REVLON, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except per share amounts)
Net sales in the third quarter of 2005 declined $19.1 million, or 6.5%, to $275.3 million, as compared to $294.4 million in the third quarter of 2004, driven by lower shipments in the U.S. and higher consolidated returns, allowances and discounts, primarily due to approximately $32 million of provisions for incremental returns and allowances associated with the launch of the brand initiatives, partially offset by higher International shipments, lower returns, allowances and discounts related to existing products and favorable currency translation. Net sales for the nine months ended September 30, 2005 decreased $24.4 million, or 2.7%, to $894.5 million, as compared to $918.9 million for the nine months ended September 30, 2004, due primarily to lower shipments in the U.S., higher consolidated returns, allowances and discounts, primarily due to approximately $32 million of provisions for incremental returns and allowances associated with the launch of the brand initiatives, and to lower licensing revenues due primarily to the $10.0 million prepayment of certain renewal fees and minimum royalties in the first nine months of 2004, partially offset by higher International shipments, lower returns, allowances and discounts related to existing products and favorable foreign currency translation.
United States and Canada.
Net sales in the Company's U.S. and Canada operations were $158.7 million for the third quarter of 2005, compared with $192.0 million for the third quarter of 2004, a decrease of $33.3 million or 17.3%. The decrease in net sales was driven primarily by approximately $32 million of provisions for incremental returns and allowances associated with the brand initiatives and $16.8 million reflecting lower shipments of existing products, partially offset by higher shipments of new and restaged products in the third quarter 2005, as compared to the third quarter 2004, as well as lower returns, allowances and discounts of $15.3 million related to existing products. Excluding the impact of Canadian currency fluctuations, net sales were down by $34.6 million.
REVLON, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except per share amounts)
Year-to-date results
Net sales in the Company's U.S. and Canada operations were $551.2 million for the nine months ended September 30, 2005, compared with $604.7 million for the nine months ended September 30, 2004, a decrease of $53.5 million or 8.8%. The decrease in net sales was driven primarily by approximately $32 million of provisions for incremental returns and allowances associated with the brand initiatives and $34.9 million reflecting lower shipments of existing products, partially offset by higher shipments of new and restaged products in the first nine months of 2005, as compared to the first nine months of 2004, as well as lower returns, allowances and discounts of $23.3 million related to existing products. Additionally, licensing revenue in the nine months ended September 30, 2005 was $9.9 million lower compared to the nine months ended September 30, 2004 due primarily to the $10.0 million prepayment of certain renewal fees and minimum royalties, which benefited the nine months ended September 30, 2004. Excluding the impact of Canadian currency fluctuations, net sales were down by $57.3 million.
International.
Net sales in the Company's international operations were $116.6 million for the third quarter of 2005, compared with $102.4 million for the third quarter of 2004, an increase of $14.2 million or 13.9%, and were $343.3 million for the nine months ended September 30, 2005, compared with $314.2 million for the nine months ended September 30, 2004, an increase of $29.1 million or 9.3%. Excluding the impact of foreign currency fluctuations, international net sales increased by 11.2% and 5.7% in the third quarter and first nine months of 2005, as compared to the third quarter and first nine months of 2004, respectively. The increase in International net sales in the third quarter and first nine months of 2005 was primarily due to higher shipments and favorable foreign currency translation. In addition, the increase in International net sales in the third quarter of 2005, as compared to the third quarter of 2004, was partially due to lower provisions for sales incentives.
Third quarter results
In Asia Pacific and Africa, net sales increased by $3.3 million, or 6.0%, to $58.6 million for the third quarter of 2005, as compared with $55.3 million for the third quarter of 2004. Excluding the impact of foreign currency fluctuations, net sales in the Asia Pacific and Africa increased $2.3 million, or 4.2%, in the third quarter of 2005, as compared to the third quarter of 2004. This increase in net sales, excluding the impact of foreign currency fluctuations, was driven by higher net sales in South Africa, Hong Kong and certain distributor markets (which the Company estimates contributed to an approximate 4.3% increase in net sales for the region for the third quarter of 2005, as compared with the third quarter of 2004).
In Europe, which is comprised of Europe and the Middle East, net sales increased by $3.3 million, or 12.7%, to $29.3 million for the third quarter of 2005, as compared with $26.0 million for the third quarter of 2004. Excluding the impact of foreign currency fluctuations, net sales in Europe increased by $3.6 million, or 13.8%, in the third quarter of 2005, as compared to the third quarter of 2004. The increase in net sales, excluding the impact of foreign currency fluctuations, was due to higher net sales in the U.K. and certain distributor markets (which the Company estimates contributed to an approximate 18.2% increase in net sales for the region for the third quarter of 2005, as compared with the third quarter of 2004), which was partially offset by lower net sales in Israel, Italy and France (which the Company estimates contributed to an approximate 5.5% reduction in net sales for the region in the third quarter of 2005, as compared with the third quarter of 2004).
In Latin America, which is comprised of Mexico, Central America and South America, net sales increased by $7.6 million, or 36.0%, to $28.7 million for the third quarter of 2005, as compared with $21.1 million for the third quarter of 2004. Excluding the impact of foreign currency fluctuations, net sales in Latin America increased by $5.6 million, or 26.5%, in the third quarter of 2005, as compared to the third
19
REVLON, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except per share amounts)
quarter of 2004. The increase in net sales, excluding the impact of foreign currency fluctuations, was driven primarily by higher net sales in most markets in the region. The Company estimates that Brazil, Argentina and certain distributor markets contributed approximately 21.2% of the increase in net sales for the region for the third quarter of 2005, as compared with the third quarter of 2004.
Year-to-date results
In Asia Pacific and Africa, net sales increased by $15.0 million, or 9.4%, to $175.5 million for the nine months ended September 30, 2005, as compared with $160.5 million for the nine months ended September 30, 2004. Excluding the impact of foreign currency fluctuations, net sales in the Asia Pacific and Africa increased $9.2 million, or 5.7%, in the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004. This increase in net sales, excluding the impact of foreign currency fluctuations, was driven by higher net sales in all markets in the region. The Company estimates that South Africa, Australia, New Zealand, Japan and certain distributor markets contributed approximately 4.8% of the increase in net sales for the region for the first nine months of 2005, as compared with the first nine months of 2004.
In Europe, net sales increased by $3.3 million, or 3.8%, to $90.0 million for the nine months ended September 30, 2005, as compared with $86.7 million for the nine months ended September 30, 2004. Excluding the impact of foreign currency fluctuations, net sales in Europe increased by $1.6 million, or 1.8%, in the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004. The increase in net sales, excluding the impact of foreign currency fluctuations, was due to higher net sales in France and certain distributor markets (which the Company estimates contributed to an approximate 2.8% increase in net sales for the region for the first nine months of 2005, as compared with the first nine months of 2004), which was partially offset by a decrease in net sales in the U.K., Italy, and Israel (which the Company estimates contributed to an approximate 1.5% increase in net sales for the region for the first nine months of 2005, as compared with the first nine months of 2004).
In Latin America, net sales increased by $10.8 million, or 16.0%, to $77.8 million for the nine months ended September 30, 2005, as compared with $67.0 million for the nine months ended September 30, 2004. Excluding the impact of foreign currency fluctuations, net sales in Latin America increased by $7.1 million, or 10.6%, in the first nine months of 2005, as compared to the first nine months of 2004. The increase in net sales, excluding the impact of foreign currency fluctuations, was driven primarily by increased sales in Brazil, Venezuela and certain distributor markets (which the Company estimates contributed to an approximate 11.6% increase in net sales for the region in the first nine months of 2005, as compared with the first nine months of 2004), which was partially offset by lower net sales in Mexico, Argentina, and Chile (which the Company estimates contributed to an approximate 0.9% reduction in net sales for the region for the first nine months of 2005, as compared with the first nine months of 2004).
Gross profit:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
September 30, | | | | Nine Months Ended
September 30, | | |
| | | 2005 | | 2004 | | Change | | 2005 | | 2004 | | Change |
| Gross profit | | $ | 158.3 | | | $ | 176.5 | | | $ | (18.2 | ) | | $ | 544.4 | | | $ | 565.5 | | | $ | (21.1 | ) |
|
Gross profit as a percent of sales decreased to 57.5% in the third quarter of 2005 from 60.0% in the third quarter of 2004, reflecting higher returns, allowances and discounts in the third quarter of 2005, as compared with the third quarter of 2004, as well as higher brand support related costs included within cost of goods sold.
Gross profit as a percent of sales decreased to 60.9% in the first nine months of 2005 from 61.5% in the first nine months of 2004. Higher returns, allowances and discounts and the aforementioned $9.9 million in lower licensing revenues were partially offset by lower brand support related costs included within cost of goods sold in the first nine months of 2005, as compared with the first nine months of 2004.
20
REVLON, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except per share amounts)
SG&A expenses:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
September 30, | | | | Nine Months Ended
September 30, | | |
| | | 2005 | | 2004 | | Change | | 2005 | | 2004 | | Change |
| SG&A expenses | | $ | 190.6 | | | $ | 177.9 | | | $ | (12.7 | ) | | $ | 577.6 | | | $ | 549.2 | | | $ | (28.4 | ) |
|
SG&A increased $12.7 million to $190.6 million for the third quarter of 2005, as compared to $177.9 million for the third quarter of 2004, due primarily to $2.0 million in unfavorable foreign currency fluctuations, $4.0 million in expenditures in support of our two brand initiatives, $1.5 million in higher display amortization, $1.3 million in higher distribution costs, and higher brand support of approximately $3.5 million, in each case in the third quarter of 2005, as compared with the third quarter of 2004. Total SG&A for the third quarter of 2005 also included approximately $4 million of accelerated amortization associated with the Company's brand initiatives impacting the third quarter of 2005.
SG&A increased $28.4 million to $577.6 million for the nine months ended September 30, 2005, as compared to $549.2 million for the nine months ended September 30, 2004, due primarily to $7.0 million in unfavorable foreign currency fluctuations, $7.7 million in expenditures in support of our two brand initiatives, approximately $4 million of accelerated amortization associated with the Company's brand initiatives impacting the third quarter of 2005, $2.3 million in higher distribution costs and higher brand support of $3.8 million in the first nine months of 2005, as compared with the first nine months of 2004. SG&A expense in the first nine months of 2004 also benefited by $1.4 million due to a reduction of liability associated with an international benefit arrangement. See "Overview" for a discussion of the Company's brand initiatives.
Restructuring (benefit) costs and other, net:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
September 30, | | | | Nine Months Ended
September 30, | | |
| | | 2005 | | 2004 | | Change | | 2005 | | 2004 | | Change |
Restructuring (benefit)
costs and other, net.. | | $ | — | | | $ | 0.6 | | | $ | 0.6 | | | $ | 1.5 | | | $ | — | | | $ | (1.5 | ) |
|
During the nine months ended September 30, 2005, the Company recorded $1.5 million in restructuring for employee severance and other personnel benefits. During the nine months ended September 30, 2004, the Company revised its estimate of the cost to be incurred related to a previous restructuring program, which was offset by the restructuring charge in the third quarter of 2004.
Other expenses:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
September 30, | | | | Nine Months Ended
September 30, | | |
| | | 2005 | | 2004 | | Change | | 2005 | | 2004 | | Change |
| Interest expense | | $ | 33.2 | | | $ | 28.8 | | | $ | (4.4 | ) | | $ | 94.7 | | | $ | 102.4 | | | $ | 7.7 | |
|
The increase in interest expense of $4.4 million for the third quarter of 2005, as compared with the third quarter of 2004, was primarily due to higher average debt outstanding and higher weighted average borrowing rates during the third quarter of 2005, as compared to the third quarter of 2004. The decrease in interest expense of $7.7 million for the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004, is primarily due to the refinancing of Products Corporation's 12% Senior Secured Notes in July and August 2004 using borrowings under the Term Loan Facility of Products Corporation's 2004 Credit Agreement which bears interest at a comparatively lower interest rate.
21
REVLON, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
September 30, | | | | Nine Months Ended
September 30, | | |
| | | 2005 | | 2004 | | Change | | 2005 | | 2004 | | Change |
Loss on early
extinguishment of debt | | $ | — | | | $ | 58.8 | | | $ | 58.8 | | | $ | 9.0 | | | $ | 91.4 | | | $ | 82.4 | |
|
The $9.0 million loss on early extinguishment of debt for the nine months ended September 30, 2005 includes the loss on redemption of Products Corporation's 8 1/8% Senior Notes and 9% Senior Notes in April 2005, the $5.0 million prepayment fee related to the prepayment of $100.0 million of indebtedness outstanding under the Term Loan Facility of the 2004 Credit Agreement with the proceeds from the issuance of the Original 9½% Senior Notes, as well as the write-off of the portion of deferred financing costs related to such prepaid amount. The loss on early extinguishment of debt for the nine months ended September 30, 2004 represents the loss on the exchange of equity for certain indebtedness in the Revlon Exchange Transactions and fees, expenses and the write-off of deferred financing costs related to the Revlon Exchange Transactions, the tender for and redemption of Products Corporation's 12% Senior Secured Notes due in 2005 (the "12% Senior Secured Notes") (including the applicable premium) and the repayment of Products Corporation's 2001 Credit Agreement (as hereinafter defined).
Provision for income taxes:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
September 30, | | | | Nine Months Ended
September 30, | | |
| | | 2005 | | 2004 | | Change | | 2005 | | 2004 | | Change |
| Provision for income taxes | | $ | 2.3 | | | $ | 2.9 | | | $ | 0.6 | | | $ | 9.2 | | | $ | 5.0 | | | $ | (4.2 | ) |
|
The increase in the provision for income taxes in the nine months ended September 30, 2005, as compared with the nine months ended September 30, 2004, was primarily attributable to a dividend distribution from a foreign subsidiary in the first quarter of 2005. Additionally, the 2004 period benefited from the resolution of various tax audits. The decrease in the provision for income taxes in the third quarter of 2005, as compared with the third quarter of 2004, is attributable to offsetting factors in certain foreign markets.
Financial Condition, Liquidity and Capital Resources
Net cash used for operating activities for the nine months ended September 30, 2005 improved to $115.9 million, as compared to $135.3 million for the nine months ended September 30, 2004. This improvement resulted from a lower net loss in the first nine months of 2005, as compared to the first nine months of 2004, cash used in changes in working capital of $18.5 million in the first nine months of 2005, compared with cash used in changes in working capital of $65.4 million in the first nine months of 2004, partially offset by lower adjustments made for non-cash expenses, consisting primarily of depreciation and amortization and stock compensation amortization, as well as the loss on extinguishment of debt. The improvement in cash provided by changes in working capital in the first nine months of 2005 was due to better management of the Company's working capital, partially offset by the increased cash used for the purchase and production of inventory primarily related to the launch of the Company's brand initiatives and due in part to lower shipments of existing products in the U.S. and Canada.
Net cash used for investing activities was $16.0 million and $12.5 million for the nine months ended September 30, 2005 and 2004, respectively, and consisted of capital expenditures.
Net cash provided by financing activities was $92.1 million and $172.1 million for the nine months ended September 30, 2005 and 2004, respectively. Net cash provided by financing activities for the nine months ended September 30, 2005 included proceeds from the issuance of the 9½% Senior Notes; partially offset by the prepayment of $100.0 million of indebtedness under the Term Loan Facility of Products
22
REVLON, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except per share amounts)
Corporation's 2004 Credit Agreement, along with the $5.0 million prepayment fee plus accrued interest; the redemption of $116.2 million aggregate principal amount outstanding of Products Corporation's 8 1/8% Senior Notes, plus the payment of accrued interest; the redemption of $75.5 million aggregate principal amount outstanding of Products Corporation's 9% Senior Notes, plus accrued interest and the applicable premium; and the payment of financing costs related to such transactions. Net cash provided by financing activities for the nine months ended September 30, 2004 included cash drawn under Products Corporation's credit agreements, partially offset by the repayment of borrowings under such credit agreements, payment of the redemption price, the applicable premium and accrued interest in connection with the redemption of Products Corporation's 12% Senior Secured Notes and payment of financing costs related to the above transactions.
At September 30, 2005, the Company had a liquidity position, excluding cash in compensating balance accounts, of approximately $259.2 million, consisting of cash and cash equivalents (net of any outstanding checks), as well as $143.5 million in available borrowings under the Multi-Currency Facility (as hereinafter defined) and $87.0 million in available borrowings under the 2004 Consolidated MacAndrews & Forbes Line of Credit, which commitment under the 2004 Consolidated MacAndrews & Forbes Line of Credit reduced from $152.0 million on July 1, 2005. See "Overview" regarding certain proposed financing activities.
2004 Credit Agreement
Products Corporation's credit agreement (the "2004 Credit Agreement") originally provided up to $960.0 million and, before giving effect to the $100.0 million prepayment in March 2005, consisted of an $800.0 million term loan facility (the "Term Loan Facility") and a $160.0 million asset-based multi-currency facility (the "Multi-Currency Facility"), the availability under which varies based upon the borrowing base determined relative to the value of eligible accounts receivable, eligible inventory and eligible real property and equipment in the U.S. and the U.K. from time to time (see Note 9 of the Company's Annual Report on Form 10-K/A for the year ended December 31, 2004 for further details).
The Multi-Currency Facility will terminate on July 9, 2009 and the loans under the Term Loan Facility will mature on July 9, 2010; provided that the 2004 Credit Agreement will terminate on October 30, 2007 if Products Corporation's 8 5/8% Senior Subordinated Notes due 2008 (the "8 5/8% Senior Subordinated Notes") are not redeemed, repurchased or defeased on or before such date such that not more than $25.0 million in aggregate principal amount of the 8 5/8% Senior Subordinated Notes remain outstanding. In addition to customary events of default, it would be an event of default under the 2004 Credit Agreement if Revlon, Inc. fails to undertake an approximately $110.0 million equity issuance and transfer the proceeds of such issuance to Products Corporation to reduce Products Corporation's outstanding indebtedness by March 31, 2006.
The 2004 Credit Agreement requires Products Corporation to comply with various financial covenants and restrictions, including covenants and restrictions relating to indebtedness, liens, investments, sales of assets, mergers and acquisitions, dividends and transactions with affiliates of Products Corporation, each of which is subject to limited exceptions. Additionally, the 2004 Credit Agreement contains financial covenants limiting the senior secured leverage ratio of Products Corporation (the ratio of Products Corporation's Senior Secured Debt to EBITDA, as each such term is defined in the 2004 Credit Agreement) to 5.50 to 1.00 for the four consecutive quarters ended during the period from December 31, 2004 to September 30, 2005; 5.00 to 1.00 for the four consecutive quarters ending during the period from December 31, 2005 to December 31, 2006; and 4.50 to 1.00 for the four consecutive quarters ending March 31, 2007 and each subsequent quarter until the maturity date of the 2004 Credit Agreement. Additionally, under any circumstances when the excess borrowing base under the Multi-Currency Facility is less than $30.0 million for a period of 30 consecutive days or more, Products Corporation would be required to maintain a consolidated fixed charge coverage ratio (the ratio of EBITDA minus Capital
23
REVLON, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except per share amounts)
Expenditures to Cash Interest Expense for such period, as each such term is defined in the 2004 Credit Agreement) of 1.00 to 1.00. Products Corporation was in compliance with all applicable covenants under the 2004 Credit Agreement as of September 30, 2005.
At September 30, 2005, the Term Loan Facility was fully drawn and availability under the Multi-Currency Facility, based upon the calculated borrowing base less outstanding borrowings and letters of credit, was $143.5 million.
2004 Consolidated MacAndrews & Forbes Line of Credit
Products Corporation has a line of credit with MacAndrews & Forbes (the "2004 Consolidated MacAndrews & Forbes Line of Credit"), which had availability of $87.0 million at September 30, 2005. The commitment reduced to $87.0 million from $152.0 million as of July 1, 2005, pursuant to the original terms of the 2004 Consolidated MacAndrews & Forbes Line of Credit, and was scheduled to terminate on December 1, 2005, but has been extended through the earlier of the consummation of Revlon, Inc.'s planned equity issuance described in "Overview" or March 31, 2006 (provided that in no case would such line of credit terminate prior to its previous expiration date of December 1, 2005). See Note 9 of the Company's Annual Report on Form 10-K/A for the year ended December 31, 2004 for further details.
2005 Refinancing Transactions
On March 16, 2005, Products Corporation issued $310.0 million aggregate principal amount of its Original 9½% Senior Notes. This issuance and the related transactions extended the maturities of Products Corporation's debt that would have otherwise been due in 2006. The proceeds from the Original 9½% Senior Notes were used to prepay $100.0 million of indebtedness outstanding under the Term Loan Facility of Products Corporation's 2004 Credit Agreement, together with accrued interest and the associated $5.0 million prepayment fee, and to pay $7.0 million in certain fees and expenses associated with the issuance of the Original 9½% Senior Notes. The remaining $197.9 million in proceeds was placed in a debt defeasance trust and in April 2005 was used to redeem $116.2 million aggregate principal amount outstanding of Products Corporation's 8 1/8% Senior Notes, plus accrued interest, and $75.5 million aggregate principal amount outstanding of Products Corporation's 9% Senior Notes, plus accrued interest and applicable premium. The aggregate redemption amounts for the 8 1/8% Senior Notes and 9% Senior Notes were $118.1 million and $79.8 million, respectively, which constituted the principal amount and interest payable on the 8 1/8% Senior Notes and the 9% Senior Notes up to, but not including, the redemption date, and, with respect to the 9% Senior Notes, the applicable premium. On June 21, 2005, all of the Original 9½% Senior Notes which were issued by Products Corporation in March 2005 were exchanged for the March 2005 9½% Senior Notes, which have substantially identical terms to the Original 9½% Senior Notes, except that the March 2005 9½% Senior Notes are registered with the Commission under the Securities Act, and the transfer restrictions and registration rights applicable to the Original 9½% Senior Notes do not apply to the March 2005 9½% Senior Notes.
On August 16, 2005, Products Corporation issued $80.0 million aggregate principal amount of the August 2005 9½% Senior Notes, which priced at 95¼% of par. Products Corporation issued the August 2005 9½% Senior Notes as additional notes pursuant to the same indenture, dated as of March 16, 2005, governing the March 2005 9½% Senior Notes (the "9½% Senior Notes Indenture"), by and between Products Corporation and U.S. Bank National Association, as trustee. The August 2005 9½% Senior Notes constitute a further issuance of, are the same series as, and will vote on any matters submitted to note holders with, the March 2005 9½% Senior Notes. Pursuant to a registration agreement that Products Corporation entered into as part of the original issuance of the August 2005 9½% Senior Notes, Products Corporation filed a registration statement that, when such statement becomes effective, will permit holders of the August 2005 9½% Senior Notes to exchange such notes for new notes that will have substantially identical terms to the August 2005 9½% Senior Notes, except that (1) the new notes will be registered with the Commission under the Securities Act, and (2) the transfer restrictions and registration
24
REVLON, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except per share amounts)
rights currently applicable to the August 2005 9½% Senior Notes would no longer apply to the new notes. The registration statement is not yet effective as of the date of filing this Form 10-Q.
Pursuant to the terms of the 9½% Senior Notes Indenture, the 9½% Senior Notes are senior unsecured debt of Products Corporation with right to payment under the 9½% Senior Notes equal in right of payment with any present and future senior indebtedness of Products Corporation. The 9½% Senior Notes bear interest at an annual rate of 9½%, which will be payable on each April 1 and October 1 of each year, which commenced on October 1, 2005.
2004 Refinancing Transactions
In March 2004, the Company exchanged approximately $804 million of Products Corporation's debt, $54.6 million of Revlon, Inc. Series A preferred stock and $9.9 million of accrued interest for 299,969,493 shares of Class A Common Stock (the "Revlon Exchange Transactions"). As a result of the Revlon Exchange Transactions, Revlon, Inc. reduced Products Corporation's debt by approximately $804 million on March 25, 2004. In addition to the Revlon Exchange Transactions, pursuant to the 2004 Investment Agreement between Revlon, Inc. and MacAndrews & Forbes Holdings, Revlon, Inc. is committed to conduct further equity issuances in the amount of approximately $110 million by the end of March 2006, the proceeds of which Revlon, Inc. will transfer to Products Corporation to reduce its debt (such equity issuances, together with the Revlon Exchange Transactions, are referred to as the "Debt Reduction Transactions"). The terms of any other equity issuances to be undertaken in connection with the Debt Reduction Transactions, including the subscription prices, will be determined by Revlon, Inc.'s Board of Directors at the appropriate times. See "Overview" for further discussion of this proposed equity issuance.
Products Corporation used $800.0 million of proceeds from borrowings under the Term Loan Facility of the 2004 Credit Agreement to repay in full the $290.5 million of outstanding indebtedness (including accrued interest) under Products Corporation's credit agreement dated November 30, 2001 and which was scheduled to mature on May 30, 2005 (the "2001 Credit Agreement"), to purchase and redeem in July and August 2004 (the "Tender Offer") all of the $363.0 million aggregate principal amount of Products Corporation's 12% Senior Secured Notes for a purchase price of approximately $412.3 million (including the applicable premium and accrued interest), and to pay fees and expenses incurred in connection with the 2004 Credit Agreement, the Tender Offer for the 12% Senior Secured Notes and the Revlon Exchange Transactions, including the payment of expenses related to a refinancing that Products Corporation launched in May 2004 but did not consummate.
Sources and Uses
The Company's principal sources of funds are expected to be operating revenues, cash on hand, funds available for borrowing under the 2004 Credit Agreement, the 2004 Consolidated MacAndrews & Forbes Line of Credit and other permitted lines of credit. The 2004 Credit Agreement, the 2004 Consolidated MacAndrews & Forbes Line of Credit, and the indentures governing Products Corporation's 8 1/8% Senior Subordinated Notes and 9½% Senior Notes contain certain provisions that by their terms limit Products Corporation's and its subsidiaries' ability to, among other things, incur additional debt.
The Company's principal uses of funds are expected to be the payment of operating expenses, including expenses in connection with the continued implementation of, and refinement to, the Company's plan (including the Company's brand initiatives referred to in "Overview"), purchases of permanent wall displays, capital expenditure requirements, payments in connection with the Company's restructuring programs referred to herein, debt service payments and costs and regularly scheduled pension contributions. Cash contributions to the Company's pension and post-retirement benefit plans were approximately $34 million in 2004 and the Company expects them to be approximately $27 million in 2005. The Company estimates that for 2005 purchases of wall displays will be approximately $75 million
25
REVLON, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except per share amounts)
to $85 million and capital expenditures will be approximately $20 million to $30 million. See "Overview" regarding certain expected uses of funds in connection with the Company's brand initiatives.
The Company has undertaken a number of programs to efficiently manage its cash and working capital including, among other things, programs to carefully manage inventory levels, centralized purchasing to secure discounts and efficiencies in procurement, and providing additional discounts to U.S. customers for more timely payment of receivables and careful management of accounts payable.
Continuing to implement and refine the Company's plan could include taking advantage of additional opportunities to reposition, repackage or reformulate one or more of the Company's brands or product lines, launching new brands or product lines or further refining the Company's approach to retail merchandising. Any of these actions, whose intended purpose would be to create value through profitable growth, could result in the Company making investments or recognizing charges related to executing against such opportunities. See "Overview" regarding certain of the Company's proposed brand initiatives.
The Company expects that operating revenues, cash on hand, funds available for borrowing under the 2004 Credit Agreement, the 2004 Consolidated MacAndrews & Forbes Line of Credit and other permitted lines of credit will be sufficient to enable the Company to cover its operating expenses for 2005, including cash requirements in connection with the Company's operations, the continued implementation of, and refinement to, the Company's plan (including the Company's brand initiatives referred to in "Overview"), cash requirements in connection with the Company's restructuring programs referred to above, the Company's debt service requirements and regularly scheduled pension and post-retirement plan contributions. However, there can be no assurance that such funds will be sufficient to meet the Company's cash requirements on a consolidated basis. If the Company's anticipated level of revenue growth is not achieved because, for example, of decreased consumer spending in response to weak economic conditions or weakness in the mass market cosmetics category, adverse changes in currency, increased competition from the Company's competitors, changes in consumer purchasing habits, including with respect to shopping channels, retailer inventory management or the Company's advertising and marketing plans are not as successful as anticipated, or if the Company's expenses associated with the continued implementation of, and refinement to, the Company's plan exceed the anticipated level of expenses, the Company's current sources of funds may be insufficient to meet the Company's cash requirements. See "Overview" regarding certain of the Company's proposed brand initiatives and the Company's expected uses of funds and financing plans related to such initiatives.
In the event of a decrease in demand for the Company's products or reduced sales or lack of increases in demand and sales as a result of the continued implementation of, and refinement to, the Company's plan, any such development, if significant, could reduce the Company's operating revenues and could adversely affect Products Corporation's ability to achieve certain financial covenants under the 2004 Credit Agreement and in such event the Company could be required to take measures, including reducing discretionary spending.
If the Company is unable to satisfy its cash requirements from the sources identified above or comply with its debt covenants, the Company could be required to adopt one or more alternatives, such as delaying the implementation of or revising aspects of its plan, including one or more aspects of its brand initiatives referred to in "Overview", reducing or delaying purchases of wall displays or advertising or promotional expenses, reducing or delaying capital spending, delaying, reducing or revising restructuring programs, restructuring indebtedness, selling assets or operations, seeking additional capital contributions or loans from MacAndrews & Forbes, the Company's other affiliates and/or third parties, selling additional equity securities of Revlon, Inc. (or debt securities of Products Corporation) or reducing other discretionary spending. There can be no assurance that the Company would be able to take any of the actions referred to above because of a variety of commercial or market factors or constraints in the
26
REVLON, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except per share amounts)
Company's debt instruments, including, for example, market conditions being unfavorable for an equity or debt issuance, additional capital contributions or loans not being available from affiliates or third parties, or that the transactions may not be permitted under the terms of the Company's various debt instruments then in effect, because of restrictions on the incurrence of debt, incurrence of liens, asset dispositions and related party transactions. In addition, such actions, if taken, may not enable the Company to satisfy its cash requirements or comply with its debt covenants if the actions do not generate a sufficient amount of additional capital.
Using proceeds from the issuance of the Original 9½% Senior Notes in March 2005, Products Corporation prepaid $100.0 million of principal amount outstanding under the Term Loan Facility of the 2004 Credit Agreement and redeemed its 8 1/8% Senior Notes and 9% Senior Notes in April 2005. Products Corporation likewise plans to refinance Products Corporation's 8 5/8% Senior Subordinated Notes, with an aggregate principal amount outstanding of $327.0 million, prior to their maturity in 2008. Under the 2004 Credit Agreement, Products Corporation must refinance the 8 5/8% Senior Subordinated Notes by October 30, 2007, such that not more than $25.0 million of such notes remain outstanding. As of September 30, 2005, Products Corporation had $700.0 million of outstanding indebtedness under the Term Loan Facility of the 2004 Credit Agreement, while the Multi-Currency Facility and the 2004 Consolidated MacAndrews & Forbes Line of Credit were undrawn. In addition, in August 2005, Products Corporation issued $80 million aggregate principal amount of the August 2005 9½% Senior Notes. See "Overview" regarding certain of the Company's proposed brand initiatives and the Company's expected uses of funds and financing plans related to such initiatives.
Revlon, Inc., as a holding company, will be dependent on the earnings and cash flow of, and dividends and distributions from, Products Corporation to pay its expenses and to pay any cash dividend or distribution on Revlon, Inc.'s Class A Common Stock that may be authorized by the Board of Directors of Revlon, Inc. The terms of the 2004 Credit Agreement, the 2004 Consolidated MacAndrews & Forbes Line of Credit and the indentures governing the 8 5/8% Senior Subordinated Notes and the 9½% Senior Notes generally restrict Products Corporation from paying dividends or making distributions, except that Products Corporation is permitted to pay dividends and make distributions to Revlon, Inc. to enable Revlon, Inc., among other things, to pay expenses incidental to being a public holding company, including, among other things, professional fees such as legal and accounting fees, regulatory fees such as Commission filing fees and other miscellaneous expenses related to being a public holding company and, subject to certain limitations, to pay dividends or make distributions in certain circumstances to finance the purchase by Revlon, Inc. of its Class A Common Stock in connection with the delivery of such Class A Common Stock to grantees under the Amended and Restated Revlon, Inc. Stock Plan.
As a result of the closing of the Revlon Exchange Transactions, as of the end of March 25, 2004, Revlon, Inc., Products Corporation and their U.S. subsidiaries were no longer included in the MacAndrews & Forbes Holdings consolidated group for federal income tax purposes. Following the closing of the Revlon Exchange Transactions, Revlon, Inc. became the parent of a new consolidated group for federal income tax purposes and Products Corporation's federal taxable income and loss will be included in such group's consolidated tax returns. Accordingly, Revlon, Inc. and Products Corporation entered into a new tax sharing agreement (the "Revlon Tax Sharing Agreement") pursuant to which Products Corporation will be required to pay to Revlon, Inc. amounts equal to the taxes that Products Corporation would otherwise have had to pay if Products Corporation were to file separate federal, state or local income tax returns, limited to the amount, and payable only at such times, as Revlon, Inc. will be required to make payments to the applicable taxing authorities. The 2004 Credit Agreement does not prohibit payments from Products Corporation to Revlon, Inc. to the extent required under the Revlon Tax Sharing Agreement. As a result of tax net operating losses, the Company expects that there will be no federal tax payments or payments in lieu of taxes by Products Corporation to Revlon, Inc. pursuant to the Revlon Tax Sharing Agreement in respect of 2005.
27
REVLON, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except per share amounts)
As a result of dealing with suppliers and vendors in a number of foreign countries, Products Corporation enters into foreign currency forward exchange contracts and may enter into option contracts from time to time to hedge certain cash flows denominated in foreign currencies. There were foreign currency forward exchange contracts with a notional amount of $24.4 million outstanding at September 30, 2005. The fair value of foreign currency forward exchange contracts outstanding at September 30, 2005 was $(0.3) million.
Disclosures about Contractual Obligations and Commercial Commitments
As of September 30, 2005, there had been no material changes outside the ordinary course of the Company's business to the Company's total contractual obligations and commercial commitments which are set forth in the table included in the Company's Annual Report on Form 10-K/A for the year ended December 31, 2004, with the exception of: (1) Products Corporation's issuance in March 2005 of $310.0 million in aggregate principal amount of the Original 9½% Senior Notes, which are due 2011, with the proceeds used to (a) prepay $100.0 million in outstanding principal plus prepayment fees and accrued interest under the Term Loan Facility of the 2004 Credit Agreement, and (b) redeem $116.2 million outstanding principal amount of Products Corporation's 8 1/8% Senior Notes, plus accrued interest, and $75.5 million outstanding principal amount of Products Corporation's 9% Senior Notes, plus accrued interest and the applicable premium; (2) Products Corporation's issuance in August 2005 of $80.0 million aggregate principal amount of the August 2005 9½% Senior Notes, which are due in 2011, the proceeds of which will be used to help fund investments in its brand initiatives and be used for general corporate purposes, as well as to pay fees and expenses in connection with the issuance of the August 2005 9½% Senior Notes; and (3) incremental purchase obligations of approximately $46 million in connection with the Company's brand initiatives, which are due in less than one year. See "Overview – Brand initiatives" and "2005 Refinancing Transactions" for further discussion.
The following table reflects the impact of the transactions referred to above as of September 30, 2005:
| | | | | | | | | | | | | | | | | | | | | | |
| | | Payments due by calendar year
(dollars in millions) |
Contractual Obligations
As of September 30, 2005 | | Total | | Less than
1 year | | 1-3 years | | 3-5 years | | After 5 years |
| Long-term Debt | | $ | 1,417.0 | | | $ | — | | | $ | 327.0 | | | $ | 700.0 | | | $ | 390.0 | |
| Purchase Obligations | | $ | 76.2 | | | $ | 76.2 | | | $ | — | | | $ | — | | | $ | — | |
|
Off-Balance Sheet Transactions
The Company does not maintain any off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Effect of Recent Accounting Pronouncements
See discussion of recent accounting pronouncements in Note 1 "Basis of Presentation" to the Unaudited Consolidated Financial Statements.
28
REVLON, INC. AND SUBSIDIARIES
(all tabular amounts in millions)
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has exposure to market risk both as a result of changing interest rates and movements in foreign currency exchange rates. The Company's policy is to manage market risk through a combination of fixed and floating rate debt, the use of derivative financial instruments and foreign exchange forward and option contracts. The Company does not hold or issue financial instruments for trading purposes. The qualitative and quantitative information presented in Item 7A of the Company's Annual Report on Form 10-K/A for the year ended December 31, 2004 ("Item 7A") describes significant aspects of the Company's financial instrument programs that have material market risk as of December 31, 2004. As a result of Products Corporation's issuance of the Original 9½% Senior Notes and the redemption of the 8 1/8% Senior Notes and 9% Senior Notes, the maturities of Products Corporation's debt that would have otherwise been due in 2006 have been extended. The following table presents the information required by Item 7A as of September 30, 2005 (See "Long-term Debt" in Note 9 to the Unaudited Consolidated Financial Statements):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Expected Maturity date for the year ended December 31, | | Total | | Fair Value
September 30,
2005 |
| Debt | | 2005 | | 2006 | | 2007 | | 2008 | | 2009 | | Thereafter | |
| Short-term variable rate (various currencies) | | $ | 40.4 | | | | | | | | | | | | | | | | | | | | | | | $ | 40.4 | | | $ | 40.4 | |
| Average interest rate (a) | | | 5.4 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Long-term fixed rate – third party ($US) | | | | | | | | | | $ | 327.0 | * | | | | | | | | | | $ | 386.3 | | | | 713.3 | | | | 687.4 | |
| Average interest rate | | | | | | | | | | | 8.6 | % | | | | | | | | | | | 9.5 | % | | | | | | | | |
| Long-term variable rate – third party ($US) | | | | | | | | | | | | | | | | | | | | | | $ | 700.0 | | | | 700.0 | | | | 700.0 | |
| Average interest rate (a) | | | | | | | | | | | | | | | | | | | | | | | 10.6 | % | | | | | | | | |
| Total debt | | $ | 40.4 | | | | — | | | $ | 327.0 | | | | — | | | | — | | | $ | 1,086.3 | | | $ | 1,453.7 | | | $ | 1,427.8 | |
|
| | | | | | | | | | | | | | | | | | |
| Forward Contracts | | Average
Contractual
Rate
$/FC | | Original
US Dollar
Notional
Amount | | Contract
Value
September 30,
2005 | | Fair Value
September 30,
2005 |
| Buy Euros/Sell USD | | | 1.2148 | | | $ | 0.8 | | | $ | 0.8 | | | $ | — | |
| Sell British Pounds/Buy USD | | | 1.8227 | | | | 4.5 | | | | 4.6 | | | | 0.1 | |
| Sell Australian Dollars/Buy USD | | | 0.7574 | | | | 5.8 | | | | 5.8 | | | | — | |
| Sell Canadian Dollars/Buy USD | | | 0.8140 | | | | 7.7 | | | | 7.3 | | | | (0.4 | ) |
| Sell South African Rand/Buy USD | | | 0.1566 | | | | 2.4 | | | | 2.4 | | | | — | |
| Sell New Zealand Dollars/Buy USD | | | 0.6919 | | | | 0.2 | | | | 0.2 | | | | — | |
| Buy Australian Dollars/Sell New Zealand Dollars | | | 1.1096 | | | | 3.0 | | | | 3.0 | | | | — | |
| Total forward contracts | | | | | | $ | 24.4 | | | $ | 24.1 | | | $ | (0.3 | ) |
|
| |
| (a) | Weighted average variable rates are based upon implied forward rates from the yield curves at September 30, 2005. |
| |
| * | While the 8 5/8% Senior Subordinated Notes are due in March 2008, under the 2004 Credit Agreement, Products Corporation must refinance the notes by October 30, 2007, such that not more than $25.0 million of such notes remain outstanding. |
29
REVLON, INC. AND SUBSIDIARIES
Item 4. Controls and Procedures
(a) Disclosure Controls and Procedures. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including the Company's Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the fiscal period covered by this Quarterly Report on Form 10-Q.
As Revlon, Inc. previously disclosed in its Annual Report on Form 10-K/A for the fiscal year ended December 31, 2004, which it filed with the SEC on April 12, 2005, Revlon, Inc.'s management assessed the effectiveness of its internal control over financial reporting as of December 31, 2004 and identified a deficiency in the Company's policies and procedures related to the periodic review and validation of the data inputs and outputs used in its estimates of the reserves for sales returns in the U.S. Specifically, in 2004, an error of approximately $1.2 million in the estimate of the sales return calculation for one of the Company's large U.S. customers was not detected. The customer in question acquired a significant number of stores in 2004 and inventory of certain of those newly-acquired store locations was not included in the data made available to the Company for estimating the reserves for sales returns. As a result, during its 2004 year-end closing, the Company understated its estimates of the sales returns related to these newly-acquired stores by approximately $1.2 million. The Company's aggregate sales returns reserve in the U.S. for the full fiscal year ended December 31, 2004 was approximately $83 million. Although this control deficiency resulted in the error identified above, it did not result in a material misstatement of the Company's consolidated financial statements as of and for the year ended December 31, 2004, for the interim periods within that year or in the Company's consolidated financial statements as of and for the three-month and nine-month periods ended September 30, 2005.
As Revlon, Inc. also disclosed in its Annual Report on Form 10-K/A for the fiscal year ended December 31, 2004, during the first quarter of 2005 the Company implemented additional controls and procedures, as discussed below in paragraph (b) of this Item 4, that the Company believes have remediated the material weakness in internal control over financial reporting referred to above. These additional controls and procedures are designed to operate semi-annually at June 30 and December 31 utilizing specific information that is available at those times as part of the Company's normal business processes at each such period end. These additional controls and procedures operated as designed and intended.
The Company has concluded that its disclosure controls and procedures were effective at September 30, 2005.
(b) Changes in Internal Control Over Financial Reporting. To remediate the material weakness referred to above, in the first quarter of 2005, management implemented a remediation program, including the establishment of additional controls and procedures, to strengthen its internal control process with respect to the sales return calculation. This program and controls currently include, among other things, the adoption of policies pursuant to which the following procedures are or will be performed:
| |
| 1. | In order to facilitate the estimate of sales returns in the future, following any merger, acquisition or consolidation transaction involving significant customers, the Company's sales force will provide inventory and point of sale information for each of the customers involved in the transaction to provide a base line to estimate sales returns. The Company will then prepare a reconciliation between the base line information and the sales return estimation for the combined customers after giving effect to the transaction. |
| |
| 2. | The Company will analyze separately inventory and/or point of sale information that are maintained on different systems of significant customers involved in a merger, acquisition or consolidation transaction and will separately estimate returns for each of those customers. |
30
REVLON, INC. AND SUBSIDIARIES
| |
| 3. | The Company enhanced documentation and formal validation of key data and assumptions used to calculate the sales returns. |
| |
| 4. | The Company formalized the analytical validation by accounting personnel of the sales return calculation for significant customers. This analysis is reviewed and approved by both senior finance and sales department executives. |
The Company's management believes that these actions and controls strengthened the Company's disclosure controls and procedures, as well as the Company's internal control over financial reporting. These additional controls and procedures operated as designed and intended, and the Company's management believes that the Company has eliminated the material weakness that Revlon, Inc. identified in its internal control over financial reporting in its Annual Report on Form 10-K/A for the fiscal year ended December 31, 2004.
Forward-Looking Statements
This Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, as well as other public documents and statements of the Company, contain forward-looking statements that involve risks and uncertainties, which are based on the beliefs, expectations, estimates, projections, forecasts, plans, anticipations, targets, outlooks, initiatives, destinations, visions, objectives, strategies, opportunities, drivers and intents of the Company's management. The Company's actual results may differ materially from those discussed in such forward-looking statements. Such statements include, without limitation, the Company's expectations and estimates (whether qualitative or quantitative) as to:
| |
| (i) | the Company's future financial performance, including the Company's belief that it has strengthened its organizational capabilities (and its expectation to continue to do so) and that it has strengthened its relationships with its key retailers in the U.S.; |
| |
| (ii) | the effect on sales of weak economic conditions, political uncertainties, military actions, terrorist activities, adverse currency fluctuations, category weakness, competitive activities, retailer inventory management and changes in consumer purchasing habits, including with respect to shopping channels; |
| |
| (iii) | the Company's belief that the continued implementation and refinement to its plan could include taking advantage of additional opportunities to reposition, repackage and/or reformulate one or more of its brands or product lines and/or launching new brands or product lines and/or further refining its approach to retail merchandising, any of which, whose intended purpose would be to create value through profitable growth, could result in the Company making investments and/or recognizing charges related to executing against such opportunities; |
| |
| (iv) | the Company's plans regarding the continued growth momentum and accelerated growth stage of its plan, including the Company's plans to capitalize on the actions taken during the stabilization and growth phase of its plan, and the Company's expectation that such actions would help it achieve the objective of balancing top-line growth with an improved operating margin; |
| |
| (v) | the Company's plans to further improve its new product development and introduction process; |
| |
| (vi) | the Company's plans to continue to increase the effectiveness of its display walls; |
| |
| (vii) | the Company's plans to drive efficiencies across its overall supply chain, including reducing manufacturing costs by streamlining components and sourcing strategically and rationalizing its supply chain in Europe, the Company's plan to move production for its European markets to the Company's Oxford, North Carolina facility and establishing alternative warehousing and distribution arrangements in the U.K.; |
| |
| (viii) | the Company's plans to optimize the effectiveness of its advertising, marketing and promotions; |
31
REVLON, INC. AND SUBSIDIARIES
| |
| (ix) | the Company's plans to continue training and development of its organization so that it may continue to improve its capabilities to execute the Company's strategies, while providing enhanced job satisfaction for its employees; |
| |
| (x) | the Company's plans to strengthen its balance sheet and capital structure, including its plans to refinance Products Corporation's 8 5/8% Senior Subordinated Notes by October 30, 2007 prior to their maturity, and Revlon, Inc.'s plans to conduct an equity issuance in the amount of $185 million by the end of March 2006 and its plan to use the proceeds from approximately $110 million of such equity issuance to reduce Products Corporation's debt; |
| |
| (xi) | the Company's plans to launch two brand initiatives and the Company's current expectation and beliefs regarding these initiatives; |
| |
| (xii) | the Company's belief that the Almay initiative will build on its healthy beauty heritage and desire among consumers for simplicity and personalization; |
| |
| (xiii) | the Company's belief that its initiative focused on the more mature cosmetics consumer will serve an affluent and growing consumer demographic currently underserved in the market- place; |
| |
| (xiv) | the Company's current belief that the brand initiatives will have a positive effect on net sales in the second half of 2005, after giving effect to an estimated $40 million of provisions for incremental returns and allowances associated with the launch of these brand initiatives, of which approximately $32 million impacted net sales in the third quarter of 2005, with the remainder expected to impact the fourth quarter of 2005, and the Company's expectation that in connection with these brand initiatives, the accelerated amortization charges associated with certain retail display fixtures will be approximately $10 million to $15 million (of which approximately $4 million impacted SG&A in the third quarter of 2005 and approximately $10 million of which is expected to impact SG&A for the full year of 2005) and that total upfront launch and related costs of the brand initiatives in 2005 will be approximately $75 million, including provisions for the aforementioned incremental returns and allowances of approximately $40 million and the aforementioned $10 million of accelerated amortization; |
| |
| (xv) | the Company's expectation that the first quarter of 2006 will benefit from incremental initial shipments associated with the launch of these brand initiatives; |
| |
| (xvi) | the Company's expectation that the cash flow impact of the brand initiatives from its investment in permanent displays, including displays for its existing businesses and the brand initiatives, will be in the range of $75 million to $85 million during 2005 and $85 million to $95 million during 2006, returning to more normalized levels thereafter; |
| |
| (xvii) | the Company's expectation that due to the brand initiatives, and assuming they begin shipping in the fourth quarter of 2005 as planned, working capital will increase during the second half of 2005 and return to more normalized levels in relation to sales during the second half of 2006; |
| |
| (xviii) | Revlon, Inc.'s plans to issue $185 million of equity by March 31, 2006 and contribute the proceeds from approximately $110 million of such equity issuance to Products Corporation to reduce its debt, and its plans to provide the balance of the proceeds from such $185 million equity issuance to Products Corporation for general corporate purposes; |
| |
| (xix) | restructuring activities, restructuring costs, the timing of restructuring payments and annual savings and other benefits from such activities; |
| |
| (xx) | operating revenues, cash on hand, availability of borrowings under Products Corporation's 2004 Credit Agreement, the 2004 Consolidated MacAndrews & Forbes Line of Credit and other permitted lines of credit being sufficient to satisfy the Company's operating expenses in 2005, including cash requirements referred to in item (xxii) below; |
32
REVLON, INC. AND SUBSIDIARIES
| |
| (xxi) | the availability of funds from Products Corporation's 2004 Credit Agreement, the 2004 Consolidated MacAndrews & Forbes Line of Credit and other permitted lines of credit, restructuring indebtedness, selling assets or operations, capital contributions and/or loans from MacAndrews & Forbes, the Company's other affiliates and/or third parties and/or the sale of additional equity securities of Revlon, Inc. (or debt securities of Products Corporation); |
| |
| (xxii) | the Company's uses of funds, including amounts required for the payment of operating expenses, including expenses in connection with the continued implementation of, and refinement to, the Company's plan (including in connection with its brand initiatives), payments in connection with the Company's purchases of permanent wall displays, capital expenditure requirements, restructuring programs, debt service payments and costs and regularly scheduled pension and post-retirement plan contributions, and its estimates of operating expenses, working capital expenses, wall display costs, capital expenditures, cash contributions to the Company's pension plans and post-retirement benefit plans, debt service payments (including payments required under Products Corporation's debt instruments) and charges in connection with the Company's growth plan; |
| |
| (xxiii) | matters concerning the Company's market-risk sensitive instruments; |
| |
| (xxiv) | the effects of the Company's adoption of certain accounting principles; |
| |
| (xxv) | the Company's plan to efficiently manage its cash and working capital, including, among other things, by carefully managing inventory levels, centralizing purchasing to secure discounts and efficiencies in procurement, and providing additional discounts to U.S. customers for more timely payment of receivables and carefully managing accounts payable; and |
| |
| (xxvi) | the Company's belief that the remediation program that it has undertaken to remediate the material weakness that Revlon, Inc. identified in its internal control over financial reporting at the fiscal year ended December 31, 2004 was effective in eliminating such material weakness and that therefore the Company's disclosure controls and procedures are effective at September 30, 2005, including the Company's belief that its remediation program strengthened its disclosure controls and procedures and internal control process with respect to its sales return calculations. |
Statements that are not historical facts, including statements about the Company's beliefs and expectations, are forward-looking statements. Forward-looking statements can be identified by, among other things, the use of forward-looking language such as "estimates," "objectives," "visions," "projects," "forecasts," "plans," "targets," "strategies," "opportunities," "drivers," "believes," "intends," "destinations," "outlooks," "initiatives," "expects," "scheduled to," "anticipates," "seeks," "may," "will," or "should" or the negative of those terms, or other variations of those terms or comparable language, or by discussions of strategy, targets, models or intentions. Forward-looking statements speak only as of the date they are made, and except for the Company's ongoing obligations under the U.S. federal securities laws, the Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Investors are advised, however, to consult any additional disclosures the Company made in its Annual Report on Form 10-K/A for the fiscal year ended December 31, 2004 and makes in its Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, in each case filed with the Commission in 2005 (which, among other places, can be found on the Commission's website at http://www.sec.gov, as well as on the Company's website at www.revloninc.com). The information available from time to time on such websites shall not be deemed incorporated by reference into this Quarterly Report on Form 10-Q. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. In addition to factors that may be described in the Company's filings with the Commission, including this filing, the following factors, among others, could cause the Company's actual results to differ materially from those expressed in any forward-looking statements made by the Company:
33
REVLON, INC. AND SUBSIDIARIES
| |
| (i) | unanticipated circumstances or results affecting the Company's financial performance, including decreased consumer spending in response to weak economic conditions or weakness in the category, changes in consumer preferences, such as reduced consumer demand for the Company's color cosmetics and other current products, changes in consumer purchasing habits, including with respect to shopping channels, lower than expected customer acceptance or consumer acceptance of the Company's brand initiatives, decreased sales of the Company's existing products as a result of the Company's brand initiatives and changes in the competitive environment, actions by the Company's customers, such as retailer inventory management, and actions by the Company's competitors, including business combinations, technological breakthroughs, new products offerings, promotional spending and marketing and promotional successes, including increases in market share; |
| |
| (ii) | the effects of and changes in economic conditions (such as inflation, monetary conditions and foreign currency fluctuations, as well as in trade, monetary, fiscal and tax policies in international markets); political conditions (such as military actions and terrorist activities); as well as the effects of and changes in category weakness, in competitive activities, in retailer inventory management and in consumer purchasing habits, including with respect to shopping channels; |
| |
| (iii) | unanticipated costs or difficulties or delays in completing projects associated with the continued implementation of, and refinement to, the Company's plan or lower than expected revenues or inability to achieve profitability over the long term as a result of such plan, including lower than expected sales, or higher than expected costs, arising from any additional repositioning, repackaging and/or reformulating of one or more of the Company's brands or product lines and/or launching of new brands or product lines and/or further refining its approach to retail merchandising; |
| |
| (iv) | difficulties, delays or unanticipated costs in implementing the Company's plans regarding the continued growth momentum and accelerated growth stage of its plan, including difficulties, delays or unanticipated costs in taking actions to capitalize on the actions taken during the stabilization and growth phase of its plan, which could affect the Company's ability to achieve its objective of balancing top-line growth with an improved operating margin; |
| |
| (v) | difficulties, delays or unanticipated costs in connection with the Company's plans to further improve its new product development and introduction process, which could affect the Company's ability to effectively launch new and restaged products and/or reposition, repackage and/or reformulate one or more of the Company's brands or product lines and generate revenues from such sources; |
| |
| (vi) | difficulties, delays or unanticipated costs in implementing the Company's plans to continue to increase the effectiveness of its display walls; |
| |
| (vii) | difficulties, delays or unanticipated costs in implementing the Company's plans to drive efficiencies across its overall supply chain, including reducing manufacturing costs by streamlining components and sourcing strategically and rationalizing its supply chain in Europe, including unexpected difficulties, delays, unanticipated costs or disruptions in connection with its plans to move production for its European markets to the Company's Oxford, North Carolina facility and establishing alternative warehousing and distribution arrangements from third parties in the U.K.; |
| |
| (viii) | difficulties, delays or unanticipated costs in implementing the Company's plans to optimize the effectiveness of its advertising, marketing and promotions; |
| |
| (ix) | difficulties, delays or unanticipated costs in the Company continuing to train and develop its organization so that it may continue to improve its capabilities to execute the Company's strategies, while providing enhanced job satisfaction for its employees; |
34
REVLON, INC. AND SUBSIDIARIES
| |
| (x) | difficulties, delays or unanticipated costs in, or the Company's inability to consummate, transactions to strengthen its balance sheet and capital structure, including difficulties, delays or the inability of the Company to refinance certain of Products Corporation's debt, including its plans to refinance Products Corporation's 8 5/8% Senior Subordinated Notes by October 30, 2007 prior to their maturity, and Revlon, Inc.'s plans to conduct an equity issuance in the amount of $185 million by the end of March 2006, including to use the proceeds from approximately $110 million of such equity issuance to reduce Products Corporation's debt, as well as the inability to issue equity or debt securities, including Revlon, Inc. Class A Common Stock, for cash or in exchange for Products Corporation's indebtedness and difficulties, delays or the inability of the Company to consummate the remaining Debt Reduction Transactions; |
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| (xi) | difficulties, delays or unanticipated circumstances or costs associated with the Company's brand initiatives, including the Company's inability to timely implement its brand initiatives, higher than expected returns in connection with the brand initiatives, weaker than expected retail customer acceptance and/or consumer demand for the products to be launched pursuant to the brand initiatives, the possibility that the Company's product pricing strategies for the brand initiatives will not be accepted by the Company's retail customers and/or consumers or that the Company may experience decreased sales of its existing products as a result of the products launched and sold under these initiatives and the possibility that the Company's current expectations and beliefs regarding the expected timing of the brand initiatives and its estimates regarding the incremental effect that the brand initiatives would have on net sales, returns, spending, cash flow, investment in permanent displays and working capital and amortization of wall display expenses, may turn out to be incorrect, or as applicable, overestimates or underestimates; |
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| (xii) | the Almay initiative does not achieve its anticipated marketing effects and less than anticipated consumer or retail customer acceptance thereof; |
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| (xiii) | the brand initiative targeted to the more mature consumer does not achieve its anticipated marketing effects and less than anticipated consumer or retail customer acceptance thereof; |
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| (xiv) | the Company's inability to achieve the anticipated net sales potential from the two brand initiatives, including as a result of less than expected sales, higher than expected returns, consumers purchasing less of the Company's existing products, production and/or distribution difficulties, and unexpected circumstances affecting the timing thereof or other difficulties, delays or unexpected costs related thereto or unforeseen circumstances affecting the timing or levels of accelerated amortization of certain of the Company's existing wall displays; |
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| (xv) | the Company's inability to achieve the anticipated benefits from the brand initiatives in the fourth quarter of 2005 and/or the first quarter of 2006, such as due to less than expected shipments during the fourth quarter of 2005 and/or the first quarter of 2006 as a result of less than anticipated acceptance of these initiatives from the Company's retail customers and/or consumers or other difficulties, delays or unexpected costs related thereto; |
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| (xvi) | higher than anticipated costs for permanent displays or unforeseen circumstances affecting the timing or levels thereof; |
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| (xvii) | higher than anticipated working capital or unforeseen circumstances affecting the timing or levels thereof; |
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| (xviii) | difficulties, delays or increased costs associated with, or Revlon, Inc.'s inability to consummate, in whole or in part, the equity issuance of $185 million by March 31, 2006, to use the proceeds from approximately $110 million of such $185 million equity issuance to reduce Products Corporation's debt or to provide the balance of the proceeds from such $185 million equity issuance to Products Corporation, or other difficulties, delays or unexpected costs related thereto; |
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| (xix) | difficulties, delays or unanticipated costs or less than expected savings and other benefits resulting from the Company's restructuring activities; |
35
REVLON, INC. AND SUBSIDIARIES
| |
| (xx) | lower than expected operating revenues, the inability to secure capital contributions or loans from MacAndrews & Forbes, the Company's other affiliates and/or third parties; |
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| (xxi) | the unavailability of funds under Products Corporation's 2004 Credit Agreement, the 2004 Consolidated MacAndrews & Forbes Line of Credit or other permitted lines of credit; |
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| (xxii) | higher than expected operating expenses (including in connection with the brand initiatives), sales returns, working capital expenses, wall display costs, capital expenditures, restructuring costs, regularly scheduled cash pension plan contributions, post-retirement benefit plan contributions or debt service payments; |
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| (xxiii) | interest rate or foreign exchange rate changes affecting the Company and its market-risk sensitive financial instruments; |
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| (xxiv) | unanticipated effects of the Company's adoption of certain new accounting standards; |
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| (xxv) | difficulties, delays or the inability of the Company to efficiently manage its cash and working capital; and |
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| (xxvi) | unanticipated circumstances that could affect the effectiveness of the Company's disclosure controls and procedures and/or internal control over financial reporting. |
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| | This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995. |
Website Availability of Reports and Other Corporate Governance Information
The Company maintains a comprehensive corporate governance program, including Corporate Governance Guidelines for Revlon, Inc.'s Board of Directors, Revlon, Inc.'s Board Guidelines for Assessing Director Independence and charters for Revlon, Inc.'s Audit Committee, Nominating and Corporate Governance Committee and Compensation and Stock Plan Committee. Revlon, Inc. maintains a corporate investor relations website, www.revloninc.com, where stockholders and other interested persons may review, without charge, among other things, Revlon, Inc.'s corporate governance materials and certain SEC filings (such as Revlon, Inc.'s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, annual reports, Section 16 reports reflecting certain changes in the stock ownership of Revlon, Inc.'s directors and Section 16 executive officers, and certain other documents filed with the Commission), each of which are generally available on the same business day as the filing date with the SEC on the SEC's website http://www.sec.gov, as well as on the Company's website http://www.revloninc.com. In addition, under the section of the website entitled, "Corporate Governance," Revlon, Inc. posts the latest versions of its Corporate Governance Guidelines, Board Guidelines for Assessing Director Independence, charters for Revlon, Inc.'s Audit Committee, Nominating and Corporate Governance Committee and Compensation and Stock Plan Committee, as well as Revlon, Inc.'s Code of Business Conduct, which includes Revlon, Inc.'s Code of Ethics for Senior Financial Officers, each of which the Company will provide in print, without charge, upon written request to Robert K. Kretzman, Executive Vice President and Chief Legal Officer, Revlon, Inc., 237 Park Avenue, New York, NY 10017.
36
REVLON, INC. AND SUBSIDIARIES
PART II – OTHER INFORMATION
Item 6. Exhibits.
| | | | | | |
| | | |
| | | |
| *31.1 | | Certification of Jack L. Stahl, Chief Executive Officer, dated November 9, 2005, pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act. |
| *31.2 | | Certification of Thomas E. McGuire, Chief Financial Officer, dated November 9, 2005, pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act. |
32.1
(furnished
herewith) | | Certification of Jack L. Stahl, Chief Executive Officer, dated November 9, 2005, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2
(furnished
herewith) | | Certification of Thomas E. McGuire, Chief Financial Officer, dated November 9, 2005, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
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| * Filed herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: November 9, 2005
REVLON, INC.
Registrant
| | | | | | | | | | | | | | |
| By: | | /s/ Thomas E. McGuire
Thomas E. McGuire
Executive Vice President
and Chief Financial Officer | | By: | | /s/ John F. Matsen, Jr.
John F. Matsen, Jr.
Senior Vice President and
Corporate Controller |
|
37
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES![[ ]](https://capedge.com/proxy/10-Q/0000950136-05-007104/ebox.gif){kind=small}
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES