Document
 
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 June 30, 2017
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.)
Building 6, Chiswick Park, London W4 5HR
United Kingdom
(Address of principal executive offices)
+44-1604-232425
(Registrant’s 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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
  
Accelerated filer
¨
Non-accelerated filer
¨  (do not check if a smaller reporting company)
  
Smaller reporting company
¨
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨


Indicate by check mark whether the registrant 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 June 30, 2017 was 439,949,643.
 



TABLE OF CONTENTS
 
 
 
Page
Numbers
 
 
 
Item 1.
 
 
 
 
 
3 - 4
 
 
 
 
5 - 6
 
 
 
 
 
 
 
 
 
 
 
 
9 - 26
 
 
 
Item 2.
27 - 44
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
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)
June 30, 2017
 
June 30, 2016
Net sales
$
1,353.5

 
$
1,399.5

Other revenue
42.4

 
34.8

Total revenue
1,395.9

 
1,434.3

Costs, expenses and other:
 
 
 
Cost of sales
525.0

 
565.0

Selling, general and administrative expenses
839.3

 
774.2

Operating profit
31.6

 
95.1

Interest expense
36.1

 
33.2

Interest income
(3.1
)
 
(5.3
)
Other expense (income), net
10.8

 
(4.7
)
Total other expenses
43.8

 
23.2

(Loss) income before taxes
(12.2
)
 
71.9

Income taxes
(33.6
)
 
(36.1
)
(Loss) income from continuing operations, net of tax
(45.8
)
 
35.8

Loss from discontinued operations, net of tax
—

 
(2.6
)
Net (loss) income
(45.8
)
 
33.2

Net loss (income) attributable to noncontrolling interests
0.3

 
(0.2
)
Net (loss) income attributable to Avon
$
(45.5
)
 
$
33.0

(Loss) earnings per share:
 
 
 
Basic from continuing operations
$
(0.12
)
 
$
0.07

Basic from discontinued operations
—

 
(0.01
)
Basic attributable to Avon
(0.12
)
 
0.06

Diluted from continuing operations
$
(0.12
)
 
$
0.07

Diluted from discontinued operations
—

 
(0.01
)
Diluted attributable to Avon
(0.12
)
 
0.06

The accompanying notes are an integral part of these statements.


3


AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Six Months Ended
(In millions, except per share data)
June 30, 2017
 
June 30, 2016
Net sales
$
2,651.6

 
$
2,679.5

Other revenue
77.4

 
61.3

Total revenue
2,729.0

 
2,740.8

Costs, expenses and other:
 
 
 
Cost of sales
1,042.1

 
1,083.8

Selling, general and administrative expenses
1,626.6

 
1,554.1

Operating profit
60.3

 
102.9

Interest expense
71.2

 
65.9

Interest income
(7.8
)
 
(9.3
)
Other expense, net
15.8

 
132.5

Total other expenses
79.2

 
189.1

Loss before taxes
(18.9
)
 
(86.2
)
Income taxes
(63.4
)
 
(33.8
)
Loss from continuing operations, net of tax
(82.3
)
 
(120.0
)
Loss from discontinued operations, net of tax
—

 
(12.2
)
Net loss
(82.3
)
 
(132.2
)
Net loss (income) attributable to noncontrolling interests
0.3

 
(0.7
)
Net loss attributable to Avon
$
(82.0
)
 
$
(132.9
)
Loss per share:
 
 
 
Basic from continuing operations
$
(0.21
)
 
$
(0.29
)
Basic from discontinued operations
—

 
(0.03
)
Basic attributable to Avon
(0.21
)
 
(0.32
)
Diluted from continuing operations
$
(0.21
)
 
$
(0.29
)
Diluted from discontinued operations
—

 
(0.03
)
Diluted attributable to Avon
(0.21
)
 
(0.32
)
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)
June 30, 2017
 
June 30, 2016
Net (loss) income
$
(45.8
)
 
$
33.2

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
9.5

 
(8.1
)
Change in derivative losses on cash flow hedges, net of taxes of $0.0 and $0.0
—

 
0.5

Adjustments of and amortization of net actuarial loss and prior service cost, net of taxes of $0.0 and $0.2
3.1

 
4.2

Other comprehensive income related to New Avon investment, net of taxes of $0.0
0.1

 
—

Total other comprehensive income (loss), net of taxes
12.7

 
(3.4
)
Comprehensive (loss) income
(33.1
)
 
29.8

Less: comprehensive loss attributable to noncontrolling interests
(0.2
)
 
(0.9
)
Comprehensive (loss) income attributable to Avon
$
(32.9
)
 
$
30.7

The accompanying notes are an integral part of these statements.

5



AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
Six Months Ended
(In millions)
June 30, 2017
 
June 30, 2016
Net loss
$
(82.3
)
 
$
(132.2
)
Other comprehensive income:
 
 
 
Foreign currency translation adjustments
71.5

 
87.8

Change in derivative losses on cash flow hedges, net of taxes of $0.0 and $0.0
—

 
0.9

Adjustments of and amortization of net actuarial loss and prior service cost, net of taxes of $0.0 and $10.6
6.2

 
268.2

Other comprehensive income related to New Avon investment, net of taxes of $0.0
1.2

 
—

Total other comprehensive income, net of taxes
78.9

 
356.9

Comprehensive (loss) income
(3.4
)
 
224.7

Less: comprehensive (loss) income attributable to noncontrolling interests
(0.1
)
 
0.2

Comprehensive (loss) income attributable to Avon
$
(3.3
)
 
$
224.5

The accompanying notes are an integral part of these statements.



6


AVON PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions)
June 30,
2017
 
December 31,
2016
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
633.8

 
$
654.4

Accounts receivable, net
450.0

 
458.9

Inventories
636.9

 
586.4

Prepaid expenses and other
294.0

 
291.3

Current assets of discontinued operations
0.5

 
1.3

Total current assets
2,015.2

 
1,992.3

Property, plant and equipment, at cost
1,491.7

 
1,424.1

Less accumulated depreciation
(770.0
)
 
(712.8
)
Property, plant and equipment, net
721.7

 
711.3

Goodwill
94.6

 
93.6

Other assets
636.0

 
621.7

Total assets
$
3,467.5

 
$
3,418.9

Liabilities, Series C Convertible Preferred Stock and Shareholders’ Deficit
 
 
 
Current Liabilities
 
 
 
Debt maturing within one year
$
13.0

 
$
18.1

Accounts payable
752.4

 
768.1

Accrued compensation
134.5

 
129.2

Other accrued liabilities
415.5

 
401.9

Sales and taxes other than income
152.5

 
147.0

Income taxes
15.8

 
10.7

Current liabilities of discontinued operations
3.8

 
10.7

Total current liabilities
1,487.5

 
1,485.7

Long-term debt
1,873.8

 
1,875.8

Employee benefit plans
172.6

 
164.5

Long-term income taxes
75.3

 
78.6

Other liabilities
243.6

 
205.8

Total liabilities
3,852.8

 
3,810.4

 
 
 
 
Commitments and contingencies (Note 8)


 


Series C convertible preferred stock
456.1

 
444.7

 
 
 
 
Shareholders’ Deficit
 
 
 
Common stock
189.6

 
188.8

Additional paid-in capital
2,289.2

 
2,273.9

Retained earnings
2,228.8

 
2,322.2

Accumulated other comprehensive loss
(954.6
)
 
(1,033.2
)
Treasury stock, at cost
(4,606.1
)
 
(4,599.7
)
Total Avon shareholders’ deficit
(853.1
)
 
(848.0
)
Noncontrolling interests
11.7

 
11.8

Total shareholders’ deficit
(841.4
)
 
(836.2
)
Total liabilities, series C convertible preferred stock and shareholders’ deficit
$
3,467.5

 
$
3,418.9

The accompanying notes are an integral part of these statements.

7


AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended
(In millions)
June 30, 2017
 
June 30, 2016
Cash Flows from Operating Activities
 
 
 
Net loss
$
(82.3
)
 
$
(132.2
)
Loss from discontinued operations, net of tax
—

 
12.2

Loss from continuing operations, net of tax
$
(82.3
)
 
$
(120.0
)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
 
 
 
Depreciation
41.7

 
41.7

Amortization
15.0

 
14.7

Provision for doubtful accounts
113.0

 
73.8

Provision for obsolescence
16.5

 
18.5

Share-based compensation
16.2

 
16.0

Foreign exchange losses
8.5

 
—

Deferred income taxes
12.0

 
(15.0
)
Loss on deconsolidation of Venezuela
—

 
120.5

Other
16.1

 
1.7

Changes in assets and liabilities:
 
 
 
Accounts receivable
(92.0
)
 
(90.4
)
Inventories
(36.1
)
 
(69.6
)
Prepaid expenses and other
14.2

 
2.3

Accounts payable and accrued liabilities
(53.2
)
 
(65.5
)
Income and other taxes
(5.0
)
 
(24.2
)
Noncurrent assets and liabilities
26.6

 
(34.7
)
Net cash provided (used) by operating activities of continuing operations
11.2

 
(130.2
)
Cash Flows from Investing Activities
 
 
 
Capital expenditures
(43.0
)
 
(42.7
)
Disposal of assets
2.7

 
1.9

Reduction of cash due to Venezuela deconsolidation
—

 
(4.5
)
Other investing activities
(0.1
)
 
1.6

Net cash used by investing activities of continuing operations
(40.4
)
 
(43.7
)
Cash Flows from Financing Activities
 
 
 
Debt, net (maturities of three months or less)
(4.4
)
 
(11.6
)
Proceeds from debt
—

 
8.8

Repayment of debt
(2.0
)
 
(6.2
)
Repurchase of common stock
(6.4
)
 
(3.7
)
Net proceeds from the sale of series C convertible preferred stock
—

 
426.3

Other financing activities
(0.2
)
 
(1.0
)
Net cash (used) provided by financing activities of continuing operations
(13.0
)
 
412.6

Cash Flows from Discontinued Operations
 
 
 
Net cash used by operating activities of discontinued operations
(6.4
)
 
(65.9
)
Net cash used by investing activities of discontinued operations
—

 
(96.7
)
Net cash used by discontinued operations
(6.4
)
 
(162.6
)
Effect of exchange rate changes on cash and cash equivalents
28.0

 
(19.3
)
Net (decrease) increase in cash and cash equivalents
(20.6
)
 
56.8

Cash and cash equivalents at beginning of year(1)
654.4

 
684.7

Cash and cash equivalents at end of period
$
633.8

 
$
741.5

 
The accompanying notes are an integral part of these statements.
(1) Includes cash and cash equivalents of discontinued operations of $(2.2) at the beginning of the year in 2016.


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 2016 Annual Report on Form 10-K ("2016 Form 10-K") in preparing these unaudited Consolidated 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 2016 Form 10-K. When used in this report, the terms "Avon," "Company," "we" or "us" mean Avon Products, Inc.
For interim Consolidated Financial Statements purposes we provide for accruals under our various employee benefit plans for each quarter based on one quarter of the estimated annual expense. In addition, our income tax provision is determined using an estimate of our consolidated annual effective tax rate, adjusted in the current period for discrete income tax items including:
•
the effects of significant, unusual or extraordinary pretax and income tax items, if any;
•
withholding taxes recognized associated with cash repatriations; and
•
the impact of loss-making subsidiaries for which we cannot recognize an income tax benefit and subsidiaries that reduce the reliability of the estimated annual consolidated effective tax rate.
Venezuela
As of March 31, 2016, we deconsolidated our Venezuelan operations, and since then, we account for this business using the cost method of accounting. The decision to deconsolidate our Venezuelan operations was due to the lack of exchangeability between the Venezuelan bolivar and the U.S. dollar. This was caused by Venezuela's restrictive foreign exchange control regulations and our Venezuelan operations' increasingly limited access to U.S. dollars, which restricted our Venezuelan operations' ability to pay dividends and settle intercompany obligations.
As a result of the change to the cost method of accounting, in the first quarter of 2016, we recorded a loss of $120.5 in other expense, net. The loss was comprised of $39.2 in net assets of the Venezuelan business and $81.3 in accumulated foreign currency translation adjustments within accumulated other comprehensive loss ("AOCI") (shareholders' deficit) associated with foreign currency changes before Venezuela was accounted for as a highly inflationary economy. The net assets of the Venezuelan business were comprised of inventories of $23.7, property, plant and equipment, net of $15.0, other assets of $11.4, accounts receivable of $4.6, cash of $4.5, and accounts payable and accrued liabilities of $20.0. Our Consolidated Balance Sheets no longer include the assets and liabilities of our Venezuelan operations. We no longer include the results of our Venezuelan operations in our Consolidated Financial Statements, and will include income relating to our Venezuelan operations only to the extent that we receive cash for dividends or royalties remitted by Avon Venezuela.
Revisions
In our 2016 Form 10-K, our Consolidated Statements of Cash Flows presented supplemental information of the cash paid for interest of $87.1 for the year ended December 31, 2016; however, this amount should have been disclosed as $142.8. We determined that the effect of this revision was not material to our 2016 Form 10-K.
New Accounting Standards Implemented
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation, which is intended to simplify the accounting for share-based payment transactions. This new guidance changes several aspects of the accounting for share-based payment transactions, including accounting for income taxes, forfeitures and employer-tax withholding requirements. ASU 2016-09 also clarifies the Statements of Cash Flows presentation for certain components of share-based payment awards. We have adopted this new accounting guidance in the first quarter of 2017, which did not have a material impact on our Consolidated Financial Statements.

9


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


Accounting Standards to be Implemented
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, as a new Topic, Accounting Standards Codification Topic ("ASC") 606. The core principle of the guidance is that an entity 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. This new accounting guidance may be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We intend to adopt this new accounting guidance as a cumulative-effect adjustment as of January 1, 2018. We are currently evaluating the effect that adopting this new accounting guidance will have on our Consolidated Financial Statements. Based on the evaluation completed to-date, we believe that we will need to:
•
consider some of our sales incentive programs as a separate deliverable and allocate a portion of the sales transaction price to this deliverable;
•
consider some of our prospective discounts achieved based on sales targets as a separate deliverable and allocate a portion of the sales transaction prices to this deliverable, and thus deferring a portion of the sales transaction price until future discounts are realized;
•
adjust the manner in which we present our allowance for sales returns in our Consolidated Balance Sheets;
•
reflect fees paid by the Representative to the Company for items such as brochures, sales aids and late payments as revenue, rather than as a reduction to selling, general and administrative expenses ("SG&A"), as these represent separate performance obligations; and
•
reflect certain of the costs associated with the fees paid by the Representative in cost of sales, rather than SG&A.
In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits. This new guidance requires entities to (1) disaggregate the service cost component from the other components of net periodic benefit costs and present it with other current employee compensation costs in the Consolidated Statements of Operations and (2) present the other components of net periodic benefit costs below operating profit in other expense (income), net. We intend to adopt this new accounting guidance effective January 1, 2018. The new accounting guidance is applied retrospectively and will increase our operating profit for the three and six months ended June 30, 2017 and the full year 2016 by $1.0, $1.9 and $2.1, respectively, but will have no impact on net income (loss).
In February 2016, the FASB issued ASU 2016-02, Leases, which requires all assets and liabilities arising from leases to be recognized in the Consolidated Balance Sheets. We intend to adopt this new accounting guidance effective January 1, 2019. We are currently evaluating the effect that adopting this new accounting guidance will have on our Consolidated Financial Statements.
2. (LOSS) EARNINGS PER SHARE AND SHARE REPURCHASES
We compute (loss) earnings per share ("EPS") using the two-class method, which is a (loss) earnings allocation formula that determines (loss) earnings per share for common stock, and (loss) earnings allocated to convertible preferred stock and participating securities, as appropriate. The earnings allocated to convertible preferred stock are the larger of 1) the preferred dividends accrued in the period or 2) the percentage of earnings from continuing operations allocable to the preferred stock as if they had been converted to common stock. Our participating securities are our grants of restricted stock and restricted stock units, which contain non-forfeitable rights to dividend equivalents to the extent any dividends are declared and paid on our common stock. We compute basic EPS by dividing net income (loss) allocated to common shareholders by the weighted-average number of shares outstanding during the period. Diluted EPS is calculated to give effect to all potentially dilutive common shares that were outstanding during the period.

10


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


 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Shares in millions)
 
2017
 
2016
 
2017
 
2016
Numerator from continuing operations:
 
 
 
 
 
 
 
 
(Loss) income from continuing operations, less amounts attributable to noncontrolling interests
 
$
(45.5
)
 
$
35.6

 
$
(82.0
)
 
$
(120.7
)
Less: (Loss) earnings allocated to participating securities
 
(.6
)
 
.5

 
(1.0
)
 
(1.7
)
Less: Earnings allocated to convertible preferred stock
 
5.7

 
5.9

 
11.4

 
7.3

(Loss) income from continuing operations allocated to common shareholders
 
(50.6
)
 
29.2

 
(92.4
)
 
(126.3
)
Numerator from discontinued operations:
 
 
 
 
 
 
 
 
Loss from discontinued operations
 
$
—

 
$
(2.6
)
 
$
—

 
$
(12.2
)
Less: Loss allocated to participating securities
 
—

 
—

 
—

 
(.2
)
Loss allocated to common shareholders
 
—

 
(2.6
)
 
—

 
(12.0
)
Numerator attributable to Avon:
 
 
 
 
 
 
 
 
Net (loss) income attributable to Avon
 
$
(45.5
)
 
$
33.0

 
$
(82.0
)
 
$
(132.9
)
Less: (Loss) earnings allocated to participating securities
 
(.6
)
 
.4

 
(1.0
)
 
(1.8
)
Less: Earnings allocated to convertible preferred stock
 
5.7

 
5.9

 
11.4

 
7.3

(Loss) income allocated to common shareholders
 
(50.6
)
 
26.7

 
(92.4
)
 
(138.4
)
Denominator:
 
 
 
 
 
 
 
 
Basic EPS weighted-average shares outstanding
 
439.9

 
436.9

 
439.3

 
436.4

Diluted effect of assumed conversion of stock options
 
—

 
—

 
—

 
—

Diluted effect of assumed conversion of preferred stock
 
—

 
—

 
—

 
—

Diluted EPS adjusted weighted-average shares outstanding
 
439.9

 
436.9

 
439.3

 
436.4

(Loss) Earnings per Common Share from continuing operations:
 
 
 
 
 
 
 
 
Basic
 
$
(.12
)
 
$
.07

 
$
(.21
)
 
$
(.29
)
Diluted
 
(.12
)
 
.07

 
(.21
)
 
(.29
)
Loss per Common Share from discontinued operations:
 
 
 
 
 
 
 
 
Basic
 
$
—

 
$
(.01
)
 
$
—

 
$
(.03
)
Diluted
 
—

 
(.01
)
 
—

 
(.03
)
(Loss) Earnings per Common Share attributable to Avon:
 
 
 
 
 
 
 
 
Basic
 
$
(.12
)
 
$
.06

 
$
(.21
)
 
$
(.32
)
Diluted
 
(.12
)
 
.06

 
(.21
)
 
(.32
)
Amounts in the table above may not necessarily sum due to rounding.
During the three months ended June 30, 2017, and during the six months ended June 30, 2017 and 2016, we did not include stock options to purchase 18.1 million shares, 16.1 million shares and 13.8 million shares, respectively, of Avon common stock in the calculation of diluted EPS as we had a loss from continuing operations, net of tax. The inclusion of these shares would decrease the net loss per share, and therefore, their inclusion would be anti-dilutive. During the three months ended June 30, 2016, we did not include stock options to purchase 15.2 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, and therefore, their inclusion would be anti-dilutive.
For the three and six months ended June 30, 2017 and 2016, it is more dilutive to assume the Series C Convertible Preferred Stock is not converted into common stock; therefore, the weighted-average shares outstanding was not adjusted by the as-if converted Series C Convertible Preferred Stock because the effect would be anti-dilutive as it would decrease the net loss per share. If the as-if converted Series C Convertible Preferred Stock had been dilutive, approximately 87.1 million additional shares would have been included in the diluted weighted average number of shares outstanding for the three and six months ended June 30, 2017 and 2016. See Note 5, Related Party Transactions.

11


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


We purchased approximately 1.5 million shares of Avon common stock for $6.4 during the first six months of 2017, as compared to approximately .9 million shares of Avon common stock for $3.7 during the first six months of 2016, through acquisition of stock from employees in connection with tax payments upon vesting of restricted stock units and performance restricted stock units.
3. DISCONTINUED OPERATIONS
On December 17, 2015, the Company entered into definitive agreements with affiliates controlled by Cerberus Capital Management, L.P. ("Cerberus"). The agreements include an investment agreement providing for a $435.0 investment by Cleveland Apple Investor L.P. (“Cerberus Investor”) (an affiliate of Cerberus) in the Company through the purchase of perpetual convertible preferred stock (see Note 5, Related Party Transactions) and a separation and investment agreement providing for the separation of the Company's North America business, which represented the Company's operations in the United States, Canada and Puerto Rico, from the Company into New Avon LLC ("New Avon"), a privately-held company that is majority-owned and managed by Cerberus NA Investor LLC (“Cerberus NA”) (an affiliate of Cerberus). These transactions closed on March 1, 2016.
The major classes of financial statement components comprising the loss on discontinued operations, net of tax for North America are shown below:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2016
Total revenue
 
$
—

 
$
135.2

Cost of sales
 
—

 
53.2

Selling, general and administrative expenses
 
1.2

 
89.0

Operating loss
 
(1.2
)
 
(7.0
)
Other income items
 
—

 
.6

Loss from discontinued operations, before tax
 
(1.2
)
 
(6.4
)
Loss on sale of discontinued operations, before tax
 
(1.4
)
 
(16.3
)
Income taxes
 
—

 
10.5

Loss from discontinued operations, net of tax
 
$
(2.6
)
 
$
(12.2
)
There were no amounts recorded in discontinued operations for the three or six months ended June 30, 2017.
4. INVESTMENT IN NEW AVON
In connection with the separation of the Company's North America business (as discussed in Note 3, Discontinued Operations), which closed on March 1, 2016, the Company retained a 19.9% ownership interest in New Avon. The Company accounts for its ownership interests in New Avon using the equity method of accounting, which results in the Company recognizing its proportionate share of New Avon's income or loss and other comprehensive income or loss. The Company's proportionate share of the losses of New Avon was $5.8 and $.6 during the three months ended June 30, 2017 and June 30, 2016, respectively, and $9.8 and $4.5 during the six months ended June 30, 2017 and four months ended June 30, 2016, respectively. The Company recorded these amounts within other expense, net. In addition, the Company's proportionate share of the post-separation other comprehensive income of New Avon was a benefit of $.1 and $.1 during the three and six months ended June 30, 2017, respectively, and was recorded within other comprehensive income (loss).
The Company also recorded an additional loss of $.5 within other expense, net and a benefit of $1.1 within other comprehensive income (loss), during the six months ended June 30, 2017, primarily associated with purchase accounting adjustments reported by New Avon. At June 30, 2017, our investment in New Avon was $23.7 and was classified within other assets in our Consolidated Balance Sheets.
Summarized financial information related to New Avon is shown below:
 
 
 Six Months Ended
June 30, 2017
 
Four Months Ended June 30, 2016
Total revenue
 
$
361.8

 
$
318.2

Gross profit
 
$
225.6

 
$
189.9

Net loss
 
$
(49.4
)
 
$
(22.8
)

12


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


5. RELATED PARTY TRANSACTIONS
The following tables present the related party transactions with New Avon and affiliates of Cerberus. New Avon is majority owned and managed by Cerberus NA. See Note 3, Discontinued Operations and Note 4, Investment in Avon for further details.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Statement of Operations Data
 
 
 
 
 
 
 
 
Revenue from sale of product to New Avon(1)
 
$
9.6

 
$
9.8

 
$
17.6

 
$
13.5

Gross profit from sale of product to New Avon(1)
 
$
.7

 
$
.4

 
$
1.3

 
$
.9

 
 
 
 
 
 
 
 
 
Cost of sales for purchases from New Avon(2)
 
$
1.3

 
$
2.0

 
$
2.1

 
$
2.9

 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses:
 
 
 
 
 
 
 
 
Transition services, research and development and subleases(3)
 
$
(7.2
)
 
$
(11.0
)
 
$
(15.1
)
 
$
(14.9
)
Project management team(4)
 
$
.8

 
1.0

 
$
1.6

 
1.0

Net reduction of selling, general and administrative expenses
 
$
(6.4
)
 
$
(10.0
)
 
$
(13.5
)
 
$
(13.9
)
 
 
June 30, 2017
 
December 31, 2016
Balance Sheet Data
 
 
 
 
Inventories(5)
 
$
.4

 
$
1.0

Receivables due from New Avon(6)
 
$
8.0

 
$
11.6

Payables due to New Avon(7)
 
$
.2

 
$
.7

Payables due to an affiliate of Cerberus(8)
 
$
.4

 
$
.6

(1) The Company supplies product to New Avon as part of a manufacturing and supply agreement. The Company recorded revenue of $9.6 and $9.8, within other revenue, and gross profit of $.7 and $.4 associated with this agreement during the three months ended June 30, 2017 and 2016, respectively. The Company recorded revenue of $17.6 and $13.5,within other revenue, and gross profit of $1.3 and $.9 associated with this agreement during the six months ended June 30, 2017 and 2016, respectively.
(2) New Avon supplies product to the Company as part of the same manufacturing and supply agreement noted above. The Company purchased $.9 and $2.4 from New Avon associated with this agreement during the three months ended June 30, 2017 and 2016, respectively, and recorded $1.3 and $2.0 associated with these purchases within cost of sales during the three months ended June 30, 2017 and 2016, respectively. The Company purchased $1.9 and $3.6 from New Avon associated with this agreement during the six months ended June 30, 2017 and 2016, respectively and recorded $2.1 and $2.9 associated with these purchases within cost of sales during the six months ended June 30, 2017 and 2016, respectively.
(3) The Company also entered into a transition services agreement to provide certain services to New Avon, as well as an agreement for research and development and subleases for office space. In addition, New Avon is performing certain services for the Company under a similar transition services agreement. The Company recorded a net $7.2 and $11.0 reduction of selling, general and administrative expenses associated with these agreements during the three months ended June 30, 2017 and 2016, respectively, and a net $15.1 and $14.9 reduction of selling, general and administrative expenses associated with these agreements during the six months ended June 30, 2017 and 2016, respectively. The net reduction of selling, general and administrative expenses associated with these agreements generally represents a recovery of the related costs.
(4) The Company also entered into agreements with an affiliate of Cerberus, which provide for the secondment of Cerberus affiliate personnel to the Company's project management team responsible for assisting with the execution of the transformation plan (the "Transformation Plan") announced in January 2016. The Company recorded $.8 and $1.0 in selling, general and administrative expenses associated with these agreements during the three months ended June 30, 2017 and 2016, respectively, and recorded $1.6 and $1.0 in selling, general and administrative expenses associated with these agreements during the six months ended June 30, 2017 and 2016, respectively. See Note 12, Restructuring Initiatives for additional information related to the Transformation Plan.
(5) Inventories relate to purchases from New Avon, associated with the manufacturing and supply agreement, which have not yet been sold, and were classified within inventories in the Consolidated Balance Sheets.

13


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


(6) The receivables due from New Avon relate to the agreements for transition services, research and development and subleases for office space, as well as the manufacturing and supply agreement, and were classified within prepaid expenses and other in the Consolidated Balance Sheets.
(7) The payables due to New Avon relate to the manufacturing and supply agreement, and were classified within other accrued liabilities in the Consolidated Balance Sheets.
(8) The payables due to an affiliate of Cerberus relate to the agreement for the project management team, and were classified within other accrued liabilities in the Consolidated Balance Sheets.
In addition, the Company also issued standby letters of credit to the lessors of certain equipment, a lease for which was transferred to New Avon in connection with the separation of the Company's North America business. As of June 30, 2017, the Company has a liability of $1.6 for the estimated value of such standby letters of credit. The recognition of the initial liability of $2.1 was included in the estimated loss on sale of the North America business in loss from discontinued operations, net of tax during the year ended December 31, 2016.
Series C Preferred Stock
On March 1, 2016, the Company issued and sold to Cerberus Investor 435,000 shares of newly issued Series C Preferred Stock for an aggregate purchase price of $435.0. Cumulative preferred dividends accrue daily on the Series C Preferred Stock at a rate of 1.25% per quarter. The Series C Preferred Stock had accrued unpaid dividends of $29.8 as of June 30, 2017. There were no dividends declared in the six months ended June 30, 2017 and 2016.
6. INVENTORIES
Components of Inventories
 
June 30, 2017
 
December 31, 2016
Raw materials
 
$
202.3

 
$
179.3

Finished goods
 
434.6

 
407.1

Total
 
$
636.9

 
$
586.4

7. EMPLOYEE BENEFIT PLANS
 
 
Three Months Ended June 30,
 
 
Pension Benefits
 
 
 
 
Net Periodic Benefit Costs
 
U.S. Plans
 
Non-U.S. Plans
 
Postretirement Benefits
 
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Service cost
 
$
1.3

 
$
1.3

 
$
1.2

 
$
1.3

 
$
—

 
$
—

Interest cost
 
.8

 
.8

 
4.4

 
5.7

 
.3

 
.3

Expected return on plan assets
 
(.8
)
 
(1.0
)
 
(6.9
)
 
(8.7
)
 
—

 
—

Amortization of prior service credit
 
—

 
—

 
(.1
)
 
—

 
(.1
)
 
—

Amortization of net actuarial losses
 
1.3

 
1.6

 
2.0

 
1.7

 
.1

 
(.1
)
Net periodic benefit costs(1)
 
$
2.6

 
$
2.7

 
$
.6

 
$
—

 
$
.3

 
$
.2

 
 
Six Months Ended June 30,
 
 
Pension Benefits
 
 
 
 
Net Periodic Benefit Costs
 
U.S. Plans
 
Non-U.S. Plans
 
Postretirement Benefits
 
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Service cost
 
$
2.7

 
$
3.6

 
$
2.4

 
$
2.6

 
$
—

 
$
.1

Interest cost
 
1.5

 
5.1

 
8.8

 
11.7

 
.7

 
.9

Expected return on plan assets
 
(1.6
)
 
(6.2
)
 
(13.6
)
 
(17.5
)
 
—

 
—

Amortization of prior service credit
 
—

 
(.1
)
 
(.1
)
 
—

 
(.2
)
 
(.9
)
Amortization of net actuarial losses
 
2.5

 
7.7

 
3.8

 
3.4

 
.1

 
.1

Settlements/curtailments
 
—

 
.1

 
—

 
—

 
—

 
—

Net periodic benefit costs(1)
 
$
5.1

 
$
10.2

 
$
1.3

 
$
.2

 
$
.6

 
$
.2


14


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


(1) Includes $4.4 of U.S. pension and immaterial amounts of the postretirement benefit plans (related to the U.S.) for the six months ended June 30, 2016, which are included in discontinued operations. Amounts associated with the pension and postretirement benefit plans in Canada and the postretirement benefit plan in Puerto Rico, which are included in discontinued operations, have been excluded from all amounts in the table above. See Note 3, Discontinued Operations for discussion of the separation of the Company's North America business.
During the six months ended June 30, 2017, we made approximately $1 and approximately $7 of contributions to the U.S. and non-U.S. defined benefit pension and postretirement benefit plans, respectively. During the remainder of 2017, we anticipate contributing approximately $9 to $14 and approximately $13 to $18 to fund our U.S. and non-U.S. defined benefit pension and postretirement benefit plans, respectively.
In addition to the amounts in the tables above, during the second quarter of 2017, we recorded an $18.2 charge for a loss contingency related to a non-U.S. pension plan, for which an amendment to the plan that occurred in a prior year may not have been appropriately implemented.
8. 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 and along with the compliance reviews, was completed in 2014.
Following our voluntary reporting of the internal investigation to both the U.S. Department of Justice (the "DOJ") and the U.S. Securities and Exchange Commission (the "SEC") and our subsequent cooperation with those agencies, the United States District Court for the Southern District of New York (the "USDC") approved in December 2014 a deferred prosecution agreement (“DPA”) entered into between the Company and the 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 the Consent which was approved in a judgment entered by the USDC in January 2015, and included $67 in disgorgement and 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.
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, 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 monitor 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 the Consent by evaluating, among other things, the Company's internal accounting controls, recordkeeping and financial reporting policies and procedures as they relate to the Company's current and ongoing compliance with the FCPA and other applicable anti-corruption laws. The monitor has recommended some changes to our policies and procedures that we are in the process of adopting, and may make additional recommendations 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.
The third-party costs incurred in connection with ongoing compliance with the DPA and the Consent, including the monitorship, have not been material to date and we do not anticipate material costs going forward. We currently cannot estimate the costs that we are likely to incur in connection with self-reporting, if applicable, and any additional costs of implementing the changes, if any, to our policies and procedures required by the monitor.

15


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


Brazilian Tax Assessments
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 were unfounded.
These matters have been 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 appealed this decision to the second administrative level. The 2012 IPI assessment totals approximately $340, 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 $29 from approximately $69, 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 Brazilian tax authorities' appeal to this favorable decision regarding the 2002 IPI assessment was decided in Avon’s favor in February 2017. In July 2017, the Brazilian Federal Courts rejected the Brazilian tax authorities' appeal to this favorable decision. The Brazilian tax authorities may no longer appeal this decision and Avon has received notification that the case is officially closed.
In the event that the 2012 IPI assessment is upheld, 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 2010 are closed by statute). However, other similar IPI assessments involving different periods (1998-2001) have been canceled and officially closed in our favor by the second administrative level and in July 2017 we received the official cancellation of the 2002 assessment pursuant to the favorable decision discussed above. We believe that the likelihood that the 2012 IPI assessment will be upheld is reasonably possible. As stated above, we believe that the 2012 IPI assessment is unfounded.
Brazil IPI Tax on Cosmetics
In May 2015, an Executive Decree on certain cosmetics went into effect in Brazil which increased the amount of IPI taxes that are to be remitted by Avon Brazil to the taxing authority on the sales of cosmetic products subject to IPI. Avon Brazil filed an objection to this IPI tax increase on the basis that it is not constitutional. In December 2016, Avon Brazil received a favorable decision from the Federal District Court regarding this objection. This decision has been appealed by the tax authorities.
From May 2015 through April 2016, Avon Brazil remitted the taxes associated with this IPI tax increase into a judicial deposit which would be remitted to the taxing authorities in the event that we are not successful in our objection to the tax increase. In May 2016, Avon Brazil received a favorable preliminary decision on its objection to the tax and was granted a preliminary injunction. As a result, beginning in May 2016, Avon Brazil is no longer required to remit the taxes associated with IPI into a judicial deposit. As the IPI tax increase remains in effect, Avon Brazil is continuing to recognize the IPI taxes associated with the May 2015 Executive Decree as a liability. At June 30, 2017, the liability to the taxing authorities for this IPI tax increase was approximately $160 and was classified within other liabilities in our Consolidated Balance Sheets, and the judicial deposit was approximately $72 and was classified within other assets in our Consolidated Balance Sheets. The net liability that does not have a corresponding judicial deposit was $88 at June 30, 2017, and the interest associated with this net liability has been and will continue to be recognized in other expense, net. Our cash flow from operations has benefited as compared to our earnings as we have recognized the expense and associated interest related to this IPI tax in our Consolidated Statements of Operations; however, since May 2016, we have not made a corresponding cash payment into a judicial deposit.
An unfavorable ruling to our objection of this IPI tax increase would have an adverse effect on the Company's Consolidated Statements of Cash Flows as Avon Brazil would have to remit the liability owed to the taxing authorities. This amount would be partially offset by the amount of the judicial deposit held by Avon Brazil. We are not able to reliably predict the timing of the outcome of our objection to this tax increase.
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 June 30, 2017, is not expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

16


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


9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The tables below present the changes in AOCI by component and the reclassifications out of AOCI for the three and six months ended June 30, 2017 and 2016:
Three Months Ended June 30, 2017:
 
Foreign Currency Translation Adjustments
 
Net Investment Hedges
 
Pension and Postretirement Benefits
 
Investment in New Avon
 
Total
Balance at March 31, 2017
 
$
(849.0
)
 
$
(4.3
)
 
$
(117.1
)
 
$
3.3

 
$
(967.1
)
Other comprehensive income other than reclassifications
 
9.3

 
—

 
—

 
.1

 
9.4

Reclassifications into earnings:
 
 
 
 
 
 
 
 
 
 
Amortization of net actuarial loss and prior service cost, net of tax of $0.0(1)
 
—

 
—

 
3.1

 
—

 
3.1

Total reclassifications into earnings
 
—

 
—

 
3.1

 
—

 
3.1

Balance at June 30, 2017
 
$
(839.7
)
 
$
(4.3
)
 
$
(114.0
)
 
$
3.4

 
$
(954.6
)
Three Months Ended June 30, 2016:
 
Foreign Currency Translation Adjustments
 
Cash Flow Hedges
 
Net Investment Hedges
 
Pension and Postretirement Benefits
 
Total
Balance at March 31, 2016
 
$
(854.8
)
 
$
(.9
)
 
$
(4.3
)
 
$
(146.6
)
 
$
(1,006.6
)
Other comprehensive loss other than reclassifications
 
(7.9
)
 
—

 
—

 
1.4

 
(6.5
)
Reclassifications into earnings:
 
 
 
 
 
 
 
 
 
 
Derivative losses on cash flow hedges, net of tax of $0.0(2)
 
—

 
.5

 
—

 
—

 
.5

Amortization of net actuarial loss and prior service cost, net of tax of $.2(1)
 
—

 
—

 
—

 
2.8

 
2.8

Total reclassifications into earnings
 
—

 
.5

 
—

 
2.8

 
3.3

Balance at June 30, 2016
 
$
(862.7
)
 
$
(.4
)
 
$
(4.3
)
 
$
(142.4
)
 
$
(1,009.8
)
Six Months Ended June 30, 2017:
 
Foreign Currency Translation Adjustments
 
Net Investment Hedges
 
Pension and Postretirement Benefits
 
Investment in New Avon
 
Total
Balance at December 31, 2016
 
$
(910.9
)
 
$
(4.3
)
 
$
(120.2
)
 
$
2.2

 
$
(1,033.2
)
Other comprehensive income other than reclassifications
 
71.2

 
—

 
—

 
1.2

 
72.4

Reclassifications into earnings:
 
 
 
 
 
 
 
 
 
 
Amortization of net actuarial loss and prior service cost, net of tax of $0.0(1)
 
—

 
—

 
6.2

 
—

 
6.2

Total reclassifications into earnings
 
—

 
—

 
6.2

 
—

 
6.2

Balance at June 30, 2017
 
$
(839.7
)
 
$
(4.3
)
 
$
(114.0
)
 
$
3.4

 
$
(954.6
)

17


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


Six Months Ended June 30, 2016:
 
Foreign Currency Translation Adjustments
 
Cash Flow Hedges
 
Net Investment Hedges
 
Pension and Postretirement Benefits
 
Total
Balance at December 31, 2015
 
$
(950.0
)
 
$
(1.3
)
 
$
(4.3
)
 
$
(410.6
)
 
$
(1,366.2
)
Other comprehensive income (loss) other than reclassifications
 
16.0

 
—

 
—

 
(11.3
)
 
4.7

Reclassifications into earnings:
 
 
 
 
 
 
 
 
 
 
Derivative losses on cash flow hedges, net of tax of $0.0(2)
 
—

 
.9

 
—

 
—

 
.9

Amortization of net actuarial loss and prior service cost, net of tax of $.4(1)
 
—

 
—

 
—

 
9.5

 
9.5

Deconsolidation of Venezuela, net of tax of $0.0
 
81.3

 
—

 
—

 
.8

 
82.1

Separation of North America, net of tax of $10.2
 
(10.0
)
 
—

 
—

 
269.2

 
259.2

Total reclassifications into earnings
 
71.3

 
.9

 
—

 
279.5

 
351.7

Balance at June 30, 2016
 
$
(862.7
)
 
$
(.4
)
 
$
(4.3
)
 
$
(142.4
)
 
$
(1,009.8
)
(1) Gross amount reclassified to pension and postretirement expense, within selling, general & administrative expenses, and related taxes reclassified to income taxes.
(2) Gross amount reclassified to interest expense, and related taxes reclassified to income taxes.
A foreign exchange net gain of $6.4 and net loss of $9.7 for the three months ended June 30, 2017 and 2016, respectively, and a foreign exchange net gain of $9.8 and net loss of $10.9 for the six months ended June 30, 2017 and 2016, respectively, resulting from the translation of actuarial losses and prior service cost recorded in AOCI, are included in foreign currency translation adjustments in our Consolidated Statements of Comprehensive Income (Loss).
10. SEGMENT INFORMATION
We determine segment profit by deducting the related costs and expenses from segment revenue. In order to ensure comparability between periods, segment profit includes an allocation of global marketing expenses based on actual revenues. Segment profit excludes global expenses other than the allocation of marketing, costs to implement ("CTI") restructuring initiatives (see Note 12, Restructuring Initiatives), a loss contingency related to a non-U.S. pension plan (see Note 7, Employee Benefit Plans), certain significant asset impairment charges, and other items, which are not allocated to a particular segment, if applicable. This is consistent with the manner in which we assess our performance and allocate resources.
Summarized financial information concerning our reportable segments was as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 Total Revenue
 
2017
 
2016
 
2017
 
2016
Europe, Middle East & Africa
 
$
494.6

 
$
520.9

 
$
1,002.1

 
$
1,041.3

South Latin America
 
558.1

 
535.7

 
1,057.3

 
962.1

North Latin America
 
207.8

 
224.4

 
401.0

 
429.1

Asia Pacific
 
124.7

 
140.4

 
248.9

 
275.0

Total revenue from reportable segments
 
1,385.2

 
1,421.4

 
2,709.3

 
2,707.5

Other operating segments and business activities
 
10.7

 
12.9

 
19.7

 
33.3

Total revenue
 
$
1,395.9

 
$
1,434.3

 
$
2,729.0

 
$
2,740.8


18


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


 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Operating Profit
 
2017
 
2016
 
2017
 
2016
Segment Profit
 
 
 
 
 
 
 
 
Europe, Middle East & Africa
 
$
82.0

 
$
83.4

 
$
156.6

 
$
152.1

South Latin America
 
45.2

 
61.0

 
58.5

 
84.1

North Latin America
 
17.8

 
32.1

 
38.8

 
60.6

Asia Pacific
 
8.2

 
15.4

 
21.1

 
30.2

Total profit from reportable segments
 
$
153.2

 
$
191.9

 
$
275.0

 
$
327.0

Other operating segments and business activities
 
1.6

 
.1

 
2.8

 
4.2

Unallocated global expenses
 
(84.7
)
 
(87.5
)
 
(169.0
)
 
(172.1
)
CTI restructuring initiatives
 
(20.3
)
 
(9.4
)
 
(30.3
)
 
(56.2
)
Loss contingency
 
(18.2
)
 
—

 
(18.2
)
 
—

Operating profit
 
$
31.6

 
$
95.1

 
$
60.3

 
$
102.9

Other operating segments and business activities include the first quarter of 2016 results of Venezuela, as it was deconsolidated effective March 31, 2016, as well as markets that have been exited. Effective in the first quarter of 2017, given that we have exited Thailand during 2016, the results of Thailand are now reported in Other operating segments and business activities for all periods presented, while previously the results had been reported in Asia Pacific. Other operating segments and business activities also include revenue from the sale of products to New Avon since the separation of the Company's North America business into New Avon on March 1, 2016 and ongoing royalties from the licensing of our name and products.
11. SUPPLEMENTAL BALANCE SHEET INFORMATION
At June 30, 2017 and December 31, 2016, prepaid expenses and other included the following:
Components of Prepaid Expenses and Other
 
June 30, 2017
 
December 31, 2016
Prepaid taxes and tax refunds receivable
 
$
105.6

 
$
99.3

Prepaid brochure costs, paper and other literature
 
71.2

 
73.2

Receivables other than trade
 
64.0

 
68.3

Other
 
53.2

 
50.5

Prepaid expenses and other
 
$
294.0

 
$
291.3

At June 30, 2017 and December 31, 2016, other assets included the following:
Components of Other Assets
 
June 30, 2017
 
December 31, 2016
Deferred tax assets
 
$
166.0

 
$
162.1

Long-term receivables
 
84.5

 
78.9

Judicial deposits other than Brazil IPI tax (see below)
 
81.9

 
78.0

Capitalized software
 
81.5

 
83.9

Judicial deposit for Brazil IPI tax on cosmetics (Note 8)
 
72.2

 
69.0

Net overfunded pension plans
 
64.3

 
54.8

Trust assets associated with supplemental benefit plans
 
36.4

 
35.2

Investment in New Avon (Note 4)
 
23.7

 
32.8

Tooling (plates and molds associated with our beauty products)
 
13.7

 
14.7

Other
 
11.8

 
12.3

Other assets
 
$
636.0

 
$
621.7


19


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


12. RESTRUCTURING INITIATIVES
Transformation Plan
In January 2016, we announced the Transformation Plan, which includes cost reduction efforts to continue to improve our cost structure and to enable us to reinvest in growth. As a result of this plan, we have targeted pre-tax annualized cost savings of approximately $350 after three years, with an estimated $200 from supply chain reductions and an estimated $150 from other cost reductions, which are expected to be achieved through restructuring actions, as well as other cost-savings strategies that will not result in restructuring charges. We plan to reinvest a portion of these cost savings in growth initiatives, including media, social selling and information technology systems that will help us modernize our business. We initiated the Transformation Plan in order to enable us to achieve our long-term goals of double-digit operating margin and mid single-digit constant-dollar revenue growth. As part of the Transformation Plan, we identified certain actions, that we believe will reduce ongoing costs, primarily consisting of global headcount reductions relating to operating model changes, as well as the closure of Thailand, a smaller, under-performing market. These operating model changes include the streamlining of our corporate functions to align with the current and future needs of the business and an information technology infrastructure outsourcing initiative.
As a result of these restructuring actions approved-to-date, we have recorded total costs to implement these restructuring initiatives of $137.1 before taxes, of which $31.0 was recorded during the six months ended June 30, 2017, in our Consolidated Statements of Operations. The additional charges not yet incurred associated with the restructuring actions approved to-date of approximately $10 to $15 before taxes are expected to be recorded primarily in 2018. At this time we are unable to quantify the total costs to implement the restructuring initiatives that will be incurred through the time the Transformation Plan is fully implemented as we have not yet identified all actions to be taken.
Restructuring Charges - Three and Six Months Ended June 30, 2017
During the three months and six months ended June 30, 2017, we recorded costs to implement of $21.0 and $31.0, respectively, related to the Transformation Plan, in our Consolidated Statements of Operations. The costs consisted of the following:
•
net charges of $9.5 and $17.1, respectively, for employee-related costs, including severance benefits;
•
contract termination and other net charges of $10.8 and $12.2, respectively, associated with vacating our previous corporate headquarters;
•
implementation costs of $.2 and $.7, respectively, primarily related to professional service fees; and
•
accelerated depreciation of $.5 and $1.0, respectively.
The total costs to implement during the three months ended June 30, 2017 of $21.0 was recorded in selling, general and administrative expenses. Of the total costs to implement during the six months ended June 30, 2017, $31.1 was recorded in selling, general and administrative expenses and a benefit of $.1 was recorded in cost of sales.
Restructuring Charges - Three and Six Months Ended June 30, 2016
During the three months and six ended June 30, 2016, we recorded costs to implement of $10.0 and $57.5, respectively, related to the Transformation Plan, in the Consolidated Statement of Operations. The costs consisted of the following:
•
net charges of $2.8 and $49.9, respectively, for employee-related costs, including severance benefits;
•
contract termination and other net charges of $4.6 and $4.6, respectively;
•
implementation costs of $1.1 and $1.5, respectively, primarily related to professional service fees;
•
accelerated depreciation of $1.2 and $1.2, respectively; and
•
inventory write-offs of $.3 and $.3, respectively.
Of the total costs to implement during the three months ended June 30, 2016, $9.7 was recorded in selling, general and administrative expenses and $.3 was recorded in cost of sales. Of the total costs to implement during the six months ended June 30, 2016, $57.2 was recorded in selling, general and administrative expenses and $.3 was recorded in cost of sales.

20


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


The liability balance for the Transformation Plan as of June 30, 2017 is as follows:
 
 
Employee-Related Costs
 
Contract Terminations/Other
 
Total
Balance at December 31, 2016
 
$
48.6

 
$
2.8

 
$
51.4

2017 charges
 
18.7

 
—

 
18.7

Adjustments
 
(1.6
)
 
12.2

 
10.6

Cash payments
 
(19.8
)
 
(1.7
)
 
(21.5
)
Foreign exchange
 
.4

 
.1

 
.5

Balance at June 30, 2017
 
$
46.3

 
$
13.4

 
$
59.7

The majority of cash payments, if applicable, associated with these charges are expected to be made during 2017.
The following table presents the restructuring charges incurred to date, under the Transformation Plan, along with the estimated charges expected to be incurred on approved initiatives under the plan:
 
 
Employee- Related Costs
 
Inventory Write-offs
 
Foreign Currency Translation Adjustment Write-offs
 
Contract
Terminations/Other
 
Total
Charges incurred to-date
 
$
101.1

 
$
.4

 
$
2.7

 
$
20.9

 
$
125.1

Estimated charges to be incurred on approved initiatives
 
6.2

 
—

 
—

 
1.2

 
7.4

Total expected charges on approved initiatives
 
$
107.3

 
$
.4

 
$
2.7

 
$
22.1

 
$
132.5

The charges, net of adjustments, of initiatives under the Transformation Plan, along with the estimated charges expected to be incurred on approved initiatives under the plan, by reportable segment are as follows:
 
 
Europe, Middle East & Africa
 
South Latin America
 
North Latin America
 
Asia
Pacific
 
Global & Other Operating Segments
 
Total
2015
 
$
—

 
$
—

 
$
—

 
$
—

 
$
21.4

 
$
21.4

2016
 
30.9

 
13.2

 
4.4

 
11.7

 
14.2

 
74.4

First quarter 2017
 
3.0

 
2.7

 
(.1
)
 
(.5
)
 
3.9

 
9.0

Second quarter 2017
 
(.1
)
 
3.0

 
—

 
(.1
)
 
17.5

 
20.3

Charges incurred to-date
 
33.8

 
18.9


4.3


11.1


57.0


125.1

Estimated charges to be incurred on approved initiatives
 
1.2

 
—

 
—

 
—

 
6.2

 
7.4

Total expected charges on approved initiatives
 
$
35.0

 
$
18.9

 
$
4.3

 
$
11.1

 
$
63.2

 
$
132.5

We expect our total costs to implement restructuring on approved initiatives to be an estimated $145 to $150 before taxes under the Transformation Plan. 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 six months ended June 30, 2017, we recorded net benefits of $.7 and $.7, respectively, in selling, general and administrative expenses, in the Consolidated Statements of Operations, associated with the restructuring programs launched in 2005 and 2009, the restructuring initiatives launched in 2012 (including the cost savings initiative known as the "$400M Cost Savings Initiative"), and the restructuring actions identified during 2015 (collectively, the "Other Restructuring Initiatives"), which are substantially complete. During the three and six months ended June 30, 2016, we recorded net benefits of $.6 and $1.3, 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 employee-related costs, as of June 30, 2017 is not material.

21


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


13. GOODWILL
Goodwill
 
 
Europe, Middle East & Africa
 
South Latin
America
 
Asia
Pacific
 
Total
Gross balance at December 31, 2016
 
$
25.6

 
$
72.3

 
$
85.0

 
$
182.9

Accumulated impairments
 
(6.9
)
 
—

 
(82.4
)
 
(89.3
)
Net balance at December 31, 2016
 
$
18.7

 
$
72.3

 
$
2.6

 
$
93.6

 
 
 
 
 
 
 
 
 
Changes during the period ended June 30, 2017:
 
 
 
 
 
 
 
 
Foreign exchange
 
1.5

 
(.5
)
 
—

 
1.0

 
 
 
 
 
 
 
 
 
Gross balance at June 30, 2017
 
$
27.1

 
$
71.8

 
$
85.0

 
$
183.9

Accumulated impairments
 
(6.9
)
 
—

 
(82.4
)
 
(89.3
)
Net balance at June 30, 2017
 
$
20.2

 
$
71.8

 
$
2.6

 
$
94.6

14. FAIR VALUE
Assets and Liabilities Recorded at Fair Value
The fair value measurement provisions required by GAAP establish a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
•
Level 1 - Quoted prices in active markets for identical assets or liabilities.
•
Level 2 - Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
•
Level 3 - Unobservable inputs based on our own assumptions.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of June 30, 2017:
 
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
Available-for-sale securities
$
2.9

 
$
—

 
$
2.9

Foreign exchange forward contracts
—

 
1.0

 
1.0

Total
$
2.9

 
$
1.0

 
$
3.9

Liabilities:
 
 
 
 
 
Foreign exchange forward contracts
$
—

 
$
.2

 
$
.2

Total
$
—

 
$
.2

 
$
.2

The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis
as of December 31, 2016:
 
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
Available-for-sale securities
$
2.8

 
$
—

 
$
2.8

Foreign exchange forward contracts
—

 
.6

 
.6

Total
$
2.8

 
$
.6

 
$
3.4

Liabilities:
 
 
 
 
 
Foreign exchange forward contracts
$
—

 
$
3.0

 
$
3.0

Total
$
—

 
$
3.0

 
$
3.0


22


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


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 forward 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.
The net asset (liability) amounts recorded in the balance sheet (carrying amount) and the estimated fair values of our remaining financial instruments at June 30, 2017 and December 31, 2016, respectively, consisted of the following:
 
June 30, 2017
 
December 31, 2016
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Available-for-sale securities
$
2.9

 
$
2.9

 
$
2.8

 
$
2.8

Debt maturing within one year(1)
(13.0
)
 
(13.0
)
 
(18.1
)
 
(18.1
)
Long-term debt(1)
(1,873.8
)
 
(1,852.1
)
 
(1,875.8
)
 
(1,877.5
)
Foreign exchange forward contracts
(.8
)
 
(.8
)
 
(2.4
)
 
(2.4
)
(1) The carrying value of debt maturing within one year and long-term debt is presented net of debt issuance costs and includes any related discount or premium and unamortized deferred gains on terminated interest-rate swap agreements, as applicable.
The methods and assumptions used to estimate fair value are as follows:
Available-for-sale securities - The fair values of these investments were the quoted market prices for issues listed on securities exchanges.
Debt maturing within one year and long-term 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.
15. 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.
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 in the Consolidated Balance Sheets at their fair values. The following table presents the fair value of derivative instruments outstanding at June 30, 2017:
 
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
 
$
1.0

 
Accounts payable
 
$
.2

Total derivatives not designated as hedges
 
 
$
1.0

 
 
 
$
.2

Total derivatives
 
 
$
1.0

 
 
 
$
.2

 

23


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


The following table presents the fair value of derivative instruments outstanding at December 31, 2016:
 
Asset
 
 
 
Liability
 
Balance Sheet
Classification
 
Fair
Value