2012.6.30.10Q

 
UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
_________________________
FORM 10-Q
_________________________
T
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2012
OR
£
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from              to             
Commission file number 1-4881
_________________________
AVON PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
_________________________
New York
 
13-0544597
(State or other jurisdiction of
Incorporation or organization)
 
(I.R.S. Employer
Identification No.)
1345 Avenue of the Americas, New York, N.Y. 10105-0196
(Address of principal executive offices) (Zip code)

(212) 282-5000
(Telephone Number, including area code) 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
  
Accelerated filer
¨
Non-accelerated filer
£  (do not check if a smaller reporting company)
  
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The number of shares of Common Stock (par value $0.25) outstanding at June 30, 2012 was 432,068,110
 



TABLE OF CONTENTS
 
 
 
Page
Numbers
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
9 - 23
 
 
 
Item 2.
24 - 40
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 5.
42 - 43
 
 
 
Item 6.
 
 
 
 


2

PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS

AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
Three Months Ended
(In millions, except per share data)
June 30, 2012
 
June 30, 2011
Net sales
$
2,548.2

 
$
2,815.9

Other revenue
43.5

 
40.5

Total revenue
$
2,591.7

 
$
2,856.4

Costs, expenses and other:
 
 
 
Cost of sales
964.5

 
1,018.0

Selling, general and administrative expenses
1,500.6

 
1,521.8

Operating profit
126.6

 
316.6

Interest expense
24.9

 
23.9

Interest income
(2.8
)
 
(3.9
)
Other expense, net
13.8

 
2.9

Total other expenses
35.9

 
22.9

Income from continuing operations, before taxes
90.7

 
293.7

Income taxes
(28.0
)
 
(85.0
)
Income from continuing operations, net of tax
62.7

 
208.7

Discontinued operations, net of tax
—

 
—

Net income
62.7

 
208.7

Net income attributable to noncontrolling interests
(1.1
)
 
(2.5
)
Net income attributable to Avon
$
61.6

 
$
206.2

Earnings per share:
 
 
 
Basic from continuing operations
$
0.14

 
$
0.48

Basic from discontinued operations
—

 
—

Basic attributable to Avon
$
0.14

 
$
0.48

Diluted from continuing operations
$
0.14

 
$
0.47

Diluted from discontinued operations
—

 
—

Diluted attributable to Avon
$
0.14

 
$
0.47

Cash dividends per common share
$
0.23

 
$
0.23

The accompanying notes are an integral part of these statements.


3

AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

 
 
 
 
 
Six Months Ended
(In millions, except per share data)
June 30, 2012
 
June 30, 2011
Net sales
$
5,081.0

 
$
5,407.4

Other revenue
86.1

 
78.1

Total revenue
5,167.1

 
5,485.5

Costs, expenses and other:
 
 
 
Cost of sales
1,974.3

 
1,967.8

Selling, general and administrative expenses
2,994.7

 
2,954.6

Operating profit
198.1

 
563.1

Interest expense
49.5

 
46.6

Interest income
(6.7
)
 
(8.7
)
Other expense, net
23.8

 
6.6

Total other expenses
66.6

 
44.5

Income from continuing operations, before taxes
131.5

 
518.6

Income taxes
(41.2
)
 
(157.7
)
Income from continuing operations, net of tax
90.3

 
360.9

Discontinued operations, net of tax
—

 
(8.6
)
Net income
90.3

 
352.3

Net income attributable to noncontrolling interests
(2.2
)
 
(2.5
)
Net income attributable to Avon
$
88.1

 
$
349.8

Earnings per share:
 
 
 
Basic from continuing operations
$
0.20

 
$
0.83

Basic from discontinued operations
$
—

 
$
(0.02
)
Basic attributable to Avon
$
0.20

 
$
0.81

Diluted from continuing operations
$
0.20

 
$
0.82

Diluted from discontinued operations
$
—

 
$
(0.02
)
Diluted attributable to Avon
$
0.20

 
$
0.80

Cash dividends per common share
$
0.46

 
$
0.46

The accompanying notes are an integral part of these statements.




4

AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
Three Months Ended
(In millions)
June 30, 2012
 
June 30, 2011
Net income
$
62.7

—

$
208.7

Other comprehensive income:
 
 
 
Foreign currency translation adjustments
(189.7
)
 
66.1

Change in derivative losses on cash flow hedges, net of taxes of $0.6 and $0.5
0.9

 
1.0

Adjustments of and amortization of net actuarial loss, prior service cost, and transition obligation, net of taxes of $(1.3) and $4.0
0.3

 
7.2

Total other comprehensive (loss) income, net of taxes
(188.5
)
 
74.3

Comprehensive (loss) income
(125.8
)
 
283.0

Less: comprehensive income (loss) attributable to noncontrolling interests
0.6

 
(2.3
)
Comprehensive (loss) income attributable to Avon
$
(125.2
)
 
$
280.7

The accompanying notes are an integral part of these statements.

5

AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Six Months Ended
(In millions)
June 30, 2012
 
June 30, 2011
Net income
$
90.3

352.3

$
352.3

Other comprehensive income:
 
 
 
Foreign currency translation adjustments
(64.8
)
 
165.6

Change in derivative losses on cash flow hedges, net of taxes of $1.1 and $1.0
1.9

 
2.0

Change in derivate losses on net investment hedge
(0.3
)
 
—

Adjustments of and amortization of net actuarial loss, prior service cost, and transition obligation, net of taxes of $3.1 and $7.9
9.6

 
15.1

Total other comprehensive (loss) income, net of taxes
(53.6
)
 
182.7

Comprehensive income
36.7

 
535.0

Less: comprehensive income (loss) attributable to noncontrolling interests
1.2

 
(2.1
)
Comprehensive income attributable to Avon
$
37.9

 
$
532.9

The accompanying notes are an integral part of these statements.

6

AVON PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
(In millions)
June 30,
2012
 
December 31,
2011
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
1,276.4

 
$
1,245.1

Accounts receivable, net
714.1

 
761.5

Inventories
1,244.8

 
1,161.3

Prepaid expenses and other
917.8

 
930.9

Total current assets
$
4,153.1

 
$
4,098.8

Property, plant and equipment, at cost
2,634.7

 
2,708.8

Less accumulated depreciation
(1,144.7
)
 
(1,137.3
)
Property, plant and equipment, net
1,490.0

 
1,571.5

Goodwill
483.0

 
473.1

Other intangible assets, net
268.2

 
279.9

Other assets
1,308.3

 
1,311.7

Total assets
$
7,702.6

 
$
7,735.0

Liabilities and Shareholders’ Equity
 
 
 
Current Liabilities
 
 
 
Debt maturing within one year
$
952.4

 
$
849.3

Accounts payable
846.0

 
850.2

Accrued compensation
226.8

 
217.1

Other accrued liabilities
634.3

 
663.6

Sales and taxes other than income
201.5

 
212.4

Income taxes
9.9

 
98.4

Total current liabilities
2,870.9

 
2,891.0

Long-term debt
2,581.1

 
2,459.1

Employee benefit plans
624.9

 
603.0

Long-term income taxes
64.6

 
67.0

Other liabilities
122.1

 
129.7

Total liabilities
$
6,263.6

 
$
6,149.8

Contingencies (Note 5)


 


Shareholders’ Equity
 
 
 
Common stock
$
188.3

 
$
187.3

Additional paid-in capital
2,100.7

 
2,077.7

Retained earnings
4,613.3

 
4,726.1

Accumulated other comprehensive loss
(908.0
)
 
(854.4
)
Treasury stock, at cost
(4,571.3
)
 
(4,566.3
)
Total Avon shareholders’ equity
1,423.0

 
1,570.4

Noncontrolling interests
16.0

 
14.8

Total shareholders’ equity
$
1,439.0

 
$
1,585.2

Total liabilities and shareholders’ equity
$
7,702.6

 
$
7,735.0

The accompanying notes are an integral part of these statements.


7

AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended
(In millions)
June 30, 2012
 
June 30, 2011
Cash Flows from Operating Activities
 
 
 
Net income
$
90.3

 
$
352.3

Discontinued operations, net of tax
—

 
8.6

Income from continuing operations
$
90.3

 
$
360.9

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
118.3

 
115.5

Provision for doubtful accounts
134.6

 
125.3

Provision for obsolescence
59.7

 
54.5

Share-based compensation
23.2

 
24.0

Deferred income taxes
(72.0
)
 
(51.1
)
Other
21.0

 
40.7

Changes in assets and liabilities:
 
 
 
Accounts receivable
(94.7
)
 
(103.0
)
Inventories
(166.7
)
 
(204.6
)
Prepaid expenses and other
44.3

 
(13.0
)
Accounts payable and accrued liabilities
(0.5
)
 
(107.2
)
Income and other taxes
(73.5
)
 
(58.5
)
Noncurrent assets and liabilities
(42.9
)
 
(82.3
)
Net cash provided by operating activities of continuing operations
41.1

 
101.2

Cash Flows from Investing Activities
 
 
 
Capital expenditures
(87.7
)
 
(144.5
)
Disposal of assets
9.5

 
6.9

Purchases of investments
(0.8
)
 
(26.8
)
Proceeds from sale of investments
—

 
6.2

Acquisitions and other investing activities
—

 
(13.0
)
Net cash used by investing activities of continuing operations
(79.0
)
 
(171.2
)
Cash Flows from Financing Activities*
 
 
 
Cash dividends
(199.2
)
 
(203.3
)
Debt, net (maturities of three months or less)
(343.1
)
 
593.3

Proceeds from debt
638.4

 
12.8

Repayment of debt
(71.2
)
 
(535.9
)
Interest rate swap termination
43.6

 
—

Proceeds from exercise of stock options
7.6

 
15.3

Excess tax benefit realized from share-based compensation
(2.6
)
 
1.9

Repurchase of common stock
(8.1
)
 
(7.0
)
Net cash provided (used) by financing activities of continuing operations
65.4

 
(122.9
)
Cash Flows from Discontinued Operations
 
 
 
Net cash used by investing activities of discontinued operations
—

 
(1.2
)
Net cash used by discontinued operations
—

 
(1.2
)
Effect of exchange rate changes on cash and equivalents
3.8

 
25.2

Net increase (decrease) in cash and equivalents
31.3

 
(168.9
)
Cash and equivalents at beginning of year
$
1,245.1

 
$
1,179.9

Cash and equivalents at end of period
$
1,276.4

 
$
1,011.0

 

*
Non-cash financing activities in 2012 and 2011 included the change in fair market value of interest-rate swap agreements of $(1.1) and $10.4, respectively.
The accompanying notes are an integral part of these statements.

8

AVON PRODUCTS, INC.
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 six months ended June 30, 2011 for comparative purposes. 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 will not have a significant impact on our financial statements.

Out-of-Period Items
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. Also during the 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 also identified and recorded other various insignificant out-of-period adjustments during the three and six months ended June 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 six months ended June 30, 2012 was approximately $4 before tax of an increase to earnings ($1 after tax of a decrease to earnings) and $12 before tax ($13 after tax) of a decrease to earnings, respectively. 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.

9

AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)


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.
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
(Shares in millions)
 
2012
 
2011
 
2012
 
2011
Numerator from continuing operations
 
 
 
 
 
 
 
 
Income from continuing operations less amounts attributable to noncontrolling interests
 
$
61.6

 
$
206.2

 
$
88.1

 
$
358.4

Less: Earnings allocated to participating securities
 
(1.1
)
 
(1.7
)
 
(1.9
)
 
(3.0
)
Income from continuing operations allocated to common shareholders
 
60.5

 
204.5

 
86.2

 
355.4

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
 
$
61.6

 
$
206.2

 
$
88.1

 
$
349.8

Less: Earnings allocated to participating securities
 
(1.1
)
 
(1.7
)
 
(1.9
)
 
(3.0
)
Income allocated to common shareholders
 
60.5

 
204.5

 
86.2

 
346.8

Denominator:
 
 
 
 
 
 
 
 
Basic EPS weighted-average shares outstanding
 
432.0

 
430.5

 
431.6

 
430.2

Diluted effect of assumed conversion of stock options
 
0.8

 
2.1

 
0.8

 
2.1

Diluted EPS adjusted weighted-average shares outstanding
 
432.8

 
432.6

 
432.4

 
432.3

Earnings per Common Share from continuing operations:
 
 
 
 
 
 
 
 
Basic
 
$
0.14

 
$
0.48

 
$
0.20

 
$
0.83

Diluted
 
$
0.14

 
$
0.47

 
$
0.20

 
$
0.82

Loss per Common Share from discontinued operations:
 
 
 
 
 
 
 
 
Basic
 
$
—

 
$
—

 
$
—

 
$
(0.02
)
Diluted
 
$
—

 
$
—

 
$
—

 
$
(0.02
)
Earnings per Common Share attributable to Avon:
 
 
 
 
 
 
 
 
Basic
 
$
0.14

 
$
0.48

 
$
0.20

 
$
0.81

Diluted
 
$
0.14

 
$
0.47

 
$
0.20

 
$
0.80


10

AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)


At June 30, 2012 and 2011, we did not include stock options to purchase 22.2 million shares and 19.1 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 0.4 million shares of Avon common stock for $8.1 during the first six months of 2012, as compared to approximately 0.3 million shares of Avon common stock for $7.0 during the first six 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
 
June 30, 2012
 
December 31, 2011
Raw materials
 
$
423.0

 
$
361.7

Finished goods
 
821.8

 
799.6

Total
 
$
1,244.8

 
$
1,161.3



4. EMPLOYEE BENEFIT PLANS
 
 
 
Three Months Ended June 30,
 
 
Pension Benefits
 
 
 
 
Net Periodic Benefit Costs
 
U.S. Plans
 
Non-U.S. Plans
 
Postretirement Benefits
 
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Service cost
 
$
3.7

 
$
3.3

 
$
4.5

 
$
4.2

 
$
.5

 
$
.3

Interest cost
 
7.4

 
8.1

 
9.7

 
10.3

 
1.4

 
1.1

Expected return on plan assets
 
(8.8
)
 
(9.1
)
 
(9.8
)
 
(10.5
)
 
—

 
(.3
)
Amortization of prior service credit
 
—

 
(.1
)
 
(.4
)
 
(.3
)
 
(3.3
)
 
(2.5
)
Amortization of net actuarial losses
 
10.1

 
11.9

 
4.4

 
3.6

 
1.0

 
.6

Curtailments
 
—

 
—

 
—

 
—

 
(1.0
)
 
—

Net periodic benefit costs
 
$
12.4

 
$
14.1

 
$
8.4

 
$
7.3

 
$
(1.4
)
 
$
(.8
)
 
 
Six Months Ended June 30,
 
 
Pension Benefits
 
 
 
 
Net Periodic Benefit Costs
 
U.S. Plans
 
Non-U.S. Plans
 
Postretirement Benefits
 
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Service cost
 
$
7.5

 
$
6.6

 
$
9.0

 
$
8.3

 
$
1.0

 
$
.6

Interest cost
 
14.8

 
16.2

 
19.5

 
20.4

 
2.9

 
2.2

Expected return on plan assets
 
(18.0
)
 
(18.2
)
 
(19.6
)
 
(20.8
)
 
—

 
(.6
)
Amortization of prior service credit
 
(.1
)
 
(.2
)
 
(.8
)
 
(.6
)
 
(6.6
)
 
(4.9
)
Amortization of net actuarial losses
 
21.9

 
23.8

 
8.8

 
7.1

 
2.0

 
1.1

Curtailments
 
—

 
—

 
—

 
—

 
(1.0
)
 
—

Net periodic benefit costs
 
$
26.1

 
$
28.2

 
$
16.9

 
$
14.4

 
$
(1.7
)
 
$
(1.6
)

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 June 30, 2012, we made approximately $21 and $15 of contributions to the U.S. and non-U.S pension and postretirement plans, respectively. We anticipate contributing approximately $29 to $34 and $25 to $30 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.

11

AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)


5. CONTINGENCIES

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 and in the opinion of our outside counsel, the likelihood that the assessment ultimately will be upheld is remote. Management believes that the likelihood that the assessment will have a material impact on our consolidated financial position, results of operations or cash flows is correspondingly remote. Other similar excise tax assessments involving different periods have been canceled and officially closed in our favor by the second administrative level.
In October 2010, the 2002 assessment was upheld at the first administrative level at an amount reduced to $31 from $74, including penalties and accruing interest, at the exchange rate on June 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 make an estimate of the amount or range of loss that it is reasonably possible that we could incur from an unfavorable outcome in respect of this and any additional assessments that may be issued for subsequent periods.

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 we 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 are continuing to cooperate with both agencies and inquiries by them, including but not limited to, signing tolling agreements, translating and producing documents and assisting with interviews.
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 other 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 compliance reviews of these matters are ongoing, and we continue to cooperate with both agencies with respect to these matters. 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.
On October 26, 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 FCPA matters described above and the Regulation FD matters that are referenced in the subpoena. The Company intends to cooperate fully with the SEC's investigation. We also have commenced an internal investigation, which is being conducted by outside counsel under the oversight of our Audit Committee, in connection with the Regulation FD matters. In connection with the ongoing internal investigations and compliance reviews described above, certain personnel actions have been taken and additional personnel actions may be taken in the future.
We are in discussions with the SEC and DOJ regarding mutually resolving the government investigations. There can be no assurance that a settlement will be reached or, if a settlement is reached, the timing of any such settlement or that the terms of any such settlement would not have a material adverse effect on us.
At this point we are unable to predict the developments in, results of, or consequences of the internal investigations, compliance reviews and government investigations. In light of the fact that, among other things, these matters are still ongoing, we are unable to make an estimate of the amount or range of loss that it is reasonably possible that we could incur from an unfavorable outcome.

12

AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)


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, plaintiff has agreed that defendants' time to file an answer, motion to dismiss or other response is deferred pending agreement on a further stipulation. 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 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 and are unable to make an estimate of the amount or range of loss that it is reasonably possible that we could incur from an unfavorable outcome.
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., 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. 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 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 class action claim and are unable to make an estimate of the amount or range of loss that it is reasonably possible that we could incur from an unfavorable outcome.
With respect to the above-described internal investigations, compliance reviews, government investigations and the derivative and class action matters, under some circumstances, adverse outcomes could be material to our consolidated financial position, results of operations or cash flows.
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 June 30, 2012, should not have a material adverse effect on our consolidated financial position, results of operations or cash flows.  


13

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 June 30,
 
2012
 
2011
 
Revenue
 
Operating
Profit (Loss)
 
Revenue
 
Operating
Profit (Loss)
Latin America
$
1,242.8

 
$
114.9

 
$
1,359.9

 
$
195.9

Europe, Middle East & Africa
663.1

 
71.3

 
773.4

 
125.0

North America
467.4

 
(3.9
)
 
496.7

 
23.5

Asia Pacific
218.4

 
11.1

 
226.4

 
16.6

Total from operations
$
2,591.7

 
$
193.4

 
$
2,856.4

 
$
361.0

Global and other
—

 
(66.8
)
 
—

 
(44.4
)
Total
$
2,591.7

 
$
126.6

 
$
2,856.4

 
$
316.6

 
Six Months Ended June 30,
 
2012
 
2011
 
Revenue
 
Operating
Profit (Loss)
 
Revenue
 
Operating
Profit (Loss)
Latin America
$
2,392.3

 
$
165.7

 
$
2,503.2

 
$
337.2

Europe, Middle East & Africa
1,387.7

 
127.8

 
1,531.5

 
236.0

North America
947.0

 
(.1
)
 
997.1

 
49.5

Asia Pacific
440.1

 
26.5

 
453.7

 
36.5

Total from operations
$
5,167.1

 
$
319.9

 
$
5,485.5

 
$
659.2

Global and other
—

 
(121.8
)
 
—

 
(96.1
)
Total
$
5,167.1

 
$
198.1

 
$
5,485.5

 
$
563.1

Our consolidated net sales by classes of principal products were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Beauty(1)
$
1,854.5

 
$
2,039.2

 
$
3,713.1

 
$
3,914.1

Fashion(2)
460.1

 
511.1

 
909.7

 
999.1

Home(3)
233.6

 
265.6

 
458.2

 
494.2

Net sales
$
2,548.2

 
$
2,815.9

 
$
5,081.0

 
$
5,407.4

Other revenue(4)
43.5

 
40.5

 
86.1

 
78.1

Total revenue
$
2,591.7

 
$
2,856.4

 
$
5,167.1

 
$
5,485.5

 
(1)
Beauty includes color cosmetics, fragrances, skin care 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 and nutritional products.
(4)
Other revenue primarily includes shipping and handling and order processing fees billed to Representatives.
Sales from Health and Wellness products and mark. are included among these categories based on product type.

14

AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)


7. SUPPLEMENTAL BALANCE SHEET INFORMATION
At June 30, 2012 and December 31, 2011, prepaid expenses and other included the following:
Components of Prepaid Expenses and Other
 
June 30, 2012
 
December 31, 2011
Deferred tax assets
 
$
326.2

 
$
319.0

Prepaid taxes and tax refunds receivable
 
178.9

 
192.0

Prepaid brochure costs, paper, and other literature
 
112.2

 
126.9

Receivables other than trade
 
110.5

 
142.8

Healthcare trust assets (Note 4)
 
40.3

 
—

Short-term investments
 
20.5

 
18.0

Interest-rate swap agreements (Notes 10 and 11)
 
14.5

 
18.8

Other
 
114.7

 
113.4

Prepaid expenses and other
 
$
917.8

 
$
930.9

At June 30, 2012 and December 31, 2011, other assets included the following: 
Components of Other Assets
 
June 30, 2012
 
December 31, 2011
Deferred tax assets
 
$
805.7

 
$
759.5

Deferred software
 
193.7

 
176.7

Interest-rate swap agreements (Notes 10 and 11)
 
104.2

 
153.6

Investments
 
43.6

 
44.4

Other
 
161.1

 
177.5

Other assets
 
$
1,308.3

 
$
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 $526.6 for actions associated with the 2005 Restructuring Program, but we expect our total costs when fully implemented to be approximately $520 when considering historical and future costs along with expected gains from sales of properties. With regards to the 2009 Restructuring Program, we have recorded total costs to implement restructuring initiatives of $259.9 since 2009 and expect total costs to implement to reach approximately $270.

15

AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)


Restructuring Charges – First and Second Quarter of 2012
During the three and six months ended June 30, 2012, we recorded a net benefit of $1.0 and total costs to implement of $4.5, 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 $4.7 and $5.8, respectively, as a result of adjustments to the reserve, partially offset by employee-related costs;
•
implementation costs of $2.9 and $7.3, respectively, for professional service fees, primarily associated with our initiatives to outsource certain finance processes and realign certain distribution operations; and
•
accelerated depreciation of $.8 and $3.0, respectively, associated with our initiatives to realign certain distribution operations.
For the three months ended June 30, 2012, a net benefit of $1.7 was recorded in selling, general, and administrative expenses and total costs to implement of $.7 were recorded in cost of sales. For the six months ended June 30, 2012, total costs to implement of $1.1 were recorded in selling, general, and administrative expenses and $3.4 were recorded in cost of sales.
Restructuring Charges – First and Second Quarter 2011
During the three and six months ended June 30, 2011, we recorded total costs to implement of $12.0 and $26.7, 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 $1.2 and charge of $8.4, respectively, primarily for adjustments to the reserves for employee-related costs;
•
implementation costs of $9.2 and $18.2, respectively, for professional service fees, primarily associated with our initiatives to outsource certain finance processes and realign certain distribution operations; and
•
accelerated depreciation of $4.0 and $5.6 respectively, associated with our initiatives to realign certain distribution operations, offset by a gain of $5.5 due to the sale of land and building in Germany in the first quarter 2011.
Of the total costs to implement, $8.5 and $22.0 was recorded in selling, general and administrative expenses, respectively; and $3.5 and $4.7 was recorded in cost of sales, respectively, for the three and six months ended June 30, 2011.
The liability balances for the initiatives under the 2005 and 2009 Restructuring Programs are shown below:
 
Employee-
Related
Costs
 
Other
 
Total
Balance December 31, 2011
$
74.6

 
$
(.7
)
 
$
73.9

2012 Charges
1.5

 
—

 
1.5

Adjustments
(7.3
)
 
—

 
(7.3
)
Cash payments
(25.6
)
 
—

 
(25.6
)
Non-cash write-offs
1.0

 
—

 
1.0

Foreign exchange
(1.4
)
 
—

 
(1.4
)
Balance at June 30, 2012
$
42.8

 
$
(.7
)
 
$
42.1


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:
 
Employee-
Related
Costs
 
Asset
Write-offs
 
Inventory
Write-offs
 
Currency
Translation
Adjustment
Write-offs
 
Contract
Terminations/
Other
 
Total
Charges incurred to date
$
489.0

 
$
10.8

 
$
7.2

 
$
11.6

 
$
21.4

 
$
540.0

Charges to be incurred on approved initiatives
1.2

 
—

 
—

 
—

 
.3

 
1.5

Total expected charges on approved initiatives
$
490.2

 
$
10.8

 
$
7.2

 
$
11.6

 
$
21.7

 
$
541.5



16

AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)


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
)
Charges recorded to date
$
86.3

 
$
116.3

 
$
208.2

 
$
60.2

 
$
69.0

 
$
540.0

Charges to be incurred on approved initiatives
—

 
.3

 
1.4

 
(.2
)
 
—

 
1.5

Total expected charges on approved initiatives
$
86.3

 
$
116.6

 
$
209.6

 
$
60.0

 
$
69.0

 
$
541.5

As noted previously, we expect to record total costs to implement of approximately $520 before taxes for all restructuring initiatives under the 2005 Restructuring Program and approximately $270 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 will incur other costs to implement restructuring initiatives such as other professional services and accelerated depreciation. These 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 six months ended June 30, 2012, we recorded total costs to implement these various restructuring initiatives of $39.2 and $61.0, respectively, associated with approved initiatives, and the costs consisted of the following:
•
net charges of $37.2 and $56.0, respectively, primarily for employee-related costs;
•
implementation costs of $.9 and $3.9, respectively, for professional service fees; and
•
accelerated depreciation of $1.1 and $1.1, 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 estimates of sublease income, in the second half of 2012 when the relocation is complete.
Total costs to implement were recorded in selling, general and administrative expenses for the three and six months ended June 30, 2012. Cash payments associated with these charges are expected to be made during 2012 and 2013.
The liability balance for these as of June 30, 2012 is as follows:
 
 
Employee-
Related
Costs
2012 Charges
 
$
56.0

Cash payments
 
(10.9
)
Foreign Exchange
 
(.4
)
Balance at June 30, 2012
 
$
44.7


17

AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)


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

Charges recorded to date
 
$
15.3

 
$
4.7

 
$
10.6

 
$
4.7

 
$
20.7

 
$
56.0



9. GOODWILL AND INTANGIBLE ASSETS
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 June 30, 2012:
 
 
 
 
 
 
 
 
 
Foreign exchange
$
—

 
$
9.9

 
$
.6

 
$
(.4
)
 
$
10.1

Adjustments
—

 
—

 
(.2
)
 
—

 
(.2
)
 
 
 
 
 
 
 
 
 
 
Gross balance at June 30, 2012
$
314.7

 
$
121.7

 
$
161.2

 
$
83.4

 
$
681.0

Accumulated impairments
(198.0
)
 
—

 
—

 
—

 
(198.0
)
Net balance at June 30, 2012
$
116.7

 
$
121.7

 
$
161.2

 
$
83.4

 
$
483.0


Intangible assets
 
June 30, 2012
 
December 31, 2011
 
Gross
Amount
 
Accumulated
Amortization
 
Gross
Amount
 
Accumulated
Amortization
Amortized Intangible Assets
 
 
 
 
 
 
 
Customer relationships
$
224.8

 
$
(77.9
)
 
$
221.8

 
$
(65.2
)
Licensing agreements
61.9

 
(52.0
)
 
58.2

 
(47.4
)
Noncompete agreements
8.5

 
(7.1
)
 
8.1

 
(6.6
)
Trademarks
6.6

 
(5.1
)
 
6.6

 
(4.0
)
Indefinite Lived Trademarks
108.5

 
—

 
108.4

 
—

Total
$
410.3

 
$
(142.1
)
 
$
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 $5.1 and $6.2 for the three months ended June 30, 2012 and 2011, respectively, and $10.5 and $12.4 for the six months ended June 30, 2012 and 2011, respectively.

18

AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)


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.
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 June 30, 2012:
 
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
Available-for-sale securities
$
1.9

 
$
—

 
$
1.9

Interest-rate swap agreements
—

 
104.2

 
104.2

Foreign exchange forward contracts
—

 
5.7

 
5.7

Total
$
1.9

 
$
109.9

 
$
111.8

Liabilities:
 
 
 
 
 
Interest-rate swap agreements
$
—

 
$
3.8

 
$
3.8

Foreign exchange forward contracts
—

 
7.9

 
7.9

Total
$
—

 
$
11.7

 
$
11.7

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 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 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.

19

AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)


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 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 Silpada 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 June 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
$
1,276.4

 
$
1,276.4

 
$
1,245.1

 
$
1,245.1

Available-for-sale securities
1.9

 
1.9

 
1.8

 
1.8

Grantor trust cash and cash equivalents
.2

 
.2

 
.7

 
.7

Short term investments
20.5

 
20.5

 
18.0

 
18.0

Cash surrender value of supplemental life insurance
41.6

 
41.6

 
41.9

 
41.9

Healthcare trust assets
40.3

 
40.3

 
—

 
—

Debt maturing within one year
952.4

 
960.2

 
849.3

 
849.3

Long-term debt, net of related discount or premium
2,581.1

 
2,458.1

 
2,459.1

 
2,445.2

Foreign exchange forward contracts, net
(2.2
)
 
(2.2
)
 
(4.9
)
 
(4.9
)
Interest-rate swap agreements, net
100.4

 
100.4

 
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.

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 June 30, 2012:

20

AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)


 
Asset
 
Liability
 
Balance Sheet
Classification
 
Fair
Value
 
Balance Sheet
Classification
 
Fair
Value
Derivatives designated as hedges:
 
 
 
 
 
 
 
Interest-rate swap agreements
Other assets
 
$
100.4

 
Other liabilities
 
$
—

Total derivatives designated as hedges
 
 
$
100.4

 
 
 
$
—

Derivatives not designated as hedges:
 
 
 
 
 
 
 
Interest-rate swap agreements
Other assets
 
$
3.8

 
Other liabilities
 
$
3.8

Foreign exchange forward contracts
Prepaid expenses and other
 
5.7

 
Accounts payable
 
7.9

Total derivatives not designated as hedges
 
 
$
9.5

 
 
 
$
11.7

Total derivatives
 
 
$
109.9

 
 
 
$
11.7

 
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, we designate the instrument, for financial reporting purposes, as a fair value hedge, a cash flow hedge, a net investment hedge, or a non-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 June 30, 2012 and December 31, 2011, we held interest-rate swap agreements that effectively converted approximately 61% 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 June 30, 2012 and December 31, 2011 was approximately 72% 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 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 six months ended June 30, 2012, the net impact of the gain amortization was immaterial and $1.4, respectively. The interest-rate swap agreements were terminated in order to increase our ratio of fixed rate debt.

21

AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)


At June 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 six months ended June 30, 2012, we recorded a net gain of $3.4 and a net loss of $1.1 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 six months ended June 30, 2011, we recorded a net gain of $26.3 and $10.4, 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.
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 June 30, 2012, we had interest-rate swap agreements that were not designated as hedges with notional amounts totaling $250. During the three and six months ended June 30, 2012, we recorded an immaterial net loss and an immaterial net gain in other expense, net associated with these undesignated interest-rate swap agreements. During the three and six months ended June 30, 2011, we recorded an immaterial net gain in other expense, net associated with these undesignated interest-rate swap agreements.

There was no hedge ineffectiveness for the three and six months ended June 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 June 30, 2012, we had outstanding foreign exchange forward contracts with notional amounts totaling approximately $362.5 for the euro, the British pound, the Mexican peso, the Peruvian new sol, 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 six months ended June 30, 2012, we recorded losses of $8.9 and $5.6, respectively, in other expense, net related to these undesignated foreign exchange forward contracts. During the three and six months ended June 30, 2012, we recorded gains of $10.2 and $7.4, respectively, related to the intercompany loans, caused by changes in foreign currency exchange rates. During the three and six months ended June 30, 2011, we recorded gains of $4.8 and $20.5, respectively, in other expense, net related to these undesignated foreign exchange forward contracts. During the three and six months ended June 30, 2011, we recorded losses of $2.7 and $16.9, 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 six months ended June 30, 2012. The foreign exchange forward contract terminated in January 2012, and therefore no gain or loss was recorded for the three months ended June 30, 2012.

12. DEBT
We maintain a $1 billion revolving credit facility, which expires in November 2013. As discussed below, the $1 billion available under the credit facility is effectively reduced to the extent of any commercial paper outstanding. The credit facility contains various covenants, including a financial covenant that requires our interest coverage ratio to equal or exceed 4:1, lien covenant, events of default and cross-default provisions. The interest coverage ratio is determined in relation to our consolidated pre-tax income, which is not adjusted for one-time charges such as non-cash impairments or significant currency devaluations, and interest expense, in each case for the period of four fiscal quarters ending on the date of determination. Based on interest rates at June 30, 2012, the full $1 billion facility, less the outstanding commercial paper, could have been drawn down without violating any covenant.
In November 2010, we issued in a private placement $535.0 in notes (the "private notes") pursuant to a note purchase agreement that has covenants substantially similar to those in the revolving credit facility agreement, including the requirement to maintain an interest coverage ratio that equals or exceeds 4:1.

22

AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)


Our interest coverage ratio, as calculated under both our revolving credit facility and the note purchase agreement of our November 2010 private notes, for the four fiscal quarters ended June 30, 2012 was 4.7:1. We anticipate that we may not be able to comply with the interest coverage ratio covenant for the four fiscal quarters ending September 30, 2012, primarily due to the inclusion of a non-cash impairment charge of $263.0 associated with the Silpada business. The non-cash impairment charge had an adverse impact on our interest coverage ratio as of June 30, 2012 of 2.7 points. Accordingly, we have obtained waivers from the lenders under our revolving credit facility and our private noteholders to exclude the non-cash impairment charge associated with the Silpada business recorded during the fourth quarter of 2011 from our interest coverage ratio calculation for the four fiscal quarters ending September 30, 2012. With such waivers, we currently anticipate that we will be in compliance with the interest coverage ratio covenants in the revolving credit facility and the note purchase agreement for the four fiscal quarters ending September 30, 2012. In connection with the waiver to the note purchase agreement, we entered into a letter agreement with the holders of the private notes pursuant to which we agreed, among other things, to amend the note purchase agreement no later than August 15, 2012 to add a leverage ratio covenant, add a most favored lender provision and to amend the interest coverage ratio.
We also maintain a $1 billion commercial paper program, which is supported by the 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 credit facility. At June 30, 2012, there was $330.1 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. For more information regarding risks associated with our ability to 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.
On June 29, 2012, the Company entered into a $500.0 Term Loan Agreement (the "Term Loan"). The Term Loan is subject to a possible one-time increase of principal on or prior to August 2, 2012, for which the Company intends to draw down an incremental $50.0 of principal. The Company is required to repay on June 29, 2014, an amount equal to twenty-five percent of the aggregate principal amount of the loans and on June 29, 2015, the then outstanding aggregate principal amount of the loans made under the Term Loan. At June 30, 2012, $500.0 was outstanding under the Term Loan. Amounts borrowed under the Term Loan and repaid or prepaid may not be reborrowed. Borrowings under the Term Loan bear interest at a rate per annum, which will be, at the Company's option, either 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. The Term Loan is available for general corporate purposes, including funding or making payments for the debt of the Company or any of its subsidiaries and funding loans from the Company to any of its subsidiaries. The Term Loan contains various covenants, including a financial covenant that requires our interest coverage ratio (determined in relation to our consolidated net income adjusted for interest expense, taxes, and non-cash expenses) to equal or exceed 4:1 as well as a financial covenant that requires our maximum leverage ratio (determined in relation to our consolidated net income adjusted for interest expense, taxes, non-cash expenses, and depreciation and amortization expense) to not be greater than 4:1 up to March 31, 2013, 3.75:1 up to December 31, 2013, and 3.5:1 on March 31, 2014 and thereafter, and includes cross-default provisions.


23

AVON PRODUCTS, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in millions, except per share data)

OVERVIEW
We are a global manufacturer and marketer of beauty and related products. Our business is conducted worldwide, primarily in the direct selling channel. We presently have sales operations in 65 countries and territories, including the U.S., and distribute products in 42 more. Our reportable segments are based on geographic operations in four regions: Latin America; North America; Europe, Middle East & Africa; and Asia Pacific. Our product categories are Beauty, Fashion and Home. Beauty consists of color cosmetics, fragrances, skin care and personal care. Fashion consists of jewelry, watches, apparel, footwear, accessories and children’s products. Home consists of gift and decorative products, housewares, entertainment and leisure products and nutritional products. Sales are made to the ultimate consumer principally through direct selling by over 6 million active independent Representatives, who are independent contractors and not our employees. The success of our business is highly dependent on recruiting, retaining and servicing our Representatives. During 2011, approximately 83% of our consolidated revenue was derived from operations outside the U.S.
During the first half of 2012, revenues declined 6% due to unfavorable foreign exchange. Constant $ revenues were flat. Sales of products in the Beauty category decreased 5% due to unfavorable foreign exchange, and increased 1% on a Constant $ basis. Active Representatives decreased 2%. See the “Segment Review” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information related to changes in revenue by segment.
We have experienced increases in product costs in part due to inflationary pressures, primarily in Latin America, as well as higher labor costs. Our pricing strategies are helping to partially offset the resulting product cost increases but there is no assurance that we will be able to pass on product cost increases fully or immediately.
In an effort to improve operating performance, we identified certain actions in 2012, not associated with the 2005 and 2009 Restructuring Programs, that we believe will enhance our operating model, reduce costs, and improve efficiencies. As a result of the analysis and the actions taken, we recorded total costs to implement of $61.0 for the six months ended June 30, 2012. In connection with these actions, effective April 1, 2012, Central & Eastern Europe and Western Europe, Middle East & Africa are being 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 connection with these actions, we expect to realize operating profit benefits of approximately $40 annually and cash flow benefits of approximately $35 after taxes annually beginning in 2013, which will likely be a mitigating factor against inflationary cost pressures.
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 results of the Dominican Republic are included in Latin America and excluded from North America for all periods presented.

NEW ACCOUNTING STANDARDS
Information relating to new accounting standards is included in Note 1, Accounting Policies, of the Notes to Consolidated Financial Statements.


24

AVON PRODUCTS, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in millions, except per share data)



RESULTS OF OPERATIONS—THREE AND SIX MONTHS ENDED JUNE 30, 2012 AS COMPARED TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2011
Non- GAAP Financial Measures
To supplement our financial results presented in accordance with generally accepted accounting principles in the United States (“GAAP”), we disclose operating results that have been adjusted to exclude the impact of changes due to the translation of foreign currencies into U.S. dollars. We refer to these adjusted growth rates as Constant $ growth, which is a non- GAAP financial measure. We believe this measure provides investors an additional perspective on trends. To exclude the impact of changes due to the translation of foreign currencies into U.S. dollars, we calculate current year results and prior year results at a constant exchange rate. Currency impact is determined as the difference between actual growth rates and constant currency growth rates.
We present gross margin, selling, general and administrative expenses as a percentage of revenue, net global expenses, operating profit, operating margin and effective tax rate on a non-GAAP basis. The discussion of our segments presents operating profit and operating margin on a non-GAAP basis. We have provided a quantitative reconciliation of the difference between the non-GAAP financial measure and the financial measure calculated and reported in accordance with GAAP. These non-GAAP measures should not be considered in isolation, or as a substitute for, or superior to, financial measures calculated in accordance with GAAP. The Company uses the non-GAAP financial measures to evaluate its operating performance and believes that it is meaningful for investors to be made aware of, on a period-to-period basis, the impacts of costs to implement (“CTI”) restructuring initiatives. The Company believes investors find the non-GAAP information helpful in understanding the ongoing performance of operations separate from items that may have a disproportionate positive or negative impact on the Company’s financial results in any particular period. See Note 8, Restructuring Initiatives for more information on these items.



25

AVON PRODUCTS, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in millions, except per share data)



Consolidated
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
%/Point
Change
 
2012
 
2011
 
%/Point
Change
Total revenue
$
2,591.7

 
$
2,856.4

 
(9
)%
 
$
5,167.1

 
$
5,485.5

 
(6
)%
Cost of sales
964.5

 
1,018.0

 
(5
)%
 
1,974.3

 
1,967.8

 
—
 %
Selling, general and administrative expenses
1,500.6

 
1,521.8

 
(1
)%
 
2,994.7

 
2,954.6

 
1
 %
Operating profit
126.6

 
316.6

 
(60
)%
 
198.1