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UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-Q
_________________________
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x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2019
OR
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¨ | 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)
_________________________
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| | |
New York | | 13-0544597 |
(State or other jurisdiction of Incorporation or organization) | | (I.R.S. Employer Identification No.) |
Building 6, Chiswick Park, London W4 5HRUnited 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 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 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.
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| | | | |
Large accelerated filer | x | | Accelerated filer | ¨ |
Non-accelerated filer | ¨ | | 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
Securities registered pursuant to Section 12(b) of the Exchange Act:
|
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common stock, par value $0.25 per share | AVP | NYSE |
The number of shares of Common Stock (par value $0.25) outstanding at March 31, 2019 was 443,221,115.
TABLE OF CONTENTS
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| | Page Numbers |
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Item 1. | | |
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| Three Months Ended March 31, 2019 and March 31, 2018
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| | |
| Three Months Ended March 31, 2019 and March 31, 2018
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| March 31, 2019 and December 31, 2018
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| | |
| Three Months Ended March 31, 2019 and March 31, 2018
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| Three Months Ended March 31, 2019 and March 31, 2018 | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 1. | | |
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Item 2. | | |
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Item 6. | | |
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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) | March 31, 2019 | | March 31, 2018 |
Net sales | $ | 1,116.2 |
| | $ | 1,309.6 |
|
Other revenue | 70.7 |
| | 83.9 |
|
Total revenue | 1,186.9 |
| | 1,393.5 |
|
Costs, expenses and other: | | | |
Cost of sales | 517.0 |
| | 579.7 |
|
Selling, general and administrative expenses | 673.8 |
| | 768.9 |
|
Operating (loss) profit | (3.9 | ) | | 44.9 |
|
| | | |
Interest expense | 33.2 |
| | 36.2 |
|
Loss on extinguishment of debt and credit facilities | 2.0 |
| | — |
|
Interest income | (1.7 | ) | | (4.2 | ) |
Other (income) expense, net | (22.6 | ) | | 2.5 |
|
Gain on sale of business | (10.3 | ) | | — |
|
Total other expenses | 0.6 |
| | 34.5 |
|
| | | |
(Loss) income from continuing operations, before income taxes | (4.5 | ) | | 10.4 |
|
Income taxes | (19.5 | ) | | (31.5 | ) |
Loss from continuing operations, net of tax | (24.0 | ) | | (21.1 | ) |
Loss from discontinued operations, net of tax | (9.5 | ) | | — |
|
Net loss | (33.5 | ) | | (21.1 | ) |
Net loss attributable to noncontrolling interests | 0.8 |
| | 0.8 |
|
Net loss attributable to Avon | $ | (32.7 | ) | | $ | (20.3 | ) |
| | | |
Loss per share | | | |
Basic | | | |
Basic from continuing operations | $ | (0.07 | ) | | $ | (0.06 | ) |
Basic from discontinued operations | (0.02 | ) | | — |
|
Basic attributable to Avon | $ | (0.09 | ) | | $ | (0.06 | ) |
| | | |
Diluted | | | |
Diluted from continuing operations | $ | (0.07 | ) | | $ | (0.06 | ) |
Diluted from discontinued operations | (0.02 | ) | | — |
|
Diluted attributable to Avon | $ | (0.09 | ) | | $ | (0.06 | ) |
The accompanying notes are an integral part of these statements.
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
| | | | | | | |
| Three Months Ended |
(In millions) | March 31, 2019 | | March 31, 2018 |
Net loss | $ | (33.5 | ) | | $ | (21.1 | ) |
Other comprehensive income: | | | |
Foreign currency translation adjustments | (2.7 | ) | | (4.2 | ) |
Unrealized (losses) gains on revaluation of long-term intercompany balances, net of taxes of $0.0 and $0.0 | (0.6 | ) | | 36.9 |
|
Change in unrealized gains/losses on cash flow hedges, net of taxes of $0.0 and $0.0 | (1.9 | ) | | — |
|
Adjustments of and amortization of net actuarial loss and prior service cost, net of taxes of $0.2 and $0.2 | 1.3 |
|
| 2.9 |
|
Total other comprehensive (loss) income, net of income taxes | (3.9 | ) | | 35.6 |
|
Comprehensive (loss) income | (37.4 | ) | | 14.5 |
|
Less: comprehensive loss attributable to noncontrolling interests | (0.6 | ) | | (0.6 | ) |
Comprehensive (loss) income attributable to Avon | $ | (36.8 | ) | | $ | 15.1 |
|
The accompanying notes are an integral part of these statements.
AVON PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2018 (Audited) and March 31, 2019 (Unaudited)
|
| | | | | | | |
(In millions) | March 31, 2019 | | December 31, 2018 |
Assets | | | |
Current Assets | | | |
Cash and cash equivalents | $ | 406.4 |
| | $ | 532.7 |
|
Restricted cash | 17.0 |
| | — |
|
Accounts receivable, net | 340.9 |
| | 349.7 |
|
Inventories | 532.3 |
| | 542.0 |
|
Prepaid expenses and other | 255.2 |
| | 272.0 |
|
Assets held for sale | 15.7 |
| | 65.6 |
|
Total current assets | $ | 1,567.5 |
| | 1,762.0 |
|
Property, plant and equipment, at cost | 1,200.5 |
| | 1,207.8 |
|
Less accumulated depreciation | (657.3 | ) | | (650.2 | ) |
Property, plant and equipment, net | 543.2 |
| | 557.6 |
|
Right-of-use assets | 180.3 |
| | — |
|
Goodwill | 88.6 |
| | 87.4 |
|
Deferred tax asset | 204.2 |
| | 212.6 |
|
Other assets | 413.7 |
| | 390.4 |
|
Total assets | $ | 2,997.5 |
| | $ | 3,010.0 |
|
Liabilities, Series C Convertible Preferred Stock and Shareholders’ Deficit | | | |
Current Liabilities | | | |
Debt maturing within one year | $ | 425.4 |
| | $ | 12.0 |
|
Accounts payable | 706.0 |
| | 816.5 |
|
Accrued compensation | 103.9 |
| | 85.5 |
|
Other accrued liabilities | 425.2 |
| | 451.3 |
|
Sales taxes and taxes other than income | 94.1 |
| | 103.9 |
|
Income taxes | 11.0 |
| | 15.9 |
|
Held for sale liabilities | .1 |
| | 11.4 |
|
Current liabilities of discontinued operations | 9.5 |
| | — |
|
Total current liabilities | 1,775.2 |
| | 1,496.5 |
|
Long-term debt | 1,196.4 |
| | 1,581.6 |
|
Long-term operating lease liability | 150.4 |
| | — |
|
Employee benefit plans | 128.2 |
| | 128.3 |
|
Long-term income taxes | 135.3 |
| | 136.2 |
|
Other liabilities | 55.2 |
| | 72.1 |
|
Total liabilities | 3,440.7 |
| | 3,414.7 |
|
| | | |
Series C convertible preferred stock | 498.3 |
| | 492.1 |
|
| | | |
Shareholders’ Deficit | | | |
Common stock | 190.6 |
| | 190.3 |
|
Additional paid-in capital | 2,302.1 |
| | 2,303.6 |
|
Retained earnings | 2,195.4 |
| | 2,234.3 |
|
Accumulated other comprehensive loss | (1,034.4 | ) | | (1,030.4 | ) |
Treasury stock, at cost | (4,602.3 | ) | | (4,602.3 | ) |
Total Avon shareholders’ deficit | (948.6 | ) | | (904.5 | ) |
Noncontrolling interests | 7.1 |
| | 7.7 |
|
Total shareholders’ deficit | (941.5 | ) | | (896.8 | ) |
Total liabilities, series C convertible preferred stock and shareholders’ deficit | $ | 2,997.5 |
| | $ | 3,010.0 |
|
The accompanying notes are an integral part of these statements.
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| | | | | | | |
| Three Months Ended |
(In millions) | March 31, 2019 | | March 31, 2018 |
Cash Flows from Operating Activities | | | |
Net loss | $ | (33.5 | ) | | $ | (21.1 | ) |
Loss from discontinued operations, net of tax | (9.5 | ) | | — |
|
Loss from continuing operations, net of tax | (24.0 | ) | | (21.1 | ) |
Adjustments to reconcile net loss to net cash used by operating activities: | | | |
Depreciation | 20.6 |
| | 20.8 |
|
Amortization | 6.6 |
| | 7.1 |
|
Provision for doubtful accounts | 29.9 |
| | 43.1 |
|
Provision for obsolescence | 6.7 |
| | 9.7 |
|
Share-based compensation | (0.5 | ) | | 3.8 |
|
Foreign exchange (losses) gains | (19.2 | ) | | 4.6 |
|
Deferred income taxes | 8.2 |
| | 1.8 |
|
Other | (8.6 | ) | | 3.2 |
|
Changes in assets and liabilities: | | | |
Accounts receivable | (24.3 | ) | | (4.4 | ) |
Inventories | 4.8 |
| | (58.4 | ) |
Prepaid expenses and other | 38.4 |
| | 0.1 |
|
Accounts payable and accrued liabilities | (164.2 | ) | | (106.3 | ) |
Income and other taxes | (12.0 | ) | | (0.9 | ) |
Noncurrent assets and liabilities | (5.1 | ) | | 0.6 |
|
Net cash used by operating activities of continuing operations | (142.7 | ) | | (96.3 | ) |
Cash Flows from Investing Activities | | | |
Capital expenditures | (21.2 | ) | | (27.8 | ) |
Disposal of assets | 0.4 |
| | 0.8 |
|
Net proceeds from sale of business | 46.4 |
| | — |
|
Net cash provided (used) by investing activities of continuing operations | 25.6 |
| | (27.0 | ) |
Cash Flows from Financing Activities | | | |
Debt, net (maturities of three months or less) | 27.2 |
| | 3.6 |
|
Repurchase of common stock | — |
| | (2.7 | ) |
Other financing activities | (9.2 | ) | | (0.5 | ) |
Net cash provided by financing activities of continuing operations | 18.0 |
| | 0.4 |
|
Effect of exchange rate changes on cash and cash equivalents, and restricted cash | (6.3 | ) | | 13.9 |
|
Net decrease in cash and cash equivalents, and restricted cash | (105.4 | ) | | (109.0 | ) |
Cash and cash equivalents, and restricted cash at beginning of year(1) | 536.4 |
| | 881.5 |
|
Cash and cash equivalents, and restricted cash at end of period (2) | $ | 431.0 |
| | $ | 772.5 |
|
The accompanying notes are an integral part of these statements.
| |
(1) | $3.7 classified as Held for sale assets in our Consolidated Balance Sheets at the end of the year in 2018 |
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions, except per | | Common Stock | | Additional | | Retained | | Accumulated Other | | Treasury Stock | | Noncontrolling | | |
share data) | | Shares | | Amount | | Paid-In Capital | | Earnings | | Comprehensive Loss | | Shares | | Amount | | Interests | | Total |
Balances at December 31, 2018 | | 761.8 |
| | $ | 190.3 |
| | $ | 2,303.6 |
| | $ | 2,234.3 |
| | $ | (1,030.4 | ) | | 319.4 |
| | $ | (4,602.3 | ) | | $ | 7.7 |
| | $ | (896.8 | ) |
Net loss | | — |
| | — |
| | — |
| | (32.7 | ) | | — |
| | — |
| | — |
| | (0.8 | ) | | (33.5 | ) |
Other comprehensive loss | | — |
| | — |
| | — |
| | | | (4.0 | ) | | — |
| | — |
| | 0.1 |
| | (3.9 | ) |
Dividends accrued - Series C convertible preferred stock | | — |
| | — |
| | — |
| | (6.2 | ) | | — |
| | — |
| | — |
| | — |
| | (6.2 | ) |
Exercise/ vesting/ expense of share-based compensation | | 1.3 |
| | 0.3 |
| | (1.5 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (1.2 | ) |
Purchases and sales of noncontrolling interests, net of dividends paid of $0.0 | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 0.1 |
| | 0.1 |
|
Balances at March 31, 2019 | | 763.1 |
| | $ | 190.6 |
| | $ | 2,302.1 |
| | $ | 2,195.4 |
| | $ | (1,034.4 | ) | | 319.4 |
| | $ | (4,602.3 | ) | | $ | 7.1 |
| | $ | (941.5 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions, except per | | Common Stock | | Additional | | Retained | | Accumulated Other | | Treasury Stock | | Noncontrolling | | |
share data) | | Shares | | Amount | | Paid-In Capital | | Earnings | | Comprehensive Loss | | Shares | | Amount | | Interests | | Total |
Balances at December 31, 2017 | | 758.7 |
| | $ | 189.7 |
| | $ | 2,291.2 |
| | $ | 2,320.3 |
| | $ | (926.2 | ) | | 318.4 |
| | $ | (4,600.0 | ) | | $ | 10.3 |
| | $ | (714.7 | ) |
Net loss | | — |
| | — |
| | — |
| | (20.3 | ) | | — |
| | — |
| | — |
| | (0.8 | ) | | (21.1 | ) |
Revenue Recognition Cumulative catch up | | — |
| | — |
| | — |
| | (41.1 | ) | | — |
| | — |
| | — |
| | — |
| | (41.1 | ) |
Other comprehensive income | | — |
| | — |
| | — |
| | | | 35.2 |
| | | | | | 0.4 |
| | 35.6 |
|
Dividends accrued - Series C convertible preferred stock | | — |
| | — |
| | — |
| | (6.0 | ) | | — |
| | — |
| | — |
| | — |
| | (6.0 | ) |
Exercise/ vesting/ expense of share-based compensation | | 2.2 |
| | 0.6 |
| | 2.5 |
| | (0.4 | ) | | — |
| | (0.1 | ) | | 0.9 |
| | — |
| | 3.6 |
|
Repurchase of common stock | | — |
| | — |
| | — |
| | — |
| | — |
| | 0.9 |
| | (2.7 | ) | | — |
| | (2.7 | ) |
Purchases and sales of noncontrolling interests, net of dividends paid of $0.0 | | — |
| | — |
| | — |
| | — |
| | | | — |
| | — |
| | (0.2 | ) | | (0.2 | ) |
Balances at March 31, 2018 | | 760.9 |
| | $ | 190.3 |
| | $ | 2,293.7 |
| | $ | 2,252.5 |
| | $ | (891.0 | ) | | 319.2 |
| | $ | (4,601.8 | ) | | $ | 9.7 |
| | $ | (746.6 | ) |
The accompanying notes are an integral part of these statements.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
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 2018 Annual Report on Form 10-K ("2018 Form 10-K") in preparing these unaudited interim Consolidated Financial Statements, other than those impacted by new accounting standards as described below. 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 2018 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 generally provide for accruals under our various employee benefit plans for each quarter based on one quarter of the estimated annual expense, and adjust these accruals as estimates are refined. 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 for which an effective tax rate cannot be reliably estimated. |
Argentina Currency
During the quarter ended June 30, 2018, based on published official exchange rates which indicated that Argentina's three-year cumulative inflation rate had exceeded 100%, we concluded that Argentina had become a highly inflationary economy. From July 1, 2018, we have applied highly inflationary accounting for our Argentinian subsidiary. As such, the functional currency for Argentina has changed to the U.S. dollar, which is the consolidated group's reporting currency. When an entity operates in a highly inflationary economy, exchange gains and losses associated with monetary assets and liabilities resulting from changes in the exchange rate are recorded in income. Nonmonetary assets and liabilities, which include inventories, property, plant and equipment and contract liabilities, are carried forward at their historical dollar cost, which was calculated using the exchange rate at June 30, 2018.
Leases
In February 2016, the FASB issued ASU 2016-02, Leases, which requires all assets and liabilities arising from leases to be recognized in our Consolidated Balance Sheets. We adopted this new accounting guidance effective January 1, 2019.
In July 2018, the FASB added an optional transition method which we elected upon adoption of the new standard. This allowed us to recognize and measure leases existing at January 1, 2019 without restating comparative information. In addition, we elected to apply the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carry forward the historical lease classification.
We determine if an arrangement is a lease at the lease commencement date. In addition to our lease agreements, we review all material new vendor arrangements for potential embedded lease obligations. The asset balance related to operating and finance leases is presented within right-of-use (ROU) asset and property, plant and equipment, respectively, on our Consolidated Balance Sheet. The short-term liability balance related to operating and finance leases is presented within other accrued liabilities on our Consolidated Balance Sheets. The long-term liability balance is presented within long-term operating lease liability and long-term debt on our Consolidated Balance Sheets for operating and finance leases, respectively.
The lease liability is recognized based on the present value of the remaining fixed or in-substance fixed lease payments discounted using our incremental borrowing rates. We use a specific incremental borrowing rate for our material leases, which is determined based on the geography and term of the lease. These rates are determined based on inputs provided by external banks and updated periodically. The lease liability includes the exercise of a purchase option only if we are reasonably certain to exercise as of the commencement date of the lease. The residual value guarantee amount is only included in the lease liability
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
calculation to the extent payment is probable to the lessor as of the commencement of the lease. The ROU asset is calculated based on the lease liability adjusted for any lease payments paid to the lessor at or before the commencement date (i.e. prepaid rent) and initial direct costs incurred by Avon and excluding any lease incentives received from the Lessor.
Variable lease payments are payments to the lessor not included in the lease liability calculation. We define variable lease payments as payments made by Avon to the lessor for the right to use a leased asset that vary because of changes in facts or circumstances (such as changes in an index rate, volume, usage, etc.) occurring after the lease commencement date, other than predetermined contractual changes due to the passage of time (for example, predetermined rent increase amounts that are set out in the contract). Variable lease payments or charges are accounted for as incurred.
The lease term for purposes of lease accounting may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option as of the commencement date of the lease. For operating leases, the lease expense is recognized on a straight-line basis over the lease term. For finance leases, the Company amortizes the ROU asset on a straight-line basis and records interest expense on the lease liability created at lease commencement over the lease term.
We account for our lease and non-lease components as a single component for most of our asset classes, and therefore both are included in the calculation of lease liability recognized on the Consolidated Balance Sheets. However, for certain lease asset classes related to identified embedded leases we account for the lease and non-lease components separately, and therefore, the non-lease component is not included in the lease liability.
Leases with an initial term of twelve months or less are not recorded on the balance sheet; we recognize lease expense for these leases over their lease term. See Note 9, Leases, for further details.
Other Accounting Standards Implemented
ASU 2018-02, Income Statement - Reporting Comprehensive Income
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income, which permits entities to reclassify the disproportionate income tax effects of the 2017 enactment of U.S. tax reform legislation (the "Act") on items within accumulated other comprehensive income (loss) to retained earnings. We adopted this new accounting guidance effective January 1, 2019 and elected not to reclassify the disproportionate income tax effects of the Act from accumulated other comprehensive income (loss) to retained earnings.
Accounting Standards to be Implemented
ASU 2016-13, Financial Instruments - Credit Losses
In January 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which requires measurement and recognition of expected credit losses for financial assets held. We intend to adopt this new accounting guidance effective January 1, 2020. We are currently assessing the impact on our consolidated financial statements.
2. LOSS PER SHARE AND SHARE REPURCHASES
We compute loss per share ("EPS") using the two-class method, which is a loss allocation formula that determines loss per share for common stock, and loss 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.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
|
| | | | | | | | |
| | Three Months Ended March 31, |
(Shares in millions) | | 2019 | | 2018 |
Numerator from continuing operations: | | | | |
Loss from continuing operations, less amounts attributable to noncontrolling interests | | $ | (23.2 | ) | | $ | (20.3 | ) |
Less: Loss allocated to participating securities | | (.2 | ) | | (.2 | ) |
Less: Cumulative dividends on preferred stock | | 6.3 |
| | 5.9 |
|
Loss from continuing operations allocated to common shareholders | | (29.3 | ) | | (26.0 | ) |
Numerator from discontinued operations: | | | | |
Loss from discontinued operations | | $ | (9.5 | ) | | $ | — |
|
Less: Loss allocated to participating securities | | (.1 | ) | | — |
|
Loss allocated to common shareholders | | (9.4 | ) | | — |
|
Numerator attributable to Avon: | | | | |
Net loss attributable to Avon | | $ | (32.7 | ) | | $ | (20.3 | ) |
Less: Loss allocated to participating securities | | (.3 | ) | | (.2 | ) |
Less: Cumulative dividends on preferred stock | | 6.3 |
| | 5.9 |
|
Loss allocated to common shareholders | | (38.7 | ) | | (26.0 | ) |
Denominator: | | | | |
Basic EPS weighted-average shares outstanding | | 442.2 |
| | 440.9 |
|
Diluted effect of assumed conversion of stock options | | — |
| | — |
|
Diluted effect of assumed conversion of preferred stock | | — |
| | — |
|
Diluted EPS adjusted weighted-average shares outstanding | | 442.2 |
| | 440.9 |
|
Loss per Common Share from continuing operations: | | | | |
Basic | | $ | (.07 | ) | | $ | (.06 | ) |
Diluted | | (.07 | ) | | (.06 | ) |
Loss per Common Share from discontinued operations: | | | | |
Basic | | $ | (.02 | ) | | $ | — |
|
Diluted | | (.02 | ) | | — |
|
Loss per Common Share attributable to Avon: | | | | |
Basic | | $ | (.09 | ) | | $ | (.06 | ) |
Diluted | | (.09 | ) | | (.06 | ) |
Amounts in the table above may not necessarily sum due to rounding.
During the three months ended March 31, 2019 and 2018, we did not include stock options to purchase 17.2 million and 15.3 million shares, respectively, of Avon common stock in the calculation of diluted EPS as we had a net loss and the inclusion of these shares would decrease the net loss per share. Since the inclusion of such shares would be anti-dilutive, these are excluded from the calculation.
For the three months ended March 31, 2019 and 2018, respectively, it is more dilutive to assume the series C convertible preferred stock is not converted into common stock; therefore, the weighted-average shares outstanding were not adjusted by the as-if converted series C convertible preferred stock because the effect would be anti-dilutive. The inclusion of the series C convertible preferred stock would decrease the net loss per share for the three months ended March 31, 2019 and 2018. 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 months ended March 31, 2019 and 2018. See Note 6, Related Party Transactions.
We did not purchase any shares of Avon common stock during the first three months of 2019, as compared to approximately .9 million shares of Avon common stock for $2.7 during the first three months of 2018, through acquisition of stock from employees in connection with tax payments upon the vesting of restricted stock units and performance restricted stock units.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
3. DISCONTINUED OPERATIONS, ASSETS AND LIABILITIES HELD FOR SALE AND DIVESTITURES
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 6, 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 (an affiliate of Cerberus). These transactions closed on March 1, 2016.
The Company incurred costs during the three months ended March 31, 2019 following the resolution of certain contingent liabilities related to its ownership and operation of the North America business prior to its separation into New Avon. These costs are reported as discontinued operations related to New Avon.
The major classes of financial statement components comprising the loss on discontinued operations, net of tax for New Avon are shown below:
|
| | | |
| | Three Months Ended March 31, 2019 |
Selling, general and administrative expenses | | 9.5 |
|
Operating loss | | (9.5 | ) |
Loss from discontinued operations, net of tax | | (9.5 | ) |
There were no amounts recorded in discontinued operations for the three months ended March 31, 2018. See Note 21, Subsequent Events, for additional information relating to New Avon.
Assets and Liabilities Held for Sale
The major classes of assets and liabilities comprising Held for sale assets and Held for sale liabilities on the Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018 are shown in the following table.
|
| | | | | | | | | | | | |
| | March 31, 2019 |
| | Rye Office | | Malaysia Maximin | | Total |
Current Held for sale assets | | | | | | |
Property, Plant & Equipment (net) | | $ | 12.5 |
| | $ | 3.1 |
| | $ | 15.6 |
|
Other assets | | — |
| | .1 |
| | .1 |
|
| | $ | 12.5 |
| | $ | 3.2 |
| | $ | 15.7 |
|
| | | | | | |
Current Held for sale liabilities | | | | | | |
Other liabilities | | $ | — |
| | $ | .1 |
| | $ | .1 |
|
| | $ | — |
| | $ | .1 |
| | $ | .1 |
|
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
|
| | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Avon Manufacturing (Guangzhou) | | Rye Office | | Malaysia Maximin | | Total |
Current held for sale assets | | | | | | | | |
Inventories | | $ | 8.7 |
| | $ | — |
| | $ | — |
| | $ | 8.7 |
|
Property, Plant & Equipment (net) | | 36.7 |
| | 12.3 |
| | 3.0 |
| | 52.0 |
|
Cash and cash equivalents | | 3.7 |
| | — |
| | — |
| | 3.7 |
|
Other assets | | 1.1 |
| | — |
| | .1 |
| | 1.2 |
|
| | $ | 50.2 |
| | $ | 12.3 |
| | $ | 3.1 |
| | $ | 65.6 |
|
| | | | | | | | |
Current held for sale liabilities | | | | | | | | |
Accounts payable | | 8.6 |
| | — |
| | — |
| | 8.6 |
|
Other liabilities | | 2.6 |
| | — |
| | .2 |
| | 2.8 |
|
| | $ | 11.2 |
| | $ | — |
| | $ | .2 |
| | $ | 11.4 |
|
Refer to Divestitures section below for sale of Avon Manufacturing (Guangzhou).
Rye Office
In February 2019, we signed an agreement to sell the Rye office. As negotiations progressed, we refined the calculation for the held for sale assets which gave rise to an additional $0.2 in assets.
The due diligence process has been ongoing during the first quarter of 2019 and we expect this transaction to close during the second quarter of 2019.
Malaysia Maximin
In February 2019, we signed an agreement to sell Malaysia Maximin. The Company is finalizing certain due diligence items and expects this transaction to close during the second quarter of 2019.
Divestitures - China manufacturing
On February 15, 2019, we completed the sale to TheFaceShop Co., Ltd., an affiliate of LG Household & Health Care Ltd., of all of the equity interests in Avon Manufacturing (Guangzhou), Ltd. for a total purchase price of $71.0, less expenses of approximately $1.1; the purchase price included $23.5 relating to outstanding intercompany loans payable to Avon Manufacturing (Guangzhou), Ltd. from other Avon subsidiaries. As of March 31, 2019, the Company had received the gross cash proceeds of $71.0 (which included $24.6 of restricted cash, refer to Note 4, Restricted Cash) but had not yet settled the loans of $23.5. The net cash proceeds of $46.4, net of loan amounts, are presented as investing activities in the Consolidated Statement of Cash Flows. The proceeds to cover settlement of the loans are presented within debt, net as financing activities in the Consolidated Statement of Cash Flows. The loans were subsequently settled in April 2019. Further, $15.8 of the restricted cash balance of $24.6 was transferred from escrow into the Company's bank account in April 2019.
In the first quarter of 2019, we recorded a gain on sale of $10.3 before tax, which is reported separately in the Consolidated Statements of Operations, and $8.2 after tax, representing the difference between the proceeds, including the settlement of the intercompany loans, and the carrying value of Avon Manufacturing (Guangzhou), Ltd. on the date of sale.
Refer to Note 4, Restricted Cash, for the reporting of the proceeds related to this sale.
4. RESTRICTED CASH
Restricted cash is related to the sale of Avon Manufacturing (Guangzhou), Ltd. as described in Note 3, Discontinued Operations, Assets and Liabilities Held for Sale and Divestitures.
Restricted cash is subject to legal restrictions imposed by the Equity Purchase Agreement between TheFaceShop Co., Ltd., an affiliate of LG Household & Health Care Ltd., Avon Asia Holdings Company and Avon Products (China) Co., Ltd related to the sale of Avon Manufacturing (Guangzhou), Ltd. These deposits are not available for general use by the Company. However, $15.8 of the restricted cash balance of $24.6 was transferred from escrow into the Company's bank accounts in April 2019.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheet that sum to the total of the same such amounts shown in the Consolidated Statement of Cash Flows for the three month period ended March 31, 2019.
|
| | | | | | | | |
| | March 31, 2019 | | December 31, 2018 |
Cash and cash equivalents | | $ | 406.4 |
| | $ | 532.7 |
|
Restricted Cash(1) | | 17.0 |
| | — |
|
Long-term restricted cash(2) | | 7.6 |
| | — |
|
Held for sale cash and cash equivalents | | — |
| | 3.7 |
|
Cash and cash equivalents, and restricted cash at end of period per the statement of cash flows | | $ | 431.0 |
| | $ | 536.4 |
|
(1) $15.8 of the $17.0 was transferred from escrow into the Company's bank accounts in April 2019. The remainder is expected to be transferred into the Company's bank accounts during the second quarter of 2019.
(2) Long-term restricted cash is presented in other assets in our Consolidated Balance Sheets.
5. INVESTMENT IN NEW AVON
In connection with the separation of the Company's North America business, which closed on March 1, 2016, the Company retained a 19.9% ownership interest in New Avon, a privately-held company that is majority-owned and managed by an affiliate of Cerberus.
Our recorded investment balance in New Avon at March 31, 2019 and December 31, 2018 was zero. See Note 21, Subsequent Events, for additional information relating to New Avon.
6. RELATED PARTY TRANSACTIONS
The following tables present the related party transactions with New Avon, affiliates of Cerberus and the Instituto Avon in Brazil. There are no other related party transactions. New Avon is majority-owned and managed by Cerberus. See Note 5, Investment in New Avon for further details.
|
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2019 | | 2018 |
Statement of Operations Data | | | | |
Revenue from sale of product to New Avon(1) | | $ | 4.8 |
| | $ | 5.9 |
|
Gross profit from sale of product to New Avon(1) | | $ | .1 |
| | $ | .4 |
|
| | | | |
Cost of sales for purchases from New Avon(2) | | $ | .6 |
| | $ | .5 |
|
| | | | |
Selling, general and administrative expenses related to New Avon: | | | | |
Transition services, intellectual property, technical support and innovation and subleases(3) | | $ | — |
| | $ | (3.2 | ) |
Project management team(4) | | $ | 1.4 |
| | .5 |
|
Net reduction of selling, general and administrative expenses | | $ | 1.4 |
| | $ | (2.7 | ) |
| | | | |
Interest income from Instituto Avon(5) | | $ | — |
| | $ | — |
|
| | | | |
|
| | | | | | | | |
| | March 31, 2019 | | December 31, 2018 |
Balance Sheet Data | | | | |
Inventories(6) | | $ | .3 |
| | $ | .3 |
|
Receivables due from New Avon(7) | | $ | 4.3 |
| | $ | 7.0 |
|
Receivables due from Instituto Avon(5) | | $ | 3.2 |
| | $ | 3.2 |
|
Payables due to New Avon(8) | | $ | 1.0 |
| | $ | .2 |
|
Payables due to an affiliate of Cerberus(9) | | $ | .6 |
| | $ | .6 |
|
(1) The Company supplies product to New Avon as part of a manufacturing and supply agreement.
(2) New Avon supplies product to the Company as part of the same manufacturing and supply agreement noted above. The Company purchased $.8 and $.6 from New Avon associated with this agreement during the three months ended March 31, 2019 and 2018, respectively, and recorded $.6 and $.5 associated with these purchases within cost of sales in our Consolidated Statement of Operations during the three months ended March 31, 2019 and 2018, respectively.
(3) The Company also entered into a transition services agreement to provide certain services to New Avon, which expired on October 31, 2018, as well as an intellectual property ("IP") license agreement, an agreement for technical support and innovation and sublease for office space. The net amounts recorded within selling, general and administrative expenses generally represent 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 implementation of the Company’s strategic initiatives. The Company recorded $1.4 and $.5 in selling, general and administrative expenses associated with these agreements during the three months ended March 31, 2019 and 2018, respectively. See Note 15, Restructuring Initiatives for additional information related to the Company's strategic initiatives.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
(5) During the second quarter of 2018, the Company entered into an agreement to loan the Instituto Avon, an independent non-government charitable organization in Brazil, R$12 million (Brazilian real) for an unsecured 5-year term at a fixed interest rate of 7% per annum, to be paid back in 5 equal annual installments. The Instituto Avon was created by an Avon subsidiary in Brazil, with the board and executive team comprised of Avon Brazil management. The purpose of the loan is to provide the Instituto Avon with the means to donate funds to Fundação Pio XII (a leading cancer prevention and treatment organization in Brazil and owner of the Hospital do Câncer de Barretos), in order to invest in equipment with the objective of expanding breast cancer prevention and treatment.
(6) 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 our Consolidated Balance Sheets.
(7) The receivables due from New Avon relate to the agreements for transition services, the IP license agreement, technical support and innovation and subleases for office space, as well as the manufacturing and supply agreement, and were classified within prepaid expenses and other in our Consolidated Balance Sheets.
(8) The payables due to New Avon relate to the manufacturing and supply agreement and were classified within other accrued liabilities in our Consolidated Balance Sheets.
(9) 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 our 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 March 31, 2019, the Company has a liability of $.8 for the estimated value of such standby letters of credit.
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 $72.0 as of March 31, 2019. Series C convertible preferred stock and accrued dividends of $498.3 on the Consolidated Balance Sheet at March 31, 2019 is stated net of $8.7 of costs incurred in connection with the issuance of the Series C convertible preferred stock in 2016. There were no dividends declared in the three months ended March 31, 2019 and 2018.
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)
7. REVENUE
Disaggregation of revenue
In the following table, revenue is disaggregated by product or service type. All revenue is recognized at a point in time, when c