10-Q
 
UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
_________________________
FORM 10-Q
_________________________
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2015
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.)
777 Third Avenue, New York, N.Y. 10017-1307
(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  x   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  x    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
x
  
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  x
The number of shares of Common Stock (par value $0.25) outstanding at September 30, 2015 was 435,398,380.
 



TABLE OF CONTENTS
 
 
 
Page
Numbers
 
 
 
Item 1.
 
 
 
 
 
3-4
 
 
 
 
5-6
 
 
 
 
 
 
 
 
 
 
 
 
9-26
 
 
 
Item 2.
27-49
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 

2

PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS

AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three Months Ended
(In millions, except per share data)
September 30, 2015
 
September 30, 2014
Net sales
$
1,631.2

 
$
2,059.0

Other revenue
35.7

 
79.2

Total revenue
1,666.9

 
2,138.2

Costs, expenses and other:
 
 
 
Cost of sales
652.7

 
813.9

Selling, general and administrative expenses
991.2

 
1,136.4

Operating profit
23.0

 
187.9

Interest expense
30.1

 
27.5

Loss on extinguishment of debt
5.5

 
—

Interest income
(3.6
)
 
(3.8
)
Other expense, net
29.4

 
19.8

Gain on sale of business
(46.2
)
 
—

Total other expenses
15.2

 
43.5

Income before taxes
7.8

 
144.4

Income taxes
(704.8
)
 
(52.4
)
Net (loss) income
(697.0
)
 
92.0

Net income attributable to noncontrolling interests
—

 
(0.6
)
Net (loss) income attributable to Avon
$
(697.0
)
 
$
91.4

(Loss) Earnings per share:
 
 
 
Basic
$
(1.58
)
 
$
0.21

Diluted
(1.58
)
 
0.21

Cash dividends per common share
$
0.06

 
$
0.06

The accompanying notes are an integral part of these statements.


3

AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Nine Months Ended
(In millions, except per share data)
September 30, 2015
 
September 30, 2014
Net sales
$
5,183.5

 
$
6,340.5

Other revenue
101.0

 
169.9

Total revenue
5,284.5

 
6,510.4

Costs, expenses and other:
 
 
 
Cost of sales
2,073.4

 
2,580.0

Selling, general and administrative expenses
3,133.9

 
3,700.2

Operating profit
77.2

 
230.2

Interest expense
89.7

 
83.7

Loss on extinguishment of debt
5.5

 
—

Interest income
(9.7
)
 
(11.4
)
Other expense, net
48.3

 
88.8

Gain on sale of business
(44.9
)
 
—

Total other expenses
88.9

 
161.1

(Loss) income before taxes
(11.7
)
 
69.1

Income taxes
(802.0
)
 
(124.4
)
Net loss
(813.7
)
 
(55.3
)
Net income attributable to noncontrolling interests
(1.8
)
 
(2.6
)
Net loss attributable to Avon
$
(815.5
)
 
$
(57.9
)
Loss per share:
 
 
 
Basic
$
(1.84
)
 
$
(0.13
)
Diluted
(1.84
)
 
(0.13
)
Cash dividends per common share
$
0.18

 
$
0.18

The accompanying notes are an integral part of these statements.


4

AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
Three Months Ended
(In millions)
September 30, 2015
 
September 30, 2014
Net (loss) income
$
(697.0
)
 
$
92.0

Other comprehensive loss:
 
 
 
Foreign currency translation adjustments
(150.9
)
 
(124.6
)
Change in derivative losses on cash flow hedges, net of taxes of $0.0 and $0.1
0.5

 
0.3

Adjustments of and amortization of net actuarial loss and prior service cost, net of taxes of $0.3 and $11.7
30.0

 
22.4

Total other comprehensive loss, net of taxes
(120.4
)
 
(101.9
)
Comprehensive loss
(817.4
)
 
(9.9
)
Less: comprehensive loss attributable to noncontrolling interests
(2.3
)
 
(0.8
)
Comprehensive loss attributable to Avon
$
(815.1
)
 
$
(9.1
)
The accompanying notes are an integral part of these statements.

5

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

 
Nine Months Ended
(In millions)
September 30, 2015
 
September 30, 2014
Net loss
$
(813.7
)
 
$
(55.3
)
Other comprehensive loss:
 
 
 
Foreign currency translation adjustments
(256.4
)
 
(101.0
)
Change in derivative losses on cash flow hedges, net of taxes of $0.0 and $0.5
1.4

 
0.9

Adjustments of and amortization of net actuarial loss and prior service cost, net of taxes of $0.9 and $10.7
53.0

 
22.6

Total other comprehensive loss, net of taxes
(202.0
)
 
(77.5
)
Comprehensive loss
(1,015.7
)
 
(132.8
)
Less: comprehensive loss attributable to noncontrolling interests
(2.4
)
 
(1.1
)
Comprehensive loss attributable to Avon
$
(1,013.3
)
 
$
(131.7
)
The accompanying notes are an integral part of these statements.



6

AVON PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions)
September 30,
2015
 
December 31,
2014
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
587.4

 
$
960.5

Accounts receivable, net
470.3

 
563.5

Inventories
847.2

 
822.2

Prepaid expenses and other
480.7

 
618.3

Total current assets
2,385.6

 
2,964.5

Property, plant and equipment, at cost
1,917.5

 
2,292.6

Less accumulated depreciation
(969.2
)
 
(1,061.6
)
Property, plant and equipment, net
948.3

 
1,231.0

Goodwill
99.9

 
249.3

Other assets
340.9

 
1,052.0

Total assets
$
3,774.7

 
$
5,496.8

Liabilities and Shareholders’ (Deficit) Equity
 
 
 
Current Liabilities
 
 
 
Debt maturing within one year
$
117.2

 
$
137.1

Accounts payable
815.2

 
895.4

Accrued compensation
189.9

 
210.5

Other accrued liabilities
424.6

 
598.8

Sales and taxes other than income
149.4

 
168.6

Income taxes
29.2

 
36.8

Total current liabilities
1,725.5

 
2,047.2

Long-term debt
2,196.3

 
2,463.9

Employee benefit plans
473.5

 
501.8

Long-term income taxes
62.3

 
77.8

Other liabilities
85.5

 
100.8

Total liabilities
4,543.1

 
5,191.5

Shareholders’ (Deficit) Equity
 
 
 
Common stock
187.9

 
187.6

Additional paid-in capital
2,233.4

 
2,207.9

Retained earnings
2,808.6

 
3,702.9

Accumulated other comprehensive loss
(1,417.4
)
 
(1,217.6
)
Treasury stock, at cost
(4,594.0
)
 
(4,591.0
)
Total Avon shareholders’ (deficit) equity
(781.5
)
 
289.8

Noncontrolling interests
13.1

 
15.5

Total shareholders’ (deficit) equity
(768.4
)
 
305.3

Total liabilities and shareholders’ (deficit) equity
$
3,774.7

 
$
5,496.8

The accompanying notes are an integral part of these statements.

7

AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended
(In millions)
September 30, 2015
 
September 30, 2014
Cash Flows from Operating Activities
 
 
 
Net loss
$
(813.7
)
 
$
(55.3
)
Adjustments to reconcile net loss to net cash (used) provided by operating activities:
 
 
 
Depreciation
87.7

 
106.1

Amortization
27.3

 
38.7

Provision for doubtful accounts
114.2

 
146.9

Provision for obsolescence
44.7

 
67.6

Share-based compensation
28.9

 
28.4

Foreign exchange losses
28.2

 
21.1

Deferred income taxes
674.9

 
(87.9
)
Charge for Venezuelan monetary assets and liabilities
(4.2
)
 
53.7

Charge for Venezuelan non-monetary assets
101.7

 
115.7

Pre-tax gain on sale of business
(44.9
)
 
—

Other
56.2

 
55.8

Changes in assets and liabilities:
 
 
 
Accounts receivable
(118.4
)
 
(120.0
)
Inventories
(198.9
)
 
(229.7
)
Prepaid expenses and other
(1.6
)
 
(56.3
)
Accounts payable and accrued liabilities
(47.9
)
 
100.0

Income and other taxes
17.6

 
23.8

Noncurrent assets and liabilities
(48.5
)
 
(82.8
)
Net cash (used) provided by operating activities
(96.7
)
 
125.8

Cash Flows from Investing Activities
 
 
 
Capital expenditures
(61.8
)
 
(88.2
)
Disposal of assets
5.7

 
7.0

Net proceeds from sale of business
208.3

 
—

Purchases of investments
(25.0
)
 
(22.9
)
Proceeds from sale of investments
9.0

 
18.4

Net cash provided (used) by investing activities
136.2

 
(85.7
)
Cash Flows from Financing Activities
 
 
 
Cash dividends
(80.7
)
 
(81.9
)
Debt, net (maturities of three months or less)
(10.3
)
 
(6.4
)
Proceeds from debt
7.6

 
—

Repayment of debt
(265.6
)
 
(70.0
)
Net proceeds from exercise of stock options
—

 
0.2

Repurchase of common stock
(3.0
)
 
(9.4
)
Other financing activities
(5.9
)
 
—

Net cash used by financing activities
(357.9
)
 
(167.5
)
Effect of exchange rate changes on cash and cash equivalents
(54.7
)
 
(154.5
)
Net decrease in cash and cash equivalents
(373.1
)
 
(281.9
)
Cash and cash equivalents at beginning of year
960.5

 
1,107.9

Cash and cash equivalents at end of period
$
587.4

 
$
826.0

 
The accompanying notes are an integral part of these statements.

8

AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. 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 2014 Annual Report on Form 10-K ("2014 Form 10-K") in preparing these unaudited financial statements. In our opinion, the unaudited interim consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair statement of the results for the interim periods presented. 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 2014 Form 10-K. When used in this report, 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 revised our Consolidated Statements of Cash Flows to correct the presentation of certain financing activities, specifically a decrease of $25.3 in repayment of debt, a decrease of $9.1 in proceeds from debt, and a decrease of $16.2 in debt, net for the nine months ended September 30, 2014. Additionally, we revised our Consolidated Statements of Cash Flows to reflect income tax receivables of $7.8 for the nine months ended September 30, 2014 in income and other taxes, while they had been previously reported in prepaid expenses and other, as we believe that this is a better presentation of our income tax receivables. These revisions did not impact the total cash flows from operating activities, our Consolidated Statements of Operations, our Consolidated Statements of Comprehensive Income (Loss) or our Consolidated Balance Sheets. We determined that the effect of these revisions was not material to any of our previously issued financial statements.
Venezuela Currency
We account for Venezuela as a highly inflationary economy. In February 2015, the Venezuelan government announced that a new foreign exchange system was created, referred to as the SIMADI exchange ("SIMADI"). SIMADI began operating on February 12, 2015. There are multiple legal mechanisms in Venezuela to exchange currency. As SIMADI represents the rate which better reflects the economics of Avon Venezuela's business activity, in comparison to the other available exchange rates, we concluded that we should utilize the SIMADI exchange rate to remeasure our Venezuelan operations effective February 12, 2015. As a result of the change to the SIMADI rate, which caused the recognition of a devaluation of approximately 70% as compared to the exchange rate we used previously, we recorded an after-tax benefit of approximately $3 (a benefit of approximately $4 in other expense, net, and a loss of approximately $1 in income taxes) in the first quarter of 2015, primarily reflecting the write-down of monetary assets and liabilities. In addition, as a result of using the historical U.S. dollar cost basis of non-monetary assets, such as inventories, these assets continued to be remeasured, following the change to the SIMADI rate, at the applicable rate at the time of their acquisition. The remeasurement of non-monetary assets at the historical U.S. dollar cost basis causes a disproportionate expense as these assets are consumed in operations, negatively impacting operating profit and net income by approximately $6 and $17 during the three and nine months ended September 30, 2015, respectively. Also as a result of the change to the SIMADI rate, we determined that an adjustment of approximately $11 to cost of sales was needed to reflect certain non-monetary assets, primarily inventories, at their net realizable value, which was recorded in the first quarter of 2015.
In addition, at February 12, 2015, we reviewed Avon Venezuela's long-lived assets to determine whether the carrying amount of the assets was recoverable. Based on our expected cash flows associated with the asset group, we determined that the carrying amount of the assets, carried at their historical U.S. dollar cost basis, was not recoverable. As such, an impairment charge of approximately $90 to selling, general and administrative expenses was needed to reflect the write-down of the long-lived assets to their estimated fair value of $15.7, which was recorded in the first quarter of 2015. The fair value of Avon Venezuela's long-lived assets was determined using both market and cost valuation approaches. The valuation analysis performed required several estimates, including market conditions and inflation rates.
In February 2014, the Venezuelan government announced a foreign exchange system which began operating on March 24, 2014, referred to as the SICAD II exchange ("SICAD II"). As SICAD II represented the rate which better reflected the economics of Avon Venezuela's business activity, in comparison to the other available exchange rates, we concluded that we should utilize the SICAD II exchange rate to remeasure our Venezuelan operations effective March 31, 2014. As a result of the

9

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


change to the SICAD II rate, which caused the recognition of a devaluation of approximately 88% as compared to the official exchange rate we used previously, we recorded an after-tax loss of approximately $42 (approximately $54 in other expense, net, and a benefit of approximately $12 in income taxes) in the first quarter of 2014, primarily reflecting the write-down of monetary assets and liabilities. In addition, as a result of using the historical U.S. dollar cost basis of non-monetary assets, such as inventories, these assets continued to be remeasured, following the change to the SIMADI rate, at the applicable rate at the time of their acquisition. The remeasurement of non-monetary assets at the historical U.S. dollar cost basis causes a disproportionate expense as these assets are consumed in operations, negatively impacting operating profit and net income by approximately $2 and $20 during the three and nine months ended September 30, 2014, respectively. Also as a result, we determined that an adjustment of approximately $116 to cost of sales was needed to reflect certain non-monetary assets, primarily inventories, at their net realizable value, which was recorded in the first quarter of 2014.
Standards to be Implemented
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, issued as a new Topic, Accounting Standards Codification Topic 606. The core principle of the guidance is that a Company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, Deferral of the Effective Date, which resulted in the standard being effective beginning in 2018, with early adoption permitted in the beginning of 2017. This standard can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are currently evaluating the effect that adopting this new accounting guidance will have on our consolidated financial statements.
2. EARNINGS (LOSS) PER SHARE AND SHARE REPURCHASES
We compute earnings (loss) per share ("EPS") using the two-class method, which is an earnings (loss) allocation formula that determines earnings (loss) per share for common stock and 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 (loss) allocated to common shareholders by the weighted-average number of shares outstanding during the period. Diluted EPS is calculated to give effect to all potentially dilutive common shares that were outstanding during the period.
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30
 
September 30
(Shares in millions)
 
2015
 
2014
 
2015
 
2014
Numerator:
 
 
 
 
 
 
 
 
Net (loss) income attributable to Avon
 
$
(697.0
)
 
$
91.4

 
$
(815.5
)
 
$
(57.9
)
Less: Loss (income) allocated to participating securities
 
11.1

 
(.8
)
 
12.8

 
1.6

(Loss) income allocated to common shareholders
 
(685.9
)
 
90.6

 
(802.7
)
 
(56.3
)
Denominator:
 
 
 
 
 
 
 
 
Basic EPS weighted-average shares outstanding
 
435.4

 
434.6

 
435.1

 
434.4

Diluted effect of assumed conversion of stock options
 
—

 
—

 
—

 
—

Diluted EPS adjusted weighted-average shares outstanding
 
435.4

 
434.6

 
435.1

 
434.4

(Loss) Earnings per Common Share:
 
 
 
 
 
 
 
 
Basic
 
$
(1.58
)
 
$
.21

 
$
(1.84
)
 
$
(.13
)
Diluted
 
(1.58
)
 
.21

 
(1.84
)
 
(.13
)
Amounts in the table above may not necessarily sum due to rounding.
During the three and nine months ended September 30, 2015, we did not include stock options to purchase 11.9 million shares and 13.2 million shares, respectively, of Avon common stock in the calculation of diluted EPS as we had a net loss attributable to Avon. During the three months ended September 30, 2014, we did not include stock options to purchase 17.2 million shares of Avon common stock in the calculation of diluted EPS because the exercise prices of those options were greater than the average market price. During the nine months ended September 30, 2014, we did not include stock options to purchase 18.4 million shares of Avon common stock in the calculation of diluted EPS as we had a net loss attributable to Avon. For the three and nine months ended September 30, 2015 and the nine months ended September 30, 2014, when we had a net loss attributable to Avon, the inclusion of these shares would decrease the net loss per share, and therefore, their inclusion would be anti-dilutive.

10

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


We purchased approximately .4 million shares of Avon common stock for $3.0 during the first nine months of 2015, as compared to approximately .6 million shares of Avon common stock for $9.4 during the first nine months of 2014, through acquisition of stock from employees in connection with tax payments upon vesting of restricted stock units, and in 2014, also through private transactions with a broker in connection with stock based obligations under our Deferred Compensation Plan.
3. DIVESTITURES
On July 9, 2015, the Company sold Liz Earle Beauty Co. Limited (“Liz Earle”) for approximately $215, less expenses of approximately $5. Liz Earle was previously reported within our Europe, Middle East & Africa segment. In 2015, we recorded a gain on sale of $44.9 before tax, which was reported separately in the Consolidated Statements of Operations, and $51.6 after tax, representing the difference between the proceeds, including the expected working capital settlement, and the carrying value of the Liz Earle business on the date of sale. Proceeds from the sale of Liz Earle were used to fund a portion of the Company’s redemption of the $250 principal amount of its 2.375% Notes due March 15, 2016, which occurred on August 10, 2015. See Note 15, Debt for additional information.
4. INVENTORIES
Components of Inventories
 
September 30, 2015
 
December 31, 2014
Raw materials
 
$
233.8

 
$
248.8

Finished goods
 
613.4

 
573.4

Total
 
$
847.2

 
$
822.2

5. EMPLOYEE BENEFIT PLANS 
 
 
Three Months Ended September 30,
 
 
Pension Benefits
 
 
 
 
Net Periodic Benefit Costs
 
U.S. Plans
 
Non-U.S. Plans
 
Postretirement Benefits
 
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Service cost
 
$
3.3

 
$
3.9

 
$
1.8

 
$
2.0

 
$
.3

 
$
.2

Interest cost
 
6.2

 
6.4

 
7.0

 
9.1

 
1.0

 
1.1

Expected return on plan assets
 
(8.3
)
 
(9.0
)
 
(10.6
)
 
(11.0
)
 
—

 
—

Amortization of prior service credit
 
(.2
)
 
(.1
)
 
—

 
—

 
(1.0
)
 
(1.1
)
Amortization of net actuarial losses
 
11.6

 
11.1

 
3.0

 
2.6

 
.5

 
—

Settlements/curtailments
 
23.8

 
5.4

 
1.9

 
1.0

 
—

 
(2.1
)
Net periodic benefit costs
 
$
36.4

 
$
17.7

 
$
3.1

 
$
3.7

 
$
.8

 
$
(1.9
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
Pension Benefits
 
 
 
 
Net Periodic Benefit Costs
 
U.S. Plans
 
Non-U.S. Plans
 
Postretirement Benefits
 
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Service cost
 
$
9.8

 
$
10.4

 
$
5.9

 
$
6.5

 
$
.9

 
$
.8

Interest cost
 
18.7

 
21.4

 
21.2

 
27.7

 
3.2

 
3.7

Expected return on plan assets
 
(24.9
)
 
(26.9
)
 
(32.2
)
 
(33.0
)
 
—

 
—

Amortization of prior service credit
 
(.6
)
 
(.3
)
 
—

 
—

 
(3.1
)
 
(3.3
)
Amortization of net actuarial losses
 
34.7

 
35.6

 
8.4

 
7.2

 
1.5

 
1.0

Settlements/curtailments
 
23.8

 
30.4

 
1.9

 
1.0

 
—

 
(2.1
)
Net periodic benefit costs
 
$
61.5

 
$
70.6

 
$
5.2

 
$
9.4

 
$
2.5

 
$
.1

As of September 30, 2015, we made approximately $10 and $28 of contributions to the U.S. and non-U.S. defined benefit pension and postretirement benefit plans, respectively. During the remainder of 2015, we anticipate contributing approximately $5 to $10 and $0 to $5 to fund our U.S. and non-U.S. defined benefit pension and postretirement benefit plans, respectively.

11

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


As a result of the lump-sum payments made to former employees that were vested and participated in the U.S. defined benefit pension plan, in the third quarter of 2015, we recorded a settlement charge of $23.8. These lump sum payments were made from our plan assets and are not the result of a specific offer to participants of our U.S. defined benefit pension plan as described below. This settlement charge was allocated between Global Expenses and the operating results of North America.
In an effort to reduce our pension benefit obligations, in March 2014, we offered former employees who were vested and participated in the U.S. defined benefit pension plan a payment that would fully settle our pension plan obligation to those participants who elected to receive such payment. The election period ended during the second quarter of 2014 and the payments were made in June 2014 from our plan assets. As a result of the lump-sum payments made, in the second quarter of 2014, we recorded a settlement charge of $23.5. Because the settlement threshold was exceeded in the second quarter of 2014, a settlement charge of $5.4 was also recorded in the third quarter of 2014 as a result of additional payments from our U.S. pension plan. These settlement charges were allocated between Global Expenses and the operating results of North America.
6. INCOME TAXES
During the first and second quarters of 2015, the Company recorded a $31.3 charge and a $3.2 benefit, respectively, associated with valuation allowances, to adjust our U.S. deferred tax assets to an amount that was “more likely than not” to be realized. These adjustments were primarily caused by fluctuations of the U.S. dollar against currencies of some of our key markets.
During the third quarter of 2015, we recorded an additional valuation allowance for the remaining U.S. deferred tax assets of $649.5. The increase in the valuation allowance resulted from reduced tax benefits expected to be obtained from tax planning strategies associated with an anticipated accelerated receipt in the U.S. of foreign source income. As the U.S. dollar had further strengthened against currencies of some of our key markets during the third quarter of 2015, the benefits associated with the Company’s tax planning strategies were no longer sufficient for the Company to continue to conclude that its tax planning strategies were prudent. In the absence of any alternative prudent tax planning strategies and other sources of future taxable income, it was determined that a full valuation allowance should be recorded. Although the Company continues to expect that it will generate taxable income and tax liability in the U.S., the Company is expected to offset its current and future tax liability with foreign tax credits, and as a result, the expected level of future taxable income and tax liability is not adequate to realize the benefit of previously recorded deferred tax assets. Although the Company may not be able to recognize a financial statement benefit associated with its deferred tax assets, the Company will continue to manage and plan for the utilization of its deferred tax assets to avoid the expiration of deferred tax assets that may have limited lives.
7. CONTINGENCIES
Settlements of FCPA Investigations
As previously reported, we 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 was conducted under the oversight of our Audit Committee, began in June 2008. The internal investigation and compliance reviews 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 complete. In connection with the internal investigation and compliance reviews, certain personnel actions, including termination of employment of certain senior members of management, were taken. In connection with the internal investigation and compliance reviews, we have enhanced 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 U.S. Securities and Exchange Commission (the "SEC") and the U.S. Department of Justice (the "DOJ") to advise both agencies of our internal investigation. We cooperated with investigations of these matters by the SEC and the DOJ.
As previously reported, in December 2014, the United States District Court for the Southern District of New York (the "USDC") approved a deferred prosecution agreement (the "DPA") entered into between the Company and the DOJ related to charges of violations of the books and records and internal controls provisions of the FCPA. In addition, Avon Products (China) Co. Ltd., a subsidiary of the Company operating in China, pleaded guilty to conspiring to violate the books and records provision of the FCPA and was sentenced by the USDC to pay a $68 fine. The SEC also filed a complaint against the Company charging violations of the books and records and internal controls provisions of the FCPA and a consent to settlement (the "Consent") which was approved in a judgment entered by the USDC in January 2015, and included $67 in disgorgement and

12

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


prejudgment interest. The DPA, the above-mentioned guilty plea and the Consent resolved the SEC’s and the DOJ’s investigations of the Company’s compliance with the FCPA and related U.S. laws in China and additional countries. The fine was paid in December 2014 and the payment to the SEC was made in January 2015, both of which had been previously accrued for before December 31, 2014.
Under the DPA, the DOJ will defer criminal prosecution of the Company for a term of three years. If the Company remains in compliance with the DPA during its term, the charges against the Company will be dismissed with prejudice. Under the DPA, the Company also represented that it has implemented and agreed that it will continue to implement a compliance and ethics program designed to prevent and detect violations of the FCPA and other applicable anti-corruption laws throughout its operations.
Under the DPA and the Consent, among other things, the Company agreed to have a compliance monitor (the "monitor"). During July 2015, the Company engaged a monitor, who had been approved by the DOJ and SEC. With the approval of the DOJ and the SEC, the monitor can be replaced by the Company after 18 months, if the Company agrees to undertake self-reporting obligations for the remainder of the monitoring period. The monitoring period is scheduled to expire in July 2018. There can be no assurance as to whether or when the DOJ and the SEC will approve replacing the monitorship with the Company’s self-reporting. If the DOJ determines that the Company has knowingly violated the DPA, the DOJ may commence prosecution or extend the term of the DPA, including the monitoring provisions described above, for up to one year.
The monitor is assessing and monitoring the Company's compliance with the terms of the DPA and Consent by evaluating, among other things, the Company's internal accounting controls, recordkeeping and financial reporting policies and procedures. The monitor may recommend changes to our policies and procedures that we must adopt unless they are unduly burdensome or otherwise inadvisable, in which case we may propose alternatives, which the DOJ and the SEC may or may not accept. In addition, operating under the oversight of the monitor may result in additional time and attention on these matters by members of our management, which may divert their time from the operation of our business. Assuming the monitorship is replaced by a self-reporting period, the Company’s self-reporting obligations may continue to be costly or time-consuming.
We currently cannot estimate the costs that we are likely to incur in connection with compliance with the DPA and the Consent, including the monitorship, the costs, if applicable, of self-reporting, and the costs of implementing the changes, if any, to our policies and procedures required by the monitor. However, the costs of the monitoring process could be significant.
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)). On November 22, 2013, a derivative action was filed in federal court against certain present or former officers and/or directors of the Company and following the federal court's dismissal, was subsequently re-filed in New York state court on May 1, 2015 (Sylvia Pritika, 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. 651479/2015)). The claims asserted in one or more of these actions include alleged breach of fiduciary duty, abuse of control, waste of corporate assets, and 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 more of these derivative actions include 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. On April 28, 2015, an action was filed to seek enforcement of demands for the inspection of certain of the Company’s books and records (Belle Cohen v. Avon Products, Inc. (filed in the New York Supreme Court, New York County, Index No. 651418/2015)). We believe the parties had reached agreements in principle for the settlement of the pending derivative and books and records actions, but those agreements are subject to entry into stipulations of settlement (which have yet to be executed) and to obtaining certain approvals. The contemplated terms of settlement include agreement upon certain corporate governance measures. The Company has accrued approximately $4 with respect to these matters, which the Company expects will be paid by insurance. If a stipulation of settlement of the derivative actions is entered into, the proposed settlement will be submitted to the court for approval. There can be no assurance that the proposed settlement will be finalized. In the event that the proposed settlement is not finalized, is not approved by the court, or is otherwise terminated before it becomes final, 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 the Company and certain present or former officers and/or directors of the Company. On September 29, 2011, the Court appointed LBBW

13

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


Asset Management Investmentgesellschaft mbH and SGSS Deutschland Kapitalanlagegesellschaft mbH as lead plaintiffs and Motley Rice LLC as lead counsel. Lead plaintiffs filed an amended complaint, and the defendants moved to dismiss the amended complaint on June 14, 2012. On September 29, 2014, the Court granted the defendants' motion to dismiss and also granted the plaintiffs leave to amend their complaint. On October 24, 2014, plaintiffs filed their second 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 second amended complaint names as defendants the Company and two individuals 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 and declaratory, injunctive, and other equitable relief. Defendants moved to dismiss the Second Amended Complaint on November 21, 2014. The parties have reached an agreement on a settlement of this class action. The terms of settlement include releases by members of the class of claims against the Company and the individual defendants and payment of $62. Under the terms of the settlement, approximately $60 of the settlement was paid by the Company's insurers and approximately $2 was paid by the Company (which represents the remaining deductible under the Company’s applicable insurance policies) into escrow. On August 21, 2015, the court granted preliminary approval of the settlement and scheduled a hearing on December 1, 2015 to consider final approval. In the event the settlement is not approved by the court, or is otherwise terminated before it is finalized, the Company will be unable to predict the outcome of this matter. Furthermore, in that event, it is reasonably possible that the Company may incur a loss in connection with this matter, which the Company is unable to reasonably estimate.
Between December 23, 2014 and March 12, 2015, two purported class actions were filed in the United States District Court for the Southern District of New York -- Poovathur v. Avon Products, Inc., et al. (No. 14-CV-10083) and McCoy et al. v. Avon Products, Inc., et al. (No. 15-CV-01828) asserting claims under the Employee Retirement Income Security Act ("ERISA") against the Company, the Plan's administrator, benefits board and investment committee, and certain individuals alleged to have served as Plan fiduciaries. On April 8, 2015, the Court consolidated the two actions and recaptioned the consolidated case as In re 2014 Avon Products, Inc. ERISA Litigation, (No. 14-CV-10083). On May 8, 2015, plaintiffs filed a consolidated complaint, asserting claims for alleged breach of fiduciary duty and failure to monitor under ERISA on behalf of a purported class of participants in and beneficiaries of the Plan who invested in and/or held shares of the Avon Common Stock Fund between July 31, 2006 and May 1, 2014 and between December 14, 2011 and the present.  Plaintiffs seek, inter alia, certain monetary relief, damages, and declaratory, injunctive and other equitable relief. On July 9, 2015, Defendants moved to dismiss the consolidated complaint and on August 24, 2015, the Court stayed all pending motions and discovery and directed the parties to pursue non-binding mediation. Avon has provided notice of this matter to the Company’s insurers. 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.
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 (IPI) assessment from the Brazilian tax authorities for alleged tax deficiencies during the years 1997-1998. In December 2012, additional assessments were received for the year 2008 with respect to excise tax (IPI) and taxes charged on gross receipts (PIS and COFINS). In the second quarter of 2014, the PIS and COFINS assessments were officially closed in favor of Avon Brazil. The 2002 and the 2012 IPI assessments assert that the establishment in 1995 of separate manufacturing and distribution companies in Brazil was done without a valid business purpose and that Avon Brazil 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 and 2012 IPI assessments are unfounded.
These matters are being vigorously contested. In January 2013, we filed a protest seeking a first administrative level review with respect to the 2012 IPI assessment. In July 2013, the 2012 IPI assessment was upheld at the first administrative level and we have appealed this decision to the second administrative level. The 2012 IPI assessment totals approximately $241, including penalties and accrued interest. In October 2010, the 2002 IPI assessment was upheld at the first administrative level at an amount reduced to approximately $22 from approximately $52, including penalties and accrued interest. We appealed this decision to the second administrative level, which ruled in favor of Avon in March 2015 and canceled the 2002 IPI assessment. The 2002 IPI assessment remains subject to appeal by the government.
In the event that the 2002 or 2012 IPI assessments are upheld at the 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 earnings. It is not possible to reasonably estimate the likelihood or potential amount of assessments that may be issued for subsequent periods (tax years up through 2009 are closed by statute). However, other similar IPI assessments involving different periods

14

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


(1998-2001) have been canceled and officially closed in our favor by the second administrative level. We believe that the likelihood that the 2002 IPI assessment will be upheld on any further appeal is remote and the likelihood that the 2012 IPI assessment will be upheld is reasonably possible. As stated above, we believe that the 2002 and 2012 IPI assessments are unfounded.
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, 2015, is not expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows.
8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The tables below present the changes in accumulated other comprehensive loss ("AOCI") by component and the reclassifications out of AOCI for the three months ended September 30, 2015 and 2014:
Three Months Ended September 30, 2015:
 
Foreign Currency Translation Adjustments
 
Cash Flow Hedges
 
Net Investment Hedges
 
Pension and Postretirement Benefits
 
Total
Balance at June 30, 2015
 
$
(781.7
)
 
$
(2.3
)
 
$
(4.3
)
 
$
(510.1
)
 
$
(1,298.4
)
Other comprehensive loss other than reclassifications
 
(149.5
)
 
—

 
—

 
(9.4
)
 
(158.9
)
Reclassifications into earnings:
 
 
 
 
 
 
 
 
 
 
Derivative losses on cash flow hedges, net of tax of $0.0(1)
 
—

 
.5

 
—

 
—

 
.5

Amortization of net actuarial loss and prior service cost, net of tax of $.3(2)
 
—

 
—

 
—

 
39.4

 
39.4

Total reclassifications into earnings
 
—

 
.5

 
—

 
39.4

 
39.9

Balance at September 30, 2015
 
$
(931.2
)
 
$
(1.8
)
 
$
(4.3
)
 
$
(480.1
)
 
$
(1,417.4
)
Three Months Ended September 30, 2014:
 
Foreign Currency Translation Adjustments
 
Cash Flow Hedges
 
Net Investment Hedges
 
Pension and Postretirement Benefits
 
Total
Balance at June 30, 2014
 
$
(406.0
)
 
$
(4.5
)
 
$
(4.3
)
 
$
(431.5
)
 
$
(846.3
)
Other comprehensive (loss) income other than reclassifications
 
(124.4
)
 
—

 
—

 
11.2

 
(113.2
)
Reclassifications into earnings:
 
 
 
 
 
 
 
 
 
 
Derivative losses on cash flow hedges, net of tax of $.1(1)
 
—

 
.3

 
—

 
—

 
.3

Amortization of net actuarial loss and prior service cost, net of tax of $5.4(2)
 
—

 
—

 
—

 
11.2

 
11.2

Total reclassifications into earnings
 
—

 
.3

 
—

 
11.2

 
11.5

Balance at September 30, 2014
 
$
(530.4
)
 
$
(4.2
)
 
$
(4.3
)
 
$
(409.1
)
 
$
(948.0
)

15

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


The tables below present the changes in accumulated other comprehensive loss ("AOCI") by component and the reclassifications out of AOCI for the nine months ended September 30, 2015 and 2014:
Nine Months Ended September 30, 2015:
 
Foreign Currency Translation Adjustments
 
Cash Flow Hedges
 
Net Investment Hedges
 
Pension and Postretirement Benefits
 
Total
Balance at December 31, 2014
 
$
(677.0
)
 
$
(3.2
)
 
$
(4.3
)
 
$
(533.1
)
 
$
(1,217.6
)
Other comprehensive loss other than reclassifications
 
(254.2
)
 
—

 
—

 
(13.0
)
 
(267.2
)
Reclassifications into earnings:
 
 
 
 
 
 
 
 
 
 
Derivative losses on cash flow hedges, net of tax of $0.0(1)
 
—

 
1.4

 
—

 
—

 
1.4

Amortization of net actuarial loss and prior service cost, net of tax of $.9(2)
 
—

 
—

 
—

 
66.0

 
66.0

Total reclassifications into earnings
 
—

 
1.4

 
—

 
66.0

 
67.4

Balance at September 30, 2015
 
$
(931.2
)
 
$
(1.8
)
 
$
(4.3
)
 
$
(480.1
)
 
$
(1,417.4
)
Nine Months Ended September 30, 2014:
 
Foreign Currency Translation Adjustments
 
Cash Flow Hedges
 
Net Investment Hedges
 
Pension and Postretirement Benefits
 
Total
Balance at December 31, 2013
 
$
(429.3
)
 
$
(5.1
)
 
$
(4.3
)
 
$
(431.7
)
 
$
(870.4
)
Other comprehensive loss other than reclassifications
 
(101.1
)
 
—

 
—

 
(21.5
)
 
(122.6
)
Reclassifications into earnings:
 
 
 
 
 
 
 
 
 
 
Derivative losses on cash flow hedges, net of tax of $.5(1)
 
—

 
.9

 
—

 
—

 
.9

Amortization of net actuarial loss and prior service cost, net of tax of $23.4(2)
 
—

 
—

 
—

 
44.1

 
44.1

Total reclassifications into earnings
 
—

 
.9

 
—

 
44.1

 
45.0

Balance at September 30, 2014
 
$
(530.4
)
 
$
(4.2
)
 
$
(4.3
)
 
$
(409.1
)
 
$
(948.0
)
(1) Gross amount reclassified to interest expense, and related taxes reclassified to income taxes.
(2) Gross amount reclassified to pension and postretirement expense, within selling, general & administrative expenses, and related taxes reclassified to income taxes.
Foreign exchange net losses of $7.3 and $10.1 for the three months ended September 30, 2015 and 2014, respectively, and foreign exchange net losses of $15.6 and of $10.0 for the nine months ended September 30, 2015 and 2014, respectively, resulting from the translation of actuarial losses and prior service cost recorded in AOCI are included in changes in foreign currency translation adjustments in the Consolidated Statements of Comprehensive Income (Loss).
9. SEGMENT INFORMATION
Summarized financial information concerning our reportable segments was as follows:
 
Three Months Ended September 30,
 
2015
 
2014
 
Revenue
 
Operating
Profit (Loss)
 
Revenue
 
Operating
Profit (Loss)
Latin America
$
790.9

 
$
34.7

 
$
1,067.2

 
$
142.3

Europe, Middle East & Africa
499.2

 
48.1

 
620.0

 
55.5

North America
230.6

 
(27.5
)
 
276.7

 
(18.3
)
Asia Pacific
146.2

 
9.4

 
174.3

 
9.0

Total from operations
$
1,666.9

 
$
64.7

 
$
2,138.2

 
$
188.5

Global and other
—

 
(41.7
)
 
—

 
(.6
)
Total
$
1,666.9

 
$
23.0

 
$
2,138.2

 
$
187.9


16

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


 
Nine Months Ended September 30,
 
2015
 
2014
 
Revenue
 
Operating
Profit (Loss)
 
Revenue
 
Operating
Profit (Loss)
Latin America
$
2,481.2

 
$
55.6

 
$
3,187.7

 
$
196.9

Europe, Middle East & Africa
1,602.8

 
139.6

 
1,932.9

 
199.7

North America
731.3

 
(46.9
)
 
876.5

 
(54.1
)
Asia Pacific
469.2

 
26.8

 
513.3

 
15.6

Total from operations
$
5,284.5

 
$
175.1

 
$
6,510.4

 
$
358.1

Global and other
—

 
(97.9
)
 
—

 
(127.9
)
Total
$
5,284.5

 
$
77.2

 
$
6,510.4

 
$
230.2


10. SUPPLEMENTAL BALANCE SHEET INFORMATION
At September 30, 2015 and December 31, 2014, prepaid expenses and other included the following:
Components of Prepaid Expenses and Other
 
September 30, 2015
 
December 31, 2014
Deferred tax assets (Note 6)
 
$
122.1

 
$
204.7

Prepaid taxes and tax refunds receivable
 
102.0

 
165.7

Prepaid brochure costs, paper, and other literature
 
72.3

 
77.6

Receivables other than trade
 
67.5

 
72.5

Short-term investments
 
36.8

 
21.0

Other
 
80.0

 
76.8

Prepaid expenses and other
 
$
480.7

 
$
618.3

At September 30, 2015 and December 31, 2014, other assets included the following: 
Components of Other Assets
 
September 30, 2015
 
December 31, 2014
Long-term receivables
 
$
125.4

 
$
149.5

Capitalized software
 
87.3

 
101.3

Deferred tax assets (Note 6)
 
50.0

 
685.8

Investments
 
35.9

 
36.4

Tooling (plates and molds associated with our beauty products)
 
15.3

 
21.7

Other intangible assets, net (Note 12)

 
—

 
29.0

Other
 
27.0

 
28.3

Other assets
 
$
340.9

 
$
1,052.0

11. RESTRUCTURING INITIATIVES
Additional Restructuring Charges 2015
As a result of the current economic environment, including the impact of foreign currency movements and inflation on our expenses, and in an effort to continue to improve our cost structure, we identified certain actions during 2015 that we believe will reduce ongoing costs. To date, these actions have primarily consisted of global headcount reductions.
As a result of these restructuring actions, we have recorded total costs to implement these restructuring initiatives of $31.7 before taxes, during the first nine months of 2015 in selling, general and administrative expenses, in the Consolidated Statements of Operations. There are no material remaining costs for restructuring actions approved-to-date. In connection with these restructuring actions, we expect to realize annualized savings of approximately $35 before taxes. We began to realize savings in the second quarter of 2015 and have achieved the annualized savings beginning in the third quarter of 2015. The annualized savings represent the net reduction of expenses that will no longer be incurred by Avon.

17

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


A benefit of $.5 and costs to implement of $31.7 were recorded during the three and nine months ended September 30, 2015, respectively, consisted of the following:
•
benefit of $1.9 and charge of $24.9, respectively, for employee-related costs due to severance benefits; and
•
implementation costs of $1.4 and $6.8, respectively, primarily for professional service fees associated with Corporate and Asia Pacific.
The majority of cash payments, if applicable, associated with these charges are expected to be made during 2015.
The liability balance, which primarily consists of employee-related costs, for these various restructuring initiatives as of September 30, 2015 is as follows:
 
 
Total
2015 charges
 
$
27.3

Adjustments
 
(2.4
)
Cash payments
 
(16.8
)
Foreign exchange
 
(.2
)
Balance at September 30, 2015
 
$
7.9

The charges approved to date under these various restructuring initiatives by reportable business segment were as follows:
 
 
Latin
America
 
Europe, Middle East & Africa
 
North
America
 
Asia
Pacific
 
Corporate
 
Total
First Quarter 2015
 
$
3.3

 
$
5.3

 
$
1.6

 
$
7.0

 
$
9.4

 
$
26.6

Second Quarter 2015
 
(.2
)
 
—

 
.5

 
(.3
)
 
.2

 
.2

Third Quarter 2015
 
(.1
)
 
(.9
)
 
.1

 
(.6
)
 
(.4
)
 
(1.9
)
Charges incurred to date
 
$
3.0


$
4.4


$
2.2


$
6.1


$
9.2


$
24.9

In addition to the charges included in the tables above, we have incurred and other costs to implement restructuring initiatives such as professional services fees.
$400M Cost Savings Initiative
In 2012, we announced a cost savings initiative (the "$400M Cost Savings Initiative") in an effort to stabilize the business and return Avon to sustainable growth, which was expected to be achieved through restructuring actions as well as other cost-savings strategies that would not result in restructuring charges. The $400M Cost Savings Initiative was designed to reduce our operating expenses as a percentage of total revenue to help us achieve a targeted low double-digit operating margin. The restructuring actions under the $400M Cost Savings Initiative primarily consisted of global headcount reductions and related actions, as well as the closure of certain smaller, under-performing markets, including South Korea, Vietnam, Republic of Ireland, Bolivia and France. Other costs to implement these restructuring initiatives consist primarily of professional service fees and accelerated depreciation, and also include professional service fees associated with our North America business. A portion of the professional service fees associated with the North America business are contingent upon the achievement of operating profit targets through December 31, 2015. These fees were recognized over the period that the services were provided and are based upon our estimate of the total amount expected to be paid, which may change based on our actual results.
As a result of the restructuring actions associated with the $400M Cost Savings Initiative, we have recorded total costs to implement these restructuring initiatives of $243.1 before taxes, of which $12.7 before taxes was recorded in the first nine months of 2015. For these restructuring actions, we expect our total costs to implement restructuring to be approximately $245 before taxes. The additional charges not yet incurred associated with the restructuring actions approved to-date are not expected to be significant. In connection with the restructuring actions associated with the $400M Cost Savings Initiative, we expect to realize annualized savings of approximately $270 to $280 before taxes which excludes the benefits from other cost-savings strategies that were not the result of restructuring charges (including reductions in legal and brochure costs). Substantially all of these annualized savings will be achieved in 2015. For market closures, the annualized savings represent the foregone selling, general and administrative expenses as a result of no longer operating in the respective markets. For actions that did not result in the closure of a market, the annualized savings represent the net reduction of expenses that will no longer be incurred by Avon. The annualized savings do not incorporate the impact of the decline in revenue associated with these actions (including market closures), which is not material.

18

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


Restructuring Charges – Three and Nine Months Ended September 30, 2015
During the three and nine months ended September 30, 2015, we recorded costs to implement of $.2 and $12.7, respectively, related to the $400M Cost Savings Initiative in selling, general and administrative expenses, in the Consolidated Statements of Operations. The costs consisted of the following:
•
implementation net benefit of $.3 during the three months ended September 30, 2015, largely related to professional service fees associated with our North America business in which we updated our estimates and reduced such accruals, and costs of $3.9 during the nine months ended September 30, 2015, primarily related to professional service fees associated with our North America business;
•
employee-related net charges of $.1 and $.5 , respectively, primarily associated with postretirement benefits and severance benefits;
•
accelerated depreciation of $.3 and $2.6, respectively, associated with the closure and rationalization of certain facilities; and
•
contract termination and other net charges of $.1 and $5.7, respectively, primarily related to the costs associated with the closure of a North America distribution center.
The majority of cash payments, if applicable, associated with these charges are expected to be made during 2015.
Restructuring Charges – Three Months and Nine Months Ended September 30, 2014
During the three and nine months ended September 30, 2014, we recorded costs to implement of $2.4 and $75.5, respectively, related to the $400M Cost Savings Initiative in selling, general and administrative expenses, in the Consolidated Statements of Operations. The costs consisted of the following:
•
employee-related net benefit of $3.0 during the three months ended September 30, 2014, primarily associated with postretirement benefits, and net charge of $46.5 during the nine months ended September 30, 2014, primarily associated with severance benefits;
•
contract termination and other net benefit of $.5 and net charge of $7.0, respectively, primarily related to costs associated with the closure of the France market and the exit of the Service Model Transformation ("SMT") facility;
•
accelerated depreciation of $1.9 and $3.8, respectively, associated with the closure and rationalization of certain facilities and other assets;
•
charges of $.1 and $3.8, respectively, primarily related to the accumulated foreign currency translation adjustments associated with the closure of the France market; and
•
implementation costs of $3.9 and $8.8, respectively, primarily related to professional service fees associated with our North America business.
The liability balance for the $400M Cost Savings Initiative as of September 30, 2015 is as follows:
 
 
Employee-
Related
Costs
 
Contract Terminations/Other
 
Total
Balance at December 31, 2014
 
$
50.1

 
$
.5

 
$
50.6

2015 charges
 
4.3

 
5.7

 
10.0

Adjustments
 
(3.8
)
 
—

 
(3.8
)
Cash payments
 
(30.3
)
 
(5.9
)
 
(36.2
)
Non-cash write-offs
 
(1.9
)
 
—

 
(1.9
)
Foreign exchange
 
(1.5
)
 
(.1
)
 
(1.6
)
Balance at September 30, 2015
 
$
16.9

 
$
.2

 
$
17.1


19

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


The following table presents the restructuring charges incurred to-date, net of adjustments, under our $400M Cost Savings Initiative, along with the estimated charges expected to be incurred on approved initiatives under the plan:
 
 
Employee-
Related
Costs
 
Inventory/Asset
Write-offs
 
Foreign Currency
Translation
Adjustment
Write-offs
 
Contract
Terminations/Other
 
Total
Charges incurred to date
 
$
168.1

 
$
.7

 
.2

 
$
18.7

 
$
187.7

Estimated charges to be incurred on approved initiatives
 
—

 
2.2

 
—

 
.3

 
2.5

Total expected charges on approved initiatives
 
$
168.1

 
$
2.9

 
$
.2

 
$
19.0

 
$
190.2

The charges, net of adjustments, of initiatives under the $400M Cost Savings Initiative by reportable business segment were as follows:
 
 
Latin
America
 
Europe, Middle East & Africa
 
North
America
 
Asia
Pacific
 
Corporate
 
Total
2012
 
$
12.9

 
$
1.1

 
$
18.0

 
$
12.9

 
$
3.6

 
$
48.5

2013
 
11.1

 
15.6

 
5.3

 
1.3

 
17.7

 
51.0

2014
 
24.5

 
19.9

 
14.0

 
6.5

 
17.1

 
82.0

First Quarter 2015
 
(.4
)
 
.1

 
1.6

 
.6

 
(.3
)
 
1.6

Second Quarter 2015
 
—

 
.2

 
4.9

 
(.1
)
 
(.6
)
 
4.4

Third Quarter 2015
 
(.5
)
 
(1.0
)
 
1.9

 
(.2
)
 
—

 
.2

Charges incurred to date
 
47.6


35.9


45.7


21.0


37.5


187.7

Estimated charges to be incurred on approved initiatives
 
(.3
)
 
—

 
2.5

 
.3

 
—

 
2.5

Total expected charges on approved initiatives
 
$
47.3

 
$
35.9

 
$
48.2

 
$
21.3

 
$
37.5

 
$
190.2

As noted previously, we expect our total costs to implement restructuring to be approximately $245 before taxes under the $400M Cost Savings Initiative. 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 continue to incur other costs to implement restructuring initiatives such as professional services fees and accelerated depreciation.
Other Restructuring Initiatives
During the three and nine months ended September 30, 2015, we recorded net charges of $.5 and $.4, respectively, in selling, general and administrative expenses, in the Consolidated Statements of Operations, associated with the restructuring programs launched in 2005 and 2009 and the restructuring initiative launched in 2012 (the "Other Restructuring Initiatives"), each of which are substantially complete. During the three and nine months ended September 30, 2014, we recorded total costs to implement of $.1 and $.9, respectively, in selling, general and administrative expenses, in the Consolidated Statements of Operations, associated with the Other Restructuring Initiatives. The liability balance associated with the Other Restructuring Initiatives, which primarily consists of contract termination costs, as of September 30, 2015 is not material.
12. GOODWILL AND INTANGIBLE ASSETS
As a result of the sale of Liz Earle in July 2015, we disposed of goodwill and other intangible assets, net of $124.3 and $28.2, respectively. Other intangible assets, net included indefinite-lived trademarks of $23.6, licensing agreements of $3.0 and customer relationships of $1.6. See Note 3, Divestitures for additional information.

20

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


Goodwill
 
Latin
America
 
Europe, Middle East & Africa
 
Asia
Pacific
 
Total
Gross balance at December 31, 2014
$
90.7

 
$
156.0

 
$
85.0

 
$
331.7

Accumulated impairments
—

 
—

 
(82.4
)
 
(82.4
)
Net balance at December 31, 2014
$
90.7

 
$
156.0

 
$
2.6

 
$
249.3

 
 
 
 
 
 
 
 
Changes during the period ended September 30, 2015:
 
 
 
 
 
 
 
Divestitures
$
—

 
$
(124.3
)
 
$
—

 
$
(124.3
)
Foreign exchange
(21.2
)
 
(3.9
)
 
—

 
(25.1
)
 
 
 
 
 
 
 
 
Gross balance at September 30, 2015
$
69.5

 
$
27.8

 
$
85.0

 
$
306.6

Accumulated impairments
—

 
—

 
(82.4
)
 
(82.4
)
Net balance at September 30, 2015
$
69.5

 
$
27.8

 
$
2.6

 
$
99.9

Other intangible assets
 
September 30, 2015
 
December 31, 2014
 
Gross
Amount
 
Accumulated
Amortization
 
Gross
Amount
 
Accumulated
Amortization
Finite-Lived Intangible Assets
 
 
 
 
 
 
 
Customer relationships
$
21.7

 
$
(21.7
)
 
$
33.0

 
$
(31.1
)
Licensing agreements
26.4

 
(26.4
)
 
43.4

 
(39.9
)
Noncompete agreements
6.3

 
(6.3
)
 
7.2

 
(7.2
)
Indefinite-Lived Trademarks
—

 
—

 
23.6

 
—

Total
$
54.4

 
$
(54.4
)
 
$
107.2

 
$
(78.2
)
Aggregate amortization expense was not material for the nine months ended September 30, 2015 and 2014.
13. FAIR VALUE
Assets and Liabilities Recorded at Fair Value
The fair value measurement provisions required by GAAP establish a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
•
Level 1 - Quoted prices in active markets for identical assets or liabilities.
•
Level 2 - Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
•
Level 3 - Unobservable inputs based on our own assumptions.

21

AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. 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, 2015:
 
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
Available-for-sale securities
$
2.8

 
$
—

 
$
2.8

Foreign exchange forward contracts
—

 
3.3

 
3.3

Total
$
2.8

 
$
3.3

 
$
6.1

Liabilities:
 
 
 
 
 
Foreign exchange forward contracts
$
—

 
$
3.3

 
$
3.3

Total
$
—

 
$
3.3

 
$
3.3

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, 2014:
 
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
Available-for-sale securities
$
2.7

 
$
—

 
$
2.7

Foreign exchange forward contracts
—

 
.6

 
.6

Total
$
2.7

 
.6

 
$
3.3

Liabilities:
 
 
 
 
 
Foreign exchange forward contracts
$
—

 
$
5.0

 
$
5.0

Total
$
—

 
$
5.0

 
$
5.0

Assets and Liabilities Recorded at Fair Value on a Non-recurring Basis
Venezuela Long-Lived Assets - March 31, 2015
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a non-recurring basis as of March 31, 2015, 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:
 
 
 
 
 
 
 
Venezuela long-lived assets
$
—

 
$
—

 
$
15.7

 
$
15.7

Total
$
—

 
$
—

 
$
15.7

 
$
15.7

At February 12, 2015, we reviewed Avon Venezuela's long-lived assets to determine whether the carrying amount of the assets was recoverable. Based on our expected cash flows associated with the asset group, we determined that the carrying amount of the assets, carried at their historical U.S. dollar cost basis, was not recoverable. As such, an impairment charge of approximately $90 to selling, general and administrative expenses in the Latin America segment was needed to reflect the write-down of the long-lived assets to their estimated fair value, which was $15.7 at March 31, 2015. The fair value of Avon Venezuela's long-lived assets was determined using both market and cost valuation approaches. The valuation analysis performed required several estimates, including market conditions and inflation rates.
Fair Value of Financial Instruments
Our financial instruments include cash and cash equivalents, available-for-sale securities, short-term investments, accounts receivable, loans receivable, debt maturing within one year, accounts payable, long-term debt and foreign exchange forwards contracts. The carrying value for cash and cash equivalents, accounts receivable, accounts payable and short-term investments approximate fair value because of the short-term nature of these instruments.

22

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


The net asset (liability) amounts recorded in the balance sheet (carrying amount) and the estimated fair values of our remaining financial instruments at September 30, 2015 and December 31, 2014, respectively, consisted of the following:
 
September 30, 2015
 
December 31, 2014
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Available-for-sale securities
$
2.8

 
$
2.8

 
$
2.7

 
$
2.7

Debt maturing within one year(1)
(117.2
)
 
(117.2
)
 
(137.1
)
 
(137.1
)
Long-term debt(1)
(2,196.3
)
 
(1,717.8
)
 
(2,463.9
)
 
(2,242.5
)
Foreign exchange forward contracts
—

 
—

 
(4.4
)
 
(4.4
)
(1) The carrying value of debt maturing within one year and long-term debt includes any related discount or premium and unamortized deferred gains on terminated interest-rate swap agreements, as applicable.
The methods and assumptions used to estimate fair value are as follows:
Available-for-sale securities - The fair values of these investments were the quoted market prices for issues listed on securities exchanges.
Debt maturing within one year and long-term debt - The fair values of our debt and other financing were determined using Level 2 inputs based on indicative market prices.
Foreign exchange forward contracts - The fair values of forward contracts were estimated based on quoted forward foreign exchange prices at the reporting date.
14. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We operate globally, with manufacturing and distribution facilities in various countries around the world. We may reduce our exposure to fluctuations in the fair value and cash flows associated with changes in interest rates and foreign exchange rates by creating offsetting positions, including through the use of derivative financial instruments. If we use foreign currency-rate sensitive and interest-rate sensitive instruments to hedge a certain portion of our existing and forecasted transactions, we would expect that any gain or loss in value of the hedge instruments generally would be offset by decreases or increases in the value of the underlying forecasted transactions. As of September 30, 2015, we do not have any interest-rate swap agreements.
We do not enter into derivative financial instruments for trading or speculative purposes, nor are we a party to leveraged derivatives. The master agreements governing our derivative contracts generally contain standard provisions that could trigger early termination of the contracts in certain circumstances, including if we were to merge with another entity and the creditworthiness of the surviving entity were to be "materially weaker" than that of Avon prior to the merger.
Derivatives are recognized on the Consolidated Balance Sheets at their fair values. The following table presents the fair value of derivative instruments outstanding at September 30, 2015:
 
Asset
 
Liability
 
Balance Sheet
Classification
 
Fair
Value
 
Balance Sheet
Classification
 
Fair
Value
Derivatives not designated as hedges:
 
 
 
 
 
 
 
Foreign exchange forward contracts
Prepaid expenses and other
 
$
3.3

 
Accounts payable
 
$
3.3

Total derivatives not designated as hedges
 
 
$
3.3

 
 
 
$
3.3

Total derivatives
 
 
$
3.3

 
 
 
$
3.3

 
The following table presents the fair value of derivative instruments outstanding at December 31, 2014:
 
Asset
 
 
 
Liability
 
Balance Sheet
Classification
 
Fair
Value
 
Balance Sheet
Classification
 
Fair
Value
Derivatives not designated as hedges:
 
 
 
 
 
 
 
Foreign exchange forward contracts
Prepaid expenses and other
 
$
.6

 
Accounts payable
 
$
5.0

Total derivatives not designated as hedges
 
 
$
.6

 
 
 
$
5.0

Total derivatives
 
 
$
.6

 
 
 
$
5.0


23

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


Interest Rate Risk
A portion of our borrowings is subject to interest rate risk. In the past we have used interest-rate swap agreements, which effectively converted the fixed rate on long-term debt to a floating interest rate, to manage our interest rate exposure. The agreements were designated as fair value hedges. At 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 designated to offset the gain or loss on the de-designated contract. As of September 30, 2015, we do not have any interest-rate swap agreements. Approximately 5% of our debt portfolio at both September 30, 2015 and December 31, 2014 was exposed to floating interest rates.
In January 2013, we terminated eight of our interest-rate swap agreements previously designated as fair value hedges, with notional amounts totaling $1,000. As of the interest-rate swap agreements’ termination date, the aggregate favorable adjustment to the carrying value (deferred gain) of our debt was $90.4, which is being amortized as a reduction to interest expense over the remaining term of the underlying debt obligations. For the three and nine months ended September 30, 2015, the net impact of the gain amortization was $3.6 and $10.9, respectively. For the three and nine months ended September 30, 2014, the net impact of the gain amortization was $3.5 and $10.7, respectively. The interest-rate swap agreements were terminated in order to improve our capital structure, including increasing our ratio of fixed-rate debt. At September 30, 2015, the unamortized deferred gain associated with the January 2013 interest-rate swap termination was $39.1, and was classified within long-term debt in the Consolidated Balance Sheets.
In March 2012, we terminated two of our interest-rate swap agreements previously designated as fair value hedges, with notional amounts totaling $350. As of the interest-rate swap agreements’ termination date, the aggregate favorable adjustment to the carrying value (deferred gain) of our debt was $46.1, which is being amortized as a reduction to interest expense over the remaining term of the underlying debt obligations through March 2019. For the three and nine months ended September 30, 2015, the net impact of the gain amortization was $1.6 and $4.9, respectively. For the three and nine months ended September 30, 2014, the net impact of the gain amortization was $1.6 and $4.7, respectively. The interest-rate swap agreements were terminated in order to increase our ratio of fixed-rate debt. At September 30, 2015, the unamortized deferred gain associated with the March 2012 interest-rate swap termination was $24.5, and was classified within long-term debt in the Consolidated Balance Sheets.
Foreign Currency Risk
We use foreign exchange forward contracts to manage a portion of our foreign currency exchange rate exposures. At September 30, 2015, we had outstanding foreign exchange forward contracts with notional amounts totaling approximately $144.4 for various currencies.
We use foreign exchange forward contracts to manage foreign currency exposure of certain 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 associated intercompany loans. During the three and nine months ended September 30, 2015, we recorded a gain of $4.2 and a loss of $3.9, respectively, in other expense, net in the Consolidated Statements of Operations related to these undesignated foreign exchange forward contracts. Also during the three and nine months ended September 30, 2015, we recorded losses of $7.4 and $.1, respectively, related to the associated intercompany loans, caused by changes in foreign currency exchange rates. During the three and nine months ended September 30, 2014, we recorded losses of $5.1 and $5.2, respectively, in other expense, net in the Consolidated Statements of Operations related to these undesignated foreign exchange forward contracts. During the three and nine months ended September 30, 2014, we recorded gains of $5.1 and $6.2, respectively, related to the associated intercompany loans, caused by changes in foreign currency exchange rates.
15. DEBT
Revolving Credit Facility
In June 2015, the Company and Avon International Operations, Inc., a wholly-owned domestic subsidiary of the Company (“AIO”), entered into a new five-year $400.0 senior secured revolving credit facility (the “2015 revolving credit facility”). The Company terminated its previous $1 billion unsecured revolving credit facility (the “2013 revolving credit facility”) in June 2015 prior to its scheduled expiration in March 2017. There were no amounts drawn under the 2013 revolving credit facility on the date of termination and no early termination penalties were incurred. In the second quarter of 2015, $2.5 was recorded for the write-off of issuance costs related to the 2013 revolving credit facility. Borrowings under the 2015 revolving credit facility bear interest, at our option, at a rate per annum equal to LIBOR plus 250 basis points or a floating base rate plus 150 basis points, in each case subject to adjustment based upon a leverage-based pricing grid. The 2015 revolving credit facility may be

24

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


used for general corporate purposes. As of September 30, 2015, there were no amounts outstanding under the 2015 revolving credit facility.
All obligations of AIO under the 2015 revolving credit facility are (i) unconditionally guaranteed by each material domestic restricted subsidiary of the Company (other than AIO, the borrower), in each case, subject to certain exceptions and (ii) guaranteed on a limited recourse basis by the Company. The obligations of AIO and the guarantors are secured by first priority liens on and security interest in substantially all of the assets of AIO and the subsidiary guarantors and by certain assets of the Company, in each case, subject to certain exceptions.
The 2015 revolving credit facility will terminate in June 2020; provided, however, that it shall terminate on the 91st day prior to the maturity of the 2018 Notes (as defined below), the 4.20% Notes (as defined below), the 2019 Notes (as defined below) and the 4.60% Notes (as defined below), if on such 91st day, the applicable notes are not redeemed, repaid, discharged, defeased or otherwise refinanced in full.
The 2015 revolving credit facility contains affirmative and negative covenants, which are customary for financings of this type, including, among other things, limits on the ability of the Company, AIO or any restricted subsidiary to, subject to certain exceptions, incur liens, incur debt, make restricted payments, make investments or merge, consolidate or dispose of all or substantially all its assets. In addition, the 2015 revolving credit facility contains customary events of default and cross-default provisions, as well as financial covenants (interest coverage and total leverage ratios). As of September 30, 2015, we were in compliance with our interest coverage and total leverage ratios under the 2015 revolving credit facility, and based on then applicable interest rates, the entire $400.0 2015 revolving credit facility could have been drawn down without violating any covenant.
Public Notes
In March 2013, we issued, in a public offering, $250.0 principal amount of 2.375% Notes due March 15, 2016 (the "2.375% Notes"), $500.0 principal amount of 4.60% Notes due March 15, 2020 (the "4.60% Notes"), $500.0 principal amount of 5.00% Notes due March 15, 2023 and $250.0 principal amount of 6.95% Notes due March 15, 2043 (collectively, the "2013 Notes"). The net proceeds from these 2013 Notes were used to repay outstanding debt. Interest on the 2013 Notes is payable semi-annually on March 15 and September 15 of each year. On August 10, 2015, we prepaid our 2.375% Notes at a prepayment price equal to 100% of the principal amount of $250.0, plus accrued interest of $3.1 and a make-whole premium of $5.0. In connection with the prepayment of our 2.375% Notes, we incurred a loss on extinguishment of debt of $5.5 in the third quarter of 2015 consisting of the $5.0 make-whole premium for the 2.375% Notes and the write-off of $.5 of debt issuance costs and discounts related to the initial issuance of the 2.375% Notes.
The indenture governing the 2013 Notes contains interest rate adjustment provisions depending on the long-term credit ratings assigned to the 2013 Notes with S&P and Moody's. As described in the indenture, the interest rates on the 2013 Notes increase by .25% for each one-notch downgrade below investment grade on each of our long-term credit ratings assigned to the 2013 Notes by S&P or Moody's. These adjustments are limited to a total increase of 2% above the respective interest rates in effect on the date of issuance of the 2013 Notes. As a result of the long-term credit rating downgrades by S&P in November 2014 to BB+ (Stable Outlook), in February 2015 to BB (Stable Outlook) and in June 2015 to B+ (Stable Outlook), and by Moody's in October 2014 to Ba1 (Stable Outlook) and in May 2015 to Ba3 (Negative Outlook) for senior unsecured debt, the interest rates on the 2013 Notes have increased by 1.75%, of which .75% was effective as of March 15, 2015 and 1.0% was effective as of September 15, 2015.
At September 30, 2015, we also have outstanding $250.0 principal amount of our 5.75% Notes due March 1, 2018 (the "2018 Notes"), $250.0 principal amount of our 4.20% Notes due July 15, 2018 (the "4.20% Notes") and $350.0 principal amount of our 6.50% Notes due March 1, 2019 (the "2019 Notes"), with interest on each series of these Notes payable semi-annually.
The indentures governing our outstanding notes described above contain certain covenants, including limitations on the incurrence of liens and restrictions on the incurrence of sale/leaseback transactions and transactions involving a merger, consolidation or sale of substantially all of our assets. In addition, these indentures contain customary events of default and cross-default provisions. Further, we would be required to make an offer to repurchase all of our outstanding notes described above, with the exception of our 4.20% Notes, at a price equal to 101% of their aggregate principal amount plus accrued and unpaid interest in the event of a change in control involving Avon and a corresponding credit ratings downgrade to below investment grade.
Long-Term Credit Ratings
Our long-term credit ratings are Ba2 (Negative Outlook) for corporate family debt, and Ba3 (Negative Outlook) for senior unsecured debt, with Moody's; B+ (Stable Outlook) with S&P; and BB- (Negative Outlook) with Fitch, which are below investment grade. We do not believe these long-term credit ratings will have a material impact on our near-term liquidity.

25

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


However, any rating agency reviews could result in a change in outlook or downgrade, which could further limit our access to new financing, particularly short-term financing, reduce our flexibility with respect to working capital needs, affect the market price of some or all of our outstanding debt securities, and likely result in an increase in financing costs, including interest expense under certain of our debt instruments, and less favorable covenants and financial terms under our financing arrangements.

26

AVON PRODUCTS, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(U.S. 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. As of December 31, 2014, we had sales operations in 60 countries and territories, including the United States ("U.S."), and distributed products in 41 more. Our reportable segments are based on geographic operations and include commercial business units in Latin America; Europe, Middle East & Africa; North America; and Asia Pacific. Our product categories are Beauty and Fashion & Home. Beauty consists of skincare (which includes personal care), fragrance and color (cosmetics). Fashion & Home consists of fashion jewelry, watches, apparel, footwear, accessories, gift and decorative products, housewares, entertainment and leisure products, children’s products and nutritional products. Sales are made to the ultimate consumer principally through direct selling by Representatives, who are independent contractors and not our employees. At December 31, 2014, we had approximately 6 million active Representatives. The success of our business is highly dependent on recruiting, retaining and servicing our Representatives. During 2014, approximately 89% of our consolidated revenue was derived from operations outside of the U.S.
During the nine months ended September 30, 2015, revenue declined 19% compared to the prior-year period, primarily due to unfavorable foreign exchange. Constant $ revenue was relatively unchanged. Constant $ revenue benefited from higher average order, which was offset by a 1% decrease in Active Representatives. The net impact of price and mix increased 4%, while units sold decreased 4%. Sales from the Beauty category decreased 19%, or increased 1% on a Constant $ basis. Sales from the Fashion & Home category decreased 16%, or was relatively unchanged on a Constant $ basis.
During the nine months ended September 30, 2015, foreign currency had a significant impact on our financial results. As the U.S. dollar has strengthened relative to currencies of key Avon markets, our revenue and profits have been reduced when translated into U.S. dollars and our margins have been negatively impacted by country mix, as certain of our markets which have historically had higher operating margins experienced significant devaluation of their local currency. In addition, as our sales and costs are often denominated in different currencies, this has created a negative foreign currency transaction impact. Specifically, as compared to the prior-year period, foreign currency has impacted our consolidated financial results as a result of foreign currency transaction losses (classified within cost of sales, and selling, general and administrative expenses), which had an unfavorable impact to Adjusted operating profit of an estimated $150, foreign currency translation, which had an unfavorable impact to Adjusted operating profit of approximately $200 (of which approximately $80 related to Venezuela, as discussed further below), and foreign exchange losses on our working capital (classified within other expense, net), which had an unfavorable impact of approximately $15 before tax.
In November 2015 we announced an internal reorganization of our management structure, including the combined management of Latin America and Europe, Middle East & Africa, which will be effective January 1, 2016. We are still evaluating the potential impact on our segment reporting for 2016.
As a result of the current economic environment, including the impact of foreign currency movements and inflation on our expenses, and in an effort to continue to improve our cost structure, we identified certain actions during 2015 that we believe will reduce ongoing costs. See Note 11, Restructuring Initiatives, to the consolidated financial statements included herein for more information.
In July 2015, we sold Liz Earle Beauty Co. Limited (“Liz Earle”), and as a result, we expect Avon's Constant $ and reported revenue in the fourth quarter of 2015 to be negatively impacted by approximately 1 point. See Note 3, Divestitures, to the consolidated financial statements included herein for more information.
We have updated our full-year 2015 outlook, which includes our results for the nine months ended September 30, 2015, an updated estimate for additional negative impacts from foreign currency translation and transaction costs due to the continued strengthening of the U.S. dollar and an expected negative impact from recently enacted additional Value Added Tax ("VAT") in Brazil (which is in addition to an Industrial Production Tax ("IPI tax") law on cosmetics in Brazil, which went into effect in May 2015). We expect constant-dollar revenue to be relatively unchanged in 2015 as compared with 2014 (which includes the impact of the sale of Liz Earle noted above). However, revenue in reported dollars is expected to be negatively impacted by foreign currency translation, which is expected to have an approximate 19 point negative impact. We expect Constant-dollar Adjusted operating margin to be approximately 100 basis points lower than 2014, of which approximately 50 basis points is due to the IPI tax. In addition, the continued strengthening U.S. dollar is expected to cause a larger negative impact from foreign currency translation than originally anticipated on our Adjusted operating margin in reported dollars. As a result, we expect Adjusted operating margin in reported dollars to be down approximately 300 basis points as compared with 2014, primarily due

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


to the expected impact from foreign currency translation and transaction costs, the IPI tax and recently enacted additional VAT in Brazil.
In February 2015, the Venezuelan government announced that the SICAD II market would no longer be available, and a new foreign exchange system was created, referred to as the SIMADI exchange ("SIMADI"). SIMADI began operating on February 12, 2015. As the SIMADI exchange represents the rate which better reflects the economics of Avon Venezuela's business activity, in comparison to the other available exchange rates (the official rate and SICAD rate), we concluded that we should utilize the SIMADI exchange rate to remeasure our Venezuelan operations effective February 12, 2015. At February 12, 2015, the SIMADI exchange rate was approximately 170, as compared to the SICAD II exchange rate of approximately 50 that we used previously, which caused the recognition of a devaluation of approximately 70%. In addition, at February 12, 2015, we reviewed Avon Venezuela's long-lived assets to determine whether the carrying amount of the assets was recoverable. Based on our expected cash flows associated with the asset group, we determined that the carrying amount of the assets, carried at their historical U.S. dollar cost basis, was not recoverable. As such, an impairment charge of approximately $90 to selling, general and administrative expenses was needed to reflect the write-down of the long-lived assets to estimated fair value of approximately $16, which was recorded in the first quarter of 2015. In addition, as a result of using the historical U.S. dollar cost basis of non-monetary assets, such as inventories, these assets continued to be remeasured, following the change to the SIMADI rate, at the applicable rate at the time of their acquisition. As a result, we determined that an adjustment of approximately $11 to cost of sales was needed to reflect certain non-monetary assets at their net realizable value, which was recorded in the first quarter of 2015. We recognized an additional negative impact of approximately $17 to operating profit and net income relating to these non-monetary assets in the first, second and third quarters of 2015. We expect an additional negative impact of approximately $2 to operating profit and net income in the fourth quarter of 2015, relating to these non-monetary assets. In addition to the negative impact to operating margin, we recorded an after-tax benefit of approximately $3 (a benefit of approximately $4 in other expense, net, and a loss of approximately $1 in income taxes) in the first quarter of 2015, primarily reflecting the write-down of monetary assets and liabilities. See "Segment Review - Latin America" of this MD&A for further discussion of our Venezuela operations.
NEW ACCOUNTING STANDARDS
Information relating to new accounting standards is included in Note 1, Accounting Policies, to the consolidated financial statements included herein.
RESULTS OF OPERATIONS—THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AS COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014
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, including changes in: revenue, operating profit, Adjusted operating profit, operating margin and Adjusted operating margin. We also refer to these adjusted financial measures as Constant $ items, which are Non-GAAP financial measures. We believe these measures provide investors an additional perspective on trends. 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. Foreign currency impact is determined as the difference between actual growth rates and constant-currency growth rates.
We also present gross margin, selling, general and administrative expenses as a percentage of revenue, total and 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 refer to these Non-GAAP financial measures as "Adjusted." We have provided a quantitative reconciliation of the difference between the Non-GAAP financial measures and the financial measures calculated and reported 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 1) costs to implement ("CTI") restructuring initiatives, 2) costs and charges related to the devaluations of Venezuelan currency in February 2015 and March 2014, combined with being designated as a highly inflationary economy ("Venezuelan special items"), 3) the additional $46 accrual recorded in the first quarter of 2014 for the settlements related to the Foreign Corrupt Practices Act ("FCPA") investigations ("FCPA accrual"), 4) the settlement charges associated with the U.S. pension plan ("Pension settlement charge"), 5) costs and charges related to the extinguishment of debt and the termination of our previous $1 billion revolving credit facility ("Debt-related items"), 6) the gain on sale of Liz Earle ("Liz Earle gain on sale") and, as it relates to our effective tax rate discussion, 7) the non-cash income tax adjustments

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


associated with our deferred tax assets recorded in 2015 ("Special tax items"). 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. 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 Venezuelan special items include the impact on the Consolidated Statements of Operations in 2015 and 2014 caused by the devaluations of Venezuelan currency on monetary assets and liabilities, such as cash, receivables and payables; deferred tax assets and liabilities; and non-monetary assets, such as inventories. For non-monetary assets, the Venezuelan special items include the earnings impact caused by the difference between the historical U.S. dollar cost of the assets at the previous exchange rate and the revised exchange rate. In 2015 and 2014, the Venezuelan special items also include adjustments of approximately $11 and approximately $116, respectively, to reflect certain non-monetary assets at their net realizable value. In 2015, the Venezuelan special items also include an impairment charge of approximately $90 to reflect the write-down of the long-lived assets to their estimated fair value. In 2014, the devaluation was caused as a result of moving from the official exchange rate of 6.30 to the SICAD II exchange rate of approximately 50, and in 2015, the devaluation was caused as a result of moving from the SICAD II exchange rate of approximately 50 to the SIMADI exchange rate of approximately 170.
The Pension settlement charge includes the impact on the Consolidated Statements of Operations in the third quarter of 2015 and the second and third quarters of 2014 associated with the payments made to former employees who were vested and participated in the U.S. pension plan. Such payments fully settle our pension plan obligation to those participants who elected to receive such payment.
The Debt-related items include the impact on the Consolidated Statements of Operations in the third quarter of 2015 of the loss on extinguishment of debt caused by the make-whole premium and the write-off of debt issuance costs and discounts associated with the prepayment of our 2.375% Notes (as defined below in "Liquidity and Capital Resources"). The Debt-related items also include the impact during the second quarter of 2015 on other expense, net in the Consolidated Statements of Operations of $2.5 associated with the write-off of issuance costs related to our previous $1 billion revolving credit facility.
The Liz Earle gain on sale includes the impact during 2015 on the Consolidated Statements of Operations due to the gain on sale of Liz Earle.
In addition, the effective tax rate discussion includes Special tax items which include the impact during 2015 on income taxes in the Consolidated Statements of Operations due to a non-cash income tax charge in the first quarter of 2015 and a non-cash income tax benefit in the second quarter of 2015, each associated with valuation allowances, to adjust our U.S. deferred tax assets to an amount that was "more likely than not" to be realized. In the first quarter of 2015 the additional valuation allowance was due to the continued strengthening of the U.S. dollar against currencies of some of our key markets, and in the second quarter of 2015 we released a portion of our valuation allowance due to the weakening of the U.S. dollar against currencies of some of our key markets. The Special tax items also include the impact during the third quarter of 2015 on income taxes in the Consolidated Statements of Operations due to a non-cash income tax charge as a result of establishing a valuation allowance for the full amount of our U.S. deferred tax assets due to the impact of the continued strengthening of the U.S. dollar against currencies of some of our key markets and its associated effect on our tax planning strategies. Additionally, the Special tax items includes the impact during the third quarter of 2015 on income taxes in the Consolidated Statements of Operations due to a non-cash income tax charge associated with valuation allowances, to adjust certain non-U.S. deferred tax assets to an amount that is "more likely than not" to be realized. The non-U.S. valuation allowance included an adjustment associated with Russia, which was primarily the result of lower earnings, which were significantly impacted by foreign exchange losses on working capital balances.
See Note 11, Restructuring Initiatives, Note 1, Accounting Policies, Note 7, Contingencies, Note 5, Employee Benefit Plans, Note 15, Debt, Note 3, Divestitures, and Note 6, Income Taxes, to the consolidated financial statements included herein, and "Segment Review - Latin America" and "Liquidity and Capital Resources" below for more information on these items.

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


Consolidated
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
%/Point
Change
 
2015
 
2014
 
%/Point
Change
Total revenue
$
1,666.9

 
$
2,138.2

 
(22
)%
 
$
5,284.5

 
$
6,510.4

 
(19
)%
Cost of sales
652.7

 
813.9

 
(20
)%
 
2,073.4

 
2,580.0

 
(20
)%
Selling, general and administrative expenses
991.2

 
1,136.4

 
(13
)%
 
3,133.9

 
3,700.2

 
(15
)%
Operating profit
23.0

 
187.9

 
(88
)%
 
77.2

 
230.2

 
(66
)%
Interest expense
30.1

 
27.5

 
9
 %
 
89.7