NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
1. ACCOUNTING POLICIES
Basis of Presentation
We prepare our unaudited interim consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”). We consistently applied the accounting policies described in our
2011
Annual Report on Form 10-K (“
2011
Form 10-K”) in preparing these unaudited financial statements. In our opinion, we made all adjustments of a normal recurring nature that are necessary for a fair statement of the results for the interim periods. Results for interim periods are not necessarily indicative of results for a full year. You should read these unaudited interim consolidated financial statements in conjunction with our consolidated financial statements contained in our
2011
Form 10-K. When used in these notes, the terms “Avon,” “Company,” “we” or “us” mean Avon Products, Inc.
For interim consolidated financial statement purposes, our tax provision is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. We also provide for accruals under our various employee benefit plans for each quarter based on one quarter of the estimated annual expense. We have revised some immaterial amounts in the Consolidated Statements of Cash Flows for the
nine
months ended
September 30, 2011
for comparative purposes. Specifically, we reclassified
$13.0
from Accounts payable and accrued liabilities to Acquisitions and other investing activities.
New Accounting Standards Implemented
In May 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-04,
Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.
ASU 2011-04 provides a consistent definition of fair value and ensures that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for level 3 fair value measurements. ASU 2011-04 is effective for Avon as of January 1, 2012 and did not have a significant impact on our financial statements.
In June 2011, the FASB issued ASU 2011-05,
Presentation of Comprehensive Income.
ASU 2011-05 requires entities to present items of net income and other comprehensive income either in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive, statements of net income and other comprehensive income. In addition, in December 2011, the FASB issued ASU 2011-12,
Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.
ASU 2011-12
defers the requirement to present components of reclassifications of comprehensive income on the statement of comprehensive income, with all other requirements of ASU 2011-05 unaffected. Both ASU 2011-05 and 2011-12 are effective as of January 1, 2012 for Avon and did not have a significant impact on our financial statements, other than presentation.
In September 2011, the FASB issued ASU 2011-08,
Testing Goodwill for Impairment
. ASU 2011-08 provides entities with an option to perform a qualitative assessment to determine whether further impairment testing is necessary. ASU 2011-08 is effective for annual and interim goodwill impairment tests for Avon as of January 1, 2012 and did not have a significant impact on our financial statements.
In July 2012, the FASB issued ASU 2012-02,
Testing Indefinite-Lived Intangible Assets for Impairment
. ASU 2012-02 provides entities with an option to perform a qualitative assessment to determine whether further impairment testing is necessary. ASU 2012-02 is effective for annual and interim indefinite-lived intangible assets impairment tests for Avon as of January 1, 2013 and will not have a significant impact on our financial statements.
Out-of-Period Items
We identified and recorded various out-of-period adjustments during the three and
nine
months ended
September 30, 2012
(primarily related to cost of sales and selling, general and administrative expenses, and the provision for income taxes) that related to prior years. The total out-of-period adjustments impacting earnings during the three and
nine
months ended
September 30, 2012
was approximately
$6
before tax (
$6
after tax) of a decrease to earnings and
$17
before tax (
$18
after tax) of a decrease to earnings, respectively.
During the second quarter of 2012, we recorded an out-of-period adjustment which increased earnings by approximately
$5
before tax (
$3
after tax) which related to prior years and was associated with vendor liabilities in North America. During the
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
second quarter of 2012, we recorded an out-of-period adjustment which decreased earnings by approximately
$4
before tax (
$4
after tax) which related to prior years and was associated with brochure costs in Poland. During the first quarter of 2012, we recorded an out-of-period adjustment which decreased earnings by approximately
$14
before tax (
$10
after tax) which related to 2011 and was associated with bad debt expense in our South Africa operations.
We evaluated the total out-of-period adjustments, both individually and in the aggregate, in relation to the quarterly and annual periods in which they originated and the annual period in which they were corrected, and concluded that these adjustments were not material.
During the first quarter of 2011, the Company determined that the net after tax gain on the sale of Avon Products Company Limited (“Avon Japan”), reported in our financial statements for the year ended December 31, 2010 of
$10
, should have been reported as a net after tax loss of
$3
, to correctly include all balances relating to Avon Japan that were previously included in Accumulated Other Comprehensive Loss ("AOCI"). In addition, in the first quarter of 2011 the Company released a liability relating to a previously owned health care business, which should have been released in a prior period, resulting in a
$4
increase in net income. The results of these businesses were originally reported within discontinued operations upon disposition. The net impact of these two items decreased net income for the first quarter of 2011 by
$9
. We evaluated the total out-of-period adjustments impacting the first quarter of 2011, both individually and in the aggregate, in relation to the quarterly and annual periods in which they originated and the annual period in which they were corrected, and concluded that these adjustments were not material.
2. EARNINGS PER SHARE AND SHARE REPURCHASES
We compute earnings per share ("EPS") using the two-class method, which is an earnings allocation formula that determines earnings per share for common stock and participating securities. Our participating securities are our grants of restricted stock and restricted stock units, which contain non-forfeitable rights to dividend equivalents. We compute basic EPS by dividing net income 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 period.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
(Shares in millions)
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Numerator from continuing operations
|
|
|
|
|
|
|
|
|
Income from continuing operations less amounts attributable to noncontrolling interests
|
|
$
|
31.6
|
|
|
$
|
164.2
|
|
|
$
|
119.7
|
|
|
$
|
522.6
|
|
Less: Earnings allocated to participating securities
|
|
(.8
|
)
|
|
(1.4
|
)
|
|
(2.7
|
)
|
|
(4.4
|
)
|
Income from continuing operations allocated to common shareholders
|
|
30.8
|
|
|
162.8
|
|
|
117.0
|
|
|
518.2
|
|
Numerator from discontinued operations
|
|
|
|
|
|
|
|
|
Loss from discontinued operations plus/less amounts attributable to noncontrolling interests
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(8.6
|
)
|
Less: Earnings allocated to participating securities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Loss allocated to common shareholders
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8.6
|
)
|
Numerator attributable to Avon
|
|
|
|
|
|
|
|
|
Income attributable to Avon less amounts attributable to noncontrolling interests
|
|
$
|
31.6
|
|
|
$
|
164.2
|
|
|
$
|
119.7
|
|
|
$
|
514.0
|
|
Less: Earnings allocated to participating securities
|
|
(.8
|
)
|
|
(1.4
|
)
|
|
(2.7
|
)
|
|
(4.4
|
)
|
Income allocated to common shareholders
|
|
30.8
|
|
|
162.8
|
|
|
117.0
|
|
|
509.6
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic EPS weighted-average shares outstanding
|
|
432.1
|
|
|
430.7
|
|
|
431.8
|
|
|
430.3
|
|
Diluted effect of assumed conversion of stock options
|
|
.4
|
|
|
1.5
|
|
|
.7
|
|
|
1.8
|
|
Diluted EPS adjusted weighted-average shares outstanding
|
|
432.5
|
|
|
432.2
|
|
|
432.5
|
|
|
432.1
|
|
Earnings per Common Share from continuing operations:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.07
|
|
|
$
|
0.38
|
|
|
$
|
0.27
|
|
|
$
|
1.20
|
|
Diluted
|
|
$
|
0.07
|
|
|
$
|
0.38
|
|
|
$
|
0.27
|
|
|
$
|
1.20
|
|
Loss per Common Share from discontinued operations:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.02
|
)
|
Diluted
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.02
|
)
|
Earnings per Common Share attributable to Avon:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.07
|
|
|
$
|
0.38
|
|
|
$
|
0.27
|
|
|
$
|
1.18
|
|
Diluted
|
|
$
|
0.07
|
|
|
$
|
0.38
|
|
|
$
|
0.27
|
|
|
$
|
1.18
|
|
At
September 30, 2012
and
2011
, we did not include stock options to purchase
22.1 million
shares and
19.3 million
shares of Avon common stock, respectively, in the calculations of diluted EPS because the exercise prices of those options were greater than the average market price, and therefore, their inclusion would have been anti-dilutive.
We purchased approximately
.4 million
shares of Avon common stock for
$8.5
during the first
nine
months of
2012
, as compared to approximately
.3 million
shares of Avon common stock for
$6.8
during the first
nine
months of
2011
through acquisition of stock from employees in connection with tax payments upon vesting of restricted stock units and under our previously announced share repurchase program.
3. INVENTORIES
|
|
|
|
|
|
|
|
|
|
Components of Inventories
|
|
September 30, 2012
|
|
December 31, 2011
|
Raw materials
|
|
$
|
438.6
|
|
|
$
|
361.7
|
|
Finished goods
|
|
864.1
|
|
|
799.6
|
|
Total
|
|
$
|
1,302.7
|
|
|
$
|
1,161.3
|
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
4. EMPLOYEE BENEFIT PLANS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Pension Benefits
|
|
|
|
|
Net Periodic Benefit Costs
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Postretirement Benefits
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Service cost
|
|
$
|
3.8
|
|
|
$
|
3.1
|
|
|
$
|
4.5
|
|
|
$
|
3.6
|
|
|
$
|
.5
|
|
|
$
|
.5
|
|
Interest cost
|
|
7.4
|
|
|
8.2
|
|
|
10.0
|
|
|
9.9
|
|
|
1.4
|
|
|
1.5
|
|
Expected return on plan assets
|
|
(9.0
|
)
|
|
(9.0
|
)
|
|
(9.6
|
)
|
|
(10.5
|
)
|
|
—
|
|
|
(.6
|
)
|
Amortization of prior service credit
|
|
(.1
|
)
|
|
—
|
|
|
(.3
|
)
|
|
(.5
|
)
|
|
(3.3
|
)
|
|
(4.0
|
)
|
Amortization of transition asset
|
|
—
|
|
|
—
|
|
|
—
|
|
|
.1
|
|
|
—
|
|
|
—
|
|
Amortization of net actuarial losses
|
|
10.9
|
|
|
10.8
|
|
|
4.4
|
|
|
3.2
|
|
|
1.0
|
|
|
.7
|
|
Settlements/curtailments
|
|
—
|
|
|
—
|
|
|
(.7
|
)
|
|
—
|
|
|
—
|
|
|
|
|
Net periodic benefit costs
|
|
$
|
13.0
|
|
|
$
|
13.1
|
|
|
$
|
8.3
|
|
|
$
|
5.8
|
|
|
$
|
(.4
|
)
|
|
$
|
(1.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
Pension Benefits
|
|
|
|
|
Net Periodic Benefit Costs
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Postretirement Benefits
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Service cost
|
|
$
|
11.3
|
|
|
$
|
9.7
|
|
|
$
|
13.5
|
|
|
$
|
11.9
|
|
|
$
|
1.5
|
|
|
$
|
1.5
|
|
Interest cost
|
|
22.2
|
|
|
24.4
|
|
|
29.5
|
|
|
30.3
|
|
|
4.3
|
|
|
4.9
|
|
Expected return on plan assets
|
|
(27.0
|
)
|
|
(27.2
|
)
|
|
(29.2
|
)
|
|
(31.3
|
)
|
|
—
|
|
|
(1.6
|
)
|
Amortization of prior service credit
|
|
(.2
|
)
|
|
(.2
|
)
|
|
(1.1
|
)
|
|
(1.1
|
)
|
|
(9.9
|
)
|
|
(12.0
|
)
|
Amortization of transition asset
|
|
—
|
|
|
—
|
|
|
—
|
|
|
.1
|
|
|
—
|
|
|
—
|
|
Amortization of net actuarial losses
|
|
32.8
|
|
|
34.6
|
|
|
13.2
|
|
|
10.3
|
|
|
3.0
|
|
|
2.5
|
|
Settlements/curtailments
|
|
—
|
|
|
—
|
|
|
(.7
|
)
|
|
—
|
|
|
(1.0
|
)
|
|
—
|
|
Net periodic benefit costs
|
|
$
|
39.1
|
|
|
$
|
41.3
|
|
|
$
|
25.2
|
|
|
$
|
20.2
|
|
|
$
|
(2.1
|
)
|
|
$
|
(4.7
|
)
|
We expect to contribute approximately
$50
to
$55
and
$40
to
$45
to our U.S. and non-U.S. pension and postretirement plans, respectively, for the full year of
2012
. As of
September 30, 2012
, we made approximately
$47
and
$27
of contributions to the U.S. and non-U.S pension and postretirement plans, respectively. We anticipate contributing approximately
$3
to
$8
and
$13
to
$18
to fund our U.S. and non-U.S. pension and postretirement plans, respectively, during the remainder of
2012
. Our funding requirements may be impacted by regulations or interpretations thereof. In addition, during the second quarter of 2012, approximately
$40
of assets previously designated and intended to be used solely for postretirements benefits were transferred to a trust that funds both active and retiree benefits. At September 30, 2012, the balance in this Healthcare trust was
$34.1
.
5. CONTINGENCIES
FCPA Investigations
As previously reported, we have engaged outside counsel to conduct an internal investigation and compliance reviews focused on compliance with the Foreign Corrupt Practices Act (“FCPA”) and related U.S. and foreign laws in China and additional countries. The internal investigation, which is being conducted under the oversight of our Audit Committee, began in June 2008.
As previously reported in July 2009, in connection with the internal investigation, we commenced compliance reviews regarding the FCPA and related U.S. and foreign laws in additional countries in order to evaluate our compliance efforts. We are conducting these compliance reviews in a number of countries selected to represent each of the Company's international geographic segments. The internal investigation and compliance reviews are focused on reviewing certain expenses and books and records processes, including, but not limited to, travel, entertainment, gifts, use of third-party vendors and consultants and related due diligence, joint ventures and acquisitions, and payments to third-party agents and others, in connection with our business dealings, directly or indirectly, with foreign governments and their employees. The internal investigation and
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
compliance reviews of these matters are ongoing. In connection with the internal investigation and compliance reviews, certain personnel actions, including termination of employment of certain senior members of management, have been taken, and additional personnel actions may be taken in the future. In connection with the internal investigation and compliance reviews, we continue to enhance our ethics and compliance program, including our policies and procedures, FCPA compliance-related training, FCPA third-party due diligence program and other compliance-related resources.
As previously reported in October 2008, we voluntarily contacted the United States Securities and Exchange Commission ("SEC") and the United States Department of Justice ("DOJ") to advise both agencies of our internal investigation.We have cooperated and continue to cooperate with investigations of these matters by the SEC and the DOJ. We have, among other things, signed tolling agreements, responded to inquiries, translated and produced documents, assisted with interviews, and provided information on our internal investigation and compliance reviews, personnel actions taken and steps taken to enhance our ethics and compliance program. As previously reported in August 2012, we are in discussions with the SEC and the DOJ regarding resolving the government investigations. These discussions are ongoing. There can be no assurance that a settlement with the SEC and the DOJ will be reached or, if a settlement is reached, the timing of any such settlement or the terms of any such settlement. We expect any such settlement may include civil and/or criminal fines and penalties as well as non-monetary remedies, such as oversight requirements and additional remediation and compliance requirements. We may be required to incur significant future costs to comply with the non-monetary terms of any settlement with the SEC and the DOJ. Under certain circumstances, we may also be required to advance significant professional fees and expenses to certain current and former Company employees in connection with these matters. Until any settlement or other resolution of these matters, we expect to continue to incur costs, primarily professional fees and expenses, which may be significant, in connection with the government investigations.
At this point we are unable to predict the developments in, outcome of, and economic and other consequences of the government investigations or their impact on our earnings, cash flow, liquidity, financial condition and ongoing business. However, based on our most recent communications with the DOJ and the SEC, the Company believes that it is probable that the Company will incur a loss related to the government investigations. We are unable to reasonably estimate the amount or range of such loss; however such loss could be material.
SEC Investigation related to Regulation FD
In October 2011, the Company received a subpoena from the SEC requesting documents and information in connection with a Regulation FD investigation of the Company's contacts and communications with certain financial analysts and other representatives of the financial community during 2010 and 2011. The Company was also advised that a formal order of investigation was issued by the SEC relating to the Regulation FD matters that are referenced in the subpoena. On September 11, 2012, the Company was advised by the Staff of the SEC Division of Enforcement that the Staff does not intend to recommend any enforcement action by the SEC against the Company in connection with the Regulation FD investigation.
Litigation Matters
In July and August 2010, derivative actions were filed in state court against certain present or former officers and/or directors of the Company (
Carol J. Parker, derivatively on behalf of Avon Products, Inc. v. W. Don Cornwell, et al. and Avon Products, Inc. as nominal defendant
(filed in the New York Supreme Court, Nassau County, Index No. 600570/2010);
Lynne Schwartz, derivatively on behalf of Avon Products, Inc. v. Andrea Jung, et al. and Avon Products, Inc. as nominal defendant
(filed in the New York Supreme Court, New York County, Index No. 651304/2010)). These actions allege breach of fiduciary duty, abuse of control, waste of corporate assets, and, in one complaint, unjust enrichment, relating to the Company's compliance with the FCPA, including the adequacy of the Company's internal controls. The relief sought against the individual defendants in one or both of these derivative complaints includes certain declaratory and equitable relief, restitution, damages, exemplary damages and interest. The Company is a nominal defendant, and no relief is sought against the Company itself. In the
Parker
case, plaintiff has agreed that defendants' time to file an answer, motion to dismiss or other response is adjourned until plaintiff files an amended pleading. In
Schwartz
, the parties have agreed to defer the filing of an amended complaint and the defendants' response thereto until the parties submit a further stipulation addressing the scheduling of proceedings. On May 14, 2012, County of York Retirement Plan (“County of York”) - which had been a plaintiff in a previously filed but now discontinued derivative action - filed a complaint against the Company seeking enforcement of its demands for the inspection of certain of the Company's books and records (
County of York Retirement Plan v. Avon Products, Inc.,
New York Supreme Court, New York County, Index No. 651673/2012). On July 10, 2012, the Company moved to dismiss County of York's complaint. We are unable to predict the outcome of these matters.
On July 6, 2011, a purported shareholder's class action complaint (
City of Brockton Retirement System v. Avon Products, Inc., et al.
, No. 11-CIV-4665) was filed in the United States District Court for the Southern District of New York against certain
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
present or former officers and/or directors of the Company. On September 29, 2011, the Court appointed LBBW Asset Management Investmentgesellschaft mbH and SGSS Deutschland Kapitalanlagegesellschaft mbH as lead plaintiffs and Motley Rice LLC as lead counsel. Lead plaintiffs have filed an amended complaint on behalf of a purported class consisting of all persons or entities who purchased or otherwise acquired shares of Avon's common stock from July 31, 2006 through and including October 26, 2011. The amended complaint names the Company and two individual defendants and asserts violations of Sections 10(b) and 20(a) of the Exchange Act based on allegedly false or misleading statements and omissions with respect to, among other things, the Company's compliance with the FCPA, including the adequacy of the Company's internal controls. Plaintiffs seek compensatory damages as well as injunctive relief. Defendants moved to dismiss the amended complaint on June 14, 2012. In light of, among other things, the early stage of the litigation, we are unable to predict the outcome of this matter. However, it is reasonably possible that we may incur a loss in connection with this matter. We are unable to reasonably estimate the amount or range of such reasonably possible loss.
In April 2012, several purported shareholders' actions were filed against the Company and certain present or former directors of the Company in New York Supreme Court, New York County (
Pritika v. Jung, et al
., Index No. 651072/2012;
Feinman v. Avon Products, Inc., et al.
, Index No. 651087/2012;
Gaines v. Jung, et al
., Index No. 651097/2012;
Schwartz v. Avon Products, Inc., et al.
, Index No. 651152/2012;
Robaczynki, individually and on behalf of all others similarly situated and derivatively on behalf of Avon Products, Inc. v. Jung, et al.,
Index No. 651176/2012). On April 26, 2012, the actions were consolidated in New York Supreme Court, New York County (
In re Avon Products, Inc. Shareholder Litigation
, Consolidated Index No. 651087/2012E). An amended consolidated complaint was filed on May 18, 2012. The amended consolidated complaint asserts a derivative claim against the individual defendants based on alleged breaches of fiduciary duties in connection with indications of interest by Coty, Inc. in acquiring the Company.The Company is named as a nominal defendant on the purported derivative claim, and no relief appears to be sought against the Company on that claim. The amended consolidated complaint also asserts a direct claim on behalf of a class of shareholders against the individual defendants based on alleged breaches of such fiduciary duties. Plaintiffs seek compensatory damages as well as injunctive relief. On June 27, 2012, defendants moved to dismiss the consolidated action. In light of, among other things, the early stage of the litigation, we are unable to predict the outcome of the matter. However, it is reasonably possible that we may incur a loss in connection with this matter. We are unable to reasonably estimate the amount or range of such reasonably possible loss.
Under some circumstances, any losses incurred in connection with adverse outcomes in the litigation matters described above could be material.
Brazilian Tax Matters
In 2002, our Brazilian subsidiary received an excise tax assessment from the Brazilian tax authorities for alleged tax deficiencies during the years 1997-1998 asserting that the establishment in 1995 of separate manufacturing and distribution companies in that country was done without a valid business purpose and that Avon Brazil did not observe minimum pricing rules to define the taxable basis of excise tax. The structure adopted in 1995 is comparable to that used by many other companies in Brazil. We believe that our Brazilian corporate structure is appropriate, both operationally and legally, and that the 2002 assessment is unfounded. This matter is being vigorously contested. In October 2010, the 2002 assessment was upheld at the first administrative level at an amount reduced to $
32
from $
75
, including penalties and accruing interest, at the exchange rate on
September 30, 2012
. We have appealed this decision to the second administrative level. In the event that the 2002 assessment is upheld at the third and last administrative level, it may be necessary for us to provide security to pursue further appeals, which, depending on the circumstances, may result in a charge to income.
It is not possible to reasonably estimate the amount or range of potential loss that we could incur related to the 2002 assessment or any additional assessments that may be issued for subsequent periods. However, other similar excise tax assessments involving different periods have been canceled and officially closed in our favor by the second administrative level, and management believes that the likelihood that the 2002 assessment will be upheld is remote.
Other Matters
Various other lawsuits and claims, arising in the ordinary course of business or related to businesses previously sold, are pending or threatened against Avon. In management's opinion, based on its review of the information available at this time, the total cost of resolving such other contingencies at
September 30, 2012
, 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
(Dollars in millions, except per share data)
6. SEGMENT INFORMATION
In conjunction with organizational changes, effective in the second quarter of 2012, the results of Central and Eastern Europe and Western Europe, Middle East & Africa were managed as a single operating segment. Accordingly, Europe, Middle East & Africa amounts include the results of Central and Eastern Europe and Western Europe, Middle East & Africa for all periods presented.
In conjunction with organizational changes, effective in the second quarter of 2012, the Dominican Republic was included in Latin America whereas in prior periods it had been included in North America. The impact was not material to either segment. Accordingly, the Dominican Republic is included in Latin America and excluded from North America for all periods presented.
Summarized financial information concerning our reportable segments was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2012
|
|
2011
|
|
Revenue
|
|
Operating
Profit (Loss)
|
|
Revenue
|
|
Operating
Profit (Loss)
|
Latin America
|
$
|
1,270.9
|
|
|
$
|
142.2
|
|
|
$
|
1,350.6
|
|
|
$
|
168.4
|
|
Europe, Middle East & Africa
|
620.7
|
|
|
53.6
|
|
|
695.5
|
|
|
105.8
|
|
North America
|
443.6
|
|
|
(13.4
|
)
|
|
482.5
|
|
|
4.2
|
|
Asia Pacific
|
215.7
|
|
|
(30.2
|
)
|
|
233.8
|
|
|
20.8
|
|
Total from operations
|
$
|
2,550.9
|
|
|
$
|
152.2
|
|
|
$
|
2,762.4
|
|
|
$
|
299.2
|
|
Global and other
|
—
|
|
|
(46.2
|
)
|
|
—
|
|
|
(20.6
|
)
|
Total
|
$
|
2,550.9
|
|
|
$
|
106.0
|
|
|
$
|
2,762.4
|
|
|
$
|
278.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2012
|
|
2011
|
|
Revenue
|
|
Operating
Profit (Loss)
|
|
Revenue
|
|
Operating
Profit (Loss)
|
Latin America
|
$
|
3,663.2
|
|
|
$
|
307.9
|
|
|
$
|
3,853.8
|
|
|
$
|
505.6
|
|
Europe, Middle East & Africa
|
2,008.4
|
|
|
181.4
|
|
|
2,227.0
|
|
|
341.8
|
|
North America
|
1,390.6
|
|
|
(13.5
|
)
|
|
1,479.6
|
|
|
53.7
|
|
Asia Pacific
|
655.8
|
|
|
(3.7
|
)
|
|
687.5
|
|
|
57.3
|
|
Total from operations
|
$
|
7,718.0
|
|
|
$
|
472.1
|
|
|
$
|
8,247.9
|
|
|
$
|
958.4
|
|
Global and other
|
—
|
|
|
(168.0
|
)
|
|
—
|
|
|
(116.7
|
)
|
Total
|
$
|
7,718.0
|
|
|
$
|
304.1
|
|
|
$
|
8,247.9
|
|
|
$
|
841.7
|
|
Our consolidated net sales by classes of principal products were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Beauty
(1)
|
$
|
1,820.4
|
|
|
$
|
2,006.8
|
|
|
$
|
5,533.5
|
|
|
$
|
5,920.9
|
|
Fashion
(2)
|
443.7
|
|
|
454.6
|
|
|
1,353.4
|
|
|
1,453.7
|
|
Home
(3)
|
245.3
|
|
|
245.3
|
|
|
703.5
|
|
|
739.5
|
|
Net sales
|
$
|
2,509.4
|
|
|
$
|
2,706.7
|
|
|
$
|
7,590.4
|
|
|
$
|
8,114.1
|
|
Other revenue
(4)
|
41.5
|
|
|
55.7
|
|
|
127.6
|
|
|
133.8
|
|
Total revenue
|
$
|
2,550.9
|
|
|
$
|
2,762.4
|
|
|
$
|
7,718.0
|
|
|
$
|
8,247.9
|
|
|
|
(1)
|
Beauty includes color cosmetics, fragrances, skincare and personal care.
|
|
|
(2)
|
Fashion includes jewelry, watches, apparel, footwear, accessories and children’s products.
|
|
|
(3)
|
Home includes gift and decorative products, housewares, entertainment and leisure products, children's products and nutritional products.
|
|
|
(4)
|
Other revenue primarily includes shipping and handling and order processing fees billed to Representatives.
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
7. SUPPLEMENTAL BALANCE SHEET INFORMATION
At
September 30, 2012
and
December 31, 2011
, prepaid expenses and other included the following:
|
|
|
|
|
|
|
|
|
|
Components of Prepaid Expenses and Other
|
|
September 30, 2012
|
|
December 31, 2011
|
Deferred tax assets
|
|
$
|
312.4
|
|
|
$
|
319.0
|
|
Prepaid taxes and tax refunds receivable
|
|
139.1
|
|
|
192.0
|
|
Prepaid brochure costs, paper, and other literature
|
|
119.9
|
|
|
126.9
|
|
Receivables other than trade
|
|
117.1
|
|
|
142.8
|
|
Healthcare trust assets (Note 4)
|
|
34.1
|
|
|
—
|
|
Short-term investments
|
|
17.8
|
|
|
18.0
|
|
Interest-rate swap agreements (Notes 10 and 11)
|
|
7.1
|
|
|
18.8
|
|
Other
|
|
109.1
|
|
|
113.4
|
|
Prepaid expenses and other
|
|
$
|
856.6
|
|
|
$
|
930.9
|
|
At
September 30, 2012
and
December 31, 2011
, other assets included the following:
|
|
|
|
|
|
|
|
|
|
Components of Other Assets
|
|
September 30, 2012
|
|
December 31, 2011
|
Deferred tax assets
|
|
$
|
843.5
|
|
|
$
|
759.5
|
|
Deferred software
|
|
216.5
|
|
|
176.7
|
|
Long-term receivables
|
|
180.1
|
|
|
138.3
|
|
Interest-rate swap agreements (Notes 10 and 11)
|
|
103.7
|
|
|
153.6
|
|
Investments
|
|
43.9
|
|
|
44.4
|
|
Other
|
|
37.2
|
|
|
39.2
|
|
Other assets
|
|
$
|
1,424.9
|
|
|
$
|
1,311.7
|
|
8. RESTRUCTURING INITIATIVES
2005 and 2009 Restructuring Programs
We launched restructuring programs in late 2005 (the "2005 Restructuring Program") and in February 2009 (the "2009 Restructuring Program"). The 2005 and 2009 Restructuring Programs initiatives include:
|
|
•
|
enhancement of organizational effectiveness, including efforts to flatten the organization and bring senior management closer to consumers through a substantial organizational downsizing;
|
|
|
•
|
implementation of a global manufacturing strategy through facilities realignment;
|
|
|
•
|
implementation of additional supply chain efficiencies in distribution;
|
|
|
•
|
restructuring our global supply chain operations;
|
|
|
•
|
realigning certain local business support functions to a more regional base to drive increased efficiencies; and
|
|
|
•
|
streamlining of transactional and other services through outsourcing, moves to lower-cost countries, and reorganizing certain other functions.
|
We have approved and announced all of the initiatives that are part of our 2005 and 2009 Restructuring Programs. We believe that we have substantially realized the anticipated savings associated with our 2005 Restructuring Program, and we are on track to achieving our anticipated savings associated with our 2009 Restructuring Program. The savings achieved from these Restructuring Programs have been offset by investments in Representative Value Proposition and advertising. Since 2005, we have recorded total costs to implement restructuring initiatives of
$526.9
for actions associated with the 2005 Restructuring Program, but we expect our total costs when fully implemented to be approximately
$525
when considering historical and future costs along with expected gains from sales of properties. With regards to the 2009 Restructuring Program, we have
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
recorded total costs to implement restructuring initiatives of
$258.9
since 2009 and expect total costs to implement to reach approximately
$265
.
Restructuring Charges – Three and Nine Months Ended September 30, 2012
During the three and
nine
months ended
September 30, 2012
, we recorded a net benefit of
$.6
and total costs to implement of
$3.9
, respectively, associated with previously approved initiatives that are part of our 2005 and 2009 Restructuring Programs, and the costs consisted of the following:
|
|
•
|
net benefits of
$1.7
and
$7.5
, respectively, as a result of adjustments to the reserve, partially offset by employee-related costs;
|
|
|
•
|
implementation costs of
$1.0
and
$8.2
, respectively, for professional service fees, primarily associated with our initiatives to outsource certain finance processes and realign certain distribution operations;
|
|
|
•
|
accelerated depreciation of
$.8
and
$3.9
, respectively, associated with our initiatives to realign certain distribution operations; and
|
|
|
•
|
a gain of
$.7
due to the sale of machinery and equipment in Germany in the third quarter of 2012.
|
For the three months ended
September 30, 2012
, net benefits of
$.4
were recorded in selling, general, and administrative expenses and
$.2
were recorded in cost of sales. For the
nine
months ended
September 30, 2012
, total costs to implement of
$.7
were recorded in selling, general, and administrative expenses and
$3.2
were recorded in cost of sales.
Restructuring Charges – Three and Nine Months Ended September 30, 2011
During the three and
nine
months ended
September 30, 2011
, we recorded total costs to implement of
$4.6
and
$31.3
, respectively, associated with previously approved initiatives that are part of our 2005 and 2009 Restructuring Programs, and the costs consisted of the following:
|
|
•
|
net benefit of
$4.6
and charge of
$3.8
, respectively, primarily for adjustments to the reserves for employee-related costs;
|
|
|
•
|
implementation costs of
$5.5
and
$23.7
, respectively, for professional service fees, primarily associated with our initiatives to outsource certain finance processes and realign certain distribution operations;
|
|
|
•
|
accelerated depreciation of
$3.7
and
$9.3
respectively, associated with our initiatives to realign certain distribution operations; and
|
|
|
•
|
a gain of
$5.5
due to the sale of land and building in Germany in the first quarter of 2011.
|
Of the total costs to implement,
$1.1
and
$23.1
was recorded in selling, general and administrative expenses, respectively; and
$3.5
and
$8.2
was recorded in cost of sales, respectively, for the three and
nine
months ended
September 30, 2011
.
The liability balances, which primarily consist of employee-related costs, for the initiatives under the 2005 and 2009 Restructuring Programs are shown below:
|
|
|
|
|
|
|
|
Total
|
Balance December 31, 2011
|
|
$
|
73.9
|
|
2012 Charges
|
|
1.8
|
|
Adjustments
|
|
(9.3
|
)
|
Cash payments
|
|
(34.0
|
)
|
Non-cash write-offs
|
|
1.0
|
|
Foreign exchange
|
|
(.7
|
)
|
Balance at September 30, 2012
|
|
$
|
32.7
|
|
The following table presents the restructuring charges incurred to date, net of adjustments, under our 2005 and 2009 Restructuring Programs, along with the charges expected to be incurred under the plan:
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee-
Related
Costs
|
|
Asset
Write-offs
|
|
Inventory
Write-offs
|
|
Currency
Translation
Adjustment
Write-offs
|
|
Contract
Terminations/
Other
|
|
Total
|
Charges incurred to date
|
$
|
487.5
|
|
|
$
|
10.8
|
|
|
$
|
7.2
|
|
|
$
|
11.6
|
|
|
$
|
21.2
|
|
|
$
|
538.3
|
|
Charges to be incurred on approved initiatives
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
.1
|
|
|
.1
|
|
Total expected charges on approved initiatives
|
$
|
487.5
|
|
|
$
|
10.8
|
|
|
$
|
7.2
|
|
|
$
|
11.6
|
|
|
$
|
21.3
|
|
|
$
|
538.4
|
|
The charges, net of adjustments, of initiatives under the 2005 and 2009 Restructuring Programs by reportable business segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Latin
America
|
|
North
America
|
|
Europe, Middle East & Africa
|
|
Asia
Pacific
|
|
Corporate
|
|
Total
|
2005
|
$
|
3.5
|
|
|
$
|
6.9
|
|
|
$
|
12.7
|
|
|
$
|
22.4
|
|
|
$
|
6.1
|
|
|
$
|
51.6
|
|
2006
|
34.6
|
|
|
61.8
|
|
|
52.0
|
|
|
14.2
|
|
|
29.5
|
|
|
192.1
|
|
2007
|
14.9
|
|
|
7.0
|
|
|
69.8
|
|
|
4.9
|
|
|
12.7
|
|
|
109.3
|
|
2008
|
1.9
|
|
|
(1.1
|
)
|
|
20.7
|
|
|
(.7
|
)
|
|
(3.0
|
)
|
|
17.8
|
|
2009
|
19.2
|
|
|
26.7
|
|
|
52.5
|
|
|
19.9
|
|
|
12.0
|
|
|
130.3
|
|
2010
|
13.6
|
|
|
17.8
|
|
|
(.8
|
)
|
|
(.3
|
)
|
|
11.0
|
|
|
41.3
|
|
2011
|
2.1
|
|
|
(1.1
|
)
|
|
1.9
|
|
|
(.3
|
)
|
|
.8
|
|
|
3.4
|
|
First Quarter 2012
|
.1
|
|
|
(.9
|
)
|
|
(.3
|
)
|
|
(.1
|
)
|
|
.1
|
|
|
(1.1
|
)
|
Second Quarter 2012
|
(3.6
|
)
|
|
(.8
|
)
|
|
(.3
|
)
|
|
.2
|
|
|
(.2
|
)
|
|
(4.7
|
)
|
Third Quarter 2012
|
(.8
|
)
|
|
.1
|
|
|
.1
|
|
|
—
|
|
|
(1.1
|
)
|
|
(1.7
|
)
|
Charges recorded to date
|
$
|
85.5
|
|
|
$
|
116.4
|
|
|
$
|
208.3
|
|
|
$
|
60.2
|
|
|
$
|
67.9
|
|
|
$
|
538.3
|
|
Charges to be incurred on approved initiatives
|
—
|
|
|
.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
.1
|
|
Total expected charges on approved initiatives
|
$
|
85.5
|
|
|
$
|
116.5
|
|
|
$
|
208.3
|
|
|
$
|
60.2
|
|
|
$
|
67.9
|
|
|
$
|
538.4
|
|
As noted previously, we expect to record total costs to implement of approximately
$525
before taxes for all restructuring initiatives under the 2005 Restructuring Program and approximately
$265
before taxes for all restructuring initiatives under the 2009 Restructuring Program, in each case including restructuring charges and other costs to implement. The amounts shown in the tables above as charges recorded to date relate to initiatives that have been approved and recorded in the 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. In addition to the charges included in the tables above, we have incurred and will incur other costs to implement restructuring initiatives such as other professional services and accelerated depreciation. The future costs are expected to be more than offset by gains on the sales of properties exited due to restructuring initiatives.
Additional Restructuring Charges
In an effort to improve operating performance, we identified certain actions in 2012 that we believe will enhance our operating model, reduce costs, and improve efficiencies. In addition, management approved the relocation of our corporate headquarters in New York City. As a result of the analysis and the actions taken, during the three and
nine
months ended
September 30, 2012
, we recorded total costs to implement these various restructuring initiatives of
$2.2
and
$63.2
, respectively, associated with approved initiatives, and the costs consisted of the following:
|
|
•
|
net charges of
$.2
and
$56.2
, respectively, primarily for employee-related costs;
|
|
|
•
|
implementation costs of
$.4
and
$4.3
, respectively, for professional service fees; and
|
|
|
•
|
accelerated depreciation of
$1.6
and
$2.7
, respectively, associated with the relocation of our corporate headquarters.
|
As a result of the decision to relocate our corporate headquarters, we expect to incur a charge in the range of
$10
-
$20
, dependent on market estimates of sublease income, in the fourth quarter of 2012 when the relocation is complete.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
Total costs to implement were recorded in selling, general and administrative expenses for the three and
nine
months ended
September 30, 2012
. Cash payments associated with these charges are expected to be made during 2012 and 2013.
The liability balance for these as of
September 30, 2012
is as follows:
|
|
|
|
|
|
|
|
Employee-
Related
Costs
|
2012 Charges
|
|
$
|
56.2
|
|
Cash payments
|
|
(23.1
|
)
|
Non-cash write-offs
|
|
(.2
|
)
|
Foreign exchange
|
|
(.2
|
)
|
Balance at September 30, 2012
|
|
$
|
32.7
|
|
The charges under the additional restructuring initiatives by reportable business segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Latin America
|
|
North America
|
|
Europe, Middle East & Africa
|
|
Asia Pacific
|
|
Corporate
|
|
Total
|
First Quarter 2012
|
|
$
|
4.6
|
|
|
$
|
.8
|
|
|
$
|
3.1
|
|
|
$
|
.7
|
|
|
$
|
9.6
|
|
|
$
|
18.8
|
|
Second Quarter 2012
|
|
10.7
|
|
|
3.9
|
|
|
7.5
|
|
|
4.0
|
|
|
11.1
|
|
|
37.2
|
|
Third Quarter 2012
|
|
$
|
.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
.3
|
|
|
$
|
(.2
|
)
|
|
$
|
.2
|
|
Charges recorded to date
|
|
$
|
15.4
|
|
|
$
|
4.7
|
|
|
$
|
10.6
|
|
|
$
|
5.0
|
|
|
$
|
20.5
|
|
|
$
|
56.2
|
|
9. GOODWILL AND INTANGIBLE ASSETS
Based on the continued decline in revenue performance in China during the third quarter of 2012 and a corresponding lowering of our long-term growth estimates in China, we completed an interim impairment assessment of the fair value of goodwill related to our operations in China. The changes to our long-term growth estimates were based on the current state of our China business, which is predominantly retail at this time. We are still analyzing our long-term strategic plan for China and any changes to our long-term strategic plan may impact our expectations of future financial performance. Based upon this interim analysis, we determined that the goodwill related to our operations in China was impaired. Specifically, the results of our interim impairment test indicated the estimated fair value of our China reporting unit was less than its respective carrying amount. The test to evaluate goodwill for impairment is a two-step process. In the first step, we compare the fair value of a reporting unit to its carrying value. If the fair value of a reporting unit is less than its carrying value, we perform a second step to determine the implied fair value of the reporting unit's goodwill. The second step of the impairment analysis requires a valuation of a reporting unit's tangible and intangible assets and liabilities in a manner similar to the allocation of the purchase price in a business combination. If the resulting implied fair value of the reporting unit's goodwill is less than its carrying value, that difference represents an impairment. As a result of our impairment testing, we recorded a non-cash impairment charge of $
44
(
$44
after tax) to reduce the carrying amount of goodwill for China to its estimated fair value. Following the impairment charge, the carrying value of the China goodwill was approximately $
37
.
The impairment analysis performed for goodwill requires several estimates in computing the estimated fair value of a reporting unit. We 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 this business, and is most consistent with the approach a market place participant would use. The estimation of fair value utilizing a DCF approach includes numerous uncertainties which require our 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, among other factors. Key assumptions used in measuring the fair value of our China reporting unit included the discount rate (based on the weighted-average cost of capital) and revenue growth. A further decline in China expected future cash flows and growth rates or a change in the risk-adjusted discount rate used to determine fair value expected future cash flows may result in an additional impairment charge for the goodwill in future periods.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
Latin
America
|
|
Europe, Middle East & Africa
|
|
Asia
Pacific
|
|
Total
|
Gross balance at December 31, 2011
|
$
|
314.7
|
|
|
$
|
111.8
|
|
|
$
|
160.8
|
|
|
$
|
83.8
|
|
|
$
|
671.1
|
|
Accumulated impairments
|
(198.0
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(198.0
|
)
|
Net balance at December 31, 2011
|
$
|
116.7
|
|
|
$
|
111.8
|
|
|
$
|
160.8
|
|
|
$
|
83.8
|
|
|
$
|
473.1
|
|
|
|
|
|
|
|
|
|
|
|
Changes during the period ended September 30, 2012:
|
|
|
|
|
|
|
|
|
|
Impairment
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(44.0
|
)
|
|
$
|
(44.0
|
)
|
Foreign exchange
|
—
|
|
|
8.8
|
|
|
6.0
|
|
|
.1
|
|
|
14.9
|
|
Adjustments
|
—
|
|
|
—
|
|
|
(.2
|
)
|
|
—
|
|
|
(.2
|
)
|
|
|
|
|
|
|
|
|
|
|
Gross balance at September 30, 2012
|
$
|
314.7
|
|
|
$
|
120.6
|
|
|
$
|
166.6
|
|
|
$
|
83.9
|
|
|
$
|
685.8
|
|
Accumulated impairments
|
(198.0
|
)
|
|
—
|
|
|
—
|
|
|
(44.0
|
)
|
|
(242.0
|
)
|
Net balance at September 30, 2012
|
$
|
116.7
|
|
|
$
|
120.6
|
|
|
$
|
166.6
|
|
|
$
|
39.9
|
|
|
$
|
443.8
|
|
Other intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
December 31, 2011
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
Finite Lived Intangible Assets
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
224.7
|
|
|
$
|
(82.8
|
)
|
|
$
|
221.8
|
|
|
$
|
(65.2
|
)
|
Licensing agreements
|
61.9
|
|
|
(52.3
|
)
|
|
58.2
|
|
|
(47.4
|
)
|
Noncompete agreements
|
8.5
|
|
|
(7.0
|
)
|
|
8.1
|
|
|
(6.6
|
)
|
Trademarks
|
6.6
|
|
|
(5.7
|
)
|
|
6.6
|
|
|
(4.0
|
)
|
Indefinite Lived Trademarks
|
109.4
|
|
|
—
|
|
|
108.4
|
|
|
—
|
|
Total
|
$
|
411.1
|
|
|
$
|
(147.8
|
)
|
|
$
|
403.1
|
|
|
$
|
(123.2
|
)
|
|
|
|
|
|
Estimated Amortization Expense:
|
|
2012
|
$
|
23.6
|
|
2013
|
21.7
|
|
2014
|
20.6
|
|
2015
|
20.0
|
|
2016
|
19.3
|
|
Aggregate amortization expense was
$8.0
and
$5.2
for the three months ended
September 30,
2012 and 2011, respectively, and
$18.5
and
$17.6
for the
nine
months ended
September 30,
2012 and 2011, respectively.
10. FAIR VALUE
The fair value measurement provisions required by the Fair Value Measurements and Disclosures Topic of the Codification 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.
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of
September 30, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
Assets:
|
|
|
|
|
|
Available-for-sale securities
|
$
|
1.8
|
|
|
$
|
—
|
|
|
$
|
1.8
|
|
Interest-rate swap agreements
|
—
|
|
|
103.7
|
|
|
103.7
|
|
Foreign exchange forward contracts
|
—
|
|
|
4.9
|
|
|
4.9
|
|
Total
|
$
|
1.8
|
|
|
$
|
108.6
|
|
|
$
|
110.4
|
|
Liabilities:
|
|
|
|
|
|
Interest-rate swap agreements
|
$
|
—
|
|
|
$
|
2.8
|
|
|
$
|
2.8
|
|
Foreign exchange forward contracts
|
—
|
|
|
.4
|
|
|
.4
|
|
Total
|
$
|
—
|
|
|
$
|
3.2
|
|
|
$
|
3.2
|
|
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of
December 31, 2011
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
Assets:
|
|
|
|
|
|
Available-for-sale securities
|
$
|
1.8
|
|
|
$
|
—
|
|
|
$
|
1.8
|
|
Interest-rate swap agreements
|
—
|
|
|
153.6
|
|
|
153.6
|
|
Foreign exchange forward contracts
|
—
|
|
|
5.6
|
|
|
5.6
|
|
Total
|
$
|
1.8
|
|
|
$
|
159.2
|
|
|
$
|
161.0
|
|
Liabilities:
|
|
|
|
|
|
Interest-rate swap agreements
|
$
|
—
|
|
|
$
|
6.0
|
|
|
$
|
6.0
|
|
Foreign exchange forward contracts
|
—
|
|
|
10.5
|
|
|
10.5
|
|
Total
|
$
|
—
|
|
|
$
|
16.5
|
|
|
$
|
16.5
|
|
Assets and Liabilities Recorded at Fair Value on a Non-recurring Basis
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a non-recurring basis as of
September 30, 2012
, and indicates the placement in the fair value hierarchy of the valuation techniques utilized to determine such fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
China goodwill
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
37.3
|
|
|
$
|
37.3
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
37.3
|
|
|
$
|
37.3
|
|
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a non-recurring basis as of
December 31, 2011
, and indicates the placement in the fair value hierarchy of the valuation techniques utilized to determine such fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Silpada goodwill
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
116.7
|
|
|
$
|
116.7
|
|
Silpada indefinite-lived trademark
|
—
|
|
|
—
|
|
|
85.0
|
|
|
85.0
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
201.7
|
|
|
$
|
201.7
|
|
In the third quarter of 2012, we completed an interim impairment assessment of the fair value of goodwill related to China and subsequently determined that the goodwill associated with China was impaired. As a result, the carrying amount of China's
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
goodwill was reduced from
$81.3
to its implied fair value of $
37.3
, resulting in an impairment charge of $
44.0
. See Note 9 for further discussion.
In the fourth quarter of 2011, we completed the annual goodwill and indefinite-lived intangible assets impairment assessments and subsequently determined that the goodwill and indefinite-lived trademarks associated with Silpada were impaired. As a result, the carrying amount of Silpada's goodwill was reduced from
$314.7
to its implied fair value of
$116.7
, resulting in an impairment charge of
$198.0
. In addition, the carrying amount of Silpada's indefinite-lived trademarks was reduced from
$150.0
to its implied fair value of
$85.0
, resulting in an impairment charge of
$65.0
.
We use a DCF approach to estimate the fair value of a reporting unit, which we believe is the most reliable indicator of fair value of a business, and is most consistent with the approach a market place participant would use. The estimation of fair value utilizing a DCF approach includes numerous uncertainties which require our 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, among other factors. Key assumptions used in measuring the fair value of our China reporting unit included the discount rate (based on the weighted-average cost of capital) and revenue growth. Key assumptions used in measuring the fair value of our Silpada reporting unit included the discount rate (based on the weighted-average cost of capital), revenue growth, silver prices, and Representative growth and activity rates. The fair value of the Silpada trademark was determined using a risk-adjusted DCF model under the relief-from-royalty method. The royalty rate used was based on a consideration of market rates.
Fair Value of Financial Instruments
The net asset (liability) amounts recorded in the balance sheet (carrying amount) and the estimated fair values of financial instruments at
September 30, 2012
and
December 31, 2011
, respectively, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Cash and cash equivalents
|
$
|
1,097.5
|
|
|
$
|
1,097.5
|
|
|
$
|
1,245.1
|
|
|
$
|
1,245.1
|
|
Available-for-sale securities
|
1.8
|
|
|
1.8
|
|
|
1.8
|
|
|
1.8
|
|
Grantor trust cash and cash equivalents
|
—
|
|
|
—
|
|
|
.7
|
|
|
.7
|
|
Short-term investments
|
17.8
|
|
|
17.8
|
|
|
18.0
|
|
|
18.0
|
|
Cash surrender value of supplemental life insurance
|
42.2
|
|
|
42.2
|
|
|
41.9
|
|
|
41.9
|
|
Healthcare trust assets
|
34.1
|
|
|
34.1
|
|
|
—
|
|
|
—
|
|
Debt maturing within one year
|
684.5
|
|
|
690.5
|
|
|
849.3
|
|
|
849.3
|
|
Long-term debt, net of related discount or premium
|
2,628.3
|
|
|
2,680.2
|
|
|
2,459.1
|
|
|
2,445.2
|
|
Foreign exchange forward contracts, net
|
4.5
|
|
|
4.5
|
|
|
(4.9
|
)
|
|
(4.9
|
)
|
Interest-rate swap agreements, net
|
100.9
|
|
|
100.9
|
|
|
147.6
|
|
|
147.6
|
|
The methods and assumptions used to estimate fair value are as follows:
Cash and cash equivalents, Grantor trust cash and cash equivalents, Short-term investments, and Healthcare trust assets - Given the short-term nature of these financial instruments, the stated cost approximates fair value.
Available-for-sale securities - The fair values of these investments were the quoted market prices for issues listed on securities exchanges.
Cash surrender value of supplemental life insurance - The fair value is equal to the cash surrender value of the life insurance policy.
Debt maturing within one year and long-term debt - The fair values of all 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.
Interest-rate swap agreements - The fair values of interest-rate swap agreements were estimated based on LIBOR yield curves at the reporting date.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
11. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Derivatives are recognized on the balance sheet at their fair values. The following table presents the fair value of derivative instruments outstanding at
September 30, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
Liability
|
|
Balance Sheet
Classification
|
|
Fair
Value
|
|
Balance Sheet
Classification
|
|
Fair
Value
|
Derivatives designated as hedges:
|
|
|
|
|
|
|
|
Interest-rate swap agreements
|
Other assets
|
|
$
|
100.8
|
|
|
Other liabilities
|
|
$
|
—
|
|
Total derivatives designated as hedges
|
|
|
$
|
100.8
|
|
|
|
|
$
|
—
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
Interest-rate swap agreements
|
Other assets
|
|
$
|
2.9
|
|
|
Other liabilities
|
|
$
|
2.8
|
|
Foreign exchange forward contracts
|
Prepaid expenses and other
|
|
4.9
|
|
|
Accounts payable
|
|
.4
|
|
Total derivatives not designated as hedges
|
|
|
$
|
7.8
|
|
|
|
|
$
|
3.2
|
|
Total derivatives
|
|
|
$
|
108.6
|
|
|
|
|
$
|
3.2
|
|
The following table presents the fair value of derivative instruments outstanding at
December 31, 2011
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
|
|
Liability
|
|
Balance Sheet
Classification
|
|
Fair
Value
|
|
Balance Sheet
Classification
|
|
Fair
Value
|
Derivatives designated as hedges:
|
|
|
|
|
|
|
|
Interest-rate swap agreements
|
Other assets
|
|
$
|
147.6
|
|
|
Other liabilities
|
|
$
|
—
|
|
Foreign exchange forward contracts
|
Prepaid expenses and other
|
|
1.2
|
|
|
Accounts payable
|
|
—
|
|
Total derivatives designated as hedges
|
|
|
$
|
148.8
|
|
|
|
|
$
|
—
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
Interest-rate swap agreements
|
Other assets
|
|
$
|
6.0
|
|
|
Other liabilities
|
|
$
|
6.0
|
|
Foreign exchange forward contracts
|
Prepaid expenses and other
|
|
4.4
|
|
|
Accounts payable
|
|
10.5
|
|
Total derivatives not designated as hedges
|
|
|
$
|
10.4
|
|
|
|
|
$
|
16.5
|
|
Total derivatives
|
|
|
$
|
159.2
|
|
|
|
|
$
|
16.5
|
|
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.
For derivatives designated as hedges, we assess, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. The ineffective portion of a derivative’s gain or loss, if any, is recorded in earnings in other expense, net on the Consolidated Statements of Income. In addition, when we determine that a derivative is not highly effective as a hedge, hedge accounting is discontinued. When it is probable that a hedged forecasted transaction will not occur, we discontinue hedge accounting for the affected portion of the forecasted transaction, and reclassify gains or losses that were accumulated in AOCI to earnings, in other expense, net on the Consolidated Statements of Income.
Interest Rate Risk
Our borrowings are subject to interest rate risk. We use interest-rate swap agreements, which effectively convert the fixed rate on long-term debt to a floating interest rate, to manage our interest rate exposure. The agreements are designated as fair value hedges. At
September 30, 2012
and
December 31, 2011
, we held interest-rate swap agreements that effectively converted approximately
62%
and
74%
, respectively, of our outstanding long-term, fixed-rate borrowings to a variable interest rate based on LIBOR. Our total exposure to floating interest rates at
September 30, 2012
and
December 31, 2011
was approximately
70%
and
82%
, respectively.
In March 2012, we terminated two of our interest-rate swap agreements 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
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
value 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. We incurred termination fees of
$2.5
which were recorded in other expense, net. For the
three and nine
months ended
September 30, 2012
, the net impact of the gain amortization was
$1.5
and
$2.9
, respectively. The interest-rate swap agreements were terminated in order to increase our ratio of fixed-rate debt.
At
September 30, 2012
, we had interest-rate swap agreements designated as fair value hedges of fixed-rate debt, with notional amounts totaling
$1,375
. During the
three and nine
months ended
September 30, 2012
, we recorded a net gain of
$.4
and a net loss of
$.7
respectively, in interest expense for these interest-rate swap agreements designated as fair value hedges. The loss on these interest-rate swap agreements was offset by an equal and offsetting gain in interest expense on our fixed-rate debt. During the
three and nine
months ended
September 30, 2011
, we recorded a net gain of
$48.8
and
$59.2
, respectively, in interest expense for these interest-rate swap agreements designated as fair value hedges. The gain on these interest-rate swap agreements was offset by an equal and offsetting loss in interest expense on our fixed-rate debt.
At times, we may de-designate the hedging relationship of a receive-fixed/pay-variable interest-rate swap agreement. In these cases, we enter into receive-variable/pay-fixed interest-rate swap agreements that are designed to offset the gain or loss on the de-designated contract. At
September 30, 2012
, we had interest-rate swap agreements that were not designated as hedges with notional amounts totaling
$250
. During the
three and nine
months ended
September 30, 2012
, we recorded an immaterial net gain in other expense, net associated with these undesignated interest-rate swap agreements. During the
three and nine
months ended
September 30, 2011
, we recorded a net loss of
$.1
in other expense, net associated with these undesignated interest-rate swap agreements.
There was
no
hedge ineffectiveness for the
three and nine
months ended
September 30, 2012
and
2011
, related to these interest-rate swaps.
Foreign Currency Risk
The primary currencies for which we have net underlying foreign currency exchange rate exposures are the Argentine peso, Australian dollar, Brazilian real, British pound, Canadian dollar, Chinese renminbi, Colombian peso, the euro, Mexican peso, Philippine peso, Polish zloty, Russian ruble, South African rand, Turkish lira, Ukrainian hryvnia and Venezuelan bolivar. We use foreign exchange forward contracts to manage a portion of our foreign currency exchange rate exposures. At
September 30, 2012
, we had outstanding foreign exchange forward contracts with notional amounts totaling approximately
$282
for the British pound, the euro, the Peruvian new sol, the Mexican peso, the Hungarian forint, the Romanian leu, the Czech Republic koruna, and the New Zealand dollar.
We use foreign exchange forward contracts to manage foreign currency exposure of intercompany loans. These contracts are not designated as hedges. 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 intercompany loans. During the
three and nine
months ended
September 30, 2012
, we recorded gains of
$9.8
and
$4.2
, respectively, in other expense, net related to these undesignated foreign exchange forward contracts. During the
three and nine
months ended
September 30, 2012
, we recorded losses of
$8.8
and
$1.4
, respectively, related to the intercompany loans, caused by changes in foreign currency exchange rates. During the
three and nine
months ended
September 30, 2011
, we recorded a loss of
$11.7
and a gain of
$8.8
, respectively, in other expense, net related to these undesignated foreign exchange forward contracts. During the
three and nine
months ended
September 30, 2011
, we recorded a gain of
$13.0
and a loss of
$3.9
, respectively, related to the intercompany loans, caused by changes in foreign currency exchange rates.
We also used a foreign exchange forward contract to hedge a portion of the net assets of a foreign subsidiary, which was effective as a hedge. A loss of
$.3
on the foreign exchange forward contract was recorded in AOCI for the
nine
months ended
September 30, 2012
. The foreign exchange forward contract terminated in January 2012, and therefore no gain or loss was recorded for the
three
months ended
September 30, 2012
.
12. DEBT
Revolving Credit Facility
We maintain a
$1 billion
revolving credit facility (the “revolving credit facility”), which expires in November 2013. As discussed below, the
$1 billion
available under the revolving credit facility is effectively reduced by the principal amount of any commercial paper outstanding. Borrowings under the revolving credit facility bear interest, at our option, at a rate per annum equal to the floating base rate or LIBOR, plus an applicable margin which varies within a specified band based upon our credit ratings. As of September 30, 2012, there were no amounts outstanding under the revolving credit facility.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
The revolving credit facility contains covenants limiting our ability to, among other things, incur liens and enter into mergers and consolidations or sales of substantially all our assets, and a financial covenant which requires our interest coverage ratio at the end of each fiscal quarter to equal or exceed
4
:
1
. In addition, the revolving credit facility contains customary events of default and cross-default provisions. The interest coverage ratio is determined by dividing our consolidated pre-tax income by our consolidated interest expense, in each case for the period of four fiscal quarters ending on the date of determination. For purposes of calculating the ratio, our consolidated pre-tax income is not adjusted for certain one-time charges, such as non-cash impairments, currency devaluations, legal or regulatory settlements. As of
September 30, 2012
, based on the waiver obtained (as discussed further below), and based on interest rates, approximately
$820
of the
$1 billion
revolving credit facility, less the principal amount of any commercial paper outstanding, could have been drawn down without violating any covenant.
Term Loan Agreement
On June 29, 2012, we entered into a
$500.0
term loan agreement (the “term loan agreement”). Subsequently on August 2, 2012, we borrowed an incremental
$50.0
of principal from subscriptions by new lenders under the term loan agreement. At
September 30, 2012
,
$550.0
remained outstanding under the term loan agreement.
The term loan agreement contains covenants limiting our ability to incur liens and enter into mergers and consolidations or sales of substantially all o
ur assets. In ad
dition, the term loan agreement contains financial covenants which require our interest coverage ratio at the end of each fiscal quarter to equal or exceed
4
:
1
and our leverage ratio not be greater than
4
:
1
at the end of each fiscal quarter on or prior to March 31, 2013, and
3.75
:
1
at the end of each fiscal quarter on or prior to December 31, 2013, and
3.5
:
1
at the end of each fiscal quarter thereafter. The interest coverage ratio is determined by dividing our consolidated EBIT by our consolidated interest expense, in each case for the period of four fiscal quarters ending on the date of determination. The leverage ratio is determined by dividing the amount of our consolidated funded debt on the date of determination by our consolidated EBITDA for the period of four fiscal quarters ending on the date of determination. For purposes of calculating the ratios, consolidated EBIT and consolidated EBITDA are adjusted for non-cash expenses. In addition, the term loan agreement contains customary events of default and cross-default provisions.
Pursuant to the term loan agreement, we are required to repay an amount equal to 25% of the aggregate principal amount of the term loans on June 29, 2014, and the remaining outstanding principal amount of the term loans on June 29, 2015. Amounts repaid or prepaid under the term loan agreement may not be reborrowed. Borrowings under the term loan agreement bear interest, at our option, at a rate per annum equal to LIBOR plus an applicable margin or a floating base rate plus an applicable margin, in each case subject to adjustment based on the credit ratings of the Company.
Private Notes
In November 2010, we issued in a private placement
$535.0
principal amount of notes (the “private notes”) pursuant to a note purchase agreement that contains covenants limiting, among other things, the ability of our subsidiaries to incur indebtedness, our and our subsidiaries' ability to incur liens and our and any subsidiary guarantor's ability to enter into mergers and consolidations or sales of substantially all of our or its assets. In addition, the note purchase agreement contains a financial covenant which requires our interest coverage ratio (which is calculated in the same manner as in the revolving credit facility) at the end of each fiscal quarter to equal or exceed
4
:
1
. The note purchase agreement contains customary events of default and cross-default provisions and any prepayment of the notes would require payment of a make-whole premium.
In connection with obtaining the waiver described below from the holders of the private notes (the “private noteholders”), on August 15, 2012, we entered into the first amendment to the note purchase agreement to, among other things, (1) add a financial covenant requiring our leverage ratio (which is calculated in the same manner as in the term loan agreement) not be greater than
4
:
1
at the end of each fiscal quarter on or prior to March 31, 2013,
3.75
:
1
at the end of each fiscal quarter thereafter, unless a bank credit agreement or any other principal credit facility contains a leverage ratio more favorable to the private noteholders, then such more favorable ratio will apply for the fiscal quarters ended March 31, 2014 and thereafter, (2) amend the interest coverage ratio to, subject to the most favored lender provision, add back to our consolidated pre-tax income actual non-cash impairment charges related solely to the Silpada business in an amount not to exceed
$125.0
in the aggregate (in addition to the
$263.0
non-cash Silpada impairment charge already recorded) during the term of the note purchase agreement, (3) add a most favored lender provision with respect to financial covenants in favor of other lenders and (4) provide a 150 basis point step up of the applicable coupon if our unsecured and unsubordinated debt is not rated above investment grade by a certain number of rating agencies.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
Waivers Regarding Revolving Credit Facility and Private Notes
On July 31, 2012, we obtained waivers from the lenders under our revolving credit facility and our private noteholders that allow us to exclude the non-cash impairment charge of
$263.0
associated with the Silpada business recorded during the fourth quarter of 2011 from our interest coverage ratio calculation contained in the revolving credit facility and the note purchase agreement for the four fiscal quarters ending September 30, 2012.
Ratio Calculations
Our interest coverage ratio, as calculated under both our revolving credit facility and the note purchase agreement associated with our private notes, for the four fiscal quarters ended September 30, 2012 was
5.5
:
1
. The calculated interest coverage ratio of
5.5
:
1
excludes the non-cash Silpada impairment charge under the terms of the waivers obtained. It is reasonably likely that events will arise that may cause us to be in non-compliance with the interest coverage ratio covenant for the four rolling fiscal quarters ended December 31, 2012 and March 31, 2013, primarily due to a) the overall decline in our business operating results and b) the inclusion of the non-cash impairment charge associated with our operations in China of $
44
recorded during the third quarter of 2012. The non-cash impairment charge associated with China had an adverse impact on our interest coverage ratio covenant as of September 30, 2012 of .4 points. Our forecast for the fiscal quarters ended December 31, 2012 and March 31, 2013 does not include the impact of any unanticipated, nonrecurring items, such as significant non-cash impairments, significant currency devaluations, or significant legal or regulatory settlements, which we are currently unable to predict. An inability to comply with this covenant would result in a default under the revolving credit facility and the note purchase agreement. In the event of such a default, the revolving credit facility would no longer be available to support future issuances of commercial paper, the private noteholders would have a right to accelerate payment with a make-whole premium, and this would constitute a cross-default under our term loan and, if the private noteholders accelerate, a cross-default under approximately $
1.7
billion of our other debt instruments, which could be accelerated. We would expect to seek to obtain any necessary waivers or amendments prior to any such default from the lenders under our revolving credit facility and our private noteholders; however, there cannot be any assurances that we will be able to do so. In the event that we are unable to obtain a waiver or amendment from our lenders and/or our private noteholders and we do not satisfy the interest coverage ratio, we could seek to repay our note purchase agreement and outstanding commercial paper by securing additional sources of financing, although there can be no assurances that we may be able to secure additional sources of financing, using cash generated from operations held outside of the U.S., and reducing our cash dividend to shareholders.
Commercial Paper Program
We also maintain a
$1 billion
commercial paper program, which is supported by the revolving credit facility. Under this program, we may issue from time to time unsecured promissory notes in the commercial paper market in private placements exempt from registration under federal and state securities laws, for a cumulative face amount not to exceed
$1 billion
outstanding at any one time and with maturities not exceeding
270
days from the date of issue. The commercial paper short-term notes issued under the program are not redeemable prior to maturity and are not subject to voluntary prepayment. Outstanding commercial paper effectively reduces the amount available for borrowing under the revolving credit facility. At September 30, 2012, there was
$68.9
outstanding under this program. In 2012, the demand for the Company's commercial paper has declined, partially impacted by rating agency action with respect to the Company.
Additional Information
As of September 30, 2012, Avon's long-term credit ratings were on the low end of investment grade: Baa1 (Stable Outlook) with Moody's, BBB- (Stable Outlook) with S&P, and BBB- (Negative Outlook) with Fitch. Additional rating agency reviews could result in a change in outlook or further downgrade. Any downgrade or change in outlook may result in an increase to financing costs, including interest expense under the debt instruments described above, and reduced access to lending sources, including the commercial paper market. For more information regarding risks associated with our ability to refinance debt or access certain debt markets, including the commercial paper market, see “Risk Factors - A general economic downturn, a recession globally or in one or more of our geographic regions or sudden disruption in business conditions or other challenges may adversely affect our business and our access to liquidity and capital” included in Item 1A of our 2011 Form 10-K and “Risk Factors - Under certain debt instruments, it is reasonably likely that events will arise that may cause us to be in non-compliance with the interest coverage ratio covenant for the four rolling fiscal quarters ended December 31, 2012 and March 31, 2013, primarily due to the overall decline in our business operating results and the inclusion of the non-cash impairment charge associated with our operations in China during the third quarter of 2012” included in Part II, Item 1A below.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
13. SUBSEQUENT EVENTS
As part of an overall review of the capital structure, on November 1, 2012, we announced a decrease in our quarterly cash dividend to
$.06
per share from
$.23
per share, for the fourth-quarter dividend payable December 3, 2012, to shareholders of record on November 15, 2012.
AVON PRODUCTS, INC.