revenue recognition standard. Revenue and Constant $ Adjusted revenue in Brazil were negatively impacted primarily by a decrease in Active Representatives, and to a lesser extent, lower average order. Revenue and Constant $ Adjusted revenue in Brazil, as well as Active Representatives and Ending Representatives were negatively impacted by competitive pressures against a backdrop of a challenging macroeconomic environment and lower consumption in the market, as well as lower appointments, partly due to the application of strict credit requirements for the acceptance of new Representatives. In addition, revenue and Constant $ Adjusted revenue in Brazil, as well as Active Representatives and Ending Representatives, were also impacted by a national transportation strike which affected sales and distribution in the second quarter of 2018. On an Adjusted Constant $ basis, Brazil’s sales from Beauty products and Fashion & Home products declined 8% and 4%, respectively,period, including a 2% benefit in both categories due to the impact of the new revenue recognition standard. The decline in Constant $ Beauty sales in Brazil was mainly in Color.
Revenue in Argentina declined 25%, unfavorably impacted by foreign exchange. On a Constant $ basis, Argentina's revenue grew 22%. Argentina's revenue and Constant $ revenue included a benefit of approximately 1% due to the impact of adopting the new revenue recognition standard. Revenue and Constant $ revenue in Argentina benefited from higher average order, which was impacted by improved revenue growth management including inflationary pricing.
Segment margin increased 590 basis points, including 730 basis points from the Brazil IPI tax release. On a Constant $ basis, segment margin increased 690 basis points, including 800 basis points from the Brazil IPI tax release. The reported segment margin increase and the Constant $ Adjusted segment margin decrease of 110 basis points both included a decline of approximately 20 basis points due to the impact of adopting the new revenue recognition standard. The remaining decrease in reported and in Constant $ Adjusted segment margin was primarily as a result of:
a decline of 110 basis points due to higher Representative, sales leader and field expense, primarily in Brazil due to investments aimed at recovering activity levels that were disrupted by the national transportation strike in the second quarter of 2018, as well as increased focus on Representatives training in the second half of 2018;
a decline of 90 basis points due to higher net brochure cost, primarily due to an increase in brochure volumes in Brazil;
a decline of 60 basis points due to higher transportation costs in Brazil, primarily driven by inefficiencies caused by the national transportation strike and an increase in fuel prices;
a decline of 50 basis points due to higher fixed expenses, primarily due to the impact of the Constant $ Adjusted revenue decline causing deleverage of our fixed expenses;
a benefit of 110 basis points from lower net bad debt expense, primarily in Brazil due to improved credit control and collections processes; and
a benefit of 80 basis points due to higher gross margin of 200 basis points from the favorable net impact of mix and pricing, driven by inflationary pricing in Argentina and revenue management initiatives in Brazil. These items were partially offset by 150 basis points due to higher supply chain costs driven by higher material costs.
Brazil IPI tax discussion
In May 2015, an Executive Decree on certain cosmetics went into effect in Brazil which increased the amount of IPI taxes that are to be remitted by Avon Brazil to the taxing authority on the sales of cosmetic products subject to IPI. As of September 30, 2018, due in part, to 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 during ongoing judicial reviews is reasonably possible but not probable, and accordingly, we released our liability accrued as of September 30, 2018 of $195. We considered the release of the liability as a non-GAAP adjustment, and therefore, we adjusted for the IPI tax of $168 (which was recorded in net sales in our Consolidated Income Statements) and the associated interest of $27 (which was recorded in other (income) expense, net in our Consolidated Income Statements) in our Adjusted non-GAAP results during the period ended December 31, 2018. The accrual for the Brazil IPI tax negatively impacted total revenue for the nine month period ended September 30, 2018 for Brazil, South Latin America, and total Avon by approximately 4-5%, approximately 2-3% and approximately 1%, respectively. For additional details on the IPI tax on cosmetics increase in Brazil, see Note 19, Contingencies, to the Consolidated Financial Statements included herein.
Argentina discussion
During the quarter ended June 30, 2018, based on published official exchange rates which indicate that Argentina's three-year cumulative inflation rate has exceeded 100%, we concluded that Argentina had become a highly inflationary economy. From July 1, 2018, we have applied highly inflationary accounting for our Argentinian subsidiary. As such, the functional currency for Argentina has changed to the U.S. dollar, which is the consolidated group's reporting currency. When an entity operates in a highly inflationary economy, exchange gains and losses associated with monetary assets and liabilities resulting from changes in the exchange rate are recorded in income. Nonmonetary assets and liabilities, which include inventories, property, plant and equipment and contract liabilities, are carried forward at their historical dollar cost, which was calculated using the exchange rate at June 30, 2018.
As a result of the devaluation of the Argentinian peso of approximately 25% from June 30, 2018 to December 31, 2018, operating profit was negatively impacted by approximately $8, largely in cost of sales in our Consolidated Income Statements, primarily due to inventory being accounted for at its historical dollar cost. During the six months ended December 31, 2018, we also recorded a benefit of approximately $6 in other expense, net primarily associated with the net monetary liability position of Argentina, and an approximate $2 positive impact on income taxes, both in our Consolidated Income Statements.
Our Argentinian operations contributed approximately $272, or approximately 5% of revenues, or approximately 7% of Constant $ Adjusted revenue during the year ended December 31, 2018. As of December 31, 2018, the net Argentine peso-denominated monetary liability position of Argentina was $33 and the net Argentine peso-denominated non-monetary asset position was $50, primarily consisting of inventory balances of $32.
South Latin America – 2017 Compared to 2016 |
| | | | | | | | | | | | | | |
| | | | | | | %/Point Change |
| | | 2017 | | 2016 | | US$ | | Constant $ |
| Total revenue | | $ | 2,222.4 |
| | $ | 2,145.9 |
| | 4 | % | | — | % |
| Segment profit | | 195.7 |
| | 201.1 |
| | (3 | )% | | (3 | )% |
| | | | | | | | | |
| Segment margin | | 8.8 | % | | 9.4 | % | | (60 | ) | | (30 | ) |
| | | | | | | | | |
| Change in Active Representatives | | | | | | | | (4 | )% |
| Change in units sold | | | | | | | | (3 | )% |
| Change in Ending Representatives | | | | | | | | (3 | )% |
Amounts in the table above may not necessarily sum due to rounding.
Total revenue increased 4% compared to the prior-year period, primarily due to the favorable impact of foreign exchange which was primarily driven by the weakening of the U.S. dollar relative to the Brazilian real.South African rand and the British pound, partially offset by the strengthening of the U.S. dollar relative to the Turkish lira. On a Constant $ basis, revenue decreased 4% driven by an increase in Average Representative Sales which was relatively unchangedmore than offset by a 15% decrease in Active Representatives.
The decrease in Revenue and Constant $ revenue was mostly driven by changes in COVID-19 restrictions in many markets compared to the same period in the prior year, as higher average order was offset by a decrease in Active Representatives. The decline in Ending Representatives was primarily driven by a decline in Brazil as described below.
Revenue in Brazil increased 4%, favorablywith some markets remaining materially impacted by foreign exchange. Brazil’s Constant $ revenue declined 4%, primarily dueCOVID-19 restrictions and yet to a decrease in Active Representatives, partially offset by higher average order. On a Constant $ basis, Brazil’s sales from Beauty products and Fashion & Home products decreased 4% and 5%, respectively. show signs of recovery.
The decline in Constant $ Beauty sales in Brazil was driven by weaker performance in Color. Revenue in Brazil, as well ascontribution of Active Representatives and Ending Representatives,Average Representative Sales into total revenue was also impacted by a difficult macroeconomic environment particularlyreduction in the first halffrequency of 2017, combinedcampaign cycles as part of our strategy to simplify our business, with the application of strict credit requirements for the acceptance of new Representatives as compared to the requirements in the prior year. In addition, Brazil's results were negatively impacted by competition primarily in the second half of 2017. Revenue in Argentina grew 10%,all markets now on a monthly campaign cycle.
Segment margin increased 140 basis points, or 23%200 on a Constant $ basis, primarily due to higher average order, which was impacted by the inflationary pricing.
Segment margin decreased 60 basis points, or 30 basis points on a Constant $ basis, in each case primarily as a result of:
a decline of 60 basis points from higher bad debt expense, driven by Brazil due to the lower than anticipated collection of receivables, primarily impacted by the macroeconomic environment, as well as resulting from an adjustment to credit terms available to new Representatives during 2016;
a decline of 60 basis points primarily due to higher fixed expenses, driven by the inflationary impact on costs outpacing revenue growth, particularlycombination of an increase in Argentina, partially offset by lower expenses associated with employee incentive compensation plans;
a decline of 50 basis points due to higher Representative, sales leader and field expense, most significantly in Brazil to support efforts to activate the field and improve Representative recruitment;
a decline of 30 basis points from higher transportation expense, driven by Argentina due to inflationary cost increases; and
a benefit of 180 basis points due to higherConstant $ Adjusted gross margin caused by 200 basis points fromand lower SG&A as a percentage of total revenue.
Constant $ Adjusted gross margin increased as the favorable netpositive impact of price/mix and pricing, primarily due to inflationary pricing, partially offset by 30 basis points fromthe impact of higher supply chain costs, which were primarily negatively impacted by higher material costs which included inflationary pressurescosts.
The decrease in Argentina.Constant $ Adjusted SG&A as a percentage of Adjusted revenue was largely due to decreases in bad debts.
North Latin AmericaAvon International – 20182020 Compared to 20172019
| | | | | | | | | %/Point Change | | %/Point Change |
| | | 2018 | | 2017 | | US$ | | Constant $ | | 2020 | | 2019 | | US$ | | Constant $ |
| Total revenue | | $ | 809.3 |
| | $ | 811.8 |
| | — | % | | 2 | % | Total revenue | | 1,772.6 | | | 2,234.3 | | | (21) | % | | (18) | % |
| Segment profit | | 70.4 |
| | 83.4 |
| | (16 | )% | | (15 | )% | Segment profit | | 27.4 | | | 170.9 | | | (84) | % | | (79) | % |
| | | | | | | | | | |
| | | Segment margin | | 8.7 | % | | 10.3 | % | | (160 | ) | | (170 | ) | Segment margin | | 1.5 | % | | 7.6 | % | | (610) | | | (570) | |
| | | | | | | | | | | |
| Change in Active Representatives | | | | | | | | (4 | )% | Change in Active Representatives | | (19) | % |
| Change in units sold | | | | | | | | (3 | )% | Change in units sold | | (19) | % |
| Change in Ending Representatives | | | | | | | | (7 | )% | |
|
Amounts in the table above may not necessarily sum due to rounding.
North Latin America consists largely of our Mexico business. Total revenue for the segment remained relatively unchangeddecreased 21% compared to the prior-year period.period, unfavorably impacted by foreign exchange, which was driven by the strengthening of the U.S. dollar relative to multiple currencies, primarily the Russian Ruble, the South African Rand and the Turkish Lira. On a Constant $ basis, revenue increased 2%. Revenue and Constant $ revenue includeddecreased 18% primarily driven by a benefit of approximately 4% due to the impact of adopting the new revenue recognition standard.decrease in Active Representatives across all markets. Revenue and Constant $ revenue were affected by the COVID-19 pandemic, which negatively impacted the initial signs of recovery from a lower Representative base in 2019. The most significant impact of the COVID-19 pandemic was felt during the second quarter of 2020, with the third quarter showing signs of recovery in most markets. The fourth quarter has again been impacted by the new COVID-19 restriction measures imposed in parts of Europe, although not to the extent felt during the second quarter as we were able to continue normal operations in our manufacturing facilities and distribution centers.
Segment margin decreased 610 basis points, or 570 on a decrease in Active Representatives, partiallyConstant $ basis, mostly due to the impact of lower revenue on SG&A expenses.
Constant $ Adjusted gross margin decreased 40 basis points as the positive impact of price/mix did not fully offset bythe impact of higher average order. The decline in Ending Representatives wassupply chain costs, primarily driven by a decline in Mexico.
Revenue in Mexico increased 2%, despitedue to lower volume on fixed overhead costs, and the unfavorable impact of foreign exchange. On acurrency.
The increase in Constant $ basis, Mexico'sAdjusted SG&A as a percentage of total revenue increased 5%. Mexico's revenue and Constant $ revenue included a benefit of approximately 4%was largely due to the impact of the new revenue recognition standard. Revenue andCOVID-19, which caused deleverage of our fixed expenses as a percentage of lower revenue. In addition, Constant $ Adjusted SG&A as a percentage of total revenue in Mexico benefited from higher average order drivenwas impacted by incremental mediaincreased investment in the Colorsales leaders and Fragrance categories in the second half of 2018, partially offset by a decrease in Active Representatives primarily duefield to quality issues in the Fashion & Home category in the first quarter of 2018.maintain engagement, drive productivity and accelerate revenue recovery, as well as increased distribution costs across multiple markets.
Segment margin decreased 160 basis points, or 170 basis points on a Constant $ basis, including an immaterial impact of adopting the new revenue recognition standard. The decrease in reported and Constant $ segment margin was primarily as a result of:
a net decline of 170 basis points primarily from higher fixed expenses, primarily related to personnel cost;a decline of 50 basis points due to higher transportation costs, primarily related to an increase in fuel prices in Mexico;
a decline of 40 basis points from higher advertising expense, primarily in Mexico due to incremental media investment in the Color and Fragrance categories to support new product launches in the second half of 2018;
a benefit of 50 basis points due to lower net brochure costs; and
a benefit of 30 basis points due to higher gross margin primarily due to 70 basis points from the favorable net impact of mix and pricing and 30 basis points from the favorable impact of foreign currency net gains, partially offset by 70 basis points from higher supply chain costs driven by higher material costs.
NorthAvon Latin America – 20172021 Compared to 2016
|
| | | | | | | | | | | | | | |
| | | | | | | %/Point Change |
| | | 2017 | | 2016 | | US$ | | Constant $ |
| Total revenue | | $ | 811.8 |
| | $ | 829.9 |
| | (2 | )% | | (1 | )% |
| Segment profit | | 83.4 |
| | 116.1 |
| | (28 | )% | | (26 | )% |
| | | | | | | | | |
| Operating margin | | 10.3 | % | | 14.0 | % | | (370 | ) | | (350 | ) |
| | | | | | | | | |
| Change in Active Representatives | | | | | | | | (1 | )% |
| Change in units sold | | | | | | | | (3 | )% |
| Change in Ending Representatives | | | | | | | | (2 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | %/Point Change |
| | | 2021 | | 2020 | | US$ | | Constant $ |
| Total revenue | | $ | 1,654.7 | | | $ | 1,845.9 | | | (10) | % | | (8) | % |
| Certain Brazil indirect taxes benefit | | (21.5) | | | — | | | * | | * |
| Adjusted revenue | | 1,633.2 | | | 1,845.9 | | | (12) | % | | (9) | % |
| | | | | | | | |
| Avon Luxembourg | | (249.2) | | (431.8) | | * | | * |
| Adjusted revenue excluding Avon Luxembourg | | 1,384.0 | | 1,414.1 | | (2) | % | | 2 | % |
| | | | | | | | |
| Segment profit | | (10.9) | | | (39.1) | | | (72) | % | | (45) | % |
| Certain Brazil indirect taxes benefit | | (21.5) | | | — | | | * | | * |
| Adjusted segment profit | | (32.4) | | | (39.1) | | | (17) | % | | 3 | % |
| | | | | | | | |
| Avon Luxembourg | | (21.4) | | (27.7) | | * | | * |
| Adjusted profit excluding Avon Luxembourg | | (53.8) | | (66.8) | | (19) | % | | (13) | % |
| | | | | | | | |
| Segment margin | | (.7) | % | | (2.1) | % | | 140 | | | 30 | |
| Certain Brazil indirect taxes benefit | | 1.3 | | | — | | | * | | * |
| Adjusted segment margin | | (2.0) | % | | (2.1) | % | | 10 | | | (20) | |
| | | | | | | | |
| Avon Luxembourg | | (1.9) | % | | (2.6) | % | | * | | * |
| Adjusted segment margin excluding Avon Luxembourg | | (3.9) | % | | (4.7) | % | | 80 | | | 60 | |
| | | | | | | | |
| Change in Active Representatives | | | | | | | | (16) | % |
| Change in units sold | | | | | | | | (20) | % |
Amounts in the table above may not necessarily sum due to rounding.
North Latin America consists largely of the Mexico business. Total revenue for the segment decreased 2%10% compared to the prior-year period, partly due tofavorably impacted by the unfavorable impact fromrecognition of certain Brazil indirect taxes in the current year. Excluding these items, Adjusted revenue for the region was down 12%, unfavorably impacted by foreign exchange, which was primarily driven by the strengthening of the U.S. dollar relative to multiple currencies, primarily the Brazilian real and the Argentinian peso, partially offset by the weakening of the U.S. dollar relative to the Mexican peso. On a Constant $ basis, Adjusted revenue decreased 1% due to a decrease in Active Representatives, bothdeclined 9% which includes the impact from the sale of which were negatively impacted by product fulfillment shortfalls in the region in the second quarter of 2017.Avon Luxembourg, including our Mexican business, on July 1, 2021. Constant $ Adjusted revenue forexcluding the region and Mexico were both negatively impacted by approximately 1 point and 1 point, respectively, due toimpact of the earthquake in Mexico. This earthquake occurred in late September 2017 and adversely impacted Mexico's fourth quarter 2017 results. The segment's Constant $ revenue benefited from growth in Central America, offset by a Constant $ revenue decline in Mexico. The decline in Ending Representatives wassale of Avon Luxembourg increased 2% primarily driven by a declinean increase in Central America.Average Representative Sales.
Revenue in Mexico declined 4%, and wasBrazil decreased 14% compared to the prior year period, despite the favorable impact of the recognition of certain Brazil indirect taxes in the current year. Excluding these items, Adjusted revenue decreased 17% unfavorably impacted by foreign exchange. On aan Adjusted Constant $ basis, Mexico's revenue declined 2%,decreased 13% primarily due to adriven by decrease in Active Representatives, the Covid-19 second wave and the impact of the earthquake.changes in macro-economic conditions.
Segment margin decreased 370increased 140 basis points, or 350a 20 basis points decrease on a Constant $ Adjusted segment margin basis, driven by the combination of an increase in each case primarilythe Constant $ Adjusted gross margin and higher SG&A as a result of:percentage of total revenue.
a decline of 90 basis points due to lowerConstant $ Adjusted gross margin caused primarily by 90 basis points from higher supply chain costsincreased slightly as the positive impact of price/mix and 50 basis points from the unfavorablefavorable impact of foreign currency transaction net losses, partiallymovements were offset by 50 basis points from the favorable net impact of mix and pricing. higher supply chain costs.
The increase in Constant $ Adjusted SG&A as a percentage of Adjusted revenue was largely due to the impact of supply chain costs on gross margin was primarily due to lower volume andrevenue decline, causing a deleveraging of our fixed overhead costs,expenses, as well as higher material costs;
a decline of 80 basis points from higherincreases in bad debt expense,debts and advertising expenses, primarily in Mexico partially due to the implementation of a new collection process as a result of changes in regulations;Brazil.
a decline of 70 basis points due to higher Representative, sales leader and field expense, primarily as a result of increasing incentives to mitigate the impact of the product fulfillment shortfalls in the region and the earthquake in Mexico;
a decline of 60 basis points from higher transportation costs driven by Mexico primarily due to increased fuel prices; and
a decline of 30 basis points from higher net brochure costs, partly due to an increase in the number of pages in support of the segmentation of our Color category.
Asia PacificAvon Latin America – 20182020 Compared to 20172019
| | | | | | | | | %/Point Change | | | | | | | %/Point Change |
| | | 2018 | | 2017 | | US$ | | Constant $ | | | 2020 | | 2019 | | US$ | | Constant $ |
| Total revenue | | $ | 470.8 |
| | $ | 471.9 |
| | — | % | | 2 | % | Total revenue | | $ | 1,845.9 | | | $ | 2,528.9 | | | (27) | % | | (13) | % |
| Certain Brazil taxes | | Certain Brazil taxes | | — | | | (67.7) | | | * |
| Adjusted revenue | | Adjusted revenue | | 1,845.9 | | | 2,461.2 | | | (25) | % | | (10) | % |
| | Segment profit | | 42.0 |
| | 50.8 |
| | (17 | )% | | (12 | )% | Segment profit | | (39.1) | | | 194.1 | | | (120) | % | | (102) | % |
| Certain Brazil taxes | | Certain Brazil taxes | | — | | | (67.7) | | | * |
| Adjusted segment profit | | Adjusted segment profit | | (39.1) | | | 126.4 | | | (131) | % | | (103) | % |
| | | | | | | | | | | |
| Segment margin | | 8.9 | % | | 10.8 | % | | (190 | ) | | (140 | ) | Segment margin | | (2.1) | % | | 7.7 | % | | (980) | | | (850) | |
| Certain Brazil taxes | | Certain Brazil taxes | | — | | | 2.6 | | | * |
| Adjusted segment margin | | Adjusted segment margin | | (2.1) | % | | 5.1 | % | | (720) | | | (580) | |
| | | | | | | | | | |
| Change in Active Representatives | | | | | | | | (2 | )% | Change in Active Representatives | | (10) | % |
| Change in units sold | | | | | | | | 1 | % | Change in units sold | | (9) | % |
| Change in Ending Representatives | | | | | | | | (3 | )% | |
Amounts in the table above may not necessarily sum due to rounding.
Effective from the first quarter of 2018, given that we have 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.
Total revenue has remained relatively unchangeddecreased 27% compared to the prior-year period, impacted by certain indirect taxes recognized in Brazil in the prior year. Excluding these items, Adjusted revenue for the region was down 25%, unfavorably impacted by foreign exchange.exchange, which was driven by the strengthening of the U.S. dollar relative to multiple currencies, primarily the Brazilian real, the Argentinian peso and the Mexican peso. On a Constant $ basis, Adjusted revenue increased 2%. Revenue and Constant $ revenue included a benefit of approximately 1% due to the impact of adopting the new revenue recognition standard. Revenue and Constant $ revenue benefited from higher average order, partially offsetdeclined 10% primarily driven by a decrease in Active Representatives most significantly in Malaysia.of 10% across all markets. The decline in Ending RepresentativesRevenue and Constant $ Adjusted revenue was drivenaffected by the COVID-19 pandemic, which negatively impacted the initial signs of recovery from a declineslower Representative base in 2019, with the Philippinesthird and Malaysia.fourth quarters showing improving trends across Latin America markets and revenue growth in Brazil and Mexico.
Revenue in the PhilippinesBrazil decreased 1%29%, negativelysignificantly impacted by certain indirect tax items recognized in Brazil in the unfavorable impact ofyear ended December 31, 2019. Excluding these items, Adjusted revenue in Brazil decreased 25%, unfavorably impacted by foreign exchange. On aexchange, while Brazil's Constant $ basis,Adjusted revenue in the Philippines increased 4%decreased 2%. Revenue and Constant $ Adjusted revenue in the Philippines includedBrazil were driven by a benefit of approximately 2% due to the impact of adopting the new revenue recognition standard. Revenue and Constant $ revenueminor decrease in the Philippines benefited from an increase inboth Active Representatives and higher average order,Average Representative Sales, impacted by the COVID-19 pandemic, which negatively affected the initial signs of recovery from a lower Representative base in 2019. Brazil returned to growth in the third quarter driven by the market's initiative to grow the Skincare category, mainlya significant increase in the second half of 2018.Fashion & Home category, which continued to outperform in the fourth quarter.
Segment margin decreased, 190significantly impacted by the effects of certain indirect tax items recognized in Brazil in the year ended December 31, 2019. Excluding these items, Adjusted segment margin decreased 720 basis points, or 140580 basis points on a Constant $ basis, including a decline of approximately 30 basis pointsmostly due to the impact of adopting the newlower revenue recognition standard.on SG&A expenses as well as a decline in gross margin. The decrease in reported and Constant $year-on-year comparison of segment margin was primarily as a result of:also included other certain indirect tax benefits in revenue and SG&A in the prior year.
a decline of 120 basis points due to higherAdjusted gross margin primarily caused by 80 basis points fromdeclined as the positive impact of price/mix did not fully offset the impact of higher supply chain costs, due to higher logistics cost in the Philippines,driven by increased material costs and 20 basis points fromlower volume on fixed overhead costs, and the unfavorable impact of foreign current transaction losses;currency.
The increase in SG&A as a declinepercentage of 30 basis points due to higher advertising expense, primarily in China, related to celebrity and digital advertising to support growth; and
a benefit of 40 basis points due to lower fixed expenses primarilyConstant $ Adjusted revenue was largely due to the impact of theCOVID-19, which caused deleverage of our fixed expenses as a percentage of lower revenue, and additional investments in distribution relating to COVID-19 safety actions. The increase in SG&A as a percentage of Constant $ Adjusted revenue growth with respect to out fixed expenses.
Asia Pacific – 2017 Compared to 2016
|
| | | | | | | | | | | | | | |
| | | | | | | %/Point Change |
| | | 2017 | | 2016 | | US$ | | Constant $ |
| Total revenue | | $ | 471.9 |
| | $ | 494.0 |
| | (4 | )% | | (1 | )% |
| Segment profit | | 50.8 |
| | 62.5 |
| | (19 | )% | | (12 | )% |
| | | | | | | | | |
| Operating margin | | 10.8 | % | | 12.7 | % | | (190 | ) | | (140 | ) |
| | | | | | | | | |
| Change in Active Representatives | �� | | | | | | | (4 | )% |
| Change in units sold | | | | | | | | (1 | )% |
| Change in Ending Representatives | | | | | | | | (1 | )% |
Amounts in the table above may not necessarily sum due to rounding.
Effective in the first quarter of 2017, given that we exited Thailand during 2016, the results of Thailand are now reported in
Other operating segments and business activities for all periods presented, while previously the results had been reported in
Asia Pacific. The impact was not material to Asia Pacific or Other operating segments and business activities and is consistent
with how we present other market exits.
Total revenue decreased 4% compared to the prior-year period, partially due to the unfavorable impact from foreign exchange. On a Constant $ basis, revenue decreased 1%, primarily due to a decrease in Active Representatives, most significantly in Malaysia, partially offsetalso impacted by higher average order. The decreasesales leaders and field investments across most markets in Ending Representatives was impacted most significantly by a decline in Malaysia, whichresponse to COVID-19 and to accelerate revenue recovery. This was partially offset by growth in the Philippines.
Revenue in the Philippines decreased 2%, or increased 3% on a Constant $ basis, primarily due to higher average order and an increase in Active Representatives. Revenue growth in the Philippines was driven by the latter halfreduction of 2017, as strong commercial offers, including pricing, which, along with television advertising associated with our Color category, helped drive momentum in the field. In addition, actions implemented to improve inventory availability provided benefits to revenue growth.
Segment margin decreased 190 basis points, or 140 basis points on a Constant $ basis, in each case primarily as a result of:
a decline of 140 basis points primarily related to the net impact of declining revenue with respect to Representative, sales leader and field expense, primarily in the Philippines;
a decline of 100 basis points due to lower gross margin caused primarily by 70 basis points from supply chain costs and 40 basis points from the unfavorable net impact of mix and pricing. The impact of supply chain costs on gross margin was primarily due to lower volume on fixed overhead costs;
a decline of 40 basis points due to higher advertising expense, primarily in the Philippines, related to television advertising associated with our Color category during the latter half of 2017;
a benefit of 100 basis points due to the lower fixed expenses, including the benefits associated with the Transformation Plan, primarily reductions in headcount; and
a benefit of 40 basis points from lower bad debt expense, primarilydriven by continued improvements in the Philippines, driven mainly by improved collection.credit control and collections processes in Brazil.
Earlier in 2017, we completed the review of our China operations and have determined that we will retain China in our portfolio of businesses.
Liquidity and Capital Resources
Our principal sources of fundingfunds 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. At December 31, 2018,Furthermore, since January 3, 2020, we hadare part of the Natura &Co group of companies which gives us access to intercompany funding. The Company has received an irrevocable commitment from Natura &Co Holding that it will provide sufficient financial support if and when
needed to enable the Company to meet its obligations as they come due in the normal course of business for a period of not less than 12 months from the date issuance of the Consolidated Financial Statements contained herein.
Cash and cash equivalents
The Company has cash and cash equivalents of $251.5 at December 31, 2021.
Short term commitments
At December 31, 2021, our debt and other financing maturing within one year include $372 of loans from affiliates of Natura &Co and $33 of short term debt which is held and managed at the market level. In addition, our short term contractual financial obligations and commitments include approximately $159 relating to purchase obligations and approximately $46 relating to operating lease repayments. We also expect to make contributions in the range of $10 to $15 to our defined benefit pension and postretirement plans. These commitments and repayments are expected to be fulfilled through a combination of operating cash flows and where necessary, further financial support from Natura &Co Holding (see going concern below).
Long-term commitments
At December 31, 2021, our long-term debt and other financing include $736 of loans from affiliates of Natura &Co due in 2028, $462 of Notes due in March 2023 and $216 of Notes due in March 2043. In addition, our long-term contractual financial obligations and commitments include operating lease payments of approximately $102 and purchase obligations of approximately $79. These commitments and repayments are expected to be fulfilled through a combination of operating cash flows and where necessary, further financial support from Natura &Co Holding (see going concern below).
Off balance sheet arrangements
At December 31, 2021, the Company has a issued a number of guarantees totaling approximately $532.7 We believe$157 that it could be required to make in the event of adverse judgments in a number of lawsuits in Brazil. See Note 18, Contingencies, to the Consolidated Financial Statements included herein for more information. The company has no other material off balance sheet arrangements at December 31, 2021.
COVID-19 pandemic and going concern
Considering the uncertain nature of any possible future COVID-19 impacts which are beyond the Company’s control and the ongoing military conflicts between Russia and Ukraine, we expect some negative impact on revenue in 2022, which will, in turn, result in lower cash generation from activities. If the downturn is deeper or for longer than we anticipate, the Company could take certain further actions to ease the pressure of certain cash outflows, such as reducing discretionary expenditure, selling non-core assets, accessing government pandemic initiatives or arranging borrowing facilities with third-party banks and affiliate companies.
The Company has received an irrevocable commitment from Natura &Co Holding that it will provide sufficient financial support if and when needed to enable the Company to meet its obligations as they come due in the normal course of business for a period of not less than 12 months from the date issuance of the Consolidated Financial Statements. This includes the obligations related to the $461m 5.00% Notes, which are due to be repaid in March 2023. See Note 7, Debt and Other Financing, and Note 15, Leases and Commitments, respectively, for information on our sources of funding will be sufficient to satisfy our currently anticipated cash requirements through at leastdebt and contractual financial obligations and commitments, including the next twelve months.loans from Natura &Co and its affiliates maturing within 1 year.
Other liquidity matters
We may seek to repurchase our equity or to retire our outstanding debt in open market purchases, through existing call mechanisms, privately negotiated transactions, through derivative instruments, cash tender offers or otherwise. Repurchases of equity and debt may be funded by cash or 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. Any issuances of equity
(including shares of preferred stock) or convertible securities could have a dilutive effect on the ownership interest ofHowever, our current shareholders and may adversely impact earnings per share in future periods.Our credit ratings were downgraded during the past several years,remain below investment grade which may impact our ability to access such transactions on favorable terms, if at all. For more information, see "Risk Factors -Our- Our credit ratings were downgraded during the past several years,are below investment grade, 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" included in Item 1A on pages 7 through 20 of our 2018 Annual Report.1A.
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 19,18, Contingencies, on pages F-57 through F-59 of our 2018 Annual Report.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 on pages 1 through 2 of our 2018 Annual Report.2.
Balance Sheet Data | | | | | | | | | | | | | | |
| | 2021 | | 2020 |
| Cash and cash equivalents | | $ | 251.5 | | | $ | 364.9 | |
| Restricted cash | | — | | | 7.8 | |
| Total debt | | $ | 1,816.6 | | | $ | 1,712.0 | |
| Working capital | | 66.2 | | | 56.9 | |
|
| | | | | | | | |
| | | 2018 | | 2017 |
| Cash and cash equivalents | | $ | 532.7 |
| | $ | 881.5 |
|
| Total debt | | 1,593.6 |
| | 1,897.9 |
|
| Working capital | | 265.5 |
| | 673.7 |
|
Cash Flows | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
Net cash (used) provided by continuing operating activities (1) | | $ | (260.4) | | | $ | (270.1) | | | $ | 56.9 | |
| Net cash (used) provided by continuing investing activities | | (48.1) | | | (20.5) | | | 50.2 | |
Net cash from continuing financing activities (1) | | 222.6 | | | 39.1 | | | 38.5 | |
| Effect of exchange rate changes on cash and equivalents | | (22.0) | | | (19.5) | | | (.3) | |
|
| | | | | | | | | | | | |
| | | 2018 | | 2017 | | 2016 |
| Net cash from continuing operating activities | | $ | 92.7 |
| | $ | 271.2 |
| | $ | 128.0 |
|
| Net cash from continuing investing activities | | (93.4 | ) | | (69.6 | ) | | (82.7 | ) |
| Net cash from continuing financing activities | | (306.9 | ) | | — |
| | 137.0 |
|
| Effect of exchange rate changes on cash and equivalents | | (37.5 | ) | | 34.1 |
| | (50.4 | ) |
Net Cash from Continuing Operating Activities
Net cash providedused by continuing operating activities during 20182021 was approximately $93$260 as compared to net cash used by continuing operating activities of approximately $270 during 2020, a decreased cash outflow of approximately $10. The decrease in net cash used by operating activities was primarily due to lower cash losses in 2021 impacted by one-time costs linked to the acquisition by Natura &Co Holding in 2020, this was partially offset by a decrease in debt related costs in 2021.
Net cash used by continuing operating activities during 2020 was approximately $270 as compared to net cash provided by continuing operating activities of approximately $271$57 during 2017, a decrease2019, an increased cash outflow of approximately $178.$327. The increase in net cash used by operating activities was primarily due to lower cash profits impacted by lower revenue levels and one-time costs linked to the acquisition by Natura &Co Holding. Cash outflows related the Transaction included professional fees, senior officer severance and other expenses during the first quarter of 2020. Further information relating to the Transaction is included in Note 21, Merger with Natura Cosméticos S.A., to the Consolidated Financial Statements included herein. In addition, the year-over-year comparison of net cash used byfrom continuing operating activities was unfavorably impacted by lower cash-related earnings and higher inventory purchases. These unfavorable impactslevels, primarily to the year-over-year comparison of cash from operating activities were partially offset by the judicial deposit receipt of approximately $68 relating to Brazil IPI taxes (described more fullysupport growth in Note 19, Contingencies on pages F-57 through F-59 of our 2018 Annual Report) and lower net receivables.
Net cash provided by continuing operating activities during 2017 was approximately $271 as compared to approximately $128 during 2016, an increase of approximately $143. The year-over-year comparison was unfavorably impacted by approximately $27 of proceeds, net of legal fees, related to settling claims relating to professional services in connection with a previously disclosed legal matter, which was received in 2016. This unfavorable impact was partially offset by an injunction we received in May 2016 for cash deposits associated with IPI in Brazil. As a result, we were not required to make cash deposits in 2017, while we paid approximately $19 for these cash deposits in 2016, prior to May. See Note 19, Contingencies on pages F-57 through F-59 of our 2018 Annual Report for additional information on the IPI taxes.
The remaining approximate $135 benefit to the year-over-year comparison of net cash provided by continuing operating activities was primarily due to improvements in working capital, most significantly from lower purchases of inventory and the timing of payments, as well as lower net receivables. Avon Latin America.
We maintain defined benefit pension plans and unfunded supplemental pension benefit plans (see Note 14,13, Employee Benefit
Plans, on pages F-42 through F-50 of our 2018 Annual Report)to the Consolidated Financial Statements included herein). Our funding policy for thesepension plans is based on legal
requirementsto meet the minimum required contributions under applicable law and available cash flows.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" in
this MD&A). 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, we expect to make contributions in the range of $5 to $10 to our U.S. defined benefit pension and postretirement plans and in the range of $10 to $15 to fund our non-U.S.global defined benefit pension and postretirement plans during 2019.2022.
Net Cash from Continuing Investing Activities
Net cash used by continuing investing activities during 20182021 was approximately $93,$48, as compared to approximately $70 during 2017. The approximate $23 increase to net cash used by continuing investing activities of approximately $21 during 2020. The approximate $27 increase to net cash used in investing activities was driven by higher capital expenditures in the current year compared to the prior year. During 2021, net proceeds of $17 were received in relation primarily due to an approximate $22 cashthe sale of the Spanish distribution received from New Avon LLC incenter during the third quarter of 2017.2021.
Net cash used by continuing investing activities during 20172020 was approximately $70,$21, as compared to net cash provided by continuing investing activities of approximately $83$50 during 2016.2019. The approximate $13$71 decrease to net cash used by continuingfrom investing activities was primarily duedriven by lower net proceeds from the sale of businesses and assets in the current year compared to an approximate $22 cash distributionthe prior year. During 2020, net proceeds of $11 were received from Newthe sale of the Hungary Distribution Center in Gödöllő in the second quarter of 2020, and the sale of the China Wellness Plant and Avon inManagement Shanghai, both of which closed during the third quarter of 2017, partially offset by lower asset disposals as compared to the prior-year period. See Note 4, Investment in New Avon on page F-26 of our 2018 Annual Report for more information on the cash distribution received from New Avon.2020.
Capital expenditures during 2018 were approximately $95 compared with approximately $97 during 2017 and approximately $93 during 2016.
Capital expenditures in 2019 are currently expected to be in the range of $120 to $140 and are expected to be funded by cash from operations.
Net Cash from Continuing Financing Activities
Net cash usedprovided by continuing financing activities during 20182021 was approximately $307,$223, as compared to zeronet cash provided by financing activities of $39 in 2017.2020. The approximate $307 unfavorable impact to net$184 increase in cash usedprovided by continuing financingfinancial activities wasis primarily due to a $238the favorable decrease in repayment of debt, partially offset by the adverse decrease in proceeds from debt in the second quartercurrent year compared to the prior year. During 2021, the proceeds from debt issued consisted primarily of 2018 plus a make-whole premiumloans from affiliates of $6, as well as open market repurchases of $48 inNatura &Co. Note 7, Debt and Other Financing, to the fourth quarter of 2018.Consolidated Financial Statements included herein for more information on these items.
Net cash provided by continuing financing activities during 20172020 was zero,approximately $39, as compared to approximately $137 during 2016. The approximate $137 decrease to net cash providedused by financing activities of $39 in 2019. Net cash from continuing financing activities was primarily due torelatively unchanged, as the net proceeds related to the $500 principal amountfavorable impact of 7.875% Senior Secured Notes issued in the August 2016 and the net proceeds from the sale of series C preferred stock. These drivers were partiallydebt issued was largely offset by the repayment of certaindebt in both the current and prior years. During 2020, the proceeds from debt issued consisted primarily of the $960 promissory note provided by a subsidiary of Natura &Co Holding S.A., whilst the repayment of debt primarily consisted of the redemption of our debt in 2016 Notes due August 15, 2022 and of approximately $720 in the aggregate and higher repayments of short-term debt in the prior-year period. Seeour 2019 Notes due August 15, 2022. Note 8,7, Debt and Other Financing, on pages F-30 through F-33 of our 2018 Annual Report and Note 18, Series C Convertible Preferred Shares on page F-57 of our 2018 Annual Report for more information.
We purchased approximately 1.1 million shares of our common stock for $3.2 during 2018, as compared to 1.6 million shares of our common stock for $7.2 during 2017 and 1.4 million shares for $5.6 during 2016, 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, 2017 and 2016.
We did not declare a dividend for 2018 or 2017 as we suspended the dividend effective in the first quarter of 2016.
Debt and ContractualConsolidated Financial Obligations and Commitments
At December 31, 2018, our debt and contractual financial obligations and commitments by due dates were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 and Beyond | | Total |
| Short-term debt | | $ | 11.0 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 11.0 |
|
| Long-term debt | | — |
| | 387.0 |
| | — |
| | 500.0 |
| | 461.9 |
| | 243.8 |
| | 1,592.7 |
|
| Capital lease obligations | | 1.1 |
| | .6 |
| | .4 |
| | .2 |
| | 0.1 |
| | .1 |
| | 2.5 |
|
| Total debt | | 12.1 |
| | 387.6 |
| | 0.4 |
| | 500.2 |
| | 462.0 |
| | 243.9 |
| | 1,606.2 |
|
Debt-related interest(1) | | 119.1 |
| | 98.8 |
| | 93.5 |
| | 78.7 |
| | 28.5 |
| | 21.8 |
| | 440.4 |
|
| Total debt-related | | 131.2 |
| | 486.4 |
| | 93.9 |
| | 578.9 |
| | 490.5 |
| | 265.7 |
| | 2,046.6 |
|
Operating leases(2) | | 45.4 |
| | 29.4 |
| | 22.6 |
| | 18.1 |
| | 9.2 |
| | 5.6 |
| | 130.3 |
|
| Purchase obligations | | 345.6 |
| | 186.4 |
| | 87.5 |
| | 37.1 |
| | 7.9 |
| | 5.9 |
| | 670.4 |
|
Benefit obligations(3) | | 58.5 |
| | 12.7 |
| | 12.7 |
| | 12.3 |
| | 12.7 |
| | 57.5 |
| | 166.4 |
|
Total debt and contractual financial obligations and commitments(4) | | $ | 580.7 |
| | $ | 714.9 |
| | $ | 216.7 |
| | $ | 646.4 |
| | $ | 520.3 |
| | $ | 334.7 |
| | $ | 3,013.7 |
|
| |
(1) | Amounts are based on our current long-term credit ratings. See Note 8, Debt and Other Financing on pages F-30 through F-33 of our 2018 Annual Report for more information. |
| |
(2) | Amounts are net of expected sublease rental income. See Note 16, Leases and Commitments on page F-52 of our 2018 Annual Report for more information. |
| |
(3) | Amounts represent expected future benefit payments for our unfunded defined benefit pension and postretirement benefit plans, as well as expected contributions for 2019 to our funded defined benefit pension benefit plans. We are not able to estimate our contributions to our funded defined benefit pension and postretirement plans beyond 2019. |
| |
(4) | The amount of debt and contractual financial obligations and commitments excludes amounts due under derivative transactions. The table also excludes information on non-binding purchase orders of inventory. The table does not include any reserves for uncertain income tax positions because we are unable to reasonably predict the ultimate amount or timing of settlement of these uncertain income tax positions. At December 31, 2018, our reserves for uncertain income tax positions, including interest and penalties, totaled approximately $107. |
See Note 8, Debt and Other Financing, and Note 16, Leases and Commitments on pages F-30 to F-33, and on page F-52, respectively, of our 2018 Annual ReportStatements included herein for more information on our debt and contractual financial obligations and commitments. Additionally, as disclosed in Note 17, Restructuring Initiatives on pages F-53 through F-56 of our 2018 Annual Report, at December 31, 2017, we have liabilities of approximately $59 associated with our restructuring actions, primarily associated with our Transformation Plan. The majority of future cash payments associated with these restructuring liabilities are expected to be made during 2019.items.
Off Balance Sheet Arrangements
At December 31, 2018, we had no material off-balance-sheet arrangements.
Capital Resources
Revolving Credit Facility
In June 2015, Avon International Operations, Inc. ("AIO"), a wholly-owned domestic subsidiary of the Company, entered into a five-year $400.0 senior secured revolving credit facility (the “2015 facility”). In December 2017, AIO entered into an amendment to the 2015 facility, which, among other things, modified the financial covenants (interest coverage and total leverage ratios) to provide the Company additional flexibility. As of December 31, 2018, there were no amounts outstanding under the 2015 facility.
In February 2019, Avon International Capital, p.l.c. ("AIC"), a wholly-owned foreign subsidiary of the Company, entered into a three-year €200.0 senior secured revolving credit facility (the “2019 facility”). The 2019 facility replaced the 2015 facility and the 2015 facility was terminated at such time. Borrowings under the 2019 facility bear interest at our option, at a rate per annum, equal to either LIBOR or EURIBOR (for any loan in euros) plus 225 basis points, in each case subject to adjustment based upon a leveraged-based pricing grid. The 2019 facility may be used for general corporate and working capital purposes. There are no amounts outstanding under the 2019 facility. The amount available to be drawn on under the 2019 facility is reduced by any standby letters of credit granted by AIC or any Obligor under the 2019 facility, including the standby letters of credit granted by AIO under the 2015 facility that were rolled over into the 2019 facility, which, as of December 31, 2018, were approximately $29.
All obligations of AIC under the 2019 facility are unconditionally guaranteed by the Company, AIO and each other material United States or English restricted subsidiary of the Company (collectively, the “Obligors”), in each case, subject to certain exceptions. The obligations of the Obligors are secured by first priority liens on and security interests in substantially all of the assets of the Obligors, in each case, subject to certain exceptions.
The 2019 facility will terminate in February 2022; provided, however, that it shall terminate on the 91st day prior to the maturity of the 4.60% Notes, if on such 91st day, the applicable notes are not redeemed, repaid, discharged, defeased or otherwise refinanced in full.
The 2019 facility contains affirmative and negative covenants, which are customary for secured financings of this type, as well as financial covenants (interest coverage and total leverage ratios). Depending on our business results (including the impact of any adverse foreign exchange movements and significant restructuring charges), it is possible that we may become non-compliant with our interest coverage or total leverage ratio absent the Company undertaking other alternatives to avoid noncompliance, such as obtaining additional amendments to the 2019 facility or repurchasing certain debt. If we were to be non-compliant with our interest coverage or total leverage ratio, we would no longer have access to our 2019 facility and our credit ratings may be downgraded.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(U.S. dollars in millions, except per share data)
The overall objective of our financial risk management program is to reduce the potential negative effects from changes in foreign exchange and interest rates arising from our business activities. We may reduce our 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 we may use foreign currency rate-sensitive instruments to hedge a portion of our 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.
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 some 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.circumstances.
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 December 31, 2018, we do not have any interest-rate swap agreements. Approximately 1%5% and 4% of our debt portfolio at December 31, 20182021 and 2017,2020, respectively, was exposed to floating interest rates.
Our long-term borrowings were analyzed at year-end to determine their sensitivitywere all at fixed rates of interest and are therefore notsensitive to interest rate changes. Based on the outstanding balance of all these financial instruments at December 31, 2018, a hypothetical 50-basis-point change (either an increase or a decrease) in interest rates prevailing at that date, sustained for one year, would not represent a material potential change in fair value, earnings or cash flows. This potential change was calculated based on DCF analyses using interest rates comparable to our current cost of debt.
Foreign Currency Risk
We conduct business globally, with operations in various locations around the world. Over the past threefour years, all of our consolidated revenue was derived from operations of subsidiaries outside of the United States ("U.S.").U.S.. The functional currency for most of our foreign operations is their local currency. We are exposed to changes in financial market conditions in the normal course of our operations, primarily due to international businesses and transactions denominated in foreign currencies and the use of various financial instruments. We are 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, 2018,2021, the primary foreign currencies for which we 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.
We may reduce our 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. Our hedges of our foreign currency exposure are not designed to, and, therefore, cannot entirely eliminate the effect of changes in foreign exchange rates on our consolidated financial position, results of operations and cash flows.
Our foreign-currency financial instruments were analyzed at year-end to determine their sensitivity to foreign exchange rate changes. Based on our outstanding foreign exchange contracts at December 31, 2018,2021, all of which were taken out to hedge underlying foreign currency exposures, a hypothetical 10% appreciation of the U.S. dollar against our foreign exchange contracts would reduce earnings by $105$17 and a hypothetical 10% depreciation of the U.S. dollar against our foreign exchange contracts would increase earnings by $128.$17. This hypothetical analysis does not consider our underlying foreign currency exposures. The hypothetical impact was calculated on the open positions using forward rates at December 31, 2018,2021, adjusted for an assumed 10% appreciation or 10% depreciation of the U.S. dollar against these hedging contracts.
Credit Risk of Financial Instruments
At times, we attempt to minimize our credit exposure to counterparties by entering into derivative transactions and similar agreements with major international financial institutions with "A-" or higher credit ratings as issued by Standard & Poor’s Corporation.
Our foreign currency derivatives are typically comprised of over-the-counter forward contracts, swaps or options with major international financial institutions. Although our theoretical credit risk is the replacement cost at the then estimated fair value of these instruments, we believe that the risk of incurring credit risk losses is remote and that such losses, if any, would not be material.
Non-performance of the counterparties on the balance of all the foreign exchange agreements would not have resulted in aany write-off of $1.3 at December 31, 2018.2021. In addition, in the event of non-performance by such counterparties, we would be exposed to market risk on the underlying items being hedged as a result of changes in foreign exchange rates.
See Note 11,10, Financial Instruments and Risk Management on pages F-37 through F-38 of our 2018 Annual Reportto the Consolidated Financial Statements included herein for more information.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Index on page F-1 of our Consolidated Financial Statements and Notes thereto contained herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, our principal executive and principal financial officers carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the SecuritiesExchange Act. Disclosure controls and procedures are designed to ensure that information relating to Avon (including our consolidated subsidiaries) required to be disclosed by us in the reports we file or submit under the Exchange Act of 1934, as amended (the "Exchange Act").is recorded, processed, summarized and reported within the time periods specified in the U.S. and Exchange Commission’s rules and forms and to ensure that information required to be disclosed is accumulated and communicated to management to allow timely decisions regarding disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply its judgment in evaluating and implementing possible controls and procedures.
Based upon their evaluation, the principal executive and principal financial officers concluded that our disclosure controls and procedures were effective as of December 31, 2018,2021, at the reasonable assurance level. Disclosure controls and procedures are designed to ensure that information relating to Avon (including our consolidated subsidiaries) required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the United States Securities and Exchange Commission’s rules and forms and to ensure that information required to be disclosed is accumulated and communicated to management to allow timely decisions regarding disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is defined as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
•pertain to the maintenance of records that, in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process, and it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Under the supervision and with the participation of our management, including our principal executive and principal financial officers, we assessed as of December 31, 2018,2021, the effectiveness of our internal control over financial reporting. This assessment was based on criteria established in the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on our assessment using those criteria, our management concluded that our internal control over financial reporting as of December 31, 2018,2021, was effective.
PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the financial statements included in this 2018 Annual Report on Form 10-K, has audited the effectiveness of our internal control over financial reporting as of December 31, 2018. Their 2018 report is included on pages F-2 through F-4 of our 2018 Annual Report.
Changes in Internal Control over Financial Reporting
Our management has evaluated, with the participation of our principal executive and principal financial officers, whether any changes in our internal control over financial reporting that occurred during our last fiscalthe quarter (the registrant’s fourth fiscal quarter in the case of an annual report)ended December 31, 2021 have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on the evaluation we conducted, our management has concluded that no such changes have occurred.
ITEM 9B. OTHER INFORMATION
Not applicable.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
DirectorsThe information called for by this item has been omitted pursuant to General Instruction I(2)(c) of Form 10-K.
Information regarding directors is incorporated by reference to the proposal titled "Election of Directors" and the "Information Concerning the Board of Directors" sections of our proxy statement for the 2019 Annual Meeting of Shareholders ("2019 Proxy Statement").
Executive Officers
Information regarding executive officers is incorporated by reference to the "Executive Officers" section of our 2019 Proxy Statement.
Section 16(a) Beneficial Ownership Reporting Compliance
This information is incorporated by reference to the "Section 16(a) Beneficial Ownership Reporting Compliance" section of our 2019 Proxy Statement.
Code of Conduct
We have adopted a Code of Conduct, amended in June 2013, that applies to all members of the Board of Directors and to all of our employees, including our principal executive officer, principal financial officer and principal accounting officer or controller. Our Code of Conduct is available, free of charge, on our investor website, www.avoninvestor.com. Our Code of Conduct is also available, without charge, by sending a letter to Investor Relations, Avon Products, Inc., 601 Midland Avenue, Rye, N.Y. 10580, by sending an email to investor.relations@avon.com or by calling (203) 682-8200. None of the provisions of the Code of Conduct may be waived. However, any amendment to, or waiver from, the provisions of the Code of Conduct that applies to any of those officers would be posted to the same location on our website in accordance with applicable rules.
Audit Committee; Audit Committee Financial Expert
This information is incorporated by reference to the "Information Concerning the Board of Directors" section of our 2019 Proxy Statement.
Material Changes in Nominating Procedures
This information is incorporated by reference to the "Information Concerning the Board of Directors" section of our 2019 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
ThisThe information is incorporatedcalled for by referencethis item has been omitted pursuant to the "Information Concerning the BoardGeneral Instruction I(2)(c) of Directors," "Executive Compensation" and "Director Compensation" sections of our 2019 Proxy Statement.Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ThisThe information is incorporatedcalled for by referencethis item has been omitted pursuant to the "Equity Compensation Plan Information" and "OwnershipGeneral Instruction I(2)(c) of Shares" sections of our 2019 Proxy Statement.Form 10-K
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
ThisThe information is incorporatedcalled for by referencethis item has been omitted pursuant to the "Information Concerning the BoardGeneral Instruction I(2)(c) of Directors" and "Transactions with Related Persons" sections of our 2019 Proxy Statement.Form 10-K.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
This information is incorporated by reference to the proposal titled "Ratification of Appointment of Independent Registered Public Accounting Firm" sectionFirm Fees
The Company's principal accountant for 2021 and 2020 was PricewaterhouseCoopers LLP, United Kingdom ("PwC-UK"). The following table sets forth the aggregate fees for professional services rendered for us by PwC, as of and for the years ended December 31, 2021 and December 31, 2020. | | | | | | | | | | | | | | |
| | 2021 | | 2020 |
| Audit Fees | | $ | 7.2 | | | $ | 8.4 | |
| Audit-Related Fees | | — | | | — | |
| Tax Fees | | — | | | — | |
| All Other Fees | | — | | | — | |
| Total | | $ | 7.2 | | | $ | 8.4 | |
Audit Fees. These amounts represent the aggregate fees for professional services rendered by PwC for the audit of our 2019 Proxy Statement.
annual financial statements for the years ended December 31, 2021 and 2020, the review of the financial statements included in our Quarterly Reports on Form 10-Q for those years, and services related to statutory and regulatory filings and engagements for such years.
Audit-Related Fees. These amounts represent the aggregate fees for assurance and related services performed by PwC that are reasonably related to the performance of the audit or review of our financial statements. In 2021 and 2020, audit-related fees were de minimis.
Tax Fees. In 2021 and 2020, tax-related fees were de minimis.
All Other Fees. These amounts represent the aggregate fees for other services rendered by PwC not included in any of the foregoing categories. In 2021, all other fees were de minimis.
Audit and Non-Audit Services Pre-Approval Policy
Since the merger of Avon into Natura &Co, in January 2020, Avon no longer maintains an Audit Committee and decisions related to the Company’s independent auditor are taken by Natura &Co in compliance with paragraph (c) (7)(i) of Rule 2-01 of Regulation S-X. Prior to the merger of Avon into Natura &Co, the Company's Audit Committee had historically established a policy for the pre-approval of all audit and non-audit services by PricewaterhouseCoopers LLP and its worldwide affiliates ("PwC"), and the corresponding fees.
The current Natura &Co policy, and the former Avon Audit Committee policy, was established to (i) strictly disallow any service that would be a prohibited service; (ii) allow audit, audit-related, and tax services only if the particular type of service is on the list of types of services that has been pre-approved by the Audit Committee, specific procedures are followed to ensure appropriate management assessment of such service, the proposed fee is within the overall limit set by the Audit Committee for that category of service, and the Audit Committee is informed on a timely basis of each such service; and (iii) allow other services not within any of the foregoing categories only if each such service and the corresponding fee is approved in advance
by the Audit Committee or by one or more members of the Audit Committee with subsequent approval by the Audit Committee. All services provided by PwC during 2021 and 2020 have been reviewed, and the amount of fees paid to PwC for such services and concluded that the provision of services by PwC is compatible with the maintenance of their independence.
PART IV
|
| | | | |
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULE |
(a) 1. Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm
See Index on page F-1.
(a) 2. Financial Statement Schedule
See Index on page F-1.
All other schedules are omitted because they are not applicable or because the required information is shown in the consolidated financial statements and notes.
(a) 3. Index to Exhibits
|
| | | | | | | |
| Exhibit Number | | Description |
| 2.1 | | Agreement and Plan of Mergers, dated as of May 22, 2019, among Avon Products, Inc., Natura Cosméticos S.A., Nectarine Merger Sub I, Inc., Nectarine Merger Sub II, Inc. and Natura Holding S.A (incorporated by reference to Exhibit 2.1 to Avon's Current Report on Form 8-K filed on May 24, 2019). |
| 2.2 | | Amendment Number One, dated as of October 3, 2019, to the Agreement and Plan of Mergers, dated as of May 22, 2019, among Avon Products, Inc., Natura Cosméticos S.A., Nectarine Merger Sub I, Inc., Nectarine Merger Sub II, Inc. and Natura &Co Holding S.A (incorporated by reference to Exhibit 2.1 to Avon's Current Report on Form 8-K filed on October 4, 2019). |
| 2.3 | | Amendment Number Two, dated as of November 5, 2019, to the Agreement and Plan of Mergers, dated as of May 22, 2019, among Avon Products, Inc., Natura Cosméticos S.A., Nectarine Merger Sub I, Inc., Nectarine Merger Sub II, Inc. and Natura &Co Holding S.A. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 5, 2019). |
| 2.4 | | |
3.12.5 | |
|
| 3.1 | | |
| 3.2 | | |
| 4.1 | | |
| 4.2 | | |
4.3 | | |
4.44.3 | | |
4.54.4 | | Ninth Supplemental Indenture, dated August 15, 2016, amongJuly 26, 2019, between Avon International Operations,Products, Inc., the guarantors party theretoas Issuer, and Deutsche Bank Trust Company Americas, as trustee and collateral agent (incorporated by reference to Exhibit 4.1 to Avon's Current Report on Form 8-K filed on July 31, 2019). |
| | | | | | | | |
| 4.5 | | |
| 4.6 | | |
| 4.7 | | |
| 4.8 | | |
| 4.9 | | |
| 10.1* | | |
10.1*10.2* | | |
10.2*10.3* | | |
10.3*10.4* | | |
10.4*10.5* | | |
10.5*10.6* | | |
| 10.7* | | |
10.6*10.8* | | |
10.7* | | |
10.8*10.9* | | |
|
| 10.10* | | |
10.9* | | |
10.10*10.11* | | |
10.11*10.12* | | |
| | | | | | | | |
10.12*10.13* | | |
10.13*10.14* | | |
10.14*10.15* | | |
10.15*10.16* | | |
10.16*10.17* | | |
10.17*10.18* | | |
10.18*10.19* | | |
10.19*10.20* | | |
10.20*10.21* | | |
10.21*10.22* | | |
10.22*10.23* | | |
10.23*10.24* | | |
10.24*10.25* | | |
10.25*10.26* | | |
10.26*10.27* | | |
10.27*10.28* | | |
10.28*10.29* | | |
10.29*10.30* | | |
10.30*10.31* | | |
|
| 10.33* | | |
10.32* | | |
10.33*10.34* | | |
10.34*10.35* | | |
10.35*10.36* | | |
10.36*10.37* | | |
10.37*10.38* | | |
10.38*10.39* | | |
10.39*10.40* | | |
10.40*10.41* | | |
10.41*10.42* | | |
10.42*10.43* | | |
10.43*10.44* | | |
10.44*10.45* | | |
10.45*10.46* | | |
10.46*10.47* | | |
10.47*10.48* | | |
10.48*10.49* | | |
10.49*10.50* | | |
10.50*10.51* | | |
|
| 10.54* | | |
10.53* | | |
10.54*10.55* | | |
10.55*10.56* | | |
10.56*10.57* | | |
10.57*10.58* | | |
10.58*10.59* | | |
10.59*10.60* | |
|
10.60* | |
|
10.61* | |
|
10.62* | |
|
10.63* | |
|
10.64* | |
|
10.65* | | |
10.66* | | |
10.67* | | |
10.68* | | |
10.69* | |
|
10.70* | | |
10.71* | | |
10.72* | |
|
10.73* | |
|
|
| 10.61 | | |
10.74* | |
|
10.75* | |
|
10.76* | |
|
10.77* | |
|
10.78 | | Revolving Credit Agreement, dated as of June 5, 2015, among Avon Products, Inc., Avon International Operations, Inc., the banks and other lenders party thereto, Citibank, N.A., as Administrative Agent, Collateral Agent and an L/C issuer (incorporated by reference to Exhibit 10.1 to Avon's Current Report on Form 8-K filed on June 8, 2015). |
10.79 | | First Amendment to Credit Agreement and General Security Agreement (Revolving Credit Agreement), dated as of December 7, 2015, among Avon Products, Inc., Avon International Operations, Inc., the banks and other lenders party thereto, Citibank, N.A., as Administrative Agent, Collateral Agent and an L/C issuer (incorporated by reference to Exhibit 10.53 to Avon's Annual Report on Form 10-K for the year ended December 31, 2015). |
10.80 | | |
10.81 | | |
10.82 | | Multicurrency Revolving Facility Agreement, dated as of February 12, 2019, by and among Avon International Capital p.l.c., as borrower, Avon Products, Inc., the other obligors party thereto from time to time, the lenders party thereto from time to time, Citibank Europe plc, UK Branch, as agent, Citibank, N.A., London Branch, as common security agent, and the other parties party thereto from time to time (incorporated by reference to Exhibit 10.1 to Avon's Current Report on Form 8-K filed on February 14, 2019)..
|
10.83 | | |
10.8410.62 | | |
10.8510.63 | | |
10.8610.64 | | |
10.8731.1 | | Nomination Agreement, dated March 26, 2018, by and among Avon Products, Inc., Barington Companies Equity Partners, L.P., Barington Companies Investors, LLC, Barington Companies Management, LLC, Barington Capital Group, L.P., James A. Mitarotonda, LNA Capital Corp., NuOrion Advisors, LLC, Guy Phillips, Shah Capital Management, Inc., Shah Capital Opportunity Fund, L.P., Shah Capital, LLC and Himanshu H. Shah (incorporated by reference to Exhibit 10.1 to Avon's Current Report on Form 8-K filed on March 26, 2018)
|
10.88 | | Confidentiality Agreement, dated March 26, 2018, by and among Avon Products, Inc., James A. Mitarotonda, Barington Companies Equity Partners, L.P., Barington Capital Group, L.P., Barington Companies Investors, LLC and Barington Companies Management, LLC (incorporated by reference to Exhibit 10.2 to Avon's Current Report on Form 8-K filed on March 26, 2018)
|
21 | | |
23.1 | | |
23.2 | | |
31.1 | | |
| 31.2 | | |
| 32.1 | | |
|
| 32.2 | | |
32.2 | | |
| 101 | | The following materials formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Statements of Operations, (ii) Consolidated Statements of Comprehensive Income (Loss), (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Changes in Shareholders’ Equity (Deficit), (vi) Notes to Consolidated Financial Statements and (vi) Schedule of Valuation and Qualifying Accounts. |
*104 | | Cover Page Interactive Data File – the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document (included in Exhibit 101). |
| * | | The Exhibits identified above with an asterisk (*) are management contracts or compensatory plans or arrangements. |
Avon’s Annual Report on Form 10-K for the year ended December 31, 2018,2021, at the time of filing with the United States Securities and Exchange Commission, shall modify and supersede all prior documents filed pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended, for purposes of any offers or sales of any securities after the date of such filing pursuant to any Registration Statement or Prospectus filed pursuant to the Securities Act of 1933, which incorporates by reference such Annual Report on Form 10-K.
|
| | | | |
| ITEM 16. | FORM 10-K SUMMARY |
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 21st10th day of February 2019.March 2022.
| | | | | |
| Avon Products, Inc. |
| |
| Avon Products, Inc./s/ Samantha Hutchison |
| Samantha Hutchison |
| /s/ Laura Barbrook |
| Laura Barbrook |
| Vice President and Corporate Controller - Principal Accounting Officer |
| Accounting Officer |
Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
| | | | |
| Signature | | Title | | Date |
Signature | | Title | | Date |
| /s/ Angela Cretu | | Chief Executive Officer - Principal Executive Officer | | March 10, 2022 |
| Angela Cretu | | |
| | |
| /s/ Carl Rogberg | | Vice President Finance - Principal Financial Officer | | March 10, 2022 |
| Carl Rogberg | | | |
| | |
| /s/ Itamar Gaino Filho | | Director | | March 10, 2022 |
| Itamar Gaino Filho | | | | |
| | |
/s/ Jan ZijderveldGuilherme Castellan | | Chief Executive Officer – Principal Executive Officer and Director | | February 21, 2019March 10, 2022 |
Jan ZijderveldGuilherme Castellan | | | | |
| | |
/s/ James WilsonRoberto de Oliveira Marques | | Executive Vice President and Chief Financial Officer - Principal Financial OfficerDirector | | February 21, 2019 |
James Wilson | | | |
| | |
/s/ Jose Armario | | Director | | February 21, 2019 |
Jose Armario | | | | |
| | |
/s/ W. Don Cornwell | | Director | | February 21, 2019 |
W. Don Cornwell | | | | |
| | |
/s/ Chan W. Galbato | | Director | | February 21, 2019 |
Chan W. Galbato | | | | |
| | |
/s/ Nancy Killefer | | Director | | February 21, 2019March 10, 2022 |
Nancy KilleferRoberto de Oliveira Marques
| | | | |
| | | | |
/s/ Susan J. Kropf | | Director | | February 21, 2019 |
Susan J. Kropf | | | | |
| | |
/s/ Helen McCluskey | | Director | | February 21, 2019 |
Helen McCluskey | | | | |
| | | | |
/s/ Andrew G. McMaster, Jr.
| | Director | | February 21, 2019 |
Andrew G. McMaster, Jr.
| | | | |
| | | | |
/s/ James A. Mitarotonda
| | Director | | February 21, 2019 |
James A. Mitarotonda
| | | | |
| | | | |
/s/ Michael F. Sanford | | Director | | February 21, 2019 |
Michael F. Sanford | | | | |
| | | | |
/s/ Lenard B. Tessler
| | Director | | February 21, 2019 |
Lenard B. Tessler
| | | | |
|
AVON PRODUCTS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
| | | | | | | | |
| | |
| | Page |
| | Page |
| | |
| | |
| | |
| Consolidated Financial Statements: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Financial Statement Schedule: | | |
| | |
| | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To theBoard of Directors and Shareholders of Avon Products, Inc.:
OpinionsOpinion on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Avon Products, Inc. and its subsidiaries (the “Company”) as of December 31, 20182021 and December 31, 2017,2020, and the related consolidated statements of operations, comprehensive income (loss)loss (income), cash flows and changes in shareholders’ equity (deficit)deficit for each of the twothree years in the period ended December 31, 2018,2021, including the related notes and financial statement schedule listed in the accompanying index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidatedfinancial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20182021 and December 31, 2017, 2020, and the results of itsoperations and itscash flows for each of the twothree years in the period ended December 31, 20182021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework(2013)issued by the COSO.
Basis for OpinionsOpinion
The Company's management is responsible for theseThese consolidated financial statements for maintaining effective internal control over financial reporting, and for its assessmentare the responsibility of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reportingunder Item 9A.Company's management. Our responsibility is to express opinionsan opinion on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effectivefraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting was maintained in all material respects.
Our auditsbut not for the purpose of expressing an opinion on the effectiveness of the consolidatedCompany's internal control over financial statementsreporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidatedfinancial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.opinion.
Critical Audit Matters
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reportingThe critical audit matter communicated below is a process designedmatter arising from the current period audit of the consolidated financial statements that was communicated or required to provide reasonable assurance regardingbe communicated to the reliabilityaudit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial reportingstatements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Realizability of the deferred tax assets
As described in Notes 1 and 9 to the consolidated financial statements, the Company’s consolidated deferred tax asset balance as of December 31, 2021 was $118.9 million, which is net of valuation allowances and deferred tax liabilities. The ultimate realization of deferred tax assets depends upon generating sufficient future taxable income during the periods in which the temporary differences become deductible or before net operating loss and tax credit carryforwards expire. The Company records a valuation allowance to reduce 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 the Company in order to determine whether all or some portion of the deferred tax assets will not be realized. In performing this analysis, the Company’s forecasted U.S. and foreign taxable income, and the preparationexistence of financial statementspotential prudent and feasible tax planning strategies that would enable the Company to utilize some or all of its deferred tax assets, are taken into consideration.
The principal considerations for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies andour determination that performing procedures that (i) pertainrelating to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositionsrealizability of the deferred tax assets is a critical audit matter is the significant judgment by management when assessing the realizability of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expendituresdeferred tax assets through the assessment of the company are being made onlyCompany’s ability to generate sufficient future taxable income. This led to a high degree of auditor judgment, subjectivity and effort in accordance with authorizations of management and directorsperforming procedures on management’s assessment of the company;future taxable income to enable utilization of deferred tax assets in U.S. and (iii) provide reasonable assurance regarding prevention or timely detectionforeign jurisdictions. The evaluation of unauthorized acquisition,audit evidence available to support
the realizability of U.S. and foreign tax loss and tax credit carryforwards was complex and subjective, and therefore required significant auditor judgment. In addition, the audit effort involved the use or dispositionof professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the recognition of U.S. and foreign tax loss and tax credit carryforwards and the review of the company’s assetsCompany’s future taxable income. These procedures also included, among others, (i) evaluating the reasonableness of management’s assessment of future taxable income and the deferred tax asset that could have a material effectis "more likely than not" to be realized, (ii) evaluating both positive and negative evidence to determine whether, based on the financial statements.
Becauseweight of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subjectthat evidence, and where the weight assigned to the risk that controls may become inadequate because of changes in conditions, or that the degree of complianceevidence is commensurate with the policies or procedures may deteriorate.
extent to which it could be objectively verified, a valuation allowance for deferred tax assets should be recorded, (iii) testing the completeness and accuracy of tax loss and tax credit carryforwards, (iv) evaluating the appropriateness of the realizability of net operating loss and tax credit carryforwards relevant to the deferred tax assets recognized, and (v) evaluating the completeness, accuracy and sufficiency of disclosures. |
| |
|
| /s/ PricewaterhouseCoopers LLP |
| London, United Kingdom |
February 21, 2019March 10, 2022 |
PricewaterhouseCoopers LLP (United Kingdom) hasWe have served as the Company’s auditor since 2017.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Avon Products, Inc.:
In our opinion, the consolidated statements of operations, comprehensive income, changes in shareholders’ equity (deficit) and cash flows or the period from January 1, 2016 to December 31, 2016 present fairly, in all material respects, the results of operations and cash flows of Avon Products Inc. and its subsidiaries for the period from January 1, 2016 to December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) for the year ended December 31, 2016 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
|
|
|
/s/ PricewaterhouseCoopers LLP |
New York, New York |
February 22, 2017 |
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
| | | | | | | | | | | | |
| (In millions, except per share data) | | | | | | |
| Years ended December 31 | | 2018 | | 2017 | | 2016 |
| Net sales | | $ | 5,247.7 |
| | $ | 5,565.1 |
| | $ | 5,578.8 |
|
| Other revenue | | 323.6 |
| | 150.5 |
| | 138.9 |
|
| Total revenue | | 5,571.3 |
| | 5,715.6 |
| | 5,717.7 |
|
| Costs, expenses and other: | | | | | | |
| Cost of sales | | 2,364.0 |
| | 2,203.3 |
| | 2,257.0 |
|
| Selling, general and administrative expenses | | 2,972.1 |
| | 3,231.0 |
| | 3,136.9 |
|
| Operating profit | | 235.2 |
| | 281.3 |
| | 323.8 |
|
| Interest expense | | 134.6 |
| | 140.8 |
| | 136.6 |
|
| Loss (gain) on extinguishment of debt | | 0.7 |
| | — |
| | (1.1 | ) |
| Interest income | | (15.3 | ) | | (14.8 | ) | | (15.8 | ) |
| Other expense, net | | 7.1 |
| | 34.6 |
| | 172.9 |
|
| Total other expenses | | 127.1 |
| | 160.6 |
| | 292.6 |
|
| Income from continuing operations, before taxes | | 108.1 |
| | 120.7 |
| | 31.2 |
|
| Income taxes | | (129.9 | ) | | (100.7 | ) | | (124.6 | ) |
| (Loss) income from continuing operations, net of tax | | (21.8 | ) | | 20.0 |
| | (93.4 | ) |
| Loss from discontinued operations, net of tax | | — |
| | — |
| | (14.0 | ) |
| Net (loss) income | | (21.8 | ) | | 20.0 |
| | (107.4 | ) |
| Net loss (income) attributable to noncontrolling interests | | 2.3 |
| | 2.0 |
| | (0.2 | ) |
| Net (loss) income attributable to Avon | | $ | (19.5 | ) | | $ | 22.0 |
| | $ | (107.6 | ) |
| Loss per share: | | | | | | |
| Basic from continuing operations | | $ | (0.10 | ) | | $ | 0.00 |
| | $ | (0.25 | ) |
| Basic from discontinued operations | | — |
| | — |
| | (0.03 | ) |
| Basic attributable to Avon | | (0.10 | ) | | 0.00 |
| | (0.29 | ) |
| Diluted from continuing operations | | $ | (0.10 | ) | | $ | 0.00 |
| | $ | (0.25 | ) |
| Diluted from discontinued operations | | — |
| | — |
| | (0.03 | ) |
| Diluted attributable to Avon | | (0.10 | ) | | 0.00 |
| | (0.29 | ) |
| Weighted-average shares outstanding: | | | | | | |
| Basic | | 441.9 | | 439.7 | | 437.0 |
| Diluted | | 441.9 | | 439.7 | | 437.0 |
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | | | | | |
| Years ended December 31 | | 2021 | | 2020 | | 2019 |
| Net sales | | $ | 3,202.9 | | | $ | 3,431.2 | | | $ | 4,494.1 | |
| Other revenue | | 176.4 | | | 187.3 | | | 269.1 | |
| Revenue from affiliates of Natura &Co | | 25.2 | | | 6.7 | | | — | |
| Total revenue | | 3,404.5 | | | 3,625.2 | | | 4,763.2 | |
| Costs, expenses and other: | | | | | | |
| Cost of sales | | (1,439.1) | | | (1,588.6) | | | (2,010.1) | |
| Cost of sales from affiliates of Natura &Co | | (22.4) | | | (5.9) | | | — | |
| Selling, general and administrative expenses (inclusive of provision for doubtful accounts of $62.4, $78.3, $115.4) | | (2,001.4) | | | (2,152.9) | | | (2,627.5) | |
| | | | | | |
| Operating (loss) profit | | (58.4) | | | (122.2) | | | 125.6 | |
| Interest expense | | (63.5) | | | (119.6) | | | (127.6) | |
| Interest expense on Loan from affiliates of Natura &Co | | (50.6) | | | (7.5) | | | — | |
| Loss on extinguishment of debt and credit facilities | | — | | | (37.7) | | | (11.6) | |
| Interest income | | 2.2 | | | 2.1 | | | 7.7 | |
| Other income (expense), net | | 1.6 | | | (20.2) | | | 94.2 | |
| Gain on sale of business | | 9.9 | | | 1.5 | | | 50.1 | |
| Total other (expenses) income | | (100.4) | | | (181.4) | | | 12.8 | |
| (Loss) Income from continuing operations, before taxes | | (158.8) | | | (303.6) | | | 138.4 | |
| Income taxes | | (16.2) | | | (34.0) | | | (103.1) | |
| Loss from continuing operations, net of tax | | (175.0) | | | (337.6) | | | 35.3 | |
| Loss from discontinued operations, net of tax | | (18.5) | | | (27.9) | | | (36.6) | |
| Net loss | | (193.5) | | | (365.5) | | | (1.3) | |
| Net loss attributable to noncontrolling interests | | 1.4 | | | 2.7 | | | 1.0 | |
| Net loss attributable to Avon | | $ | (192.1) | | | $ | (362.8) | | | $ | (.3) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
The accompanying notes are an integral part of these statements.
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (LOSS)
|
| | | | | | | | | | | | |
| (In millions) | | | | |
| Years ended December 31 | | 2018 | | 2017 | | 2016 |
| Net (loss) income | | $ | (21.8 | ) | | $ | 20.0 |
| | $ | (107.4 | ) |
| Other comprehensive income (loss): | |
| | | | |
| Foreign currency translation adjustments | | (48.7 | ) | | 19.8 |
| | 17.0 |
|
| Unrealized (losses) gains on revaluation of long-term intercompany balances, net of taxes of $0.0, $0.0 and $0.0 | | (58.1 | ) | | 62.2 |
| | 21.6 |
|
| Change in derivative gains on cash flow hedges, net of taxes of $0.0, $0.0 and $2.7 | | 0.5 |
| | — |
| | 1.3 |
|
| Amortization of net actuarial loss and prior service cost, net of taxes of $0.6, $0.8 and $10.9 | | 10.5 |
| | 15.6 |
| | 287.3 |
|
| Adjustments of net actuarial loss and prior service cost, net of taxes of $(1.1), $2.1 and $7.1 | | (8.6 | ) | | 8.9 |
| | 3.1 |
|
| Other comprehensive income related to New Avon investment, net of taxes of $0.0, $0.0 and $0.0 | | — |
| | 1.2 |
| | 2.2 |
|
| Total other comprehensive (loss) income, net of taxes | | (104.4 | ) | | 107.7 |
| | 332.5 |
|
| Comprehensive (loss) income | | (126.2 | ) | | 127.7 |
| | 225.1 |
|
| Less: comprehensive loss attributable to noncontrolling interests | | (2.6 | ) | | (1.5 | ) | | (2.1 | ) |
| Comprehensive (loss) income attributable to Avon | | $ | (123.6 | ) | | $ | 129.2 |
| | $ | 227.2 |
|
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | | | |
| Years ended December 31 | | 2021 | | 2020 | | 2019 |
| Net loss | | $ | (193.5) | | | $ | (365.5) | | | $ | (1.3) | |
| Other comprehensive loss: | | | | | | |
| Foreign currency translation adjustments | | (.9) | | | (162.9) | | | (.6) | |
| Unrealized (losses) gains on revaluation of long-term intercompany balances | | (21.3) | | | 67.6 | | | (5.7) | |
| Change in derivative gains (losses) on cash flow hedges | | — | | | .6 | | | (1.1) | |
| Amortization of net actuarial loss and prior service cost, net of taxes of $0.8, $0.8 and $0.4 | | 5.1 | | | 8.2 | | | 9.4 | |
| Adjustments of net actuarial loss and prior service cost, net of taxes of $3.2, $3.8 and $2.9 | | 67.3 | | | (7.1) | | | (8.0) | |
| Sale of New Avon | | — | | | — | | | (3.4) | |
| Total other comprehensive income (loss), net of taxes | | 50.2 | | | (93.6) | | | (9.4) | |
| Comprehensive loss | | (143.3) | | | (459.1) | | | (10.7) | |
| Less: comprehensive loss attributable to noncontrolling interests | | .5 | | | 2.5 | | | .9 | |
| Comprehensive loss attributable to Avon | | $ | (142.8) | | | $ | (456.6) | | | $ | (9.8) | |
The accompanying notes are an integral part of these statements.
AVON PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS | | | | | | | | | | | | | | |
| (In millions, except per share data and share numbers) | | | | |
| December 31 | | 2021 | | 2020 |
| Assets | | | | |
| Current Assets | | | | |
| Cash, including cash equivalents of $15.5 and $51.0 | | $ | 251.5 | | | $ | 364.9 | |
| Restricted cash | | — | | | 7.8 | |
| Accounts receivable (less allowances of $37.1 and $51.1) | | 198.7 | | | 259.1 | |
| Receivables from affiliates of Natura &Co | | 34.1 | | | 6.1 | |
| Loans to affiliates of Natura &Co | | 46.6 | | | — | |
| Inventories | | 384.1 | | | 459.1 | |
| Prepaid expenses and other | | 165.6 | | | 204.2 | |
| Held for sale assets | | 2.8 | | | 13.9 | |
| Total current assets | | 1,083.4 | | | 1,315.1 | |
| Property, plant and equipment, at cost | | | | |
| Land | | 18.5 | | | 20.8 | |
| Buildings and improvements | | 374.5 | | | 447.1 | |
| Equipment | | 549.5 | | | 680.6 | |
| | 942.5 | | | 1,148.5 | |
| Less accumulated depreciation | | (578.8) | | | (709.9) | |
| Property, plant and equipment, net | | 363.7 | | | 438.6 | |
| Right-of-use assets | | 111.1 | | | 153.1 | |
| Goodwill | | 72.1 | | | 83.2 | |
| Deferred tax asset | | 121.4 | | | 135.8 | |
| Loans to affiliates of Natura &Co | | 46.7 | | | — | |
| Other assets | | 509.4 | | | 438.5 | |
| | | | |
| Total assets | | $ | 2,307.8 | | | $ | 2,564.3 | |
| Liabilities and Shareholders’ Deficit | | | | |
| Current Liabilities | | | | |
| Debt maturing within one year | | $ | 32.6 | | | $ | 28.0 | |
| Loans from affiliates of Natura &Co | | 371.7 | | | 1,008.6 | |
| Accounts payable | | 522.8 | | | 709.4 | |
| | | | |
| Payables to affiliates of Natura &Co | | 29.4 | | | — | |
| Accrued compensation | | 81.5 | | | 89.4 | |
| Other accrued liabilities | | 273.4 | | | 334.7 | |
| Sales and taxes other than income | | 66.8 | | | 89.9 | |
| Income taxes | | 11.6 | | | 5.4 | |
| Current liabilities of discontinued operations | | 31.7 | | | 27.1 | |
| Liabilities held for sale | | — | | | 2.3 | |
| Total current liabilities | | 1,421.5 | | | 2,294.8 | |
| Long-term debt | | 676.0 | | | 675.4 | |
| Loans from affiliates of Natura &Co | | 736.3 | | | — | |
| Long-term operating lease liability | | 87.5 | | | 120.9 | |
| Employee benefit plans | | 84.6 | | | 133.3 | |
| Long-term income taxes | | 81.5 | | | 101.1 | |
| Other liabilities | | 75.1 | | | 106.0 | |
| | | | |
| Total liabilities | | 3,162.5 | | | 3,431.5 | |
| Leases and Commitments and contingencies (Notes 15 and 18) | | 0 | | 0 |
| | | | |
| Shareholders’ Deficit | | | | |
Common stock, par value $0.01 - authorized 1,000 shares; issued 101.34 (2020: par value $0.01 - authorized 1,000 shares; issued 101.34 shares)(1) | | — | | | — | |
| Additional paid-in capital | | 631.2 | | | 622.8 | |
| Retained earnings | | (404.2) | | | (360.5) | |
| Accumulated other comprehensive loss | | (1,085.5) | | | (1,133.8) | |
| | | | |
| Total Avon shareholders’ deficit | | (858.5) | | | (871.5) | |
| Noncontrolling interests | | 3.8 | | | 4.3 | |
| Total shareholders’ deficit | | (854.7) | | | (867.2) | |
| Total liabilities, series C convertible preferred stock and shareholders’ deficit | | $ | 2,307.8 | | | $ | 2,564.3 | |
|
| | | | | | | | |
| (In millions, except per share data) | | | | |
| December 31 | | 2018 | | 2017 |
| Assets | | | | |
| Current Assets | | | | |
| Cash, including cash equivalents of $36.2 and $116.7 | | $ | 532.7 |
| | $ | 881.5 |
|
| Accounts receivable (less allowances of $93.0 and $138.6) | | 349.7 |
| | 457.2 |
|
| Inventories | | 542.0 |
| | 598.2 |
|
| Prepaid expenses and other | | 272.0 |
| | 296.4 |
|
| Held for sale assets | | 65.6 |
| | — |
|
| Total current assets | | 1,762.0 |
| | 2,233.3 |
|
| Property, plant and equipment, at cost | | | | |
| Land | | 22.6 |
| | 31.3 |
|
| Buildings and improvements | | 502.9 |
| | 646.0 |
|
| Equipment | | 682.3 |
| | 804.6 |
|
| | | 1,207.8 |
| | 1,481.9 |
|
| Less accumulated depreciation | | (650.2 | ) | | (779.2 | ) |
| Property, plant and equipment, net | | 557.6 |
| | 702.7 |
|
| Goodwill | | 87.4 |
| | 95.7 |
|
| Other assets | | 603.0 |
| | 666.2 |
|
| Total assets | | $ | 3,010.0 |
| | $ | 3,697.9 |
|
| Liabilities and Shareholders’ Deficit | | | |
|
| Current Liabilities | | | | |
| Debt maturing within one year | | $ | 12.0 |
| | $ | 25.7 |
|
| Accounts payable | | 816.5 |
| | 832.2 |
|
| Accrued compensation | | 85.5 |
| | 130.3 |
|
| Other accrued liabilities | | 451.3 |
| | 405.6 |
|
| Sales and taxes other than income | | 103.9 |
| | 153.0 |
|
| Income taxes | | 15.9 |
| | 12.8 |
|
| Held for sale liabilities | | 11.4 |
| | — |
|
| Total current liabilities | | 1,496.5 |
| | 1,559.6 |
|
| Long-term debt | | 1,581.6 |
| | 1,872.2 |
|
| Employee benefit plans | | 128.3 |
| | 150.6 |
|
| Long-term sales taxes and taxes other than income | | — |
| | 193.1 |
|
| Long-term income taxes | | 136.2 |
| | 84.9 |
|
| Other liabilities | | 72.1 |
| | 84.4 |
|
| Total liabilities | | 3,414.7 |
| | 3,944.8 |
|
| Commitments and contingencies (Notes 16 and 19) | |
| |
|
| Series C convertible preferred stock | | 492.1 |
| | 467.8 |
|
| Shareholders’ Deficit | | | | |
| Common stock, par value $.25 - authorized 1,500 shares; issued 761.8 and 758.7 shares | | 190.3 |
| | 189.7 |
|
| Additional paid-in capital | | 2,303.6 |
| | 2,291.2 |
|
| Retained earnings | | 2,234.3 |
| | 2,320.3 |
|
| Accumulated other comprehensive loss | | (1,030.4 | ) | | (926.2 | ) |
| Treasury stock, at cost (319.4 and 318.4 shares) | | (4,602.3 | ) | | (4,600.0 | ) |
| Total Avon shareholders’ deficit | | (904.5 | ) | | (725.0 | ) |
| Noncontrolling interests | | 7.7 |
| | 10.3 |
|
| Total shareholders’ deficit | | (896.8 | ) | | (714.7 | ) |
| Total liabilities, series C convertible preferred stock and shareholders’ deficit | | $ | 3,010.0 |
| | $ | 3,697.9 |
|
F-6
`
(1) In January 2020, subsequent to the Transaction, the Company restated its certificate of incorporation to effect a change in capitalization of the Company by changing the number of authorized shares of stock from 1,525,000,000 shares (of which (i) 1,500,000,000 shares, par value $0.25 per share, were common stock and (ii) 25,000,000 shares, par value $1.00 per share, were preferred stock) to 1,000 shares of common stock, par value $0.01 per share. As a result of the Merger, all of the issued and outstanding common stock of the Company, being 550,890,788, were canceled and converted. See Note 21, Mergers with Natura Cosméticos S.A.,.
The accompanying notes are an integral part of these statements.
AVON PRODUCTS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | | | | | |
| Years ended December 31 | | 2021 | | 2020 | | 2019 |
| Cash Flows from Operating Activities | | | | | | |
| Net loss | | $ | (193.5) | | | $ | (365.5) | | | $ | (1.3) | |
| Loss from discontinued operations, net of tax | | (18.5) | | | (27.9) | | | (36.6) | |
| (Loss) income from continuing operations | | (175.0) | | | (337.6) | | | 35.3 | |
| Adjustments to reconcile net (loss) income from continuing operations to net cash (used) provided by operating activities: | | | | | | |
| Depreciation | | 50.4 | | | 57.3 | | | 68.1 | |
| Amortization | | 22.4 | | | 24.5 | | | 24.8 | |
| Provision for doubtful accounts | | 62.4 | | | 78.3 | | | 115.4 | |
| Provision for inventory obsolescence | | 26.8 | | | 37.9 | | | 37.1 | |
| Share-based compensation | | 6.9 | | | 26.4 | | | 15.6 | |
| Foreign exchange (gains) losses | | (5.2) | | | (5.1) | | | (51.5) | |
| Deferred income taxes | | (20.2) | | | (.4) | | | 37.5 | |
| Impairment loss on assets | | 1.0 | | | 3.1 | | | 17.7 | |
| Gain on sale of business / assets | | (9.9) | | | (1.5) | | | (50.1) | |
| Certain Brazil indirect taxes | | — | | | — | | | (118.3) | |
| Other | | 5.9 | | | 54.2 | | | 12.0 | |
| Changes in assets and liabilities: | | | | | | |
| Accounts receivable | | (60.1) | | | (81.5) | | | (55.2) | |
| Inventories | | (53.0) | | | (65.9) | | | 56.0 | |
| Prepaid expenses and other | | (14.9) | | | 1.2 | | | 25.7 | |
| Accounts payable and accrued liabilities | | (35.1) | | | (61.7) | | | (145.4) | |
| Income and other taxes | | (13.1) | | | 2.5 | | | 28.8 | |
| Noncurrent assets and liabilities | | (49.7) | | | (1.8) | | | 3.4 | |
| Net cash (used) provided by operating activities of continuing operations | | (260.4) | | | (270.1) | | | 56.9 | |
| Cash Flows from Investing Activities | | | | | | |
| Capital expenditures | | (68.3) | | | (44.6) | | | (58.5) | |
| Disposal of assets | | 3.3 | | | 2.6 | | | 7.8 | |
| Net proceeds from sale of business / assets | | 16.9 | | | 11.3 | | | 99.9 | |
| | | | | | |
| Cash receipts from the settlement of corporate-owned life insurance policies | | — | | | 9.9 | | | — | |
| Other investing activities | | — | | | .3 | | | 1.0 | |
| Net cash (used) provided by investing activities of continuing operations | | (48.1) | | | (20.5) | | | 50.2 | |
| Cash Flows from Financing Activities | | | | | | |
| Cash dividend | | — | | | (8.6) | | | — | |
| Debt, net (maturities of three months or less) | | (11.1) | | | 13.6 | | | (9.2) | |
| Proceeds from debt | | 297.0 | | | 1,039.7 | | | 400.0 | |
| Repayment of debt | | (68.5) | | | (956.9) | | | (388.2) | |
Repayment of debt to affiliates of Natura &Co(2) | | (38.0) | | | — | | | — | |
| Repayment of debt from affiliates of Natura &Co | | 58.7 | | | — | | | — | |
| Repurchase of common stock | | — | | | (.4) | | | (9.6) | |
| Net proceeds from exercise of stock options | | — | | | — | | | 15.6 | |
| Settlement of stock options | | — | | | (25.8) | | | — | |
| Settlement of derivative operations | | — | | | (.8) | | | 37.4 | |
| Costs associated with debt issue / repayment | | — | | | (21.7) | | | (26.8) | |
| Proceeds from monetization of COFINS tax credits | | (15.5) | | | — | | | 19.4 | |
| Other financing activities | | — | | | — | | | (.1) | |
Net cash provided by financing activities of continuing operations(2) | | 222.6 | | | 39.1 | | | 38.5 | |
| Cash Flows from Discontinued Operations | | | | | | |
| Net cash used by operating activities of discontinued operations | | (14.0) | | | (16.7) | | | (20.6) | |
| | | | | | |
| | | | | | |
| Net cash used by discontinued operations | | (14.0) | | | (16.7) | | | (20.6) | |
| Effect of exchange rate changes on cash and cash equivalents | | (22.0) | | | (19.5) | | | (.3) | |
| Net (decrease) increase in cash and cash equivalents and restricted cash | | (121.9) | | | (287.7) | | | 124.7 | |
|
| | | | | | | | | | | | |
| (In millions) | | | | | | |
| Years ended December 31 | | 2018 | | 2017 | | 2016 |
| Cash Flows from Operating Activities | | | | | | |
| Net (loss) income | | $ | (21.8 | ) | | $ | 20.0 |
| | $ | (107.4 | ) |
| Loss from discontinued operations, net of tax | | — |
| | — |
| | 14.0 |
|
| (Loss) income from continuing operations, net of tax | | (21.8 | ) | | 20.0 |
| | (93.4 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |
| | | | |
| Depreciation | | 81.1 |
| | 84.3 |
| | 83.3 |
|
| Amortization | | 26.6 |
| | 29.7 |
| | 30.6 |
|
| Provision for doubtful accounts | | 162.4 |
| | 221.9 |
| | 190.5 |
|
| Provision for obsolescence | | 113.5 |
| | 36.7 |
| | 36.5 |
|
| Share-based compensation | | 13.8 |
| | 24.2 |
| | 24.0 |
|
| Foreign exchange losses | | 21.2 |
| | 18.1 |
| | 6.1 |
|
| Deferred income taxes | | (49.0 | ) | | (30.2 | ) | | (8.5 | ) |
| Charge for Argentinian monetary assets and liabilities | | (6.3 | ) | | — |
| | — |
|
| Brazil IPI release | | (194.7 | ) | | — |
| | — |
|
| Loss on deconsolidation of Venezuela | | — |
| | — |
| | 120.5 |
|
| Other | | 18.5 |
| | 39.6 |
| | (3.3 | ) |
| Changes in assets and liabilities: | |
| | | | |
| Accounts receivable | | (102.8 | ) | | (214.6 | ) | | (216.6 | ) |
| Inventories | | (99.6 | ) | | (19.2 | ) | | (28.6 | ) |
| Prepaid expenses and other | | (49.3 | ) | | 14.8 |
| | 16.8 |
|
| Accounts payable and accrued liabilities | | 73.1 |
| | 12.3 |
| | (17.6 | ) |
| Income and other taxes | | 63.2 |
| | 4.1 |
| | (4.7 | ) |
| Noncurrent assets and liabilities | | 42.8 |
| | 29.5 |
| | (7.6 | ) |
| Net cash provided by operating activities of continuing operations | | 92.7 |
| | 271.2 |
| | 128.0 |
|
| Cash Flows from Investing Activities | |
| | | | |
| Capital expenditures | | (94.9 | ) | | (97.3 | ) | | (93.0 | ) |
| Disposal of assets | | 4.8 |
| | 5.9 |
| | 13.3 |
|
| Distribution from New Avon LLC | | — |
| | 22.0 |
| | — |
|
| Reduction of cash due to Venezuela deconsolidation | | — |
| | — |
| | (4.5 | ) |
| Other investing activities | | (3.3 | ) | | (.2 | ) | | 1.5 |
|
| Net cash used by investing activities of continuing operations | | (93.4 | ) | | (69.6 | ) | | (82.7 | ) |
| Cash Flows from Financing Activities | |
| | | | |
| Debt, net (maturities of three months or less) | | (10.7 | ) | | 10.3 |
| | (36.4 | ) |
| Proceeds from debt | | — |
| | — |
| | 508.7 |
|
| Repayment of debt | | (289.1 | ) | | (2.9 | ) | | (733.0 | ) |
| Repurchase of common stock | | (3.2 | ) | | (7.2 | ) | | (5.6 | ) |
| Net proceeds from the sale of series C convertible preferred stock | | — |
| | — |
| | 426.3 |
|
| Other financing activities | | (3.9 | ) | | (.2 | ) | | (23.0 | ) |
| Net cash (used) provided by financing activities of continuing operations | | (306.9 | ) | | — |
| | 137.0 |
|
| Cash Flows from Discontinued Operations | |
| | | | |
| Net cash (used) provided by operating activities of discontinued operations | | — |
| | (8.6 | ) | | (67.6 | ) |
| Net cash used by investing activities of discontinued operations | | — |
| | — |
| | (94.6 | ) |
| Net cash (used) provided by discontinued operations | | — |
| | (8.6 | ) | | (162.2 | ) |
| Effect of exchange rate changes on cash and cash equivalents | | (37.5 | ) | | 34.1 |
| | (50.4 | ) |
| Net (decrease) increase in cash and cash equivalents | | (345.1 | ) | | 227.1 |
| | (30.3 | ) |
Cash and cash equivalents at beginning of year(1) | | 881.5 |
| | 654.4 |
| | 684.7 |
|
Cash and cash equivalents at end of year(2) | | $ | 536.4 |
| | $ | 881.5 |
| | $ | 654.4 |
|
| Cash paid for: | | | | | | |
| Interest | | $ | 139.0 |
| | $ | 141.7 |
| | $ | 142.8 |
|
| Income taxes, net of refunds received | | $ | 87.4 |
| | $ | 132.2 |
| | $ | 143.3 |
|
| | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents and restricted cash at beginning of year(1) | | 373.4 | | | 661.1 | | | 536.4 | |
Cash and cash equivalents and restricted cash at end of year(1) | | $ | 251.5 | | | $ | 373.4 | | | $ | 661.1 | |
| Cash paid for: | | | | | | |
| Interest | | $ | 50.1 | | | $ | 133.5 | | | $ | 122.0 | |
| Income taxes, net of refunds received | | $ | 37.0 | | | $ | 21.3 | | | $ | 55.9 | |
| |
(1) | Includes cash and cash equivalents of discontinued operations of $(2.2) at the beginning of the year in 2016 |
| |
(2) | Includes cash and cash equivalents of $3.7 classified as Held for sale assets in our Consolidated Balance Sheets at the end of the year in 2018 |
(1)The accompanying notes are an integral partfollowing table provides a reconciliation of these statements.
cash, cash equivalents, restricted cash, and cash held for sale 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 years ended December 31, 2021, 2020 and 2019.
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 | | December 31, 2019 |
| Cash and cash equivalents | | $ | 251.5 | | | $ | 364.9 | | | $ | 650.6 | |
| Restricted cash | | — | | | 7.8 | | | 2.9 | |
| Long-term restricted cash | | — | | | — | | | 7.6 | |
| Held for sale cash and cash equivalents | | — | | | .7 | | | — | |
| Cash and cash equivalents, and restricted cash at end of period per the statement of cash flows | | $ | 251.5 | | | $ | 373.4 | | | $ | 661.1 | |
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (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, 2015 | | 751.4 |
| | $ | 187.9 |
| | $ | 2,254.0 |
| | $ | 2,448.1 |
| | $ | (1,366.2 | ) | | 315.9 |
| | $ | (4,594.1 | ) | | $ | 13.9 |
| | $ | (1,056.4 | ) |
| Net (loss) income | | — |
| | — |
| | — |
| | (107.6 | ) | | — |
| | — |
| | — |
| | 0.2 |
| | (107.4 | ) |
| Other comprehensive income (loss) | | — |
| | — |
| | — |
| | — |
| | 333.0 |
| | — |
| | | | (0.5 | ) | | 332.5 |
|
| Dividends accrued - Series C convertible preferred stock | | — |
| | — |
| | — |
| | (18.3 | ) | | — |
| | — |
| | — |
| | — |
| | (18.3 | ) |
| Exercise/ vesting/ expense of share-based compensation | | 3.5 |
| | 0.9 |
| | 22.3 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 23.2 |
|
| Repurchase of common stock | | — |
| | — |
| | — |
| | — |
| | — |
| | 1.4 |
| | (5.6 | ) | | — |
| | (5.6 | ) |
| Purchases and sales of noncontrolling interests, net of dividends paid of $1.8 | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1.8 | ) | | (1.8 | ) |
| Income tax expense – stock transactions | | — |
| | — |
| | (2.4 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (2.4 | ) |
| Balances at December 31, 2016 | | 754.9 |
| | $ | 188.8 |
| | $ | 2,273.9 |
| | $ | 2,322.2 |
| | $ | (1,033.2 | ) | | 317.3 | | $ | (4,599.7 | ) | | $ | 11.8 |
| | $ | (836.2 | ) |
| Net income | | — |
| | — |
| | — |
| | 22.0 |
| | | | — |
| | — |
| | (2.0 | ) | | 20.0 |
|
| Other comprehensive income | | — |
| | — |
| | — |
| | | | 107.0 |
| | — |
| | — |
| | 0.7 |
| | 107.7 |
|
| Dividends accrued - Series C convertible preferred stock | | — |
| | — |
| | — |
| | (23.1 | ) | | — |
| | — |
| | — |
| | — |
| | (23.1 | ) |
| Exercise/ vesting/ expense of share-based compensation | | 3.8 |
| | 1.0 |
| | 17.3 |
| | (0.8 | ) | | — |
| | (0.5 | ) | | 6.8 |
| | — |
| | 24.3 |
|
| Repurchase of common stock | | — |
| | (0.1 | ) | | — |
| | — |
| | — |
| | 1.6 |
| | (7.1 | ) | | — |
| | (7.2 | ) |
| Purchases and sales of noncontrolling interests, net of dividends paid of $0.2 | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (0.2 | ) | | (0.2 | ) |
| 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 | | — |
| | — |
| | — |
| | (19.5 | ) | | — |
| | — |
| | — |
| | (2.3 | ) | | (21.8 | ) |
| Revenue Recognition Cumulative catch up | | — |
| | — |
| | — |
| | (41.1 | ) | | — |
| | — |
| | — |
| | — |
| | 41.1 |
|
| Other comprehensive income | | — |
| | — |
| | — |
| |
| | (104.2 | ) | | — |
| | — |
| | (0.2 | ) | | (104.4 | ) |
| Dividends accrued - Series C convertible preferred stock | | — |
| | — |
| | — |
| | (24.3 | ) | | — |
| | — |
| | — |
| | — |
| | (24.3 | ) |
| Exercise/ vesting/ expense of share-based compensation | | 3.1 |
| | 0.7 |
| | 12.4 |
| | (1.1 | ) | | — |
| | (0.1 | ) | | 0.8 |
| | — |
| | 12.8 |
|
| Repurchase of common stock | | — |
| | (0.1 | ) | | — |
| | — |
| | — |
| | 1.1 |
| | (3.1 | ) | | — |
| | (3.2 | ) |
| Purchases and sales of noncontrolling interests, net of dividends paid of $0.1 | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (0.1 | ) | | (0.1 | ) |
| 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 | ) |
The accompanying notes are an integral part of these statements.
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (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) income | | — | | | — | | | — | | | (.3) | | | — | | | — | | | — | | | (1.0) | | | (1.3) | |
| Other comprehensive income (loss) | | — | | | — | | | — | | | — | | | (9.6) | | | — | | | — | | .2 | | | (9.4) | |
| Dividends accrued - Series C convertible preferred stock | | — | | | — | | | — | | | (25.5) | | | — | | | — | | | — | | | — | | | (25.5) | |
| Dividends accrued- common stock | | — | | | — | | | — | | | (8.7) | | | — | | | — | | | — | | | — | | | (8.7) | |
| Exercise/ vesting/ expense of share-based compensation | | 9.9 | | | 2.6 | | | 25.9 | | | — | | | — | | | — | | | — | | | — | | | 28.5 | |
| Repurchase of common stock | | (1.7) | | | (.3) | | | (8.3) | | | — | | | — | | | .5 | | | (1.0) | | | — | | | (9.6) | |
| Remeasurement of Series C convertible preferred stock | | — | | | — | | | — | | | (60.9) | | | — | | | — | | | — | | | — | | | (60.9) | |
| Purchases and sales of noncontrolling interests, net of dividends paid of $0.1 | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (.1) | | | (.1) | |
| Balances at December 31, 2019 | | 770.0 | | | 192.6 | | | 2,321.2 | | | 2,138.9 | | | (1,040.0) | | | 319.9 | | | (4,603.3) | | | 6.8 | | | (983.8) | |
| Credit Losses cumulative catch up | | — | | | — | | | — | | | (2.0) | | | — | | | — | | | — | | | — | | | (2.0) | |
| Gain on common control transaction | | — | | | — | | | — | | | 1.4 | | | — | | | — | | | — | | | — | | | 1.4 | |
Capitalization of payable(1) | | — | | | — | | | 91.5 | | | — | | | — | | | — | | | — | | | — | | | 91.5 | |
| Net income | | — | | | — | | | — | | | (362.8) | | | — | | | — | | | — | | | (2.7) | | | (365.5) | |
| Other comprehensive income | | — | | | — | | | — | | | — | | | (93.8) | | | — | | | — | | | .2 | | | (93.6) | |
Conversion of Series C convertible preferred stock(2) | | — | | | — | | | — | | | (710.8) | | | — | | | (87.0) | | | 1,197.6 | | | — | | | 486.8 | |
| Exercise/ vesting/ expense of share-based compensation | | — | | | (.2) | | | (1.8) | | | — | | | — | | | — | | | — | | | — | | | (2.0) | |
Exchange of common stock (3) | | (770.0) | | | (192.4) | | | (1,788.1) | | | (1,425.2) | | | — | | | (232.9) | | | 3,405.7 | | | — | | | — | |
| | | | | | | | | | | | | | | | | | |
Balances at December 31, 2020(4) | | — | | | — | | | 622.8 | | | (360.5) | | | (1,133.8) | | | — | | | — | | | 4.3 | | | (867.2) | |
Sale of Avon Luxembourg(5) | | — | | | — | | | — | | | 148.4 | | | — | | | — | | | — | | | — | | | 148.4 | |
| Net loss | | — | | | — | | | — | | | (192.1) | | | — | | | — | | | — | | | (1.4) | | | (193.5) | |
| Other comprehensive income | | — | | | — | | | — | | | — | | | 48.3 | | | — | | | — | | | 1.9 | | | 50.2 | |
| Exercise/ vesting/ expense of share-based compensation | | — | | | — | | | 8.4 | | | — | | | — | | | — | | | — | | | — | | | 8.4 | |
| Purchases and sales of noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1.0) | | | (1.0) | |
Balances at December 31, 2021(4) | | — | | | — | | | 631.2 | | | (404.2) | | | (1,085.5) | | | — | | | — | | | 3.8 | | | (854.7) | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these statements.
(1) In January 2020 Natura &Co Holding paid the accrued dividends on the shares of series C preferred stock in an amount equal to U.S. $91.5 to Cerberus, resulting in a payable due to an affiliate of Natura &Co Holding for the same amount. See Note 17, Series C Convertible Preferred Stock, for discussion of preferred shares issued to Cleveland Apple Investor L.P. (“Cerberus Investor”). During 2020, the payable due to Natura &Co was capitalized and recorded as a capital contribution through Additional Paid in Capital.
(2) On December 30, 2019, an affiliate of Cerberus Capital Management, L.P. ("Cerberus") elected to convert 435,000 shares of Series C Preferred Stock into 87,000,000 shares of the Company’s common stock, par value U.S.$0.25 per share, conditioned on the Conversion Condition (as defined below). See Note 17, Series C Convertible Preferred Stock.
(3) In January 2020, subsequent to the Transaction, the Company restated its certificate of incorporation to effect a change in capitalization of the Company by changing the number of authorized shares of stock from 1,525,000,000 shares (of which (i) 1,500,000,000 shares, par value $0.25 per share, were common stock and (ii) 25,000,000 shares, par value $1.00 per share, were preferred stock) to 1,000 shares of common stock, par value $0.01 per share. As a result of the Merger, all of the issued and outstanding common stock of the Company, being 550,890,788, were canceled and converted. See Note 21, Mergers with Natura Cosméticos S.A.,.
(4) The number of shares of Common Stock (par value $0.01 per share) outstanding at December 31, 2021 and 2020 was 101.34.
(5) On July 1, 2021, the Company sold Avon Luxembourg Holdings S.à r.l. and its subsidiaries ("Avon Luxembourg"), including our Mexican business, to a subsidiary of Natura &Co Holding S.A. for $150. The sale was accounted for as a transaction under common control in accordance with ASC805 - Business Combinations, with the resulting gain of $148, representing the difference between the proceeds, the net assets of Avon Luxembourg on the date of sale, and the cumulative foreign currency translation adjustment, taken directly to Retained Earnings.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share and share data)
NOTE 1. Description of the Business and Summary of Significant Accounting Policies
Business
When used in these notes, the terms "Avon," "Company," "we," "our" or "us" mean Avon Products, Inc.
We are a global manufacturer and marketer of beauty and related products. Our business is conducted primarily in one1 channel, direct selling. Our reportable segments are based on geographic operations in four2 regions: Europe, Middle East & Africa; SouthAvon International and Avon Latin America; North Latin America; and Asia Pacific.America. Our product categories are Beauty and Fashion & Home. Beauty consists of skincare, fragrance and color (cosmetics). Fashion & Home consists of fashion jewelry, watches, apparel, footwear, accessories, gift and decorative products, housewares, entertainment and leisure products, children’s products and nutritional products. Sales are made to the ultimate consumer principally by independent Representatives.
In December 2015, we entered into definitive agreements with affiliates of Cerberus Capital Management L.P. ("Cerberus"), which included a $435 investment in Avon by an affiliate of Cerberus through the purchase of our convertible preferred stock and the separation of the North America business (including approximately $100 of cash, subject to certain adjustments) from Avon into New Avon LLC ("New Avon"), a privately-held company that is majority-owned and managed by an affiliate of Cerberus. These transactions closed in March 2016 and Avon retained approximately 20% ownership in New Avon. In April 2019, Avon and Cerberus signed an agreement with LG Household & Health Care Ltd. for the sale of New Avon, including our 20% ownership interest. This transaction closed on August 14, 2019. See Note 3, Discontinued Operations and Assets and Liabilities Held for Sale, for additional information. The North American business, which represented the Company's operations in the United States ("U.S."), Canada and Puerto Rico, was previously its own reportable segment and has been presented as discontinued operations for all periods. Refer to Note 3, Discontinued Operations and Assets and Liabilities Held for Sale for additional information regarding the investment by an affiliate of Cerberus and the separation of the North America business. As a result of this transaction, all of our consolidated revenue is derived from operations of subsidiaries outside of the U.S.
On May 22, 2019, we entered into an Agreement and Plan of Mergers 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"), and two subsidiaries of Natura &Co Holding ("Natura &Co") pursuant to which, in a series of transactions, Avon and Natura Cosméticos became direct wholly owned subsidiaries of Natura &Co (the "Transaction"). On January 3, 2020, the Company consummated the Transaction and became a fully owned subsidiary of Natura &Co Holding. In connection with the consummation of the Transaction, the Company notified the NYSE that trading of their stock should be suspended, the Company's common stock was subsequently delisted and deregistered. The Company files these financial statements with the SEC, as a voluntary filer, to comply with the terms of certain debt instruments. For additional information, see Note 21, Agreement and Plan of Mergers with Natura Cosméticos S.A.,.
In December 2019, the Company declared a dividend of $0.016 per share equating to $9, this dividend was subsequently paid in January 2020 by the Company.
Principles of Consolidation
The consolidated financial statements include the accounts of Avon and our majority and wholly-owned subsidiaries. Intercompany balances and transactions are eliminated.
Basis of Presentation and Use of Estimates
We prepare our consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America, or GAAP. In preparing these statements, we are required to use estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates and assumptions. On an ongoing basis, we review our estimates, including those related to stand-alone selling prices ("SSP") of promised goods or services delivered under sales incentives, allowances for sales returns, allowances for doubtful accounts receivable, provisions for inventory obsolescence, the determination of discount rates and other actuarial assumptions for pension and postretirement benefit expenses, restructuring expense, income taxes and tax valuation allowances, share-based compensation, loss contingencies and the evaluation of goodwill, property, plant and equipment and capitalized software for potential impairment.
Sale of Avon Luxembourg Holdings S.à r.l
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On July 1, 2021, the Company sold Avon Luxembourg, including our Mexican business, to a subsidiary of Natura &Co Holding for $150, with the proceeds used to repay maturing loans of $150 borrowed under the $250 Revolving Credit Facility with a subsidiary of Natura &Co Holding.
The sale was accounted for as a transaction under common control in accordance with ASC805 - Business Combinations, with the resulting gain of $148, representing the difference between the proceeds, the net assets of Avon Luxembourg on the date of sale, and the cumulative foreign currency translation adjustment, taken directly to Retained Earnings. Under the terms of the transaction and the associated Direction and Settlement Agreement, no cash flows in either investing or financing activities arose as a result of the transaction and it has been treated as a non cash flow item in the Consolidated Statements of Cash Flows. For additional information, see the Consolidated Statements of Changes in Shareholders' Deficit and the Consolidated Statements of Cash Flows.
Reclassifications
During the third quarter of 2020, we identified an immaterial classification error in the Consolidated Statement of Cash Flows relating to the year ended December 31, 2019 with respect to cash flows from the settlement of derivative contracts. Our accounting policy is to classify derivative cash flows as operating, investing or financing consistent with the nature of the underlying hedged item. However, we have identified that cash flows relating to derivative contracts that economically hedge foreign exchange gains and losses on intercompany loans have been incorrectly classified as operating activities rather than financing activities. We have corrected this reclassification error through a revision to the Consolidated Statement of Cash Flows for the year ended December 31, 2019 to reclassify cash inflows of $37.4 from the settlement of derivative contracts from operating activities to financing activities.
COVID-19 pandemic
A novel strain of coronavirus (COVID-19) was first identified in Wuhan, China in December 2019, and subsequently declared a pandemic by the World Health Organization. Due to the uncertain and rapidly evolving nature of current conditions around the world, the impacts of COVID-19 most of which are beyond the Company’s control, continue to evolve, and the outcome is uncertain. We are therefore unable to predict accurately the impact that COVID-19 will have on our business going forward.
In 2020, the most significant impact of the COVID-19 pandemic was felt during the second quarter of 2020, as many markets were subject to lockdown restrictions to varying degrees, which limited our ability to recruit and enroll Representatives, operate manufacturing facilities and distribution centers and to process and deliver orders. The pandemic primarily resulted in reduced revenue, which in turn impacted profitability and cash generation. The third quarter of 2020 showed signs of recovery in most markets. The fourth quarter of 2020 has again been impacted by the new lockdown measures imposed in parts of Europe, although not to the extent felt during the second quarter of 2020 as we were able to continue normal operations in our manufacturing facilities and distribution centers.
In 2021, the economic disruption caused by the COVID-19 pandemic has resulted in inflationary pressures on the cost of certain raw materials used in the production of essential items due to the increased demand for these inputs worldwide. These inflationary pressures have been compounded by disruptions in global supply chains and climate events that hit electricity generation globally, among others. Moreover, novel strains and variants of COVID-19 emerged in 2021, and the rollout of vaccination programs worldwide have compromised the ability of certain countries to effectively contain the spread and the toll of the virus.
We continue to monitor the evolution of the Covid-19 pandemic in the markets in which we operate, especially with regard to restrictive measures adopted by these jurisdictions. We continuously analyze the situation and act to minimize impacts on the operations and on the equity and financial position of the Company, with the objective of implementing appropriate measures, ensuring the continuity of operations, hedge cash, improve liquidity and promote the health and safety of all.
In view of this scenario, we review the recoverability expectations of our financial and non-financial assets in the preparation of these financial statements, considering the most recent information available and reflected in the Company’s business plans. In addition, we also consider possible effects on the financial statements including revenues and the continued transition to the digital environment, allowances for doubtful accounts receivable, impairment of non-financial assets, leases, liquidity and capital resources and going concern (see below).
As of the date of this report, we are unable to estimate the long-term economic impact arising from efforts to curb the spread of the COVID-19 virus and the expected reduction in activity on our business, results of operations and financial condition. We will continue to review our revenue, investments, expenses and cash outflows, as well as adjusting our relationships with suppliers. Furthermore, the actions outlined above are continuously being re-evaluated in light of global developments relating to COVID-19.
Going concern
Considering the uncertain nature of any possible future COVID-19 impacts which are beyond the Company’s control and the ongoing military conflicts between Russia and Ukraine, we expect some negative impact on revenue in 2022, which will, in
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
turn, result in lower cash generation from activities. If the downturn is deeper or for longer than we anticipate, the Company could take certain further actions to ease the pressure of certain cash outflows, such as reducing discretionary expenditure, selling non-core assets, accessing government pandemic initiatives or arranging borrowing facilities with third-party banks and affiliate companies.
The Company has received an irrevocable commitment from Natura &Co Holding that it will provide sufficient financial support if and when needed to enable the Company to meet its obligations as they come due in the normal course of business for a period of not less than 12 months from the date issuance of the Consolidated Financial Statements. This includes the obligations related to the $461m 5.00% Notes, which are due to be repaid in March 2023. See Note 7, Debt and Other Financing, and Note 15, Leases and Commitments, respectively, for information on our debt and contractual financial obligations and commitments, including the loans from Natura &Co and its affiliates maturing within 1 year.
Foreign Currency
Financial statements of foreign subsidiaries operating in other than highly inflationary economies are translated at year-end exchange rates for assets and liabilities and average exchange rates during the year for income and expense accounts. The resulting translation adjustments are recorded within accumulated other comprehensive income (loss) ("AOCI"). Gains or losses resulting from the impact of changes in foreign currency rates on assets and liabilities denominated in a currency other than the functional currency are recorded in other expense, net.
For financial statements of Avon subsidiaries operating in highly inflationary economies, the U.S. dollar is required to be used as the functional currency. At December 31, 2018, only our Argentinian subsidiary is considered to be operating in a highly inflationary economy. Highly inflationary accounting requires monetary assets and liabilities, such as cash, receivables and payables, to be remeasured into U.S. dollars at the current exchange rate at the end of each period with the impact of any changes in exchange rates being recorded in income. We record the impact of changes in exchange rates on monetary assets and liabilities in other expense, net. Similarly, deferred tax assets and liabilities are remeasured into U.S. dollars at the current exchange rates; however, the impact of changes in exchange rates is recorded in income taxes in our Consolidated Statements of Operations. Non-monetary assets and liabilities, such as inventory, property, plant and equipment and prepaid expenses are recorded in U.S. dollarscarried forward at their historical dollar cost, which was calculated using the exchange rate at the historical rates at the time of acquisition of such assets or liabilities.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
date which hyperinflationary accounting is implemented.
Argentina Currency
During the quarter ended June 30, 2018, based on published official exchange rates which indicate that Argentina's three-year cumulative inflation rate has exceeded 100%, we concluded that Argentina had become a highly inflationary economy. From July 1, 2018, we have applied highly inflationary accounting for our Argentinian subsidiary. As such, the functional currency for Argentina has changed to the U.S. dollar, which is the consolidated group's reporting currency. When an entity operates in a highly inflationary economy, exchange gains and losses associated with monetary assets and liabilities resulting from changes in the exchange rate are recorded in income. Nonmonetary assets and liabilities, which include inventories, property, plant and equipment and contract liabilities, are carried forward at their historical dollar cost, which was calculated using the exchange rate at June 30, 2018.
As a result of highly inflationary accounting for our Argentinian subsidiary, the devaluation of the Argentinian peso of approximately 25% from June 30, 2018 to December 31, 2018, operating profit was negatively impacted by approximately $8, largely in cost of salesmost significant impacts in our Consolidated Income Statements are in cost of sales, primarily due to inventory being accounted for at its historical dollar cost. During the six months ended December 31, 2018, we also recorded a benefit during the period of approximately $6cost, and in other expense,(expense) income, net, primarily associated with the net monetary liability position of Argentina, and an approximate $2 positive impact on income taxes, both inArgentina. However, these impacts are not considered material to our Consolidated Income Statements. As of December 31, 2018, the net Argentine peso-denominated monetary liability position of Argentina was $33 and the net Argentine peso-denominated non-monetary asset position was $50, primarily consisting of inventory balances of $32.
Venezuela Currency
Currency restrictions enacted by the Venezuelan government since 2003 have impacted the ability of Avon Venezuela to obtain foreign currency to pay for imported products. In 2010, we began accounting for our operations in Venezuela under accounting guidance associated with highly inflationary economies.
Venezuela's restrictive foreign exchange control regulations and our Venezuelan operations' increasingly limited access to U.S. dollars resulted in lack of exchangeability between the Venezuelan bolivar and the U.S. dollar, and restricted our Venezuelan operations' ability to pay dividends and settle intercompany obligations. The severe currency controls imposed by the Venezuelan government significantly limited our ability to realize the benefits from earnings of our Venezuelan operations and access the resulting liquidity provided by those earnings. We expected that this lack of exchangeability would continue for the foreseeable future, and as a result, we concluded that, effective March 31, 2016, this condition was other-than-temporary and we no longer met the accounting criteria of control in order to continue consolidating our Venezuelan operations. As a result, since March 31, 2016, we have accounted for our Venezuelan operations using the cost method of accounting.
As a result of the change to the cost method of accounting, in the first quarter of 2016, we recorded a loss of $120.5 in other expense, net. The loss was comprised of $39.2 in net assets of the Venezuelan business and $81.3 in accumulated foreign currency translation adjustments within AOCI (shareholders' deficit) associated with foreign currency changes before Venezuela was accounted for as a highly inflationary economy. The net assets of the Venezuelan business were comprised of inventories of $23.7, property, plant and equipment, net of $15.0, other assets of $11.4, accounts receivable of $4.6, cash of $4.5, and accounts payable and accrued liabilities of $20.0. Our Consolidated Balance Sheets no longer include the assets and liabilities of our Venezuelan operations. We no longer include the results of our Venezuelan operations in our Consolidated Financial Statements, and will include income relating to our Venezuelan operations only to the extent that we receive cash for dividends or royalties remitted by Avon Venezuela.
Revenue Recognition
Nature of goods and services
We are a global manufacturer and marketer of beauty and related products. Our product categories are Beauty and Fashion & Home. Beauty consists of skincare, fragrance and color (cosmetics). Fashion & Home consists of fashion jewelry, watches, apparel, footwear, accessories, gift and decorative products, housewares, entertainment and leisure products, children’s products and nutritional products.
Our business is conducted primarily in one channel, - direct selling. Our reportable segments are based on geographic operations in four2 regions: Europe, Middle East & Africa; SouthAvon International and Avon Latin America; North Latin America; and Asia Pacific.America. We primarily sell our products to the ultimate consumer through the direct selling channel principally through Representatives, who are independent contractors and not our employees.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenue recognition
Revenue is recognized when control of a product or service is transferred to a customer, which is generally the Representative. Revenue is measured based on the consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties, such as Value Added Taxes (“VAT”("VAT") collected for taxing authorities.
Principal revenue streams and significant judgments
Our principal revenue streams can be distinguished into: i) the sale of Beauty and Fashion & Home products to Representatives (recorded in net sales); ii) Representative fees, primarily for the sale of brochures to Representatives and fulfillment activities related to the contract, which include fees for shipping and handling (recorded in other revenue); and iii) other, which includes
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the sale of products to New Avon LLC ("New Avon") and royalties from the licensing of our name and products (recorded in other revenue).
i) Sale of Beauty and Fashion & Home products to Representatives
We generate the majority of our revenue through the sale of Beauty and Fashion & Home products. A Representative contacts her customers directly, selling primarily through our brochure (whether paper or online), which highlights new products and special promotions (or incentives) for each sales campaign. In this sense, the Representative, together with the brochure, are the "store" through which our products are sold. A brochure introducing a new sales campaign is typically generated every three to four weeks. A purchase order is processed, and the products are picked at a distribution center and delivered to the Representative usually through a combination of local and national delivery companies. Generally, the Representative then delivers the merchandise and collects payment from the customer for her or his own account. A Representative generally receives a refund of the price the Representative paid for a product if the Representative chooses to return it.
A Representative Agreement, which outlines the basic terms of the agreement between Avon and the Representative, combined with a purchase order, constitutes a contract for the purposes of Accounting Standards Codification Topic (“ASC”("ASC"), Revenue from Contracts with Customers ("ASC 606").
Revenue from Contracts with Customers
We account for individual products and services separately in the contract if they are distinct (i.e., if a product or service is separately identifiable from the other items in the contract and if a Representative can benefit from the product or service on its own or with other resources that are readily available), which is recognized at a point in time, when control of a product is transferred to a Representative. In addition, we offer incentives to Representatives to support sales growth. Certain of these sales incentives are distinct promises to a Representative, and therefore are a separate performance obligation. As a result, revenue is allocated to the performance obligation for sales incentives and is deferred on the balance sheet until the associated performance obligations are satisfied.
Typically included within a contract is variable consideration, such as sales returns and late payment fees. Revenue is only recorded to the extent it is probable that it will not be reversed, and therefore revenue is adjusted for variable consideration. Variable consideration is generally estimated using the expected value method, which considers possible outcomes weighted by their probability. Specifically for sales returns, a refund liability will be recorded for the estimated cash to be refunded for the products expected to be returned, and a returns asset will be recorded for the products which we expect to be returned and re-sold, each of these based on historical experience. The estimate of sales returns as well as the measurement of the returns asset and the refund liability is updated at the end of each month for changes in expectations regarding the amount of salvageable returns, reconditioning costs and any additional decreases in the value of the returned products. Late payment fees are recorded when the uncertainty associated with collecting such fees are resolved (i.e., when collected).
The Representative generally receives a credit period of one sales campaign if they meet certain criteria; however, the specific credit terms are outlined in the Representative Agreement. Generally, the Representative remits payment during each sales campaign, which relates to the prior campaign cycle. The Representative is generally precluded from submitting an order for the current sales campaign until the accounts receivable balance past due for prior campaigns is paid; however, there are circumstances where the Representative fails to make the required payment.
Our contracts with Representatives often include multiple promises to transfer products and/or services to the Representative, and determining which of these products and/or services are considered distinct performance obligations that should be accounted for separately. In addition, in assessing the recognition of revenue for the following performance obligations, management has exercised significant judgment in the following areas: estimation of variable consideration and the SSPstand-alone selling prices ("SSP") of promised goods or services in order to determine and allocate the transaction price.
Performance obligation - Avon products and appointment kits
The Representative purchases Avon products and appointment kits through a purchase order. Avon offers appointment kits for purchase to Representatives, which may contain various Avon products. We recognize revenue for Avon products and appointment kits in net sales in our Consolidated Statements of Operations when the Representative obtains control of the
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products, which occurs upon delivery of the product to the Representative. Transaction price is the amount we expect to receive in exchange for those products adjusted for variable consideration as discussed above and the estimated SSP of other performance obligations as discussed below. The cost of these products and appointment kits is recognized in cost of sales in our Consolidated Statements of Operations.
Performance obligation - Sales incentives
Types of sales incentives include status programs, loyalty points, prospective discounts, and gift with purchase, among others. A Representative is eligible for certain status programs if specified sales levels are met. Status programs offer additional benefits such as free or discounted products and services. Loyalty points offer the option to redeem for
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additional Avon or other products or services. Prospective discounts are offered in some countries when certain sales levels are reached in a given time period. The revenue attributable to the prospective discount performance obligation is for the option to purchase additional product at a discounted amount.
Certain benefits within status programs, loyalty points, prospective discounts and certain other sales incentives constitute a material right and, therefore, a distinct performance obligation in the contract with the Representative. Transaction price is allocated to the material right (performance obligation) based on estimated SSP and is deferred on the balance sheet until the associated performance obligations are satisfied. The cost of incentives is presented in inventories in our Consolidated Balance Sheets. We recognize revenue allocated to the material right in net sales in our Consolidated Statements of Operations at the point in time that the Representative receives the benefits of the material right or obtains control of the products, which occurs upon delivery to the Representative or upon expiration of the material right. For sales incentives that are delivered with the associated products order (such as gift with purchase), no deferral is required.
SSP represents the estimated market value, or the estimated amount that could be charged for that material right when the entity sells it separately in similar circumstances to similar customers. Judgment is required to determine the SSP for each distinct performance obligation. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, including for certain sales incentives, we determine the SSP using information that may include market prices and other observable inputs.
ii) Representative fees, primarily for the sale of brochures to Representatives and fulfillment activities related to the contract ("Representative fees")
The purchase order in the contract with the Representative explicitly identifies activities that we will perform. This includes fees that we charge Representatives, primarily for the sale of brochures to Representatives and fulfillment activities, and also includes late payment fees (discussed above). Brochures represent promotional materials that are given directly by the Representatives to their customers as a marketing activity. Under ASC 606, brochures that are sold by Avon to Representatives through purchase orders represent separate performance obligations in the contract as these are promises made between Avon and the Representative. Although the brochures are used similar to marketing materials, the Representative generally orders and pays for the brochures, and we allocate consideration for purposes of revenue recognition. The revenue associated with brochures that are sold to Representatives is recognized in other revenue and the related cost is recognized in cost of sales in our Consolidated Statements of Operations. We recognize revenue when the Representative obtains control of the brochures, which occurs upon delivery to the Representative. When brochures are given away for free to Representatives as promotional items, the cost is recognized in selling, general and administrative expenses in our Consolidated Statements of Operations.
We often charge the Representative for shipping and handling (including order processing) and payment processing activities on the invoice, and such activities are considered to be fulfillment costs. The consideration received represents part of the transaction price in the contract that is allocated to the performance obligations in the contract. We recognize revenue for fulfillment activities in other revenue in our Consolidated Statements of Operations when such services are provided to the Representative. The cost of these activities is recognized in SG&A expenses in our Consolidated Statements of Operations.
iii) Other revenue
We also recognize revenue from the sale of products to New Avon, LLC ("New Avon"), as part of a manufacturing and supply agreement, since the separation of the Company's North America business into New Avon on March 1, 2016, and royalties from the licensing of our name and products, in other revenue in our Consolidated Statements of OperationsOperations.
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.
Cash and Cash Equivalents
Cash equivalents are stated at cost plus accrued interest, which approximates fair value. Cash equivalents are generally high-quality, short-term money market instruments with an original maturity of three months or less and consist of time deposits with a number of U.S. and non-U.S. commercial banks and money market fund investments.
Inventories
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Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method. We classify inventory into various categories based upon its stage in the product life cycle, future marketing sales plans and the disposition process. We assign a degree of obsolescence risk to products based on this classification to estimate the level of obsolescence provision.
Brochure Costs
Brochures represent promotional materials that are given directly by the Representatives to their customers as a marketing activity. Brochures that are sold by Avon to Representatives through purchase orders represent separate performance obligations in the contract as these are promises made between Avon and the Representative. Although the brochures are used similar to marketing materials, the Representative generally orders and pays for the brochures, and Avon allocates consideration for purposes of revenue recognition. The revenue associated with brochures that are sold to Representatives is recognized in other revenue and the related cost is recognized in cost of sales in our Consolidated Statements of Operations. We recognize revenue when the Representative obtains control of the brochures, which occurs upon delivery to the Representative. When brochures are given away for free to Representatives as promotional items, the cost is recognized in SG&A expenses in our Consolidated Statements of Operations.
Brochure costs and associated fees that are presented as inventory were $13.2$4.1 at December 31, 20182021 and zero$7.6 at December 31, 2017, an increase driven by the implementation of ASU 606.2020. Brochure costs and associated fees that are presented as prepaid expenses and other were $5.9$4.0 at December 31, 20182021 and $26.6$6.7 at December 31, 2017, a decrease driven by the implementation of ASU 606.2020.
Brochure costs were expensed to COGS and SG&A in 20182021 amounted to $113.5$54.8 and $106.2,$72.6, respectively. In 2017 and 2016 brochures2020 brochure costs of $244.0 and $244.7, respectively, were expensed to COGS and SG&A under the previous ASU 605.were $75.8 and $77.1, respectively. In 2019 brochure costs expensed to COGS and SG&A were of $101.1 and $93.9, respectively.
The fees charged to Representatives for brochures sold recorded in Other revenue in 20182021, 2020 and 2019 amounted to $117.0. In 2017$49.3, $66.8 and 2016, the fees charged to Representatives were recorded as a reduction to SG&A expenses and amounted to 106.2 in 2018 $139.4 and $138.6,$96.9, respectively.
Property, Plant and Equipment and Capitalized Software
Property, plant and equipment are stated at cost and are depreciated using a straight-line method over the estimated useful lives of the assets. The estimated useful lives generally are as follows: buildings, 45 years; land improvements, 20 years; machinery and equipment, 15 years; and office equipment, five to ten years. Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful life of the asset. Upon disposal of property, plant and equipment, the cost of the assets and the related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in earnings. Costs associated with repair and maintenance activities are expensed as incurred.
Certain systems development costs related to the purchase, development and installation of computer software, and implementation costs incurred in a hosting arrangement that is a service contract, are capitalized and amortized over the estimated useful life of the related project. Costs incurred prior to the development stage, as well as maintenance, training costs, and general and administrative expenses are expensed as incurred. The other assets balance included unamortized capitalized software costs of $89.3$74.9 at December 31, 20182021 and $85.2$76.0 at December 31, 2017.2020. The amortization expense associated with capitalized software was $26.5, $29.5$22.4, $24.5 and $30.5$24.7 for the years ended December 31, 2018, 20172021, 2020 and 2016,2019, respectively.
We evaluate our property, plant and equipment and capitalized software for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated pre-tax undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. The fair value of the asset is determined using revenue and cash flow projections, and royalty and discount rates, as appropriate.
Leases
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
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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.
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.
Assets and Liabilities Held for Sale
A long-lived asset (or disposal group) is classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use and a sale is considered highly probable within a year. A long-lived asset (or disposal group) classified as held for sale is initially measured at the lower of its carrying amount or fair value less cost to sell. An impairment loss is recognized for any initial or subsequent write-down of the long-lived asset (or disposal group) to fair value less costs to sell. A gain or loss not previously recognized by the date of the sale of the long-lived asset (or disposal group) is recognized at the date of derecognition.
Long-lived assets (including those that are part of a disposal group) are not depreciated or amortized while they are classified as held for sale. Long-lived assets classified as held for sale and the assets of a disposal group classified as held for sale are
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presented separately from the other assets in the balance sheet. The liabilities of a disposal group classified as held for sale are presented separately from other liabilities in the balance sheet.
Goodwill
Goodwill is not amortized and is assessed for impairment annually during the fourth quarter or on the occurrence of an event that indicates impairment may have occurred, at the reporting unit level. A reporting unit is the operating segment, or a component, which is one level below that operating segment. Components are aggregated as a single reporting unit if they have similar economic characteristics. When testing goodwill for impairment, we perform either a qualitative or quantitative assessment for each of our reporting units. Factors considered in the qualitative analysis include macroeconomic conditions, industry and market considerations, cost factors and overall financial performance specific to the reporting unit. If the qualitative analysis results in a more likely than not probability of impairment, the first quantitative step,test, as described below, is required.
TheWe perform the quantitative test to evaluate goodwill for impairment is a two-step process. In the first step, we compareby comparing the fair value of a reporting unit towith its carrying value.amount. If the fair value of a reporting unit is less than its carrying value, we perform a second step to determine the implied fair value ofamount exceeds the reporting unit’s goodwill. The second step of the impairment analysis requires a valuation of a reporting unit’s tangible and intangible assets and liabilities in a manner similar to the allocation of the purchase price in a business combination. If the resulting implied fair value of the reporting unit’s goodwill is less than its carrying value, that difference represents an impairment.impairment; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
The impairment analysis performed for goodwill requires several estimates in computing the estimated fair value of a reporting unit. We typically use a DCFdiscounted cash flow ("DCF") approach to estimate the fair value of a reporting unit, which we believe is the most reliable indicator of fair value of this business, and is most consistent with the approach that we would generally expect a marketplace participant would use. In estimating the fair value of our reporting units utilizing a DCF approach, we typically forecast revenue and the resulting cash flows for periods of five to ten years and include an estimated terminal value at the end of the forecasted period. When determining the appropriate forecast period for the DCF approach, we consider the amount of time required before the reporting unit achieves what we consider a normalized, sustainable level of cash flows. The estimation of fair value utilizing a DCF approach includes numerous uncertainties which require significant judgment when making assumptions of expected growth rates and the selection of discount rates, as well as assumptions regarding general economic and business conditions, and the structure that would yield the highest economic value, among other factors.
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Financial Instruments
We use derivative financial instruments, including forward foreign currency contracts, to manage foreign currency exposures.
If applicable, derivatives are recognized in our Consolidated Balance Sheets at their fair values. When we become a party to a derivative instrument and intend to apply hedge accounting, we designate the instrument, for financial reporting purposes, as a fair value hedge, a cash flow hedge, or a net investment hedge. The accounting for changes in fair value (gains or losses) of a derivative instrument depends on whether we had designated it and it qualified as part of a hedging relationship and further, on the type of hedging relationship. We apply the following:
•Changes in the fair value of a derivative that is designated as a fair value hedge, along with the loss or gain on the hedged asset or liability that is attributable to the hedged risk are recorded in earnings.
•Changes in the fair value of a derivative that is designated as a cash flow hedge are recorded in AOCI and reclassified into earnings in the same period or periods during which the transaction hedged by that derivative also affects earnings.
•Changes in the fair value of a derivative that is designated as a hedge of a net investment in a foreign operation are recorded in foreign currency translation adjustments within AOCI.
•Changes in the fair value of a derivative that is not designated as a hedging instrument are recognized in earnings in other expense, net in our Consolidated Statements of Operations.
We present the earnings effect of the hedging instrument in our Consolidated Statements of Operations in the same income statement line item in which the earnings effect of the hedged item is reported.
We classify derivative cash flows as operating, investing or financing consistent with the nature of the underlying hedged item.
For derivatives designated as cash flow hedges, if we conclude that the hedging relationship is perfectly effective at inception, a detailed effectiveness assessment in each period is not required as long as (i) the critical terms of the hedging instrument completely match the related terms of the hedged item (ii) it is considered probable that the counterparties to the hedging instrument and the hedged item will not default, and (iii) the hedged cash flows remain probable.
If the conditions above are not met, we will assess prospective and retrospective effectiveness using the cumulative dollar-offset method, which compares the change in fair value or present value of cash flows of the hedging instrument to the changes
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in the fair value or present value of the cash flows of the hedged item. If the result of the quantification demonstrates that the hedge is still highly effective (meaning that cumulative changes in the fair value of the derivative are between 80% and 125% of the cumulative changes in the fair value of the hedged item), we will revert to qualitative assessments of hedge effectiveness in subsequent periods if an expectation of high effectiveness on a qualitative basis for subsequent periods can be reasonably supported. If effectiveness is not within the 80% to 125% range, hedge accounting will be discontinued, and changes in the fair value of the hedging instrument will be recorded in earnings from the date the hedge is no longer considered highly effective.
Deferred Income Taxes
Deferred income taxes have been provided on items recognized for financial reporting purposes in different periods than for income tax purposes using tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is provided to reduce our deferred tax assets to an amount that is "more likely than not" to be realized. The ultimate realization of our deferred tax assets depends upon generating sufficient future taxable income during the periods in which our temporary differences become deductible or before our net operating loss and tax credit carryforwards expire. See Note 10,9, Income Taxes for more information.
In accordance with guidance issued by the Financial Accounting Standards Board ("FASB"), we are choosing to treat the U.S. income tax consequences of Global Intangible Low-Taxed Income ("GILTI") as a period cost. As a result, as ofat December 31, 2018,2021, no deferred income taxes have been provided.
Uncertain Tax Positions
We recognize the benefit of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. We record interest expense and penalties payable to relevant tax authorities in income taxes in our Consolidated Statements of Operations.
SG&A Expenses
SG&A expenses include costs associated with selling; marketing; distribution, including shipping and handling costs; advertising; net brochure costs; research and development; information technology; and other administrative costs, including finance, legal and human resource functions.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Shipping and Handling
Shipping and handling costs are expensed as incurred and amounted to $503.5$339.4 in 2018, $530.82021, $373.1 in 20172020 and $489.3$432.1 in 2016.2019.
Advertising
Advertising costs, excluding brochure preparation costs, are expensed as incurred and amounted to $127.6$67.8 in 2018, $118.42021, $59.9 in 20172020 and $108.9$72.9 in 2016.2019.
Research and Development
Research and development costs are expensed as incurred and amounted to $48.0$39.3 in 2018, $52.92021, $36.5 in 20172020 and $52.1$40.6 in 2016.2019. Research and development costs include all costs related to the design and development of new products such as salaries and benefits, supplies and materials and facilities costs.
Share-based Compensation
AllWhere applicable, share-based payments to employees are recognized in the financial statements based on their fair value at the date of grant. If applicable, we use a Monte-Carlo simulation to calculate the fair value of performance restricted stock units with market conditions and the fair value of premium-priced stock options. We account for forfeitures on share-based payments as they occur.
When the terms of an equity-settled award are modified, the minimum expense recognized is the grant date fair value of the unmodified award, provided the original vesting terms of the award are met. An additional expense, measured as at the date of modification, is recognized for any modification that increases the total fair value of the share-based payment. Where an award is cancelled, any unamortized compensation cost is expensed immediately.
Subsequent to the Transaction with Natura &Co, our employees are considered employees of the parent company for purposes of applying ASC 718 Compensation—Stock Compensation. Share-based payments made by Natura &Co to our employees are recognized in the financial statements based on their fair value at the date of grant.
Restructuring Expense
We record the estimated expense for our restructuring initiatives, such as our Transformation Plan, and Open Up & Grow and Avon Integration, when such costs are deemed probable and estimable, when approved by the appropriate corporate authority and by accumulating detailed estimates of costs for such plans. These expenses include the estimated costs of employee severance and related benefits, inventory write-offs, impairment or accelerated depreciation of property, plant and equipment and capitalized software, and any other qualifying exit costs. Such costs represent our best estimate, but require assumptions about the programs that may change over time, including attrition rates. Estimates are evaluated periodically to determine whether an adjustment is required.
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Pension and Postretirement Expense
Pension and postretirement expense is determined based on a number of actuarial assumptions, which are generally reviewed and determined on an annual basis. These assumptions include the discount rate applied to plan obligations, the expected rate of return on plan assets, the rate of compensation increase of plan participants, price inflation, cost-of-living adjustments, mortality rates and certain other demographic assumptions, and other factors. Actual results that differ from assumptions are accumulated and amortized to expense over future periods and, therefore, generally affect recognized expense in future periods. We recognize the funded status of pension and other postretirement benefit plans in our Consolidated Balance Sheets. Each overfunded plan is recognized as an asset and each underfunded plan is recognized as a liability. The recognition of prior service costs or credits and net actuarial gains or losses, as well as subsequent changes in the funded status, are recognized as components of AOCI, net of tax, in shareholders’ equity, until they are amortized as a component of net periodic benefit cost. We recognize prior service costs or credits and actuarial gains and losses beyond a 10% corridor to earnings based on the estimated future service period of the participants. The determination of the 10% corridor utilizes a calculated value of plan assets for our more significant plans, whereby gains and losses are smoothed over three-three- and five-year periods. We use a December 31 measurement date for all of our employee benefit plans. Service cost is presented in SG&A in our Consolidated Statements of Operations. The components of net periodic benefit costs other than service cost are presented in other expense, net in our Consolidated Statements of Operations.
Contingencies
We determine whether to disclose and/or accrue for loss contingencies based on an assessment of whether the risk of loss is remote, reasonably possible or probable. We record loss contingencies when it is probable that a liability has been incurred and the amount of loss is reasonably estimable.
Earnings (Loss) per ShareWe compute earnings (loss) per share ("EPS") using the two-class method, which is an earnings (loss) allocation formula that determines earnings (loss) per share for common stock, and earnings (loss) allocated to convertible preferred stock and participating securities, as appropriate. The earnings allocated to convertible preferred stock are the larger of 1) the preferred dividends accrued in the year or 2) the percentage of earnings from continuing operations allocable to the preferred stock as if they had been converted to common stock. Our participating securities are our grants of restricted stock and restricted stock units, which contain non-forfeitable rights to dividend equivalents to the extent any dividends are declared and paid on our common stock. We compute basic EPS by dividing net income (loss) allocated to common shareholders by the weighted-average number of shares outstanding during the year. Diluted EPS is calculated to give effect to all potentially dilutive common shares that were outstanding during the year.
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For each of the three years ended December 31 the components of basic and diluted EPS were as follows:
|
| | | | | | | | | | | | |
| (Shares in millions) | | 2018 | | 2017 | | 2016 |
| Numerator from continuing operations: | | | | | | |
| Income (loss) from continuing operations less amounts attributable to noncontrolling interests | | $ | (19.5 | ) | | $ | 22.0 |
| | $ | (93.6 | ) |
| Less: Earnings (loss) allocated to participating securities | | (.2 | ) | | .3 |
| | (1.2 | ) |
| Less: Earnings allocated to convertible preferred stock | | 24.3 |
| | 23.1 |
| | 18.4 |
|
| Loss from continuing operations allocated to common shareholders | | (43.6 | ) | | (1.4 | ) | | (110.8 | ) |
| Numerator from discontinued operations: | | | | | | |
| Loss from discontinued operations less amounts attributable to noncontrolling interests | | $ | — |
| | $ | — |
| | $ | (14.0 | ) |
| Less: Loss allocated to participating securities | | — |
| | — |
| | (.2 | ) |
| Loss from discontinued operations allocated to common shareholders | | — |
| | — |
| | (13.8 | ) |
| Numerator attributable to Avon: | | | | | | |
| Net income (loss) attributable to Avon less amounts attributable to noncontrolling interests | | $ | (19.5 | ) | | $ | 22.0 |
| | $ | (107.6 | ) |
| Less: Earnings (loss) allocated to participating securities | | (.2 | ) | | .3 |
| | (1.4 | ) |
| Less: Earnings allocated to convertible preferred stock | | 24.3 |
| | 23.1 |
| | 18.4 |
|
| Loss attributable to Avon allocated to common shareholders | | (43.6 | ) | | (1.4 | ) | | (124.6 | ) |
| Denominator: | | | | | | |
| Basic EPS weighted-average shares outstanding | | 441.9 |
| | 439.7 |
| | 437.0 |
|
| Diluted effect of assumed conversion of stock options | | — |
| | — |
| | — |
|
| Diluted effect of assumed conversion of preferred stock | | — |
| | — |
| | — |
|
| Diluted EPS adjusted weighted-average shares outstanding | | 441.9 |
| | 439.7 |
| | 437.0 |
|
| Loss per Common Share from continuing operations: | | | | | | |
| Basic | | $ | (.10 | ) | | $ | (.00 | ) | | $ | (.25 | ) |
| Diluted | | (.10 | ) | | (.00 | ) | | (.25 | ) |
| Loss per Common Share from discontinued operations: | | | | | | |
| Basic | | $ | .00 |
| | $ | .00 |
| | $ | (.03 | ) |
| Diluted | | .00 |
| | .00 |
| | (.03 | ) |
| Loss per Common Share attributable to Avon: | | | | | | |
| Basic | | $ | (.10 | ) | | $ | (.00 | ) | | $ | (.29 | ) |
| Diluted | | (.10 | ) | | (.00 | ) | | (.29 | ) |
Amounts in the table above may not necessarily sum due to rounding.
During the years ended December 31, 2018, 2017 and 2016, we did not include stock options to purchase 17.8 million shares, 16.9 million shares and 14.2 million shares of Avon common stock, respectively, in the calculation of diluted EPS as we had a loss from continuing operations, net of tax and the inclusion of these shares would decrease the net loss per share. Since the inclusion of such shares would be anti-dilutive, these are excluded from the calculation.
For the years ended December 31, 2018 and 2017, it is more dilutive to assume the series C convertible preferred stock is not converted into common stock; therefore, the weighted-average shares outstanding were not adjusted by the as-if converted series C convertible preferred stock because the effect would be anti-dilutive. The inclusion of the series C convertible preferred stock would decrease the net loss per share for the years ended December 31, 2018 and 2017. If the as-if converted series C convertible preferred stock had been dilutive, approximately 87.1 million additional shares would have been included in the diluted weighted average number of shares outstanding for the years ended December 31, 2018 and 2017. There were no shares of series C convertible preferred stock outstanding for the year ended December 31, 2016. See Note 18, Series C Convertible Preferred Stock.
NOTE 2. New Accounting Standards
New Accounting Standards Implemented
ASU 2014-09, Revenue from Contracts with Customers
Except for the changes below, we have consistently applied the accounting policies to all periods presented in these consolidated financial statements.
We adopted ASC 606 with a date of the initial application of January 1, 2018, as a cumulative-effect adjustment to retained earnings. Therefore, the comparative information for prior periods has not been adjusted and continues to be reported under ASC 605, Revenue Recognition. We applied ASC 606 to all outstanding contracts at January 1, 2018.
We recorded a cumulative-effect adjustment upon adoption of the new revenue recognition standard as of January 1, 2018 comprised of the following:
a reduction to retained earnings of $52.7 before taxes ($41.1 after tax), with a corresponding impact to deferred income taxes of $11.6;
a reduction to prepaid expenses and other of $54.9;
an increase to inventories of $39.3; and
an increase to other accrued liabilities of $37.1 due to the net impact of the establishment of a contract liability of $91.8 for deferred revenue where our performance obligations are not yet satisfied, which is partially offset by a reduction in the sales incentive accrual of $54.7.
This cumulative-effect adjustment impacting our Consolidated Balance Sheets is primarily driven by sales incentives and brochures. The other changes resulting from the new revenue recognition standard were not material.
The details of the significant changes to our accounting policy for revenue recognition and the quantitative impact of the changes on our Consolidated Financial Statements are set out below.
Performance obligations - Avon products and appointment kits
We recognize revenue for Avon products and appointment kits in net sales in our Consolidated Statements of Operations when the Representative obtains control of the products, which occurs upon delivery of the product to the Representative. Transaction price is the amount we expect to receive in exchange for those products adjusted for variable consideration, such as sales returns and past due fees, and the estimated SSP of other performance obligations, such as sales incentives. Revenue allocated to the material right (performance obligation) for sales incentives is deferred on the balance sheet until the associated performance obligations are satisfied. The cost of these products and appointment kits is recognized in cost of sales in our Consolidated Statements of Operations.
Under our historical accounting, we recognized revenue for Avon products in net sales in our Consolidated Statements of Operations upon delivery of the product to the Representative. We recognized revenue for appointment kits sold to Representatives as a reduction of SG&A expenses in our Consolidated Statements of Operations, and the associated cost was recognized in SG&A expenses in our Consolidated Statements of Operations. Revenue was adjusted for expected sales returns.
Performance obligations/ material rights - sales incentives
Certain benefits within status programs, loyalty points, prospective discounts and certain other sales incentives constitute a material right and, therefore, a distinct performance obligation in the contract with the Representative. Transaction price is allocated to the material right based on estimated SSP and is deferred on the balance sheet until the associated performance obligations are satisfied. The cost of sales incentives is presented in inventories in our Consolidated Balance Sheets. We recognize revenue allocated to the material right in net sales and the associated cost of sales incentives is recognized in cost of sales in our Consolidated Statements of Operations, at the point in time that the Representative receives the benefits of the material right or obtains control of the products, which occurs upon delivery to the Representative or upon expiration of the material right. For sales incentives that are delivered with the associated products order (such as gift with purchase), no deferral is required.
Under our historical accounting, the cost of sales incentives was generally presented in other accrued liabilities and prepaid expenses and other in our Consolidated Balance Sheets and recognized in SG&A expenses in our Consolidated Statements of Operations over the period that the sales incentive was earned.
Representative fees, primarily for the sale of brochures to Representatives and fulfillment activities related to the contract
This includes fees that we charge Representatives, primarily for the sale of brochures to Representatives and fulfillment activities, and also includes late payment fees.
Brochures - Brochures represent promotional materials that are given directly by the Representatives to their customers as a marketing activity. Under ASC 606, brochures that are sold by Avon to Representatives through purchase orders represent separate performance obligations in the contract as these are promises made between Avon and the
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Representative. Although the brochures are used similar to marketing materials, the Representative generally orders and pays for the brochures, and Avon allocates consideration for purposes of revenue recognition. The revenue associated with brochures that are sold to Representatives is recognized in other revenue and the related cost is recognized in cost of sales in our Consolidated Statements of Operations. We recognize revenue when the Representative obtains control of the brochures, which occurs upon delivery to the Representative. When brochures are given away for free to Representatives as promotional items, the cost is recognized in SG&A expenses in our Consolidated Statements of Operations.
Under our historical accounting, all brochure costs were initially deferred to prepaid expenses and other in our Consolidated Balance Sheets and were charged to SG&A expenses in our Consolidated Statements of Operations over the campaign length. In addition, fees charged to Representatives for brochures were initially deferred and presented as a reduction of prepaid expenses and other in our Consolidated Balance Sheets, and were recorded as a reduction of SG&A expenses in our Consolidated Statements of Operations over the campaign length.
Fulfillment activities and late payment fees - We often charge the Representative for shipping and handling (including order processing) and payment processing activities on the invoice, and such activities are considered to be fulfillment costs. The consideration received represents part of the transaction price in the contract that is allocated to the performance obligations in the contract. We recognize revenue for fulfillment activities in other revenue in our Consolidated Statements of Operations when such services are provided to the Representative. The cost of these activities is recognized in SG&A expenses in our Consolidated Statements of Operations. Late payment fees are recorded in other revenue in our Consolidated Statements of Operations when collected.
Under our historical accounting, revenue for shipping and handling (including order processing) activities was recorded in other revenue in our Consolidated Statements of Operations. However, the revenue for payment processing activities and late payment fees were recognized as a reduction of SG&A expenses in our Consolidated Statements of Operations. The cost of these activities was recognized in SG&A expenses in our Consolidated Statements of Operations.
Impacts on consolidated financial statements
The following tables summarize the impacts of adopting ASC 606 on the Company's consolidated financial statements for the twelve months ended December 31, 2018:
|
| | | | | | | | | | | |
| | Impact of change in revenue recognition standard |
| Line items impacted within the Consolidated Statements of Operations | Per consolidated financial statements | | Adjustments | | Balances excluding the impact of adopting ASC 606 |
| Revenue | | | | | |
| Net sales | $ | 5,247.7 |
| | $ | (28.5 | ) | (1) | $ | 5,219.2 |
|
| Other revenue | 323.6 |
| | (200.7 | ) | (2) | 122.9 |
|
| Total revenue | 5,571.3 |
| | (229.2 | ) | | 5,342.1 |
|
| Costs and expenses | | | | | |
| Cost of sales | 2,364.0 |
| | (277.4 | ) | (3) | 2,086.6 |
|
| SG&A expenses | 2,972.1 |
| | 60.4 |
| (4) | 3,032.5 |
|
| Operating profit | 235.2 |
| | (12.2 | ) | | 223.0 |
|
| Income before income taxes | 108.1 |
| | (12.2 | ) | | 95.9 |
|
| Income taxes | (129.9 | ) | | 3.6 |
| | (126.3 | ) |
| Net loss | (21.8 | ) | | (8.6 | ) | | (30.4 | ) |
| Net loss attributable to Avon | (19.5 | ) | | (8.6 | ) | | (28.1 | ) |
(1) Primarily relates to appointment kits, which were reclassified from SG&A, partially offset by the timing of recognition of sales incentives.
(2) Relates to Representative fees (primarily brochure fees, late payment fees and certain other fees), which were reclassified from SG&A. Brochure fees were also impacted by the timing of recognition.
(3) Primarily relates to the cost of sales incentives, the cost of brochures paid for by Representatives and the cost of appointment kits, which were reclassified from SG&A. The cost of sales incentives and the cost of brochures were also impacted by the timing of recognition.
(4) Relates to the cost of sales incentives, which were reclassified to cost of sales and were also impacted by the timing of recognition. This was partially offset by Representative fees, which were reclassified to other revenue, and appointment kits, which were reclassified to net sales and cost of sales.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | | | | | | | | |
| | Impact of change in revenue recognition standard |
| Line items impacted within the Consolidated Statements of Other Comprehensive Income | Per consolidated financial statements | | Adjustments | | Balances excluding the impact of adopting ASC 606 |
| Net loss | $ | (21.8 | ) | | $ | (8.6 | ) | | $ | (30.4 | ) |
| Foreign currency translation adjustments | (48.7 | ) | | (3.5 | ) | | (52.2 | ) |
| Total other comprehensive loss, net of income taxes | (104.4 | ) | | (3.5 | ) | | (107.9 | ) |
| Comprehensive loss | (126.2 | ) | | (12.1 | ) | | (138.3 | ) |
| Comprehensive loss attributable to Avon | (123.6 | ) | | (12.1 | ) | | (135.7 | ) |
|
| | | | | | | | | | | |
| | Impact of change in revenue recognition standard |
| Line items impacted within the Consolidated Balance Sheets | Per consolidated financial statements | | Adjustments | | Balances excluding the impact of adopting ASC 606 |
| Accounts receivable, net | $ | 349.7 |
| | $ | (8.2 | ) | (1) | $ | 341.5 |
|
| Inventories | 542.0 |
| | (42.8 | ) | (2) | 499.2 |
|
| Prepaid expenses and other | 272.0 |
| | 47.8 |
| (2) | 319.8 |
|
| Total current assets | 1,762.0 |
| | (3.2 | ) | | 1,758.8 |
|
| Other assets | 603.0 |
| | (10.1 | ) | (3) | 592.9 |
|
| Total assets | 3,010.0 |
| | (13.3 | ) | | 2,996.7 |
|
| Liabilities, Series C Convertible Preferred Stock and Shareholders’ Deficit | | | | | |
| Other accrued liabilities | 451.3 |
| | (38.0 | ) | (4) | 413.3 |
|
| Income taxes | 15.9 |
| | (3.6 | ) | | 12.3 |
|
| Total current liabilities | 1,496.5 |
| | (41.6 | ) | | 1,454.9 |
|
| Other liabilities | 72.1 |
| | (0.7 | ) | | 71.4 |
|
| Total liabilities | 3,414.7 |
| | (42.3 | ) | | 3,372.4 |
|
| | | | | | |
| Retained earnings | 2,234.3 |
| | 32.5 |
| (5) | 2,266.8 |
|
| Accumulated other comprehensive loss | (1,030.4 | ) | | (3.5 | ) | | (1,033.9 | ) |
| Total Avon shareholders’ deficit | (904.5 | ) | | 29.0 |
| | (875.5 | ) |
| Total shareholders’ deficit | (896.8 | ) | | 29.0 |
| | (867.8 | ) |
| Total liabilities, series C convertible preferred stock and shareholders’ deficit | 3,010.0 |
| | (13.3 | ) | | 2,996.7 |
|
(1) Relates to sales returns, which were reclassified from a reduction of accounts receivable to a refund liability (within other accrued liabilities) and a returns asset (within prepaid expenses and other).
(2) Primarily relates to sales incentives and brochures, both of which were reclassified from prepaid expenses and other to inventories, and were also impacted by the timing of recognition. In addition, prepaid expenses and other was impacted by the timing of recognition of brochures, as well as the reclassification of sales returns (described above).
(3) Relates to deferred tax assets associated with the cumulative-effect adjustment.
(4) Primarily relates to the contract liability for sales incentives, which is partially offset by the lower accrual for sales incentives. In addition, other accrued liabilities was impacted by the reclassification of sales returns (described above).
(5) Relates to the $41.1 cumulative-effect adjustment upon adoption of ASC 606, partially offset by the year-to-date $8.6 net loss adjustment.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | | | | | | | | |
| | Impact of change in revenue recognition standard |
| Line items impacted within the Consolidated Statements of Cash Flows | Per consolidated financial statements | | Adjustments | | Balances excluding the impact of adopting ASC 606 |
| Cash Flows from Operating Activities | | | | | |
| Net loss | $ | (21.8 | ) | | $ | (8.6 | ) | | $ | (30.4 | ) |
| Other | 18.5 |
| | (3.5 | ) | | 15.0 |
|
| Accounts receivable | (102.8 | ) | | (.4 | ) | | (103.2 | ) |
| Inventories | (99.6 | ) | | 3.5 |
| | (96.1 | ) |
| Prepaid expenses and other | (49.3 | ) | | 3.9 |
| | (45.4 | ) |
| Accounts payable and accrued liabilities | 73.1 |
| | 10.5 |
| | 83.6 |
|
| Income and other taxes | 63.2 |
| | (3.6 | ) | | 59.6 |
|
| Noncurrent assets and liabilities | 42.8 |
| | (1.8 | ) | | 41.0 |
|
ASU 2016-09, Compensation - Stock Compensation
In March 2016, the FASB issued Accounting Standards Update ("ASU") 2016-09, Compensation - Stock Compensation, which is intended to simplify the accounting for share-based payment transactions. This new guidance changes several aspects of the accounting for share-based payment transactions, including accounting for income taxes, forfeitures and employer-tax withholding requirements. ASU 2016-09 also clarifies the Statements of Cash Flows presentation for certain components of share-based payment awards. We adopted this new accounting guidance in the first quarter of 2017, which did not have a material impact on our Consolidated Financial Statements.
ASU 2017-07, Compensation - Retirement Benefits
In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits. This new guidance requires entities to (1) disaggregate the service cost component from the other components of net periodic benefit costs and present it with other current employee compensation costs in the Consolidated Statements of Operations and (2) present the other components of net periodic benefit costs below operating profit in other expense, net. We adopted this new accounting guidance effective January 1, 2018. The new accounting guidance was applied retrospectively and increased our operating profit for 2017 and 2016 by $8.0 and $1.9 respectively, but had no impact on net loss.
The following tables summarize the impacts of adopting ASC 2017-07 on the Company's consolidated financial statements for the twelve months ended December 31, 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | | | |
| | Impact of ASU 2017-07 adoption |
| Line items impacted within the Consolidated Statements of Operations | Per consolidated financial statements | | Impact of adoption | | As originally reported |
| | 2017 | 2016 | | 2017 | 2016 | | 2017 | 2016 |
| SG&A expenses | $ | 3,231.0 |
| $ | 3,136.9 |
| | $ | (8.0 | ) | $ | (1.9 | ) | (4) | $ | 3,239.0 |
| $ | 3,138.8 |
|
| Operating profit | 281.3 |
| 323.8 |
| | 8.0 |
| 1.9 |
| | 273.3 |
| 321.9 |
|
| Other expense, net | 34.6 |
| 172.9 |
| | 8.0 |
| 1.9 |
| | 26.6 |
| 171.0 |
|
| Income before income taxes | 120.7 |
| 31.2 |
| | — |
| — |
| | 120.7 |
| 31.2 |
|
ASU 2017-12, Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities to align the hedge accounting model more closely with risk management practices, and to simplify its application. Among other things, the new guidance eliminates the requirement to separately measure and report hedge ineffectiveness. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2018. The new guidance must be adopted using a modified retrospective transition with a cumulative effect adjustment recorded to opening retained earnings as of the initial adoption date. We early adopted ASU 2017-12 effective July 1, 2018 and initiated a new hedging program during the third quarter 2018 to hedge foreign exchange risk relating to forecasted transactions. The adoption did not have a material impact on our Consolidated Financial Statements.
ASU 2018-15, Intangibles - Goodwill and Other-Internal - Use Software - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendment. We early adopted ASU 2018-15 effective October 1, 2018, which did not have a material impact on our Consolidated Financial Statements.
Accounting Standards to be Implemented
ASU 2016-02, Leases
In February 2016, the FASB issued ASU 2016-02, Leases, which requires all assets and liabilities arising from leases to be recognized in our Consolidated Balance Sheets. We intend to adopt this new accounting guidance effective January 1, 2019.
In July 2018, the FASB added an optional transition method which we will elect upon adoption of the new standard. This allows us to recognize and measure leases existing at January 1, 2019 without restating comparative information. In addition, we will elect to apply the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carry forward the historical lease classification.
The standard will have a material impact on our consolidated balance sheets but will not have a material impact on our Consolidated Income Statements. The most significant impact will be the recognition of right-of-use (ROU) assets and lease liabilities for operating leases, while our accounting for finance leases remains substantially unchanged.
Adoption of the standard will result in the recognition of additional ROU assets and lease liabilities for operating leases of approximately $200 and approximately $195 as of January 1, 2019. The difference between these amounts will be recorded as an adjustment to retained earnings.
ASU 2018-02, Income Statement - Reporting Comprehensive Income
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income, which permits entities to reclassify the disproportionate income tax effects of the 2017 enactment of U.S. tax reform legislation (the "Act") on items within AOCI (loss) to retained earnings. We intend to adopt this new accounting guidance effective January 1, 2019 and have elected not to reclassify the disproportionate income tax effects of the Act from AOCI (loss) to retained earnings.
ASU 2016-13, Financial Instruments - Credit Losses
In JanuaryJune 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 adoptadopted this new accounting guidance effective January 1, 2020. We are currently assessing the2020, using a modified retrospective transition approach. The adoption did not have a material impact on our condensed consolidated financial statements.statements and disclosures and did not significantly impact the Company’s accounting policies or estimation methods related to the allowance for doubtful accounts. The adoption resulted in a cumulative effect decrease to retained earnings of approximately $2 to reflect a change in the allowance for doubtful accounts.
ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General. ASU 2018-14 modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Early adoption is permitted. The amendments in this Update are effective for fiscal years ending after December 15, 2020, therefore we adopted this standard effective December 31, 2020. The adoption did not have a material impact on our Consolidated Financial Statements.
ASU 2017-04, Intangibles - Goodwill and other (Topic 350)
In January 2017, the FASB issued Accounting Standards Update ("ASU") 2017-04 Intangibles - Goodwill and other, which simplifies the test for goodwill impairment. This Update eliminates Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of the assets acquired and liabilities assumed in a business combination. Instead an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, however the loss recognized should not exceed the total amount of goodwill allocated to the reporting unit. The guidance requires prospective adoption. We adopted the guidance for the goodwill impairment test that we have conducted since 2020, and adoption of the guidance did not have a significant impact on our financial statements.
ASU 2019-12, Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU 2019-12, Income Taxes, which is intended to simplify the accounting standard and improve the usefulness of information provided in the financial statements. We adopted this new accounting guidance as of January 1, 2021. The adoption did not have a material impact on our Consolidated Financial Statements.
ASU 2020-04, Reference Rate Reform (Topic 848)
In March 2020, the FASB issued ASU 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. In January 2021, the FASB issued ASU 2021-01 which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022.
The Company has implemented a transition plan to identify and modify its loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR and, as a result, has elected to apply the optional expedient included in ASU 2020-04 to account for modifications of contracts within the scope of Topics 310, Receivables, and 470, Debt, to be accounted for by prospectively adjusting the effective interest rate.
Accounting Standards to be Implemented
ASU 2021-08, Business Combinations (Topic 805)
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. ASU 2021-08 is effective for our fiscal year beginning after December 15, 2022. The adoption is not expected to have a material impact on our Consolidated Financial Statements.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3. Discontinued Operations and Assets and Liabilities Held for Sale
Discontinued Operations
North America
On December 17, 2015, the Company entered into definitive agreements with affiliates controlled by Cerberus. The agreements include an investment agreement providing for a $435.0 investment by Cleveland Apple Investor L.P. (“Cerberus Investor”) (an affiliate of Cerberus)resulted in the Company through the purchase of perpetual convertible preferred stock (see Note 18, Series C Convertible Preferred Stock) and a separation and investment agreement providing for the separation of the Company's North America business, which represented the Company's operations in the U.S.,United States, Canada and Puerto Rico, from the Company into The Avon Company, formerlyNew Avon, ("New Avon") a privately-held company that is majority-owned and managed by Cerberus NA Investor LLC (“Cerberus NA”) (an affiliate of Cerberus). The Company retained an investment of 19.9% ownership interest in New Avon. These transactions closed on March 1, 2016.
Proceeds2016; from the salethat date, resolution of the perpetual convertible preferred stock were usedcontingent liabilities relating to fund the $100 cash contribution into New Avon, approximately $250 was used to reduce debt,Avon's ownership and the remainder was used for restructuring and reinvestment in the business. The Company considered that the transactions with affiliatesoperation of Cerberus should help to drive enhanced focus on Avon's international markets, revitalize the North America business and deliver long-term valueprior to shareholders.
During 2016, Cerberus NA contributed approximately $170 of cashits separation from the Company into New Avon in exchange for 80.1% of its ownership interests. The Company contributed (i) assets primarily relatedhave been treated as discontinued operations. In April 2019, we signed an agreement with LG Household & Health Care Ltd. to sell our North America business (including approximately $100 of cash, subject to certain adjustments), (ii) certain assumed liabilities (primarily pension and postretirement liabilities) of our North America business and (iii) the employees of our North America business into New Avon in exchange for a 19.9% ownership interest in New Avon, which was completed during August 2019. Refer to the Divestitures section below for information relating to the sale of New Avon.
The Company received approximately $6incurred costs during the years ended December 31, 2021, 2020 and 2019 following the resolution of cash from New Avon as partcertain contingent liabilities related to its ownership and operation of a customary working capital adjustment.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The North America business was previously its own reportable segment and has been presented as discontinued operations for all periods presented as the separation represented a significant strategic shift and was determined to have a major effect on our operations and financial results.
During the fourth quarter of 2015, the Company recorded an estimated loss on sale of discontinued operations of $340.0 before tax ($340.0 after tax) as the carrying value exceeded the estimated fair value less costs to sell. During 2016, the Company recognized an additional loss on sale of $15.6 before tax ($5.4 after tax), respectively. The cumulative loss on sale of $355.6 before tax ($345.4 after tax) represents the net assets contributed into New Avon, including certain pension and postretirement benefit plan liabilities and amounts in AOCI associated with the North America business which were primarily unrecognized losses associated with our U.S. defined benefit pension plan, and costsprior to sell, as compared to the implied value of our ownership interests in New Avon, at closing, which was $42.5.
In 2016, New Avon enteredits separation into a perpetual, irrevocable royalty-free licensing agreement with the Company for the use of the Avon brand and certain other intellectual property. Also in 2016, Avon and New Avon also entered into a transition services agreement, which expired on October 31, 2018, and covered, among other things, information technology, financial services and human resources, as well as other commercial agreements, including research and development, product supply and a sublease of office space from Avon to New Avon. See Note 5, Related Party Transactions.
The major classes of financial statement components comprising the loss on discontinued operations, net of tax for North AmericaNew Avon are shown below:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2021 | | Year Ended December 31, 2020 | | Year Ended December 21, 2019 |
| Selling, general and administrative expenses | | $ | (18.5) | | | $ | (27.9) | | | $ | (36.6) | |
| Operating loss | | $ | (18.5) | | | $ | (27.9) | | | $ | (36.6) | |
| Loss from discontinued operations, net of tax | | $ | (18.5) | | | $ | (27.9) | | | $ | (36.6) | |
|
| | | | | |
| | | Year ended December 31, |
| | | 2016 | |
| Total revenue | | $ | 135.2 |
| |
| Cost of sales | | 53.2 |
| |
| SG&A expenses | | 91.5 |
| |
| Operating (loss) income | | (9.5 | ) | |
| Other income (expense) items | | .6 |
| |
| Loss from discontinued operations, before tax | | (8.9 | ) | |
| Loss on sale of discontinued operations, before tax | | (15.6 | ) | |
| Income taxes | | 10.5 |
| |
| Loss from discontinued operations, net of tax | | $ | (14.0 | ) | |
There were no amounts recorded in discontinued operations for the year ended December 31, 2018 or 2017.
Assets and Liabilities Held for Sale
The major classes of assets and liabilities comprising Heldheld for sale assets and Heldheld for sale liabilities on the Consolidated Balance Sheet as ofat December 31, 20182021 and December 31, 2020 are shown in the following table. There were no
| | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2021 | | 2020 |
| Current held for sale assets | | | | |
| Inventories | | $ | — | | | $ | 2.6 | |
| Property, Plant & Equipment (net) | | 2.8 | | | 9.2 | |
| Cash and cash equivalents | | — | | | .7 | |
| Other assets | | — | | | 1.4 | |
| | $ | 2.8 | | | $ | 13.9 | |
| | | | |
| Current held for sale liabilities | | | | |
| Accounts payable | | $ | — | | | $ | .5 | |
| Other liabilities | | — | | | 1.8 | |
| | $ | — | | | $ | 2.3 | |
At December 31, 2020, assets or liabilities held for sale atinclude 1 property and 1 business in Avon International segment and 1 property in the Avon Latin America Segment.
At December 31, 2017 or 2016.2021, assets held for sale include 1 property in the Avon Latin America Segment.
Divestitures
Disposal of Avon Beauty Arabia in Saudi Arabia
On December 23, 2021, the Company completed the sale of its 51% share of the business and assets of Avon Beauty Arabia in exchange for converting the business to a distributorship model together with the write off of a $3.9 loan balance.
|
| | | | | | | | | | | | | | | | |
| | | 2018 |
| | | Avon Manufacturing (Guangzhou) | | Rye Office | | Malaysia Maximin | | Total |
| Current held for sale assets | | | | | | | | |
| Inventories | | $ | 8.7 |
| | $ | — |
| | $ | — |
| | $ | 8.7 |
|
| Property, Plant & Equipment (net) | | 36.7 |
| | 12.3 |
| | 3.0 |
| | 52.0 |
|
| Cash and cash equivalents | | 3.7 |
| | — |
| | — |
| | 3.7 |
|
| Other assets | | 1.1 |
| | — |
| | 0.1 |
| | 1.2 |
|
| | | $ | 50.2 |
| | $ | 12.3 |
| | $ | 3.1 |
| | $ | 65.6 |
|
| | | | | | | | | |
| Current held for sale liabilities | | | | | | | | |
| Accounts payable | | 8.6 |
| | — |
| | — |
| | 8.6 |
|
| Other liabilities | | 2.6 |
| | — |
| | 0.2 |
| | 2.8 |
|
| | | $ | 11.2 |
| | $ | — |
| | $ | .2 |
| | $ | 11.4 |
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In the fourth quarter of 2021 we recognized a loss of $1.1 before and after tax, which is reported separately in the Consolidated Statements of Operations representing the difference between the write off of the loan balance, the carrying value of the business and assets of the Avon Beauty Arabia on the date of sale, and associated disposal costs.
Disposal of Cosmetics Manufacturing Operations in India
On November 17, 2021, the Company completed the sale of the business and assets of the Cosmetics Manufacturing Operation in India for a total selling price of $2.9, the proceeds of which are presented as investing activities in the Consolidated Statement of Cash Flows.
In the fourth quarter of 2021 we recognized a gain of $1.1 before and after tax, which is reported separately in the Consolidated Statements of Operations representing the difference between the proceeds, the carrying value of the business and assets of the Cosmetics Manufacturing Operation in India on the date of sale, and associated disposal costs.
Sale of Avon Luxembourg Holdings S.à r.l
On July 1, 2021, the Company sold Avon Luxembourg, including our Mexican business, to a subsidiary of Natura &Co Holding for $150, with the proceeds used to repay maturing loans of $150 borrowed under the $250 Revolving Credit Facility with a subsidiary of Natura &Co Holding.
The sale was accounted for as a transaction under common control in accordance with ASC805 - Business Combinations, with the resulting gain of $148, representing the difference between the proceeds, the net assets of Avon Luxembourg on the date of sale and the cumulative foreign currency translation adjustment, taken directly to Retained Earnings. For additional information, see the Consolidated Statements of Changes in Shareholders' Deficit.
Spanish Distribution Center
In September 2021, we completed the sale of our Spanish Distribution Center for a total selling price of $14.7, the proceeds of which are presented as investing activities in the Consolidated Statement of Cash Flows.
In the third quarter of 2021 we recognized a gain of $8.3 before and $6.2 after tax, which is reported separately in the Consolidated Statements of Operations representing the difference between the proceeds, the carrying value of the branch of the Spanish Distribution Center on the date of sale, and associated disposal costs.
Italy Branch
In June 2021, we completed the sale of a branch of our Italian business for a total selling price of $1.7, the proceeds of which will be received in installments between October 2021 and December 2026, and will be presented as investing activities in the Consolidated Statement of Cash Flows.
In the second quarter of 2021, we recorded a gain of $1.4 before and after tax, which is reported separately in the Consolidated Statements of Operations representing the difference between the proceeds and the carrying value of the branch of the Italian business on the date of sale.
Avon Shanghai
In August 2020, we signed an agreement to sell Avon Management Shanghai ("Avon Shanghai") to an affiliate of Natura &Co for a selling price of $2.9. In August 2020, we completed the sale of the entity and received proceeds of $2.9. These proceeds are presented as investing activities in the Consolidated Statement of Cash Flows as the sale was to an affiliate under common control by Natura &Co. The gain on sale of $1.4 was recorded directly to Retained earnings.
Hungary Distribution Center in Gödöllő
In April 2020, we signed an agreement to sell the Hungary Distribution Center in Gödöllő for a selling price of $3.4 and received a deposit of $.3. In June 2020, we completed the sale of the asset and the remaining proceeds of $3.1 were received. These proceeds are presented as investing activities in the Consolidated Statement of Cash Flows.
In the second quarter of 2020, we recorded a gain of $.1 before and after tax, which is reported separately in the Consolidated Statements of Operations. The gain represents the difference between the proceeds and the carrying value of the Hungary Distribution Center on the date of sale.
China ManufacturingWellness Plant
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In March 2020, we signed an agreement to sell the China Wellness Plant for a total selling price of $6.6 before expenses. In the six-month period ended June 30, 2020, we received a cash deposit for the selling price of $6.6, which included $3.3 of restricted cash held in escrow.
In August 2020, we completed the sale of the China Wellness Plant and $3.3 of restricted cash in escrow was transferred to Avon. In the third quarter of 2020, we recorded a gain of $1.4 before and after tax, which is reported separately in the Consolidated Statements of Operations. The gain represents the difference between the net proceeds (after associated expenses) and the carrying value of the China Wellness Plant on the date of sale.
Rye Office
On January 8,June 26, 2019, Avon Asia Holdings Companywe completed the sale of the Rye office for a selling price of $23.2, less expenses of approximately $.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 Avon Products (China) Co., Ltd. executed an Equity Purchase Agreement forafter 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.
Malaysia Maximin
On May 9, 2019, we completed the sale of all theof our equity interests in Avon Manufacturing (Guangzhou), Ltd. to TheFaceShop Co., Ltd., an affiliate of LG Household & Health Care Ltd,Maximin Corporation Sdn Bhd ("Malaysia Maximin") for a total purchaseselling price of $71.$7.8. The cash proceeds of $7.6, net of expenses, are presented within investing activities in the Consolidated Statement of Cash Flows.
Avon Manufacturing (Guangzhou), Ltd. metIn the held forsecond quarter of 2019, we recorded a gain on sale criteria under ASC 360, Plant, Propertyof $3.3 before tax, which is reported separately in the Consolidated Statements of Operations, and Equipment ("ASC 360") as of December 31, 2018,$3.0 after tax. The gain recorded represents the difference between the proceeds and the entity's assets and liabilities were classified as held forcarrying value of Malaysia Maximin on the date of sale.
China manufacturing
On February 15, 2019, we completed the sale to TheFaceShop Co., Ltd., an affiliate of LG Household & Health Care Ltd. ("TheFaceShop"), of all of the equity interests in Avon Manufacturing (Guangzhou), Ltd. for a total purchaseselling price of $71.0, million. Net cash proceeds (pre-tax) will be $47.0 after the required repayment by the Companyless expenses of certainapproximately $1.1. The selling price included $23.5 relating to outstanding intercompany loans of $23.3 and after deducting cash on hand inpayable to Avon Manufacturing (Guangzhou), Ltd. from other Avon subsidiaries that was presented as financing activities in the Consolidated Statement of $.7.
Rye Office
On September 19, 2018, Avon issued a press release entitled “Avon Products Inc. to create leaner New York Operations. InCash Flows, this press release, Avon announced its intention to completewas subsequently settled in April 2019. The cash proceeds of $46.4, net of loan amounts, are presented as investing activities in the saleConsolidated Statement of the Rye office in 2019 as a further step in its ongoing plan to streamline the business to fuel growth by consolidating its U.S. operations into its existing facilities in Suffern, New York.
Prior to December 31, 2018, we entered into a LetterCash Flows, which includes $7.6 of Intent with a third party to sell the Rye office. The due diligence period is currently ongoing.
The Rye office met the held for sale criteria under ASC 360restricted cash as of December 31, 2018, and2019. This was classified as an asset held for sale.subsequently reclassified to short-term restricted cash in the three month period ended March 31, 2020. The restriction on this cash was removed in the three-month period ended March 31, 2021.
In Februarythe 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 the Rye office. This transaction is expected to close by the end of the second quarter of 2019.
Malaysia Maximin
On November 12, 2018, the Company approved the sale in principal of Maximin Corporation Sdn Bhd (“Maximin”), which owns the Malaysia office and warehouse, in line with our current strategy. In early December, the Company entered into letter of intent with a third party. Refer to Note 23, Subsequent Events, for additional information on developments relating to the sale of Maximin.
Maximin met the held for sale criteria under ASC 360 as of December 31, 2018, and the entity's assets and liabilities were classified as held for sale.
In February 2019, we signed an agreement to sell Maximin. This transaction is expected to close by the end of the first quarter of 2019.
NOTE 4. Investment in New Avon
In connection with the separation of the Company's North America business (as discussed in Note 3, Discontinued Operations and Assets and Liabilities Held for Sale), which closed on March 1, 2016, the Company retained a 19.9% ownership interest in New Avon, a privately-held company that is majority-owned and managed by an affiliateAvon. During August 2019, we completed the sale of Cerberus Capital Management L.P. ("Cerberus"). The Company has accounted for its ownership interest in New Avon using the equity methodfor a selling price of accounting, which resulted$24.5. Expenses were approximately $1.1, resulting in cash proceeds of $23.4. These proceeds are presented as investing activities in the Company recognizing its proportionate shareConsolidated Statement of New Avon's income or lossCash Flows.
In the third quarter of 2019, we recorded a gain on sale of $26.8 before and other comprehensive income or loss.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 AOCI of $3.4. Our recorded investment balance in New Avon at December 31, 2018 and December 31, 2017August 14, 2019 was zero.
During the years ended December 31, 2017 and 2016, the Company's proportionate share of the losses of New Avon was $20.2 and $11.9, of which $11.5 and $11.9, respectively, of these amounts was recorded within other expense, net. In addition, during the third quarter of 2017, the Company received a cash distribution of $22.0 from New Avon, which reduced our recorded investment balance in New Avon. During the third quarter of 2017, we recorded only $1.7 of the Company's proportionate share of the losses in New Avon, as this reduced our recorded investment balance in New Avon to zero. As a result, we have not recorded our proportionate share of New Avon's losses since the fourth quarter of 2017. If New Avon experiences future losses while our recorded investment balance is zero, we would not record our proportionate share of such loss. In addition, the Company's proportionate share of the post-separation other comprehensive income of New Avon was benefits of $.1 and $2.2 during the years ended December 31, 2017 and 2016, respectively, and was recorded within other comprehensive income (loss).The Company also recorded an additional loss of $.5 within other expense, net and a benefit of $1.1 within other comprehensive income (loss), during the year ended December 31, 2017, primarily associated with purchase accounting adjustments reported by New Avon.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5.4. Related Party Transactions
On January 3, 2020, the Company became a wholly owned subsidiary of Natura &Co Holding. From this point, Natura &Co Holding, its subsidiaries and affiliates became related parties of the Company. On July 1, 2021, the Company sold Avon Luxembourg, including our Mexican business, to a subsidiary of Natura &Co Holding. As a result, beginning on July 1, 2021, transactions and balances between Avon International and Avon Luxembourg are no longer eliminated on consolidation and instead are treated as transactions and balances with Related Parties.
The following tables present the related party transactions with New Avon,Natura &Co and its affiliates of Cerberus and the Instituto Avon in Brazil.Brazil, all of which were on an arm's-length basis. There are no other related party transactions. New Avon is majority owned and managed by Cerberus NA. See Note 3, Discontinued Operations and Assets and Liabilities Held for Sale and Note 4, Investment in New Avon for further details.
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | Year Ended December 31, |
| | 2021 | | 2020 |
| Statement of Operations Data | | | | |
Revenue from affiliates of Natura &Co(2)(3) | | $ | 25.2 | | | $ | 6.7 | |
Cost of sales from affiliaties of Natura &Co(2)(3) | | $ | (22.4) | | | $ | (5.9) | |
Gross profit from affiliates of Natura &Co(2)(3) | | $ | 2.8 | | | $ | .8 | |
| | | | |
Interest income from Instituto Avon(1) | | $ | — | | | $ | .1 | |
Interest expense on Loan from affiliates of Natura &Co(5) | | $ | (50.6) | | | $ | (7.5) | |
Interest income on Loan to affiliates of Natura &Co(5) | | $ | 1.6 | | | $ | — | |
| | | | |
| | December 31, 2021 | | December 31, 2020 |
| Balance Sheet Data | | | | |
Receivables due from Instituto Avon(1) | | $ | — | | | $ | .8 | |
Trade Receivables due from affiliates of Natura &Co(2) | | $ | 32.7 | | | $ | 6.1 | |
Other receivables due from affiliates of Natura &Co(7) | | $ | 1.4 | | | $ | — | |
Loans to affiliates of Natura &Co maturing within one year(7) | | $ | 46.6 | | | $ | — | |
Loans to affiliates of Natura &Co maturing after one year(7) | | $ | 46.7 | | | $ | — | |
Trade Payables due to affiliates of Natura &Co(7) | | $ | (24.5) | | | $ | — | |
Other payables due to affiliates of Natura &Co(4) | | $ | (4.9) | | | $ | — | |
Loans from affiliates of Natura &Co maturing within one year(5) | | $ | (371.7) | | | $ | (1,008.6) | |
Loans from affiliates of Natura &Co maturing after one year(5) | | $ | (736.3) | | | $ | — | |
Investments in affiliates of Natura &Co(6) | | $ | .1 | | | $ | — | |
|
| | | | | | | | |
| | | Year Ended December 31, | | Year Ended December 31, |
| | | 2018 | | 2017 |
| Statement of Operations Data | | | | |
Revenue from sale of product to New Avon(1) | | $ | 25.7 |
| | $ | 32.5 |
|
Gross profit from sale of product to New Avon(1) | | $ | 1.6 |
| | $ | 1.9 |
|
| | | | | |
Cost of sales for purchases from New Avon(2) | | $ | 2.9 |
| | $ | 3.8 |
|
| | | | | |
| SG&A expenses: | | | | |
Transition services, intellectual property, research and development and subleases(3) | | $ | (5.9 | ) | | $ | (32.2 | ) |
Project management team(4) | | 1.2 |
| | 2.6 |
|
| Net reduction of SG&A expenses | | $ | (4.7 | ) | | $ | (29.6 | ) |
| | | | | |
Interest income from Instituto Avon(5) | | $ | .1 |
| | — |
| | | | | |
| | | December 31, 2018 | | December 31, 2017 |
| Balance Sheet Data | | | | |
Inventories(6) | | $ | .3 |
| | $ | .4 |
|
Receivables due from New Avon(7) | | $ | 7.0 |
| | $ | 9.8 |
|
Receivables due from Instituto Avon(5) | | $ | 3.2 |
| | $ | — |
|
Payables due to New Avon(8) | | $ | .2 |
| | $ | .2 |
|
Payables due to an affiliate of Cerberus(9) | | $ | .6 |
| | $ | .4 |
|
(1)The Company supplies product to New Avon as part of a manufacturing and supply agreement. The Company recorded revenue of $25.7 and $32.5, within other revenue, and gross profit of $1.6 and $1.9 associated with this agreement during the years ended December 31, 2018 and 2017, respectively.
(2) New Avon also supplies product to the Company as part of the same manufacturing and supply agreement noted above. The Company purchased $2.8 and $3.2 from New Avon associated with this agreement during the years ended December 31, 2018 and 2017, respectively, and recorded $2.9 and $3.8 associated with these purchases within cost of sales during the years ended December 31, 2018 and 2017, respectively.
(3) The Company also entered into a transition services agreement to provide certain services to New Avon, which expired on October 31, 2018, as well as an intellectual property ("IP") license agreement, an agreement for technical support and innovation and subleases for office space. In addition, New Avon performed certain services for the Company under a similar transition services agreement which expired during the third quarter of 2017. The Company recorded a net $5.9 and $32.2 reduction of SG&A expenses associated with these agreements during the years ended December 31, 2018 and 2017, respectively, which generally represents a recovery of the related costs.
(4) The Company also entered into agreements with an affiliate of Cerberus, which provide for the secondment of Cerberus affiliate personnel to the Company's project management team responsible for assisting with the execution of the transformation plan (the "Transformation Plan") announced in January 2016 and Open Up Avon strategy (“Open Up Avon”) announced in September 2018. The Company recorded $1.2 and $2.6 in SG&A expenses associated with these agreements during the years ended December 31, 2018 and 2017, respectively. See Note 17, Restructuring Initiatives for additional information related to the Transformation Plan and Open Up Avon.
(5) During the second quarter of 2018, the Company entered into an agreement to loan the Instituto Avon, an independent non-government charitable organization in Brazil, $3.6R$12 million (Brazilian real) for an unsecured 5-year term at a fixed interest rate of 7% per annum, to be paid back in 5 equal annual installments. The Instituto Avon was created by an Avon subsidiary in Brazil, with the board and executive team comprisecomprised of Avon Brazil management. The purpose of the loan iswas to provide the Instituto Avon with the means to donate funds to Fundação Pio XII (a leading cancer prevention and treatment organization in Brazil and owner of the
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Hospital do Câncer de Barretos), in order to invest in equipment with the objective of expanding breast cancer prevention and treatment. During the fourth quarter of 2021, the loan was repaid in full.
(6) Inventories relate to purchases(2) During the second quarter of 2020, the Company entered into manufacturing agreements with affiliates of Natura &Co Holding. The Company recorded revenue from New Avon,related party of $25.2 and $6.7 associated with these agreements during the manufacturingyears ended December 31, 2021 and supply agreement, which have not yet been sold,2020, respectively. The Company recorded gross profit from related party of $2.8 and were classified within inventories in our Consolidated Balance Sheets.
(7) The$.8 associated with these agreements during the years ended December 31, 2021 and 2020, respectively. Trade receivables due from New Avonaffiliates of Natura &Co primarily relate to the agreements for transition services, the IPthese manufacturing agreements.
(3) The Company is party to a license research and development and subleases for office space, as well as the manufacturing and supply agreement and were classified within prepaid expenses and other in our Consolidated Balance Sheets.
(8) The payables due to Newwith Avon relate to the manufacturing and supply agreement, and were classified within other accrued liabilities in our Consolidated Balance Sheets.
(9) The payables due to an affiliate of Cerberus relate to the agreement for the project management team, and were classified within other accrued liabilities in our Consolidated Balance Sheets.
In addition,Mexico, whereby Avon Mexico pays the Company also issued standby lettersa variable royalty. The Company recorded revenue from related party of credit to the lessors of certain equipment, a lease for which was transferred to New Avon in connection$1 associated with the separation of the Company's North America business. The initial liability for the estimated value of such standby letters of credit was $2.1, which was included in the additional loss on sale of the North America business recognized in loss from discontinued operations, net of tax in our Consolidated Statements of Operationsthese agreements during the year ended December 31, 2016. At both December 31, 2018 and 2017, the2021. The Company had a liabilityrecorded gross profit from related party of $1.4 for the estimated value of such standby letters of credit. The reduction of this estimated liability of $.2$1 associated with these agreements during the yearsyear ended December 31, 2017 was recognized2021.
(4) The payable to Natura &Co relates to the vesting and settlement of share based compensation awards denominated in Natura &Co American Depository Receipts including the 2018 long-term employee incentive program which vested and were automatically exercised in March 2021.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(5) Loans from affiliates of Natura &Co Holding at December 31, 2021 of $1,108.0 include $736.3 outstanding under a Promissory Note between Avon Beauty Limited and a subsidiary of Natura &Co Holding, and $207.3 outstanding under a Promissory Note with a subsidiary of Natura &Co Holding and an affiliate of the Company. In addition loans from affiliates of Natura &Co Holding at December 31, 2021 include $164.4 of intercompany loans between Avon Luxembourg and Avon Products, Inc. affiliates that, following the sale of Avon Luxembourg to a subsidiary of Natura &Co Holding on July 1, 2021, were redesignated as loans from affiliates of Natura & Co Holding. Loans from affiliates of Natura &Co Holding at December 31, 2020 of $1,008.6 include $965 outstanding under a Promissory Note between Avon International Operations Inc. and a subsidiary of Natura &Co Holding. Loans from affiliates of Natura &Co Holding at December 31, 2020 also include $41.6 outstanding under the Revolving Credit Facility between Avon Luxembourg and Natura &Co International S.à r.l.. See Note 15, Debt and Other Financing, for further information relating to these loans.
(6) During the second quarter of 2021, Avon Cosméticos LTDA., made an investment of R$.5 in Natura &Co Pay Holding Financeira S.A., representing a 10% holding in the company. This is presented in other expense, netassets in our Consolidated StatementsBalance Sheets.
(7) On July 1, 2021, the Company sold Avon Luxembourg, including our Mexican business, to a subsidiary of Operations.Natura &Co Holding. As a result, transactions and balances between Avon International and Avon Luxembourg are no longer eliminated on consolidation and instead are treated as transactions and balances with Related Parties.
See Note 18, Series C Convertible Preferred Stock, for discussion of preferred shares issued to Cerberus Investor.
NOTE 6.5. Revenue
Disaggregation of revenue
In the following table,tables, revenue is disaggregated by product or service type. All revenue is recognized at a point in time, when control of a product is transferred to a customer:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Twelve Months Ended December 31, 2021 |
| | Reportable segments | | | | |
| | Avon International | | Avon LATAM | | | | | | Total reportable segments | | Affiliates of Natura | | Total |
| Beauty: | | | | | | | | | | | | | | |
| Skincare | | $ | 577.6 | | | $ | 465.8 | | | | | | | $ | 1,043.4 | | | $ | — | | | $ | 1,043.4 | |
| Fragrance | | 514.2 | | | 375.8 | | | | | | | 890.0 | | | — | | | 890.0 | |
| Color | | 238.0 | | | 181.9 | | | | | | | 419.9 | | | — | | | 419.9 | |
| Total Beauty | | 1,329.8 | | | 1,023.5 | | | | | | | 2,353.3 | | | — | | | 2,353.3 | |
| Fashion & Home: | | | | | | | | | | | | | | |
| Fashion | | 258.3 | | | 159.8 | | | | | | | 418.1 | | | — | | | 418.1 | |
| Home | | 69.6 | | | 340.4 | | | | | | | 410.0 | | | — | | | 410.0 | |
| Total Fashion & Home | | 327.9 | | | 500.2 | | | | | | | 828.1 | | | — | | | 828.1 | |
| Certain Brazil taxes* | | — | | | 21.5 | | | | | | | 21.5 | | | — | | | 21.5 | |
| Product sales | | 1,657.7 | | | 1,545.2 | | | | | | | 3,202.9 | | | — | | | 3,202.9 | |
| Representative fees | | 66.4 | | | 107.8 | | | | | | | 174.2 | | | — | | | 174.2 | |
| Other | | .5 | | | 1.7 | | | | | | | 2.2 | | | 25.2 | | | 27.4 | |
| Other revenue | | 66.9 | | | 109.5 | | | | | | | 176.4 | | | 25.2 | | | 201.6 | |
| Total revenue | | $ | 1,724.6 | | | $ | 1,654.7 | | | | | | | $ | 3,379.3 | | | $ | 25.2 | | | $ | 3,404.5 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Twelve Months Ended December 31, 2018 |
| | | Reportable segments | | | | |
| | | Europe, Middle East & Africa | | South Latin America | | North Latin America | | Asia Pacific | | Total reportable segments | | Other operating segments and business activities | | Total |
| Beauty: | | | | | | | | | | | | | | |
| Skincare | | $ | 619.2 |
| | $ | 564.3 |
| | $ | 166.9 |
| | $ | 124.3 |
| | $ | 1,474.7 |
| | $ | 6.4 |
| | $ | 1,481.1 |
|
| Fragrance | | 636.6 |
| | 483.9 |
| | 218.1 |
| | 89.5 |
| | 1,428.1 |
| | 2.9 |
| | 1,431.0 |
|
| Color | | 398.7 |
| | 310.7 |
| | 81.8 |
| | 54.1 |
| | 845.3 |
| | 4.8 |
| | 850.1 |
|
| Total Beauty | | 1,654.5 |
| | 1,358.9 |
| | 466.8 |
| | 267.9 |
| | 3,748.1 |
| | 14.1 |
| | 3,762.2 |
|
| Fashion & Home: | | | | | | | | | | | | | | |
| Fashion | | 298.0 |
| | 190.6 |
| | 94.4 |
| | 167.8 |
| | 750.8 |
| | 3.0 |
| | 753.8 |
|
| Home | | 45.3 |
| | 283.4 |
| | 204.2 |
| | 28.4 |
| | 561.3 |
| | 2.0 |
| | 563.3 |
|
| Total Fashion & Home | | 343.3 |
| | 474.0 |
| | 298.6 |
| | 196.2 |
| | 1,312.1 |
| | 5.0 |
| | 1,317.1 |
|
| Brazil IPI tax release * | | — |
| | 168.4 |
| | — |
| | — |
| | 168.4 |
| | — |
| | 168.4 |
|
| Net sales | | 1,997.8 |
| | 2,001.3 |
| | 765.4 |
| | 464.1 |
| | 5,228.6 |
| | 19.1 |
| | 5,247.7 |
|
| Representative fees | | 95.3 |
| | 135.7 |
| | 43.9 |
| | 6.5 |
| | 281.4 |
| | 2.0 |
| | 283.4 |
|
| Other | | 0.7 |
| | 9.9 |
| | — |
| | 0.2 |
| | 10.8 |
| | 29.4 |
| | 40.2 |
|
| Other revenue | | 96.0 |
| | 145.6 |
| | 43.9 |
| | 6.7 |
| | 292.2 |
| | 31.4 |
| | 323.6 |
|
| Total revenue | | $ | 2,093.8 |
| | $ | 2,146.9 |
| | $ | 809.3 |
| | $ | 470.8 |
| | $ | 5,520.8 |
| | $ | 50.5 |
| | $ | 5,571.3 |
|
* Includes the impact of the Brazil IPI tax release, which was recorded in net sales and other (income) expense, net in the amounts of approximately $168 and approximately $27, respectively, in our Consolidated Income Statements (See Note 19, Contingencies for further information).
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Twelve Months Ended December 31, 2020 |
| | Reportable segments | | | | |
| | Avon International | | Avon LATAM | | | | | | Total reportable segments | | Affiliates of Natura | | Total |
| Beauty: | | | | | | | | | | | | | | |
| Skincare | | $ | 594.7 | | | $ | 515.9 | | | | | | | $ | 1,110.6 | | | $ | — | | | $ | 1,110.6 | |
| Fragrance | | 516.0 | | | 456.4 | | | | | | | 972.4 | | | — | | | 972.4 | |
| Color | | 265.8 | | | 197.5 | | | | | | | 463.3 | | | — | | | 463.3 | |
| Total Beauty | | 1,376.5 | | | 1,169.8 | | | | | | | 2,546.3 | | | — | | | 2,546.3 | |
| Fashion & Home: | | | | | | | | | | | | | | |
| Fashion | | 267.4 | | | 192.5 | | | | | | | 459.9 | | | — | | | 459.9 | |
| Home | | 55.6 | | | 369.4 | | | | | | | 425.0 | | | — | | | 425.0 | |
| Total Fashion & Home | | 323.0 | | | 561.9 | | | | | | | 884.9 | | | — | | | 884.9 | |
| | | | | | | | | | | | | | |
| Product sales | | 1,699.5 | | | 1,731.7 | | | | | | | 3,431.2 | | | — | | | 3,431.2 | |
| Representative fees | | 66.7 | | | 108.4 | | | | | | | 175.1 | | | — | | | 175.1 | |
| Other | | 6.4 | | | 5.8 | | | | | | | 12.2 | | | 6.7 | | | 18.9 | |
| Other revenue | | 73.1 | | | 114.2 | | | | | | | 187.3 | | | 6.7 | | | 194.0 | |
| Total revenue | | $ | 1,772.6 | | | $ | 1,845.9 | | | | | | | $ | 3,618.5 | | | $ | 6.7 | | | $ | 3,625.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Twelve Months Ended December 31, 2019 |
| | Reportable segments | | | | |
| | Avon International | | Avon LATAM | | | | | | | | | | Total |
| Beauty: | | | | | | | | | | | | | | |
| Skincare | | $ | 671.5 | | | $ | 699.9 | | | | | | | | | | | $ | 1,371.4 | |
| Fragrance | | 639.9 | | | 604.7 | | | | | | | | | | | 1,244.6 | |
| Color | | 381.6 | | | 340.0 | | | | | | | | | | | 721.6 | |
| Total Beauty | | 1,693.0 | | | 1,644.6 | | | | | | | | | | | 3,337.6 | |
| Fashion & Home: | | | | | | | | | | | | | | |
| Fashion | | 383.8 | | | 235.0 | | | | | | | | | | | 618.8 | |
| Home | | 61.7 | | | 408.3 | | | | | | | | | | | 470.0 | |
| Total Fashion & Home | | 445.5 | | | 643.3 | | | | | | | | | | | 1,088.8 | |
| Certain Brazil taxes** | | — | | | 67.7 | | | | | | | | | | | 67.7 | |
| Product sales | | 2,138.5 | | | 2,355.6 | | | | | | | | | | | 4,494.1 | |
| Representative fees | | 91.5 | | | 152.7 | | | | | | | | | | | 244.2 | |
| Other | | 4.3 | | | 20.6 | | | | | | | | | | | 24.9 | |
| Other revenue | | 95.8 | | | 173.3 | | | | | | | | | | | 269.1 | |
| Total revenue | | $ | 2,234.3 | | | $ | 2,528.9 | | | | | | | | | | | $ | 4,763.2 | |
* 2021 includes approximately $22, to reflect the impact of certain Brazil indirect taxes which were recorded in product sales, in our Consolidated Income Statements. See Note 20 Supplemental Balance Sheet Information.
** 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 20 Supplemental Balance Sheet Information.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Contract balances
The timing of revenue recognition generally is different from the timing of a promise made to a Representative. As a result, we have contract liabilities, which primarily relate to the advance consideration received from Representatives prior to transfer of the related good or service for material rights, such as loyalty points and status programs, and are primarily classified within other accrued liabilities (with the long-term portion in other liabilities) in our Consolidated Balance Sheets.
Generally, we record accounts receivable when we invoice a Representative. In addition, we record an estimate of an allowance for doubtful accounts on receivable balances based on an analysis of historical data and, as applicable, current circumstances,conditions and reasonable and supportable forecasts that affect collectability, including seasonality and changing trends.trends and the impact of COVID-19. The allowance for doubtful accounts is reviewed for adequacy, at a minimum, on a quarterly basis. We generally have no detailed information concerning, or any communication with, any ultimate consumer of our products beyond the Representative. We have no legal recourse against the ultimate consumer for the collection of any accounts receivable balances due from the Representative to us. If the financial condition of the Representatives were to deteriorate, resulting in their inability to make payments, additional allowances may be required.
The following table provides information about receivables and contract liabilities from contracts with customers at December 31, 2018:2021 and 2020:
| | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| Accounts receivable, net of allowances of $37.1 and $51.1 | | $ | 198.7 | | | $ | 259.1 | |
| Contract liabilities | | $ | 37.1 | | | $ | 52.1 | |
|
| | | | |
| | | December 31, 2018 |
| Accounts receivable, net of allowances of $93.0 | | $ | 349.7 |
|
| Contract liabilities | | $ | 84.4 |
|
At January 1, 2018 and December 31, 2018 we had aThe contract liability of $91.8 and $84.4, respectively, relatingbalances relate to certain material rights (loyalty points, status program and prospective discounts). During the twelve months ended December 31, 2018,2021, we recognized $89.5$39.5 of revenue related to the contract liability balance at January 1, 2018,December 31, 2020, as the result of performance obligations satisfied. In addition, we deferred an additional $82.3$29.9 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 December 31, 20182021 as compared with December 31, 2017.2020, and the sale of Avon Luxembourg.
Contract costs
Incremental costs to obtain contracts, such as bonuses or commissions, are recognized as an asset if the entity expects to recover them. However, ASC 340-40, Other Assets and Deferred Costs, offers a practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less. We elected the practical expedient and expense costs to obtain contracts when incurred because our amortization period is one year or less.
Costs to fulfill contracts with Representatives are comprised of shipping and handling (including order processing) and payment processing services, which are expensed as incurred. The fees for these services are included in the transaction price.
NOTE 7.6. Inventories
Inventories at December 31 consisted of the following: | | | | | | | | | | | | | | |
| | 2021 | | 2020 |
| Raw materials | | $ | 103.4 | | | $ | 131.3 | |
| Finished goods | | 280.7 | | | 327.8 | |
| Total | | $ | 384.1 | | | $ | 459.1 | |
|
| | | | | | | | |
| | | 2018 | | 2017 |
| Raw materials | | $ | 157.8 |
| | $ | 190.6 |
|
| Finished goods | | 384.2 |
| | 407.6 |
|
| Total | | $ | 542.0 |
| | $ | 598.2 |
|
These amounts are net of the allowance for inventory obsolescence, and include the impact of an incremental one-off inventory obsolescence expense recognized at December 31, 2018, resulting from the structural reset of inventory announced in January 2019 (refer to Note 17, Restructuring Initiatives, for additional information regarding Open Up Avon and the structural reset of inventory).
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8.7. Debt and Other Financing
Debt
Debt at December 31 consisted of the following:
| | | | | | | | | | | | | | |
| | 2021 | | 2020 |
| Debt maturing within one year: | | | | |
| Short term debt | | $ | 32.6 | | | $ | 28.0 | |
| Loans from affiliates of Natura &Co | | 371.7 | | | 1,008.6 | |
| | | | |
| Total | | $ | 404.3 | | | $ | 1,036.6 | |
| Long-term debt: | | | | |
| Finance lease liabilities | | 1.3 | | | 1.5 | |
| 5.00% Notes, due March 2023 | | 460.8 | | | 460.1 | |
| | | | |
| 6.95% Notes, due March 2043 | | 213.9 | | | 213.8 | |
| Loans from affiliates of Natura &Co, due 2028 | | 736.3 | | | — | |
| Total | | 1,412.3 | | | 675.4 | |
| | | | |
| | | | |
| | | | |
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | | | | | |
| | | 2018 | | 2017 |
| Debt maturing within one year: | | | | |
| Notes payable | | $ | 8.8 |
| | $ | 22.6 |
|
| Current portion of long-term debt | | 3.2 |
| | 3.1 |
|
| Total | | $ | 12.0 |
| | $ | 25.7 |
|
| Long-term debt: | | | | |
| 6.50% Notes, due March 2019 | | $ | — |
| | $ | 237.2 |
|
| 4.60% Notes, due March 2020 | | 386.4 |
| | 408.8 |
|
| 7.875% Senior Secured Notes, due August 2022 | | 494.2 |
| | 492.6 |
|
| 5.00% Notes, due March 2023 | | 458.5 |
| | 484.5 |
|
| Other debt, payable through 2025 with interest from .4% to 12.1% | | 4.6 |
| | 5.2 |
|
| 6.95% Notes, due March 2043 | | 241.1 |
| | 241.0 |
|
| Total | | 1,584.8 |
| | 1,869.3 |
|
| Unamortized deferred gain - swap terminations | | — |
| | 6.0 |
|
| Less current portion | | (3.2 | ) | | (3.1 | ) |
| Total long-term debt | | $ | 1,581.6 |
| | $ | 1,872.2 |
|
Notes payable included short-term borrowings of international subsidiaries at average annual interest rates of approximately 19.0% at December 31, 2018 and 23.0% at December 31, 2017.
Other debt included obligations under capital leases of $2.5 at December 31, 2018 and $4.0 at December 31, 2017, which primarily relate to leases of automobiles and equipment.
PublicUnsecured Notes
In March 2013, we issued, in a public offering, $250.0 principal amount of 2.375% Notes due March 15, 2016 (the "2.375% Notes"), $500.0 principal amount of 4.60% Notes due March 15, 2020 (the "4.60% Notes"), $500.0 principal amount of 5.00% Notes due March 15, 2023 (the "5.00% Notes") and $250.0 principal amount of 6.95% Notes due March 15, 2043 (the "6.95% Notes") (collectively, the "2013 Notes"). In March 2008, we issued $350.0 principal amount of 6.50% Notes due March 1, 2019 (the "6.50% Notes"). Interest on the 2013 Notes is payable semi-annually on March 15 and September 15 of each year, and interest on the 6.50% Notes is payable semi-annually on March 1 and September 1 of each year. In August 2015, we prepaid the entire principal amount of our 2.375% Notes.
The indenture governing the 2013 Notes contains interest rate adjustment provisions depending on the long-term credit ratings assigned to the 2013 Notes with S&P and Moody's. As described in the indenture, the interest rates on the 2013 Notes increase or decrease by .25% for each one-notch downgrademovement below investment grade on each of our long-termthe credit ratings assigned to the 2013 Notes by S&P or Moody's. These adjustments are limited to a total increase of 2% above the respective interest rates in effect on the date of issuance of the 2013 Notes. As a result of the long-term credit rating downgrades by S&P and Moody's since issuance of the 2013 Notes, the interest rates on these notes have increased by the maximum allowable increase.
In August 2016, we completed cash tender offers which resulted in a reduction of principal of $108.6 of our 5.75% Notes due March 1, 2018 (the "5.75% Notes"), $73.8 of our 4.20% Notes due July 15, 2018 (the "4.20% Notes"), $68.1 of our 6.50% Notes and $50.1 of our 4.60% Notes.
In connection with the cash tender offers, we incurred a gain on extinguishment of debt of $3.9 before tax in the thirdfourth quarter of 2016, consisting of a deferred gain of $12.8 associated with the March 2012 and January 2013 interest-rate swap agreement terminations (see Note 11, Financial Instruments and Risk Management), partially offset by the $5.8 of early tender premium paid for the cash tender offers, $1.2 of a deferred loss associated with treasury lock agreements designated as cash flow hedges of the anticipated interest payments on the 5.75% Notes (see Note 11, Financial Instruments and Risk Management), $1.0 of deal costs and the write-off of $.9 of debt issuance costs and discounts related to the initial issuances of the notes that were the subject of the cash tender offers.
In October 2016, we repurchased $44.0 of our 6.50% Notes, $44.0 of our 4.20% Notes, $40.0 of our 4.60% Notes, and $35.2 of our 5.75% Notes. The aggregate repurchase price was equal to the principal amount of the notes, plus a premium of $6.2 and accrued interest of $1.1. In connection with these repurchases of debt, we incurred a loss on extinguishment of debt of $1.0 before tax in the fourth quarter of 2016 consisting of the $6.2 premium paid for the repurchases, $.5 for the write-off of debt issuance costs and discounts related to the initial issuance of the notes that were repurchased and $.4 for a deferred loss
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
associated with treasury lock agreements designated as cash flow hedges of the anticipated interest payments on the 5.75% Notes (see Note 11, Financial Instruments and Risk Management), partially offset by a deferred gain of approximately $6.1 associated with the March 2012 and January 2013 interest-rate swap agreement terminations (see Note 11, Financial Instruments and Risk Management).
On November 30, 2016, we prepaid the remaining principal amount of our 4.20% Notes and 5.75% Notes. The prepayment price was equal to the remaining principal amount of $132.2 for our 4.20% Notes and $106.2 for our 5.75% Notes, plus a make-whole premium of $12.1 for both series of notes and accrued interest of $3.6 for both series of notes. In connection with the prepayment of our 4.20% Notes and 5.75% Notes, we incurred a loss on extinguishment of debt of $2.9 before tax in the fourth quarter of 2016 consisting of the $12.1 make-whole premium, $1.0 of a deferred loss associated with treasury lock agreements designated as cash flow hedges of the anticipated interest payments on the 5.75% Notes (see Note 11, Financial Instruments and Risk Management) and the write-off of $.3 of debt issuance costs and discounts related to the initial issuances of the notes that were prepaid, partially offset by a deferred gain of $10.5 associated with the January 2013 interest-rate swap agreement termination (see Note 10, Financial Instruments and Risk Management).
In December 2016, we repurchased $11.1 of our 5.00% Notes and $6.2 of our 6.95% Notes, and the aggregate repurchase price was equal to the principal amount of the notes, less a discount received of $1.3 and plus accrued interest of $.3. In connection with this repurchase of debt, we incurred a gain on extinguishment of debt of $1.1 before tax in the fourth quarter of 2016 consisting of the $1.3 discount received for the repurchases, partially offset by $.2 for the write-off of debt issuance costs and discounts related to the initial issuance of the notes that were repurchased.Notes.
In June 2018, we prepaid the remaining principal amount of our 6.50% Notes. The prepayment price was equal to the remaining principal amount of $237.8, plus a make-whole premium of $6.2 and accrued interest of $4.6. In connection with the prepayment, we incurred a loss on extinguishment of debt of $2.9 before tax in the second quarter of 2018 consisting of the $6.2 make-whole premium, and the write-off of $.3 of debt issuance costs and discounts related to the initial issuances of the notes that were prepaid, partially offset by a write off of a deferred gain of $3.6 associated with the March 2012 interest-rate swap agreement termination (see Note 11, Financial Instruments and Risk Management).termination.
In the fourth quarter of 2018, we repurchased $23.0 of our 4.60% Notes and $27.0 of our 5.00% Notes. The aggregate repurchase price was equal to the principal amount of the notes, less a discount received of $2.4 and accrued interest of $.7. In connection with these repurchases of debt, we incurred a gain on extinguishment of debt of $2.1 before tax in the fourth quarter of 2018 consisting of the $2.4 discount received for the repurchases, partially offset by $0.3$.3 for the write-off of debt issuance costs and discounts related to the initial issuance of the notes that were repurchased.
In July 2019, we repurchased $274.8 of our 4.60% Notes by way of a tender offer. The aggregate repurchase price was equal to the principal amount of $274.8 less a discount received of $.6, plus an early tender premium of $8.2 and accrued interest of $5.4. In December 2019, we prepaid the remaining principal amount of our 4.6% Notes. The prepayment price was equal to the remaining principal amount of $112.2, plus a make-whole premium of $1.4 and accrued interest of $1.7. In connection with these repurchases of debt, we incurred a loss on extinguishment of debt of $8.1 before tax in the third quarter and $1.5 before tax in the fourth quarter of 2019.
In September 2020, we repurchased $27.8 of our 6.95% Notes due March 15, 2043. The aggregate repurchase price was equal to the principal amount of the notes, plus a premium of $3.8 and accrued interest of $1.2. In connection with the repurchase, we incurred a loss on extinguishment of debt of $4.1 before tax in the third quarter of 2020 consisting of the $3.8 premium paid for the repurchases, and $.3 for the write-off of debt issuance costs and discounts related to the initial issuance of the notes that were repurchased.
At December 31,
20182021 and
2017,2020, the carrying values of our
publicunsecured notes were comprised of the following:
| | | | | | | | | | | | | | | | | | | | 2021 | | 2020 |
| | 2018 | | 2017 | | Remaining Principal | | Unamortized Discounts | | Unamortized Debt Issuance Costs | | Total | | Remaining Principal | | Unamortized Discounts | | Unamortized Debt Issuance Costs | | Total |
| | Remaining Principal | | Unamortized Discounts | | Unamortized Debt Issuance Costs | | Total | | Remaining Principal | | Unamortized Discounts | | Unamortized Debt Issuance Costs | | Total | |
| 6.50% Notes, due March 2019 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 237.9 |
| | $ | (.4 | ) | | $ | (.3 | ) | | $ | 237.2 |
| |
| 4.60% Notes, due March 2020 | 387.0 |
| | (.1 | ) | | (.5 | ) | | 386.4 |
| | 409.9 |
| | (.2 | ) | | (.9 | ) | | 408.8 |
| |
| | 5.00% Notes, due March 2023 | 461.9 |
| | (1.9 | ) | | (1.5 | ) | | 458.5 |
| | 488.9 |
| | (2.5 | ) | | (1.9 | ) | | 484.5 |
| 5.00% Notes, due March 2023 | 461.9 | | | (.5) | | | (.6) | | | 460.8 | | | 461.9 | | | (1.0) | | | (.8) | | | 460.1 | |
| 6.95% Notes, due March 2043 | 243.9 |
| | (.6 | ) | | (2.2 | ) | | 241.1 |
| | 243.8 |
| | (.6 | ) | | (2.2 | ) | | 241.0 |
| 6.95% Notes, due March 2043 | 216.1 | | | (1.7) | | | (.5) | | | 213.9 | | | 216.1 | | | (.5) | | | (1.8) | | | 213.8 | |
The indentures governing our outstanding notes described above contain certain customary covenants, and customary events of default, and cross-default provisions. Further, we would be required to make an offer to repurchase all of our outstanding notes described above at a price equal to 101% of their aggregate principal amount plus accruedprovisions and unpaid interest in the event of a change in control involvingprovisions. In July and September 2019, bondholder consents for the 5% Notes and the 6.95% Notes, respectively, were obtained to amend the definition of "change of control" to permit the acquisition of Avon by Natura. No repayment of notes was triggered by the Transaction with Natura &Co.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At December 31, 2021 and at such time, the outstanding2020, we had recorded accrued interest on our unsecured notes are rated below investment grade.of $14.7 and $15.2, respectively, which is classified within other accrued liabilities in our Consolidated Balance Sheets.
Senior Secured Notes
In August 2016, Avon International Operations, Inc. (“AIO”("AIO"), a wholly-owned domestic subsidiary of the Company, issued, in a private placement exempt from registration under the Securities Act of 1933, as amended, $500.0 in aggregate principal amount of 7.875% Senior Secured Notes, which will mature onwith a maturity date of August 15, 2022 (the "Senior Secured"2016 Notes"). Interest on our Senior Secured Notes is payable semi-annually on February 15 and August 15 of each year. The carrying value of our Senior Secured Notes represented the $500.0 principal amount, net of unamortized debt issuance costs of $5.8 and $7.4 at December 31, 2018 and 2017, respectively. This represents the total debt for AIO at December 31, 2018 and 2017.
All obligations of AIO under our Senior Secured Notes are unconditionally guaranteed by the Company, AIO and each other material United States or English restrictedIn July 2019, Avon International Capital, p.l.c. ("AIC"), a wholly-owned subsidiary of the Company, (collectively,issued, in a private placement exempt from registration under the “Obligors”),Securities Act of 1933, as amended, $400.0 in each case, subjectaggregate principal amount of 6.5% Senior Secured Notes, with a maturity date August 15, 2022 (the "2019 Notes").
In November 2020, in connection with the Natura & Co Promissory Note, we redeemed the outstanding principal amount of our 2016 Notes due August 15, 2022 and the outstanding principal amount of our 2019 Notes due August 15, 2022. With respect to certain exceptions. Thethe 2016 Notes, the aggregate redemption amount paid was equal to the outstanding principal amount of $500, plus a premium of $9.8 and accrued interest of $8.4. With respect to the 2019 Notes, the aggregate redemption amount paid was equal to the outstanding principal amount of $400, plus a premium of $7.9 and accrued interest of $5.6.
In connection with the redemption, we incurred a loss on extinguishment of debt of $25.6 before tax in the fourth quarter of 2020 consisting of the $17.7 premiums, and the write-off of $7.9 of debt issuance costs related to the initial issuances of the notes that were redeemed.
Certain hedging and cash management obligations of the ObligorsCompany and certain subsidiaries are secured by first priority liens on and security interests in substantially all of theits assets, of the Obligors, in each case, subject to certain exceptions.
At December 31, 2021 and 2020, the carrying values of our senior secured notes was nil.
Maturities of Long-Term Debt
Annual maturities of long-term debt, which includes our notes, loans from affiliates of Natura &Co and capital leases outstanding at December 31, 2021, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 and Beyond | | Total |
| Maturities | | $ | — | | | $ | 462.7 | | | $ | .3 | | | $ | .2 | | | $ | .1 | | | $ | 952.4 | | | $ | 1,415.7 | |
Other Financing
Natura Revolving Credit Facility
In May 2020, the Company’s subsidiary, Avon Luxembourg entered into a Revolving Credit Facility Agreement with Natura &Co International S.à r.l., a subsidiary of Natura &Co Holding and an affiliate of the Company, in the initial amount of $100, increased to $250 in March 2021, which may be used for working capital and other general corporate purposes (the "Facility"). Borrowings under the Facility bear interest at a rate per annum of LIBOR plus a margin determined on an arm's length basis, and the Facility is to mature on May 31, 2022. On July 1, 2021, the Company sold Avon Luxembourg to a subsidiary of Natura &Co Holding and the Company no longer has access to this facility.
Related Party loans
In November 2020, AIO entered into a Promissory Note with a subsidiary of Natura &Co Holding S.A. and an affiliate of the Company in the amount of $960. The Promissory Note bears interest at a rate per annum of 3.13% and matures on November 2, 2022 (“the Natura &Co Loan”). On July 1, 2021, as part of the sale of Avon Luxembourg to a subsidiary of Natura &Co Holding the $960 loan was partially repaid with the proceeds from a loan maturing in 2028. As at December 31, 2021, $207 was outstanding under the Natura &Co Loan and $736 was outstanding under the loan maturing in 2028 which is between Avon Beauty Limited, and Natura &Co Luxembourg Holdings S.à r.l. ("Natura &Co Lux Loan").
In addition, loans from affiliates of Natura &Co Holding at December 31, 2021 of $164 includes a number of intercompany loans between Avon Luxembourg and Avon Products, Inc. affiliates that, following the sale of Avon Luxembourg to a subsidiary of Natura &Co Holding S.A. on July 1, 2021, were redesignated as loans from affiliates of Natura & Co Holding.
Other short-term financing
At December 31, 2021, we utilized approximately $33 of short-term financing from third-party banks across multiple markets bearing an average interest rate of per annum of 7.7%.
Revolving Credit Facility
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The indenture governing our Senior Secured Notes contains certain customary covenants and restrictions as well as customary events of default and cross-default provisions. The indenture also contains a covenant requiring AIO and its restricted subsidiaries to, at the end of each year, own at least a certain percentage of the total assets of API and its restricted subsidiaries, subject to certain qualifications. Further, we would be required to make an offer to repurchase all of our Senior Secured Notes, at a price equal to 101% of their aggregate principal amount plus accrued and unpaid interest, in the event of a change in control involving Avon.
Maturities of Long-Term Debt
Annual maturities of long-term debt, which includes our notes and capital leases outstanding at December 31, 2018, are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 and Beyond | | Total |
| Maturities | | $ | 1.1 |
| | $ | 387.6 |
| | $ | 0.4 |
| | $ | 500.2 |
| | $ | 462.0 |
| | $ | 243.9 |
| | $ | 1,595.2 |
|
Other Financing
Revolving Credit Facility
In June 2015, Avon International Operations, Inc. ("AIO"),AIO, a wholly-owned domestic subsidiary of the Company, entered into a five-year $400.0 senior secured revolving credit facility (the “2015 facility”"2015 facility"). In December 2017, AIO entered into an amendment to the 2015 facility, which, among other things, modified the financial covenants (interest coverage and total leverage ratios) to provide the Company additional flexibility. As of December 31, 2018, there were no amounts outstanding under the 2015 facility.
In February 2019, Avon International Capital, p.l.c. ("AIC"),AIC, a wholly-owned foreign subsidiary of the Company, entered into a three-year €200.0 senior secured revolving credit facility (the “2019 facility”"2019 facility"). The 2019 facility replaced the 2015 facility and the 2015 facility was terminated at such time. Borrowings under
In the first quarter of 2019, facility bear interest at our option, at a rate per annum, equal$2.0 was recorded for the write-off of unamortized issuance costs related to either LIBOR or EURIBOR (for any loanthe 2015 revolving credit facility. In the first quarter of 2019, the Company capitalized $11.0 of issue costs relating to the new revolving credit facility; the cash outflow is presented in euros) plus 225 basis points, in each case subject to adjustment based upon a leveraged-based pricing grid. Theother financing activities within the Consolidated Statement of Cash Flows.
As of December 31, 2019, facility may be used for general corporate and working capital purposes. There arethere were no amounts outstanding under the 2019 facility. The amount available to be drawnfacility and on underJanuary 3, 2020, the 2019 facility is reduced by any standby letterswas automatically cancelled upon change of credit granted by AIC or any Obligor under the 2019 facility, including the standby letterscontrol, and as a result $7.8 was of credit granted by AIO under the 2015 facility thatunamortized issuance costs were rolled over into the 2019 facility, which, aswritten off, see Note 21, Agreement and Plan of December 31, 2018, were approximately $29 million.
All obligations of AIC under the 2019 facility are unconditionally guaranteed by the Company, AIO and each other material United States or English restricted subsidiary of the Company (collectively, the “Obligors”)Mergers with Natura Cosméticos S.A., in each case, subject to certain exceptions. The obligations of the Obligors are secured by first priority liens on and security interests in substantially all of the assets of the Obligors, in each case, subject to certain exceptions.
The 2019 facility will terminate in February 2022; provided, however, that it shall terminate on the 91st day prior to the maturity of the 4.60% Notes, if on such 91st day, the applicable notes are not redeemed, repaid, discharged, defeased or otherwise refinanced in full.
The 2019 facility contains affirmative and negative covenants, which are customary for secured financings of this type, as well as financial covenants (interest coverage and total leverage ratios). Depending on our business results (including the impact of any adverse foreign exchange movements and significant restructuring charges), it is possible that we may become non-compliant with our interest coverage or total leverage ratio absent the Company undertaking other alternatives to avoid noncompliance, such as obtaining additional amendments to the 2019 facility or repurchasing certain debt. If we were to be non-compliant with our interest coverage or total leverage ratio, we would no longer have access to our 2019 facility and our credit ratings may be downgraded.Consolidated Financial Statements included herein.
Letters of Credit
At December 31, 20182021 and December 31, 2017,2020, we also had letters of credit outstanding under our revolving credit facility totaling 29.4$11.3 and $37.7,$16.9, respectively. TheThese balances at December 31, 2018 and 2017 primarily relate to lettersa letter of credit issued to lessorsa lessor of certain equipment, a lease for which was transferred to New Avon in connection with the separation of the Company's North America business. The balances at December 31, 2018business, and December 31, 2017 also include letters of credit which guarantee various insurance activities.
Long-Term Credit Ratings
Our long-term credit ratings are: Moody’s ratings of Stable OutlookOutlook with B1 forBa3 for corporate family debt, B3 for senior unsecured debt, and Ba1 for our Senior Secured Notes;debt; S&P ratings of Stable Outlook with BBB- for corporate family debt and senior
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
unsecured debt and BB- for our Senior Secured Notes;debt; and Fitch rating of Stable Outlook with B+, each of which areBB for corporate family and unsecured debt.
Our credit ratings remain below investment grade. We do not believe these long-term credit ratings will have a materialgrade which may impact our ability to access financing transactions on our near-term liquidity. However, any rating agency reviews could result in a change in outlook or downgrade, which could further limit our access to new financing, particularly short-term financing, reduce our flexibility with respect to working capital needs, affect the market price of some or all of our outstanding debt securities, and likely result in an increase in financing costs, and less favorable covenants and financial terms under our financing arrangements.terms.
NOTE 9.8. Accumulated Other Comprehensive Income (Loss)
The tables below present the changes in AOCI by component and the reclassifications out of AOCI during 20182021 and 2017:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Foreign Currency Translation Adjustments | | Net Investment Hedges | | Pension and Postretirement Benefits | | Total |
| Balance at December 31, 2020 | | $ | (1,038.2) | | | $ | (4.3) | | | $ | (91.3) | | | $ | (1,133.8) | |
| Other comprehensive income (loss) other than reclassifications | | (24.1) | | | — | | | 67.3 | | | 43.2 | |
| Sale of Avon Luxembourg | | .1 | | | 0 | | (.1) | | | — | |
| Reclassifications into earnings: | | | | | | | | |
| | | | | | | | |
Amortization of net actuarial loss and prior service cost, net of tax of $.8(1) | | — | | | — | | | 5.1 | | | 5.1 | |
| Total reclassifications into earnings | | — | | | — | | | 5.1 | | | 5.1 | |
| Balance at December 31, 2021 | | $ | (1,062.2) | | | $ | (4.3) | | | $ | (19.0) | | | $ | (1,085.5) | |
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Foreign Currency Translation Adjustments | | Cash Flow Hedges | | Net Investment Hedges | | Pension and Postretirement Benefits | | Investment in New Avon | | Total |
| Balance at December 31, 2017 | | $ | (829.6 | ) | | $ | — |
| | $ | (4.3 | ) | | $ | (95.7 | ) | | $ | 3.4 |
| | $ | (926.2 | ) |
| Other comprehensive (loss) income other than reclassifications | | (106.6 | ) | | .5 |
| | — |
| | (8.6 | ) | | — |
| | (114.7 | ) |
| Reclassifications into earnings: | | | | | | | | | | | | |
| Derivative gains on cash flow hedges, net of tax of $0.0 | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Amortization of net actuarial loss and prior service cost, net of tax of $.6(1) | | — |
| | — |
| | — |
| | 10.5 |
| | — |
| | 10.5 |
|
| Total reclassifications into earnings | | — |
| | | | — |
| | 10.5 |
| | — |
| | 10.5 |
|
| Balance at December 31, 2018 | | $ | (936.2 | ) | | $ | 0.5 |
| | $ | (4.3 | ) | | $ | (93.8 | ) | | $ | 3.4 |
| | $ | (1,030.4 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Foreign Currency Translation Adjustments | | Cash Flow Hedges | | Net Investment Hedges | | Pension and Postretirement Benefits | | Total |
| Balance at December 31, 2019 | | $ | (942.7) | | | $ | (.6) | | | $ | (4.3) | | | $ | (92.4) | | | $ | (1,040.0) | |
| Other comprehensive loss other than reclassifications | | (95.5) | | | — | | | — | | | (7.1) | | | (102.6) | |
| Reclassifications into earnings: | | | | | | | | | | |
| Derivative gains on cash flow hedges, net of tax of $0 | | — | | | .6 | | | — | | | — | | | .6 | |
Amortization of net actuarial loss and prior service cost, net of tax of $.8(1) | | — | | | — | | | — | | | 8.2 | | | 8.2 | |
| Total reclassifications into earnings | | — | | | .6 | | | — | | | 8.2 | | | 8.8 | |
| Balance at December 31, 2020 | | $ | (1,038.2) | | | $ | — | | | $ | (4.3) | | | $ | (91.3) | | | $ | (1,133.8) | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Foreign Currency Translation Adjustments | | Net Investment Hedges | | Pension and Postretirement Benefits | | Investment in New Avon | | Total |
| Balance at December 31, 2016 | | $ | (910.9 | ) | | $ | (4.3 | ) | | $ | (120.2 | ) | | $ | 2.2 |
| | (1,033.2 | ) |
| Other comprehensive income other than reclassifications | | 81.3 |
| | — |
| | 8.9 |
| | 1.2 |
| | 91.4 |
|
| Reclassifications into earnings: | | | | | | | | | | |
Amortization of net actuarial loss and prior service cost, net of tax of $.8(1) | | — |
| | — |
| | 15.6 |
| | — |
| | 15.6 |
|
| Total reclassifications into earnings | | — |
| | — |
| | 15.6 |
| | — |
| | 15.6 |
|
| Balance at December 31, 2017 | | $ | (829.6 | ) | | $ | (4.3 | ) | | $ | (95.7 | ) | | $ | 3.4 |
| | $ | (926.2 | ) |
(1) Gross amount reclassified to other expense, net, and related taxes reclassified to income taxes.
A foreign exchange net loss of $6.9$5.3 for 2018,2021, a net gain of $16.3$8.8 for 2017,2020, and a net lossgain of $23.7$.8 for 20162019, resulting from the translation of actuarial losses and prior service cost recorded in AOCI, are included in changes in foreign currency translation adjustments in our Consolidated Statements of Comprehensive Income (Loss).
NOTE 10.9. Income Taxes
Income from continuing operations, before taxes for the years ended December 31 was as follows: | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| United States | | $ | 19.3 | | | $ | (89.6) | | | $ | (108.3) | |
| Foreign | | (178.1) | | | (214.0) | | | 246.7 | |
| Total | | $ | (158.8) | | | $ | (303.6) | | | $ | 138.4 | |
|
| | | | | | | | | | | | |
| | | 2018 | | 2017 | | 2016 |
| United States | | $ | 39.3 |
| | $ | (147.6 | ) | | $ | (403.0 | ) |
| Foreign | | 68.8 |
| | 268.3 |
| | 434.2 |
|
| Total | | $ | 108.1 |
| | $ | 120.7 |
| | $ | 31.2 |
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The provision for income taxes for the years ended December 31 was as follows: | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| Federal: | | | | | | |
| Current | | $ | .2 | | | $ | (9.5) | | | $ | (9.0) | |
| Deferred | | — | | | 8.9 | | | 8.5 | |
| Total Federal | | .2 | | | (.6) | | | (0.5) | |
| Foreign: | | | | | | |
| Current | | 35.5 | | | 31.4 | | | 79.0 | |
| Deferred | | (20.0) | | | 2.6 | | | 28.9 | |
| Total Foreign | | 15.5 | | | 34.0 | | | 107.9 | |
| State and Local: | | | | | | |
| Current | | .5 | | | .6 | | | (4.3) | |
| Deferred | | — | | | — | | | — | |
| Total State and other | | .5 | | | .6 | | | (4.3) | |
| Total | | $ | 16.2 | | | $ | 34.0 | | | $ | 103.1 | |
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | | | | | | | | | |
| | | 2018 | | 2017 | | 2016 |
| Federal: | | | | | | |
| Current | | $ | (6.1 | ) | | $ | — |
| | $ | — |
|
| Deferred | | 3.7 |
| | (34.0 | ) | | — |
|
| Total Federal | | (2.4 | ) | | (34.0 | ) | | — |
|
| Foreign: | | | | | | |
| Current | | 182.3 |
| | 130.6 |
| | 128.5 |
|
| Deferred | | (53.0 | ) | | 3.8 |
| | (4.2 | ) |
| Total Foreign | | 129.3 |
| | 134.4 |
| | 124.3 |
|
| State and Local: | | | | | | |
| Current | | 3.0 |
| | .3 |
| | .3 |
|
| Deferred | | — |
| | — |
| | — |
|
| Total State and other | | 3.0 |
| | .3 |
| | .3 |
|
| Total | | $ | 129.9 |
| | $ | 100.7 |
| | $ | 124.6 |
|
The continuing operations effective tax rate for the years ended December 31 was as follows:
|
| | | | | | | | | |
| | | 2018 | | 2017 | | 2016 |
| Statutory federal rate | | 21.0 | % | | 35.0 | % | | 35.0 | % |
| State and local taxes, net of federal tax benefit | | 2.2 |
| | .2 |
| | .6 |
|
| U.S. Tax Reform | | — |
| | (24.7 | ) | | — |
|
| Tax on foreign income | | (16.2 | ) | | 6.0 |
| | (24.4 | ) |
| Tax on uncertain tax positions - Brazil | | 67.4 |
| | — |
| | — |
|
| Tax on uncertain tax positions - Rest of World | | 8.5 |
| | (3.6 | ) | | 34.1 |
|
| Reorganizations | | (91.3 | ) | | — |
| | (93.6 | ) |
| Net change in valuation allowances | | 128.3 |
| | 62.4 |
| | 375.1 |
|
| Venezuela deconsolidation, devaluation and highly inflationary accounting | | — |
| | — |
| | 23.9 |
|
| Imputed royalties and associated non-deductible expenses | | .6 |
| | 9.5 |
| | 50.3 |
|
| Research credits | | (1.3 | ) | | (1.3 | ) | | (5.4 | ) |
| Other | | 1.0 |
| | (.1 | ) | | 3.8 |
|
| Effective tax rate | | 120.2 | % | | 83.4 | % | | 399.4 | % |
| | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| Statutory federal rate | | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State and local taxes, net of federal tax benefit | | (.3) | | | (.2) | | | (2.7) | |
| Tax on foreign income | | 67.1 | | | (1.8) | | | 62.1 | |
| Tax on uncertain tax positions | | 3.7 | | | 1.1 | | | 16.6 | |
| Reorganizations | | — | | | (10.0) | | | 185.6 | |
| Net change in valuation allowances | | (103.1) | | | (21.4) | | | (208.0) | |
| Other | | 1.4 | | | .1 | | | (.1) | |
| Effective tax rate | | (10.2) | % | | (11.2) | % | | 74.5 | % |
In 2021, the Company’s effective tax rate continues to be impacted by the country mix of earnings. The country mix includes losses in certain jurisdictions that cannot be benefited and income tax expense in certain jurisdictions where taxable income is generated. In 2021, the Company adjusted its reserves for uncertain tax positions associated with current year activity and events, primarily due to the expiration of statutes of limitation. Included in Tax on Foreign Income is the effect of tax rate changes including the increase in the United Kingdom tax rate from 19% to 25% which resulted in a deferred tax benefit of $89.
In 2021, the Net Change in Valuation Allowances line in the rate reconciliation above includes $164 of net benefits that could not be recognized. The $164 of benefits which were not recognized consisted of the following key items: 1) $71 of increased Valuation Allowances due to additional Deferred Tax Assets generated during 2021 which cannot be benefitted; 2) $89 of increased Valuation Allowances on Deferred Tax Assets due to a tax rate change offsetting equivalent and associated accruals of deferred tax benefits reflected in the “Tax on Foreign Income” line above; and 3) $4 of increased Valuation Allowances due to changes in judgment regarding the ability to use certain Deferred Tax Assets which existed at the beginning of 2021.
In 2020, the Company’s effective tax rate continues to be impacted by the country mix of earnings. The country mix includes losses in certain jurisdictions that cannot be benefited and income tax expense in certain jurisdictions where taxable income is generated. In 2020, the Company adjusted its reserves for uncertain tax positions associated with current year activity and events, primarily due to the expiration of statutes of limitation. Included in Tax on Foreign Income is the effect of tax rate changes including the increase in the United Kingdom tax rate from 17% to 19% which resulted in a deferred tax benefit of $21.0. Included in the Re-organizations line is the effect of a true-up for a change in estimate of $30.5 regarding the amount of net operating losses generated as part of the 2018 restructuring transactions.
In 2020, the Net Change in Valuation Allowances line in the rate reconciliation above includes $65.1 of net benefits that could not be recognized. The $65.1 of benefits which were not recognized consisted of the following key items: 1) $69.9 of increased Valuation Allowances due to additional Deferred Tax Assets generated during 2020 which cannot be benefitted; 2) $21.0 of increased Valuation Allowances on Deferred Tax Assets due to a tax rate change offsetting equivalent and associated accruals of deferred tax benefits reflected in the “Tax on Foreign Income” line above; 3) $4.7 of increased Valuation Allowances due to changes in judgment regarding the ability to use certain Deferred Tax Assets which existed at the beginning of 2020; and 4) $30.5 decrease which offsets the true-up effect for the change in estimate of the benefit of net operating losses generated as part of the 2018 restructuring transactions.
In 2019, as a result of continued business model changes related to the move of the Company’s headquarters from the US to the UK, the Company recognized one timeone-time tax benefitscharges of $98.7$256.9 reflected in the “Reorganizations”"Reorganizations" line above associated primarily with the:the rationalization and re-alignment of the Company’s legal entity structure the ownership transfer of certain operational assets within the consolidated group and the tax benefit associated with the Foreign Derived Intangible Income provisions of the Tax Cuts and Jobs Actwhich resulted in the U.S.use of approximately $256.9 of Foreign Tax Credits, deferred tax assets and other tax attributes.
In 2018,2019, the Net Change in Valuation Allowances line in the rate reconciliation above includes $138.6includes: 1) $232.5 of increasesdecreases to the Valuation Allowances primarily associated with Deferredthe utilization of Foreign Tax Assets generated in 2018. Reductions to Valuation Allowances of $93.0 were reflected in other captions of the rate reconciliation net of the associated Deferred Tax Assets which were expensed or written off during 2018 as follows: $57.2 for excess tax basis in deconsolidated subsidiaries that was re-allocated against investments in consolidated subsidiaries, $15.3 for reduction of future tax benefits anticipated for stateCredits and deferred tax assets $11.7offsetting the one-time tax charges of other Deferred Tax Assets and a reduction of $8.8 of Deferred Tax Assets associated with the repatriation of earnings from consolidated subsidiaries.
In 2017, as a result of the enactment of the Tax Cuts and Jobs Act$256.9 noted in the U.S., the Company recognized"Reorganizations" line above; and 2) $66.5 of decreases due to a net income tax benefit of $29.9rate change offsetting equivalent and associated with the following items which are reflected in the “U.S. Tax Reform” line above: $33.5 for a valuation allowance release associated with minimum tax credits which can be utilized and/or refunded in the future and $3.6 for an uncertain tax position for potential withholding taxes on the repatriation of unremitted earnings. In addition, there was no impact on our financial position or results associated with each of the following: a write-offwrite-offs of deferred tax assets and their associated valuation allowancereflected in the “Tax on Foreign Income” line above.
Deferred tax assets (liabilities) at December 31 consisted of $161.4 due to the rate change from 35% to 21%; a reversal of deferred tax liabilities andfollowing:
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | |
| | 2021 | | 2020 |
| Deferred tax assets: | | | | |
| Tax loss and deduction carryforwards | | $ | 425.0 | | | $ | 1,997.5 | |
| Intangibles | | 218.5 | | | 188.3 | |
| Tax credit carryforwards | | 119.7 | | | 119.0 | |
| Interest carryforwards | | 76.3 | | | 48.3 | |
| All other future deductions | | 199.8 | | | 199.1 | |
| Valuation allowance | | (815.4) | | | (2,327.6) | |
| Total deferred tax assets | | 223.9 | | | 224.6 | |
| Deferred tax liabilities | | $ | (105.0) | | | $ | (90.8) | |
| Net deferred tax assets | | $ | 118.9 | | | $ | 133.8 | |
As of December 31, 2021, excluded from the above table are approximately $1,638 of deferred tax assets for Avon Luxembourg Holdings S.à r.l. and subsidiaries that previously were offset with a full valuation allowance. As discussed in Note 3. Discontinued Operations and Assets and Liabilities Held for Sale, Avon Luxembourg Holdings S.à r.l. and subsidiaries were divested as of July 1, 2021.
We monitor the realizability of our deferred tax assets on a continuous basis. Should macroeconomic and socio-political conditions change or our business operations do not improve, approximately $67 of deferred tax assets could potentially need to be offset with the recording of a valuation allowance of $66.7 associated with unremitted earnings; establishment ofduring the next 12 months. The deferred tax assets for other miscellaneous withholdingare associated with Avon subsidiary operations that suffered a loss in earnings before tax items and theirduring 2021.
As of December 31, 2020, excluded from the above table are approximately $635 of worthless deferred tax assets that previously were offset with a full valuation allowance. Approximately $465 of these deferred tax assets cannot be used due to change of control limitation resulting from the merger with Natura. The remaining $170 is primarily associated valuation allowance of $5.5; and a one-time tax on offshore earnings and the associated utilization ofwith U.S. foreign tax credits of $2.9.
Included in$70 and state net operating/capital losses of $100 which the net change in valuation allowance noted above for 2017, we released valuation allowancesCompany has determined that use of $25.5 associated with a number of markets in Europe, Middle East & Africa as a result of a business model change related to the move of the Company's headquarters from the U.S. to the UK.
Deferredsuch deferred tax assets (liabilities) at December 31 consisted of the following:would be remote. |
| | | | | | | | |
| | | 2018 | | 2017 |
| Deferred tax assets: | | | | |
| Tax loss and deduction carryforwards | | $ | 2,144.3 |
| | $ | 2,022.1 |
|
| Tax credit carryforwards | | 830.5 |
| | 981.0 |
|
| All other future deductions | | 560.8 |
| | 471.0 |
|
| Valuation allowance | | (3,257.5 | ) | | (3,217.7 | ) |
| Total deferred tax assets | | 278.1 |
| | 256.4 |
|
| Deferred tax liabilities | | $ | (85.1 | ) | | $ | (74.9 | ) |
| Net deferred tax assets | | $ | 193.0 |
| | $ | 181.5 |
|
Deferred tax assets (liabilities) at December 31 were classified as follows: | | | | | | | | | | | | | | |
| | 2021 | | 2020 |
| Deferred tax assets: | | | | |
| | | | |
| Other assets | | $ | 121.4 | | | $ | 135.8 | |
| Total deferred tax assets | | 121.4 | | | 135.8 | |
| Deferred tax liabilities: | | | | |
| | | | |
| Long-term income taxes | | $ | (2.5) | | | $ | (2.0) | |
| Total deferred tax liabilities | | (2.5) | | | (2.0) | |
| Net deferred tax assets | | $ | 118.9 | | | $ | 133.8 | |
|
| | | | | | | | |
| | | 2018 | | 2017 |
| Deferred tax assets: | | | | |
| Other assets | | $ | 212.6 |
| | $ | 203.8 |
|
| Total deferred tax assets | | 212.6 |
| | 203.8 |
|
| Deferred tax liabilities: | | | | |
| Long-term income taxes | | $ | (19.6 | ) | | $ | (22.3 | ) |
| Total deferred tax liabilities | | (19.6 | ) | | (22.3 | ) |
| Net deferred tax assets | | $ | 193.0 |
| | $ | 181.5 |
|
During 2018,2021, excluding the reductions associated with the divested deferred tax assets noted above, the Company also recorded a net increase toin its valuation allowanceallowances of $45.6 in income tax expense$126. The $126 of benefits primarily forrelates to current year losses that could not be benefitted and the effects of currency translation.
During 2020, excluding the reductions associated with the worthless deferred tax assets generated in 2018 that are not currently more likely than not to be realized. In the future,noted above, the Company will continue to evaluate whetherrecorded a net increase in its financial results will allow for the valuation allowances of $2.6. The $2.6 includes the effect of $65.1 of benefits related to operations and other activity which could not be released. Release of the valuation allowancerecognized as noted in the future would occur whenrate reconciliation above offset with the deferred tax assetswrite-off of $81.8 of Valuation Allowance associated with Deferred Tax Assets which can no longer be utilized due to change of control restrictions resulting from the valuation allowance are determined to be more likely than notNatura merger and $19.4 of being realized.
At December 31, 2018, exclusive of ASU 2013-11 reductions, we had recognized deferred tax assets of $842.5 relating to tax credit carryforwards (U.S. foreign tax credits, minimum tax credits, research and experimentation creditsincreases primarily driven by currency translation and other tax credits) for which a valuation allowance of $812.5 has been provided. The tax credit carryforwards consist of U.S. foreign tax credits of $793.8 which are subject to expiration between 2020 and 2027; U.S. minimum tax credits of $18.0 which are not subject to expiration; U.S. research and experimentation credits of $21.0 which are subject to expiration between 2027 and 2038 and other tax credits of $9.7 which are subject to expiration between 2019 and 2033.miscellaneous effects.
At December 31, 2018, exclusive of ASU 2013-11 reductions, we had recognized deferred tax assets of $2,166.2 relating to foreign and state tax loss carryforwards for which a valuation allowance of $2,073.3 has been provided. The deferred tax assets relating to tax loss carryforwards consist of $2,045.5 of foreign tax loss carryforwards, for which a valuation allowance of $1,974.5 has been provided, and $98.8 of state tax loss carryforwards, for which a valuation allowance of $98.8 has been provided.F-34
The foreign tax loss carryforwards at December 31, 2018 were $8,616.2, of which $6,927.5 are not subject to expiration and $1,688.7 are subject to expiration between 2019 and 2048. The state tax loss carryforwards at December 31, 2018, after taking into consideration the estimated effects of pre-apportionment states, were $1,396.7 which are subject to expiration between 2019 and 2038.
At December 31, 2018, as a result of our U.S. liquidity profile, we continue to assert that our foreign earnings are not indefinitely reinvested. Accordingly, we adjusted our deferred tax liability to account for our 2018 undistributed earnings of foreign subsidiaries and for the tax effect of earnings that were actually repatriated to the U.S. during the year. The net impact on the deferred tax liability associated with the Company’s undistributed earnings is a decrease of $5.1, resulting in a deferred
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
tax liability balance of $17.5 related to the incremental tax cost on approximately $1.1 billion of undistributed foreign earnings at December 31, 2018.
At December 31, 2018,2021, the valuation allowance primarily represents amounts for certain foreign tax loss carryforwards, substantially all U.S. deferred tax assets certain foreign tax loss carryforwards and certain other foreign deferred tax assets. The recognition of deferred tax assets was based on the evaluation of current and estimated future profitability of the operations, reversal of deferred tax liabilities and the likelihood of utilizing tax credit and/or loss carryforwards. Tax planning strategies were also considered and evaluated as support for the realization of deferred tax assets. Where these sources of income existed along with sufficient positive evidence that indicated it was more likely than not that such sources of income could be relied upon, then the deferred tax assets were not reduced by a valuation allowance.
Uncertain Tax PositionsAt December 31, 2021, we had recognized deferred tax assets of $119.7 relating to tax credit carryforwards (U.S. foreign tax credits, research and experimentation credits and other tax credits) for which a valuation allowance of $119.7 has been provided. The tax credit carryforwards consist of U.S. foreign tax credits of $87.6 which are subject to expiration between 2022 and 2027; U.S. research and experimentation credits of $23.7 which are subject to expiration between 2027 and 2042 and other tax credits of $8.4 which are subject to expiration between 2022 and 2033.
At December 31, 2018,2021, we had $137.6recognized deferred tax assets of $393.7 relating to foreign loss carryforwards for which a valuation allowance of $322.4 has been provided and for which $22.4 has also been offset in accordance with ASU2013-11. At December 31, 2021, we had recognized deferred tax assets of $31.4 relating to federal loss carryforwards for which a valuation allowance of $31.4 has been provided
At December 31, 2021 we had foreign tax loss carryforwards of $2,599.0, of which $1,059.2 are not subject to expiration and $1,539.8 are subject to expiration between 2022 and 2051. At December 31, 2021, we had federal tax loss carryforwards of $149.3 which are not subject to expiration.
At December 31, 2021, we continue to assert that substantially all of our foreign earnings are indefinitely reinvested. At December 31, 2021 the company’s undistributed foreign earnings of approximately $1.2 billion and would generate an approximate $7.9 of income tax if repatriated from the local subsidiaries.
Uncertain Tax Positions
At December 31, 2021, we had $251.7 of total gross unrecognized tax benefits of which approximately $123.2$95.8 would favorably impact the provision for income taxes, if recognized.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | | | |
| |
| Balance at December 31, 2018 | 137.6 | |
| Additions based on tax positions related to the current year | 13.3 | |
| Additions for tax positions of prior years | 186.6 | |
| Reductions for tax positions of prior years | (3.0) | |
| Reductions due to lapse of statute of limitations | (.6) | |
| Reductions due to settlements with tax authorities | (2.2) | |
| Balance at December 31, 2019 | 331.7 | |
| Additions based on tax positions related to the current year | 90.6 | |
| Additions for tax positions of prior years | .6 | |
| Reductions for tax positions of prior years | (34.1) | |
| Reductions due to lapse of statute of limitations | (16.5) | |
| Reductions due to settlements with tax authorities | (.2) | |
| Balance at December 31, 2020 | 372.1 | |
| Additions based on tax positions related to the current year | 6.8 | |
| Additions for tax positions of prior years | 24.1 | |
| Reductions for tax positions of prior years | (136.8) | |
| Reductions due to lapse of statute of limitations | (11.2) | |
| Reductions due to settlements with tax authorities | (3.3) | |
| Balance at December 31, 2021 | $ | 251.7 | |
|
| | | |
| | |
| Balance at December 31, 2015 | $ | 53.0 |
|
| Additions based on tax positions related to the current year | 1.8 |
|
| Additions for tax positions of prior years | 9.4 |
|
| Reductions for tax positions of prior years | (2.8 | ) |
| Reductions due to lapse of statute of limitations | (.7 | ) |
| Reductions due to settlements with tax authorities | (2.0 | ) |
| Balance at December 31, 2016 | 58.7 |
|
| Additions based on tax positions related to the current year | 1.4 |
|
| Additions for tax positions of prior years | 17.6 |
|
| Reductions for tax positions of prior years | (7.9 | ) |
| Reductions due to lapse of statute of limitations | (3.1 | ) |
| Reductions due to settlements with tax authorities | (18.0 | ) |
| Balance at December 31, 2017 | 48.6 |
|
| Additions based on tax positions related to the current year | 43.6 |
|
| Additions for tax positions of prior years | 65.5 |
|
| Reductions for tax positions of prior years | (3.7 | ) |
| Reductions due to lapse of statute of limitations | (.9 | ) |
| Reductions due to settlements with tax authorities | (15.4 | ) |
| Balance at December 31, 2018 | $ | 137.6 |
|
We accrue interest and penalties related to unrecognized tax benefits in the provision for income taxes. We accrued interest and penalties, net of taxes of $0.5 and $1.0, for the years ended December 31, 2021 and 2020, respectively, and reversed previously recorded expenses for interest and penalties, net of taxes by $1.3 duringtax of $1.0 for the year ended December 31, 2018, and recorded expenses of $0.0 and $2.5 for interest and penalties, net of taxes during the years ended December 31, 2017 and 2016, respectively. 2019.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At December 31, 20182021 and December 31, 20172020 we had $7.4$7.1 and $9.9,$6.8, respectively, recorded for interest and penalties, net of tax benefit. The unrecognized tax benefits, including interest and penalties, were classified within long-term income taxes in our Consolidated Balance Sheets.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We file income tax returns in the U.S. and foreign jurisdictions. As of December 31, 2018,2021, the tax years that remained subject to examination by major tax jurisdiction for our most significant subsidiaries were as follows:
|
| | | | | | | |
| Jurisdiction | | Open Years |
| Brazil | | 2013-20182016-2021 |
MexicoPhilippines | | 2013-20182017-2021 |
PhilippinesPoland | | 2014-20182014-2021 |
PolandRussia | | 2013-20182019-2021 |
RussiaUnited Kingdom | | 2017-20182019-2021 |
United Kingdom | | 2017-2018 |
| United States (Federal) | | 2017-20182017-2021 |
We anticipate that it is reasonably possible that the total amount of unrecognized tax benefits will not change materiallycould increase in the range of $5 to $10 within the next twelve months.
Given the timing of the enactment of the Tax Cuts and Jobs Act on December 22, 2017, the SEC issued guidance under SAB 118 directing taxpayers to consider the impact of the new legislation as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effects resulting from the change in law. As of December 22, 2017, except for the impact of remeasuring our deferred tax assets at the 21% rate, we accounted for all other impacts of the new legislation, including but not limited to effects on existing deferred taxes and valuation allowances, a one-time tax on offshore earnings, potential changes to and impact of our indefinite reinvestment assertion, and the measurement of deferred taxes on foreign unremitted earnings, on a provisional basis on our financial statements. The amounts reported at that time represented our best estimate given the data we had available and based on our interpretation of the U.S. legislation. During 2018, the U.S. Treasury issued various guidance on the application of certain provisions that may impact our calculations. As of December 31, 2018, the Company completed its accounting for the impact of the Tax Cuts and Jobs Act including any necessary adjustments to the “provisional” amounts previously recorded. The recording of the additional adjustments had no material impact on our financial position or results.
NOTE 11.10. Financial Instruments and Risk Management
We operate globally, with manufacturing and distribution facilities in various countries around the world. We may reduce our exposure to fluctuations in the fair value and cash flows associated with changes in interest rates and foreign exchange rates by creating offsetting positions, including through the use of derivative financial instruments. If we use foreign currency-rate sensitive and interest-rate sensitive instruments to hedge a certain portion of our existing and forecasted transactions, we would expect that any gain or loss in value of the hedge instruments generally would be offset by decreases or increases in the value of the underlying 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.circumstances.
Derivatives are recognized in ourthe Consolidated Balance Sheets at their fair values. The following table presents the fair value of derivative instruments outstanding were immaterial at December 31, 2018 and 2017.2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Asset | | Liability |
| Balance Sheet
Classification | | Fair
Value | | Balance Sheet
Classification | | Fair
Value |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Derivatives not designated as hedges: | | | | | | | |
| Foreign exchange forward contracts | Prepaid expenses and other | | $ | — | | | Accounts payable | | $ | 2.7 | |
| Total derivatives | | | $ | — | | | | | $ | 2.7 | |
Derivatives are recognized in the Consolidated Balance Sheets at their fair values. The following table presents the fair value of derivative instruments at December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| Asset | | Liability |
| Balance Sheet
Classification | | Fair
Value | | Balance Sheet
Classification | | Fair
Value |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Derivatives not designated as hedges: | | | | | | | |
| Foreign exchange forward contracts | Prepaid expenses and other | | $ | 2.8 | | | Accounts payable | | $ | 6.0 | |
| Total derivatives | | | $ | 2.8 | | | | | $ | 6.0 | |
Interest Rate Risk
A portion of our borrowings is subject to interest rate risk. In the past we have used interest-rate swap agreements, which effectively converted the fixed rate on long-term debt to a floating interest rate, to manage our interest rate exposure. The agreements were designated as fair value hedges. At December 31, 2018Approximately 5% and 2017, we do not have any interest-rate swap agreements. Approximately 1%4% of our debt portfolio at December 31, 20182021 and 2017,2020, respectively, was exposed to floating interest rates.rates, which relates to our short term debt portfolio.
In January 2013, we terminated eight of our interest-rate swap agreements previously designated as fair value hedges, with notional amounts totaling $1,000. As of the interest-rate swap agreements’ termination date, the aggregate favorable adjustment to the carrying value (deferred gain) of our debt was $90.4, which was amortized as a reduction to interest expense over the remaining term of the underlying debt obligations. During the year ended December 31, 2016, the net impact of the gain amortization was $35.4, including $23.6 related to the extinguishment of debt (see Note 8, Debt and Other Financing). At December 31, 2018, there is no unamortized deferred gain associated with the January 2013 interest-rate swap termination, as the underlying debt obligations have been paid.
AVON PRODUCTS, INC.
In March 2012, we terminated two of our interest-rate swap agreements previously designated as fair value hedges, with notional amounts totaling $350. As of the interest-rate swap agreements’ termination date, the aggregate favorable adjustment to the carrying value (deferred gain) of our debt was $46.1, which is being amortized as a reduction to interest expense over the remaining term of the underlying debt obligations through March 2019. During the years ended December 31, 2018 and 2017, the net impact of the gain amortization was $6.0 and $4.9, respectively, including $3.6 related to the extinguishment of debt during the year ended December 31, 2018 (see Note 8, Debt and Other Financing). At December 31, 2018, there was no unamortized deferred gain associated with the March 2012 interest-rate swap termination, as the underlying debt obligations have been paid.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Foreign Currency Risk
We may use foreign exchange forward contracts to manage a portion of our foreign currency exchange rate exposures. At December 31, 2018,2021, we had outstanding foreign exchange forward contracts with notional amounts totaling approximately $1,275$171 for various currencies, none of which $22 were designated as cash flow hedges.
We may use foreign exchange forward contracts to manage foreign currency exposure of certain intercompany loans. The change in fair value of these contracts is immediately recognized in earnings and substantially offsets the foreign currency impact recognized in earnings relating to the associated intercompany loans. During the years ended December 31, 20182021 and 2017,2020, we recorded a gainlosses of $1.5$.3 and a gain of $3.0,$5.7, respectively, in other expense, net in our Consolidated Statements of Operations related to these undesignated foreign exchange forward contracts. Also during the years ended December 31, 2018 and 2017, we recorded a gain of $2.2 and a loss of $5.2, respectively, related to the associated intercompany loans, caused by changes in foreign currency exchange rates.
We initiated a new hedging program to hedge foreign exchange risk relating to forecasted transactions during the third quarter of 2018. This did not have a material impact on our Consolidated Financial Statements.
Credit Risk of Financial Instruments
At times, we attempt to minimize our credit exposure to counterparties by entering into derivative transactions and similar agreements with major international financial institutions with "A-" or higher credit ratings as issued by Standard & Poor’s Corporation. Our foreign currency derivatives are typically comprised of over-the-counter forward contracts, swaps or options with major international financial institutions. Although our theoretical credit risk is the replacement cost at the then estimated fair value of these instruments, we believe that the risk of incurring credit risk losses is remote and that such losses, if any, would not be material.
Non-performance of the counterparties on the balance of all the foreign exchange agreements would not have resulted in aany write-off of $1.3 at December 31, 2018.2021. In addition, in the event of non-performance by such counterparties, we would be exposed to market risk on the underlying items being hedged as a result of changes in foreign exchange rates.
NOTE 12.11. Fair Value
Assets and Liabilities Recorded at Fair Value
The fair value measurement provisions required by GAAP establish a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
•Level 1 - Quoted prices in active markets for identical assets or liabilities.
•Level 2 - Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
•Level 3 - Unobservable inputs based on our own assumptions.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis at December 31, 2021:
| | | | | | | | | | | | | | | | | |
| | Level 1 | | Level 2 | | Total |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Liabilities: | | | | | |
| Foreign exchange forward contracts | $ | — | | | $ | 2.7 | | | $ | 2.7 | |
| Total | $ | — | | | $ | 2.7 | | | $ | 2.7 | |
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis at December 31, 2020:
| | | | | | | | | | | | | | | | | |
| | Level 1 | | Level 2 | | Total |
| Assets: | | | | | |
| Available-for-sale securities | $ | 4.2 | | | $ | — | | | $ | 4.2 | |
| Foreign exchange forward contracts | $ | — | | | $ | 2.8 | | | $ | 2.8 | |
| Total | $ | 4.2 | | | $ | 2.8 | | | $ | 7.0 | |
| Liabilities: | | | | | |
| Foreign exchange forward contracts | $ | — | | | $ | 6.0 | | | $ | 6.0 | |
| Total | $ | — | | | $ | 6.0 | | | $ | 6.0 | |
Other than our defined benefit pension and postretirement plan assets, the assets and liabilities measured at fair value on a recurring basis are comprised of foreign exchange forward contracts (see Note 11,10, Financial Instruments and Risk
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Management) and available-for-sale securities, which were immaterial at December 31, 20182021 and 2017.2020. See Note 14,13, Employee Benefit Plans, for the fair value hierarchy for our plan assets. The available-for-sale securities include securities held in a trust in order to fund future benefit payments for non-qualified retirement plans (see Note 14,13, Employee Benefit Plans).
Fair Value of Financial Instruments
Our financial instruments include cash and cash equivalents, available-for-sale securities, short-term investments, accounts receivable, debt maturing within one year, accounts payable, long-term debt and foreign exchange forward contracts. The
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
carrying value for cash and cash equivalents, accounts receivable, accounts payable and short-term investments approximate fair value because of the short-term nature of these instruments.
The net asset (liability) amounts recorded in the balance sheet (carrying amount) and the estimated fair values of our remaining financial instruments at December 31 consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2021 | | 2020 |
| | | Carrying
Amount | | Fair Value | | Carrying
Amount | | Fair Value |
| Available-for-sale securities | | $ | — | | | $ | — | | | $ | 4.2 | | | $ | 4.2 | |
| Loans to affiliates of Natura &Co maturing within one year | | 46.6 | | | 46.6 | | | — | | | — | |
| Loans to affiliates of Natura &Co maturing after one year | | 46.7 | | | 46.7 | | | — | | | — | |
| Debt maturing within one year | | (32.6) | | | (32.6) | | | (28.0) | | | (28.0) | |
| Loans from affiliates of Natura &Co maturing within one year | | (371.7) | | | (371.7) | | | (1,008.6) | | | (1,008.6) | |
Long-term debt(1) | | (676.0) | | | (754.2) | | | (675.4) | | | (782.4) | |
| Loans from affiliates of Natura &Co maturing after one year | | (736.3) | | | (736.3) | | | — | | | — | |
| Foreign exchange forward contracts | | (2.7) | | | (2.7) | | | (3.2) | | | (3.2) | |
|
| | | | | | | | | | | | | | | | |
| | | 2018 | | 2017 |
| | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| Available-for-sale securities | | $ | 3.8 |
| | $ | 3.8 |
| | $ | 3.7 |
| | $ | 3.7 |
|
Debt maturing within one year(1) | | (12.0 | ) | | (12.0 | ) | | (25.7 | ) | | (25.7 | ) |
Long-term debt(1) | | (1,581.6 | ) | | (1,460.2 | ) | | (1,872.2 | ) | | (1,718.6 | ) |
| Foreign exchange forward contracts | | (5.1 | ) | | (5.1 | ) | | — |
| | — |
|
(1) The carrying value of debt maturing within one year and long-term debt is presented net of debt issuance costs and includes any related discount or premium, and unamortized deferred gains on terminated interest-rate swap agreements, as applicable.
The methods and assumptions used to estimate fair value are as follows:
•Available-for-sale securities - The fair values of these investments were the quoted market prices for issues listed on securities exchanges.
Debt maturing within one year and long-term•Long-term debt - The fair values of our debt and other financing were determined using Level 2 inputs based on indicative market prices.
•Foreign exchange forward contracts - The fair values of forward contracts were estimated based on quoted forward foreign exchange prices at the reporting date.
NOTE 13.12. Share-Based Compensation Plans
The Avon Products, Inc. 2013 Stock Incentive Plan, as amended and restated (the “2013 Plan”"2013 Plan") and the Avon Products, Inc. 2016 Omnibus Incentive Plan (the "2016 Plan"), which are shareholder-approved plans, provide for several types of share-based incentive compensation awards including stock options, restricted stock, restricted stock units and performance restricted stock units. Following shareholder approval of the 2016 Plan in May 2016, there were no further awards made under the 2013 Plan. The 2016 Plan was amended and restated (the “Amended and Restated 2016 Plan”) following shareholder approval in May 2019. Under the 2013 Plan, the maximum number of shares that may be awarded is 55,000,000 shares, where the maximum number of shares are reduced as follows: (i) in the case of the grant of an award of an option or stock appreciation right ("SAR"), by each share subject to such an awardAmended and (ii) in the case of the grant of an award payable in shares other than an option or SAR by 3.13 multiplied by each share subject to such an award. Under theRestated 2016 Plan, the maximum number of shares that may be awarded is 48,000,000was amended to 20,451,976 shares of common stock, which includes 5,000,000 additional shares and 15,451,976 unused shares under the 2016 Plan as of March 15, 2019, where the maximum number of shares are reduced as follows: (i) in the case of the grant of an award of an option or SAR, by each share subject to such an award and (ii) in the case of the grant of an award payable in shares other than an option or SAR by 2.41.35 multiplied by each share subject to such an award. Shares issued under share-based awards will be primarily funded with issuance of new shares.
We have issued stock options and restricted stock under the 2016 Plan (including under the Amended and Restated 2016 Plan), and restricted stock units and performance restricted stock units under the 2013 Plan and the 2016 Plan.Plan (including under the Amended and Restated 2016 Plan). We also have outstanding stock options under our prior shareholder-approved plans. Stock option awards arewere granted with an exercise price generally at a premium to the closing market price of our stock at the date of grant. Stock options generally vest in thirds over the three-year period following each option grant date and have ten-year contractual terms. Restricted stock units granted to Associates generally vest and settle after three years. Restricted stock units awarded to non-management directors vest in approximately one year and settle upon a director's departure from the Board of
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Directors. Performance restricted stock units generally vest after three years only upon the satisfaction of certain market or performance conditions.
On January 3, 2020, upon the completion of the Transaction with Natura &Co, our share-based compensation awards were either cancelled in exchange for the right to receive an amount in cash or converted into an award denominated in Natura &Co shares. Subsequent to the Transaction, the 2013 Plan and the 2016 Plan (including under the Amended and Restated 2016 Plan) were replaced by the Natura &Co Stock-Based Compensation Plan.
Under the Natura &Co Stock-Based Compensation Plan, Natura has issued nominal cost options and performance share units ("performance shares" or "PSUs"). Nominal cost options were granted in exchange for Avon restricted stock units and performance restricted stock units and vest as a single tranche in line with the vesting date of the original Avon awards. Nominal cost options will automatically exercise on vest date. Performance share units generally vest after three years only upon the satisfaction of certain market and/or performance conditions.
For the years ended December 31:
| | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| Compensation cost for stock-based compensation | | $ | 13.4 | | | $ | 24.9 | | | $ | 15.6 | |
| Total income tax (cost)/ benefit recognized for share-based arrangements | | (.2) | | | 1.9 | | | 1.3 | |
|
| | | | | | | | | | | | |
| | | 2018 | | 2017 | | 2016 |
| Compensation cost for stock options, performance restricted stock units and restricted stock units | | $ | 13.8 |
| | $ | 24.2 |
| | $ | 24.0 |
|
| Total income tax benefit recognized for share-based arrangements | | 2.0 |
| | 1.4 |
| | 1.9 |
|
All of the compensation cost for stock options, performance restricted stock unitsshare based compensation for 2021, 2020 and restricted stock units, including those that will be funded with treasury shares, for 2018, 2017 and 20162019 was recorded in SG&A expenses in our Consolidated Statements of Operations.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock Options
During 2018, 2017 and 2016,2019 we granted premium-priced stock options, in which the exercise price was equal to a 25% premium and 30% premium, respectively, from the closing market price of our stock price at the date of grant. The premium-priced stock options vest on a three-year graded vesting schedule. The fair value of each premium-priced stock option is estimated on the date of grant using a Monte-Carlo simulation. When estimating the fair value of each option, we used the following weighted-average assumptions for options granted during the yearsyear ended December 31, 2018, 2017 and 2016:2019:
|
| | | | | | |
| | | 2018 | | 2017 | | 2016 |
Risk-free rate(1) | | 2.7% | | 2.1% | | 1.6% |
Expected term(2) | | 7 years | | 7 years | | 7 years |
Expected Avon volatility(3) | | 42% | | 41% | | 39% |
| Expected dividends | | —% | | —% | | —% |
| | | | | | | | |
(1) | The risk-free rate was based upon the rate on a zero coupon U.S. Treasury bill, for periods within the contractual life of the option, in effect at the time of grant. |
| 2019 |
(2)Risk-free rate(1) | The expected term of the option was based on the vesting terms of the respective option and a contractual life of 10 years. |
| 2.4% |
(3)Expected term(2) | | 7 years |
Expected Avon volatility was based on the daily historical volatility of our stock price, over a period similar to the expected life of the option.(3) | | 45% |
| Expected dividends | | —% |
(1)The risk-free rate was based upon the rate on a zero coupon U.S. Treasury bill, for periods within the contractual life of the option, in effect at the time of grant.
(2)The expected term of the option was based on the vesting terms of the respective option and a contractual life of 10 years.
(3)Expected Avon volatility was based on the daily historical volatility of our stock price, over a period similar to the expected life of the option.
The weighted-average grant-date fair value per share of options granted were $1.04, $1.54 and $1.37 during 2018, 2017 and 2016, respectively.was $1.13.
A summaryOn January 3, 2020, upon the completion of the Transaction with Natura &Co, each of the approximately 14.9 million outstanding stock options, whether or not then vested or exercisable, was automatically canceled in exchange for the right to receive an amount in cash, without interest, equal to the number of Avon Common Shares underlying such stock option immediately prior to the effective time of the Transaction multiplied by the excess, if any, of the per share cash-out price over the exercise price per share. The “per share cash out price” was the closing price of an Avon Common Share on the NYSE on the closing date of the Transaction. No amount was payable upon cancellation of stock option with an exercise price per share that is greater than the per share cash-out price.
In accordance with ASC 718, Stock-based compensation, we have accounted for the cash settlement as a repurchase of an equity instrument concurrent with the acceleration of vesting of the award. Options that were cancelled without compensation were treated as a repurchase of equity for no consideration. The cash settlement value of $20.5 was recognized through equity and $3.5 of unrecognized compensation expense of the unvested options
aswas accelerated and recorded in SG&A expenses in our Consolidated Statements of
December 31, 2018, and changes during 2018, is as follows: |
| | | | | | | | | | | | | |
| | | Shares (in 000’s) | | Weighted- Average Exercise Price | | Weighted- Average Contractual Term | | Aggregate Intrinsic Value |
| Outstanding at January 1, 2018 | | 17,165 |
| | $ | 14.95 |
| |
| |
|
|
|
| Granted | | 5,952 |
| | 3.49 |
| |
| |
|
|
| Exercised | | — |
| | — |
| |
| |
|
|
| Forfeited | | 1,082 |
| | 5.82 |
| |
| |
|
|
| Expired | | 3,073 |
| | 34.27 |
| |
| |
|
|
| Outstanding at December 31, 2018 | | 18,962 |
| | $ | 9.05 |
| | 6.4 | | $ | — |
|
| Exercisable at December 31, 2018 | | 8,679 |
| | $ | 14.05 |
| | 4.1 | | $ | — |
|
We recognizerecognized expense on stock options using a graded vesting method, which recognizes the associated expense based on the timing of option vesting dates. At December 31, 2018,2021 and 2020, there was $6.1 of unrecognized compensation cost related towere no outstanding stock options outstanding. That cost is expected to be recognized over a weighted-average period of 1.8 years.as they were cancelled as per above.
There were no stock options exercised during 2018, 2017 or 2016.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restricted Stock Units and Performance Restricted Stock Units
During 2018, 2017 and 2016,2019 we granted performance restricted stock units that would vest and settle after three years based on the relative total shareholder return of our common stock against companies included in the S&P 400 index as of the date of grant over a three year performance period ("20182019 PRSUs", "2017 PRSUs" and "2016 PRSUs", respectively)). The grant date fair value per share of these awards already reflects the estimated probability of achieving the market condition, and therefore we record the expense ratably over the performance period.
During 2015, we granted performance restricted stock units that would vest and settle after three years only upon the satisfaction of certain performance conditions over two years ("2015 PRSUs"). In addition, if the performance conditions are achieved above target, these performance restricted stock units are subject to a market condition in which the number of performance restricted stock units that vest will be limited to the target amount if the Company’s absolute total shareholder return during the three-year service period is negative. We have adjusted the compensation cost recognized to-date to reflect our performance, which reflects an estimated payout below target, and as such, the absolute total shareholder return market condition will not impact the number of performance restricted stock units that vest.
The fair value of the 2018 PRSUs, 2017 PRSUs, 2016 PRSUs and 2015 PRSUs was estimated on the date of grant using a Monte-Carlo simulation that estimates the fair value based on the Company's share price activity, expected term of the award, risk-free interest rate, expected dividends and the expected volatility of the stock of the Company. When estimating the fair value of the PRSUs, we used the following weighted-average assumptions:
| | | | | | | | |
| | 2019 PRSUs |
Risk-free rate(1) | | 2.4% |
Expected Avon volatility(2) | | 54.8% |
Expected average volatility(3) | | 29.9% |
| Expected dividends | | —% |
(1)The risk-free rate was based upon the rate on a zero coupon U.S. Treasury bill, for periods within the three year performance period, in effect at the time of grant.
(2)Expected Avon volatility was based on the weekly historical volatility of our stock price, over a period similar to the three year performance period of the 2019 PRSUs.
(3)Expected average volatility was based on the weekly historical volatility of the stock prices of each member of companies included in the S&P 400 index as of the date of the grant, over a period similar to the three year performance period of the 2019 PRSUs.
The weighted-average grant-date fair value per share of the 2019 PRSUs was $2.63.
On January 3, 2020, upon the completion of the Transaction with Natura &Co, each of the approximately 4.4 million outstanding Restricted Stock Units ("RSU") was converted into Natura &Co Holding nominal cost options equal to the number of Avon Common Shares subject to each RSU immediately prior to the Transaction multiplied by the Exchange Ratio of 0.30. In addition, each of the approximately 3.0 million outstanding PRSUs was converted into an award denominated in Natura &Co Holding Shares, that is subject only to time-based vesting, equal to the number of Avon Common Shares subject to each PRSU immediately prior to the Transaction, giving effect to market conditions that are deemed to be attained, multiplied by the Exchange Ratios of 0.30. The terms and conditions, including service conditions but excluding market conditions, applicable to each RSU and PRSU will continue in full force and effect with respect to the nominal cost options as described below.
In accordance with ASC 718, Stock-based compensation, we accounted for the modification as a Type I (probable-to-probable) modification and the incremental fair value of approximately $3.4 will be recognized over the remaining service period of the awards.
At December 31, 2021 and 2020, there were no outstanding RSUs and PRUs as they were exchanged for Natura &Co Holding Nominal Cost Options.
Natura &Co Holding Nominal cost options
As discussed above, each outstanding Avon RSU and PRSU at the time of the Transaction was exchanged for Natura &Co Holding Nominal Cost Options. These nominal cost options vest in a single tranche in line with the original vesting schedule of three years and will automatically exercise on the vest date.
We accounted for the exchange as a Type I (probable-to-probable) modification where the cumulative amount of the compensation cost that should be recognized over the vesting period is the original grant-date fair value plus incremental fair value of $3.4 resulting from the modification.
During 2021, Natura &Co granted employees of the Company and its subsidiaries a further 1,660,941 nominal cost options with a weighted-average grant date fair value of $9.72 per unit. These 2021 nominal cost options normally vest in a single tranche in line with the original vesting schedule of three years and will automatically exercise on the vest date. For certain participants, vesting automatically occurs either 50% on both the 3rd and 4th anniversary of the grant date or 50% on both the 4th and 5th anniversary of the grant date.
A summary of nominal cost options at December 31, 2021 and changes during 2021, is as follows:
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
value of the 2018 PRSUs, 2017 PRSUs, 2016 PRSUs and the 2015 PRSUs, we used the following weighted-average assumptions:
|
| | | | | | | | |
| | | 2018 PRSUs | | 2017 PRSUs | | 2016 PRSUs | | 2015 PRSUs |
Risk-free rate(1) | | 2.5% | | 1.6% | | 1.1% | | 1.1% |
Expected Avon volatility(2) | | 61.4% | | 61% | | 56% | | 38% |
Expected average volatility(3) | | 29.5% | | 29% | | 28% | | N/A |
| Expected dividends | | —% | | —% | | —% | | 3% |
| |
(1) | The risk-free rate was based upon the rate on a zero coupon U.S. Treasury bill, for periods within the three year performance period, in effect at the time of grant. |
| |
(2) | Expected Avon volatility was based on the weekly historical volatility of our stock price, over a period similar to the three year performance period of the 2018 PRSUs, 2017 PRSUs and 2016 PRSUs and the three year service period of the 2016 PRSUs. |
| |
(3) | Expected average volatility was based on the weekly historical volatility of the stock prices of each member of companies included in the S&P 400 index as of the date of the grant, over a period similar to the three year performance period of the 2018 PRSUs. 2017 PRSUs and 2016 PRSUs. |
The weighted-average grant-date fair value per share of the 2018 PRSUs, 2017 PRSUs, 2016 PRSUs and 2015 PRSUs was $2.63, $4.52, $4.42 and $7.49 respectively.
A summary of restricted stock units at December 31, 2018, and changes during 2018, is as follows:
|
| | | | | | | |
| | | Restricted Stock Units (in 000’s) | | Weighted-Average Grant-Date Fair Value |
| January 1, 2018 | | 4,804 |
| | $ | 5.26 |
|
| Granted | | 2,433 |
| | 2.61 |
|
| Vested | | (1,705 | ) | | 7.06 |
|
| Forfeited | | (534 | ) | | 4.45 |
|
| December 31, 2018 | | 4,998 |
| | $ | 3.37 |
|
A summary of performance restricted stock units at December 31, 2018, and changes during 2018, is as follows:
|
| | | | | | | |
| | | Performance Restricted Stock Units (in 000’s) | | Weighted-Average Grant-Date Fair Value |
January 1, 2018(1) | | 4,356 |
| | $ | 5.50 |
|
| Granted | | 1,301 |
| | 2.93 |
|
| Vested | | (986 | ) | | 7.49 |
|
| Forfeited | | (1,494 | ) | | 5.93 |
|
December 31, 2018(1) | | 3,177 |
| | $ | 3.76 |
|
(1) Based on initial target payout. | | | | | | | | | | | | | | |
| | Nominal cost options
(in 000’s) | | Weighted-Average
Modification-Date
Fair Value |
| January 1, 2021 | | 1,547 | | | $ | 11.51 | |
| Granted | | 1,661 | | | 9.72 | |
| Exercised | | (600) | | | (12.12) | |
| Forfeited | | (282) | | | (12.10) | |
| Outstanding at December 31, 2021 | | 2,326 | | | $ | 10.00 | |
The total fair value of restricted stock units and performance restricted stock units that vested during 20182021 was $7.2,$10.5 based upon market prices on the vesting dates.
We recognize expense over the requisite service period. At December 31, 2018,2021, there was $9.5$11.4 of unrecognized compensation cost related to these restricted stock units and performance restricted stock units compensation arrangementsnominal cost options outstanding. That cost is expected to be recognized over a weighted-average period of 1.73.0 years.
LaterNatura &Co Holding Performance Share Units (PSUs)
On March 27, 2020, Natura &Co’s Board of Directors approved the new long-term stock-based incentive plan (the “Long-Term Incentive Plan”) for 2020. The Long-Term Incentive Plan consists of the granting of PSUs, the rights of participants in 2015, werelation to the PSUs will only be fully acquired to the extent that (i) the participant remains continuously linked as an employee of the Company and its subsidiaries until the 3rd anniversary of the grant date; and (ii) performance conditions are met. For certain participants, there is a different condition for item (i) above, in which 50% of the PSUs granted 1,123,183will be acquired on the 3rd anniversary of the grant date and the remaining 50% will be acquired on the 4th anniversary of the grant date.
During 2021 and 2020, Natura &Co granted 627,983 and 1,543,244 PSUs respectively with a weighted-average grant date fair value of $17.32 and $20.91 per unit respectively.
A summary of performance restricted stockshare units at December 31, 2021 and changes during 2021, is as follows:
| | | | | | | | | | | | | | |
| | Performance Share Units
(in 000’s) | | Weighted-Average
Modification-Date
Fair Value |
| January 1, 2021 | | 1,543 | | | $ | 20.91 | |
| Granted | | 628 | | | 17.32 | |
| Exercised | | — | | | — | |
| Forfeited | | (317) | | | (20.45) | |
| Outstanding at December 31, 2021 | | 1,854 | | | $ | 19.78 | |
We recognize expense over the requisite service period to the extent that it is expected that the performance conditions are probable of being achieved. At December 31, 2021, there was $27.5 of unrecognized compensation cost related to the PSUs outstanding. That cost is expected to be recognized over a weighted-average period of 1.6 years.
Restricted Stock
In December 2019, 2,083,872 RSUs and 3,276,774 PRSUs were exchanged for 4,808,534 Restricted Stock. The exchange was done in advance of the Transaction with Natura &Co Holding. The Company accounted for the modification as a Type I (probable-to-probable) modification and the incremental fair value of approximately $1.5 will be recognized over the remaining service period of the awards. The Restricted Stock would vest and settle after three years from the grant date of the original award. The Company retained and cancelled 1,400,010 Restricted Stock to satisfy withholding tax obligations of the grantees. The cancellation resulted in the acceleration and recognition of $1.7 of compensation cost for the year ended December 31, 2019 and was included as part of the $44 of Transaction related costs.
On January 3, 2020, upon the completion of the Transaction with Natura & Co, the 3,408,524 Restricted Stock outstanding was converted at the exchange ratio of 0.30 into an award denominated in Natura &Co Holding equity. The terms and conditions, including service-based vesting conditions, continue in full force and effect with respect to such award of Natura &Co Holding Restricted Stock.
During January 2020, it was announced that the employment of certain senior officers of the Company would be terminated, in connection with the Transaction. As a result, Restricted Stock held by these senior officers immediately vested and settled in 2016 only upon the satisfaction of certain performance conditions through 2015. The terms of this award did not result in a fair value measurement date until 2016. During 2016 we recognized compensation costapproximately $10 relating to the acceleration of $2.0 for these performance restricted stock units. As this award vested and settled in 2016, no additional compensation cost was recognized in 2018 and 2017.unamortized expense.
Restricted Stock Units and Performance Restricted Stock Units Funded With Treasury Shares
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In March 2019 and March 2018, we granted 200,000 and 200,000 performance restricted stock units, respectively, that will be funded with treasury shares, outside of the 2016 Plan, in reliance upon The New York Stock Exchangethe NYSE rules. These performance restricted stock units have a weighted-average grant-date fair value of $2.98 and $2.79 for the 2019 and 2018 grants respectively, and would vest and settle after three yearsat the end of 2020 only upon the satisfaction of certain performance conditions over a one year.year performance period. During 2018,2019 none of these performance restricted stock units vested, and 200,000
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
400,000 performance restricted stock units were outstanding at December 31, 2018.2019. During 2018,2019 we recognized compensation cost of $.1$.5, for these performance restricted stock units. At December 31, 2018, there was $.4 unrecognized compensation cost related to these performance restricted stock units.
In February 2018 we granted 600,000 restricted stock units that will be funded from treasury shares, outside of our shareholder-approved plans, in reliance upon The New York Stock Exchangethe NYSE rules. The restricted stock units granted in February 2018 have a weighted-average grant-date fair value of $2.25 and vest and settle in full after three years. During 2018,2019 none of these restricted stock units vested, and there were 600,000 restricted stock units outstanding at December 31, 2018.2019. During 20182019 we recognized compensation cost of $.4 for these restricted stock units. At December 31, 2018, there was $.9 unrecognized compensation cost related to these restricted stock units.
In March 2015, we granted 121,951 performance restricted stock units that will be funded with treasury shares, outside of the 2013 Plan, in reliance upon The New York Stock Exchange rules. These performance restricted stock units have a weighted-average grant-date fair value of $7.49 and the same terms exist for these awards as the 2015 PRSUs discussed above. During 2018, 121951 of these restricted stock units vested, and no performance restricted stock units were outstandingAs at December 31, 2018. During 2018, 2017 and 2016, we recognized compensation cost of $.0, $.1 and $.1, respectively, for these performance restricted stock units. At December 31, 2018, there was no unrecognized compensation cost related to these performance restricted stock units.
In March 2015 and April 2012, we granted 489,596 and 200,000 restricted stock units, respectively, that will be funded with treasury shares, outside of our shareholder-approved plans, in reliance upon The New York Stock Exchange rules. The restricted stock units granted in March 2015 have a weighted-average grant-date fair value of $9.00 and vest and settle ratably over three years. The restricted stock units granted in April 2012 had a weighted-average grant-date fair value of $21.69 and vested and settled ratably over five years. During 2018, 163,198 of these restricted stock units vested, and2019, there were no restricted stock unitsoutstanding RSUs or PRSUs funded with Treasury Shares as they were outstanding at December 31, 2018.all exchanged for Avon Restricted Stock. During 2018, 2017 and 2016, we recognized compensation cost of $.1, $.8 and $1.7, respectively,2020 all Avon Restricted Stock was exchanged for these restricted stock units. At December 31, 2018, there was no unrecognized compensation cost related to these restricted stock unitsNatura Restricted Stock, as the awards had vested.described above.
NOTE 14.13. Employee Benefit Plans
Defined Contribution Plans
We offer a defined contribution plan for employees in the United Kingdom ("UK"), which allows eligible participants to contribute eligible compensation through payroll deductions. We double employee contributions up to the first 5% of eligible compensation and therefore the maximum level provided by Avon is 10% of eligible compensation. We made matching contributions in cash to the UK defined contribution plan of $5.9$8.1 in 2018, $6.72021, $7.6 in 20172020 and $6.5$7.5 in 2016,2019, which follow the same investment allocation that the participant has selected for his or her own contributions.
We also offer a qualified defined contribution plan for U.S.-based employees, the Avon Personal Savings Account Plan (the "PSA"), which allows eligible participants to contribute up to 25% of eligible compensation through payroll deductions. We match employee contributions dollar for dollar up to the first 3% of eligible compensation and fifty cents for each dollar contributed from 4% to 6% of eligible compensation. We made matching contributions in cash to the PSA of $2.2$.9 in 2018, $2.62021, $1.0 in 20172020 and $3.8$1.3 in 2016,2019, which follow the same investment allocation that the participant has selected for his or her own contributions. Prior to the separation of the North America business, the costs associated with the contributions to the PSA were allocated between Discontinued Operations and Global as the plan included both North America and U.S. Corporate Avon associates. See Note 3, Discontinued Operations and Assets and Liabilities Held for Sale.
For U.S.-based employees hired on or after January 1, 2015, we made additional contributions to a Retirement Savings Account ("RSA") within the PSA. Such contributions will range from 3% to 6% of a participant's eligible compensation depending on the sum of the participant's age and length of service (as of December 31 of the prior year). Investment of such contributions will follow the same investment allocation that the participant has selected for his or her own contributions to the PSA. A participant will be vested in the RSA generally after three full years of applicable service.
Defined Benefit Pension and Postretirement Plans
Avon and certain subsidiaries have contributory and noncontributory defined benefit retirement plans for substantially all employees of those subsidiaries. Benefits under these plans are generally based on an employee’s length of service and average compensation near retirement, and certain plans have vesting requirements. Plans are funded based on legal requirements and cash flow.
Our largest non-U.S. defined benefit pension plan is in the UK. The UK defined benefit pension plan was frozen for future accruals as of April 1, 2013. The U.S. defined benefit pension plan, the Avon Products, Inc. Personal Retirement Account Plan (the "PRA"), is closed to employees hired on or after January 1, 2015. Qualified retirement benefits for U.S.-based employees hired on or after January 1, 2015 will be provided solely through the PSA, as described above.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As part ofFollowing the separation of the North America business in 2016 we transferred $499.6 of pension liabilities under the PRA associated with current and former employees of the North America business and certain other former Avon employees, along with $355.9 of assets held by the PRA, to a defined benefit pension plan sponsored by New Avon. We also transferred $60.4 of other postretirement liabilities (namely, retiree medical and supplemental pension liabilities) in respect of such employees and former employees. See(see further Note 3, Discontinued Operations and Assets and Liabilities Held for Sale. WeSale), we continue to retain certain U.S. pension and other postretirement liabilities primarily associated with employees who are actively employed by Avon in the U.S. providing services other than with respect to the North America business.Prior to this separation, our net periodic benefit costs for the U.S. pension and postretirement benefit plans were allocated between Discontinued Operations and Global as the plan included both North America and U.S. Corporate Avon associates.
We provide health care benefits, subject to certain limitations, to certain retired associates in the U.S. and certain foreign countries. In the U.S., such health care benefits for Corporate Avon associates hired on or before January 1, 2005 are in the form of a health reimbursement account. U.S. Corporate Avon associates hired after January 1, 2005 are not eligible for retiree health care benefits. Certain retiree health care obligations for current and former employees of the North America business and certain other former Avon employees based in the U.S. were transferred to New Avon.
We recognize the funded status of defined benefit pension and other postretirement benefit plans on the balance sheet. Each overfunded plan is recognized as an asset and each underfunded plan is recognized as a liability. The recognition of prior service costs or credits and net actuarial gains or losses, as well as subsequent changes in the funded status, are recognized as components of AOCI, net of tax, in shareholders’ equity, until they are amortized as a component of net periodic benefit cost.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We recognize prior service costs or credits and actuarial gains and losses beyond a 10% corridor to earnings based on the estimated future service period of the participants. The determination of the 10% corridor utilizes a calculated value of plan assets for our more significant plans, whereby gains and losses are smoothed over three-three- and five-year periods.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Reconciliation of Benefit Obligations, Plan Assets and Funded Status
The following table summarizes changes in the benefit obligation, plan assets and the funded status of our significant defined benefit pension and postretirement plans. We use a December 31 measurement date for all of our employee benefit plans.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | Pension Plans | | | | Pension Plans | | |
| | | U.S. Plans | | Non-U.S. Plans | | Postretirement Benefits | | U.S. Plans | | Non-U.S. Plans | | Postretirement Benefits |
| | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
| Change in Benefit Obligation: | | | | | | | | | | | | | Change in Benefit Obligation: | | | | | | | | | | | | |
| Beginning balance | | $ | (88.9 | ) | | $ | (87.6 | ) | | $ | (714.2 | ) | | $ | (652.9 | ) | | $ | (28.2 | ) | | $ | (26.0 | ) | Beginning balance | | $ | (67.9) | | | $ | (71.7) | | | $ | (767.5) | | | $ | (685.9) | | | $ | (7.7) | | | $ | (26.8) | |
| Service cost | | (2.9 | ) | | (4.3 | ) | | (4.7 | ) | | (4.6 | ) | | (.1 | ) | | (.1 | ) | Service cost | | (.9) | | | (1.2) | | | (4.3) | | | (4.3) | | | — | | | — | |
| Interest cost | | (2.3 | ) | | (3.0 | ) | | (15.4 | ) | | (18.0 | ) | | (1.1 | ) | | (1.3 | ) | Interest cost | | (1.0) | | | (1.4) | | | (8.7) | | | (11.7) | | | (.3) | | | (.7) | |
| Actuarial (loss) gain | | 9.9 |
| | .6 |
| | 47.4 |
| | (15.5 | ) | | 1.2 |
| | .3 |
| |
| Actuarial gain (loss) | | Actuarial gain (loss) | | 1.8 | | | (6.2) | | | 54.6 | | | (61.8) | | | .4 | | | (1.5) | |
| Benefits paid | | 7.8 |
| | 5.4 |
| | 35.5 |
| | 42.5 |
| | 1.4 |
| | .4 |
| Benefits paid | | 7.7 | | | 12.6 | | | 25.7 | | | 27.8 | | | .6 | | | 5.4 | |
| Actual expenses and taxes | | — |
| | — |
| | 0.5 |
| | — |
| | — |
| | — |
| Actual expenses and taxes | | — | | | — | | | .4 | | | .5 | | | — | | | — | |
| Plan amendments | | — |
| | — |
| | (2.2 | ) | | — |
| | — |
| | — |
| Plan amendments | | — | | | — | | | — | | | — | | | — | | | 4.1 | |
| Curtailments | | 1.7 |
| | — |
| | — |
| | — |
| | — |
| | — |
| Curtailments | | — | | | — | | | .2 | | | — | | | — | | | — | |
| Settlements | | — |
| | — |
| | 2.6 |
| | — |
| | — |
| | — |
| Settlements | | — | | | — | | | 1.8 | | | 1.1 | | | — | | | — | |
| Special termination benefits | | — |
| | — |
| | — |
| | — |
| | (.1 | ) | | — |
| Special termination benefits | | — | | | — | | | — | | | — | | | (3.0) | | | 5.8 | |
| | Transfers | | Transfers | | — | | | — | | | — | | | — | | | — | | | 4.9 | |
| Foreign currency changes and other | | — |
| | — |
| | 33.5 |
| | (65.7 | ) | | .9 |
| | (1.5 | ) | Foreign currency changes and other | | — | | | — | | | 13.5 | | | (33.2) | | | .3 | | | 1.1 | |
| Sale of Avon Luxembourg | | Sale of Avon Luxembourg | | — | | | — | | | 13.1 | | | — | | | — | | | — | |
| Ending balance | | $ | (74.7 | ) | | $ | (88.9 | ) | | $ | (617.0 | ) | | $ | (714.2 | ) | | $ | (26.0 | ) | | $ | (28.2 | ) | Ending balance | | $ | (60.3) | | | $ | (67.9) | | | $ | (671.2) | | | $ | (767.5) | | | $ | (9.7) | | | $ | (7.7) | |
| Change in Plan Assets: | | | | | | | | | | | | | Change in Plan Assets: | | | | | | | | | | | | |
| Beginning balance | | $ | 63.1 |
| | $ | 51.4 |
| | $ | 705.4 |
| | $ | 613.7 |
| | $ | — |
| | $ | — |
| Beginning balance | | $ | 59.7 | | | $ | 63.3 | | | $ | 762.0 | | | $ | 695.4 | | | $ | — | | | $ | — | |
| Actual return on plan assets | | (5.4 | ) | | 5.5 |
| | (27.7 | ) | | 49.9 |
| | — |
| | — |
| Actual return on plan assets | | 1.6 | | | 8.0 | | | 29.3 | | | 62.0 | | | — | | | — | |
| Company contributions | | 12.8 |
| | 11.6 |
| | 11.6 |
| | 19.7 |
| | 1.4 |
| | .4 |
| Company contributions | | .7 | | | 1.0 | | | 10.1 | | | 3.3 | | | .6 | | | 10.2 | |
| Benefits paid | | (7.8 | ) | | (5.4 | ) | | (35.5 | ) | | (42.5 | ) | | (1.4 | ) | | (.4 | ) | Benefits paid | | (7.7) | | | (12.6) | | | (25.7) | | | (27.8) | | | (.6) | | | (5.3) | |
| Actual expenses and taxes | | Actual expenses and taxes | | — | | | — | | | (.4) | | | — | | | — | | | — | |
| Settlements | | — |
| | — |
| | (2.6 | ) | | — |
| | — |
| | — |
| Settlements | | — | | | — | | | (1.8) | | | (1.1) | | | — | | | — | |
| Transfers | | Transfers | | — | | | — | | | — | | | — | | | — | | | (4.9) | |
| Foreign currency changes and other | | — |
| | — |
| | (35.4 | ) | | 64.6 |
| | — |
| | — |
| Foreign currency changes and other | | — | | | — | | | (9.1) | | | 30.2 | | | — | | | — | |
| Ending balance | | $ | 62.7 |
| | $ | 63.1 |
| | $ | 615.8 |
| | $ | 705.4 |
| | $ | — |
| | $ | — |
| Ending balance | | $ | 54.3 | | | $ | 59.7 | | | $ | 764.4 | | | $ | 762.0 | | | $ | — | | | $ | — | |
| Funded Status: | | | | | | | | | | | | | Funded Status: | | | | | | | | | | | | |
| Funded status at end of year | | $ | (12.0 | ) | | $ | (25.8 | ) | | $ | (1.2 | ) | | $ | (8.8 | ) | | $ | (26.0 | ) | | $ | (28.2 | ) | Funded status at end of year | | $ | (6.0) | | | $ | (8.2) | | | $ | 93.2 | | | $ | (5.5) | | | $ | (9.7) | | | $ | (7.7) | |
| Amount Recognized in Balance Sheet: | | | | | | | | | | | | | Amount Recognized in Balance Sheet: | | | | | | | | | | | | |
| Other assets | | $ | — |
| | $ | — |
| | $ | 88.1 |
| | $ | 82.0 |
| | $ | — |
| | $ | — |
| Other assets | | $ | — | | | $ | — | | | $ | 162.4 | | | $ | 103.1 | | | $ | — | | | $ | — | |
| Accrued compensation | | (1.0 | ) | | (1.0 | ) | | (2.8 | ) | | (2.2 | ) | | (4.5 | ) | | (2.7 | ) | Accrued compensation | | (.7) | | | (.9) | | | (1.2) | | | (2.1) | | | (6.3) | | | (3.6) | |
| Employee benefit plans liability | | (11.0 | ) | | (24.8 | ) | | (86.5 | ) | | (88.6 | ) | | (21.5 | ) | | (25.5 | ) | Employee benefit plans liability | | (5.3) | | | (7.4) | | | (68.0) | | | (106.5) | | | (3.4) | | | (4.1) | |
| Net amount recognized | | $ | (12.0 | ) | | $ | (25.8 | ) | | $ | (1.2 | ) | | $ | (8.8 | ) | | $ | (26.0 | ) | | $ | (28.2 | ) | Net amount recognized | | $ | (6.0) | | | $ | (8.3) | | | $ | 93.2 | | | $ | (5.5) | | | $ | (9.7) | | | $ | (7.7) | |
| Pretax Amounts Recognized in Accumulated Other Comprehensive Loss: | | | | | | | | | | | | | Pretax Amounts Recognized in Accumulated Other Comprehensive Loss: | | | | | | | | | | | | |
| Net actuarial loss | | $ | 33.1 |
| | $ | 41.4 |
| | $ | 173.6 |
| | $ | 176.8 |
| | $ | — |
| | $ | 1.2 |
| Net actuarial loss | | $ | 14.7 | | | $ | 19.6 | | | $ | 122.8 | | | $ | 204.7 | | | .8 | | | $ | 1.9 | |
| Prior service (credit) cost | | (.1 | ) | | (.2 | ) | | 1.3 |
| | (.9 | ) | | .6 |
| | (1.3 | ) | Prior service (credit) cost | | — | | | (.1) | | | 2.0 | | | 1.5 | | | (.8) | | | (5.3) | |
| | Total pretax amount recognized | | $ | 33.0 |
| | $ | 41.2 |
| | $ | 174.9 |
| | $ | 175.9 |
| | $ | .6 |
| | $ | (.1 | ) | Total pretax amount recognized | | $ | 14.7 | | | $ | 19.5 | | | $ | 124.8 | | | $ | 206.2 | | | $ | — | | | $ | (3.4) | |
| Supplemental Information: | | | | | | | | | | | | | Supplemental Information: | | | | | | | | | | | | |
| Accumulated benefit obligation | | $ | 72.7 |
| | $ | 85.9 |
| | $ | 179.9 |
| | $ | 199.8 |
| | N/A |
| | N/A |
| Accumulated benefit obligation | | $ | 59.5 | | | $ | 66.8 | | | $ | 159.4 | | | $ | 200.6 | | | N/A | | N/A |
| Plans with Projected Benefit Obligation in Excess of Plan Assets: | | | | | | | | | | | | | Plans with Projected Benefit Obligation in Excess of Plan Assets: | |
| Projected benefit obligation | | $ | 74.7 |
| | $ | 88.9 |
| | $ | 195.3 |
| | $ | 216.7 |
| | N/A |
| | N/A |
| Projected benefit obligation | | $ | 60.3 | | | $ | 67.9 | | | $ | 170.0 | | | $ | 220.1 | | | N/A | | N/A |
| Fair value plan assets | | 62.7 |
| | 63.1 |
| | 106.0 |
| | 125.9 |
| | N/A |
| | N/A |
| Fair value plan assets | | 54.3 | | | 59.7 | | | 100.8 | | | 111.5 | | | N/A | | N/A |
| Plans with Accumulated Benefit Obligation in Excess of Plan Assets: | | | | | | | | | | | | | Plans with Accumulated Benefit Obligation in Excess of Plan Assets: | |
| Projected benefit obligation | | $ | 74.7 |
| | $ | 88.9 |
| | $ | 185.7 |
| | $ | 202.0 |
| | N/A |
| | N/A |
| |
| Accumulated benefit obligation | | 72.7 |
| | 85.9 |
| | 174.6 |
| | 191.9 |
| | N/A |
| | N/A |
| Accumulated benefit obligation | | 59.5 | | | 7.3 | | | 153.6 | | | 190.1 | | | N/A | | N/A |
| Fair value plan assets | | 62.7 |
| | 63.1 |
| | 98.0 |
| | 114.0 |
| | N/A |
| | N/A |
| Fair value plan assets | | 54.3 | | | — | | | 91.7 | | | 98.3 | | | N/A | | N/A |
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the year ended December 31, 2021, actuarial gains on benefit obligations were primarily due to a increase in discount rates for all plans. For the years ended December 31, 2020 and 2019, actuarial losses on the benefit obligations were primarily due to a decrease in discount rates for all plans.
The U.S. pension plans include a funded qualified plan (the PRA) and unfunded non-qualified plans. At December 31, 2018,2021, the PRA had benefit obligations of $65.4$53.6 and plan assets of $62.7.$54.3. At December 31, 2017,2020, the PRA had benefit obligations of $76.7$60.4 and plan assets of $63.0.$59.7. We believe we have adequate investments and cash flows to fund the liabilities associated with the unfunded non-qualified plans. The Non-U.S. pension plans include a funded qualified pension plan in the UK. At December 31, 2018,2021, the UK qualified pension plan had benefit obligations of $416.5$492.0 and plan assets of $501.7.$653.6. At December 31, 2017,2020, the UK qualified pension plan had benefit obligations of $494.0$545.5 and plan assets of $573.6.$648.4.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Components of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Loss
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | | | | | |
| | | U.S. Plans | | Non-U.S. Plans | | Postretirement Benefits |
| | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
| Net Periodic Benefit Cost: | | | | | | | | | | | | | | | | | | |
| Service cost | | $ | 2.9 |
| | $ | 4.3 |
| | $ | 6.4 |
| | $ | 4.7 |
| | $ | 4.6 |
| | $ | 5.0 |
| | $ | .1 |
| | $ | .1 |
| | $ | .1 |
|
| Interest cost | | 2.3 |
| | 3.0 |
| | 6.5 |
| | 15.4 |
| | 18.0 |
| | 21.8 |
| | 1.1 |
| | 1.3 |
| | 1.7 |
|
| Expected return on plan assets | | (3.5 | ) | | (3.2 | ) | | (8.2 | ) | | (31.9 | ) | | (28.2 | ) | | (33.0 | ) | | — |
| | — |
| | — |
|
| Amortization of prior service credit | | — |
| | (.1 | ) | | (.2 | ) | | (.1 | ) | | (.1 | ) | | (.1 | ) | | (.4 | ) | | (.3 | ) | | (1.2 | ) |
| Amortization of net actuarial losses | | 4.1 |
| | 5.2 |
| | 10.8 |
| | 6.8 |
| | 7.6 |
| | 6.5 |
| | — |
| | .1 |
| | .3 |
|
| Settlements/curtailments | | 1.4 |
| | — |
| | .1 |
| | (.4 | ) | | 3.7 |
| | .3 |
| | (.3 | ) | | — |
| | (.1 | ) |
| Other | | — |
| | — |
| | — |
| |
|
| | (.7 | ) | | — |
| | .1 |
| | 1.6 |
| | — |
|
Net periodic benefit cost(1) | | $ | 7.2 |
| | $ | 9.2 |
| | $ | 15.4 |
| | $ | (5.5 | ) | | $ | 4.9 |
| | $ | .5 |
| | $ | .7 |
| | $ | 2.8 |
| | $ | .8 |
|
| Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive (Loss) Income: | | | | | | | | | | | | | | | | | | |
| Actuarial (gains) losses | | $ | (2.8 | ) | | $ | (2.9 | ) | | $ | 13.6 |
| | $ | 12.2 |
| | $ | (7.4 | ) | | $ | (24.6 | ) | | $ | (1.2 | ) | | $ | (.3 | ) | | $ | (2.6 | ) |
| Prior service cost (credit) | | — |
| | — |
| | — |
| | 2.2 |
| | — |
| | — |
| | — |
| |
|
| | 1.0 |
|
| Amortization of prior service credit | | .1 |
| | .1 |
| | 1.3 |
| | .1 |
| | .1 |
| | .1 |
| | .6 |
| | .3 |
| | 26.7 |
|
| Amortization of net actuarial losses | | (5.6 | ) | | (5.2 | ) | | (274.4 | ) | | (6.4 | ) | | (11.3 | ) | | (7.8 | ) | | — |
| | (.1 | ) | | (11.3 | ) |
| Foreign currency changes | | — |
| | — |
| | — |
| | (9.1 | ) | | 18.9 |
| | (29.6 | ) | | — |
| | — |
| | (.1 | ) |
| Total recognized in other comprehensive (loss) income* | | $ | (8.3 | ) | | $ | (8.0 | ) | | $ | (259.5 | ) | | $ | (1.0 | ) | | $ | .3 |
| | $ | (61.9 | ) | | $ | (.6 | ) | | $ | (.1 | ) | | $ | 13.7 |
|
| Total recognized in net periodic benefit cost and other comprehensive income (loss) | | $ | (1.1 | ) | | $ | 1.2 |
| | $ | (244.1 | ) | | $ | (6.5 | ) | | $ | 5.2 |
| | $ | (61.4 | ) | | $ | .1 |
| | $ | 2.7 |
| | $ | 14.5 |
|
(1) Includes $4.4 of the U.S. pension plans in 2016, and immaterial amounts of the postretirement benefit plans (related to the U.S.) in 2016, which are included in discontinued operations. Amounts associated with the pension and postretirement benefit plans in Canada and the postretirement benefit plan in Puerto Rico, which are included in discontinued operations, have been excluded from all amounts in the table above. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | | | | | |
| | U.S. Plans | | Non-U.S. Plans | | Postretirement Benefits |
| | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 |
| Net Periodic Benefit Cost: | | | | | | | | | | | | | | | | | | |
| Service cost | | $ | .9 | | | $ | 1.2 | | | $ | 1.7 | | | $ | 4.3 | | | $ | 4.3 | | | $ | 4.0 | | | $ | — | | | $ | — | | | $ | .1 | |
| Interest cost | | 1.0 | | | 1.4 | | | 2.3 | | | 8.7 | | | 11.7 | | | 15.3 | | | .3 | | | .7 | | | 1.2 | |
| Expected return on plan assets | | (2.0) | | | (2.6) | | | (3.4) | | | (16.0) | | | (16.0) | | | (31.0) | | | — | | | — | | | — | |
| Amortization of prior service credit | | — | | | — | | | — | | | — | | | (.1) | | | — | | | (4.5) | | | (.2) | | | (.2) | |
| Amortization of net actuarial losses | | 2.4 | | | 2.9 | | | 2.8 | | | 7.5 | | | 6.3 | | | 4.9 | | | .7 | | | — | | | — | |
| Amortization of transition obligation | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Settlements/curtailments | | 1.0 | | | 2.6 | | | 3.0 | | | .1 | | | .1 | | | (.6) | | | — | | | — | | | — | |
| Special termination benefits | | — | | | — | | | — | | | — | | | — | | | — | | | 3.0 | | | (4.2) | | | — | |
| Other | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Net periodic benefit cost | | $ | 3.3 | | | $ | 5.5 | | | $ | 6.4 | | | $ | 4.6 | | | $ | 6.3 | | | $ | (7.4) | | | $ | (.5) | | | $ | (3.7) | | | $ | 1.1 | |
| Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive (Loss) Income: | | | | | | | | | | | | | | | | | | |
| Actuarial losses (gains) | | $ | (1.4) | | | $ | .8 | | | $ | (3.0) | | | $ | (68.1) | | | $ | 15.9 | | | $ | 13.1 | | | $ | (.4) | | | $ | 1.5 | | | $ | 2.5 | |
| Prior service cost (credit) | | — | | | — | | | — | | | — | | | — | | | — | | | 4.5 | | | (4.1) | | | (1.3) | |
| Amortization of prior service credit | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | .2 | | | .2 | |
| Amortization of net actuarial losses | | (3.4) | | | (5.5) | | | (5.7) | | | (7.6) | | | (6.4) | | | (4.6) | | | (.7) | | | (1.6) | | | — | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Foreign currency changes | | — | | | — | | | — | | | (5.9) | | | 11.6 | | | 1.7 | | | — | | | — | | | — | |
| Total recognized in other comprehensive loss* | | $ | (4.8) | | | $ | (4.7) | | | $ | (8.7) | | | $ | (81.6) | | | $ | 21.1 | | | $ | 10.2 | | | $ | 3.4 | | | $ | (4.0) | | | $ | 1.4 | |
| Total recognized in net periodic benefit cost and other comprehensive loss | | $ | (1.5) | | | $ | .8 | | | $ | (2.3) | | | $ | (77.0) | | | $ | 27.4 | | | $ | 2.8 | | | $ | 2.9 | | | $ | (7.7) | | | $ | 2.5 | |
* Amounts represent the pre-tax effect classified within other comprehensive (loss) income.loss. The net of tax amounts are classified within our Consolidated Statements of Comprehensive Income (Loss).
In addition to the amounts in the table above, during the second quarter of 2017, we recorded an $18.2 charge for a loss contingency related to a non-U.S. pension plan, for which an amendment to the plan that occurred in a prior year may not have been appropriately implemented.
The amounts in AOCI that are expected to be recognized as components of net periodic benefit cost during 2019 are as follows:
|
| | | | | | | | | | | | |
| | | Pension Benefits | | |
| | | U.S. Plans | | Non-U.S. Plans | | Postretirement Benefits |
| Net actuarial loss | | $ | 3.0 |
| | $ | 5.0 |
| | $ | — |
|
| Prior service credit | | — |
| | — |
| | (.2 | ) |
Assumptions
Weighted-average assumptions used to determine benefit obligations recorded in our Consolidated Balance Sheets as of December 31 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Postretirement |
| | U.S. Plans | | Non-U.S. Plans | | Benefits |
| | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
| Discount rate | | 2.81 | % | | 2.43 | % | | 2.09 | % | | 1.45 | % | | 3.61 | % | | 3.95 | % |
| Rate of compensation increase | | 4.00 | % | | 4.00 | % | | 2.56 | % | | 2.51 | % | | N/A | | N/A |
| Interest crediting rate | | 1.78 | % | | 1.62 | % | | 2.75 | % | | 2.68 | % | | N/A | | N/A |
|
| | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Postretirement |
| | | U.S. Plans | | Non-U.S. Plans | | Benefits |
| | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
| Discount rate | | 4.24 | % | | 3.48 | % | | 2.91 | % | | 2.56 | % | | 5.17 | % | | 4.75 | % |
| Rate of compensation increase | | 4.00 | % | | 4.00 | % | | 2.69 | % | | 2.71 | % | | N/A |
| | N/A |
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The discount rate used for determining the present value of future pension obligations for each individual defined benefit pension plan is based on a review of bonds that receive a high-quality rating from a recognized rating agency. The discount rates for our more significant plans, including the UK defined benefit pension plan and the PRA, were based on the internal rates of return for a portfolio of high-quality bonds with maturities that are consistent with the projected future benefit payment
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
obligations of each plan. The weighted-average discount rate for U.S. and non-U.S. defined benefit pension plans determined on this basis has increased to 3.06%2.15% at December 31, 2018,2021, from 2.66%1.53% at December 31, 2017.
Effective as of January 1, 2018, we changed the method we use to estimate the service and interest cost components of net periodic benefit cost for the PRA and the majority of our significant non-U.S. pension plans, including the UK defined benefit pension plan. Historically, including in 2017, we estimated the service and interest cost components using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. Beginning in 2018, we have elected to use a full yield curve approach in the estimation of these components of net periodic benefit cost by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. We have made this change to improve the correlation between projected benefit cash flows and the corresponding yield curve spot rates, which we believe results in a more precise measurement of service and interest costs.2020.
Weighted-average assumptions used to determine net benefit cost recorded in our Consolidated Statements of Operations for the years ended December 31 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | | | | | |
| | U.S. Plans | | Non-U.S. Plans | | Postretirement Benefits |
| | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 |
| Discount rate | | 2.42 | % | | 3.16 | % | | 4.24 | % | | 1.45 | % | | 2.05 | % | | 2.92 | % | | 3.95 | % | | 3.66 | % | | 5.17 | % |
| Rate of compensation increase | | 4.00 | % | | 4.00 | % | | 4.00 | % | | 2.51 | % | | 2.54 | % | | 2.69 | % | | N/A | | N/A | | N/A |
| Rate of return on assets | | 4.15 | % | | 4.90 | % | | 5.50 | % | | 2.32 | % | | 2.55 | % | | 5.27 | % | | N/A | | N/A | | N/A |
| Interest crediting rate | | 1.49 | % | | 2.49 | % | | 3.36 | % | | 2.74 | % | | 2.69 | % | | 2.69 | % | | N/A | | N/A | | N/A |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | | | | | |
| | | U.S. Plans | | Non-U.S. Plans | | Postretirement Benefits |
| | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
| Discount rate | | 3.48 | % | | 3.67 | % | | 4.19 | % | | 2.56 | % | | 2.69 | % | | 3.58 | % | | 4.75 | % | | 5.33 | % | | 4.50 | % |
| Rate of compensation increase | | 4.00 | % | | 4.00 | % | | 4.00 | % | | 2.71 | % | | 2.79 | % | | 2.94 | % | | N/A |
| | N/A |
| | N/A |
|
| Rate of return on assets | | 5.50 | % | | 5.50 | % | | 7.00 | % | | 5.20 | % | | 5.09 | % | | 6.40 | % | | N/A |
| | N/A |
| | N/A |
|
In determining the long-term rates of return, we consider the nature of each plan’s investments, an expectation for each plan’s investment strategies, historical rates of return and current economic forecasts, among other factors. We generally evaluate the expected rate of return on plan assets annually and adjust as necessary. In determining the net cost for the year ended December 31, 2018,2021, the assumed rate of return on assets globally was 5.23%2.45%, which represents the weighted-average rate of return on all plan assets. Amounts associated with the pension and postretirement benefit plans in Canada and the postretirement benefit plan in Puerto Rico, which are associated with discontinued operations, have been excluded from all amounts above.
A significant portion of our pension plan assets relate to the UK defined benefit pension plan. The assumed rate of return for determining 20182021 net periodic benefit cost for the UK defined benefit pension plan was 5.20%2.10%. In addition, the 20182021 rate of return assumption for the UK defined benefit pension plan was based on an asset allocation of approximately 80%76% in corporate and government bonds and mortgage-backed securities (which are expected to earn approximately 2% to 4% in the long-term)liability driven investments, and approximately 20%24% in equity securities, emerging market debt and high yield securities (which are expected to earn approximately 5% to 9% in the long-term).securities. In addition to the physical assets, the asset portfolio for the UK defined benefit pension plan has derivative instruments which increase our exposure to fixed income (in order to better match liabilities) and, to a lesser extent, impact our equity exposure.
Historically, the pension plan with the most significant pension plan assets was the PRA. The assumed rate of return for determining 2018 net periodic benefit cost for the PRA was 5.50%. In addition, the 2018 rate of return assumption for the PRA was based on an asset allocation of approximately 70% in corporate and government bonds (which are expected to earn approximately 3% to 5% in the long-term) and approximately 30% in equity securities (which are expected to earn approximately 6% to 8% in the long-term).
Similar assessments were performed in determining rates of return on other non-U.S. defined benefit pension plan assets, to arrive at our weighted-average assumed rate of return of 5.20%2.32% for determining 20182021 net cost for all non-US defined benefit pension plan assets.
Plan Assets
Our U.S. and non-U.S. funded defined benefit pension plans target and weighted-average asset allocations at December 31, 20182021 and 2017,2020, by asset category were as follows:
AVON PRODUCTS, INC. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | U.S. Pension Plan | | Non-U.S. Pension Plans |
| | % of Plan Assets | | % of Plan Assets |
| | | Target | | at Year-End | | Target | | at Year-End |
| Asset Category | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| Equity securities | | 30 | % | | 30 | % | | 31 | % | | 23 | % | | 23 | % | | 21 | % |
| Debt securities | | 70 | | | 70 | | | 69 | | | 72 | | | 72 | | | 74 | |
| Other | | — | | | — | | | — | | | 5 | | | 5 | | | 5 | |
| Total | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | | | | | | | | | | | | | | | |
| | | U.S. Pension Plan | | Non-U.S. Pension Plans |
| | | % of Plan Assets | | % of Plan Assets |
| | | Target | | at Year-End | | Target | | at Year-End |
| Asset Category | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| Equity securities | | 30 | % | | 30 | % | | 30 | % | | 15 | % | | 16 | % | | 18 | % |
| Debt securities | | 70 |
| | 70 |
| | 70 |
| | 80 |
| | 79 |
| | 77 |
|
| Other | | — |
| | — |
| | — |
| | 5 |
| | 5 |
| | 6 |
|
| Total | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
The following tables present the fair value hierarchy for pension assets measured at fair value on a recurring basis as ofat December 31, 20182021 : |
| | | | | | | | | | | | |
| | | U.S. Pension Plan |
| Asset Category | | Level 1 | | Level 2 | | Total |
| Equity Securities: | | | | | | |
| Domestic equity | | $ | — |
| | $ | 8.4 |
| | $ | 8.4 |
|
| International equity | | — |
| | 6.3 |
| | 6.3 |
|
| Emerging markets | | — |
| | 1.8 |
| | 1.8 |
|
| | | — |
| | 16.5 |
| | 16.5 |
|
| Fixed Income Securities: | | | | | | |
| Corporate bonds | | — |
| | 32.2 |
| | 32.2 |
|
| Government securities | | — |
| | 13.3 |
| | 13.3 |
|
| | | — |
| | 45.5 |
| | 45.5 |
|
| Cash | | .7 |
| |
|
| | .7 |
|
| Total | | $ | .7 |
| | $ | 62.0 |
| | $ | 62.7 |
|
|
| | | | | | | | | | | | | | | | |
| | | Non-U.S. Pension Plans |
| Asset Category | | Level 1 | | Level 2 | | Level 3 | | Total |
| Equity Securities: | | | | | | | | |
| Domestic equity | | $ | — |
| | $ | 25.8 |
| | $ | — |
| | $ | 25.8 |
|
| International equity | | — |
| | 72.5 |
| | — |
| | 72.5 |
|
| | | — |
| | 98.3 |
| | — |
| | 98.3 |
|
| Fixed Income Securities: | | | | | | | | |
| Corporate bonds | | — |
| | 212.7 |
| | — |
| | 212.7 |
|
| Government securities | | — |
| | 201.7 |
| | — |
| | 201.7 |
|
| Other | | — |
| | 70.1 |
| | — |
| | 70.1 |
|
| | | — |
| | 484.5 |
| | — |
| | 484.5 |
|
| Other | | | | | | | | |
| Cash | | 35.1 |
| | — |
| | — |
| | 35.1 |
|
| Derivatives | | — |
| | (4.1 | ) | | — |
| | (4.1 | ) |
| Real estate | | — |
| | — |
| | 2.0 |
| | 2.0 |
|
| Other | | — |
| | — |
| | — |
| | — |
|
| | | 35.1 |
| | (4.1 | ) | | 2.0 |
| | 33.0 |
|
| Total | | $ | 35.1 |
| | $ | 578.7 |
| | $ | 2.0 |
| | $ | 615.8 |
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | | | | |
| | U.S. Pension Plan |
| Asset Category | | Level 1 | | Level 2 | | Total |
| Equity Securities: | | | | | | |
| Domestic equity | | $ | — | | | $ | 8.3 | | | $ | 8.3 | |
| International equity | | — | | | 6.6 | | | 6.6 | |
| Emerging markets | | — | | | 1.6 | | | 1.6 | |
| | — | | | 16.5 | | | 16.5 | |
| Fixed Income Securities: | | | | | | |
| Corporate bonds | | — | | | 21.6 | | | 21.6 | |
| Government securities | | — | | | 8.8 | | | 8.8 | |
| Other | | — | | | 7.3 | | | 7.3 | |
| | — | | | 37.7 | | | 37.7 | |
| Other | | | | | | |
| Cash | | — | | | .1 | | | .1 | |
| | — | | | .1 | | | .1 | |
| Total | | $ | — | | | $ | 54.3 | | | $ | 54.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Non-U.S. Pension Plans |
| Asset Category | | Level 1 | | Level 2 | | Level 3 | | Total |
| Equity Securities: | | | | | | | | |
| Domestic equity | | $ | — | | | $ | 29.4 | | | $ | — | | | $ | 29.4 | |
| International equity | | — | | | 145.2 | | | — | | | 145.2 | |
| | — | | | 174.6 | | | — | | | 174.6 | |
| Fixed Income Securities: | | | | | | | | |
| Corporate bonds | | — | | | 257.6 | | | — | | | 257.6 | |
| Government securities | | — | | | 256.9 | | | — | | | 256.9 | |
| Other | | — | | | 36.5 | | | — | | | 36.5 | |
| | — | | | 551.0 | | | — | | | 551.0 | |
| Other | | | | | | | | |
| Cash | | 34.3 | | | — | | | — | | | 34.3 | |
| Derivatives | | — | | | 2.2 | | | — | | | 2.2 | |
| Real estate | | — | | | — | | | 2.3 | | | 2.3 | |
| | | | | | | | |
| | 34.3 | | | 2.2 | | | 2.3 | | | 38.8 | |
| Total | | $ | 34.3 | | | $ | 727.8 | | | $ | 2.3 | | | $ | 764.4 | |
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present the fair value hierarchy for pension assets measured at fair value on a recurring basis as of at December 31, 2017:2020: | | | | | U.S. Pension Plan | | U.S. Pension Plan |
| Asset Category | | Level 1 | | Level 2 | | Total | Asset Category | | Level 1 | | Level 2 | | Total |
| Equity Securities: | | | | | | | Equity Securities: | | | | | | |
| Domestic equity | | $ | — |
| | $ | 7.4 |
| | $ | 7.4 |
| Domestic equity | | $ | — | | | $ | 9.3 | | | $ | 9.3 | |
| International equity | | — |
| | 9.7 |
| | 9.7 |
| International equity | | — | | | 7.5 | | | 7.5 | |
| Emerging markets | | — |
| | 2.0 |
| | 2.0 |
| Emerging markets | | — | | | 1.9 | | | 1.9 | |
| | | — |
| | 19.1 |
| | 19.1 |
| | — | | | 18.7 | | | 18.7 | |
| Fixed Income Securities: | | | | | | | Fixed Income Securities: | |
| Corporate bonds | | — |
| | 31.8 |
| | 31.8 |
| Corporate bonds | | — | | | 23.7 | | | 23.7 | |
| Government securities | | — |
| | 12.2 |
| | 12.2 |
| Government securities | | — | | | 9.4 | | | 9.4 | |
| Other | | Other | | — | | | 7.8 | | | 7.8 | |
| | | — |
| | 44.0 |
| | 44.0 |
| | — | | | 40.9 | | | 40.9 | |
| Cash | | — |
| | — |
| | — |
| |
| Total(3) | | $ | — |
| | $ | 63.1 |
| | $ | 63.1 |
| | $ | — | | | $ | 59.7 | | | $ | 59.7 | |
| | | | | Non-U.S. Pension Plans | | | Non-U.S. Pension Plans |
| Asset Category | | Level 1 | | Level 2 | | Level 3 | | Total | Asset Category | | Level 1 | | Level 2 | | Level 3 | | Total |
| Equity Securities: | | | | | | | | | Equity Securities: | | | | | | | | |
| Domestic equity | | $ | — |
| | $ | 33.9 |
| | $ | — |
| | $ | 33.9 |
| Domestic equity | | $ | — | | | $ | 26.0 | | | $ | — | | | $ | 26.0 | |
| International equity | | — |
| | 91.1 |
| | — |
| | 91.1 |
| International equity | | — | | | 132.0 | | | — | | | 132.0 | |
| | | — |
| | 125.0 |
| | — |
| | 125.0 |
| | — | | | 158.0 | | | — | | | 158.0 | |
| Fixed Income Securities: | | | | | | | | | Fixed Income Securities: | |
| Corporate bonds | | — |
| | 223.9 |
| | — |
| | 223.9 |
| Corporate bonds | | — | | | 32.4 | | | — | | | 32.4 | |
| Government securities | | — |
| | 236.0 |
| | — |
| | 236.0 |
| Government securities | | — | | | 497.4 | | | — | | | 497.4 | |
| Other | | — |
| | 79.9 |
| | — |
| | 79.9 |
| Other | | — | | | 37.3 | | | — | | | 37.3 | |
| | | — |
| | 539.8 |
| | — |
| | 539.8 |
| | — | | | 567.1 | | | — | | | 567.1 | |
| Other: | | | | | | | | | Other: | |
| Cash | | 29.3 |
| | — |
| | — |
| | 29.3 |
| Cash | | 33.3 | | | — | | | — | | | 33.3 | |
| Derivatives | | — |
| | 34.1 |
| | — |
| | 34.1 |
| Derivatives | | — | | | 2.0 | | | — | | | 2.0 | |
| Real estate | | — |
| | — |
| | .9 |
| | .9 |
| Real estate | | — | | | — | | | 1.6 | | | 1.6 | |
| Other | | — |
| | — |
| | .6 |
| | .6 |
| |
| | | 29.3 |
| | 9.8 |
| | 1.5 |
| | 40.6 |
| | 33.3 | | | 2.0 | | | 1.6 | | | 36.9 | |
| Total | | $ | 29.3 |
| | $ | 674.6 |
| | $ | 1.5 |
| | $ | 705.4 |
| Total | | $ | 33.3 | | | $ | 727.1 | | | $ | 1.6 | | | $ | 762.0 | |
A reconciliation of the beginning and ending balances for our Level 3 investments is provided in the table below:
|
| | | |
| | Amount |
|
| Balance at January 1, 2017 | $ | 1.5 |
|
| Actual return on plan assets held | (.1 | ) |
| Foreign currency changes | .1 |
|
| | |
| Balance at December 31, 2017 | 1.5 |
|
| Purchases and sales net | (.7 | ) |
| Actual return on plan assets held | 1.4 |
|
| Foreign currency changes | (.2 | ) |
| | |
| Balance at December 31, 2018 | $ | 2.0 |
|
| | | | | |
| Amount |
| Balance at January 1, 2020 | $ | 1.6 | |
| |
| |
| |
| |
| Balance at December 31, 2020 | 1.6 | |
| |
| Actual return on plan assets held | .7 | |
| |
| |
| Balance at December 31, 2021 | 2.3 |
Investments in equity securities classified as Level 1 in the fair value hierarchy are valued at quoted market prices. Investments in equity securities classified as Level 2 in the fair value hierarchy include collective funds that are valued at quoted market prices for non-active securities. Fixed income securities are based on broker quotes for non-active securities. Mutual funds are valued at quoted market prices. Real estate is valued by reference to investment and leasing transactions at similar types of property, supplemented by third party appraisals. Derivative instruments are not publicly traded, and each derivative contract is
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
specifically negotiated with a unique financial counterparty. The derivative instruments are valued based upon valuation statements received from the financial counterparties, which use underlying yield curves or market indices.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The overall objective of the plan assets associated with the PRA and the UK defined benefit pension plan is to provide the means to pay benefits to participants and their beneficiaries in the amounts and at the times called for by the plan. This is expected to be achieved through the investment of our contributions and other trust assets and by utilizing investment policies designed to achieve adequate funding over a reasonable period of time.
In some of our defined benefit pension plans, we have adopted investment strategies which are designed to match the movements in the pension liability through an increased allocation towards debt securities. In addition, we also utilize derivative instruments in our UK defined benefit pension plans to achieve the desired market exposures or 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.
Pension trust assets are invested so as to achieve a return on investment, based on levels of liquidity and investment risk that are prudent and reasonable as circumstances change from time to time. While we recognize the importance of the preservation of capital, we also adhere to the theory of capital market pricing which maintains that varying degrees of investment risk should be rewarded with compensating returns. Consequently, prudent risk-taking is justifiable.
The asset allocation decision includes consideration of the non-investment aspects of the PRA and the UK defined benefit pension plan, including future retirements, lump-sum elections, growth in the number of participants, company contributions, and cash flow. These characteristics of the plan place certain demands upon the level, risk, and required growth of trust assets. We regularly conduct analyses of the plan’s current and likely future financial status by forecasting assets, liabilities, benefits and company contributions over time. In so doing, the impact of alternative investment policies upon the plan’s financial status is measured and an asset mix which balances asset returns and risk is selected.
Our decision with regard to asset mix is reviewed periodically. Asset mix guidelines include target allocations and permissible ranges for each asset category. Assets are monitored on an ongoing basis and rebalanced as required to maintain an asset mix within the permissible ranges. The guidelines will change from time to time, based on an ongoing evaluation of the factors discussed above.
Cash flows
We expect to make contributions related to continuing operations in the range of $5 to $10 to our U.S. defined benefit pension and postretirement plans and in the range of $10 to $15 to our non-U.S. defined benefit pension and postretirement plans during 2019.2022.
Total benefit payments expected to be paid from the plans are as follows:
|
| | | | | | | | | | | | | | | | |
| | | Pension Benefits | | |
| | | U.S. Plans | | Non-U.S. Plans | | Total | | Postretirement Benefits |
| 2019 | | $ | 12.6 |
| | $ | 41.1 |
| | $ | 53.7 |
| | $ | 4.5 |
|
| 2020 | | 21.4 |
| | 40.4 |
| | 61.8 |
| | 2.4 |
|
| 2021 | | 5.5 |
| | 41.2 |
| | 46.7 |
| | 2.3 |
|
| 2022 | | 4.6 |
| | 52.6 |
| | 57.2 |
| | 2.2 |
|
| 2023 | | 4.0 |
| | 54.8 |
| | 58.8 |
| | 2.1 |
|
| 2024-2028 | | 15.8 |
| | 280.7 |
| | 296.5 |
| | 8.7 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | |
| | U.S. Plans | | Non-U.S. Plans | | Total | | Postretirement
Benefits |
| 2022 | | $ | 5.7 | | | $ | 26.2 | | | $ | 31.9 | | | $ | 6.3 | |
| 2023 | | 4.8 | | | 26.8 | | | 31.6 | | | .3 | |
| 2024 | | 5.0 | | | 27.9 | | | 32.9 | | | .3 | |
| 2025 | | 4.1 | | | 28.0 | | | 32.1 | | | .3 | |
| 2026 | | 3.9 | | | 27.7 | | | 31.6 | | | .3 | |
| 2027-2031 | | 14.7 | | | 149.6 | | | 164.3 | | | 1.4 | |
Postemployment Benefits
We provide postemployment benefits, which include salary continuation, severance benefits, disability benefits and continuation of health care benefits to eligible former employees. The accrued cost for such postemployment benefits was $9.2 and $9.7$6.5 at December 31, 20182021 and 2017, respectively,$9.1 at December 31, 2020 and was included in employee benefit plans in our Consolidated Balance Sheets.
Supplemental Retirement Programs
In the U.S., in addition to qualified retirement plans (i.e., the PSA and the PRA), we also maintain unfunded non-qualified plans. We offer a non-qualified deferred compensation plan, the Avon Products, Inc. Deferred Compensation Plan (the "DCP"), for certain higher paid key employees. The DCP is an unfunded, unsecured plan for which obligations are paid to participants out of our general assets. The DCP allows for the deferral of up to 50% of a participant’s base salary, the deferral of up to 100%
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
of incentive compensation bonuses, and the deferral of contributions that would normally have been made to the PSA but are not deferred because the amount was in excess of U.S. Internal Revenue Code limits on contributions to the PSA. Participants may elect to have their deferred compensation invested in one or more of three3 permitted investment alternatives. Expense associated with the DCP was zero in 2021, $.1 in 2018, $1.42020 and $.8 in 2017 and $1.0 in 2016.2019. The benefit obligation under the DCP was $16.4$.7 at
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20182021 and $21.0$.8 at December 31, 20172020 and was included in other liabilities and accrued compensation in our Consolidated Balance Sheets. The Transaction triggered a change of control provision in the DCP, resulting in the settlement of the majority of the obligation in 2020.
We maintain supplemental retirement programs consisting of the Supplemental Executive Retirement Plan of Avon Products, Inc. ("SERP") and the Benefit Restoration Pension Plan of Avon Products, Inc. ("BRP") under which non-qualified supplemental pension benefits are paid to higher paid key employees in addition to amounts received under our qualified defined benefit retirement plan, which is subject to IRS limitations on covered compensation. The SERP has not been offered to new employees in the last eightten years, and the BRP is closed to employees hired on or after January 1, 2015 in conjunction with the closure of the PRA. The annual cost of these programs has been included in the determination of the net periodic benefit cost shown previously and amounted to $2.1$1.0 in 2018, $3.02021, $1.2 in 20172020 and $3.9$1.3 in 2016.2019. The benefit obligation under these programs was $9.3$6.7 at December 31, 20182021 and $12.3$7.6 at December 31, 20172020 and was included in employee benefit plans and accrued compensation in our Consolidated Balance Sheets.
We also maintain a Supplemental Life Plan ("SLIP") under which additional death benefits ranging from $.4 to $2.0 are provided to certain active and retired officers. The SLIP has not been offered to new officers in over eightten years.
We established a grantor trust to provide assets that may be used for the benefits payable under the SERP and SLIP. The trust is irrevocable and, although subject to creditors’ claims, assets contributed to the trust can only be used to pay such benefits with certain exceptions. The assets held in the trust are included in other assets and at December 31 consisted of the following:
| | | | | 2018 | | 2017 | | 2021 | | 2020 |
| Corporate-owned life insurance policies | | $ | 35.8 |
| | $ | 36.0 |
| Corporate-owned life insurance policies | | $ | 24.6 | | | $ | 28.5 | |
| Cash and cash equivalents | | 1.2 |
| | 1.1 |
| Cash and cash equivalents | | 5.8 | | | 5.2 | |
| Total | | $ | 37.0 |
| | $ | 37.1 |
| Total | | $ | 30.4 | | | $ | 33.7 | |
The assets are recorded at fair market value, except for investments in corporate-owned life insurance policies which are recorded at their cash surrender values as of each balance sheet date, which is a proxy of fair value. Changes in the cash surrender value during the period are recorded as a gain or loss within SG&A expenses in our Consolidated Statements of Operations.
NOTE 15.14. Segment Information
Our reportable segments are based on geographic operations in four regions: Europe, Middle East & Africa; South Latin America; North Latin America; and Asia Pacific. The segments have similar business characteristics and each offers similar products through similar customer access methods.
The accounting policies of the segments are the same as those described in Note 1, Description of the Business and Summary of Significant Accounting Policies. We evaluate the performance of our segments based on revenues and segment profits or losses. Segment revenues primarily reflect direct sales of products to Representatives based on the Representative’s geographic location.
We determine segment profit by deducting the related costs and expenses from segment revenue. In order to ensure comparability between periods, segmentSegment profit includes an allocation of global marketingcentral expenses based on actual revenues.to the extent they support the operating activity of the segment. Segment profit excludes global expenses other than the allocation of marketing, costs to implement ("CTI")certain CTI restructuring initiatives, (see Note 17, Restructuring Initiatives), a loss contingency related to a non-U.S. pension plan (see Note 14, Employee Benefit Plans), certain significant asset impairment charges, (see Note 20, Goodwill), and other items,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.
Other operatingSummarized financial information concerning our reportable segments andas of December 31 is shown in the following tables: | | | | | | | | | | | | | | | | | | | | |
| Total Revenue | | 2021 | | 2020 | | 2019 |
| Avon International | | $ | 1,724.6 | | | $ | 1,772.6 | | | $ | 2,234.3 | |
Avon Latin America (1) | | 1,654.7 | | | 1,845.9 | | | 2,528.9 | |
| | | | | | |
| | | | | | |
Total revenue from reportable segments (2) | | 3,379.3 | | | 3,618.5 | | | 4,763.2 | |
| | | | | | |
| Revenue from affiliates to Natura &Co | | 25.2 | | | 6.7 | | | — | |
| Total revenue | | $ | 3,404.5 | | | $ | 3,625.2 | | | $ | 4,763.2 | |
| | | | | | | | | | | | | | | | | | | | |
| Operating (Loss) Profit | | 2021 | | 2020 | | 2019 |
| Segment Profit | | | | | | |
| Avon International | | $ | 49.9 | | | $ | 27.4 | | | $ | 170.9 | |
Avon Latin America (1) | | (10.9) | | | (39.1) | | | 194.1 | |
| | | | | | |
| | | | | | |
Total (loss) profit from reportable segments (3) | | 39.0 | | | (11.7) | | | 365.0 | |
Unallocated global expenses(4) | | (27.0) | | | (11.6) | | | (35.8) | |
Certain Brazil Indirect taxes (5) | | (1.7) | | | 10.6 | | | — | |
| CTI restructuring initiatives | | (68.7) | | | (23.7) | | | (139.3) | |
Costs related to the Transaction (6) | | — | | | (85.8) | | | (64.3) | |
| Operating (loss) profit | | $ | (58.4) | | | $ | (122.2) | | | $ | 125.6 | |
(1)2021 includes the impact of certain Brazil indirect taxes, which was recorded in product sales in the amount of approximately $21 in our Consolidated Income Statements. 2019 includes the impact of certain Brazil indirect taxes, which
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
was recorded in product sales in the amount of approximately $68 in our Consolidated Income Statements. See Note 20 Supplemental Balance Sheet Information.
(2)Total revenue from reportable segments also includes revenue from other business activities includeof $4.7, $14.5 and $18.1 for the business results for Venezuela, as it was deconsolidated effective Marchyears ended December 31, 2016, as well as markets that have been exited. Effective in the first quarter of 2017, given that we exited Thailand during 2016, the results of Thailand are now reported in2021, 2020 and 2019, respectively, allocated to Avon International and Avon Latin America segments. Other operating segments and business activities for all periods presented, while previously the results had been reported in Asia Pacific. Effective in the first quarter of 2018, given that we have 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 Asia Pacific. Other operating segments and business activities also include revenue from the sale of products to New Avon since the separation of the Company'sCompany’s North America business into New Avon on March 1, 2016 and ongoing royalties from the licensing of our name and products. Previously reported amounts have been allocated to Avon International and Avon Latin America segments to conform to the current year presentation.
(3)Total profit from reportable segments also includes profit from other business activities and central expenses allocated to Avon International and Avon Latin America segments. Other business activities of $1.5, $7.3, and $2.4 for the years ended December 31, 2021, 2020 and 2019, respectively, include profit 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. Central expenses of $206.7, $197.6, and $214.7 for the years ended December 31, 2021, 2020 and 2019, respectively, include corporate general and administrative expenses allocated to Avon International and Avon Latin America to the extent they support the operating activity of the segment. Previously reported amounts have been allocated to segments to conform to the current year presentation.
(4)For the years ended December 31, 2021, 2020 and 2019, unallocated global expenses primarily include stewardship and other expenses not directly attributable to reportable segments.
(5)The year ended December 31, 2021 includes the impact of certain Brazil taxes, which were recorded in selling, general and administrative expenses, net in the amounts of approximately $2. The year ended December 31, 2020 includes the impact of certain Brazil indirect taxes, which were recorded in selling, general and administrative expenses, net in the amounts of approximately $11.
(6)For the year ended December 31, 2020, costs related to the Transaction primarily include professional fees of approximately $46, severance payments of approximately $25 and acceleration of share based compensation of approximately $10 relating to these terminations triggered by change in control provisions. For the year ended 31 December 2019, costs related to the Transaction primarily include professional fees and impairment losses on assets. Refer to Note 21, Merger with Natura Cosméticos S.A. for more information relating to the Natura transaction.
(7)On July 1, 2021, the Company sold Avon Luxembourg, including our Mexican business, to a subsidiary of Natura &Co Holding. As a result, from the same date, the results of Avon Luxembourg are no longer included within Avon's consolidated results. The year ended December 31, 2021 includes the results of Avon Luxembourg for the period from January 1 to June 30, 2021. The years ended December 31, 2020 and 2019 include the results of Avon Luxembourg.
| | | | | | | | | | | | | | | | | | | | |
| Total Assets | | 2021 | | 2020 | | 2019 |
Avon International (1) | | $ | 1,362.0 | | | $ | 1,364.4 | | | $ | 1,712.4 | |
Avon Latin America (2) | | 945.8 | | | 1,199.9 | | | 1,373.9 | |
| Total assets | | $ | 2,307.8 | | | $ | 2,564.3 | | | $ | 3,086.3 | |
(1) Avon International includes assets of $420.7 at December 31, 2019, that were not previously allocated to our reportable segments.
(2) On July 1, 2021, the Company sold Avon Luxembourg, including our Mexican business, to a subsidiary of Natura &Co Holding. As a result, balances at December 31, 2021 do not include the assets of Avon Luxembourg. Balances at December 31, 2020 and 2019 include the assets of Avon Luxembourg.
| | | | | | | | | | | | | | | | | | | | |
| Capital Expenditures | | 2021 | | 2020 | | 2019 |
Avon International (1) | | $ | 53.3 | | | $ | 36.0 | | | $ | 39.6 | |
Avon Latin America (2) | | 15.0 | | | 8.6 | | | 18.9 | |
| Total capital expenditures | | $ | 68.3 | | | $ | 44.6 | | | $ | 58.5 | |
(1) Avon International includes capital expenditures of $13.8 for the year ended December 31, 2019, that were not previously allocated to our reportable segments.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) On July 1, 2021, the Company sold Avon Luxembourg, including our Mexican business, to a subsidiary of Natura &Co Holding. As a result, from the same date, the results of Avon Luxembourg are no longer included within Avon's consolidated results. The year ended December 31, 2021 includes the results of Avon Luxembourg for the period from January 1 to June 30, 2021. The years ended December 31, 2020 and 2019 include the results of Avon Luxembourg.
Summarized financial information concerning
| | | | | | | | | | | | | | | | | | | | |
| Depreciation and Amortization | | 2021 | | 2020 | | 2019 |
Avon International (1) | | $ | 48.1 | | | $ | 49.5 | | | $ | 51.6 | |
Avon Latin America (2) | | 24.7 | | | 32.3 | | | 41.3 | |
| Total depreciation and amortization | | $ | 72.8 | | | $ | 81.8 | | | $ | 92.9 | |
(1) Avon International includes depreciation and amortization of $19.9 for the year ended December 31, 2019 that was not previously allocated to our reportable segments assegments.
(2) On July 1, 2021, the Company sold Avon Luxembourg, including our Mexican business, to a subsidiary of Natura &Co Holding. As a result, from the same date, the results of Avon Luxembourg are no longer included within Avon's consolidated results. The year ended December 31, is shown in2021 includes the following tables:
|
| | | | | | | | | | | | |
| Total Revenue | | 2018 | | 2017 | | 2016 |
| Europe, Middle East & Africa | | $ | 2,093.8 |
| | $ | 2,126.5 |
| | $ | 2,138.2 |
|
South Latin America (2) | | 2,146.9 |
| | 2,222.4 |
| | 2,145.9 |
|
| North Latin America | | 809.3 |
| | 811.8 |
| | 829.9 |
|
| Asia Pacific | | 470.8 |
| | 471.9 |
| | 494.0 |
|
| Total segment revenue | | 5,520.8 |
| | 5,632.6 |
| | 5,608.0 |
|
| Other operating segments and business activities | | 50.5 |
| | 83.0 |
| | 109.7 |
|
| Total revenue | | $ | 5,571.3 |
| | $ | 5,715.6 |
| | $ | 5,717.7 |
|
|
| | | | | | | | | | | | |
| Operating Profit | | 2018 | | 2017 | | 2016 |
| Segment Profit | | | | | | |
| Europe, Middle East & Africa | | $ | 267.5 |
| | $ | 329.6 |
| | $ | 322.8 |
|
South Latin America (2) | | 314.6 |
| | 195.7 |
| | 201.1 |
|
| North Latin America | | 70.4 |
| | 83.4 |
| | 116.1 |
|
| Asia Pacific | | 42.0 |
| | 50.8 |
| | 62.5 |
|
Total segment profit (2) | | 694.5 |
| | 659.5 |
| | 702.5 |
|
| Other operating segments and business activities | | 3.6 |
| | 2.5 |
| | 4.1 |
|
| Unallocated global expenses | | (282.4 | ) | | (302.3 | ) | | (332.6 | ) |
| CTI restructuring initiatives | | (180.5 | ) | | (60.2 | ) | | (77.4 | ) |
| Loss contingency | | — |
| | (18.2 | ) | | — |
|
Legal settlement(1) | | — |
| | — |
| | 27.2 |
|
Operating profit (2) | | $ | 235.2 |
| | $ | 281.3 |
| | $ | 323.8 |
|
| |
(1) | In the third quarter of 2016, we settled claims relating to professional services that had been provided to the Company prior to 2013 in connection with a previously disclosed legal matter. The proceeds, net of legal fees, of $27.2 before tax ($27.2 after tax) were recognized as a reduction of SG&A in the third quarter of 2016 and were subsequently received by the Company in the fourth quarter of 2016. |
(2) Includesresults of Avon Luxembourg for the impactperiod from January 1 to June 30, 2021. The years ended December 31, 2020 and 2019 include the results of the Brazil IPI tax release, which was recorded in net sales and other (income) expense, net in the amounts of approximately $168 and approximately $27, respectively, in our Consolidated Income Statements (See Note 19, Contingencies for further information).
|
| | | | | | | | | | | | |
| Total Assets | | 2018 | | 2017 | | 2016 |
| Europe, Middle East & Africa | | $ | 1,048.8 |
| | $ | 1,190.5 |
| | $ | 949.3 |
|
| South Latin America | | 1,001.0 |
| | 1,273.6 |
| | 1,306.3 |
|
| North Latin America | | 329.7 |
| | 335.8 |
| | 344.4 |
|
| Asia Pacific | | 272.0 |
| | 278.2 |
| | 291.8 |
|
| Total from reportable segments | | 2,651.5 |
| | 3,078.1 |
| | 2,891.8 |
|
| Total from discontinued operations | | — |
| | — |
| | 1.3 |
|
| Other operating segments | | 5.4 |
| | 18.9 |
| | 6.5 |
|
| Global | | 353.1 |
| | 600.9 |
| | 519.3 |
|
| Total assets | | $ | 3,010.0 |
| | $ | 3,697.9 |
| | $ | 3,418.9 |
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | | | | | | | | | |
| Capital Expenditures | | 2018 | | 2017 | | 2016 |
| Europe, Middle East & Africa | | $ | 37.0 |
| | $ | 29.4 |
| | $ | 18.8 |
|
| South Latin America | | 27.5 |
| | 35.4 |
| | 39.2 |
|
| North Latin America | | 9.1 |
| | 12.9 |
| | 11.7 |
|
| Asia Pacific | | 2.9 |
| | 2.3 |
| | 4.3 |
|
| Total from reportable segments | | 76.5 |
| | 80.0 |
| | 74.0 |
|
| Other operating segments | | — |
| | — |
| | 0.2 |
|
| Global | | 18.4 |
| | 17.3 |
| | 18.8 |
|
| Total capital expenditures | | $ | 94.9 |
| | $ | 97.3 |
| | $ | 93.0 |
|
|
| | | | | | | | | | | | |
| Depreciation and Amortization | | 2018 | | 2017 | | 2016 |
| Europe, Middle East & Africa | | $ | 27.3 |
| | $ | 29.9 |
| | $ | 28.2 |
|
| South Latin America | | 30.1 |
| | 34.3 |
| | 30.9 |
|
| North Latin America | | 14.2 |
| | 13.6 |
| | 13.1 |
|
| Asia Pacific | | 8.3 |
| | 8.9 |
| | 10.4 |
|
| Total from reportable segments | | 79.9 |
| | 86.7 |
| | 82.6 |
|
| Other operating segments | | .3 |
| | .4 |
| | 1.3 |
|
| Global | | 27.5 |
| | 26.9 |
| | 30.0 |
|
| Total depreciation and amortization | | $ | 107.7 |
| | $ | 114.0 |
| | $ | 113.9 |
|
Total Revenue by Major Country
A major country is defined as one with total revenues greater than 10% of consolidated total revenues. | | | | | | | | | | | | | | | | | | | | |
| | | 2021 | | 2020 | | 2019 |
| Brazil | | $ | 627.0 | | | $ | 729.9 | | | $ | 1,034.4 | |
Mexico(1) | | 249.2 | | | 420.2 | | | 509.4 | |
| All other | | 2,528.3 | | | 2,475.1 | | | 3,219.4 | |
| Total | | $ | 3,404.5 | | | $ | 3,625.2 | | | $ | 4,763.2 | |
|
| | | | | | | | | | | | |
| | | 2018 | | 2017 | | 2016 |
| Brazil | | $ | 1,262.8 |
| | $ | 1,263.8 |
| | $ | 1,220.4 |
|
| All other | | 4,308.5 |
| | 4,451.8 |
| | 4,497.3 |
|
| Total | | $ | 5,571.3 |
| | $ | 5,715.6 |
| | $ | 5,717.7 |
|
Long-Lived Assets by Major Country
A major country is defined as one with long-lived assets greater than 10% of consolidated long-lived assets, and also includes our country of domicile (the U.S.). Long-lived assets primarily include property, plant and equipment associated with our continuing operations. Long-lived assets in Brazil, Poland and Mexico consist primarily of property, plant and equipment related to manufacturing and distribution facilities, and long-lived assets in the U.S. consist primarily of property, plant and equipment, including our global research and development facility.facility and right-of-use assets related to equipment.
| | | | | | | | | | | | | | | | | | | | |
| | | 2021 | | 2020 | | 2019 |
| U.S. | | $ | 122.7 | | | $ | 135.3 | | | $ | 149.4 | |
| Brazil | | 75.4 | | | 86.4 | | | 116.1 | |
| Poland | | 95.0 | | | 96.8 | | | 99.3 | |
Mexico(1)(2) | | — | | | 55.2 | | | 67.8 | |
| All other | | 183.9 | | | 220.8 | | | 137.6 | |
| Total | | $ | 477.0 | | | $ | 594.5 | | | $ | 570.2 | |
(1) Mexico's long-lived assets are greater than 10% of total long-lived assets in 2019 only
(2) On July 1, 2021, the Company sold Avon Luxembourg, including our Mexican business, to a subsidiary of Natura &Co Holding. As a result, balances at December 31, 2021 do not include the assets of Avon Luxembourg. Balances at December 31, 2020 and 2019 include the assets of Avon Luxembourg.
In the above table, long lived assets have been calculated by including property, plant and equipment, net and right-of-use assets which are difficult to move and are relatively illiquid. In 2019, our definition of long lived assets also included certain intangible assets and other long term receivables and excluded right-of use assets which resulted in the following disclosure in previous filings.
|
| | | | | | | | | | | | |
| | | 2018 | | 2017 | | 2016 |
| Brazil | | $ | 283.2 |
| | $ | 396.9 |
| | $ | 400.9 |
|
| U.S. | | 152.6 |
| | 174.4 |
| | 196.1 |
|
| All other | | 458.0 |
| | 554.3 |
| | 559.9 |
|
| Total | | $ | 893.7 |
| | $ | 1,125.6 |
| | $ | 1,156.9 |
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | |
| | | | 2019 |
| Brazil | | | | $ | 203.3 | |
| U.S. | | | | 120.8 | |
| Poland | | | | 86.3 | |
| All other | | | | 335.6 | |
| Total | | | | 746.0 |
NOTE 16.15. Leases and Commitments
Minimum rental commitments under noncancelableIn 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.
We have operating and finance leases primarily for equipmentcorporate 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 | | 2021 | | 2020 | |
| Assets | | | | | | | |
| Operating right-of-use assets | | Right-of-use asset | | $ | 111.1 | | | $ | 153.1 | | |
| Finance right-of-use assets | | Property, Plant and Equipment | | 2.2 | | | 2.4 | | |
| Total right-of-use assets | | | | 113.3 | | | 155.5 | | |
| | | | | | | |
| Liabilities | | | | | | | |
| Current | | | | | | | |
| Operating lease liabilities | | Other accrued liabilities | | $ | 37.1 | | | $ | 46.2 | | |
| Finance lease liabilities | | Other accrued liabilities | | 1.2 | | | 1.1 | | |
| Total current lease liabilities | | | | 38.3 | | | 47.3 | | |
| | | | | | | |
| Noncurrent | | | | | | | |
| Operating lease liabilities | | Long-term operating lease liability | | $ | 87.5 | | | $ | 120.9 | | |
| Finance lease liabilities | | Long-term debt | | 1.3 | | | 1.5 | | |
| Total noncurrent lease liabilities | | | | $ | 88.8 | | | $ | 122.4 | | |
| | | | | | | |
| Total lease liability | | | | $ | 127.1 | | | $ | 169.7 | | |
The table below shows the lease income and expenses recorded in the Consolidated Statement of Operations incurred during the years ended December 31:
| | | | | | | | | | | | | | | | | | | | |
| Lease Costs | | Classification | | 2021 | | 2020 |
Operating lease cost (1) | | Selling, general and administrative expenses | | $ | 51.7 | | | $ | 63.6 | |
| Finance lease cost | | | | | | |
| Amortization of right-of-use assets | | Selling, general and administrative expenses | | 1.3 | | | 1.2 | |
| Interest on lease liabilities | | Interest Expense | | .2 | | | .3 | |
| Short-term leases costs | | Selling, general and administrative expenses | | 11.0 | | | 2.3 | |
Sublease income (2) | | Selling, general and administrative expenses | | (14.5) | | | (15.3) | |
| Net lease cost | | | | $ | 49.7 | | | $ | 52.1 | |
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(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 facilitieslocated 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 December 31, 20182021 Consolidated Balance Sheet:
| | | | | | | | | | | | | | | | | | | | |
| Maturity of Lease Liabilities | | Operating Leases | | Finance Leases | | Total |
| 2022 | | 45.7 | | | 1.3 | | | 47.0 | |
| 2023 | | 36.3 | | | .8 | | | 37.1 | |
| 2024 | | 26.7 | | | .3 | | | 27.0 | |
| 2025 | | 22.0 | | | .2 | | | 22.2 | |
| 2026 | | 12.2 | | | .1 | | | 12.3 | |
| Thereafter | | 5.1 | | | — | | | 5.1 | |
| Total lease payments | | $ | 148.0 | | | $ | 2.7 | | | $ | 150.7 | |
| Less: Interest | | 23.4 | | | .2 | | | 23.6 | |
| Present value of lease liabilities | | $ | 124.6 | | | $ | 2.5 | | | $ | 127.1 | |
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, Description of the Business and Summary of Significant Accounting Policies), are includedthe Company uses the incremental borrowing rate as the lease discount rate.
| | | | | | | | | | | | | | |
| Lease Term and Discount Rate | | 2021 | | 2020 |
| Weighted-average remaining lease term (years) | | | | |
| Operating leases | | 4.0 | | 4.2 |
| Finance leases | | 2.7 | | 2.5 |
| Weighted-average discount rate | | | | |
| Operating leases | | 8.3 | % | | 8.5 | % |
| Finance leases | | 9.6 | % | | 10.5 | % |
The table below sets out the classification of lease payments in the following table under leases. Consolidated Statement of Cash Flows. The ROU assets obtained in exchange for new finance and operating lease liabilities represent the new operating and finance leases entered into during the years ended December 31.
| | | | | | | | | | | | | | |
| Other Information | | 2021 | | 2020 |
| Operating Cash Flows From Operating Leases | | $ | 54.0 | | | $ | 63.7 | |
| Operating Cash Flows From Finance Leases | | .2 | | | .3 | |
| Financing Cash Flows From Finance Leases | | 1.3 | | | 1.3 | |
| Cash Paid For Amounts Included In Measurement of Liabilities | | $ | 55.5 | | | $ | 65.3 | |
| | | | |
| Right-of-use Assets Obtained In Exchange For New Finance Liabilities | | $ | 1.4 | | | $ | .9 | |
| Right-of-use Assets Obtained In Exchange For New Operating Liabilities | | $ | 8.8 | | | $ | 24.9 | |
Purchase obligations include commitments to purchase paper, inventory and other services.
|
| | | | | | | | |
| Year | | Leases | | Purchase
Obligations |
| 2019 | | $ | 56.4 |
| | $ | 345.6 |
|
| 2020 | | 42.0 |
| | 186.4 |
|
| 2021 | | 35.3 |
| | 87.5 |
|
| 2022 | | 31.1 |
| | 37.1 |
|
| 2023 | | 22.4 |
| | 7.9 |
|
| Later years | | 46.9 |
| | 5.9 |
|
| Sublease rental income | | (103.8 | ) | | N/A |
|
| Total | | $ | 130.3 |
| | $ | 670.4 |
|
Rent expense was $61.7 in 2018, $66.2 in 2017 and $75.0 in 2016. Plant construction, expansion and modernization projects with an estimated cost to complete of $31.8 were in progress at At December 31, 2018.2021, our purchase obligations by due date were as follows:
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | |
| Year | | Purchase Obligations |
| 2022 | | $ | 159.2 | |
| 2023 | | 51.8 |
| 2024 | | 21.9 |
| 2025 | | 1.7 |
| 2026 | | 1.7 |
| Later years | | 1.9 |
| Total | | $ | 238.2 | |
NOTE 17.16. Restructuring Initiatives
Transformation Plan and Open Up Avon
Natura &Co - Avon Integration
Subsequent to the merger of Natura and Avon in January 2020, an integration plan (the "Avon Integration") was established to create the right global infrastructure to support the future ambitions of the Natura &Co Group while also identifying synergies and opportunities to leverage our combined strength, scale and reach. Synergies will be derived mainly from procurement, manufacturing/distribution and administrative, as well as top line synergies, primarily between Avon LATAM and Natura &Co Latin America.
Open Up Avon, Open Up & Grow and Transformation Plan
In January 2016, we initiated a transformation plan (the "Transformation"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. The Transformation Plan included three pillars: invest in growth, reduce costs in an effort to continue to improve our cost structure and improve our financial resilience. 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 part of the Transformation Plan, we identified certain actions, that we believe will reduce ongoing costs, primarily consisting of global headcount reductions relating to operating model changes, as well as the closure of Australia, New Zealand and Thailand, which were smaller, under-performing markets.
As a result of these restructuring actions approved to-date, we have recorded total costs to implement these restructuring initiatives of $205.4 before taxes, of which $38.0 was recorded during the twelve months ended December 31, 2018, 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 will operate under our new Open Up Avon plan described below.
Open Up Avon
In September 2018, we initiated a new strategy in order to return Avon to growth ("("Open Up Avon"). As one elementThe Open Up Avon strategy is integral to our ability to return Avon to growth, built around the necessity of this plan, we are targeting pre-tax annualized cost savingsincorporating new approaches to various elements of approximately $400 by 2021, to be generated from efficienciesour business, including increased utilization of third-party providers in manufacturing and sourcing, distribution, generaltechnology, a more fit for purpose asset base, and administrative activities,a focus on enabling our Representatives to more easily interact with the company and back office functions, as well as through revenue management, interest and tax.achieve relevant earnings. These savings have been and are expected to continue to be achieved through restructuring actions (that have may continue to 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 an aggregate 18%a reduction in global workforce. The structural reset
In May 2020, the new leadership of inventory processes includes a 15% reduction in inventory levelsAvon International refreshed our strategy ("Open Up & Grow") which aims to return Avon International to growth over the next three years. Open Up & Grow replaces and 25% reduction in Stock Keeping Units (SKUs). The structural reset resulted in an incremental one-off inventory obsolescence expensebuilds on the success of $88 million recognized at December 31, 2018. As a result ofthe Open Up Avon strategy, launched in 2018 to strengthen competitiveness through enhancing the representative experience, improving brand position and relevance, accelerating digital expansion and improving costs. Over the next three years, savings are expected to continue to be achieved through restructuring actions approved to-date,(that may continue to result in charges related to severance, contract terminations and asset write-offs), as well as other cost-savings strategies that would not result in restructuring charges.
Costs to Implement Restructuring Initiatives - Twelve Months Ended December 31, 2021 , 2020 and 2019
During the twelve months ended December 31, 2021, we have recorded totalnet costs to implement theseof $58.8, of which $15.4 related to Avon Integration, $44.0 related to Open Up & Grow, and a net benefit of $0.6 related to the Transformation Plan and other restructuring initiatives, of $143.2 before taxes, which was recorded during the year ended December 31, 2018, in our Consolidated Statements of Operations.
Restructuring Charges - 2018
During the yeartwelve months ended December 31, 2018,2020, we recorded costs to implement of $181.2,$22.2 of which $38.0$16.1 related to Avon Integration, $10.9 related to Open Up Avon, and a net benefit of $4.8 related to the Transformation Plan and $143.2 related to Open Up Avon,other restructuring initiatives, in our Consolidated Statements of Operations. The costs consisted ofDuring the following:
net charges of $43.3 for employee-related costs, including severance benefits;
implementation costs of $30.9 primarily related to professional service fees;
accelerated depreciation of $5.2;
asset impairment of $4.0, primarily related to manufacturing equipment;
inventory write-off of $89.8;
foreign currency translation adjustment charges of $.7;
dual running costs of $4.1; and
contract termination and other costs of $3.2.
Of the total costs to implement during the yeartwelve months ended December 31, 2018, $89.7 was recorded in SG&A expenses and $91.5 was recorded in cost of sales.
Restructuring Charges - 2017
During the year ended December 31, 2017,2019, we recorded costs to implement of $60.8$116.7 of which $106.6 related to Open Up Avon, and $9.4 related to the Transformation Plan in our Consolidated Statements of Operations. and other restructuring initiatives.
The costs during the twelve months ended December 31, 2021, 2020 and 2019 consisted of the following:
net charge of $26.9 for employee-related costs, including severance benefits, of which $7.9 was associated with the closure of the Australia and New Zealand markets;
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
contract termination and other net charges of $27.3, associated with vacating our previous corporate headquarters, including the impairment of fixed assets;
implementation costs of $4.1 primarily related to professional service fees;
accelerated depreciation of $1.9; and
inventory write-off of $.6 primarily associated with the closure of the Australia and New Zealand markets.
Of the total costs to implement during the year ended December 31, 2017, $60.2 was recorded in SG&A expenses and $.6 was recorded in cost of sales.
Restructuring Charges - 2016
During the year ended December 31, 2016, we recorded costs to implement of $83.7 related to the Transformation Plan, in our Consolidated Statements of Operations. The costs consisted of the following:
net charge of $62.6 for employee-related costs, including severance benefits;
contract termination and other net charges of $8.7;
implementation costs of $7.4 primarily related to professional service fees;
charge of $2.7 due to the accumulated foreign currency translation adjustments associated with the closure of the Thailand market;
accelerated depreciation of $1.9; and
inventory write-off of $.4.
Of the total costs to implement during the year ended December 31, 2016, $83.3 was recorded in SG&A expenses and $.4 was recorded in cost of sales. | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2021 | | 2020 | | 2019 |
| CTI recorded in operating profit - COGS | | | | | | |
| Manufacturing asset write-offs | | $ | — | | | $ | — | | | $ | 11.1 | |
| Inventory write-off | | — | | | (1.8) | | | 1.4 | |
| | | | | | |
| | — | | | (1.8) | | | 12.5 | |
| | | | | | |
| CTI recorded in operating profit - SG&A | | | | | | |
| Net charges for employee-related costs, including severance benefits | | 36.7 | | | 5.2 | | | 56.4 | |
| Implementation costs, primarily related to professional service fees | | 17.5 | | | 10.3 | | | 44.9 | |
| Dual running costs | | 1.1 | | | 3.1 | | | 9.1 | |
| Contract termination and other net costs | | 10.5 | | | 3.9 | | | 7.9 | |
| Impairment of other assets | | 1.0 | | | .8 | | | 5.3 | |
| Accelerated depreciation | | .3 | | | .4 | | | 1.3 | |
| Variable lease charges | | 1.6 | | | 1.8 | | | 1.9 | |
| Foreign Currency Translation Adjustment Write-offs | | — | | | — | | | .7 | |
| | 68.7 | | | 25.5 | | | 127.5 | |
| | | | | | |
| CTI recorded in operating profit | | 68.7 | | | 23.7 | | | 140.0 | |
| | | | | | |
| CTI recorded in other (income) expense | | | | | | |
| Gain on sale of business / assets | | (9.9) | | | (1.5) | | | (23.3) | |
| Total CTI | | $ | 58.8 | | | $ | 22.2 | | | $ | 116.7 | |
| | | | | | |
| Avon Integration | | $ | 15.4 | | | $ | 16.1 | | | $ | — | |
| Open Up & Grow | | $ | 44.0 | | | $ | 10.9 | | | $ | 106.6 | |
| Transformation Plan & Other | | $ | (.6) | | | $ | (4.8) | | | $ | 9.4 | |
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 accelerated depreciation.gain on sale of business.
The liability balance included in other accrued liabilities in our Consolidated Balance Sheet for the restructuring actions primarily associated with our Transformation Plan,Avon Integration at December 31, 20182021 and 2020 is as follows: |
| | | | | | | | | | | | | | | | | | | | |
| | | Employee-Related Costs | | Inventory Write-offs | | Foreign Currency Translation Adjustment Write-offs | | Contract Terminations/Other | | Total |
| 2016 charges | | $ | 73.4 |
| | $ | 0.4 |
| | $ | 2.7 |
| | $ | 8.7 |
| | $ | 85.2 |
|
| Balance at December 31, 2016 | | $ | 48.6 |
| | $ | — |
| | $ | — |
| | $ | 2.8 |
| | $ | 51.4 |
|
| 2017 charges | | $ | 31.9 |
| | $ | .6 |
| | $ | — |
| | $ | — |
| | $ | 32.5 |
|
| Adjustments | | (5.0 | ) | | — |
| | — |
| | 27.3 |
| | 22.3 |
|
| Cash payments | | (34.8 | ) | | — |
| | — |
| | (8.1 | ) | | (42.9 | ) |
| Non-cash write-offs | | — |
| | (.6 | ) | | — |
| | (14.0 | ) | | (14.6 | ) |
| Foreign exchange | | .5 |
| | — |
| | — |
| | — |
| | .5 |
|
| Balance at December 31, 2017 | | $ | 41.2 |
| | $ | — |
| | $ | — |
| | $ | 8.0 |
| | $ | 49.2 |
|
| 2018 charges | | $ | 29.5 |
| | $ | 1.4 |
| | $ | 0.7 |
| | $ | 5.5 |
| | $ | 37.1 |
|
| Adjustments | | (12.6 | ) | | — |
| | — |
| | (3.4 | ) | | (16.0 | ) |
| Cash payments | | (21.3 | ) | | — |
| | — |
| | (6.3 | ) | | (27.6 | ) |
| Non-cash write-offs | | — |
| | (1.4 | ) | | (0.7 | ) | | — |
| | (2.1 | ) |
| Foreign exchange | | (2.4 | ) | | — |
| | — |
| | (.2 | ) | | (2.6 | ) |
| Balance at December 31, 2018 | | $ | 34.4 |
| | $ | — |
| | $ | — |
| | $ | 3.6 |
| | $ | 38.0 |
|
The liability balance included in other accrued liabilities in our Consolidated Balance Sheet for the restructuring actions primarily associated with Open Up Avon,& Grow at December 31, 20182021 is as follows:
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Employee-Related Costs | | Inventory/ Asset Write-offs | | | | Contract Terminations/Other | | Total |
| Balance at December 31, 2019 | | $ | 17.8 | | | $ | — | | | | | $ | 6.4 | | | $ | 24.2 | |
| 2020 charges | | 2.7 | | | .7 | | | | | 3.8 | | | 7.2 | |
| Adjustments | | (3.0) | | | (1.8) | | | | | — | | | (4.8) | |
| Cash payments | | (7.8) | | | — | | | | | (7.4) | | | (15.2) | |
| Non-cash write-offs | | — | | | 1.1 | | | | | — | | | 1.1 | |
| Foreign exchange | | (.7) | | | — | | | | | — | | | (.7) | |
| Balance at December 31, 2020 | | $ | 9.0 | | | $ | — | | | | | $ | 2.8 | | | $ | 11.8 | |
| 2021 charges | | 33.8 | | | 1.0 | | | | | 3.4 | | | 38.2 | |
| Adjustments | | (1.3) | | | — | | | | | — | | | (1.3) | |
| Cash payments | | (26.8) | | | — | | | | | (5.0) | | | (31.8) | |
| Non-cash write-offs | | — | | | (1.0) | | | | | — | | | (1.0) | |
| Foreign exchange | | (.7) | | | — | | | | | — | | | (.7) | |
| Balance at December 31, 2021 | | $ | 14.0 | | | $ | — | | | | | $ | 1.2 | | | $ | 15.2 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Employee-Related Costs | | Inventory Write-offs | | Foreign Currency Translation Adjustment Write-offs | | Contract Terminations/Other | | Total |
| Balance at December 31, 2017 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| 2018 charges | | $ | 26.4 |
| | $ | 88.5 |
| | $ | — |
| | $ | 0.8 |
| | $ | 115.7 |
|
| Adjustments | | — |
| | — |
| | — |
| | — |
| | — |
|
| Cash payments | | (6.8 | ) | | — |
| | — |
| | 0.3 |
| | (6.5 | ) |
| Non-cash write-offs | | — |
| | (88.5 | ) | | — |
| | — |
| | (88.5 | ) |
| Foreign exchange | | — |
| | — |
| | — |
| | — |
| | — |
|
| Balance at December 31, 2018 | | $ | 19.6 |
| | $ | — |
| | $ | — |
| | $ | 1.1 |
| | $ | 20.7 |
|
The majority of cash payments, if applicable, associated with the year-end liability are expected to be made during 2019.2022.
The following table presents the restructuring charges incurred to date, under the Transformation Plan andAvon Integration , Open Up Avon,& Grow 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 |
| Avon Integration | | Avon Integration | | | | | | | | | | |
| Charges incurred to-date | | Charges incurred to-date | | $ | 12.4 | | | 0 | | $ | .2 | | | 0 | | $ | 12.6 | |
| Estimated charges to be incurred on approved initiatives | | Estimated charges to be incurred on approved initiatives | | — | | | — | | | — | | | — | | | — | |
| Total expected charges on approved initiatives | | Total expected charges on approved initiatives | | $ | 12.4 | | | $ | — | | | $ | .2 | | | $ | — | | | $ | 12.6 | |
| | Open Up & Grow | | Open Up & Grow | |
| Charges incurred to-date | | Charges incurred to-date | | $ | 115.8 | | | $ | 107.4 | | | $ | 15.9 | | | $ | (10.9) | | | $ | 228.2 | |
| Estimated charges to be incurred on approved initiatives | | Estimated charges to be incurred on approved initiatives | | $ | .3 | | | — | | | — | | | — | | | $ | .3 | |
| Total expected charges on approved initiatives | | Total expected charges on approved initiatives | | $ | 116.1 | | | $ | 107.4 | | | $ | 15.9 | | | $ | (10.9) | | | $ | 228.5 | |
| | | Employee- Related Costs | | Inventory/ Asset Write-offs | | Contract Terminations/Other | | Foreign Currency Translation Adjustment Write-offs | | Total | | | | | | | | | | |
| Transformation Plan | | | | | | | | | | | Transformation Plan | |
| Charges incurred to-date | | $ | 128.0 |
| | $ | 2.2 |
| | $ | 40.7 |
| | $ | 3.4 |
| | $ | 174.3 |
| Charges incurred to-date | | $ | 122.7 | | | $ | 2.5 | | | $ | 40.9 | | | $ | 3.4 | | | $ | 169.5 | |
| Estimated charges to be incurred on approved initiatives | | — |
| | — |
| | — |
| | — |
| | — |
| Estimated charges to be incurred on approved initiatives | | — | | | — | | | — | | | — | | | — | |
| Total expected charges on approved initiatives | | $ | 128.0 |
| | $ | 2.2 |
| | $ | 40.7 |
| | $ | 3.4 |
| | $ | 174.3 |
| Total expected charges on approved initiatives | | $ | 122.7 | | | $ | 2.5 | | | $ | 40.9 | | | $ | 3.4 | | | $ | 169.5 | |
| | | | | | | | | | | | |
| Open Up Avon | | | | | | | | | | | |
| Charges incurred to-date | | $ | 26.3 |
| | $ | 88.5 |
| | $ | 2.3 |
| | $ | — |
| | $ | 117.1 |
| |
| Estimated charges to be incurred on approved initiatives | | — |
| | — |
| | .5 |
| | — |
| | .5 |
| |
| Total expected charges on approved initiatives | | $ | 26.3 |
| | $ | 88.5 |
| | $ | 2.8 |
| | $ | — |
| | $ | 117.6 |
| |
The charges, net of adjustments, of initiatives under the Open Up & Grow 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 (Continued)
| | | | | | | | | | | | | | | | Avon International | | Avon LATAM | | | Total |
| | | Europe, Middle East & Africa | | South Latin America | | North Latin America | | Asia Pacific | | Global & Other Operating Segments | | Total | |
| 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 |
| |
| Avon Integration | | Avon Integration | | | | | | | |
| 2020 | | 2020 | | 6.2 | | | 4.6 | | | | $ | 10.8 | |
| 2021 | | 2021 | | (1.2) | | | 3.0 | | | | $ | 1.8 | |
| Charges incurred to-date | | 36.8 |
| | 22.9 |
| | 4.4 |
| | 9.2 |
| | 101.0 |
| | 174.3 |
| Charges incurred to-date | | 5.0 | | | 7.6 | | | | 12.6 | |
| Estimated charges to be incurred on approved initiatives | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Estimated charges to be incurred on approved initiatives | | — | | | — | | | | — | |
| Total expected charges on approved initiatives | | $ | 36.8 |
| | $ | 22.9 |
| | $ | 4.4 |
| | $ | 9.2 |
| | $ | 101.0 |
| | $ | 174.3 |
| Total expected charges on approved initiatives | | $ | 5.0 | | | $ | 7.6 | | | | $ | 12.6 | |
| | | | | | | | | | | | | | | | | | | | |
| Open Up Avon | | | | | | | | | | | | | |
| Open Up & Grow | | Open Up & Grow | | | |
| 2018 | | 32.2 |
| | 36.4 |
| | 27.9 |
| | 14.4 |
| | 6.2 |
| | 117.1 |
| 2018 | | 52.8 | | | 64.3 | | | | $ | 117.1 | |
| 2019 | | 2019 | | 34.7 | | | 36.9 | | | | 71.6 | |
| 2020 | | 2020 | | 3.2 | | | (.8) | | | | 2.4 | |
| 2021 | | 2021 | | 36.9 | | | .2 | | | | 37.1 | |
| Charges incurred to-date | | 32.2 |
| | 36.4 |
| | 27.9 |
| | 14.4 |
| | 6.2 |
| | 117.1 |
| Charges incurred to-date | | 127.6 | | | 100.6 | | | | 228.2 | |
| Estimated charges to be incurred on approved initiatives | | — |
| | — |
| | — |
| | — |
| | .5 |
| | .5 |
| Estimated charges to be incurred on approved initiatives | | .3 | | | — | | | | .3 | |
| Total expected charges on approved initiatives | | $ | 32.2 |
| | $ | 36.4 |
| | $ | 27.9 |
| | $ | 14.4 |
| | $ | 6.7 |
| | $ | 117.6 |
| Total expected charges on approved initiatives | | $ | 127.9 | | | $ | 100.6 | | | | $ | 228.5 | |
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.
Other Restructuring Initiatives
During 2018, 2017 and 2016, we recorded net benefits of $.7, $.4 and $5.5, respectively, primarily in SG&A expenses, in our Consolidated Statements of Operations, associated with the restructuring programs launched in 2005 and 2009 and the restructuring initiative launched in 2012 (the "Other Restructuring Initiatives"), each of which are substantially complete. The net benefit in 2016 primarily consisted of a net gain of $3.7 due to the sale of a distribution center in the U.S. The liability balance associated with the Other Restructuring Initiatives is not material at December 31, 2018.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 18.17. Series C Convertible 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 pursuant to an Investment Agreement, dated as of December 17, 2015, between the Company and Cerberus Investor. In connection with the issuance of the series C preferred stock, the Company incurred direct and incremental expenses of $8.7, comprised of financial advisory fees and legal expenses, which reduced the carrying value of the series C preferred stock. 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 $65.8$91.3 at December 31, 2019.
On December 19, 2019, the Company and Natura &Co Holding announced that as of December 31, 2018. There were no dividends declared insuch date, all regulatory approvals required by the years ended December 31, 2018 and 2017.
Dividend Rights. The series C preferred stock ranks seniorMerger Agreement to complete the shares of our common stock with respect to dividend rights and rights on the distribution of assets on any liquidation, dissolution or winding up of our affairs. The series C preferred stock hasTransactions have been obtained. As a liquidation preference of $1,000 per share, representing an aggregate liquidation preference of $435.0 upon issuance. Holders of series C preferred stock are entitled to participate on an as-converted basis in any dividends paid to the holders of shares of the Company’s common stock. In addition, cumulative preferred dividends accrue daily onresult, the series C preferred stock were probable of becoming redeemable and are payablethe redemption value was adjusted. Subsequently, on December 30, 2019, Cerberus elected to convert the series C preferred stock, as described below, and the series C preferred stock was no longer probable of becoming redeemable. We recognize changes in redemption value immediately as they occur and the carrying value of the security is adjusted to equal what the redemption amount would be as if redemption were to occur at a ratethe end of 1.25% per quarter (net of any dividendsthe reporting date based on the Company’s common stock and subject toconditions that exist as of that date. As a result, we recognized an increase up to a maximum rate of 5.00% per quarter if$60.9 in the Company breaches certain obligations). Except to the extent not otherwise previously paid by the Company, preferred dividends are payable on the seventh anniversary of the issuance datecarrying value of the series C preferred stock as and when declared byfor the Board of Directors and at the end of each quarter thereafter. Accrued and unpaid preferred dividends may be paid, at the Company’s option, (i) in cash, (ii) subjectyear ended December 31, 2019.
On December 30, 2019, Cerberus elected to certain conditions, in shares of the Company’s common stock or (iii) upon conversion ofconvert 435,000 shares of series C preferred stock, inrepresenting all shares of the Company’s non-voting, non-convertible Series D Preferred Stock. Any such shares of Series D Preferred Stock issued would have similar preferential rights.
Conversion Features. series C preferred stock is convertible at the option of the holders at any timeoutstanding, into shares of the Company’s common stock, at an initial conversion price of $5.00par value U.S.$0.25 per share, subjectpursuant to certain anti-dilution adjustments. Prior to receipt of applicable shareholder approval, shares of series C preferred stock are not convertible into more than 19.99%the holder of the numberCompany’s Series C Preferred Stock’s rights under the Company’s certificate of shares of common stock outstanding immediately prior toincorporation. The foregoing election is conditioned upon the issuancefiling of the series C preferred stock, subject to certain anti-dilution adjustments. Ascertificates of December 31, 2018, series C preferred stock was convertible into 87,051,524 shares of common stock. If at any time the volume weighted average price of the common stock exceeds $10.00 per share (subject to certain anti-dilution adjustments) for a period of 30 consecutive trading days, the Company may cause all of the series C preferred stock to be converted into shares of common stock based on the then applicable conversion price.
Voting Rights. Holders of series C preferred stock are entitled to vote generally with the holders of common stock on an as-converted basis. Holders of series C preferred stock are also entitled to a separate class votemerger with respect to (i) the electionFirst Merger (the "Conversion Condition").
On January 3, 2020, the Company consummated a transaction to become a wholly owned subsidiary of up to three directors toNatura &Co Holding. Upon consummation of the Board of Directors, subject to maintaining certain levels of beneficial ownership of series C preferred stock and/ortransaction, the Company's common stock (ii) amendmentswas converted to Natura &Co Holding common stock. Natura &Co Holding subsequently paid the Company’s organizational documents that have an adverse effect on the series C preferred stock, (iii) issuances by the Companyaccrued dividend of securities that are senior$91.5 to or equal in priority with, the series C preferred stock or (iv) the delisting of the Company’s common stock, other than in connection with a change of control event.
Change of Control Put. Upon certain change of control events involving the Company, holders of series C preferred stock can require the Company to repurchase the series C preferred stock for an amount equal to the greater of (i) an amount in cash equal to 100% of the liquidation preference thereof plus all accrued but unpaid dividends or (ii) the consideration the holders would have received if they had converted their shares of series C preferred stock into common stock immediately prior to the change of control event.
NOTE 19. Contingencies
Settlements of FCPA Investigations
As previously reported, the United States District Court for the Southern District of New York (the "USDC") approved in December 2014 a deferred prosecution agreement (“DPA”) entered into between the Company and the U.S. Department of Justice related to charges of violations of the books and records and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”). In addition, Avon Products (China) Co. Ltd., a subsidiary of the Company operating in China, pleaded guilty to conspiring to violate the books and records provision of the FCPA. The USDC also entered a judgmentCerberus in January 2015 approving our consent agreement2020. See Note 21, Agreement and Plan of Mergers with the U.S. Securities and Exchange Commission (the “SEC”) (the "Consent") to settle the SEC’s complaint charging violations of the books and records and internal control provisions of the FCPA.Natura Cosméticos S.A.,.
As part of these resolutions, the Company agreed, among other things, to pay fines, disgorgement and prejudgment interest in an aggregate amount of $135 and to have a compliance monitor. The DPA expired, and the charges against the Company were
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
dismissed with prejudice on February 5, 2018. Under the terms of the Consent, the Company was subject to a continued self-monitoring period until July 2018, which has now concluded.NOTE 18. Contingencies
Brazilian Tax Assessments
Tax on Manufactured Products – minimum pricing rules
In December 2012 and in October 2017, our Brazilian subsidiary, Avon Industrial LTDA (Avon Brazil Manufacturing) received an excise (IPI) tax assessment("IPI") assessments for the yearyears 2008 with respect to excise tax (IPI) and taxes charged on gross receipts (PIS and COFINS) from the Brazilian tax authorities. In the second quarter of 2014, the PIS and COFINS assessments were officially closed in favor of Avon Brazil. 2014.
As in prior IPI cases that have been settledresolved in Avon’s favor, the 2012 IPI assessment assertsassessments assert that the establishment in 1995 of separate manufacturing and distribution companies in Brazil was done without a valid business purpose, and that Avon Brazil Manufacturing did not observe minimum pricing rules to define the taxable basis of excise tax.the tax on manufactured products. 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 isassessments are unfounded.
These matters are being vigorously contested. In January 2013, we filed a protest seeking a firstcontested at the administrative level, review with respect towhere proceedings are currently in progress. As of December 31, 2021 and 2020, the 2012 IPI assessment. In July 2013, the 2012 IPI assessmenttotal amount under discussion classified as reasonably possible was upheld at the first administrative level$360 and we appealed this decision to the second administrative level. The 2012 IPI assessment totals approximately $306, including penalties and accrued interest. 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 $63 (including associated penalty and interest),$378, respectively.
Tax on Manufactured Products – Decree equated certain commercial companies (not subject to Federal Revenue appeal. The remaining $243 of the assessment was upheld at the second administrative level. On April 20, 2018, we appealed this decision in the third administrative level.
On October 3, 2017, Avon Brazil received a new tax assessment notice regarding IPI for 2014. The 2017 IPI assessment totals approximately $236, including penalties and accrued interest. In line with the other assessments received in the past, the Brazilian tax authorities assert that the structure adopted in 2005 has no valid business purpose and that Avon Brazil did not observe minimum pricing rulestaxation) to define the taxable basis of excise tax. On April 2, 2018, Avon was notified of an unfavorable decision at the first administrative level. On April 27, 2018, we filed an appeal in the second administrative level.
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 security 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 December 31, 2018, we have not recognized a liability for the 2012 or 2017 IPI assessments.
Brazil IPI Tax on Cosmeticsindustrial companies (IPI taxpayers)
In May 2015, an Executive Decree on certain cosmetics went into effect in Brazil which increasedexecutive decree established the amountlevy of IPI taxes that are to be remitted by Avon Brazil to the taxing authority on the sales of cosmetic products subject to IPI.by Avon Brazil. Avon Brazil filed an objection to this IPI tax increaselevy on the basis that it is not constitutional.constitutional since this tax is already paid by Avon Brazil Manufacturing. In December 2016, Avon Brazil received a favorable decision from the Federal District Court regarding this objection. This decision has been appealed by the Brazilian federal tax authorities.authority. At December 31, 2021 and 2020, the total amount under discussion classified as reasonably possible was $243 and $231, respectively.
From May 2015 through April 2016, Avon Brazil remittedBrazilian Financial Indemnities
As of December 31, 2021 and 2020, the taxes associated with this IPI tax increase intoCompany has issued a judicial depositnumber of guarantees totaling $157 and $185, respectively, which wouldit could be remittedrequired to the taxing authoritiesmake in the event that we are not successfulof adverse judgments 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, beginningnumber of lawsuits 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 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 during ongoing judicial reviews was reasonably possible but not probable. Accordingly, we released the associated liability as of September 30, 2018 of approximately $195 and have 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 net sales and other (income) expense, in the amounts of approximately $168 and approximately $27, respectively, in our Consolidated Income Statements.
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 $220 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
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
objection of this IPI tax would 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 $73 at December 31, 2018. This reserve will be settled on final adjudication of the law through a combination of cash and use of deferred tax assets.Brazil.
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 codefendantsco-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 December 31, 2021, there were 151 individual cases pending against the Company. During the three months ended December 31, 2021, 19 new cases were filed and 20 cases were dismissed, settled or otherwise resolved. The value of the settlements was not material, either individually or in the aggregate, to the Company’s results of operations for the year ended December 31, 2021. 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 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, in anyand we are only able to make a specific 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 but we are unable to predict the ultimate outcome of eachnot material. However, any adverse outcomes, either in an individual case and an adverse outcome, individually or in the aggregate, could be material. Additional similar cases arising out of the use of the Company's talc products are reasonably anticipated. At this time, we are unable to estimate our reasonably possible losses, if any. Also, in light of the inherent litigation uncertainties, potentialFuture costs to litigate these cases, which we expense as incurred, are not known but they 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 December 31, 2018 is2021 and 2020 was approximately $11 and accordingly,$8, respectively. Accordingly, we have recognized a liability for this amount.
Shareholder Litigation
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 present and former officers of the Company. The complaint was subsequently amended and recaptioned "In re Avon Products, Inc. Securities Litigation". The amended complaint is brought on behalf of a purported class consisting of all purchasers or acquirers of Avon common stock between August 2,January 21, 2016 and August 2,November 1, 2017, inclusive. The complaint asserts violations of Sectionssections 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 representativesRepresentatives in Brazil. In lightAvon and the individual defendants filed a motion to dismiss which the court denied. During 2020, the parties reached an agreement on a settlement of this class action. The terms of settlement include releases by members of the early stageclass of claims against the Company and the individual defendants and payment of $14.5 million. Approximately $2 million of the litigation, we are unable to predictsettlement was paid by the outcome of this matterCompany (which represented the remaining deductible under the Company’s applicable insurance policies) and are unable to make a meaningful estimatethe remainder of the amount or rangesettlement was paid by the Company’s insurers. On August 31, 2020, the court granted preliminary approval of loss that could result fromthe settlement, and on February 3, 2021, the court entered an unfavorable outcome.order and judgment granting final approval of the settlement. This judgment is now final.
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'smanagement’s opinion, based on its review of the information available at this time, the total cost of resolving such other contingencies at December 31, 2018,2021, is not expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 20.19. Goodwill
Goodwill
| | | | | | | | | | | | | | | | | |
| Avon International | | Avon LATAM | | Total |
| Gross balance at December 31, 2020 | $ | 109.3 | | | $ | 63.2 | | | $ | 172.5 | |
| Accumulated impairments | (89.3) | | | — | | | (89.3) | |
| Net balance at December 31, 2020 | $ | 20.0 | | | $ | 63.2 | | | $ | 83.2 | |
| | | | | |
| Changes during the period ended December 31, 2021: | | | | | |
| | | | | |
| | | | | |
| Foreign exchange | (2.4) | | | (8.7) | | | (11.1) | |
| | | | | |
| Gross balance at December 31, 2021 | $ | 106.9 | | | $ | 54.5 | | | $ | 161.4 | |
| Accumulated impairments | (89.3) | | | — | | | (89.3) | |
| Net balance at December 31, 2021 | $ | 17.6 | | | $ | 54.5 | | | $ | 72.1 | |
|
| | | | | | | | | | | | | | | |
| | Europe, Middle East & Africa | | South Latin America | | Asia Pacific | | Total |
| Gross balance at December 31, 2017 | $ | 27.3 |
| | $ | 72.7 |
| | $ | 85.0 |
| | $ | 185.0 |
|
| Accumulated impairments | (6.9 | ) | | — |
| | (82.4 | ) | | (89.3 | ) |
| Net balance at December 31, 2017 | $ | 20.4 |
| | $ | 72.7 |
| | $ | 2.6 |
| | $ | 95.7 |
|
| | | | | | | | |
| Changes during the period ended December 31, 2018: | | | | | | | |
| Divestitures | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Impairment | — |
| | — |
| | — |
| | — |
|
| Foreign exchange | (2.4 | ) | | (5.9 | ) | | — |
| | (8.3 | ) |
| | | | | | | | |
| Gross balance at December 31, 2018 | $ | 24.9 |
| | $ | 66.8 |
| | $ | 85.0 |
| | $ | 176.7 |
|
| Accumulated impairments | (6.9 | ) | | — |
| | (82.4 | ) | | (89.3 | ) |
| Net balance at December 31, 2018 | $ | 18.0 |
| | $ | 66.8 |
| | $ | 2.6 |
| | $ | 87.4 |
|
NOTE 21.20. Supplemental Balance Sheet Information
At December 31, 20182021 and 2017,2020, prepaid expenses and other included the following: | | | | | | | | | | | | | | |
| Components of Prepaid expenses and other | | 2021 | | 2020 |
| Prepaid taxes and tax refunds receivable | | $ | 84.0 | | | $ | 117.6 | |
| Receivables other than trade | | 27.8 | | | 34.9 | |
| Prepaid brochure costs, paper and other literature | | 8.3 | | | 12.0 | |
| Other | | 45.5 | | | 39.7 | |
| Prepaid expenses and other | | $ | 165.6 | | | $ | 204.2 | |
|
| | | | | | | | |
| Components of Prepaid expenses and other | | 2018 | | 2017 |
| Prepaid taxes and tax refunds receivable | | $ | 145.0 |
| | $ | 111.6 |
|
| Receivables other than trade | | 69.2 |
| | 67.2 |
|
| Prepaid brochure costs, paper and other literature | | 14.9 |
| | 64.8 |
|
| Other | | 42.9 |
| | 52.8 |
|
| Prepaid expenses and other | | $ | 272.0 |
| | $ | 296.4 |
|
At December 31, 2018 and 2017, other assets included the following: |
| | | | | | | | |
| Components of Other assets | | 2018 | | 2017 |
| Deferred tax assets (Note 10) | | $ | 212.6 |
| | $ | 203.8 |
|
| Capitalized software (Note 1) | | 89.3 |
| | 85.2 |
|
| Judicial deposits other than Brazil IPI tax (see below) | | 74.1 |
| | 82.2 |
|
| Net overfunded pension plans (Note 14) | | 88.1 |
| | 82.0 |
|
| Long-term receivables | | 73.2 |
| | 75.6 |
|
| Judicial deposit for Brazil IPI tax on cosmetics (Note 19) | | — |
| | 73.8 |
|
| Trust assets associated with supplemental benefit plans (Note 14) | | 37.0 |
| | 37.1 |
|
| Tooling (plates and molds associated with our beauty products) | | 12.6 |
| | 12.5 |
|
| Investment in New Avon (Note 4) | | — |
| | — |
|
| Other | | 16.1 |
| | 14.0 |
|
| Other assets | | $ | 603.0 |
| | $ | 666.2 |
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At December 31, 2021 and 2020, other assets included the following: | | | | | | | | | | | | | | |
| Components of Other assets | | 2021 | | 2020 |
| Capitalized software (Note 1) | | 74.9 | | | 76.0 | |
| Judicial deposits | | 47.2 | | | 50.9 | |
| Net overfunded pension plans (Note 13) | | 162.5 | | | 103.0 | |
| Long-term receivables including taxes | | 180.2 | | | 157.0 | |
| Trust assets associated with supplemental benefit plans (Note 13) | | 30.4 | | | 33.7 | |
| | | | |
| Other | | 14.2 | | | 17.9 | |
| Other assets | | $ | 509.4 | | | $ | 438.5 | |
Prepaid taxes and tax refunds receivable and long-term receivables include approximately $128 and $112 related to certain Brazil indirect taxes as of December 31, 2021 and 2020, respectively. During the second quarter of 2021, the Brazilian Supreme Federal Court ruled on a motion of clarification that supported the recognition of additional receivable balances related to certain Brazil indirect taxes. As of December 31, 2021, we have recorded our best estimate of the receivable of $24 and will continue to assess the impacts of the ruling.
NOTE 22. Results21. Merger with Natura Cosméticos S.A.,
On May 22, 2019, the Company entered into the Agreement and Plan of OperationsMergers (as amended by Quarter (Unaudited)Amendment Number One to
Agreement and Plant of Mergers, dated as of October 3, 2019, and as further amended by Amendment Number Two to |
| | | | | | | | | | | | | | | | | | | | | |
| 2018 | | First | | Second | | Third | | Fourth | | Year | |
| Total revenue | | $ | 1,393.5 |
| | $ | 1,351.9 |
| | $ | 1,424.2 |
| | $ | 1,401.7 |
| | $ | 5,571.3 |
| |
| Gross profit | | 813.8 |
| | 812.2 |
| | 885.8 |
| | 695.5 |
| | 3,207.3 |
| |
Operating profit(1) | | 44.9 |
| | 53.0 |
| | 186.9 |
| | (49.6 | ) | | 235.2 |
| |
| Income (Loss) from continuing operations, before taxes | | 10.4 |
| | (0.3 | ) | | 182.1 |
| | (84.1 | ) | | 108.1 |
| |
(Loss) income from continuing operations, net of tax(2) | | (21.1 | ) | | (37.0 | ) | | 113.8 |
| | (77.5 | ) | | (21.8 | ) | |
| Net loss attributable to noncontrolling interests | | .8 |
| | .9 |
| | .7 |
| | (.1 | ) | | 2.3 |
| |
| Net (loss) income attributable to Avon | | $ | (20.3 | ) | | $ | (36.1 | ) | | $ | 114.5 |
| | $ | (77.6 | ) | | $ | (19.5 | ) | |
| | | | | | | | | | | | |
| (Loss) earnings per common share from continuing operations | | | | | | | | | | | |
| Basic | | $ | (.06 | ) | | $ | (.09 | ) | | $ | .21 |
| | $ | (.19 | ) | | $ | (.10 | ) | (3) |
| Diluted | | (.06 | ) | | (.09 | ) | | .21 |
| | (.19 | ) | | (.10 | ) | (3) |
|
| | | | | | | | | | | | | | | | | | | | | |
| 2017 | | First | | Second | | Third | | Fourth | | Year | |
| Total revenue | | $ | 1,333.1 |
| | $ | 1,395.9 |
| | $ | 1,417.8 |
| | $ | 1,568.8 |
| | $ | 5,715.6 |
| |
| Gross profit | | 816.0 |
| | 870.9 |
| | 867.8 |
| | 957.6 |
| | 3,512.3 |
| |
Operating profit(1) | | 29.8 |
| | 32.7 |
| | 87.3 |
| | 131.5 |
| | 281.3 |
| |
| (Loss) income from continuing operations, before taxes | | (6.7 | ) | | (12.2 | ) | | 48.0 |
| | 91.6 |
| | 120.7 |
| |
(Loss) income from continuing operations, net of tax(3) | | (36.5 | ) | | (45.8 | ) | | 11.9 |
| | 90.4 |
| | 20.0 |
| |
| Net (income) loss attributable to noncontrolling interests | | — |
| | .3 |
| | .6 |
| | 1.1 |
| | 2.0 |
| |
| Net (loss) income attributable to Avon | | $ | (36.5 | ) | | $ | (45.5 | ) | | $ | 12.5 |
| | $ | 91.5 |
| | $ | 22.0 |
| |
| | | | | | | | | | | | |
| (Loss) earnings per common share from continuing operations | | | | | | | | | | | |
| Basic | | $ | (.10 | ) | | $ | (.12 | ) | | $ | .01 |
| | $ | .17 |
| | $ | — |
| (4) |
| Diluted | | (.10 | ) | | (.12 | ) | | .01 |
| | .17 |
| | — |
| (4) |
(1) Operating profit (loss)The Transaction was impactedconsummated on January 3, 2020, and at this time, the Company became a wholly owned direct subsidiary of Natura &Co Holding. In connection with the Transaction, trading of the Company’s stock was suspended by the following:NYSE, and the Company’s common stock was subsequently delisted and deregistered.
On completion of the Transaction, each share of the Company’s common stock issued and outstanding immediately prior to the consummation of the Transaction was converted into the ultimate right to receive, (i) 0.300 validly issued and allotted, fully paid-up American Depositary Shares of Natura &Co Holding, ("Natura &Co Holding ADSs") against the deposit of 2 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. The Company’s Series C Preferred Stock held by Cerberus Investor were converted to common stock prior to consummation of the Transaction and were therefore automatically converted into common stock of Natura &Co; see Note 17, Series C Convertible Preferred Stock. |
| | | | | | | | | | | | | | | | | | | | |
| 2018 | | First | | Second | | Third | | Fourth | | Year |
| Brazil IPI tax release | | $ | — |
| | $ | — |
| | $ | (168.4 | ) | | $ | — |
| | $ | (168.4 | ) |
| Costs to implement restructuring initiatives: | | | | | | | | | | |
| Cost of sales | | 0.6 |
| | 0.5 |
| | (0.1 | ) | | 90.5 |
| | 91.5 |
|
| SG&A expenses | | 10.3 |
| | 23.2 |
| | 19.9 |
| | 35.6 |
| | 89.0 |
|
| Total costs to implement restructuring initiatives | | $ | 10.9 |
| | $ | 23.7 |
| | $ | 19.8 |
| | $ | 126.1 |
| | $ | 180.5 |
|
| | | | | | | | | | | |
| 2017 | | First | | Second | | Third | | Fourth | | Year |
| Costs to implement restructuring initiatives: | | | | | | | | | | |
| Cost of sales | | $ | (.1 | ) | | $ | — |
| | $ | — |
| | $ | .7 |
| | $ | .6 |
|
| SG&A expenses | | 10.1 |
| | 20.3 |
| | 6.2 |
| | 23.0 |
| | 59.6 |
|
| Total costs to implement restructuring initiatives | | $ | 10.0 |
| | $ | 20.3 |
| | $ | 6.2 |
| | $ | 23.7 |
| | $ | 60.2 |
|
| Loss contingency | | $ | — |
| | $ | 18.2 |
| | $ | — |
| | $ | — |
| | $ | 18.2 |
|
In additionJanuary 2020, subsequent to the items impacting operating profit (loss) above:Transaction, the Company restated the certificate of incorporation. The certificate of incorporation was restated to effect a change in capitalization of the Company by changing the number of authorized shares of stock from 1,525,000,000 shares (of which (i) 1,500,000,000 shares, par value $0.25 per share, are common stock and (ii) 25,000,000 shares, par value $1.00 per share, are preferred stock) to 1,000 shares of common stock, par value $0.01 per share. As a result, all of the issued and outstanding common stock of the Company, being 550,890,788 were canceled and converted into 101.34 common stock, par value $0.01 per share, and all outstanding treasury shares were canceled.
| |
(2) | (Loss) income from continuing operations, net of tax during 2018 was impacted by one-time tax reserves of approximately $18 associated with our uncertain tax positions, and an expense of approximately $3 associated with the ownership transfer of certain operational assets within the consolidated group. |
| |
(3) | (Loss) income from continuing operations, net of tax during 2017 was impacted by a $29.9 net income tax benefit recognized in the fourth quarter as a result of the enactment of the Tax Cuts and Jobs Act in the U.S., a release of valuation allowances of $25.5 associated with a number of markets in Europe, Middle East & Africa as a result of a business model change related to the move of the Company's headquarters from the U.S. to the UK, and a $10.4 benefit as a result of a favorable court decision in Brazil, partially offset by a charge of $16.0 associated with valuation allowances to adjust deferred tax assets in Mexico. |
The Company incurred costs of $46 and $44 in relation to the Transaction, primarily professional fees during the years ended December 31, 2020 and 2019, respectively.
During January 2020, it was announced that the employment of certain senior officers of the Company would be terminated, in connection with the Transaction. The Company incurred severance of approximately $25 and acceleration of share based compensation of approximately $10 relating to these terminations triggered by change in control provisions.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| |
(4) | The sum of per share amounts for the quarters does not necessarily equal that for the year because the computations were made independently. |
See Note 17, Restructuring Initiatives, "Results Of Operations - Consolidated" within MD&A on pages 35 through 43, Note 15, Segment Information, "Venezuela Discussion" within MD&A on pages 42 through 43, Note 1, DescriptionAs a result of the BusinessTransaction, the Company made payments of approximately $26 related to the settlement of stock options. In addition, any remaining restricted stock units and Summaryperformance restricted stock units were exchanged for awards of Significant Accounting Policies, Note 14, Employee Benefit Plans, Note 19, Contingencies, Note 8, DebtNatura &Co Holding. The replacement awards contain substantially the same terms and Other Financingconditions of the original awards except for the removal of the performance conditions. As such, the replacement awards contain only a service vesting condition.
On consummation of the Transaction, a deferred compensation scheme relating to former employees of the Company became payable which resulted in extinguishing the liability and Note 10, Income Taxes, for more information on these items.a cash outflow of approximately $12.
In January 2020, upon completion of the Transaction, the Company’s revolving credit facility was canceled, triggered by change in control provisions. As a result, debt issuance costs of $7.8 were written off. As a result of the Transaction, the Company will no longer have access to certain tax attributes of approximately $546 to approximately $616 in certain taxing jurisdictions. These tax attributes had been formerly reflected as deferred tax assets which were subject to a full valuation allowance and as a result, there was no impact to net income in 2020 from the write-off of the deferred tax asset and the associated valuation allowances.
NOTE 23.22. Subsequent Events
Global headcount reductionOn February 24, 2022, Russia launched a military invasion of Ukraine. The ongoing military conflict between Ukraine and Russia has provoked strong reactions from the United States, the UK, the EU and various other countries around the world, including the imposition of broad financial and economic sanctions against Russia.
In January 2019, we announced significant advancementsThe Company has sales operations in our Open Up Avon strategy,multiple countries including a structural reset of inventory processesin Russia and an aggregate 18% reduction in global workforce. The structural reset resulted in an incremental one-off inventory obsolescence expense of $88 recognized at December 31, 2018 (refer to Note 17, Restructuring Initiatives, for additional information regarding the structural reset of inventory). The global workforce will be reduced in 2019 by approximately 10% 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% reductionUkraine. While as of the global workforcedate of this report there have not been any material impacts from the above mentioned matter, management is continuously monitoring the developments to assess any potential future impacts that was completed in 2018. We expect to incurmay arise as a restructuring charge of approximately $100 in 2019 relating to the global workforce reduction, which wasn't approved by the Board of Directors until January 2019.
Revolving credit facility
In February 2019, Avon International Capital p.l.c. ("AIC"), a wholly-owned foreign subsidiaryresult of the Company, entered into a three-year €200.0 senior secured revolving credit facility (the “2019 facility”).ongoing crisis.
The 2019 facility may be used for working capital and general corporate purposes. The 2019 facility replaced the 2015 facility. All obligations of AIC under the 2019 facility are unconditionally guaranteed by the Company, AIO and each other material United States or English restricted subsidiary of the Company (collectively, the “Obligors”), in each case, subject to certain exceptions. The obligations of the Obligors are secured by first priority liens on and security interests in substantially all of the assets of the Obligors, in each case, subject to certain exceptions.The 2019 facility will terminate in February 2022; provided, however, that it shall terminate on the 91st day prior to the maturity of the 4.60% Notes, if on such 91st day, the applicable notes are not redeemed, repaid, discharged, defeased or otherwise refinanced in full. The 2019 facility contains affirmative and negative covenants, which are customary for secured financings of this type, as well as financial covenants (interest coverage and total leverage ratios).
Divestitures
China Manufacturing
In February 2019, we completed the sale to TheFaceShop Co., Ltd., an affiliate of LG Household & Health Care Ltd., of all of the equity interests in Avon Manufacturing (Guangzhou), Ltd. for a total purchase price of $71.0 million. Net cash proceeds (pre-tax) will be $47.0 after the required repayment by the Company of certain outstanding intercompany loans of $23.3 and after deducting cash on hand in Avon Manufacturing (Guangzhou), Ltd. of $.7.
Rye Office
In February 2019, we signed an agreement to sell the Rye office. This transaction is expected to close by the end of the second quarter of 2019.
Malaysia Maximin
In February 2019, we signed an agreement to sell the legal entity Maximin Corporation Sdn Bhd, which owns the Malaysia office and warehouse. This transaction is expected to close by the end of the first quarter of 2019.
SCHEDULE II
AVON PRODUCTS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2018, 20172021, 2020 and 20162019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Additions | | | | | | |
(In millions)
Description | | Balance at
Beginning
of Period | | Charged to Costs and Expenses | | | Charged
to
Revenue | | Deductions | | | Balance
at End of
Period | |
| 2021 | | | | | | | | | | | | | |
| Allowance for doubtful accounts receivable | | $ | 51.1 | | | $ | 62.4 | | | | $ | — | | | $ | (76.4) | | (1) | | $ | 37.1 | | |
| Refund liability | | 9.1 | | | — | | | | 75.9 | | | (80.7) | | (2) | | 4.3 | | |
| Allowance for inventory obsolescence | | 70.4 | | | 26.8 | | | | — | | | (42.4) | | (3) | | 54.8 | | |
| Deferred tax asset valuation allowance | | 2,327.6 | | | 125.7 | | | | — | | | (1,637.9) | | (4) | | 815.4 | | |
| 2020 | | | | | | | | | | | | | |
| Allowance for doubtful accounts receivable | | $ | 66.6 | | | $ | 78.3 | | | | $ | — | | | $ | (93.8) | | (1) | | $ | 51.1 | | |
| Refund liability | | 10.7 | | | — | | | | 101.4 | | | (103.0) | | (2) | | 9.1 | | |
| Allowance for inventory obsolescence | | 82.0 | | | 37.9 | | | | — | | | (49.5) | | (3) | | 70.4 | | |
| Deferred tax asset valuation allowance | | 2,960.0 | | | (632.4) | | | | — | | | — | | | | 2,327.6 | | |
| 2019 | | | | | | | | | | | | | |
| Allowance for doubtful accounts receivable | | $ | 93.0 | | | $ | 115.4 | | | | $ | — | | | $ | (141.8) | | (1) | | $ | 66.6 | | |
| Refund liability | | 12.3 | | | — | | | | 132.6 | | | (134.2) | | (2) | | 10.7 | | |
| Allowance for inventory obsolescence | | 146.1 | | | 37.1 | | | | — | | | (101.2) | | (3) | | 82.0 | | |
| Deferred tax asset valuation allowance | | 3,257.5 | | | (297.5) | | | | — | | | — | | | | 2,960.0 | | |
(1)Accounts written off, net of recoveries and foreign currency translation adjustment.
(2)Returned product reused or destroyed and foreign currency translation adjustment.
(3)Obsolete inventory destroyed and foreign currency translation adjustment.
(4)Deductions associated with divestiture of Luxembourg Holdings and subsidiaries.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Additions | | | | | | |
(In millions) Description | | Balance at Beginning of Period | | Charged to Costs and Expenses | | | Charged to Revenue | | Deductions | | | Balance at End of Period | |
| 2018 | | | | | | | | | | | | | |
| Allowance for doubtful accounts receivable | | $ | 129.3 |
| | $ | 162.4 |
| | | $ | — |
| | $ | (198.7 | ) | (1) | | $ | 93.0 |
| |
| Refund liability | | 9.3 |
| (3) | — |
| | | 172.3 |
| | (169.3 | ) | (2) | | 12.3 |
| |
| Allowance for inventory obsolescence | | 61.3 |
| | 113.5 |
| (4) | | — |
| | 55.2 |
| (5) | | 230.0 |
| |
| Deferred tax asset valuation allowance | | 3,217.6 |
| | 39.9 |
| | | — |
| | — |
| | | 3,257.5 |
| |
| 2017 | | | | | | | | | | | | | |
| Allowance for doubtful accounts receivable | | $ | 122.9 |
| | $ | 221.9 |
| | | $ | — |
| | $ | (215.5 | ) | (1) | | $ | 129.3 |
| |
| Allowance for sales returns | | 8.2 |
| | — |
| | | 197.9 |
| | (196.8 | ) | (2) | | 9.3 |
| (3) |
| Allowance for inventory obsolescence | | 58.4 |
| | 36.7 |
| | | — |
| | (33.8 | ) | (5) | | 61.3 |
| |
| Deferred tax asset valuation allowance | | 3,296.0 |
| | (78.4 | ) | (6) | | — |
| | — |
| | | 3,217.6 |
| |
| 2016 | | | | | | | | | | | | | |
| Allowance for doubtful accounts receivable | | $ | 77.6 |
| | $ | 190.5 |
| | | $ | — |
| | $ | (145.2 | ) | (1) | | $ | 122.9 |
| |
| Allowance for sales returns | | 9.1 |
| | — |
| | | 186.9 |
| | (187.8 | ) | (2) | | 8.2 |
| |
| Allowance for inventory obsolescence | | 71.3 |
| | 36.5 |
| | | — |
| | (49.4 | ) | (5) | | 58.4 |
| |
| Deferred tax asset valuation allowance | | 2,090.1 |
| | 1,205.9 |
| (7) | | — |
| | — |
| | | 3,296.0 |
| |
| |
(1) | Accounts written off, net of recoveries and foreign currency translation adjustment. |
| |
(2) | Returned product reused or destroyed and foreign currency translation adjustment. |
| |
(3) | Due to the adoption of ASC 606, Revenue from Contracts with Customers, as of January 1, 2018, the allowance for sales returns was reclassified from a reduction of accounts receivable to a refund liability (within other accrued liabilities).
|
| |
(4) | Includes a one-off inventory obsolescence expense of $88 recognized at December 31, 2018 relating to the structural reset of inventory (refer to Note 17, Restructuring Initiatives, for additional information regarding the structural reset of inventory).
|
| |
(5) | Obsolete inventory destroyed and foreign currency translation adjustment. |
| |
(6) | Decrease in valuation allowance primarily related to a partial release of the U.S. valuation allowance as a result of the enactment of the Tax Cuts and Jobs Act in the U.S. and the impact of a business model change related to the move of the Company's headquarters from the U.S. to the UK. |
| |
(7) | Increase in valuation allowance primarily for deferred tax assets that are not more likely than not to be realized in the future. |
