Building 6, Chiswick Park, London W4 5HR
United Kingdom
(Address of principal executive offices)
+44-1604-232425
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol(s): | Name of each exchange on which registered |
Common stock (par value $.25)None | None | New York Stock ExchangeNone |
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes xo No ox
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ox No xo
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 o
Note: The registrant is a voluntary filer of reports required to be filed by certain companies under Sections 13 or 15(d) of the Securities Exchange Act of 1934.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer" andfiler," "smaller reporting company"
and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | | o | | Accelerated filer | | o |
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Non-accelerated filer | | x | | Smaller reporting company | | ☐ |
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Large accelerated filer | | x | | Accelerated filer | | o |
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Non-accelerated filer | | o (Do not check if a smaller reporting company)
| | Smaller reporting company | | o |
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| | | | Emerging growth company | | o☐ |
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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o☐ No x
The aggregate market value of voting and non-voting Common Stock (par value $.25) held by non-affiliates at June 30, 20172020 (the last business day of our most recently completed second quarter) was $1.7 billion.NaN.
The number of shares of Common Stock (par value $.25)$.01) outstanding at January 31, 2018,30, 2021, was 440,373,865101.34
_________________________The registrant meets the conditions sets forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format
Documents Incorporated by Reference
Part III - Portions of the registrant’s Proxy Statement relating to the 2018 Annual Meeting of Shareholders.
Table of Contents
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Part I | | |
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Item 1A | | |
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Item 3 | | |
Item 4 | | |
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Part II |
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Item 6 | | |
Item 7 | | |
Item 7A | | |
Item 8 | | |
Item 9 | | |
Item 9A | | |
Item 9B | | |
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Part III |
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Item 11 | | |
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Item 14 | | |
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Part IV |
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Item 16 | | |
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CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements in this report (or in the documents it incorporates by reference) that are not historical facts or information may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "estimate," "project," "forecast," "plan," "believe," "may," "expect," "anticipate," "intend," "planned," "potential," "can," "expectation," "could," "will," "would" and similar expressions, or the negative of those expressions, may identify forward-looking statements. They include, among other things, statements regarding our anticipated or expected results, future financial performance, various strategies and initiatives (including our Transformation Plan,Open Up & Grow and Avon Integration plans, stabilization strategies, digital strategies, cost savings initiatives, restructuring and other initiatives and related actions), costs and cost savings, competitive advantages, impairments, the impact of foreign currency, including devaluations, and other laws and regulations, government investigations, internal investigations and compliance reviews, results of litigation, contingencies, taxes and tax rates, potential alliances or divestitures, liquidity, cash flow, uses of cash and financing, hedging and risk management strategies, pension, postretirement and incentive compensation plans, supply chain, and the legal status of the Representatives.Representatives, and the anticipated impact of the evolving COVID-19 pandemic and related responses from governments and private sector participants on the Company, its supply chain, third-party suppliers, project development timelines, costs, revenue, margins, liquidity and financial condition, the anticipated timing, speed and magnitude of recovery from these COVID-19 pandemic related impacts and the Company’s planned actions and responses to this pandemic. Such forward-looking statements are based on management's reasonable current assumptions, expectations, plans and forecasts regarding the Company's current or future results and future business and economic conditions more generally. Such forward-looking statements involve risks, uncertainties and other factors, which may cause the actual results, levels of activity, performance or achievement of Avon to be materially different from any future results expressed or implied by such forward-looking statements, and there can be no assurance that actual results will not differ materially from management's expectations. Therefore, you should not rely on any of these forward-looking statements as predictors of future events. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:
•the COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, manufacturing, supply chains and distribution systems. There is uncertainty around the duration and breadth of the COVID-19 pandemic and the effectiveness of responses to it. As a result, we cannot reasonably estimate at this time the continued impact, that COVID-19 may have on our business or operations. The extent to which COVID-19 impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact including on financial markets or otherwise. See also "Item 1A. Risk Factors—The COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, manufacturing, supply chains and distribution systems, and we have experienced and expect to continue to experience unpredictable negative effects associated with the pandemic."
•our ability to improve our financial and operational performance and execute fully our global business strategy, including our ability to implement the key initiatives of, and/or realize the projected benefits (in the amounts and time schedules we expect) from our transformation plan,Open Up & Grow and Avon Integration plans, stabilization strategies, cost savings initiatives, restructuring and other initiatives, product mix and pricing strategies, enterprise resource planning, customer service initiatives, sales and operation planning process, outsourcing strategies, digital strategies, Internet platform and technology strategies including e-commerce, marketing and advertising strategies, information technology and related system enhancements and cash management, tax, foreign currency hedging and risk management strategies, and any plans to invest these projected benefits ahead of future growth;
our ability to achieve the anticipated benefits of our strategic partnership with Cerberus Capital Management, L.P.;
•our broad-based geographic portfolio, which is heavily weighted towards emerging markets, a general economic downturn, a recession globally or in one or more of our geographic regions or markets, such as Brazil, Mexico or Russia, or sudden disruption in business conditions, and the ability to withstand an economic downturn, recession, cost inflation, commodity cost pressures, economic or political instability (including fluctuations in foreign exchange rates), competitive or other market pressures or conditions;
•the effect of economic factors, including inflation and fluctuations in interest rates and foreign currency exchange rates; as well as the designation of Argentina as a highly inflationary economy, and the potential effect of such factors on our business, results of operations and financial condition;
•the possibility of business disruption in connection with our transformation plan,Open Up & Grow and Avon Integration plans, stabilization strategies, cost savings initiatives, or restructuring and other initiatives;
•our ability to reverse declining revenue, to improve margins and net income, or to achieve profitable growth, particularly in our largest markets and developing and emerging markets, such as Brazil, Mexico, Russia and Russia;the United Kingdom;
•our ability to improve working capital and effectively manage doubtful accounts and inventory and implement initiatives to reduce inventory levels, includingand the potential impact on cash flows and obsolescence;
•our ability to reverse declines in Active Representatives, to enhance our sales leadership programs, to generate Representative activity, to increase the number of consumers served per Representative and their engagement online, to enhance branding and the Representative and consumer experience and increase Representative productivity through field activation and segmentation programs and technology tools and enablers, to invest in the direct-selling channel, to offer a more social selling experience, and to compete with other direct-selling organizations to recruit, retain and service Representatives and to continue to innovate the direct-selling model;
•general economic and business conditions in our markets, including social, economic and political uncertainties, such as in Russia and Ukraine or elsewhere, and any potential sanctions, restrictions or responses to such conditions imposed by other markets in which we operate;
developments in or consequences of any investigations and compliance reviews, and any litigation related thereto, including the investigations and compliance reviews of Foreign Corrupt Practices Act and related United States ("U.S.") and foreign law matters, as well as any disruption or adverse consequencesresulting from such investigations, reviews, related actions or litigation;
•the effect of economic, political, legal, tax, including changes in tax rates, and other regulatory risks imposed on us abroad and in the U.S., our operations or the Representatives, including foreign exchange, pricing, data privacy or other restrictions, the adoption, interpretation and enforcement of foreign laws, including in jurisdictions such as Brazil and Russia, and any changes thereto, as well as reviews and investigations by government regulators that have occurred or may occur from time to time, including, for example, local regulatory scrutiny;
•competitive uncertainties in our markets, including competition from companies in the consumer packaged goods industry, some of which are larger than we are and have greater resources;
•the impact of the adverse effect of volatile energy, commodity and raw material prices, changes in market trends, purchasing habits of our consumers and changes in consumer preferences, particularly given the global nature of our business and the conduct of our business in primarily one channel;
•our ability to attract and retain key personnel;
•other sudden disruption in business operations beyond our control as a result of events such as acts of terrorism or war, natural disasters, pandemic situations, large-scale power outages and similar events;
•key information technology systems, process or site outages and disruptions, and any cyber securitycybersecurity breaches, including any security breach of our systems or those of a third-party provider that results in the theft, transfer or unauthorized disclosure of Representative, customer, employee or Company information or compliance with information security and privacy laws and regulations in the event of such an incident which could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputation and results of operations, and related costs to address such malicious intentional acts and to implement adequate preventative measures against cybersecurity breaches. This includes the cyber security breaches;incident which occurred in the second quarter of 2020, see Note 1, Accounting Policies, to the Consolidated Financial Statements included herein and Part 4, Controls and Procedures;
•our ability to comply with various data privacy laws affecting the markets in which we do business;
•the risk of product or ingredient shortages resulting from our concentration of sourcing in fewer suppliers;
•any changes to our credit ratings and the impact of such changes on our financing costs, rates, terms, debt service obligations, access to lending sources and working capital needs;
•the impact of our indebtedness, our access to cash and financing, and our ability to secure financing or financing at attractive rates and terms and conditions;
the impact of our business results (including the impact of any adverse foreign exchange movements and significant restructuring charges), on our ability to comply with certain covenants in our revolving credit facility;
•our ability to successfully identify new business opportunities, strategic alliances and strategic alternatives and identify and analyze alliance candidates, secure financing on favorable terms and negotiate and consummate alliances;
•disruption in our supply chain or manufacturing and distribution operations;
•the quality, safety and efficacy of our products;
•the success of our research and development activities;
•our ability to protect our intellectual property rights, including in connection with the separation of the North America business;
our ability to repurchase the series C preferred stock in connection with a change of control; and
•the risk of an adverse outcome in any material pending and future litigation or with respect to the legal status of Representatives.Representatives; and,
•other risks and uncertainties include the possibility that the expected synergies and value creation from the Transaction (as defined in “Item 7 Management’s Discussion And Analysis Of Financial Condition And Results Of Operations—Overview—Merger with Natura Cosméticos S.A.”) will not be realized or will not be realized within the expected time period; the risk that the businesses of the Company and Natura &Co Holding will not be integrated successfully; disruption from the Transaction making it more difficult to maintain business and operational relationships; the possibility that the intended
accounting and tax treatments of the Transaction are not achieved; the effect of the consummation of the Transaction on customers, employees, representatives, suppliers and partners and operating results; as well as more specific risks and uncertainties.
Additional information identifying such factors is contained in Item 1A of our Form 10-K for the year ended December 31, 2017,2020, and other reports and documents we file with the SEC. We undertake no obligation to update any such forward-looking statements.
PART I
ITEM 1. BUSINESS
(U.S. dollars in millions, except per share data)
When used in this report, the terms "Avon," "Company," "we," "our" or "us" mean, unless the context otherwise indicates, Avon Products, Inc. and its majority and wholly owned subsidiaries.
General
We are a global manufacturer and marketer of beauty and related products. We commenced operations in 1886 and were incorporated in the State of New York on January 27, 1916. We conduct our business in the highly competitive beauty industry and compete against other consumer packaged goods ("CPG") and direct-selling companies to create, manufacture and market beauty and non-beauty-related products. Our product categories are Beauty and Fashion & Home. Beauty consists of skincare, fragrance and color (cosmetics). Fashion & Home consists of fashion jewelry, watches, apparel, footwear, accessories, gift and decorative products, housewares, entertainment and leisure products, children’s products and nutritional products.
Our business is conducted primarily in one channel, direct selling. Ourselling, and our strategy is to expand to omnichannel. Since our merger with Natura Cosméticos S.A., we have updated our reportable segments areto align with how the business is currently operated and managed. We have identified two reportable segments based on geographic operations inoperations: Avon International and Avon Latin America. In prior periods, the Company reported four regions:segments: Europe, Middle East & Africa;and Africa, Asia Pacific, South Latin America;America and North Latin America; and Asia Pacific.America. Financial information relating to our reportable segments is included in "Segment Review" within Management’s Discussion and Analysis of Financial Condition and Results of Operations, which we refer to in this report as "MD&A," on pages 27 through 55 of this Annual Report on Form 10-K for the year ended December 31, 2017, which we refer to in this report as our "2017 Annual Report,", and in Note 14, Segment Information, to the Consolidated Financial Statements on pages F-42 through F-44 of our 2017 Annual Report.included herein. We refer to each of the Notes to the Consolidated Financial Statements in this 2017 Annual Reportincluded herein as a "Note." Information about geographic areas is included in Note 14, Segment Information on pages F-42 through F-44 of our 2017 Annual Report.to the Consolidated Financial Statements included herein. All of our consolidated revenue is derived from operations of subsidiaries outside of the United States ("U.S.").
In December 2015,May 2019 we and Natura Cosméticos S.A., a Brazilian corporation (sociedade anônima) ("Natura Cosméticos"), entered into definitive agreements with affiliatesan Agreement and Plan of Cerberus Capital Management L.P. ("Cerberus"Mergers (the "Merger Agreement"), pursuant to which includedthe Company and Natura Cosméticos were acquired by and became wholly-owned subsidiaries of Natura &Co, Holding S.A., a $435 investmentBrazilian corporation (sociedade anônima) ("Natura &Co") in AvonJanuary 2020. Natura has stock listed on the B3 S.A. - Brasil, Bolsa, Balcão stock exchange in Brazil and American Depositary Shares traded on the New York Stock Exchange ("NYSE"). With the completion of this transaction, our common stock was removed from trading on the NYSE, and we became a privately held company.
COVID-19
A novel strain of coronavirus (COVID-19) was first identified in Wuhan, China in December 2019, and subsequently declared a pandemic by an affiliatethe World Health Organization. Due to the uncertain and rapidly evolving nature of Cerberus throughcurrent conditions around the purchaseworld, the impacts of our convertible preferred stockCOVID-19 most of which are beyond the Company’s control, continue to evolve, and the separationoutcome is uncertain.
The most significant impact of the North America business (including approximately $100COVID-19 pandemic was felt during the second quarter of cash,2020, as many markets were subject to certain adjustments) from Avon into New Avon LLC ("New Avon"), a privately-held company that is majority-ownedlockdown restrictions which limited our ability to recruit and managedenroll Representatives, operate manufacturing facilities and distribution centers and to process and deliver orders. The pandemic primarily resulted in reduced revenue, which in turn impacted profitability and cash generation. The third quarter showed signs of recovery in most markets. The fourth quarter has again been impacted by an affiliatethe new lockdown measures imposed in parts of Cerberus. These transactions closedEurope, although not to the extent felt during the second quarter as we were able to continue normal operations in March 2016our manufacturing facilities and Avon retained approximately 20% ownership in New Avon. Our North America business had consisteddistribution centers.
As of the Company's operations indate of this report, we are unable to estimate the U.S., Canada and Puerto Rico; this business was previously its own reportable segment, and has been presented as discontinued operations for all periods presented. Referlong-term impact of the economic paralysis arising from efforts to Note 3, Discontinued Operations and Divestitures on pages F-19 through F-20curb the spread of our 2017 Annual Report and Note 4, Investment in New Avon on page F-20 of our 2017 Annual Report for additional information regarding the investment by an affiliate of CerberusCOVID-19 virus and the separationexpected reduction in activity on our business, results of operations and financial condition. We will continue to review our revenue, investments, expenses and cash outflows, as well as adjusting our relationships with suppliers. Furthermore, the North America business.actions outlined above are continuously being re-evaluated in light of global developments relating to COVID-19. See also “Item 1A. Risk Factors—The COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, manufacturing, supply chains and distribution systems, and we have experienced and expect to continue to experience unpredictable negative effects associated with the pandemic" and “Item 7 Management’s Discussion And Analysis Of Financial Condition And Results Of Operations—Overview— COVID-19 pandemic”.
Distribution
During 2017,2020, we had sales operations in 5655 countries and territories, and distributed our products in 1825 other countries and territories.
Unlike most of our CPG competitors, which sell their products through third-party retail establishments (e.g., drug stores and department stores), we primarily sell our products to the ultimate consumer through the direct-selling channel.channel, with a strategy to
expand to omnichannel. Our priority in the omnichannel model is to accelerate digital social selling through Representative engagement, activation, training, direct customer delivery service, and e-commerce. In our case, sales of our products are made to the ultimate consumer principally through direct selling by Representatives, who are independent contractors and not our employees. As of December 31, 2017,On average we had approximately 64 million activeActive Representatives during the year ended December 31, 2020, which represents the number of Representatives submitting an order in a sales campaign, totaled for all campaigns during the year and then divided by the number of campaigns. Representatives earn by purchasing products directly from us at a discount from a published brochure price and selling them to their customers, the ultimate consumer of our products. Representatives can start their Avon businesses for a nominal fee, or in some markets for no fee at all. We generally have no arrangements with end users of our products beyond the Representative, except as described below. No single Representative accounts for more than 10% of our net sales globally.
A Representative contacts their customers directly, selling primarily through our brochure (whether paper or online), which highlights new products and special promotions (or incentives) for each sales campaign. In this sense, the Representative, together with the brochure, are the "store" through which our products are sold. A brochure introducing a new sales campaign is typically generated every three to four weeks. Generally, the Representative forwards an order for a campaign to us using the Internet, paper, telephone, or fax. ThisA purchase order is processed and the products are assembledpicked at a distribution center and delivered to the Representative usually through a combination of local and national delivery companies. Generally,Historically, the Representative then delivers the merchandise and collects payment from the customer for her or his own account. Several of our larger countries have begun to offer direct to customer delivery of the ordered products. A Representative generally receives a refund of the price the Representative paid for a product if the Representative chooses to return it.
We employ certain web-enabled systems to increase Representative support, which allow a Representative to run her or his business more efficiently and also allow us to improve our order-processing accuracy. For example, in many countries, Representatives can utilize the Internet to manage their business electronically, including order submission, order tracking, payment and communications with us. In addition, in many markets, Representatives can further build their own business through personalized web pages provided by us, enabling them to sell a complete line of our products online. Self-paced online training also is available in certain markets. We are actively deploying and training the Representatives on additional digital tools and sales methods to help increase its customer reach.
In some markets, particularly in Asia Pacific, we use decentralized branches, satellite stores and independent retail operations (e.g., beauty boutiques) to serve Representatives and other customers. Representatives come to a branch to place and pick up product orders for their customers. The branches also create visibility of the Avon brand, and channel with consumers and help reinforce our beauty image. In certain markets, we provide opportunities to licenseallow our beauty centers and other retail-oriented and direct-to-consumer opportunities to reach new customers in complementary ways to direct selling. In the United Kingdom and certain other markets, we also utilizeAvon increasingly utilizes e-commerce and market ourmarkets its products through consumer websites.
The recruiting or appointing and training of Representatives are the primary responsibilities of district sales managers,independent leaders supported by zone managers and independent leaders.managers. Depending on the market and the responsibilities of the role, some of these individuals are our employees and some are independent contractors. Those who are employees are paid a salary and an incentive based primarily on the achievement of a sales objective in their district. Those who are independent contractors are rewarded primarily based on total sales achieved in their zones or downline team of recruited, trained and managed Representatives. Personal contacts, including recommendations from current Representatives (including the sales leadership program), and local market advertising constitute the primary means of obtaining new Representatives. The sales leadership program is a multi-level compensation program which gives Representatives, known as independent leaders, the opportunity to earn discounts on their own sales of our products, as well as commissions based on the net sales made by Representatives they have recruited and trained. This program generally limits the number of levels on which commissions can be earned to three. The primary responsibilities of independent leaders are the prospecting, appointing, training and development of their downline Representatives while maintaining a certain level of their own sales. As described above, the Representative is the "store" through which we primarily sell our products and, given the high rate of turnover among Representatives, which is a common characteristic of direct selling, it is critical that we recruit, retain and service Representatives on a continuing basis in order to maintain and grow our business.
From time to time, local governments and others question the legal status of Representatives or impose burdens inconsistent with their status as independent contractors, often in regard to possible coverage under social benefit laws that would require us (and, in most instances, the Representatives) to make regular contributions to government social benefit funds. Although we have generally been able to address these questions in a satisfactory manner, these questions can be raised again following regulatory changes in a jurisdiction or can be raised in other jurisdictions. If there should be a final determination adverse to us in a country, the cost for future, and possibly past, contributions could be so substantial in the context of the volume and profitability of our business in that country that we would consider discontinuing operations in that country.
Promotion and Marketing
Sales promotion and sales development activities are directed at assisting Representatives, through sales aids such as brochures, product samples, demonstration products and demonstration products.training. In order to support the efforts of Representatives to reach new customers, specially designed sales aids, digital content and tools, promotional pieces, customer flyers television advertising and print various forms of
advertising may be used. In addition, we seek to motivate the Representatives through the use of special incentive programs that reward superior sales performance. Periodic sales meetings with Representatives are conducted by the district sales or zone managers. TheWe believe that the training meetings are designedan integral part of enabling the Representatives to keep Representatives abreast of product line changes, explainprovide customers with the advice and tools to better service her customer base as well as teach sales techniques and provide recognition for sales performance.
We use a number of merchandising techniques, including promotional pricing for new products, combination offers, trial sizes and samples, and the promotion of products packaged as gift items. In most markets, for each sales campaign, we publish a distinctive brochure (whether paper or online), in which we introduce new products and special promotions on selected items or give particular prominence to a particular category. A key priority for our merchandising is to continue the use of analytical tools to enable a deeper, fact-based understanding of the role and impact of pricing within our product portfolio.
From time to time, various regulations or laws have been proposed or adopted that would, in general, restrict the frequency, duration or volume of sales resulting from new product introductions, special promotions or other special price offers. We expect our broad product lines and pricing flexibility to mitigate the effect of these regulations.
Competitive Conditions
We face competition from various products and product lines. The beauty and beauty-related products industry is highly competitive and the number of competitors and degree of competition that we face in this industry varies widely from country
to country. We compete against products sold to consumers in a number of distribution methods, including direct selling, through the Internet, and through the mass market retail and prestige retail channels.
Specifically, due to the nature of the direct-selling channel, we often compete on a country-by-country basis, with our direct-selling competitors. Unlike a typical CPG company which operates within a broad-based consumer pool, direct sellers compete for representative or entrepreneurial talent by providing a more competitive earnings opportunity or "better deal" than that offered by the competition as well as significant competition from other non-direct selling earnings opportunities for which the existing Representatives or potential Representatives could avail themselves. Providing a compelling earnings opportunity for the Representatives is as critical as developing and marketing new and innovative products. As a result, in contrast to a typical CPG company, we must first compete for a limited pool of Representatives before we reach the ultimate consumer.
Within the broader CPG industry, we principally compete against large and well-known cosmetics (color), fragrance and skincare companies that manufacture and sell broad product lines through various types of retail establishments and other channels, including through the Internet. In addition, we compete against many other companies that manufacture and sell more narrow beauty product lines sold through retail establishments and other channels, including through the Internet.
We also have many global branded and private label competitors in the accessories, apparel, housewares, and gift and decorative products industries, including retail establishments, principally department stores, mass merchandisers, gift shops and specialty retailers. Our principal competition in the fashion jewelry industry consists of a few large companies and many small companies that sell fashion jewelry through department stores, mass merchandisers, specialty retailers and e-commerce.
We believe that the personalized customer service offered by the Representatives; the Representatives’ earnings opportunity as well as the amount and type of field incentives we offer the Representatives on a market-by-market basis; the high quality, attractive designs and prices of our products; the high level of new and innovative products; our easily recognized brand namename; and our guarantee of product satisfaction are significant factors in helping to establish and maintain our competitive position.
International Operations
During 2017,2020, our international operations, outside of the U.S., were conducted primarily through subsidiaries in 5655 countries and territories. Outside of the U.S., our products were also distributed in 1724 other countries and territories. In March 2016, we separated from our North America business, which had consisted of the Company's operations in the U.S., Canada and Puerto Rico; this business has been presented as discontinued operations for all periods presented. As a result, all of our consolidated revenue is derived from operations of subsidiaries outside of the U.S. During 2017,2020, approximately 39%51% of our consolidated revenue was derived from South Latin America, approximately 38% was derived from Europe, Middle East & Africa, approximately 14% was derived from NorthAvon Latin America, and approximately 9%49% was derived from Asia Pacific.Avon International. Further, approximately 22%20% of our consolidated revenue during 20172020 was derived from Brazil, which is our largest market and is included within the SouthAvon Latin America reportable segment.
Our international operations are subject to risks inherent in conducting business abroad, including, but not limited to, the risk of adverse foreign currency fluctuations, foreign currency remittance restrictions, the ability to procure products, pandemic situations and unfavorable social, economic and political conditions.
See the sections "Risk Factors - Our ability to conduct business in our international markets may be affected by political, legal, tax and regulatory risks"risks." and "Risk Factors - We are subject to financial risks as a result of our international operations, including exposure to foreign currency fluctuations and the impact of foreign currency restrictions"restrictions." in Item 1A on pages 7 through 20 of our 2017 Annual Report for more information.
Manufacturing and Sourcing
We manufacture and package the majority of our Beauty products, which are formulated and designed by our staff of chemists, designers and artists. Raw materials, consisting chiefly of essential oils, chemicals, containers and packaging components
required for our Beauty products are purchased from a range of third-party suppliers. The remainder of our Beauty products and all of our Fashion & Home products are purchased from various third-party manufacturers.
Our products are affected by the cost and availability of materials such as glass, plastics, chemicalsfragrance and fabrics.fuel. For the vast majority of items we have more than one source of supply available. We believe that we can continue to obtain sufficient raw materials and supplies to manufacture and produce our Beauty products for the foreseeable future.
Additionally, we design the brochures (whether paper or online) that are used by the Representatives to sell our products. The brochures are then produced on our behalf by a range of printing suppliers.
The loss of any one supplier would not have a material impact on our ability to source raw materials for the majority of our Beauty products or source products for the remainder of our Beauty products and all of our Fashion & Home products or paper for the brochures.
See Item 2, Properties on pages 20 through 21 of our 2017 Annual Report for additional information regarding the location of our principal manufacturing facilities.
Product Categories
Both of our product categories individually account for 10% or more of consolidated net sales in 2017.2020. The following is the percentage of net sales by product category for the years ended December 31:
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| | 2020 | | 2019 | | 2018 |
Beauty | | 74 | % | | 74 | % | | 75 | % |
Fashion & Home | | 26 | % | | 26 | % | | 25 | % |
|
| | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
Beauty | | 75 | % | | 74 | % | | 74 | % |
Fashion & Home | | 25 | % | | 26 | % | | 26 | % |
2019 was impacted by certain indirect tax items in Brazil and 2018 was impacted by the Brazil Tax on Industrial products ("IPI") tax release, both are excluded from net sales in our calculation above. See "Avon LATAM" within MD&A for more information.Trademarks and Patents
Our business is not materially dependent on the existence of third-party patent, trademark or other third-party intellectual property rights, and we are not a party to any ongoing material licenses, franchises or concessions. We do seek to protect our key proprietary technologies by aggressively pursuing comprehensive patent coverage in major markets. We protect our Avon name and other major proprietary trademarks through registration of these trademarks in the relevant markets, monitoring the markets for infringement of such trademarks by others, and by taking appropriate steps to stop any infringing activities.
Seasonal Nature of Business
Our sales and earnings are typically affected by seasonal variations, a characteristic of many companies selling beauty, gift and
decorative products, apparel and fashion jewelry. For instance, our sales are generally highest during the fourth quarter due to
seasonal and holiday-related patterns. However, the sales volume of holiday gift items is, by its nature, difficult to forecast, and
taken as a whole, seasonality does not have a material impact on our financial results.
Research and Product Development Activities
New products are essential to growth in the highly competitive cosmetics industry. Our research and development ("R&D") department’s efforts are importantvital to developing new products, including formulating effective beauty treatments relevant to women’s needs, and redesigning or reformulatingimproving existing products. To increaseAs part of our Open Up & Grow strategy and to improve our brand competitiveness, we have sustained our focusare focusing on developing breakthrough new technology and product innovation to deliver first-to-marketaccessible Beauty products that provide visible consumer benefits.benefits while also delivering the Company’s ambitious sustainability goals. R&D also works extensively with third party companies to bring in new ideas, help accelerate development time and deliver against local market trends.
Our global R&D facilityinnovation center is located in Suffern, NY. AThere is a team of expert scientists, researchers and technicians applyapplying the disciplines of science to the practical aspects of bringing products to market around the world. Relationships with dermatologists and other specialists enhance our ability to deliver new formulas and ingredients to market. Additionally, we have R&D facilitiescenters located in, Argentina, Brazil, China, Mexico, the Philippines, Poland, South Africa and the United Kingdom.
In 2017, our most significant product launches included: Anew Reversalist Infinite Effects Night Treatment Cream, Avon True Nutra Effects collection, Avon True Color Flawless Foundation, Mark Big & Style Mascara, Mark Liquid Lip Lacquer, Avon Care Oatmeal collection, Eve Duet, Luminata, Encanto Body Cream and Advanced Techniques Miracle Densifier.UK.
The amounts incurred on research activities relating to the development of new products and the improvement of existing products were $52.9$36.5 in 2017, $52.12020, $40.6 in 20162019 and $61.9$48.0 in 2015.2018. This research included the activities of product research and development and package design and development. Most of these activities were related to the design and development of Beauty products.
Environmental Matters
Compliance with environmental laws and regulations impacting our global operations has not had, and currently is not anticipated to have, a material adverse effect on our financial position, capital expenditures or competitive position. As part of the Natura &Co group, we are now in the process of working towards our B Corp accreditation; which we aim to achieve by 2025.
EmployeesHuman Capital Resources
At December 31, 2017,2020, we employed approximately 25,00019,500 employees. Of these, approximately 500200 were employed in the U.S. Females constituted approximately 61% of our workforce and approximately 24,50061% of our managerial employees.
At Avon, we use the power of beauty to transform women’s lives for the better. People are at the heart of our business and part of our Open Up & Grow strategy is the key focus on empowering our Associates to have a meaningful career experience.
In 2020, we refreshed our employee value proposition after a listening exercise across the organization. Our refreshed brand essence reflects our commitment to doing good with our people, purpose and product. 2020 also saw the launch of our new engagement tool, Glint, with a focus on building manager capability to engage their teams. We had high levels of engagement with 84% participation and overall engagement score of 72%. Managers are briefed and asked to identify one action area of focus which, when coupled with a focused change at organizational level, creates powerful and systemic change across Avon.
We are committed to creating an inclusive environment where all Associates are able to bring their whole selves to work through hiring, developing and supporting a diverse and inclusive workplace. Our Associates and Management are expected to adhere to a set of expectations that sets standards for appropriate behavior and includes required annual training on inclusion in the workplace. Our employee networks provide a space for Associates to have honest conversations, highlight areas of improvement for the Company and build their own capabilities through mentoring, career conversations and educational events.
Our learning strategy is designed to empower Associates to maximize their impact and build capability at all levels. The “Leading with Heart” program for first -time people managers covers key concepts critical to being an effective and compassionate leader. Through the “Leading with Purpose” program, participants learn how to leverage their personal strengths while maximizing impact as senior leaders. Accessible to all Associates, the dynamic global communications and learning platform Inside Avon enables access to internal networks, communities of interest and bite-sized learning across a variety of topics.
Throughout the COVID-19 pandemic, we implemented safety protocols and new procedures to protect our employees, our subcontractors and our customers. These protocols include temporarily closing offices, significantly expanding the use of virtual interactions in all aspects of our business, including customer facing activities and for front line workers, social distancing measures enforced in all operations consistently since the beginning of the pandemic, including reconfiguring work spaces where possible and delineating paths, entrances, and exits in factories and warehouses and enhanced cleaning protocols.
The “Staying Connected” virtual community was established to support Associates working remotely with topics ranging from exercise videos, mental well-being support, teaching resources for parents home-schooling and increased communication from Organizational Leaders in the form of Staying Connected: Virtual coffee breaks. All Associates had 3-month access to the THRIVE application and, when surveyed in April 2020, 92% of Avon Associates felt they were employed in other countries.getting the support they needed.
Transformation Plan, Open Up & Grow and Avon Integration
In January 2016, we announced a transformation plan (the "Transformation Plan") which was completed in 2018. In September 2018, we initiated a new strategy to return Avon to growth ("Open Up Avon"). In May 2020, the new leadership of Avon International refreshed our strategy ("Open Up & Grow") which aims to return Avon International to growth over the next three years.
In addition, subsequent to the merger of Natura and Avon in January 2020, an integration plan (the "Avon Integration") was established to create the right global infrastructure to support the future vision of the Natura &Co Group, while also identifying synergies primarily between Avon LATAM and Natura &Co Latin America.
See "Overview" within MD&A on pages 27 through 28 for more information on these items.
Acquisitions and Dispositions
In December 2015, we entered into definitive agreements with affiliates of Cerberus, which included the separation of the North America business from Avon into New Avon, a privately-held company that is majority-owned and managed by an affiliate of Cerberus. Avon retained approximately 20% ownership in New Avon. These transactions closed in March 2016. In July 2015,August 2019 we and Cerberus finalized the sale of our respective interests in New Avon to LG Household & Health Care Ltd.
In May 2019 we and Natura Cosméticos, a Brazilian corporation entered into the Merger Agreement, pursuant to which the Company and Natura Cosméticos were acquired by and became wholly-owned subsidiaries of Natura &Co Holding, S.A. ("Natura &Co") in January 2020. With the completion of this transaction, our common stock was removed from trading on the NYSE, and we became a privately held company.
During 2020 and 2019, we disposed of businesses and assets as part of the Open up Avon strategy and later the Open Up & Grow strategy. In February, May and June 2019, we completed the sale of Liz Earle. Avon Manufacturing (Guangzhou), Ltd, Maximin Corporation Sdn Bhd ("Malaysia Maximin") and the Rye office, respectively. In April and August 2020, we completed the sale of the Hungary distribution center and the China Wellness Plant, respectively.
Refer to Note 3, Discontinued Operations and Divestitures on pages F-19 through F-20 of our 2017 Annual Report,Assets and Liabilities Held for Sale to the Consolidated Financial Statements included herein, for additional information regarding the salessale of the North America business, Avon Manufacturing (Guangzhou), Ltd, Maximin Corporation Sdn Bhd, the Rye office, the China Wellness Plant, the Hungary distribution center and Liz Earle.Avon Shanghai.
Website Access to Reports
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, are, and have been throughout 2017, available without charge on our investor website (www.avoninvestor.com) as soon as reasonably practicable after they are filed with or furnished to the U.S. Securities and Exchange Commission (the "SEC"). We also make available on our website the charters of our Board Committees, our Corporate Governance Guidelines and our Code of Conduct. Copies of these SEC reports and other documents are also available, without charge, by sending a letter to Investor Relations, Avon Products, Inc., 601 Midland Avenue, Rye, N.Y. 10580, by sending an email to investor.relations@avon.com or by calling (203) 682-8200. Information on our website does not constitute part of this report. Additionally, our filings with the SEC, may be read and copied at the SEC Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. These filings, including reports, proxy and information statements, and other information regarding the Company are also available on the SEC’s website at www.sec.gov free of charge as soon as reasonably practicable after we have filed or furnished the above-referenced reports.
ITEM 1A. RISK FACTORS
You should carefully consider each of the following risks associated with an investment in our publicly-traded securities and all of the other information in our 2017 Annual Report.Consolidated Financial Statements and Notes thereto contained herein. Our business may also be adversely affected by risks and uncertainties not presently known to us or that we currently believe to be immaterial. If any of the events contemplated by the following discussion of risks should occur, our business, prospects, financial condition, liquidity, results of operations and cash flows may be materially adversely affected.
Risks RelatedSummary of Risk Factors
The following is a summary of the risk factors our business faces. The list below is not exhaustive, and investors should read this “Risk Factors” section in full. Some of the risks we face include:
•The COVID-19 pandemic is adversely affecting, and is expected to Uscontinue to adversely affect, our operations, manufacturing, supply chains and Our Businessdistribution systems, and we have experienced and expect to continue to experience unpredictable negative effects associated with the pandemic.
•Now that the Transaction has been consummated, the expected benefits from integrating our operations with Natura & Co's operations may not be achieved.
•Third parties may terminate or alter existing contracts or relationships with us as a result of the Transaction.
•The consummation of the Transaction limits our ability to utilize existing US tax credits and also could be further reduced pursuant to Sections 382 and 383 of the Code if an additional ownership change occurs in the future.
•The combined company may not realize the cost savings, synergies and other benefits that the parties expect to achieve from the Transaction.
•The financial analyses and projections considered by Natura &Co and Avon prior to the Transaction may not be realized.
•Our success depends on our ability to improve our financial and operational performance and execute fully our global business strategy.
Our ability to improve our financial and operational performance and implement the key initiatives of our global business strategy is dependent upon a number of factors, including our ability to:
implement our Transformation Plan, stabilization strategies, cost savings initiatives, restructuring and other initiatives, and achieve anticipated savings and benefits from such programs and initiatives;
reverse declines in our market share and strengthen our brand image;
implement appropriate pricing strategies and product mix that are more aligned with the preferences of local markets and achieve anticipated benefits from these strategies;
reduce costs and effectively manage our cost structure, particularly selling, general and administrative ("SG&A") expenses;
improve our business in the markets where we operate, including through improving field health;
execute investments in information technology ("IT") infrastructure and realize efficiencies across our supply chain, marketing processes, sales model and organizational structure;
implement and continue to innovate our Internet platform, technology strategies and customer service initiatives, including our ability to offer a more compelling social selling experience and the roll-out of e-commerce in certain markets;
effectively manage our outsourcing activities;
improve our marketing and advertising, including our brochures and our social media presence;
improve working capital, effectively manage inventory and implement initiatives to reduce inventory levels, including the potential impact on cash flows and obsolescence;
secure financing at attractive rates, maintain appropriate capital investment, capital structure and cash flow levels and implement cash management, tax, foreign currency hedging and risk management strategies;
reverse declines in Active Representatives and Representative satisfaction by successfully reducing campaign complexity and enhancing our sales leadership program, the Representative experience and earnings potential, along with improving our brand image;
increase the productivity of Representatives through successful implementation of segmentation, field activation programs and technology tools and enablers and other investments in the direct-selling channel;
improve management of our businesses in developing markets, including improving local IT resources and management of local supply chains;
increase the number of consumers served per Representative and their engagement online, as well as to reach new consumers through a combination of new brands, new businesses, new channels and pursuit of strategic opportunities such as joint ventures and alliances with other companies;
comply with certain covenants in our revolving credit facility, which depends on our business results (including the impact of any adverse foreign exchange movements and significant restructuring charges), or undertake other alternatives to avoid noncompliance, such as obtaining additional amendments to our revolving credit facility or repurchasing certain debt, and address the impact any non-compliance with such covenants may have on our ability to secure financing with favorable terms; and
estimate and achieve any financial projections concerning, for example, customer demand, future revenue, profit, cash flow, and operating margin increases and maintain an effective internal control environment as a result of any challenges associated with the implementation of our various plans, strategies and initiatives.
There can be no assurance if and when any of these initiatives will be successfully and fully executed or completed.
•We may experience financial and strategic difficulties and delays or unexpected costs in completing our Transformation PlanOpen Up & Grow and Avon Integration and any other restructuring and cost-savingscost-saving initiatives, including achieving any anticipated savings and benefits of these initiatives.
In January 2016, we initiated a Transformation Plan (the "Transformation Plan"), which included cost reduction efforts to continue to improve our cost structure and to enable us to reinvest in growth. Under this plan, we had targeted pre-tax annualized cost savings of approximately $350 million after three years, with an estimated $200 million from supply chain reductions and an estimated $150 million from other cost reductions, which were expected to be achieved through restructuring actions, as well as other cost-savings strategies that will not result in restructuring charges. We have reinvested and continue to 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 had initiated the Transformation Plan in an attempt to enable us to achieve our long-term goals of mid-single-digit constant-dollar revenue growth and low double-digit operating margin.
As we work to right-size our cost structure, we may not realize anticipated savings or benefits from one or more of the various restructuring and cost-savings initiatives we may undertake as part of these efforts in full or in part or within the time periods we expect. Other events and circumstances, such as financial and strategic difficulties and delays or unexpected costs, including the impact of foreign currency and inflationary pressures, may occur which could result in our not realizing our targets or in offsetting the financial benefits of reaching those targets. If we are unable to realize these savings or benefits, or otherwise fail to invest in the growth initiatives, our business may be adversely affected. In addition, any plans to invest these savings and benefits ahead of future growth means that such costs will be incurred whether or not we realize these savings and benefits. We are also subject to the risks of labor unrest, negative publicity and business disruption in connection with these initiatives, and the failure to realize anticipated savings or benefits from such initiatives could have a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows.
•There can be no assurance that we will be able to improve revenue, margins and net income or to achieve profitable growth.
There can be no assurance that we will be able to improve revenue, margins and net income, or to achieve profitable growth in the future, particularly in our largest markets and developing and emerging markets, such as Brazil, Mexico and Russia. Our revenue in 2017 was $5,715.6 million, compared with $5,717.7 million in 2016 and $6,160.5 million in 2015. Improving revenue, margins and net income and achieving profitable growth will depend on our ability to improve financial and operational performance and execute our global business strategy, and there can be no assurance that we will be able to achieve these goals. Our ability to improve could be hindered by competing business priorities and projects.
To improve revenue, margins and net income and to achieve profitable growth, we also need to successfully implement certain initiatives, including our Transformation Plan, and there can no assurance that we will be able to do so. Our achievement of
profitable growth is also subject to the strengths and weaknesses of our individual international markets, which are or may be impacted by global economic conditions. We cannot assure that our broad-based geographic portfolio will be able to withstand an economic downturn, recession, cost or wage inflation, commodity cost pressures, economic or political instability (including fluctuations in foreign exchange rates), competitive pressures or other market pressures in one or more particular regions.
Failure to improve revenue, margins and net income and to achieve profitable growth could have a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows.
Our business is conducted primarily in one channel, direct selling.
Our business is conducted primarily in the direct-selling channel. Sales are made to the ultimate consumer principally through direct selling by Representatives, who are independent contractors and not our employees. As of December 31, 2017, we had approximately 6 million active Representatives. There is a high rate of turnover among Representatives, which is a common characteristic of the direct-selling business. In order to reverse losses of Representatives and grow our business in the future, we need to recruit, retain and service Representatives on a continuing basis. Among other things, we need to create attractive Representative earning opportunities and transform the value chain, restore field health and sales force effectiveness, successfully implement other initiatives in the direct-selling channel, successfully execute our digital strategy, including e-commerce, improve our brochure and product offerings and improve our marketing and advertising. There can be no assurance that we will be able to achieve these objectives. Our direct-selling model contains an inherent risk of bad debt associated with providing Representatives with credit, which is exacerbated if the financial condition of the Representatives deteriorates. Additionally, consumer purchasing habits, including reducing purchases of beauty and related products generally, or reducing purchases from Representatives through direct selling by buying beauty and related products in other channels such as retail, could reduce our sales, impact our ability to execute our global business strategy or have a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows. Additionally, if we lose market share in the direct-selling channel, our business, prospects, financial condition, liquidity, results of operations and cash flows may be adversely affected. Furthermore, if any government or regulatory body such as Brazil or the European Union, bans or severely restricts our business methods or operational/commercial model of direct selling, our business, prospects, financial condition, liquidity, results of operations and cash flows may be materially adversely affected.
We are subject to financial risks as a result of our international operations, including exposure to foreign currency fluctuations and the impact of foreign currency restrictions.
We operate globally, through operations in various locations around the world, and derive all of our consolidated revenue from operations outside of the United States ("U.S.").
One risk associated with our international operations is that the functional currency for most of our international operations is their local currency. The primary foreign currencies for which we have significant exposures include the Argentine peso, Brazilian real, British pound, Chilean peso, Colombian peso, the euro, Mexican peso, Peruvian new sol, Philippine peso, Polish zloty, Romanian leu, Russian ruble, South African rand, Turkish lira and Ukrainian hryvnia. As the U.S. dollar strengthens relative to our foreign currencies, our revenues and profits are reduced when translated into U.S. dollars and our margins may be negatively impacted by country mix if our higher margin markets experience significant devaluation. In addition, our costs are more weighted to U.S. dollars while our sales are denominated in local currencies. Although we typically work to mitigate this negative foreign currency transaction impact through price increases and further actions to reduce costs, and by shifting costs to markets in which we generate revenue, we may not be able to fully offset the impact, if at all. Our success depends, in part, on our ability to manage these various foreign currency impacts and there can be no assurance that foreign currency fluctuations will not have a material adverse effect on our business, assets, financial condition, liquidity, results of operations or cash flows.
Another risk associated with our international operations is the possibility that a foreign government may tax or impose foreign currency remittance restrictions. Due to the possibility of government restrictions on transfers of cash out of the country and control of exchange rates, we may not be able to immediately repatriate cash. If this should occur, or if the exchange rates devalue, it may have a material adverse effect on our business, assets, financial condition, liquidity, results of operations or cash flows.
Inflation is another risk associated with our international operations. Gains and losses resulting from the remeasurement of the financial statements of subsidiaries operating in highly inflationary economies are recorded in earnings. High rates of inflation or the related devaluation of foreign currency may have a material adverse effect on our business, assets, financial condition, liquidity and results of operations or cash flows. There can be no assurance that countries in which we operate, such as Argentina, will not become highly inflationary and that our revenue, operating profit and net income will not be adversely impacted as a result.
•Our ability to improve our financial performance depends on our ability to anticipate and respond to market trends and changes in consumer preferences.
•Our ability to improve our financial performance depends on our ability to anticipate, gauge and react in a timely and effective manner to changes in consumer spending patterns and preferences for beauty and related products. We must continually work to develop, produce and market new products, maintain and enhance the recognition of our brands, achieve a favorable mix of products, and refine our approach as to how and where we market and sell our products. Consumer spending patterns and preferences cannot be predicted with certainty and can change rapidly. In addition, certain market trends may be short-lived. There can be no assurance that we will be able to anticipate and respond to trends timely and effectively in the market for beauty and related products and changing consumer demands and improve our financial results.
Furthermore, material shifts or decreases in market demand for our products, including as a result of changes in consumer spending patterns and preferences or incorrect forecasting of market demand, could result in us carrying inventory that cannot be sold at anticipated prices or increased product returns by the Representatives. Failure to maintain proper inventory levels or increased product returns by the Representatives could result in a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows.
Our success depends, in part, on our key personnel.
Our success depends, in part, on our ability to retain our key personnel. The unexpected loss of or failure to retain one or more of our key employees could adversely affect our business. Our success also depends, in part, on our continuing ability to identify, hire, attract, train, develop and retain other highly qualified personnel. Competition for these employees can be intense and our ability to hire, attract and retain them depends on our ability to provide competitive compensation. We may not be able to attract, assimilate, develop or retain qualified personnel in the future, and our failure to do so could adversely affect our business, including the execution of our global business strategy. For example, there have been many changes to the Company's senior management, including a new chief executive officer in 2018, a new chief financial officer in 2015 and 2017 and other significant changes to senior management during 2017. Such turnover creates a risk of business processes not being sustained if the turnover occurs with inadequate knowledge transfer. Any failure by our management team to perform as expected may have a material adverse effect on our business, prospects, financial condition, results of operations and cash flows. This risk may be exacerbated by the uncertainties associated with the implementation of our Transformation Plan and any other stabilization strategies and restructuring and cost-savings initiatives we undertake from time to time.
A general economic downturn, a recession globally or in one or more of our geographic regions or markets or sudden disruption in business conditions or other challenges may adversely affect our business, our access to liquidity and capital, and our credit ratings.
Current global macro-economic instability or a further downturn in the economies in which we sell our products, including any recession in one or more of our geographic regions or markets could adversely affect our business, our access to liquidity and capital, and our credit ratings. Economic events, including high unemployment levels and recession, as well as the tightening of credit markets, have resulted in challenges to our business and a heightened concern regarding further deterioration globally. In addition, as mentioned above, our business is conducted primarily in the direct-selling channel. We could experience declines in revenues, profitabilityone channel, direct selling, and cash flow dueour inability to reduced orders, payment delays, supply chain disruptions or other factors caused by such economic, operational or business challenges. Any or all of these factors could potentially have a material adverse effect onretain our liquidity and capital resources and credit ratings, including our ability to access short-term financing, raise additional capital, reduce flexibility with respect to working capital, and maintain credit lines and offshore cash balances.
Consumer spending is also generally affected by a number of factors, including general economic conditions, inflation, interest rates, energy costs, gasoline prices and consumer confidence generally, all of which are beyond our control. Consumer purchases of discretionary items, such as beauty and related products, tend to decline during recessionary periods, when disposable income is lower, andRepresentatives may impact sales of our products. We may face continued economic challenges in 2018 because customers may continue to have less money for discretionary purchases as a result of job losses, bankruptcies, and reduced access to credit, among other things.
In addition, sudden disruptions in business conditions and consumer spending may result from acts of terror, natural disasters, adverse weather conditions, and pandemic situations or large-scale power outages, none of which are under our control.
Our credit ratings were downgraded during the past several years, which could limit our access to financing, affect the market price of our financing and increase financing costs. A further downgrade in our credit ratings maymaterially adversely affect our access to liquidity.us.
Nationally recognized credit rating organizations have issued credit ratings relating to our long-term debt. Our credit ratings have been downgraded at various points during the past several years, including in 2017. Our long-term credit ratings are: Moody’s ratings of Stable Outlook with B1 for corporate family debt, B3 for senior unsecured debt, and Ba1 for our Senior Secured Notes; S&P ratings of Stable Outlook with B for corporate family debt and senior unsecured debt and BB- for our
Senior Secured Notes; and Fitch rating of Negative Outlook with B+, each of which are below investment grade. We do not believe these long-term credit ratings will have a material impact on our near-term liquidity. However, any rating agency reviews could result in a change in outlook or downgrade, which could further limit our access to new financing, particularly short-term financing, reduce our flexibility with respect to working capital needs, affect the market price of some or all of our outstanding debt securities, and likely result in an increase in financing costs, and less favorable covenants and financial terms under our financing arrangements. A further change in outlook or downgrade of our credit ratings may increase some of these risks and limit our access to such short-term financing in the future on favorable terms, if at all. See Note 7, Debt and Other Financing on pages F-22 through F-25 of our 2017 Annual Report for details about the terms of our existing debt and other financing arrangements.
Our indebtedness and any future inability to meet any of our obligations under our indebtedness, could adversely affect us by reducing our flexibility to respond to changing business and economic conditions.
As of December 31, 2017, we had approximately $1.9 billion of indebtedness outstanding. We may also incur additional long-term indebtedness and working capital lines of credit to meet future financing needs, subject to certain restrictions under our indebtedness, including our revolving credit facility and our Senior Secured Notes (each, as described below), which would increase our total indebtedness. We may be unable to generate sufficient cash flow from operations and future borrowings and other financing may be unavailable in an amount sufficient to enable us to fund our current and future financial obligations or our other liquidity needs, which would have a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows. Our indebtedness could have material negative consequences on our business, prospects, financial condition, liquidity, results of operations and cash flows, including the following:
limitations on our ability to obtain additional debt or equity financing sufficient to fund growth, such as working capital and capital expenditures requirements or to meet other cash requirements, in particular during periods in which credit markets are weak;
a further downgrade in our credit ratings, as discussed above;
a limitation on our flexibility to plan for, or react to, competitive challenges in our business and the beauty industry;
the possibility that we are put at a competitive disadvantage relative to competitors with less debt or debt with more favorable terms than us, and competitors that may be in a more favorable position to access additional capital resources and withstand economic downturns;
limitations on our ability to execute business development activities to support our strategies or ability to execute restructuring as necessary; and
limitations on our ability to invest in recruiting, retaining and servicing the Representatives.
Our revolving credit facility and our Senior Secured Notes are secured by first-priority liens on and security interests in substantially all of the assets of Avon International Operations, Inc. (“AIO,” a wholly-owned domestic subsidiary) and the subsidiary guarantors and by certain assets of the Company, in each case, subject to certain exceptions and permitted liens. Both our revolving credit facility and our Senior Secured Notes contain customary covenants, including, among other things, limits on the ability of the Company, AIO or any restricted subsidiary to, subject to certain exceptions, incur liens, incur debt, make restricted payments, make investments or, with respect to certain entities, merge, consolidate or dispose of all or substantially all of its assets. Our revolving credit facility also contains a minimum interest coverage ratio and a maximum total leverage ratio. If we are unable to comply with these ratios as a result of our business results (including the impact of any adverse foreign exchange movements and significant restructuring charges), we would be limited in our ability to borrow under our revolving credit facility which could, as a result, restrict our operational flexibility. In addition, we could have difficulty undertaking other alternatives to avoid noncompliance, such as obtaining necessary waivers from compliance with, or necessary amendments to, the covenants contained in our revolving credit facility and our Senior Secured Notes or repurchasing certain debt, and we could have difficulty addressing the impact any non-compliance with these covenants may have on our ability to secure financing with favorable terms.
Our ability to conduct business in our international markets may be affected by political, legal, tax and regulatory risks.
Our ability to achieve growth in our international markets, and to improve operations in our existing international markets, is exposed to various risks, including:
the possibility that a foreign government might ban, halt or severely restrict our business, including our primary method of direct selling;
the possibility that local civil unrest, economic or political instability, bureaucratic delays, changes in macro-economic conditions, changes in diplomatic or trade relationships (including any sanctions, restrictions and other responses such as those related to Russia and Ukraine) or other uncertainties might disrupt our operations in an international market;
the lack of well-established or reliable legal systems in certain areas where we operate;
the adoption of new U.S. or foreign tax legislation including the newly enacted U.S. federal income tax law discussed in detail below or exposure to additional tax liabilities, including exposure to tax assessments without prior notice or the opportunity to review the basis for any such assessments in certain jurisdictions;
the possibility that a government authority might impose legal, tax or other financial burdens on the Representatives, as direct sellers, or on Avon, due, for example, to the structure of our operations in various markets, or additional taxes on our products, including in Brazil;
the possibility that a government authority might challenge the status of the Representatives as independent contractors or impose employment or social taxes on the Representatives; and
those associated with data privacy regulation and the international transfer of personal data.
We are also subject to the adoption, interpretation and enforcement by governmental agencies abroad and in the U.S. (including on federal, state and local levels) of other laws, rules, regulations or policies, including any changes thereto, such as restrictions on trade, competition, manufacturing, license and permit requirements, import and export license requirements, privacy and data protection laws, anti-corruption laws, environmental laws, records and information management, tariffs and taxes, laws relating to the sourcing of "conflict minerals," health care reform requirements such as those required by the Patient Protection and Affordable Healthcare Act, and regulation of our brochures, product claims or ingredients, which may require us to adjust our operations and systems in certain markets where we do business.
For example, from time to time, local governments and others question the legal status of Representatives or impose burdens inconsistent with the Representative's status as independent contractors, often in regard to possible coverage under social benefit laws that would require us (and, in most instances, the Representatives) to make regular contributions to government social benefit funds.
If we are unable to address these matters in a satisfactory manner, or adhere to or successfully implement processes in response to changing regulatory requirements, our business, costs and/or reputation may be adversely affected. We cannot predict with certainty the outcome or the impact that pending or future legislative and regulatory changes may have on our business in the future.
Our business is subject to a number of foreign laws and regulations in various jurisdictions governing data privacy and security.
We collect, use and store personal data of our employees, Representatives, customers and other third parties in the ordinary course of business, and we are required to comply with increasingly complex and changing data privacy and security laws and regulations, including with respect to the collection, storage, use, transmission and protection of personal information and other consumer data, including particularly the transfer of personal data between or among countries. In particular, the European Union ("EU") has adopted strict data privacy regulations. Following recent developments such as the European Court of Justice’s 2015 ruling that the transfer of personal data from the EU to the U.S. under the EU/U.S. Safe Harbor was an invalid mechanism of personal data transfer, the adoption of the EU-U.S. Privacy Shield as a replacement for the Safe Harbor, and the upcoming effectiveness of the EU’s General Data Protection Regulation (“GDPR”) in May 2018, along with the proposed Regulation on Privacy and Electronic Communications (the “ePrivacy Regulation”), also on the horizon, data privacy and security compliance in the EU are increasingly complex and challenging. The GDPR in particular has broad extraterritorial effect and imposes a strict data protection compliance regime with significant penalties for non-compliance. In general, the GDPR and ePrivacy Regulation, and other local privacy laws, could also require adaptation of our technologies or practices to satisfy local privacy requirements and standards. We may also face audits or investigations by one or more domestic or foreign government agencies relating to our compliance with these regulations. An adverse outcome under any such investigation or audit could subject us to fines, penalties or orders to cease, delay or modify collection, use or transfers of personal data. That or other circumstances related to our collection, use and transfer of personal data could cause a loss of reputation in the market or adversely affect our business.
The scope of data privacy and security regulations continues to evolve, and we believe that the adoption of increasingly restrictive regulations in this area may be likely within the jurisdictions in which we operate. Compliance with data privacy and security restrictions could increase the cost of our operations and failure to comply with such restrictions could subject us to criminal and civil sanctions as well as other penalties.
A failure, disruption, cyberattack or other breach in the security of an IT system or infrastructure that we utilize could adversely affect our business and reputation and increase our costs.
We employ IT systems to support our business, including systems to support financial reporting, web-based tools, an enterprise resource planning ("ERP") system, and internal communication and data transfer networks. We also employ IT systems to support Representatives in our markets, including electronic order collection, invoicing systems, shipping and box packing, social media tools, mobile applications and on-line training. We have e-commerce and Internet sites, including business-to-
business websites to support Representatives. We use third-party service providers in many instances to provide or support these IT systems. Over the last several years, we have undertaken initiatives to increase our reliance on IT systems which has resulted in the outsourcing of certain services and functions, such as global human resources IT systems, call center support, Representative support services and other IT processes. Our IT systems and infrastructure, as well as the systems, infrastructure and services of those of third parties, are integral to our performance.
Any of our IT systems and infrastructure, or those of our third-party service providers, may be susceptible to outages, disruptions, destruction or corruption due to the complex landscape of localized applications and architectures as well as incidents related to legacy or unintegrated systems. These IT systems and infrastructure also may be susceptible to cybersecurity breaches, attacks, break-ins, including ransomware and phishing attacks, data corruption, fire, floods, power loss, telecommunications failures, terrorist attacks and similar events beyond our control. We rely on our employees, Representatives and third parties in our day-to-day and ongoing operations, who may, as a result of human error or malfeasance or failure, disruption, cyberattack or other security breach of third-party systems or infrastructure, expose us to risk. Furthermore, our ability to protect and monitor the practices of our third-party service providers is more limited than our ability to protect and monitor our own IT systems and infrastructure.
Our IT systems, or those of our third-party service providers may be accessed by unauthorized users such as cyber criminals as a result of a failure, disruption, cyberattack or other security breach, exposing us to risk. As techniques used by cyber criminals change frequently, a failure, disruption, cyberattack or other security breach may go undetected for a long period of time. A failure, disruption, cyberattack or other security breach of our IT systems or infrastructure, or those of our third-party service providers, could result in the theft, transfer, unauthorized access to, disclosure, modification, misuse, loss, or destruction of Company, employee, Representative, customer, vendor, or other third-party data, including sensitive or confidential data, personal information and intellectual property. For example, the Company uses a newswire service that has been subject to the hacking of not-yet-issued press releases by hackers in order to trade on securities using the information contained in such press releases.
We are investing in industry-standard solutions and protections and monitoring practices of our data and IT systems and infrastructure to reduce these risks and we continue to monitor our IT systems and infrastructure on an ongoing basis for any current or potential threats. We have also deployed additional employee security training and updated security policies for the Company and its third-party service providers. Such efforts and investments are costly, and as cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities. As a company that operates globally, we could also be impacted by commercial agreements between us and processing organizations, existing and proposed laws and regulations, and government policies and practices related to cybersecurity, privacy and data protection.
Despite our efforts, our and our third-party service providers’ data, IT systems and infrastructure may be vulnerable. There can be no assurance that our efforts will prevent a failure, disruption, cyberattack or other security breach of our or our third-party service providers’ IT systems or infrastructure, or that we will detect and appropriately respond if there is such a failure, disruption, cyberattack or other security breach. Our IT databases and systems have been, and will likely continue to be, subject to ransomware, denial of service and phishing attacks, none of which has been material to the Company to date. Any such failure, disruption, cyberattack or other security breach could adversely affect our business including our ability to expand our business, cause damage to our reputation, result in increased costs to address internal data, security, and personnel issues, and result in violations of applicable privacy laws and other laws and external financial obligations such as governmental fines, penalties, or regulatory proceedings, remediation efforts such as breach notification and identity theft monitoring, and third-party private litigation with potentially significant costs. In addition, it could result in deterioration in our employees', Representatives', customers', or vendors' confidence in us, which could cause them to discontinue doing business with us or result in other competitive disadvantages. In addition, there may be other challenges and risks as we upgrade, modernize, and standardize our IT systems globally.
•We face intense competition and can make no assurances about our ability to overcome our competitive challenges.
We face intense competition from competing products in each of our lines of business in the markets we operate. We compete against products sold to consumers in a number of distribution methods, including direct selling, through the Internet, and through mass market retail and prestige retail channels. We also face increasing direct-selling and retail competition in our developing and emerging markets, particularly Brazil and Russia.
Within the direct-selling channel, we often compete on country-by-country basis with our direct-selling competitors. There are a number of direct-selling companies that sell product lines similar to ours, some of which have worldwide operations and compete with us globally. Unlike a typical consumer packaged goods ("CPG") company which operates within a broad-based consumer pool, direct sellers compete for representative or entrepreneurial talent by providing a more competitive earnings opportunity or "better deal" than that offered by the competition. Providing a compelling earnings opportunity for the
Representatives is as critical as developing and marketing new and innovative products. Therefore, in contrast to typical CPG companies, we must first compete for a limited pool of Representatives before we reach the ultimate consumer.
Representatives are attracted to a direct seller by competitive earnings opportunities, often through what are commonly known as "field incentives" in the direct-selling industry. Competitors devote substantial effort to finding out the effectiveness of such incentives so that they can invest in incentives that are the most cost-effective or produce the better payback. As one of the largest and oldest beauty direct sellers globally, Avon's business model and strategies are often highly sought after, particularly by smaller and more nimble competitors who seek to capitalize on our investment and experience. As a result, we are subject to significant competition for the recruitment of Representatives from other direct-selling or network marketing organizations as well as significant competition from other non-direct selling earnings opportunities for which our existing Representatives or potential Representatives could avail themselves. It is therefore continually necessary to innovate and enhance our direct-selling and service model as well as to recruit and retain new Representatives. If we are unable to do so, our business will be adversely affected.
Within the broader CPG industry, we principally compete against large and well-known cosmetics (color), fragrance and skincare companies that manufacture and sell broad product lines through various types of retail establishments and other channels, including through the Internet. In addition, we compete against many other companies that manufacture and sell more narrow beauty product lines sold through retail establishments and other channels, including through the Internet. This industry is highly competitive, and some of our principal competitors in the CPG industry are larger than we are and have greater resources than we do. Competitive activities on their part could cause our sales to suffer. We also have many highly competitive global branded and private label competitors in the accessories, apparel, housewares, and gift and decorative products industries, including retail establishments, principally department stores, mass merchandisers, gift shops and specialty retailers. Our principal competition in the highly competitive fashion jewelry industry consists of a few large companies and many small companies that sell fashion jewelry through department stores, mass merchandisers, specialty retailers and e-commerce.
The number of competitors and degree of competition that we face in the beauty and related products industry varies widely from country to country. If our advertising, promotional, merchandising or other marketing strategies are not successful, if we are unable to improve our product mix and offer new products that represent technological breakthroughs and are aligned with local preferences, if we do not successfully manage the timing of new product introductions or the profitability of these efforts, if we are unable to improve the Representative experience, or if for other reasons the Representatives or end customers perceive competitors' products as having greater appeal, then our sales, results of operations and cash flows will be adversely affected.
•Third-party suppliers provide, among other things, the raw materials required for our Beauty products, and the loss of these suppliers, a supplier's inability to supply a raw material or a finished product or a disruption or interruption in the supply chain may adversely affect our business.
We manufacture•The loss of, or a disruption in, our research and packagedevelopment, production and distribution operations could adversely affect our business, financial condition and results of operations.
•Our success depends, in part, on the majorityquality, safety and efficacy of our Beauty products, whichproducts.
•We are formulatedsubject to financial risks as a result of our international operations, including exposure to foreign currency fluctuations and designedthe impact of foreign currency restrictions.
•Our ability to conduct business in our international markets may be affected by economic, political, legal, tax and regulatory risks.
•Our business is subject to a number of foreign laws and regulations in various jurisdictions governing data privacy and security.
•The uncertainty surrounding the UK's decision to withdraw from the EU may adversely affect our business.
•A failure, disruption, cyberattack, other breach in the security of an IT system or infrastructure that we utilize could adversely affect our business and reputation and increase our costs.
•Unauthorized disclosure of sensitive or confidential Representative or customer information or our failure or the perception by our staffRepresentatives or customers that we failed to comply with privacy laws or properly address privacy concerns could materially harm our business and standing with our Representatives and customers.
•We were the target of chemists, designers and artists. Raw materials, consisting chiefly of essential oils, chemicals, containers and packaging components required fora cybersecurity incident which disrupted our Beauty productssystems.
•Our credit ratings are purchased from a range of third-party suppliers. The remainderbelow investment grade, which could limit our access to financing, affect the market price of our Beauty productsfinancing and allincrease financing costs. A downgrade in our credit ratings may adversely affect our access to liquidity.
•Significant changes in pension fund investment performance, assumptions relating to pension costs or required legal changes in pension funding rules may have a material effect on the valuation of pension obligations, the funded status of pension plans and our pension cost.
•We are involved, and may become involved in the future, in legal proceedings that, if adversely adjudicated or settled, could adversely affect our financial results.
•Government reviews, inquiries, investigations, and actions could harm our business or reputation. In addition, from time to time, we may conduct other investigations and reviews, the consequences of which could negatively impact our business or reputation.
•If we are unable to protect our intellectual property rights, specifically patents and trademarks, our ability to compete could be adversely affected.
•We may be exposed to claims and liabilities as a result of the separation of our Fashion & Home productsNorth America business.
•We or New Avon may fail to perform under the post-closing arrangements executed in connection with the Separation.
•The licensing of our North America intellectual property rights, including trademarks that are purchased from various third-party manufacturers. fundamental to our brand, in connection with the Separation could adversely impact our reputation, our business generally, and our ability to enforce intellectual property rights used in both North America and international jurisdictions.
•A general economic downturn, a recession globally or in one or more of our geographic regions or markets or sudden disruption in business conditions or other challenges may adversely affect our business, our access to liquidity and capital, and our credit ratings.
•Our productssuccess depends, in part, on our key personnel.
•We are affectednot insured against all risks affecting our activities and our insurance coverage may not be sufficient to cover all losses and/or liabilities that may be incurred by the costour operations.
•Any strategic alliances or divestitures may expose us to additional risks.
Risks Related to COVID-19
The COVID-19 pandemic is adversely affecting, and availability of materials such as glass, plastics, chemicalsis expected to continue to adversely affect, our operations, manufacturing, supply chains and fabrics. For the vast majority of itemsdistribution systems, and we have more than one source of supply available. We believe that we canexperienced and expect to continue to obtain sufficient raw materialsexperience unpredictable negative effects associated with the pandemic.
Public health officials worldwide have recommended and suppliesmandated precautions to manufacturemitigate the spread of COVID-19, including restrictions on manufacturing, distribution, and congregating in heavily populated areas and shelter-in-place orders or similar measures. As a result, manufacturing and distribution of our products have been negatively impacted and could be further affected in the future. Our suppliers have been similarly impacted which further affects our ability to produce our Beauty productsand distribute. Distribution has also been impacted by certain restrictions on import and export in various countries and such restrictions may continue in the future. As a result of the COVID-19 pandemic, we have also been unable to satisfy certain demand for the foreseeable future. Additionally, we design the brochures that are used by the Representatives to sell our products. The brochures are then producedpandemic has also led to challenges in recruiting Representatives, and enrollment of Representatives will likely occur at a slower pace. As a result, customers have experienced and may continue to experience delays in receiving our products. Additionally, there is a general risk that our employees or other workers could be exposed to the virus and that an incident of infection at one of our sites could result in “lock-down” measures for the whole site that could negatively impact our business.
Our results will continue to be adversely impacted by these public health restrictions and other actions taken to contain or mitigate the impact of COVID-19.
We expect some negative impact on revenue from COVID-19 to continue in 2021, which will, in turn, result in lower cash generation from activities. If the downturn is deeper or for longer than we anticipate, the Company could take certain further actions to ease the pressure of certain cash outflows, such as reducing discretionary expenditure, selling non-core assets, accessing government pandemic initiatives or arranging borrowing facilities with third-party banks and affiliate companies. Our projections indicate that we should have sufficient liquidity to meet our obligations to parties other than Natura &Co and its affiliates for a period of not less than 12 months from the date of issuance of the Consolidated Financial Statements contained herein. The Company has received an irrevocable commitment from Natura &Co Holding that it will provide sufficient financial support if and when needed to enable the Company to meet its obligations as they come due in the normal course of business for a period of not less than 12 months from the date of issuance of the Consolidated Financial Statements contained herein. For further information see Note 1, Accounting Policies, to the Consolidated Financial Statements included herein.
Although there have been certain improvements in the restrictive measures being adopted to contain the impacts of the COVID-19 pandemic, there is still considerable uncertainty as to whether future restrictions might be required or enforced by the authorities in the future. The extent of the continued impact of COVID-19 on our behalfoperational and financial performance will depend on certain developments, including the duration and spread of the outbreak and its impact on our Representatives, suppliers and employees, all of which are uncertain and cannot be predicted. COVID-19 also poses risks that our employees, contractors, suppliers, customers and other business partners may be prevented from conducting business activities for an indefinite period of time, including current or future shutdowns that may be requested or mandated by governmental authorities and could have a rangematerial adverse effect on our results of printing suppliers.operations, financial condition and liquidity going forward. Furthermore, to the extent the COVID-19 pandemic adversely affects our business, results of operations, financial condition and liquidity, it may also have the effect of heightening many of the other risks to which we are exposed, such as those relating to our high level of indebtedness and our need to generate sufficient cash flows to service our indebtedness.
TheThere is uncertainty around the duration and breadth of the COVID-19 pandemic and the response to it. As a result the ultimate impact on our business, financial condition or operating results cannot be reasonably estimated at this time. While we expect the impacts of COVID-19 to continue to have an adverse effect on our business, financial condition and results of operations, we are unable to predict the extent or precise nature of these impacts at this time. If the pandemic or the resulting economic downturn continues to worsen, we could experience loss of any one supplier would notbusiness, which could have a material impact on our ability to source raw materials forfinancial position and cash flows.
In addition, in the majorityfuture, other regional and / or global outbreaks of our Beauty products or source products forcommunicable diseases may occur. If they occur, the remainder of our Beauty products and all of our Fashion & Home products or paper foreffects that the brochures. This riskCompany will suffer may be exacerbated by our globally-coordinated purchasing strategy, which leverages volumes. Regulatory action, suchsimilar or even greater than the effects it is suffering as restrictions on importation, may also disrupt or interrupt our supply chain. Furthermore, increases ina result of the costs of raw materials or other commodities mayCOVID-19 pandemic.
If the COVID-19 pandemic continues to adversely affect our profit margins if we are unable to pass along any higher costs in the form of price increases global economy and/or otherwise achieve cost efficiencies in manufacturing and distribution. In addition, if our suppliers fail to use ethical business practices and comply with applicable laws and regulations, such as any child labor laws, our reputation could be harmed due to negative publicity.
The recently enacted comprehensive U.S. tax reform legislation could adversely affect our business, financial condition, liquidity or results of operations, it may also increase the likelihood and/or magnitude of other risks described in this “Risk Factors” section.
Risks Related to the Transaction
Now that the Transaction has been consummated, the expected benefits from integrating our operations with Natura & Co's operations may not be achieved.
The success of the Transaction depends, in part, on the ability of Natura &Co and its subsidiaries and businesses other than Avon (including Natura Cosméticos, Aesop, The Body Shop and their respective subsidiaries) and Avon to realize the expected benefits from integrating their respective operations. No assurance can be given that Natura &Co and Avon will be able to integrate their respective operations without encountering difficulties, which may include, among other things, the loss of key employees, diversion of management attention, the disruption of our respective ongoing businesses or possible inconsistencies in standards, procedures and policies. Additionally, Natura &Co and Avon may be required to make unanticipated capital expenditures or investments in order to maintain, integrate, improve or sustain our operations. Integrating our respective operations may involve additional unanticipated costs and financial condition.
On December 22, 2017,risks, such as the Tax Cutsincurrence of unexpected write-offs, the possible effect of adverse tax and Jobs Act was enacted that significantly revisesaccounting treatments and unanticipated or unknown liabilities relating to Natura &Co or Avon. All of these factors could decrease or delay the Internal Revenue Code of 1986, as amended. The newly enacted federal income tax law contains significant changes to corporate taxation, including but not limited to, a reductionexpected accretive effect of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, a limitationTransaction.
Even if our respective operations are successfully integrated, we may not realize the full benefits of the tax deduction for interest expenseTransaction, including the synergies, cost savings and growth opportunities, within the expected time frame, if at all. Natura &Co and Avon continue to 30%evaluate the estimates of adjusted earnings (except for certain small businesses), a one-time tax on offshore earnings at reduced rates regardless of whethersynergies to be realized from the funds are physically repatriated, elimination of U.S. tax on foreign earnings (subjectTransaction. However, the actual cost savings, the costs required to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over
time,realize the cost savings and modifying or repealing many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, it is unclear how certain provisionssource of the new federal tax law (including provisions aimed at taxing foreign earnings at a minimum level) will be applied absent further legislative clarificationcost savings could differ materially from the estimates of Natura &Co and guidance.Avon.
Further, Natura &Co and Avon may not achieve the targeted operating or long-term strategic benefits of the Transaction. In addition, it is uncertain ifNatura &Co and Avon may not accelerate growth by increasing investments in digital, product innovation and brand initiatives. If Natura &Co and Avon are unable to what extent various states will conformachieve the objectives, or are not able to achieve our objectives on a timely basis, the newly-enacted federal tax law. These uncertainties and the ultimate interpretationanticipated benefits of the federal provisionsTransaction may not be realized fully or at all. An inability to realize the full extent of, or any of, the anticipated benefits of the Transaction could have an adverse effect on the financial condition, results of operations and cash flows of Natura &Co and Avon and could limit Natura &Co’s and Avon’s ability to achieve the anticipated benefits of the Transaction.
In addition, the COVID-19 pandemic has created significant volatility, uncertainty and economic disruption, which may adversely affect the Natura &Co and Avon integration plans and may materially and adversely affect our results of operations, cash flows and financial position. For further information regarding the impacts of the COVID-19 pandemic on our operations, please also see "Item 1A. Risk Factors—The COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, manufacturing, supply chains and distribution systems, and we have experienced and expect to continue to experience unpredictable negative effects associated with the pandemic.
Third parties may terminate or alter existing contracts or relationships with us as a result of the Transaction.
We have contracts with customers, employees, Representatives, suppliers, vendors, distributors, landlords, lenders, licensors, joint venture partners and other business partners, and these contracts may require us to obtain consent from these other parties in connection with the Transaction. As not all such consents have been obtained, the counterparties to these contracts may seek to terminate or otherwise materially adversely alter the terms of such contracts following the Transaction, which in turn may result in us suffering a loss of potential future revenue, incurring contractual liabilities or losing rights that are material to our business. Further, parties with which we have business and operational relationships may experience uncertainty as to the future of such relationships and may delay or defer certain business decisions, seek alternative relationships with third parties or seek to alter their present business relationships with us. Parties with whom we otherwise may have sought to establish business relationships may seek alternative relationships with third parties.
In addition, current and prospective employees and Representatives may experience uncertainty about their roles now that the Transaction has been consummated and such uncertainty may have an effect on our corporate culture. There can be no assurance we will be able to attract and retain key talent, including senior leaders, to the same extent that we have previously been able to attract and retain employees and sales representatives. Any loss or distraction of our customers, employees, Representatives, suppliers, vendors, distributors, landlords, lenders, licensors, joint venture partners and other business partners, could have a material adverse effect on our business, financial condition, operating results and financial condition.cash flows and could limit our ability to achieve the anticipated benefits of the Transaction.
Our
The consummation of the Transaction limits our ability to utilize our foreignexisting US tax credits and other U.S. creditsalso could be further reduced pursuant to offset our future taxable income may be limited under Sections 382 and 383 of the Internal Revenue Code.Code if an additional ownership change occurs in the future.
As of December 31, 2017,2019, we had approximately $968$660 million of foreign tax and other credits available to offset future income for U.S. federal tax purposes. As a result of the ownership change resulting from the Transaction the ability to use these credits has been limited to a range of approximately $108 to $178 million. Our ability to utilize such credits to offset future income could be further limited, however, if the Company undergoes an “ownership change”additional "ownership change" within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”).Code. In general, an ownership change will occur if there is a cumulative increase in ownership of our stock by 5% shareholders (as defined in the Code) that exceeds 50 percentage points over a rolling three-year period. If the 50 percentage points are exceeded, Section 382 establishes an annual limitation on the amount of deferred tax assets attributable to previously incurred credits that may be used to offset taxable income in future years. A number of complex rules apply in calculating this limitation, and any such limitation would depend in part on the market value of the Company at the time of the ownership change and prevailing interest rates at the time of calculation. As a result, the magnitude of any potential limitation on the use of our deferred tax assets and the effect of such limitation on the Company if an ownership change were to occur is difficult to assess. However, if all or a portion of our deferred tax assets were to become subject to this limitation, our tax liability could increase significantly and our future results of operations and cash flows could be adversely impacted. Prospectively if we were to undergo a further ownership change these remaining credits could be further reduced.
The combined company may not realize the cost savings, synergies and other benefits that the parties expect to achieve from the Transaction.
The combination of two independent companies is a complex, costly and time-consuming process. As a result, the combined company will be required to devote significant management attention and resources to integrating the business practices and operations of Natura &Co and Avon. The integration process may disrupt the business of either or both of the companies and, if implemented ineffectively, could preclude realization of the full benefits expected by Natura &Co and Avon from the Transaction. The failure of the combined company to meet the challenges involved in successfully integrating the operations of Natura &Co and Avon or otherwise to realize the anticipated benefits of the Transaction could cause an interruption of the activities of the combined company and could seriously harm its results of operations. In addition, the overall integration of the two companies may result in material unanticipated problems, expenses, liabilities, competitive responses, loss of client relationships and diversion of management’s attention, and may cause the combined company’s share price to decline. The difficulties of combining the operations of the companies include, among others:
• coordinating geographically separate organizations;
• the potential diversion of management focus and resources from other strategic opportunities and from operational matters;
• aligning and executing the strategy of the combined company;
• retaining existing independent beauty consultants and Sales Representatives and attracting new independent beauty consultants and Sales Representatives;
• retaining existing customers and attracting new customers;
• maintaining employee morale and retaining key management and other employees;
• integrating two unique business cultures, which may prove to be incompatible;
• the possibility of faulty assumptions underlying expectations regarding the integration process;
• consolidating corporate and administrative infrastructures and eliminating duplicative operations;
• coordinating distribution and marketing efforts;
• integrating information technology, communications and other systems;
• changes in applicable laws and regulations;
• managing tax costs or inefficiencies associated with integrating the operations of the combined company;
• unforeseen expenses or delays associated with the Transaction; and
• taking actions that may be required in connection with obtaining regulatory approvals.
Many of these factors are out of the combined company’s control and any one of them could result in increased costs, decreased revenues and diversion of management’s time and energy, which could materially affect the combined company’s business, financial condition and results of operations. In addition, even if the operations of Natura &Co and Avon are integrated successfully, the combined company may not realize the full benefits of the Transaction, including the synergies, cost savings or sales or growth opportunities that Natura &Co and Avon expect. These benefits may not be achieved within the anticipated time frame, or at all. As a result, we cannot assure you that the combination of Natura &Co and Avon will result in the realization of the full benefits anticipated from the Transaction.
The financial analyses and projections considered by Natura &Co and Avon prior to the Transaction may not be realized.
The financial analyses and projections considered by Natura &Co and Avon prior to the Transaction reflected numerous estimates and assumptions that were inherently uncertain with respect to industry performance and competition, general business, economic, market and financial conditions and matters specific to Natura &Co’s and Avon’s businesses, including the factors entitled “Forward-Looking Statements” and/or entitled “Item 3. Key Information—D. Risk Factors,” all of which are difficult to predict and many of which are beyond Natura &Co’s and Avon’s control. There can be no assurance that the financial analyses and projections considered by Natura &Co and Avon will be realized or that actual results will not materially vary from such financial analyses and projections. In addition, since the financial projections cover multiple years, such information by its nature becomes less predictive with each successive year.
Risks Related to Our Business Strategy
Our success depends on our ability to improve our financial and operational performance and execute fully our global business strategy.
Our ability to improve our financial and operational performance and implement the key initiatives of our global business strategy is dependent upon a number of factors, including our ability to:
•implement Open Up & Grow and Avon Integration stabilization strategies, cost savings initiatives, restructuring and other initiatives, and achieve anticipated savings and benefits from such programs and initiatives;
•reverse declines in our market share and strengthen our brand image;
•implement appropriate pricing strategies and product mix that are more aligned with the preferences of local markets and achieve anticipated benefits from these strategies;
•reduce costs and effectively manage our cost structure, particularly selling, general and administrative (“SG&A”) expenses;
•improve our business in the markets where we operate, including through improving field health;
•execute investments in information technology (“IT”) infrastructure and realize efficiencies across our supply chain, marketing processes, sales model and organizational structure;
•implement and continue to innovate our digital strategies, Internet platform, technology strategies and customer service initiatives, including our ability to offer a more compelling social selling experience and the roll-out of e-commerce in certain markets, especially where innovative platforms and technologies may lead to a disruption of our operations, both online and offline;
•effectively manage our outsourcing activities;
•improve our marketing and advertising, including our brochures and our social media presence;
•improve working capital, effectively manage inventory and implement initiatives to reduce inventory levels, including through our recent structural reset of inventory processes, and the potential impact on cash flows and obsolescence;
•secure financing at attractive rates, maintain appropriate capital investment, capital structure and cash flow levels and implement cash management, tax, foreign currency hedging and risk management strategies;
•reverse declines in Active Representatives and Representative satisfaction by successfully reducing campaign complexity and enhancing our sales leadership program, the Representative experience, retention and earnings potential, along with improving our brand image;
•increase the productivity of Representatives through successful implementation of segmentation, field activation programs and technology tools and enablers and other investments in the direct-selling channel;
•improve management of our businesses in developing markets, including improving local IT resources and management of local supply chains;
•increase the number of consumers served per Representative and their engagement online, as well as to reach new consumers through a combination of new brands, new businesses, new channels and pursuit of strategic opportunities such as joint ventures and alliances with other companies; and
•estimate and achieve any financial projections concerning, for example, customer demand, future revenue, profit, cash flow, and operating margin increases and maintain an effective internal control environment as a result of any challenges associated with the implementation of our various plans, strategies and initiatives.
There can be no assurance if and when any of these initiatives will be successfully and fully executed or completed.
We currently believemay experience financial and strategic difficulties and delays or unexpected costs in completing Open Up & Grow and Avon Integration and any other restructuring and cost-saving initiatives, including achieving any anticipated savings and benefits of these initiatives.
Subsequent to the merger of Natura and Avon in January 2020, an ownership change hasintegration plan (the "Avon Integration") was established to create the right global infrastructure to support the future ambitions of the Natura &Co Group while also identifying synergies and opportunities to leverage our combined strength, scale and reach. Synergies will be derived mainly from procurement, manufacturing/distribution and administrative, as well as top line synergies, primarily between Avon LATAM and Natura &Co Latin America.
In September 2018, we initiated a new strategy in order to return Avon to growth ("Open Up Avon"). The Open Up Avon strategy is integral to our ability to return Avon to growth, built around the necessity of incorporating new approaches to various elements of our business, including increased utilization of third-party providers in manufacturing and technology, seeking a better fit for purpose asset base, and an increased focus on enabling our Representatives to more easily interact with the company and achieve relevant earnings. These savings have been and are expected to continue to be achieved through restructuring actions (that have resulted, and may continue to result, in charges related to severance, contract terminations and inventory and other asset write-offs), as well as other cost-savings strategies that would not occurred. However,result in recentrestructuring charges. In January 2019, we announced significant advancements in this strategy, including a structural reset of inventory processes and a reduction in global workforce.
In May 2020, the new leadership of Avon International refreshed our strategy ("Open Up & Grow") which aims to return Avon International to growth over the next three years. Open Up & Grow replaces and builds on the success of the 2018 Open Up Avon strategy in order to strengthen competitiveness through enhancing the representative experience, improving brand position and relevance, accelerating digital expansion and improving costs. Over the next three years, savings are expected to continue to be achieved through restructuring actions (that may continue to result in charges related to severance, contract terminations and asset write-offs), as well as other cost-savings strategies that would not result in restructuring charges.
As we work to right-size our cost structure, we may not realize anticipated savings or benefits from one or more of the various restructuring and cost-saving initiatives we may undertake as part of these efforts in full or in part or within the time periods we expect. Other events and circumstances, such as financial and strategic difficulties and delays or unexpected costs, including the impact of foreign currency and inflationary pressures, may occur which could result in our not realizing our targets or in offsetting the financial benefits of reaching those targets. If we are unable to realize these savings or benefits, or otherwise fail to invest in the growth initiatives, our business may be adversely affected. In addition, any plans to invest these savings and benefits ahead of future growth means that such costs will be incurred whether or not we realize these savings and benefits. We are also subject to the risks of labor unrest, negative publicity and business disruption in connection with these initiatives, and the failure to realize anticipated savings or benefits from such initiatives could have experienceda material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows.
There can be no assurance that we will be able to improve revenue, margins and net income or achieve profitable growth.
There can be no assurance that we will be able to improve revenue, margins and net income, or achieve profitable growth in the future, particularly in our largest markets and developing and emerging markets, such as Brazil, Mexico and Russia. Our revenue in 2020 was $3,625.2 million, compared with $4,763.2 million in 2019 and $5,571.3 million in 2018. Improving revenue, margins and net income and achieving profitable growth will depend on our ability to improve financial and operational performance and execute our global business strategy, and there can be no assurance that we will be able to achieve these goals. Our ability to improve could be hindered by competing business priorities and projects.
To improve revenue, margins and net income and achieve profitable growth, we also need to successfully implement certain initiatives, including Open Up & Grow and Avon Integration, and there can be no assurance that we will be able to do so. Our achievement of profitable growth is also subject to the strengths and weaknesses of our individual international markets, which are or may be impacted by global economic conditions. We cannot assure that our broad-based geographic portfolio will be able to withstand an economic downturn, recession, cost or wage inflation, commodity cost pressures, economic or political instability (including fluctuations in foreign exchange rates), competitive pressures or other market pressures in one or more particular regions.
Failure to improve revenue, margins and net income and to achieve profitable growth could have a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows.
Our business is conducted primarily in one channel, direct selling, and our inability to retain our Representatives may materially adversely affect us
Our business is conducted primarily in the direct-selling channel. Sales are made to the ultimate consumer principally through direct selling by Representatives, who are independent contractors and not our employees. As of December 31, 2020, we had an average of approximately 4 million Active Representatives, which represents the number of Representatives submitting an order in a sales campaign, totaled for all campaigns during the year and then divided by the number of campaigns. There is a high rate of turnover among Representatives, which is a common characteristic of the direct-selling business. In order to reverse losses of Representatives and grow our business in the future, we need to recruit, retain and service Representatives on a continuing basis. Among other things, we need to create attractive Representative earning opportunities and transform the value chain, restore field health and sales force effectiveness, successfully implement other initiatives in the direct-selling channel, with a strategy to expand to omnichannel successfully execute our digital strategy, including e-commerce, improve our brochure and product offerings and improve our marketing and advertising. If we are unable to constantly update our product portfolio, our ability to retain our representatives could be materially adversely affected. There can be no assurance that we will be able to achieve these objectives.
Our direct-selling model contains an inherent risk of bad debt associated with providing Representatives with credit, which is exacerbated if the financial condition of the Representatives deteriorates. Additionally, consumer purchasing habits, including reducing purchases of beauty and related products generally, or reducing purchases from Representatives through direct selling by buying beauty and related products in other channels such as retail, could reduce our sales, impact our ability to execute our global business strategy or have a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows. Additionally, if we lose market share in the direct-selling channel, our business, prospects, financial condition, liquidity, results of operations and cash flows may be adversely affected.
Furthermore, if any government or regulatory body such as Brazil or the European Union, bans or severely restricts our business methods or operational/commercial model of direct selling, our business, prospects, financial condition, liquidity, results of operations and cash flows may be materially adversely affected. We may also be adversely affected by laws or regulations in the countries in which we operate that would characterize representatives as employees or otherwise oblige us to make social security contributions on their behalf.
Our ability to improve our financial performance depends on our ability to anticipate and respond to market trends and changes in consumer preferences.
Our ability to improve our financial performance depends on our ability to anticipate, gauge and react in a timely and effective manner to changes in consumer spending patterns and preferences for beauty and related products. We must continually work to develop, produce and market new products, maintain and enhance the recognition of our brands, achieve a favorable mix of products, and refine our approach as to how and where we market and sell our products. Consumer preferences and trends may change due to a variety of factors, such as changes in demographic trends, changes in the characteristics and ingredients of products, new market trends, climate, negative publicity from lawsuits against us or our peers, or a weak economy in one or more of the markets in which we operate. In addition, consumers may switch to the products of competitors, or the demand for products in our segment as a whole could decline. If we are unable to anticipate changes in consumer preferences and trends, our business, financial condition and operating results could be materially adversely affected.
Furthermore, material shifts or decreases in market demand for our products, including as a result of changes in consumer spending patterns and preferences or incorrect forecasting of market demand, could result in us carrying inventory that cannot be sold at anticipated prices or increased product returns by the Representatives. Failure to maintain proper inventory levels or increased product returns by the Representatives could result in a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows.
Risks Related to Our Business Model
We face intense competition and can make no assurances about our ability to overcome our competitive challenges.
We face intense competition from competing products in each of our lines of business in the markets in which we operate. We compete against products sold to consumers in a number of distribution methods, including direct selling, through the Internet, and through mass market retail and prestige retail channels. We also face increasing direct-selling and retail competition in our developing and emerging markets, particularly Brazil and Russia.
Within the direct-selling channel, we often compete on country-by-country basis with our direct-selling competitors. There are a number of direct-selling companies that sell product lines similar to ours, some of which have worldwide operations and compete with us globally. Unlike a typical CPG company which operates within a broad-based consumer pool, direct sellers compete for representative or entrepreneurial talent by providing a more competitive earnings opportunity or “better deal” than that offered by the competition. Providing a compelling earnings opportunity for the Representatives is as critical as developing and marketing new and innovative products. Therefore, in contrast to typical CPG companies, we must first compete for a limited pool of Representatives before we reach the ultimate consumer.
Representatives are attracted to a direct seller by competitive earnings opportunities, often through what are commonly known as “field incentives” in the direct-selling industry. Competitors devote substantial effort to finding out the effectiveness of such incentives so that they can invest in incentives that are the most cost-effective or produce the better payback. As one of the largest and oldest beauty direct sellers globally, Avon's business model and strategies are often highly sought after, particularly by smaller and more nimble competitors who seek to capitalize on our investment and experience. As a result, we are subject to significant competition for the recruitment of Representatives from other direct-selling or network marketing organizations as well as significant competition from other non-direct selling earnings opportunities of which our existing Representatives or potential Representatives could avail themselves. Changes to our compensation models are sometimes necessary to be competitive but could have short-term negative impacts on our total number of Representatives. It is therefore continually necessary to innovate and enhance our direct-selling and service model as well as to recruit and retain new Representatives. If we are unable to do so, our business will be adversely affected.
Within the broader CPG industry, we principally compete against large and well-known cosmetics (color), fragrance and skincare companies that manufacture and sell broad product lines through various types of retail establishments and other channels, including through the Internet. In addition, we compete against many other companies that manufacture and sell more narrow beauty product lines sold through retail establishments and other channels, including through the Internet. This industry is highly competitive, and some of our principal competitors in the CPG industry are larger than we are and have greater resources than we do. Competitive activities on their part could cause our sales to suffer. We also have many highly competitive global branded and private label competitors in the accessories, apparel, housewares, and gift and decorative products industries, including retail establishments, principally department stores, mass merchandisers, gift shops and specialty retailers. Our principal competition in the highly competitive fashion jewelry industry consists of a few large companies and many small companies that sell fashion jewelry through department stores, mass merchandisers, specialty retailers and e-commerce.
The number of competitors and degree of competition that we face in the beauty and related products industry varies widely from country to country. If our advertising, promotional, merchandising or other marketing strategies are not successful, if we are unable to improve our product mix and offer new products that represent technological breakthroughs and are aligned with local preferences, if we do not successfully manage the timing of new product introductions or the profitability of these efforts, if we are unable to improve the Representative experience, or if for other reasons the Representatives or end customers perceive competitors' products as having greater appeal, then our sales, results of operations and cash flows will be adversely affected.
Third-party suppliers provide, among other things, the raw materials required for our Beauty products, and the loss of these suppliers, a supplier's inability to supply a raw material or a finished product or a disruption or interruption in the supply chain may adversely affect our business.
We manufacture and package the majority of our Beauty products, which are formulated and designed by our staff of chemists, designers and artists. Raw materials, consisting chiefly of essential oils, chemicals, containers and packaging components required for our Beauty products are purchased from a range of third-party suppliers. The remainder of our Beauty products and all of our Fashion & Home products are purchased from various third-party manufacturers. Our products are affected by the cost and availability of materials such as glass, fragrance and fuel. For the vast majority of items we have more than one source of supply available. We believe that we can continue to obtain sufficient raw materials and supplies to manufacture and produce our Beauty products for the foreseeable future. Additionally, we design the brochures that are used by the Representatives to sell our products. The brochures are then produced on our behalf by a range of printing suppliers.
The loss of any one supplier would not have a material impact on our ability to source raw materials for the majority of our Beauty products or source products for the remainder of our Beauty products and all of our Fashion & Home products or paper for the brochures. This risk may be exacerbated by our globally coordinated purchasing strategy, which leverages volumes. Regulatory action, such as restrictions on importation, may also disrupt or interrupt our supply chain. Furthermore, increases in the costs of raw materials or other commodities or, in a worst-case scenario, the impossibility of obtaining raw materials and packaging due to several factors over which we have no control, such as climate, agricultural production, legitimate access to genetic heritage and/or traditional associated knowledge, economic conditions, and transportation and processing costs, among others may adversely affect our profit margins if we are unable to pass along any higher costs in the form of price increases or otherwise achieve cost efficiencies in manufacturing and distribution. Moreover, if our suppliers fail to use ethical business
practices and comply with applicable laws and regulations, such as any child labor laws, our reputation could be harmed due to negative publicity.
In addition, our business depends on a supply chain facing inherent logistics-related risks beyond our control and that of our suppliers, which may adversely affect us if they materialize. We may be adversely affected in the event of (i) fire, natural disasters, disease outbreaks or pandemics, such as COVID-19, strikes and stoppages, power shortages, failures in the systems, forest fires and deforestation, among others, where we are unable to otherwise service the affected region, (ii) significant disruptions in logistics infrastructure, and (iii) fluctuating fuel prices within our distribution network.
The loss of, or a disruption in, our research and development, production and distribution operations could adversely affect our business, financial condition and results of operations.
Our principal properties consist of worldwide manufacturing facilities for the production of Beauty products, distribution centers where offices are located and where finished merchandise is packed and shipped to Representatives in fulfillment of their orders, and one principal research and development facility. Additionally, we use third-party manufacturers to manufacture certain of our products. Therefore, as a company engaged in manufacturing, distribution and research and development on a global scale, we are subject to the risks inherent in such activities, including industrial accidents, environmental events, fires, strikes and other labor or industrial disputes, disruptions in logistics or information systems (such as our ERP system), loss or impairment of key manufacturing or distribution sites, product quality control issues, safety concerns, licensing requirements and other regulatory or government issues, as well as natural disasters, pandemics, border disputes, acts of terrorism and other external factors over which we have no control. We could also experience a negative financial impact if we do not comply with minimum purchase commitments. These risks may be exacerbated by our efforts to increase facility consolidation covering our manufacturing, distribution and supply footprints, particularly if we are unable to successfully increase our resiliency to potential operational disruptions or enhance our disaster recovery planning. The loss of, or damage to, any of our facilities or centers, or those of our third-party manufacturers, could have a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows.
Our success depends, in part, on the quality, safety and efficacy of our products.
Our success depends, in part, on the quality, safety and efficacy of our products. If our products are found to be, or perceived to be, defective or unsafe, or if they otherwise fail to meet the Representatives’ or end customers’ standards, then our relationship with the Representatives or end customers could suffer, particularly where the impact of media coverage and new technologies such as social media may exert negative influence over perception of our products. We may need to recall some of our products and/or become subject to regulatory action, our reputation or the appeal of our brand could be diminished, we could lose market share, and we could become subject to liability claims, any of which could result in a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows.
Risks Related to Our International Operations
We are subject to financial risks as a result of our international operations, including exposure to foreign currency fluctuations and the impact of foreign currency restrictions.
We operate globally, through operations in various locations around the world, and derive all of our consolidated revenue from operations outside of the U.S.
One risk associated with our international operations is that the functional currency for most of our international operations is their local currency. The primary foreign currencies for which we have significant exposures include the Argentine peso, Brazilian real, British pound, Chilean peso, Colombian peso, euro, Mexican peso, Peruvian new sol, Philippine peso, Polish zloty, Romanian leu, Russian ruble, South African rand, Turkish lira and Ukrainian hryvnia. As the U.S. dollar strengthens relative to our foreign currencies, our revenues and profits are reduced when translated into U.S. dollars and our margins may be negatively impacted by country mix if our higher-margin markets experience significant devaluation. In addition, our costs are more weighted to U.S. dollars while our sales are denominated in local currencies. Although we typically work to mitigate this negative foreign currency transaction impact through price increases and further actions to reduce costs, and by shifting costs to markets in which we generate revenue, we may not be able to fully offset the impact, if at all. Our success depends, in part, on our ability to manage these various foreign currency impacts and there can be no assurance that foreign currency fluctuations will not have a material adverse effect on our business, assets, financial condition, liquidity, results of operations or cash flows.
Another risk associated with our international operations is the possibility that a foreign government may tax or impose foreign currency remittance restrictions. Due to the possibility of government restrictions on transfers of cash out of the country and control of exchange rates, we may not be able to immediately repatriate cash. If this should occur, or if the exchange rates
devalue, it may have a material adverse effect on our business, assets, financial condition, liquidity, results of operations or cash flows.
Inflation is another risk associated with our international operations. Gains and losses resulting from the remeasurement of the financial statements of subsidiaries operating in highly inflationary economies are recorded in earnings. High rates of inflation or the related devaluation of foreign currency may have a material adverse effect on our business, assets, financial condition, liquidity and results of operations or cash flows. For example, Argentina is considered to be a highly inflationary economy. See “Segment Review - Avon Latin America” within MD&A for additional information regarding Argentina. Moreover, governmental measures to curb inflation and speculation about any such possible future governmental measures have contributed to the negative economic impact of inflation and have created general economic uncertainty and heightened volatility in the capital markets. In addition, there can be no assurance that other countries in which we operate will not become highly inflationary and that our revenue, operating profit and net income will not be adversely impacted as a result.
Our ability to conduct business in our international markets may be affected by economic, political, legal, tax and regulatory risks.
A significant deterioration in economic conditions in any of our important markets, including economic slowdowns or recessions, inflationary pressures and/or disruptions to credit and capital markets, could lead to decreased consumer confidence and consumer spending more generally, thus reducing demand for our products. In addition, our global operations are subject to adverse political, social or other developments, such as political or social unrest, potential health issues, natural disasters, disease outbreaks or pandemics, such as COVID-19, politically motivated violence and terrorist threats and/or act which may also occur in countries where we have operations.
In particular, our ability to achieve growth in our international markets, and to improve operations in our existing international markets, is exposed to various risks, including:
•the possibility that a foreign government might ban, halt or severely restrict our business, including our primary method of direct selling;
•the possibility that local civil unrest, economic or political instability, bureaucratic delays, changes in macro-economic conditions, changes in diplomatic or trade relationships (including any sanctions, restrictions and other responses such as those related to Russia and Ukraine) or other uncertainties might disrupt our operations in an international market;
•the lack of well-established or reliable legal systems in certain areas where we operate;
•the adoption of new U.S. or foreign tax legislation or exposure to additional tax liabilities, including exposure to tax assessments without prior notice or the opportunity to review the basis for any such assessments in certain jurisdictions;
•changes to tax rules in Brazil, where the tax system is highly complex and the interpretation of the tax laws and regulations is commonly controversial, and the Brazilian government regularly implements changes to tax regimes that may increase our tax burden, including modifications in the rate of assessments and the enactment of new or temporary; taxes, the proceeds of which are earmarked for designated governmental purposes;
•the possibility that a government authority might impose legal, tax or other financial burdens on the Representatives, as direct sellers, or on Avon, due, for example, to the structure of our operations in various markets, or additional taxes on our products, including in Brazil;
•the possibility that a government authority might challenge the status of the Representatives as independent contractors or impose employment or social taxes on the Representatives; and
•those associated with data privacy regulation and the international transfer of personal data.
We are also subject to the adoption, interpretation and enforcement by governmental agencies abroad and in the U.S. (including on federal, state and local levels) of other laws, rules, regulations or policies, including any changes thereto, such as restrictions on trade, competition, manufacturing, license and permit requirements, import and export license requirements, privacy and data protection laws, anti-trust laws, anti-corruption laws, environmental laws, records and information management, tariffs and taxes, laws relating to the sourcing of "conflict minerals," health care reform requirements such as those required by the Patient Protection and Affordable Healthcare Act, and regulation of our brochures, product claims or ingredients, which may require us to adjust our operations and systems in certain markets where we do business.
For example, from time to time, local governments and others question the legal status of Representatives or impose burdens inconsistent with the Representative's status as independent contractors, often in regard to possible coverage under social benefit laws that would require us (and, in most instances, the Representatives) to make regular contributions to government social benefit funds.
If we are unable to address these matters in a satisfactory manner, or adhere to or successfully implement processes in response to changing regulatory requirements, our business, costs and/or reputation may be adversely affected. We cannot predict with
certainty the outcome or the impact that pending or future legislative and regulatory changes may have on our business in the future. Further, in the event that any jurisdiction in which we operate or plan to operate imposes any new laws, regulations, restrictions and/or other barriers to entry, our ability to expand may be thereby limited and our growth and development may be adversely affected.
Our business is subject to a number of foreign laws and regulations in various jurisdictions governing data privacy and security.
We collect, use and store personal data of our employees, Representatives, customers and other third parties in the ordinary course of business. We are required to comply with increasingly complex and changing data privacy and security laws and regulations governing the collection, storage, use, transmission and protection of personal information and other data, including the transfer of personal data between countries. In May 2018, the EU adopted robust data privacy regulations under the General Data Protection Regulation (“GDPR”).Further changes are likely to be introduced through a revised Regulation on Privacy and Electronic Communications (the “ePrivacy Regulation”).The GDPR in particular has broad extraterritorial effect and imposes a robust data protection compliance regime with significant penalties for non-compliance. Other countries in which we operate are developing comparable regulations. Brazil enacted the Lei Geral de Proteção de Dados Pessoais (“LGPD”), which is broadly equivalent to GDPR, and the requirements of which will become enforceable as of May 2021.In general, the GDPR and ePrivacy Regulation, and other local privacy laws, could require adaptation of our technologies or practices to satisfy local privacy requirements and standards. We may also face audits or investigations by one or more domestic or foreign government agencies relating to our compliance with these regulations. An adverse outcome under any such investigation or audit could result in the issuance of stop processing orders, and/or subject us to fines and penalties. That or other circumstances related to our collection, use and transfer of personal data could cause a loss of reputation in the market or adversely affect our business.
The scope of data privacy and security regulations continues to evolve, and we believe that the adoption of increasingly restrictive regulations in this area may be likely within the jurisdictions in which we operate. Compliance with data privacy and security requirements could increase the cost of our operations and failure to comply with such requirements could subject us to business disruption, criminal and civil sanctions as well as other penalties.
The uncertainty surrounding the UK's decision to withdraw from the EU may adversely affect our business.
On June 23, 2016, the UK held a referendum in which voters approved an exit from the EU, commonly referred to as “Brexit.” As a result of the referendum, the UK parliament voted in March 2017 to trigger Article 50 of the Treaty on European Union, commencing the UK’s official withdrawal process from the EU and initiating negotiations with the EU in June 2017. In January 2020, the House of Commons (the lower chamber of the UK parliament) approved the terms of an agreement with the EU to determine the future terms of the parties' relationship, including the terms of trade between the UK and the EU and other nations, following the UK’s exit from the EU on January 31, 2020.
The UK left the EU on January 31, 2020. A transition period, lasting until December 31, 2020, was put in place, during which the UK continued to (i) be subject to EU rules and (ii) remain a member of the single market. During 2020, our business in the UK and EU had contingency plans in place to mitigate any negative effects of a no deal Brexit.
The UK-EU Trade and Cooperation Agreement (“TCA”) was signed on 30 December 2020, between the EU, the European Atomic Energy Community and the UK. It has been applied provisionally since 1 January 2021, when the transition period ended. This trade agreement, in which there will be no tariffs or quotas on the movement of goods between UK and EU, means the UK has left the EU customs union and single market. Whilst the TCA between the UK and EU has provided much needed certainty on trade, naturally political and economic concerns remain as the true effects of the TCA and future trade agreements outside of the EU begin to unfold and therefore we continue to monitor developments. The TCA awaits ratification by the European Parliament and the Council of the European Union and legal revision before it formally comes into effect, which is expected early 2021.
Given that we conduct a substantial portion of our business in the EU and the UK, and our corporate headquarters has been relocated to the UK, any of these developments could have a material adverse effect on our business, financial position, liquidity and results of operations or cash flows. Changes in foreign currency exchange rates may have a material effect on our net sales, financial condition, profitability and/or cash flows and may reduce the reported value of our operating results.
During 2021, we will continue to monitor the implementation of new border controls (including any resulting delays), immigration policy (ability to recruit and maintain talent), regulatory changes and requirements to comply with new mandates which may prove challenging and costly.
Risks Related to IT and Cybersecurity Matters
A failure, disruption, cyberattack, other breach in the security of an IT system or infrastructure that we utilize could adversely affect our business and reputation and increase our costs.
We employ IT systems to support our business, including systems to support financial reporting, web-based tools, enterprise resource planning (“ERP”) systems, and internal communication and data transfer networks. We increasingly rely on a variety of web-based systems and mobile applications to support Representatives in our markets, including electronic order collection, invoicing systems, shipping and box packing, social media tools, Representative recruitment and online training. We also have e-commerce sites to allow customers to purchase products directly. We use third-party service providers in many instances to provide or support these IT systems. Over the last several years, we have undertaken initiatives to increase our reliance on IT systems which has resulted in the outsourcing of certain services and functions, such as global human resources IT systems, call center support, Representative support services and other IT processes. Our IT systems and infrastructure, as well as the systems, infrastructure and services of those of third parties, are integral to our performance.
Any of our IT systems and infrastructure, or those of our third-party service providers, may be susceptible to outages, disruptions, destruction or corruption due to the complex landscape of localized applications and architectures as well as incidents related to legacy or unintegrated systems. These IT systems and infrastructure also may be susceptible to cybersecurity breaches, attacks, computer viruses, break-ins, including ransomware, other malware and phishing attacks, data corruption, fire, floods, power loss, telecommunications failures, terrorist attacks and similar events beyond our control. We rely on our employees, Representatives and third parties in our day-to-day and ongoing operations, who may, as a result of human error or malfeasance or failure, disruption, cyberattack or other security breach of third-party systems or infrastructure, expose us to risk. Furthermore, our ability to protect and monitor the practices of our third-party service providers is more limited than our ability to protect and monitor our own IT systems and infrastructure.
Our IT systems, or those of our third-party service providers may be accessed by unauthorized users such as cyber criminals as a result of a failure, disruption, cyberattack or other security breach, exposing us to risk. As techniques used by cyber criminals change frequently, a failure, disruption, cyberattack or other security breach may go undetected for a long period of time. An actual or perceived failure, disruption, cyberattack or other security breach of our IT systems or infrastructure, or those of our third-party service providers, could result in the theft, transfer, unauthorized access to, disclosure, modification, misuse, loss, or destruction of Company, employee, Representative, customer, vendor, or other third-party data, including sensitive or confidential data, personal information and intellectual property and could be particularly harmful to our brand and reputation.
We continue to invest in industry-standard solutions and protections and monitoring practices of our data and IT systems and infrastructure to reduce these risks and we continue to monitor our IT systems and infrastructure on an ongoing basis for any current or potential threats. We have also deployed additional employee security training and updated security policies for the Company and its third-party service providers. Such efforts and investments are costly, and as cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities. As a company that operates globally, we could also be impacted by commercial agreements between us and processing organizations, existing and proposed laws and regulations, and government policies and practices related to cybersecurity, privacy and data protection.
Despite our efforts, our and our third-party service providers’ data, IT systems and infrastructure may be vulnerable. There can be no assurance that our efforts will prevent a failure, disruption, cyberattack or other security breach of our or our third-party service providers’ IT systems or infrastructure, or that we will detect and appropriately respond if there is such a failure, disruption, cyberattack or other security breach. Our IT databases and systems have been, and will likely continue to be, subject to ransomware, denial of service and phishing attacks. Any such failure, disruption, cyberattack or other security breach could adversely affect our business including our ability to expand our business, cause damage to our reputation, result in increased costs to address internal data, security, and personnel issues, and result in violations of applicable privacy laws and other laws and external financial obligations such as governmental fines, penalties, or regulatory proceedings, remediation efforts such as breach notification and identity theft monitoring, and third-party private litigation with potentially significant costs. In addition, it could result in deterioration in our employees', Representatives', customers', or vendors' confidence in us, which could cause them to discontinue doing business with us or result in other competitive disadvantages. In addition, there may be other challenges and risks as we upgrade, modernize, and standardize our IT systems globally.
See also “—We were the target of a cybersecurity incident which disrupted our systems.”
Unauthorized disclosure of sensitive or confidential Representative or customer information or our failure or the perception by our Representatives or customers that we failed to comply with privacy laws or properly address privacy concerns could materially harm our business and standing with our Representatives and customers.
We collect, store, process, transmit and use certain personal information in the ordinary course of our business. We are required to comply with increasingly complex and changing data privacy and security laws and regulations governing personal
information and other data, including the transfer of personal data between countries. We may face audits or investigations by one or more domestic or foreign government agencies relating to our compliance with these regulations. An adverse outcome under any such investigation or audit could result in the issuance of stop processing orders, subject us to fines, penalties or orders to cease, delay or modify collection, use or transfer of personal data. The perception of privacy concerns, whether or not valid, may adversely affect us. We rely on commercially available systems, software, tools and monitoring to provide secure processing, transmission and storage of confidential Representative and customer information.
Our facilities and systems, as well as those of our third-party service providers, may be vulnerable to security breaches, fraud, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors, or other similar events. Any security breach, or any perceived failure involving the misappropriation, loss or other unauthorized disclosure of confidential information, as well as any failure or perceived failure to comply with laws, policies, legal obligations or industry standards regarding data privacy and protection, whether by us or vendors upon whose systems we rely, could damage our reputation, expose us to litigation risk and liability, reduce revenue, increase costs, subject us to negative publicity, disrupt our operations and harm our business. We cannot provide assurance that our security measures will prevent security breaches or that failure to prevent them will not have a material adverse effect on us.
We were the target of a cybersecurity incident which disrupted our systems.
In June 2020, we became aware that we were exposed to a cyber incident in our Information Technology (IT) environment which interrupted some of our systems and partially affected our operations. We engaged leading external cybersecurity and IT general controls specialists, launched a comprehensive containment and remediation effort and started a forensic investigation. By mid-August 2020, the Company had re-established all of its core business processes and resumed operations in all of its markets, including all of its distribution centers.
The cyber incident did not have a material impact on our full year 2020 revenue, although it resulted in a shift in revenue from the second quarter to the third quarter of 2020 as the Company fulfilled the order backlog created. The incremental expense incurred as a result of the cyber incident was not material.
Management concluded that controls related to our IT environment had not been designed and/or operated effectively to prevent access and changes to our IT systems supporting financial information processing. Although we had no indication that the accuracy and completeness of any financial information was impacted as a result of the incident, and we performed extensive procedures immediately after discovering the incident to validate such accuracy and completeness, we believed that, if the incident had gone differently, it could have potentially resulted in a material impact to our financial statements, which led to the conclusion that the magnitude of these control deficiencies represented a material weakness in our IT general controls.
To remediate the material weakness, we strengthened procedures and controls with the support of external cyber security and IT general controls specialists and accelerated our investment in IT infrastructure to strengthen our cyber security controls. Based on testing performed by management, the implemented controls are designed and operating effectively and the material weakness has been remediated as of December 31, 2020.
As a result of the incident, we may be subject to litigation and investigations by regulators in the jurisdictions in which we operate. We may incur losses associated with potential claims by third parties or individuals, as well as fines, penalties and other sanctions imposed by regulators relating to or arising from the incident. We may also incur contingencies related to the incident. We are not able to reliably forecast all of the losses that may occur as a result of the incident, and such excess losses could have a material adverse effect on our financial condition or results of operations in future periods.
Following the incident, we have taken certain additional preventative measures to reduce cyber risks. However, we cannot provide assurance that our security frameworks and measures will be successful in preventing future cybersecurity incidents. In addition, the costs of such measures and management attention required may be significant.Further, the incident may have a negative impact on our reputation and cause customers, suppliers and other third parties with whom we maintain relationships to lose confidence in us. We are unable to definitively determine the impact to these relationships and whether we will need to engage in any activities to rebuild them.
Risks Related to Financial Matters
Our credit ratings are below investment grade, which could limit our access to financing, affect the market price of our stockfinancing and changesincrease financing costs. A downgrade in ownership by our 5% shareholders. In addition,credit ratings may adversely affect our access to liquidity.
Our long-term credit ratings are: Moody’s ratings of Stable Outlook with Ba3 for corporate family and senior unsecured debt; S&P ratings of Stable Outlook with BB- for corporate family and senior unsecured debt; and Fitch ratings of Stable Outlook with BB for corporate family and unsecured debt. Our credit ratings remain below investment grade which may impact our ability to access financing transactions on favorable terms. We do not believe these long-term credit ratings will have a material impact on our near-term liquidity. However, any rating agency review could result in a change in outlook or downgrade, which
could limit our access to new financing, reduce our flexibility with respect to working capital needs, affect the issuancemarket price of some or all of our outstanding debt securities and sale of perpetual convertible preferred stock to Cerberus Investor (as defined below) resultedcould result in an increase in financing costs. See Note 7, Debt and Other Financing to the Consolidated Financial Statements included herein, for details about the terms of our cumulative ownership change by our 5% shareholders.existing debt and other financing arrangements.
Significant changes in pension fund investment performance, assumptions relating to pension costs or required legal changes in pension funding rules may have a material effect on the valuation of pension obligations, the funded status of pension plans and our pension cost.
Our funding policy for pension plans is to meet the minimum required contributions under applicable law and accumulate plan assets that, over the long run, are expected to approximate the present value of projected benefit obligations. Our pension cost is materially affected by the discount rate used to measure pension obligations, the level of plan assets available to fund those obligations at the measurement date and the expected long-term rate of return on plan assets. Significant changes in investment performance or a change in the portfolio mix of invested assets can result in corresponding increases and decreases in the valuation of plan assets, including equity and debt securities and derivative instruments, or in a change of the expected rate of return on plan assets. A change in the discount rate could result in a significant increase or decrease in the valuation of pension obligations, affecting the reported funded status of our pension plans as well as the net periodic pension cost in the following fiscal years. Similarly, changes in the expected rate of return on plan assets can result in significant changes in the net periodic pension cost. Please see "Critical“Critical Accounting Estimates - Pension and Postretirement Expense"Expense” within MD&A on pages 32 through 33 and Note 13, Employee Benefit Plans on pages F-34 through F-42 of our 2017 Annual Report,to the Consolidated Financial Statements included herein, for additional information regarding the impact of these factors on our pension plan obligations.
Any strategic alliances or divestitures may expose us to additional risks.
We evaluate potential strategic alliances that would complement our current product offerings, increase the size and geographic scope of our operations or otherwise offer growth and/or operating efficiency opportunities. Strategic alliances may entail numerous risks, including:
substantial costs, delays or other operational or financial difficulties, including difficulties in leveraging synergies among the businesses to increase sales and obtain cost savings or achieve expected results;
difficulties in assimilating acquired operations or products, including the loss of key employees from any acquired businesses and disruption to our direct-selling channel;
diversion of management’s attention from our core business;
adverse effects on existing business relationships with suppliers and customers;
risks of entering markets in which we have limited or no prior experience; and
reputational and other risks regarding our ability to successfully implement such strategic alliances, including obtaining financing which could dilute the interests of our shareholders, result in an increase in our indebtedness or both.
Our failure to successfully complete the integration of any new or acquired businesses could have a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows. In addition, there can be no assurance that we will be able to identify suitable candidates or consummate such transactions on favorable terms.
For divestitures, success is also dependent on effectively and efficiently separating the divested unit or business from the Company and reducing or eliminating associated overhead costs. In cases where a divestiture is not successfully implemented or completed, the Company's business, prospects, financial condition, liquidity, results of operations and cash flows could be adversely affected. Please see "RisksRisks Related to the Separation of North America and the Preferred Stock Investment in the Company" below for additional information regarding the risks associated with the separation of North America.Legal Matters
The loss of, or a disruption in, our manufacturing and distribution operations could adversely affect our business.
Our principal properties consist of worldwide manufacturing facilities for the production of Beauty products, distribution centers where offices are located and where finished merchandise is packed and shipped to Representatives in fulfillment of their orders, and one principal research and development facility. Additionally, we use third-party manufacturers to manufacture certain of our products. Therefore, as a company engaged in manufacturing, distribution and research and development on a global scale, we are subject to the risks inherent in such activities, including industrial accidents, environmental events, fires, strikes and other labor or industrial disputes, disruptions in logistics or information systems (such as our ERP system), loss or impairment of key manufacturing or distribution sites, product quality control issues, safety concerns, licensing requirements and other regulatory or government issues, as well as natural disasters, pandemics, border disputes, acts of terrorism and other external factors over which we have no control. These risks may be exacerbated by our efforts to increase facility consolidation covering our manufacturing, distribution and supply footprints, particularly if we are unable to successfully increase our resiliency to potential operational disruptions or enhance our disaster recovery planning. The loss of, or damage to, any of our facilities or centers, or those of our third-party manufacturers, could have a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows.
Our success depends, in part, on the quality, safety and efficacy of our products.
Our success depends, in part, on the quality, safety and efficacy of our products. If our products are found to be, or perceived to be, defective or unsafe, or if they otherwise fail to meet the Representatives' or end customers' standards, then our relationship with the Representatives or end customers could suffer, we may need to recall some of our products and/or become subject to regulatory action, our reputation or the appeal of our brand could be diminished, we could lose market share, and we could become subject to liability claims, any of which could result in a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows.
If we are unable to protect our intellectual property rights, specifically patents and trademarks, our ability to compete could be adversely affected.
The market for our products depends to a significant extent upon the value associated with our product innovations and our brand equity. We own the material patents and trademarks used in connection with the marketing and distribution of our major products where such products are principally sold. Although most of our material intellectual property is registered in certain countries in which we operate, there can be no assurance with respect to the rights associated with such intellectual property in those countries. In addition, the laws of certain foreign countries, including many emerging markets, may not completely protect our intellectual property rights. The costs required to protect our patents and trademarks, especially in emerging markets, may be substantial. Please see "The licensing of our North America intellectual property rights, including trademarks that are fundamental to our brand, in connection with the Separation could adversely impact our reputation, our business generally, and our ability to enforce intellectual property rights used in both North America and international jurisdictions" below for additional information regarding the risks on our intellectual property rights associated with the separation of North America.
We are involved, and may become involved in the future, in legal proceedings that, if adversely adjudicated or settled, could adversely affect our financial results.
We are, and may in the future become, party to litigation, including, for example, claims alleging violation of the federal securities laws or claims relating to employee or employment matters, our products or advertising. In general, litigation claims can be expensive and time-consuming to bring or defend against and could result in settlements or damages that could significantly affect our financial results and the conduct of our business. We are currently vigorously contesting certain of these litigation claims. However, it is not possible to predict the final resolution of the litigation to which we currently are or may in the future become party, or to predict the impact of certain of these matters on our business, prospects, financial condition, liquidity, results of operations and cash flows. See Note 18, Contingencies on pages F-49 through F-51 of our 2017 Annual Reportto the Consolidated Financial Statements included herein, for a detailed discussion regarding certain legal proceedings in which we are a party.
Government reviews, inquiries, investigations, and actions could harm our business or reputation. In addition, from time to time, we may conduct other investigations and reviews, the consequences of which could negatively impact our business or reputation.
As we operate in various locations around the world, our operations in certain countries are subject to significant governmental scrutiny and may be harmed by the results of such scrutiny. The regulatory environment with regard to direct selling in emerging and developing markets where we do business is evolving, and government officials in such locations often exercise broad discretion in deciding how to interpret and apply relevant regulations. From time to time, we may receive formal and informal inquiries from various government regulatory authorities about our business and compliance with local laws and regulations. In addition, from time to time, we may conduct investigations and reviews. The consequences of such government reviews, inquiries, investigations, and actions or such investigations and reviews may adversely impact our business, prospects, reputation, financial condition, liquidity, results of operations or cash flows.
Additionally, any determination that our operations or activities, or, where local law mandates, the activities of the Representatives, including our licenses or permits, importing or exporting, or product testing or approvals are not, or were not, in compliance with existing laws or regulations could result in the imposition of substantial fines, civil and criminal penalties, interruptions of business, loss of supplier, vendor or other third-party, relationship, termination of necessary licenses and permits, modification of business practices and compliance programs, equitable remedies, including disgorgement, injunctive relief and other sanctions that we may take against our personnel or that may be taken against us or our personnel. Other legal or regulatory proceedings, as well as government investigations, which often involve complex legal issues and are subject to uncertainties, may also follow as a consequence. Further, other countries in which we do business may initiate their own investigations and impose similar sanctions. These proceedings or investigations could be costly and burdensome to our management, and could adversely impact our business, prospects, reputation, financial condition, liquidity, results of operations or cash flows. Even if an inquiry or investigation does not result in any adverse determinations, it potentially could create negative publicity and give rise to third-party litigation or action.
If we are unable to protect our intellectual property rights, specifically patents and trademarks, our ability to compete could be adversely affected.
The market for our products depends to a deferred prosecution agreementsignificant extent upon the value associated with our product innovations and our brand equity. We own the U.S. Department of Justice (the "DOJ")material patents and are subject to a consent to settlement with the U.S. Securities and Exchange Commission (the "SEC"). Pursuant to the consent to settlement, the Company must undertake self-reporting obligations until July 2018. Compliance with these obligations could divert members of management’s time from the operation of our business. Ongoing costs and burdens could be significant.
In December 2014, the U.S. District Court for the Southern District of New York (the "USDC") approved a deferred prosecution agreement between the Company and the DOJ (the "DPA") and in January 2015, the USDC approved a consent to settlement with the SEC (the "Consent")trademarks used in connection with the previously disclosed Foreign Corrupt Practices Act (the "FCPA") investigations.marketing and distribution of our major products where such products are principally sold. Although most of our material intellectual property is registered in certain countries in which we operate, there can be no assurance with respect to the rights associated with such intellectual property in those countries. In addition, the laws of certain foreign countries, including many emerging markets, may not completely protect our intellectual property rights. The DPA has expired,costs required to protect our patents and the charges against the Company were dismissed with prejudice on February 5, 2018.
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 the SEC. The monitor recommended some changestrademarks, especially in emerging markets, may be substantial. Please see “The licensing of our North America intellectual property rights, including trademarks that are fundamental to our policies and procedures that we have adopted and in August 2017, the monitor certified that the Company's compliance program was reasonably designed and implemented to detect and prevent violations of the anti-corruption laws and was functioning effectively, consistent with the requirements of the DPA and the Consent. The monitor has been replaced by the Company, which has undertaken self-reporting obligations for the remainder of the monitoring period. The Company submitted its first self-report to the DOJ and the SEC in January 2018. The Company will continue self-reporting to the SEC until the monitoring period expires, which is scheduled under the Consent to occur in July 2018.
The third-party costs incurredbrand, in connection with ongoing compliance with self-reporting and the Consent have not been material to date. While we do not anticipate material costs going forward, the Company's self-reporting obligations may be costly and/or time-consuming.
The affirmative vote in the UK to withdraw from the EU may adversely affect our business.
On June 23, 2016, the UK held a referendum in which voters approved an exit from the EU, commonly referred to as "Brexit." As a result of the referendum, the UK parliament voted in March 2017 to trigger Article 50 of the Treaty on European Union, commencing the UK’s official withdrawal process from the EU. In June 2017, the UK and EU initiated negotiations, which are currently ongoing, to determine the future terms of the parties’ relationship, including the terms of trade between the UK and the EU and other nations. The UK is due to leave the EU on March 29, 2019 unless the negotiations are extended by unanimous consent of the European Council. Uncertainty regarding the final terms of the negotiations and related regulatory changesSeparation could adversely affect business activity, political stability and economic conditions in the UK, the Eurozone, the EU and elsewhere. Any of these developments could have a material adverse effect on business activity in the UK, the Eurozone, or the EU. Given that we conduct a substantial portion ofimpact our reputation, our business in the EUgenerally, and the UK, and our corporate headquarters has
been relocated to the UK, any of these developments could have a material adverse effect on our business, financial position, liquidity and results of operations or cash flows.
The uncertainty concerning the timing and terms of the exit could also have a negative impact on the growth of the UK and/or EU economies and cause greater volatility in the pound sterling, euro and/or other currencies. Changes in foreign currency exchange rates may have a material effect on our net sales, financial condition, profitability and/or cash flows and may reduce the reported value of our operating results.
Changes to UK border and immigration policy could likewise occur as a result of Brexit, affecting our ability to recruitenforce intellectual property rights used in both North America and retain employees from outsideinternational jurisdictions” below for additional information regarding the UK. Whilerisks on our intellectual property rights associated with the full scopeseparation of implementation of the referendum decision is still unclear, companies exposed to or with operations in the UK, such as ours, may face significant regulatory changes as a result of Brexit implementation, and complying with such new regulatory mandates may prove challenging and costly.North America.
The market price of our common stock could be subject to fluctuations as a result of many factors.
Factors that could affect the trading price of our common stock include the following:
variations in operating results;
developments in connection with any investigations or litigations;
a change in our credit ratings;
economic conditions and volatility in the financial markets;
announcements or significant developments in connection with our business and with respect to beauty and related products or the beauty industry in general;
actual or anticipated variations in our quarterly or annual financial results;
unsolicited takeover proposals, proxy contests or other shareholder activism;
governmental policies and regulations;
estimates of our future performance or that of our competitors or our industries;
general economic, political, and market conditions;
market rumors; and
factors relating to competitors.
The trading price of our common stock has been, and could in the future continue to be, subject to significant fluctuations.
Risks Related to the Separation of North America and the Preferred Stock Investment in the Company
We may be exposed to claims and liabilities as a result of the separation of our North America business.
On March 1, 2016, Cleveland Apple Investor L.P. (“Cerberus Investor”) (an affiliate of Cerberus Capital Management L.P. ("Cerberus")Cerberus) contributed $170 million of cash into New Avon LLC (“New Avon”) in exchange for 80.1% of its membership interests, and we contributed (i) assets primarily related to our North America business (including approximately $100 million of cash, subject to certain adjustments), (ii) certain assumed liabilities (primarily pension and postretirement liabilities) of our North America business and (iii) the employees of our North America business into New Avon in exchange for a 19.9% ownership interest of New Avon (collectively, the "Separation"). In August 2019, we and Cerberus finalized the sale of our respective interests in New Avon to LG Household & Health Care Ltd. In connection with the Separation, we entered into a Separation Agreement and various other agreements with New Avon to govern the separation and the relationship of the two companies going forward. These agreements provide for specific indemnity and liability obligations and could lead to disputes between us. The indemnity rights we have against New Avon under the agreements may not be sufficient to protect us. In addition, our indemnity obligations to New Avon may be significant and these risks could negatively affect our financial condition.
We or New Avon may fail to perform under the post-closing arrangements executed in connection with the Separation.
In connection with the Separation, we and New Avon entered into several agreements, including among others, a Transition Services Agreement, an Intellectual Property License Agreement, a Technical Support and Innovation Agreement and a Manufacturing and Supply Agreement. Although most of the services provided under the Transition Services Agreement have terminated, we are still required to perform certain information technology-related services, for the benefit of New Avon in 2018. The Intellectual Property License Agreement provides New Avon with rights to use certain intellectual property rights that we used in the conduct of the North America business prior to the Separation. The Technical Support and Innovation Agreement provides that we will perform certain beauty product development services for New Avon through December 31, 2018.Avon. The Manufacturing and Supply Agreement provides that we and New Avon will manufacture, or cause to be manufactured, and supply certain products to each other for an initial term through December 31, 2018.other. These agreements establish a bilateral relationship between New Avon and us. We will rely on New Avon to satisfy its performance and payment obligations under these agreements. If New
Avon is unable to satisfy its obligations under these agreements, we could incur operational difficulties or losses that could have a material and adverse effect on our business, financial condition and results of operations.
The licensing of our North America intellectual property rights, including trademarks that are fundamental to our brand, in connection with the Separation could adversely impact our reputation, our business generally, and our ability to enforce intellectual property rights used in both North America and international jurisdictions.
In connection with the Separation, we granted New Avon a perpetual, irrevocable, royalty-free license, with the ability to sublicense, to certain intellectual property rights that we used in the conduct of our North America business prior to the Separation. The Intellectual Property License Agreement includes quality control provisions obligating New Avon and its sublicensees to remain in compliance with applicable law or, for certain of our brands, quality standards that we have provided to New Avon, when selling products under certain trademarks that we have licensed to New Avon. However, there is a risk that failure by New Avon or its sublicensees to comply with such quality control provisions or other conduct by New Avon or its sublicensees associated with the trademarks licensed to New Avon, could adversely affect our reputation and our business globally. We have also granted New Avon enforcement rights to intellectual property licensed to New Avon in certain circumstances, which could adversely affect our position and options globally relating to enforcement of our intellectual property.
The issuance of 435,000 shares
General Risk Factors
A general economic downturn, a recession globally or in one or more of our series C preferred stock to Cerberus Investor dilutes the ownership of holders of our common stock andgeographic regions or markets or sudden disruption in business conditions or other challenges may adversely affect our business, our access to liquidity and capital, and our credit ratings.
Current global macro-economic instability or a further downturn in the market priceeconomies in which we sell our products, including any recession in one or more of our common stock.
On March 1, 2016, we issued and sold to Cerberus Investor 435,000 shares of newly issued series C preferred stock for an aggregate purchase price of $435 million pursuant to an Investment Agreement between us and Cerberus Investor. Conversion of the series C preferred stock would dilute the ownership interest of existing holders of our common stock, and any sales in the public market of the common stock issuable upon conversion of the series C preferred stockgeographic regions or markets could adversely affect our business, our access to liquidity and capital, and our credit ratings. Economic events, including high unemployment levels and recession, have resulted in challenges to our business and a heightened concern regarding further deterioration globally. In addition, as mentioned above, our business is conducted primarily in the market pricedirect-selling channel. We could experience declines in revenues, profitability and cash flow due to reduced orders, payment delays, supply chain disruptions or other factors caused by such economic, operational or business challenges. Any or all of these factors could potentially have a material adverse effect on our common stock. We have granted Cerberus Investor registration rightsliquidity and capital resources and credit ratings, including our ability to access short-term financing, reduce flexibility with respect to working capital, and maintain credit lines and offshore cash balances.
Consumer spending is also generally affected by a number of factors, including general economic conditions, inflation, interest rates, taxation, energy costs, gasoline prices and consumer confidence generally, all of which are beyond our control. Consumer purchases of discretionary items, such as beauty and related products, tend to decline during recessionary periods, when disposable income is lower, and may impact sales of our products. We may face continued economic challenges in 2021 because customers may continue to have less money for discretionary purchases as a result of job losses, bankruptcies, and reduced access to credit, among other things.
Moreover, our results of operations and financial condition have been, and will continue to be, affected by the shares of series C preferred stock and shares of common stock issued upon conversiongrowth rate of the series C preferred stock,GDP of the countries in which would facilitatewe operate. We cannot ensure that the resaleGDP of the countries in which we operate will increase or remain stable. Developments in the macroeconomic conditions of the countries in which we operate, including Brazil, which has been experiencing an economic slowdown since 2012, may affect such securities intocountries’ growth rates and, consequently, us.
In addition, sudden disruptions in business conditions and consumer spending may result from acts of terror, natural disasters, adverse weather conditions, and pandemic situations or large-scale power outages, none of which are under our control.
The COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, manufacturing, supply chains and distribution systems. There is uncertainty around the public market. On October 11, 2016,duration and breadth of the Company filedCOVID-19 pandemic and the response to it. As a registration statementresult, we cannot reasonably estimate at this time the continued impact, that COVID-19 may have on Form S-3ASRour business or operations. The extent to which COVID-19 impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact including on financial markets or otherwise. See also "Item 1A. Risk Factors—The COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, manufacturing, supply chains and distribution systems, and we have experienced and expect to continue to experience unpredictable negative effects associated with the SEC registeringpandemic.
Our success depends, in part, on our key personnel.
Our success depends, in part, on our ability to retain our key personnel. The unexpected loss of or failure to retain one or more of our key employees could adversely affect our business. Our success also depends, in part, on our continuing ability to identify, hire, attract, train, develop and retain other highly qualified personnel. Competition for sale by Cerberus Investor 435,000 sharesthese employees can be intense and our ability to hire, attract and retain them depends on our ability to provide competitive compensation. We may not be able to attract, assimilate, develop or retain qualified personnel in the future, and our failure to do so could adversely affect our business, including the execution of series C preferred stock, 142,800 shares of series D preferred stock and 113,311,940 shares (plus an additional unspecified number) of common stock.our global business strategy. As a result of the dateNatura merger, significant changes were made to the Company's senior management in January 2020, including a new chief executive officer and a new chief financial officer. Such turnover creates a risk of this filing, Cerberus Investor hadbusiness processes not madebeing sustained if the turnover occurs with inadequate knowledge transfer. Any failure by our management team to perform as expected may have a material adverse effect on our business, prospects, financial condition, results of operations and cash flows, as well as on our ability to address the challenges arising from the COVID-19 pandemic and the response to it. This risk may be exacerbated by the uncertainties associated with the implementation of Open Up & Grow and Avon Integration and any sales in reliance on other stabilization strategies and restructuring and cost-saving initiatives we undertake from time to time.
We are not insured against all risks affecting our activities and our insurance coverage may not be sufficient to
cover all losses and/or liabilities that may be incurred by our operations.
We cannot provide assurance that our insurance coverage will always be available or will always be sufficient to cover any damages resulting from any kind of claims. In addition, there are certain types of risks that may not be covered by our policies,
such Form S-3ASR. Salesas war, force majeure or certain business interruptions. In addition, we cannot provide assurance that when our current insurance policies expire, we will be able to renew them at sufficient and favorable terms. Claims that are not covered by Cerberus Investor of a substantial number of sharesour policies or the failure to renew our insurance policies may materially adversely affect us.
Any strategic alliances or divestitures may expose us to additional risks.
We evaluate potential strategic alliances that would complement our current product offerings, increase the size and geographic scope of our common stockoperations or otherwise offer growth and/or operating efficiency opportunities. Strategic alliances may entail numerous risks, including:
•substantial costs, delays or other operational or financial difficulties, including difficulties in leveraging synergies among the public market,businesses to increase sales and obtain cost savings or achieve expected results;
•difficulties in assimilating acquired operations or products, including the perception thatloss of key employees from any acquired businesses and disruption to our direct-selling channel;
•diversion of management’s attention from our core business;
•adverse effects on existing business relationships with suppliers and customers;
•risks of entering markets in which we have limited or no prior experience; and
•reputational and other risks regarding our ability to successfully implement such sales might occur,strategic alliances, including obtaining financing which could result in an increase in our indebtedness.
Our failure to successfully complete the integration of any new or acquired businesses could have a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows. In addition, there can be no assurance that we will be able to identify suitable candidates or consummate such transactions on favorable terms.
For divestitures, success is also dependent on effectively and efficiently separating the pricedivested unit or business from the Company and reducing or eliminating associated overhead costs. In cases where a divestiture is not successfully implemented or completed, the Company's business, prospects, financial condition, liquidity, results of our common stock.
The series C preferred stock issued to Cerberus Investor has rights, preferencesoperations and privileges that are not held by, and are preferentialcash flows could be adversely affected. Please see “Risks Related to the rightsSeparation of holdersNorth America” for additional information regarding the risks associated with the separation of our common stock. Such preferential rights could adversely affect our liquidity, cash flows and financial condition, and may result in the interests of Cerberus Investor differing from those of our common shareholders.North America.
The series C preferred stock ranks senior to the shares of our common stock with respect to dividend rights and rights on the distribution of assets on any liquidation, dissolution or winding up of our affairs. The series C preferred stock has a liquidation preference of $1,000 per share, representing an aggregate liquidation preference of $435 million upon issuance. Holders of series C preferred stock are entitled to participate on an as-converted basis in any dividends paid to the holders of shares of our common stock. In addition, cumulative preferred dividends accrue daily on the series C preferred stock and are payable at the rate of 1.25% per quarter (net of any dividends on our common stock and subject to a maximum rate of 5.00% per quarter if we breach certain obligations). Except to the extent not otherwise previously paid by us, preferred dividends are payable on the seventh anniversary of the issuance date of the series C preferred stock as and when declared by the Board of Directors and at the end of each quarter thereafter. Accrued and unpaid preferred dividends may be paid, at our option, (i) in cash, (ii) subject to certain conditions, in shares of our common stock or (iii) upon conversion of shares of series C preferred stock, in shares of our non-voting, non-convertible series D preferred stock, par value $1.00 per share. Any such shares of the series D preferred stock issued would have similar preferential rights.
Upon certain change of control events involving us, holders of series C preferred stock can require us to repurchase the series C preferred stock for an amount equal to the greater of (i) an amount in cash equal to 100% of the liquidation preference thereof plus all accrued but unpaid dividends or (ii) the consideration the holders would have received if they had converted their shares of series C preferred stock into common stock immediately prior to the change of control event.
Our obligations to pay dividends to the holders of series C preferred stock, and to repurchase the outstanding shares of series C preferred stock under certain circumstances, could impact our liquidity and reduce the amount of cash flows. Our obligations to the holders of series C preferred stock could also limit our ability to obtain additional financing or increase our borrowing costs, which could have an adverse effect on our financial condition. The preferential rights of holders of our series C preferred stock could also result in divergent interests between Cerberus Investor and those of our common shareholders.
Cerberus Investor is able to exercise significant influence over us, including through its ability to elect up to three members of our Board of Directors, including the Chairman.
Holders of series C preferred stock are entitled to vote generally with holders of our common stock on an as-converted basis (subject to an agreement to vote in favor of the slate of directors nominated by the Board of Directors, so long as the 25% Ownership Requirement (as defined below) is met and subject to certain exceptions). Therefore, the series C preferred stock issued to Cerberus Investor effectively reduces the relative voting power of the holders of our common stock. The shares of series C preferred stock owned by Cerberus Investor represents approximately 16.6% of the voting rights of our common stock on an as-converted basis. As a result, Cerberus Investor has the ability to significantly influence the outcome of any matter submitted for the vote of our shareholders. In addition, provided Cerberus Investor maintains certain levels of beneficial ownership of series C preferred stock and/or common stock, Cerberus Investor has consent rights over certain actions taken by us, including increasing the size of the Board of Directors, reinstating our quarterly common stock dividend and incurring indebtedness in excess of certain thresholds.
In addition, Cerberus Investor has certain rights to designate directors to serve on our Board of Directors (one of whom will continue to act as the Chairman so long as the 50% Ownership Requirement (as defined below) continues to be met). Cerberus Investor will continue to be entitled to elect: (i) three directors to the Board of Directors, so long as Cerberus Investor continues to beneficially own shares of series C preferred stock and/or shares of common stock that represent, on an as-converted basis, at least 75% of Cerberus Investor’s initial shares of series C preferred stock on an as-converted basis, (ii) two directors to the Board of Directors, so long as Cerberus Investor continues to beneficially own shares of series C preferred stock and/or common stock that represent, on an as-converted basis, at least 50% but less than 75% of Cerberus Investor’s initial shares of series C preferred stock on an as-converted basis (the “50% Ownership Requirement”) and (iii) one director to the Board of Directors, so long as Cerberus Investor continues to beneficially own shares of series C preferred stock and/or common stock that represent, on an as-converted basis, at least 25% but less than 50% of Cerberus Investor’s initial shares of series C preferred stock on an as-converted basis (the “25% Ownership Requirement”). Until Cerberus Investor no longer meets the 25% Ownership Requirement, subject to certain exceptions and to satisfaction by such director designees of independence and other customary qualifications, Cerberus Investor has the right to have one of its director designees serve on each committee of the Board of Directors. Notwithstanding the fact that all directors are subject to fiduciary duties and applicable law, the interests of the directors appointed by Cerberus Investor may differ from the interests of holders of our common stock as a whole or of our other directors.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our principal properties worldwide consist of manufacturing facilities for the production of Beauty products, distribution centers where administrative offices are located and where finished merchandise is packed and shipped to Representatives in fulfillmentfulfilment of their orders, and one principal research and development facility located in Suffern, NY.
We own property in Rye, NY that is used for anSince January 2017 our principal executive and administrative office, as well as for Global IT. In October 2016, an office spaceoffices are located at Chiswick Park in London, UK, was leased, and beginningwhere we moved to be in January 2017, is used fora closer proximity to many of our principal executive office and an administrative office. Ourcommercial markets. All the floors of our previous principal executive office location at 777 Third Avenue, New York, NY hashave been vacated, with certain floors currently being subleased and certain floors currently in the process of being subleased. We moved our principal executive office to London to be in closer proximity to many of our commercial markets. In addition, in December 2016,
During 2020, we sold aChina Conghua distribution center in connection with the U.S. which was inactive.sale of the China Wellness Plant. See Note 3, Discontinued Operations and Assets and Liabilities held for sale, to the Consolidated Financial Statements included herein.
In addition to the facilities noted above, other principal properties measuring 50,000 square feet or more include the following:
two•four manufacturing facilities, in Europe, primarily servicing Europe, Middle East & Africa;
•thirteen distribution centers and fourfive administrative offices in Europe, Middle East & Africa;Avon International; and
•twothree manufacturing facilities, eightten distribution centers and one administrative office in SouthAvon Latin America;
one manufacturing facility, two distribution centers and one administrative office in North Latin America; and
four manufacturing facilities and five distribution centers in Asia Pacific, of which one manufacturing facility is inactive.America.
We consider all of theseour principal properties to be in good repair, to adequately meet our needs and to operate at reasonable levels of productive capacity.
Of all the properties listed above, 2620 are owned and the remaining 2118 are leased. Many of our properties are used for a combination of manufacturing, distribution and administration. These properties are included in the above listing based on primary usage.
ITEM 3. LEGAL PROCEEDINGS
Reference is made to Note 18, Contingencies on pages F-49 through F-51 of our 2017 Annual Report.to the Consolidated Financial Statements included herein.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Avon’s Common Stock
Our common stock is listed on The New York Stock Exchange and trades under the AVP ticker symbol.
At December 31, 2017, there were 12,328 holders2020, Natura &Co Holding S.A. was the sole holder of record of our common stock. We believe that there are many additional shareholders who are not "shareholders of record" but who beneficially own and vote shares through nominee holders such as brokers and benefit plan trustees. High and low market prices and dividends per share of our common stock, in dollars, for 2017 and 2016 are listed below. We suspended the dividend on our common stock effective in the first quarter of 2016.
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| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 |
Quarter | | High | | Low | | Dividends Declared and Paid | | High | | Low | | Dividends Declared and Paid |
First | | $ | 5.93 |
| | $ | 4.21 |
| | $ | — |
| | $ | 4.81 |
| | $ | 2.38 |
| | $ | — |
|
Second | | 4.85 |
| | 3.35 |
| | — |
| | 5.01 |
| | 3.53 |
| | — |
|
Third | | 3.75 |
| | 2.33 |
| | — |
| | 5.92 |
| | 3.73 |
| | — |
|
Fourth | | 2.40 |
| | 1.87 |
| | — |
| | 6.89 |
| | 5.04 |
| | — |
|
|
|
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN(1)
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Among Avon Products, Inc., The S&P 500 Index and |
2017 Peer Group (2)
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The Stock Performance Graph above assumes a $100 investment on December 31, 2012, in Avon’s common stock, the S&P 500 Index and the Peer Group. The dollar amounts indicated in the graph above and in the chart below are as of December 31 or the last trading day in the year indicated.
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| | | | | | | | | | | | | | | | | | |
| | 2012 |
| | 2013 |
| | 2014 |
| | 2015 |
| | 2016 |
| | 2017 |
|
Avon | | 100.0 |
| | 121.3 |
| | 67.4 |
| | 30.5 |
| | 37.9 |
| | 16.2 |
|
S&P 500 | | 100.0 |
| | 132.4 |
| | 150.5 |
| | 152.6 |
| | 170.8 |
| | 208.1 |
|
Old Peer Group(2) | | 100.0 |
| | 127.1 |
| | 142.4 |
| | 137.8 |
| | 142.9 |
| | 166.7 |
|
New Peer Group(3) | | 100.0 |
| | 132.6 |
| | 142.0 |
| | 154.1 |
| | 146.8 |
| | 179.0 |
|
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(1) | Total return assumes reinvestment of dividends at the closing price at the end of each quarter. |
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(2) | The Old Peer Group includes The Clorox Company, Colgate–Palmolive Company, Estée Lauder Companies, Inc., Herbalife Ltd., Kimberly Clark Corp., The Procter & Gamble Company, Revlon, Inc. and Tupperware Brands Corp. |
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(3) | The New Peer Group includes The Clorox Company, Colgate–Palmolive Company, Coty Inc., Estée Lauder Companies, Inc., Herbalife Ltd., Kimberly Clark Corp., Revlon, Inc. and Tupperware Brands Corp. |
The Stock Performance Graph above shall not be deemed to be "soliciting material" or to be "filed" with the United States Securities and Exchange Commission or subject to the liabilities of Section 18 under the Securities Exchange Act of 1934 as amended (the "Exchange Act"). In addition, it shall not be deemed incorporated by reference by any statement that incorporates this annual report on Form 10-K by reference into any filing under the Securities Act of 1933 (the "Securities Act") or the Exchange Act, except to the extent that we specifically incorporate this information by reference.
Issuer Purchases of Equity Securities
The following table provides information about our purchases of our common stock during the quarterly period ended December 31, 2017:
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| | | | | | | | | | | |
| | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program |
10/1/17 – 10/31/17 | | 24,613 |
| (1) | $ | 2.54 |
| | * | | * |
11/1/17 – 11/30/17 | | 90,913 |
| (1) | 2.45 |
| | * | | * |
12/1/17 – 12/31/17 | | — |
| | — |
| | * | | * |
Total | | 115,526 |
| | $ | 2.47 |
| | * | | * |
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* | These amounts are not applicable as the Company does not have a share repurchase program in effect. |
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(1) | All shares were repurchased by the Company in connection with employee elections to use shares to pay withholding taxes upon the vesting of their restricted stock units and performance restricted stock units. |
Some of these share repurchases may reflect a brief delay from the actual transaction date.
ITEM 6. SELECTED FINANCIAL DATA
(U.S. dollars in millions, except per share data)
We derived the following selected financial data from our audited Consolidated Financial Statements. The following data should be read in conjunction with our MD&A and our Consolidated Financial Statements and related Notes contained in our 2017 Annual Report.Not applicable.
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| | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Statement of Operations Data | | | | | | | | | | |
Total revenue | | $ | 5,715.6 |
| | $ | 5,717.7 |
| | $ | 6,160.5 |
| | $ | 7,648.0 |
| | $ | 8,496.8 |
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Operating profit(1) | | 273.3 |
| | 321.9 |
| | 165.0 |
| | 434.3 |
| | 539.8 |
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Income (loss) from continuing operations, net of tax(1) | | 20.0 |
| | (93.4 | ) | | (796.5 | ) | | (344.5 | ) | | 67.5 |
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Diluted (loss) earnings per share from continuing operations | | $ | (.00 | ) | | $ | (.25 | ) | | $ | (1.81 | ) | | $ | (.79 | ) | | $ | .14 |
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Cash dividends per share | | $ | .00 |
| | $ | .00 |
| | $ | .24 |
| | $ | .24 |
| | $ | .24 |
|
Balance Sheet Data | | | | | | | | | | |
Total assets* | | $ | 3,697.9 |
| | $ | 3,418.9 |
| | $ | 3,770.4 |
| | $ | 5,485.2 |
| | $ | 6,478.4 |
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Debt maturing within one year | | 25.7 |
| | 18.1 |
| | 55.2 |
| | 121.7 |
| | 171.2 |
|
Long-term debt | | 1,872.2 |
| | 1,875.8 |
| | 2,150.5 |
| | 2,417.1 |
| | 2,474.2 |
|
Total debt | | 1,897.9 |
| | 1,893.9 |
| | 2,205.7 |
| | 2,538.8 |
| | 2,645.4 |
|
Total shareholders’ (deficit) equity | | (714.7 | ) | | (836.2 | ) | | (1,056.4 | ) | | 305.3 |
| | 1,127.5 |
|
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* | Total assets at December 31, 2015 and 2014 in the table above exclude the $100.0 receivable from continuing operations that was presented within current assets of discontinued operations. |
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(1) | A number of items, shown below, impact the comparability of our operating profit and income (loss) from continuing operations, net of tax. See Note 16, Restructuring Initiatives on pages F-45 through F-48 of our 2017 Annual Report, Note 13, Employee Benefit Plans on pages F-34 through F-42 of our 2017 Annual Report, Note 14, Segment Information on pages F-42 through F-44 of our 2017 Annual Report, Note 1, Description of the Business and Summary of Significant Accounting Policies on pages F-11 through F-17 of our 2017 Annual Report, "Venezuela Discussion" within MD&A on pages 40 through 41, "Results Of Operations - Consolidated" within MD&A on pages 36 through 45, Note 19, Goodwill on page F-51 of our 2017 Annual Report, Note 3, Discontinued Operations and Divestitures on pages F-19 through F-20 of |
our 2017 Annual Report, Note 7, Debt and Other Financing on pages F-22 through F-25 of our 2017 Annual Report and Note 9, Income Taxes on pages F-26 through F-29 of our 2017 Annual Report for more information on these items.
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| | | | | | | | | | | | | | | | | | | | |
| | Impact on Operating Profit |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Costs to implement restructuring initiatives | | $ | (60.2 | ) | | $ | (77.4 | ) | | $ | (49.1 | ) | | $ | (86.6 | ) | | $ | (53.4 | ) |
Loss contingency(2) | | (18.2 | ) | | — |
| | — |
| | — |
| | — |
|
Legal settlement(3) | | — |
| | 27.2 |
| | — |
| | — |
| | — |
|
Venezuelan special items(4) | | — |
| | — |
| | (120.2 | ) | | (137.1 | ) | | (49.6 | ) |
FCPA accrual(5) | | — |
| | — |
| | — |
| | (46.0 | ) | | (89.0 | ) |
Pension settlement charge(6) | | — |
| | — |
| | (7.3 | ) | | (9.5 | ) | | — |
|
Other items(7) | | — |
| | — |
| | (3.1 | ) | | — |
| | — |
|
Asset impairment and other charges(8) | | — |
| | — |
| | (6.9 | ) | | — |
| | (42.1 | ) |
In addition to the items impacting operating profit identified above, income from continuing operations, net of tax during 2017 was impacted by:
a $29.9 net tax benefit recognized as a result of the enactment of the Tax Cuts and Jobs Act in the United States ("U.S."), a release of valuation allowances of $25.5 associated with a number of markets in Europe, Middle East & Africa as a result of a business model change related to the move of the Company's headquarters from the U.S. to the UK, and a $10.4 benefit as a result of a favorable court decision in Brazil, partially offset by a charge of $16.0 associated with valuation allowances to adjust deferred tax assets in Mexico.
In addition to the items impacting operating profit identified above, loss from continuing operations, net of tax during 2016 was impacted by:
the deconsolidation of our Venezuelan operations. 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 before and after tax 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 income (loss) ("AOCI") associated with foreign currency movements before Venezuela was accounted for as a highly inflationary economy;
a net gain on extinguishment of debt of $1.1 before and after tax associated with the repayment of certain of our debt in 2016; and
the release of a valuation allowance associated with Russia of $7.1 and an income tax benefit of $29.3 recognized as the result of the implementation of foreign tax planning strategies, partially offset by a charge for valuation allowances for deferred tax assets outside of the U.S. of $8.6.
See "Venezuela Discussion" within MD&A on pages 40 through 41, Note 1, Description of the Business and Summary of Significant Accounting Policies on pages F-11 through F-17 of our 2017 Annual Report, Note 7, Debt and Other Financing on pages F-22 through F-25 of our 2017 Annual Report, and Note 9, Income Taxes on pages F-26 through F-29 of our 2017 Annual Report for more information.
In addition to the items impacting operating profit identified above, loss from continuing operations, net of tax during 2015 was impacted by:
the gain on sale of Liz Earle of $44.9 before tax ($51.6 after tax);
a loss on extinguishment of debt of $5.5 before and after tax caused by the make-whole premium and the write-off of debt issuance costs and discounts, associated with the prepayment of our 2.375% Notes due March 15, 2016 and a charge of $2.5 before and after tax associated with the write-off of issuance costs related to our previous $1 billion revolving credit facility;
an aggregate income tax charge of $685.1. This was primarily due to additional valuation allowances for U.S. deferred tax assets of $669.7 which were due to the continued strengthening of the U.S. dollar against currencies of some of our key markets and the impact on the benefits from our tax planning strategies associated with the realization of our deferred tax assets. In addition, the charge was due to valuation allowances for deferred tax assets outside of the U.S. of $15.4, primarily in Russia, which was largely due to lower earnings, which were significantly impacted by foreign exchange losses on working capital balances; and
an income tax benefit of $18.7, which was recorded in the fourth quarter of 2015, recognized as a result of the implementation of the initial stages of foreign tax planning strategies.
See Note 3, Discontinued Operations and Divestitures on pages F-19 through F-20 of our 2017 Annual Report, Note 7, Debt and Other Financing on pages F-22 through F-25 of our 2017 Annual Report, and Note 9, Income Taxes on pages F-26 through F-29 of our 2017 Annual Report for more information.
In addition to the items impacting operating profit identified above, loss from continuing operations, net of tax during 2014 was impacted by:
an income tax charge of $404.9. This was primarily due to a valuation allowance of $383.5 to reduce our deferred tax assets to an amount that is "more likely than not" to be realized, which was recorded in the fourth quarter of 2014; and
the $18.5 net tax benefit recorded in the fourth quarter of 2014 related to the finalization of the Foreign Corrupt Practices Act ("FCPA") settlements.
In addition to the items impacting operating profit identified above, income from continuing operations, net of tax during 2013 was impacted by:
a loss on extinguishment of debt of $73.0 before tax ($46.2 after tax) caused by the make-whole premium and the write-off of debt issuance costs associated with the prepayment of our private notes, as well as the write-off of debt issuance costs associated with the early repayment of $380 of the outstanding principal amount of a term loan agreement;
the loss on extinguishment of debt of $13.0 before tax ($8.2 after tax) caused by the make-whole premium and the write-off of debt issuance costs and discounts, partially offset by a deferred gain associated with the January 2013 interest-rate swap agreement termination, associated with the prepayment of notes due in 2014; and
valuation allowances for deferred tax assets of $41.8 related to Venezuela and $9.2 related to China.
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(2) | During 2017, our operating profit and operating margin were negatively impacted by a charge of $18.2 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. See Note 13, Employee Benefit Plans on pages F-34 through F-42 of our 2017 Annual Report for more information. |
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(3) | During 2016, our operating profit and operating margin benefited from the net proceeds of $27.2 before and after tax recognized as a result of settling claims relating to professional services that had been provided to the Company prior to 2013 in connection with a previously disclosed legal matter. See Note 14, Segment Information on pages F-42 through F-44 of our 2017 Annual Report for more information. |
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(4) | During 2015, 2014 and 2013, our operating profit and operating margin were negatively impacted by devaluations of the Venezuelan currency, combined with Venezuela being designated as a highly inflationary economy. |
In February 2015, the Venezuelan government announced the creation of a new foreign exchange system referred to as the SIMADI exchange ("SIMADI"), which represented the rate which better reflected the economics of Avon Venezuela's business activity, in comparison to the other then available exchange rates; as such, we concluded that we should utilize the SIMADI exchange rate to remeasure our Venezuelan operations. The change to the SIMADI rate caused the recognition of a devaluation of approximately 70% as compared to the exchange rate we had used previously. As a result of using the historical U.S. dollar cost basis of non-monetary assets, such as inventories, these assets continued to be remeasured, following the change to the SIMADI rate, at the applicable rate at the time of their acquisition. The remeasurement of non-monetary assets at the historical U.S. dollar cost basis caused a disproportionate expense as these assets were consumed in operations, negatively impacting operating profit and net income by $18.5 during 2015. Also as a result of the change to the SIMADI rate, we determined that an adjustment of $11.4 to cost of sales was needed to reflect certain non-monetary assets, primarily inventories, at their net realizable value, which was recorded in the first quarter of 2015. In addition, we reviewed Avon Venezuela's long-lived assets to determine whether the carrying amount of the assets was recoverable. Based on our expected cash flows associated with the asset group, we determined that the carrying amount of the assets, carried at their historical U.S. dollar cost basis, was not recoverable. As such, an impairment charge of $90.3 to selling, general and administrative expenses was needed to reflect the write-down of the long-lived assets to estimated fair value of $15.7, which was recorded in the first quarter of 2015. In addition to the negative impact to operating profit, as a result of the devaluation of Venezuelan currency, during 2015, we recorded an after-tax benefit of $3.4 (a benefit of $4.2 in other expense, net, and a loss of $.8 in income taxes) in the first quarter of 2015, primarily reflecting the write-down of net monetary assets. See discussion of our Venezuelan operations in "Venezuela Discussion" within MD&A on pages 40 through 41 and Note 1, Description of the Business and Summary of Significant Accounting Policies on pages F-11 through F-17 of our 2017 Annual Report for more information.
In February 2014, the Venezuelan government announced a foreign exchange system which began operating in March 2014, referred to as the SICAD II exchange ("SICAD II"). As SICAD II represented the rate which better reflected the economics of Avon Venezuela's business activity, in comparison to the other then available exchange rates, we concluded that we should utilize the SICAD II exchange rate to remeasure our Venezuelan operations effective March 31, 2014. The change to the SICAD II rate caused the recognition of a devaluation of approximately 88% as compared to the official exchange rate we used previously. As a result of using the historical U.S. dollar cost basis of non-monetary assets, such as inventories, these assets continued to be remeasured, following the change to the SICAD II rate, at the applicable rate at the time of their acquisition. The remeasurement of non-monetary assets at the historical U.S. dollar cost basis caused a disproportionate expense as these assets are consumed in operations, negatively impacting operating profit and net income by $21.4 during 2014. Also as a result, we determined that an adjustment of $115.7 to cost of sales was needed to reflect certain non-monetary assets, primarily inventories, at their net realizable value, which was recorded in the first quarter of 2014. In addition to the negative impact to operating profit, as a result of the devaluation of Venezuelan currency, during 2014, we recorded an after-tax loss of $41.8 ($53.7 in other expense, net, and a benefit of $11.9 in income taxes), primarily reflecting the write-down of net monetary assets.
In 2013, as a result of using the historical U.S. dollar cost basis of non-monetary assets, such as inventories, acquired prior to the devaluation, 2013 operating profit was negatively impacted by $49.6, due to the difference between the historical U.S. dollar cost at the previous official exchange rate of 4.30 and the official exchange rate of 6.30. In addition to the negative impact to operating profit and net income, as a result of the devaluation of Venezuelan currency, during 2013, we recorded an after-tax loss of $50.7 ($34.1 in other expense, net, and $16.6 in income taxes), primarily reflecting the write-down of net monetary assets and deferred tax benefits.
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(5) | During 2014, our operating profit and operating margin were negatively impacted by the additional $46 accrual, and during 2013, our operating profit and operating margin were negatively impacted by the $89 accrual, both recorded for the settlements related to the FCPA investigations. See Note 18, Contingencies on pages F-49 through F-51 of our 2017 Annual Report for more information. |
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(6) | During 2015, our operating profit and operating margin were negatively impacted by settlement charges associated with the U.S. defined benefit pension plan. As a result of the lump-sum payments made to former employees who were vested and participated in the U.S. defined benefit pension plan, in the third quarter of 2015, we recorded a settlement charge of $23.8 (before and after tax). Because the settlement threshold was exceeded in the third quarter of 2015, a settlement charge of $4.1 (before and after tax) was also recorded in the fourth quarter of 2015, as a result of additional payments from our U.S. defined benefit pension plan. These settlement charges were allocated between Global ($7.3) and Discontinued Operations ($20.6). See Note 13, Employee Benefit Plans on pages F-34 through F-42 of our 2017 Annual Report for a further discussion. |
During 2014, our operating profit and operating margin were negatively impacted by settlement charges associated with the U.S. defined benefit pension plan. As a result of the lump-sum payments made to former employees who were vested and participated in the U.S. defined benefit pension plan, in the second quarter of 2014, we recorded a settlement charge of $23.5 (before and after tax). Because the settlement threshold was exceeded in the second quarter of 2014, settlement charges of $5.4 and $7.5 (both before and after tax) were also recorded in the third and fourth quarters of 2014, respectively, as a result of additional payments from our U.S. defined benefit pension plan. These settlement charges were allocated between Global ($9.5) and Discontinued Operations ($26.9).
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(7) | During 2015, our operating profit and operating margin were negatively impacted by transaction-related costs of $3.1 before and after tax associated with the planned separation of North America that were included in continuing operations. |
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(8) | During 2015, our operating profit and operating margin were negatively impacted by a non-cash impairment charge of $6.9 (before and after tax) associated with goodwill of our Egypt business. During 2013 and 2012, our operating profit and operating margin were negatively impacted by non-cash impairment charges of $42.1 and $44.0 (both before and after tax), respectively, associated with goodwill and intangible assets of our China business. See Note 19, Goodwill on page F-51 of our 2017 Annual Report for more information on Egypt. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ("MD&A")
(U.S. dollars in millions, except per share and share data)
You should read the following discussion of the results of operations and financial condition of Avon Products, Inc. and its majority and wholly owned subsidiaries in conjunction with the information contained in the Consolidated Financial Statements and related Notes thereto contained in our 2017 Annual Report.herein. When used in this discussion, the terms "Avon," "Company," "we," "our" or "us" mean, unless the context otherwise indicates, Avon Products, Inc. and its majority and wholly owned subsidiaries.
See "Non-GAAP Financial Measures" on pages 29 through 31 of this management's discussion and analysis of financial condition and results of operations ("MD&A")&A for a description of how constant dollar ("Constant $") growth rates (a Non-GAAP financial measure) are determined and see "Performance Metrics" on page 29 of this MD&A for definitions of our performance metrics (Change in Active Representatives, Change in units sold, Change in Ending Representatives and Change in Average Order).
Overview
We are a global manufacturer and marketer of beauty and related products. Our business is conducted primarily in the direct-selling channel.channel, with a strategy to expand to omnichannel. During 2017,2020, we had sales operations in 5655 countries and territories, and distributed products in 1825 more. All of our consolidated revenue is derived from operations of subsidiaries outside of the United States ("U.S."). Our reportable segments are based on geographic operations in four regions: Europe, Middle East & Africa; Southtwo regions, Avon International and Avon Latin America; North Latin America; and Asia Pacific.America. Our product categories are Beauty and Fashion & Home. Beauty consists of skincare, fragrance and color (cosmetics). Fashion & Home consists of fashion jewelry, watches, apparel, footwear, accessories, gift and decorative products, housewares entertainment and leisure products, children’s products and nutritional products. Sales are made to the ultimate consumer principally through direct selling by Representatives, who are independent contractors and not our employees.
As of December 31, 2017,On average we had approximately 64 million activeActive Representatives during the year ended December 31, 2020, which represents the number of Representatives submitting an order in a sales campaign, totaled for all campaigns during the year and then divided by the number of campaigns. The success of our business is highly dependent on recruiting, retaining and servicing theour Representatives.
During 2017,Total revenue decreased 24% compared to the prior-year period, impacted by certain indirect taxes recognized in Brazil in the prior year. Excluding these items, Adjusted revenue was down 23%, unfavorably impacted by foreign exchange, which was driven by the strengthening of the U.S. dollar relative to multiple currencies, and primarily to the Brazilian real. Adjusted Constant $ Revenue decreased 14%.
Revenue and Constant $ Adjusted revenue were impacted by a decrease in Active Representatives of 14%, across all markets. Average Representative Sales decreased 10% on a reported basis, unfavorably impacted by foreign exchange, and Constant $ Adjusted Average Representative Sales remained flat. Revenue and Constant $ Adjusted revenue were affected by the COVID-19 pandemic, which negatively impacted the initial signs of recovery from a lower Representative base in 2019. The third quarter showed improving trends across most markets and resulted in revenue growth in Brazil and Mexico which continued in the fourth quarter, while Avon International has again been impacted by the new COVID-19 restriction measures imposed in parts of Europe, although not to the extent felt during the second quarter as we were able to continue normal operations in our manufacturing facilities and distribution centers.
Units sold decreased 14% in 2020, across all markets, with Brazil relatively unchanged compared to the prior-year period, partially benefiting from foreign exchange, while Constant $ revenue decreased 2%. Our Constant $ revenue decline was primarily driven by declines in Brazil, Russia and the United Kingdom, partially offset by growth in Argentina and South Africa. The decline in revenue and Constant $ revenue was primarily due to a 3% decrease in Active Representatives, which was partially offset by higher average order. The decrease in Active Representatives was impacted by declines in all reportable segments, most significantly in South Latin America (driven by Brazil) and Europe, Middle East & Africa. The net impact of price and mix increased 2%, primarily due to the inflationary impact on pricing in Argentina, Russia and Mexico. Units sold decreased 4%, primarily due to declines in Russia, Brazil, Mexico and the United Kingdom. The revenue performance was negatively impacted most significantly by a decline in Color sales, as we experienced issues in some markets while we segmented our Color category into three distinct brands. The timing of innovation also impacted the decline in Color sales.
Ending Representatives were relatively unchanged. Ending Representatives at December 31, 2017 as compared to the prior-year period benefited from growth in Russia, which was offset by a decline in Brazil.prior year period.
See "Segment Review" in this MD&A for additional information related to changes in revenue by segment.
Merger with Natura Cosméticos S.A.
On May 22, 2019, we entered into an Agreement and Plan of Mergers with Natura Cosméticos S.A., a Brazilian corporation (sociedade anônima) ("Natura Cosméticos"), Natura &Co Holding S.A., a Brazilian corporation (sociedade anônima) ("Natura &Co Holding"), and two subsidiaries of Natura &Co Holding S.A. ("Natura &Co") pursuant to which, in a series of transactions, Avon and Natura Cosméticos became direct wholly owned subsidiaries of Natura &Co (the "Transaction"). For additional information see Note 21, Agreement and Plan of Mergers with Natura Cosméticos S.A., to the Consolidated Financial Statements included herein. On January 3, 2020, the Company consummated the Transaction and became a fully owned subsidiary of Natura &Co Holding. In connection with the consummation of the Transaction, the Company notified the New York Stock Exchange ("NYSE") that trading of their stock should be suspended, the Company's common stock was subsequently delisted and deregistered.
COVID-19 pandemic
A novel strain of coronavirus (COVID-19) was first identified in Wuhan, China in December 2019, and subsequently declared a pandemic by the World Health Organization. Due to the uncertain and rapidly evolving nature of current conditions around the world, the impacts of COVID-19 most of which are beyond the Company’s control, continue to evolve, and the outcome is uncertain. We are therefore unable to predict accurately the impact that COVID-19 will have on our business going forward.
The most significant impact of the COVID-19 pandemic was felt during the second quarter of 2020, as many markets were subject to lockdown restrictions which limited our ability to recruit and enroll Representatives, operate manufacturing facilities and distribution centers and to process and deliver orders. The pandemic primarily resulted in reduced revenue, which in turn impacted profitability and cash generation. The third quarter showed signs of recovery in most markets. The fourth quarter has again been impacted by the new lockdown measures imposed in parts of Europe, although not to the extent felt during the second quarter as we were able to continue normal operations in our manufacturing facilities and distribution centers.
We continue to closely monitor the evolution of the COVID-19 pandemic, deciding on actions to minimize impacts, ensure the continuity of operations and promote the safety and health of all the people involved. Since the beginning of the virus spread and the consequent restrictive measures imposed by governments, such as closing non-essential trade and restricting the movement of people across borders, the Company has implemented some measures in all its operations, in line with the official measures:
•Incentives to remote working;
•Adoption of new safety measures for operational workers, such as the use of masks and procedures to distance people between processes;
•Re-planning of sales cycles, prioritizing personal care items;
•Speeding up the digitization of sales channels;
•We communicated social distancing protocols to our Representatives around the world;
•Change in the minimum order criteria, start kit and deadlines for payment of Representatives - reflecting the Representatives’ needs on a market by market basis; and
•Daily monitoring of suppliers to ensure supply.
As of the date of this report, we are unable to estimate the long-term impact of the economic paralysis arising from efforts to curb the spread of the COVID-19 virus and the expected reduction in activity on our business, results of operations and financial condition. We will continue to review our revenue, investments, expenses and cash outflows, as well as adjusting our relationships with suppliers. Furthermore, the actions outlined above are continuously being re-evaluated in light of global developments relating to COVID-19. See also “Item 1A. Risk Factors—The COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, manufacturing, supply chains and distribution systems, and we have experienced and expect to continue to experience unpredictable negative effects associated with the pandemic".
Cyber incident
In June 2020, the Company became aware that it was exposed to a cyber incident in its Information Technology ("IT") environment which interrupted some systems and partially affected the Company's operations. We engaged leading external cyber security and IT general controls specialists, launched a comprehensive containment and remediation effort and started a forensic investigation. By mid-August, the Company had re-established all of its core business processes and resumed operations in all of its markets, including all of its distribution centers.
The cyber incident did not have a material impact on our full year 2020 revenue, although it resulted in a shift in revenue from the second quarter to the third quarter of 2020 as the Company fulfilled the order backlog created. The incremental expense incurred as a result of the cyber incident was not material.
Although we had no indication that the accuracy and completeness of any financial information was impacted as a result of the incident, the Company performed extensive procedures immediately after discovering the incident to validate such accuracy and completeness. Refer to Item 9A. Controls and Procedures for conclusions related to internal controls.
Natura &Co - Avon Integration
Subsequent to the merger of Natura and Avon in January 2020, an integration plan (the "Avon Integration") was established to create the right global infrastructure to support the future ambitions of the Natura &Co Group while also identifying synergies and opportunities to leverage our combined strength, scale and reach. Synergies will be derived mainly from procurement, manufacturing/distribution and administrative, as well as top line synergies, primarily between Avon LATAM and Natura &Co Latin America.
Open Up Avon, Open Up & Grow and Transformation Plan
In January 2016, we initiated a transformation plan (the “Transformation Plan”"Transformation Plan"), in order to enable us to achieve our long-term goals of mid-single-digit Constant $ revenue growth and low double-digit operating margin. TheThere are no further restructuring actions to be taken associated with our Transformation Plan included three pillars: investas, beginning in the third quarter of 2018, all new restructuring actions approved operate under our new Open Up Avon plan described below.
In September 2018, we initiated a new strategy in order to return Avon to growth reduce costs("Open Up Avon"). The Open Up Avon strategy is integral to our ability to return Avon to growth, built around the necessity of incorporating new approaches to various elements of our business, including increased utilization of third-party providers in an effortmanufacturing and technology, a more fit for purpose asset base, and a focus on enabling our Representatives to more easily interact with the company and achieve relevant earnings. These savings have been and are expected to continue to improve our cost structure and improve our financial resilience.
The Transformation Plan was designed to focus on cost savings and financial resilience in the first year, in order to support future investment in growth. In 2016 we estimate that webe achieved cost savings of $120 before taxes, and we significantly strengthened the balance sheet. In 2017 we estimate that we achieved cost savings of $255 before taxes when comparing to our costs in 2015. These savings include both run-rate savings from 2016, along with in-year savings from current year initiatives. These savings have mostly been offset by the impact of inflation.
In connection with the actions and associated savings discussed above, we have incurred costs to implement ("CTI") restructuring initiatives of approximately $167 before taxes associated with the Transformation Plan to-date. In connection with thethrough restructuring actions approved to-date associated with the Transformation Plan, we expect(that have may continue to realize annualized cost savings of an estimated $110result in charges related to $120 before taxes. During 2017, we realized an estimated $55 before taxes of cost savings associated with the restructuring actionsseverance, contract terminations and achieved the majority of the annualized savings. In addition, we have realized savings frominventory and other asset write-offs), as well as other cost-savings strategies that didwould not result in restructuring charges. ForIn January 2019, we announced significant advancements in this strategy, including a structural reset of inventory processes and a reduction in global workforce.
In May 2020, the market closures,new leadership of Avon International refreshed our strategy ("Open Up & Grow") which aims to return Avon International to growth over the next three years. Open Up & Grow replaces and builds on the success of the Open Up Avon strategy, launched in 2018 to strengthen competitiveness through enhancing the representative experience, improving brand position and relevance, accelerating digital expansion and improving costs. Over the next three years, savings are expected annualized savings represented the operating loss no longer included within Avon's operating resultsto continue to be achieved through restructuring actions (that may continue to result in charges related to severance, contract terminations and asset write-offs), as a result of no longer operating in the respective market. For actionswell as other cost-savings strategies that didwould not result in the closure of a market, the annualized savings represent the net reduction of expenses that will no longer be incurred by Avon.restructuring charges.
For additional details on restructuring initiatives, see Note 16, Restructuring Initiatives, on pages F-45 through F-48 of our 2017 Annual Report. For additional details on strengtheningto the balance sheet, see Note 7, Debt and Other Financing on pages F-22 through F-25 of our 2017 Annual Report.Consolidated Financial Statements included herein.
Foundational Initiatives
The Company continues to make progress in a number of key areas. Transformation will require the Company to continue to execute in a coordinated way against each of these foundational initiatives:
Deliver a Seamless, Competitive Representative Experience - prioritize investments to upgrade systems;
Insightful Data & Analytics - improve the Company's ability to support the Representative and help her run her business more effectively through deeper insight and analytics into Representative behavior and needs;
Rigorous Performance Management - the new executive team is a key enabler to driving a performance-based culture for ownership of results and is working well together, taking action to enforce accountability and beginning to identify ways to drive the right behavior; and
Relentless Focus on Execution Capabilities - focus on developing a service mindset and using pilot programs that cover service from end to end to enable the implementation of changes, with minimal disruption.
The Company believes it has the capacity to achieve its long-term goals of mid single-digit constant-dollar revenue growth and low double-digit operating margin. However, the Company recognizes it will take time to achieve its long-term goals.
New Accounting Standards
Information relating to new accounting standards is included in Note 2, New Accounting Standards, on pages F-18 through F-19 of our 2017 Annual Report.
to the Consolidated Financial Statements included herein.
Performance Metrics
Within this MD&A, in addition to our key financial metrics of revenue, operating profit and operating margin, we utilize the performance metrics defined below to assist in the evaluation of our business.
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Performance Metrics | | Definition |
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Change in Active Representatives | | This metric is a measure of Representative activity based on the number of unique Representatives submitting at least one order in a sales campaign, totaled for all campaigns in the related period. To determine the change in Active Representatives, this calculation is compared to the same calculation in the corresponding period of the prior year. Orders in China are excluded from this metric as our business in China is predominantly retail. Liz Earle was also excluded from this calculation as it did not distribute through the direct-selling channel.
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Change in units sold | | This metric is based on the gross number of pieces of merchandise sold during a period, as compared to the same number in the same period of the prior year. Units sold include samples sold and products contingent upon the purchase of another product (for example, gift with purchase or discount purchase with purchase), but exclude free samples. |
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Change in Ending Representatives | | This metric is based on the total number of Representatives who were eligible to place an order in the last sales campaign in the related period as a result of being on an active roster. To determine the Change in Ending Representatives, this calculation is compared to the same calculation in the corresponding period of the prior year. Change in Ending Representatives may be impacted by a combination of factors such as our requirements to become and/or remain a Representative, our practices regarding minimum order requirements and our practices regarding reinstatement of Representatives. We believe this may be an indicator of future revenue performance. |
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Change in Average OrderRepresentative Sales | | This metric is a measure of Representative productivity. The calculation is the difference of the year-over-year change in revenue on a Constant $ basis and the Change in Active Representatives. Change in Average OrderRepresentative Sales may be impacted by a combination of factors such as inflation, units, product mix, and/or pricing. |
Non-GAAP Financial Measures
To supplement our financial results presented in accordance with generally accepted accounting principles in the U.S. ("GAAP"), we disclose operating results that have been adjusted to exclude the impact of changes due to the translation of foreign currencies into U.S. dollars, including changes in: revenue, Adjusted revenue, operating profit, Adjusted operating profit, operating margin and Adjusted operating margin. We also refer to these adjusted financial measures as Constant $ items, which are Non-GAAP financial measures. We believe these measures provide investors an additional perspective on trends and underlying business results. To exclude the impact of changes due to the translation of foreign currencies into U.S. dollars, we calculate current-year results and prior-year results at constant exchange rates, which are updated on an annual basis as part of our budgeting process. Foreign currency impact is determined as the difference between actual growth rates and Constant $ growth rates.
We also present revenue, gross margin, selling, general and administrative expensesSG&A as a percentage of revenue, operating profit, operating margin and effective tax rateincome (loss) before taxes on a Non-GAAP basis. We refer to these Non-GAAP financial measures as "Adjusted." We have provided a quantitative reconciliation of the difference between the Non-GAAP financial measures to the most directly comparableand financial measures calculated and reported in accordance with GAAP. See "Reconciliation of Non-GAAP Financial Measures" within "Results of Operations - Consolidated" on pages 36 through 37 in this MD&A for this quantitative reconciliation.
The Company uses the Non-GAAP financial measures to evaluate its operating performance. These Non-GAAP measures should not be considered in isolation, or as a substitute for, or superior to, financial measures calculated in accordance with GAAP. The Company believes investors find the Non-GAAP information helpful in understanding the ongoing performance of
operations separate from items that may have a disproportionate positive or negative impact on the Company's financial results in any particular period. The Company believes that it is meaningful for investors to be made aware of the impacts of 1) certain Brazil indirect taxes; 2) CTI restructuring initiatives; 2) a charge for a loss contingency related to a non-U.S. pension plan ("Loss contingency"); 3) the net proceeds recognized as a result of settling claims relating to professional services ("Legal settlement"); 4) chargescosts related to the deconsolidation of our Venezuelan operations as of March 31, 2016 and the devaluation of Venezuelan currency in February 2015, combined with Venezuela being designated as a highly inflationary economy ("Venezuelan special items"); 5) the settlement chargesTransaction; 4) costs associated with the U.S. pension plan ("Pension settlement charge"); 6) a goodwill impairment charge related to the Egypt business ("Asset impairment charge"); 7) various otherearly termination of debt and credit facilities; and 5) one-time tax items that are not associated with the sale of Liz Earle, the separation of the North America business and debt-related charges ("Other items"); and, as it relates to our effective tax rate discussion, 8) the net income tax benefit as a result of the enactment of the Tax Cuts and Jobs Act in the U.S., a release of valuation allowances associated with a number of markets in Europe, Middle East & Africa, and a benefit as a result of a
favorable court decision in Brazil, partially offset by a charge associated with valuation allowances to adjust deferred tax assets in Mexico, which were recognized in 2017, income tax benefits realized in 2016 and 2015 as a result of tax planning strategies, an income tax benefit in the second quarter of 2016 primarily due to the release of a valuation allowance associated with Russia and the adjustments associated with our deferred tax assets recorded in 2016 and 2015recurring, normal operations ("Special tax items"). which are provided below.
(1) 2020 includes the impact of certain Brazil indirect taxes, which were recorded in selling, general and administrative expenses, net in the amounts of approximately $11. 2019 included the impact of certain Brazil indirect taxes, which were recorded in product sales and other income (expense), net in the amounts of approximately $68 and approximately $50, respectively, in our Consolidated Income Statements. See Note 20, Supplemental Balance Sheet Information, to the Consolidated Financial Statements contained herein for further information. The Loss contingencycorresponding tax impact was $23. 2018 included the impact of the Brazil IPI tax release, which was recorded in product sales and other income (expense), net in the amounts of approximately $168 and approximately $27, respectively, in our Consolidated Income Statements. See Note 18, Contingencies, to the Consolidated Financial Statements contained herein for further information. The Brazil IPI tax release also included approximately $66 recorded in income taxes.
(2) CTI restructuring initiatives includes the impact on ourthe Consolidated Statements of Operations duringfor all periods presented of net charges incurred on approved restructuring initiatives. See Note 16, Restructuring Initiative, to the second quarterConsolidated Financial Statements contained herein for further information.
(3) During 2020, the Company recorded approximately $86 of 2017 caused by a chargecosts related to the Transaction, primarily including professional fees incurred of approximately $18 for a loss contingency$46, severance payments of approximately $25 and acceleration of share based compensation of approximately $10 relating to these terminations triggered by change in control provisions. During 2019, the Company recorded approximately $64 of costs related to a non-U.S. pension plan, for which an amendmentthe Transaction, primarily including professional fees and impairment losses on assets. See Note 21, Agreement and Plan of Mergers with Natura Cosméticos S.A., to the plan that occurredConsolidated Financial Statements contained herein and "Agreement and Plan of Mergers with Natura Cosméticos S.A.," in a prior year may not have been appropriately implemented.this MD&A for further information.
The Legal settlement includes(4) During 2020, the impact on our Consolidated StatementsCompany incurred costs of Operations during the third quarter of 2016$38 associated with the net proceedsearly termination of approximately $27 recognized as a result of settling claims relating to professional services that had been provided todebt and credit facilities. During 2019, the Company prior to 2013 in connection with a previously disclosed legal matter.
The Venezuelan special items include the impact on our Consolidated Statementsincurred costs of Operations during the first quarter of 2016 caused by the deconsolidation of our Venezuelan operations for which we recorded a loss of approximately $120 in other expense, net. The loss was comprised of approximately $39 in net assets of the Venezuelan business and approximately $81 in accumulated foreign currency translation adjustments within accumulated other comprehensive loss ("AOCI") associated with foreign currency changes before Venezuela was accounted for as a highly inflationary economy. The Venezuelan special items also include the impact on our Consolidated Statements of Operations in 2015 caused by the devaluations of Venezuelan currency on monetary assets and liabilities, such as cash, receivables and payables; deferred tax assets and liabilities; and non-monetary assets, such as inventories. For non-monetary assets, the Venezuelan special items include the earnings impact caused by the difference between the historical U.S. dollar cost of the assets at the previous exchange rate and the revised exchange rate. In 2015, the Venezuelan special items also include an adjustment of approximately $11 to reflect certain non-monetary assets at their net realizable value and an impairment charge of approximately $90 to reflect the write-down of the long-lived assets to their estimated fair value.
The Pension settlement charge includes the impact on our Consolidated Statements of Operations during the third and fourth quarters of 2015$9 associated with the payments made to former employees who were vested and participated in the U.S. defined benefit pension plan. Such payments fully settled our pension plan obligation to those participants who elected to receive such payment.early termination of debt.
(5) The Asset impairment charge includes the impact on our Consolidated Statements of Operations during the fourth quarter of 2015 caused by the goodwill impairment charge related to the Egypt business.
The Other items include the impact on our Consolidated Statements of Operations during the third quarter of 2016 due to a net gain on extinguishment of debt associated with the cash tender offers in August 2016, the debt repurchases in October and December 2016, and the prepayment of the remaining principal amount of our 4.20% Notes due July 15, 2018 and our 5.75% Notes due March 1, 2018 in November 2016. The Other items also include the impact during 2015 on our Consolidated Statements of Operations due to the gain on the sale of Liz Earle. In addition, the Other items include the impact on our Consolidated Statements of Operations in the fourth quarter of 2015 caused by transaction-related costs of $3.1 associated with the planned separation of the North America business that were included in continuing operations. In addition, Other items in 2015 include the impact on our Consolidated Statements of Operations of the loss on extinguishment of debt caused by the make-whole premium and the write-off of debt issuance costs and discounts associated with the prepayment of our 2.375% Notes due March 15, 2016. Other items, in 2015, also include the impact on other expense, net in our Consolidated Statements of Operations of $2.5 associated with the write-off of issuance costs related to our previous $1 billion revolving credit facility.
In addition, the effective tax rate discussion includes Special tax items, including the impact on the provision for income taxes in our Consolidated Statements of Operations during 20172018 due to an approximate $30 net benefit recognized as a result of the enactment of the Tax Cuts and Jobs Act in the U.S., a release of valuation allowancesone-time tax reserves of approximately $26$18 associated with a number of markets in Europe, Middle East & Africa,our uncertain tax positions, and an approximate $10 benefit as a result of a favorable court decision in Brazil, partially offset by a charge of approximately $16 associated with valuation allowances to adjust deferred tax assets in Mexico. Special tax items also include the impact on the provision for income taxes in our Consolidated Statements of Operations during the fourth quarter of 2016 due to the charge of approximately $9 associated with valuation allowances to adjust certain non-U.S. deferred tax assets to an amount that is "more likely than not" to be realized. Special tax items also include the impact on the provision for income taxes in our Consolidated Statements of Operations during the second quarter of 2016 primarily due to the release of a valuation allowance associated with Russia of approximately $7. Special tax items also include the impact on the provision for income taxes in our Consolidated Statements of Operations during the first quarter of 2016 and the fourth quarter of 2015 due to income tax benefits of approximately $29 and approximately $19, respectively, recognized as the result of the implementation of foreign tax planning strategies. Special tax items also include the impact on the provision for income taxes in our Consolidated Statements of Operations during the first and second quarters of 2015 due to a charge of approximately $31 and a benefitexpense of approximately $3 respectively, associated with valuation allowances to adjust our U.S. deferred taxthe ownership transfer of certain operational assets to an amount that was "more likely than not" to be realized. The additional valuation allowance was
due towithin the strengthening of the U.S. dollar against currencies of some of our key markets and its associated effect on our tax planning strategies, and the partial release of the valuation allowance was due to the weakening of the U.S. dollar against currencies of some of our key markets. Special tax items also include the impact on the provision for income taxes in our Consolidated Statements of Operations during the third quarter of 2015 due to a charge of approximately $642 as a result of establishing a valuation allowance for the full amount of our U.S. deferred tax assets due to the impact of the continued strengthening of the U.S. dollar against currencies of some of our key markets and its associated effect on our tax planning strategies. Additionally, Special tax items include the impact on the provision for income taxes in our Consolidated Statements of Operations during the third quarter of 2015 due to a charge of approximately $15 associated with valuation allowances to adjust certain non-U.S. deferred tax assets to an amount that is "more likely than not" to be realized. The non-U.S. valuation allowance included an adjustment associated with Russia, which was primarily the result of lower earnings, which were significantly impacted by foreign exchange losses on working capital balances.consolidated group.
See Note 18, Contingencies, Note 16, Restructuring Initiatives, on pages F-45 through F-48 of our 2017 Annual Report, Note 13, Employee Benefit Plans on pages F-34 through F-42 of our 2017 Annual Report, Note 14, Segment Information, on pages F-42 through F-44 of our 2017 Annual Report, "Results Of Operations - Consolidated" below, Note 1, Description of the Business and Summary of Significant Accounting Policies, on pages F-11 through F-17 of our 2017 Annual Report, "Venezuela Discussion" below, Note 19, Goodwill on page F-51 of our 2017 Annual Report, Note 7, Debt and Other Financing, on pages F-22 through F-25 of our 2017 Annual Report, and Note 9, Income Taxes, on pages F-26 through F-29 of our 2017 Annual Reportto the Consolidated Financial Statements included herein. See also "Effective Tax Rate" in this MD&A, and "Results Of Operations - Consolidated" below, for more information on these items.
Critical Accounting Estimates
We believe the accounting policies described below represent our critical accounting policies due to the estimation processes involved in each. See Note 1, Description of the Business and Summary of Significant Accounting Policies, on pages F-11 through F-17 of our 2017 Annual Reportto the Consolidated Financial Statements included herein for a detailed discussion of the application of these and other accounting policies.
Revenue Recognition
Revenue is recognized when control of a product or service is transferred to a customer, which is generally the Representative. Revenue is measured based on the consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties, such as Value Added Taxes collected for taxing authorities.
Our contracts with Representatives often include multiple promises to transfer products and/or services to the Representative and determining which of these products and/or services are considered distinct performance obligations that should be accounted for separately. When assessing the recognition of revenue for the identified performance obligations, management has exercised significant judgment in the following areas: estimation of variable consideration and the stand-alone selling prices ("SSP") of promised goods or services delivered under sales incentives to determine and allocate the transaction price.
Typically included within a contract with customers is variable consideration, such as sales returns and late payment fees. Revenue is only recorded to the extent it is probable that it will not be reversed, and therefore revenue is adjusted for variable consideration. Judgment is required to estimate the variable consideration. The Company uses the expected value method, which considers possible outcomes weighted by their probability. Specifically, for sales returns, a refund liability will be recorded for the estimated cash to be refunded for the products expected to be returned, and a returns asset will be recorded for the products which we expect to be returned and re-sold, each of these based on historical experience. The estimate of sales
returns as well as the measurement of the returns asset and the refund liability is updated at the end of each month for changes in expectations regarding the amount of salvageable returns, reconditioning costs and any additional decreases in the value of the returned products. Late payment fees are recorded when the uncertainty associated with collecting such fees are resolved (i.e., when collected).
Additionally, management has exercised significant judgment in the estimation of the SSP of promised goods or services delivered under sales incentives such as status programs, loyalty points, prospective discounts, and gift with purchase, among others, to determine and allocate the transaction price. SSP represents the estimated market value, or the estimated amount that could be charged for that material right when the entity sells it separately in similar circumstances to similar customers. Judgment is required to determine the SSP for each distinct performance obligation. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, including for certain sales incentives, we determine the SSP using information that may include market prices and other observable inputs.
Allowances for Doubtful Accounts Receivable
Representatives contact their customers, selling primarily through the use of brochures for each sales campaign, generally on credit if the Representatives meet certain criteria. Sales campaigns are generally for a three- to four-week duration. The Representative purchases products directly from us and may or may not sell them to an end user. In general, the Representative, an independent contractor, remits a payment to us during each sales campaign, which relates to the prior campaign cycle. The Representative is generally precluded from submitting an order for the current sales campaign until the accounts receivable balance past due for prior campaigns is paid; however, there are circumstances where the Representative fails to make the required payment. We record an estimate of an allowance for doubtful accounts on receivable balances based on an analysis of historical data and, as applicable, current circumstances,conditions and reasonable and supportable forecasts that affect collectibility, including seasonality and changing trends.trends and the impact of COVID-19. Over the past three years, annual bad debt expense was $222$78 in 2017, $1912020, $115 in 20162019 and $144$162 in 2015,2018, or approximately 4%2% of total revenue in 2017,2020 and 2019, and approximately 3% of total revenue in 2016, and approximately 2% of total revenue 2015.2018. The allowance for doubtful accounts is reviewed for adequacy, at a minimum, on a quarterly basis. We generally have no detailed information concerning, or any communication with, any end user of our products beyond the Representative. We have no legal recourse against the end user for the collection of any accounts receivable balances due from the Representative to us. If the financial condition of the Representatives were to deteriorate, resulting in their inability to make payments, additional allowances may be required.
Allowances for Sales Returns
Policies and practices for product returns vary by jurisdiction. We record a provision for estimated sales returns based on historical experience with product returns. Over the past three years, annual sales returns were $198$101 for 2017, $1872020, $133 for 20162019 and $191$172 for 2015,2018, or approximately 3%2-4% of total revenue in each year, which has been generally in line with our expectations. If the historical data we use to calculate these estimates does not approximate future returns, due to changes in marketing or promotional strategies, or for other reasons, additional allowances may be required.
Provisions for Inventory Obsolescence
We record an allowance for estimated obsolescence, when applicable, equal to the difference between the cost of inventory and the net realizable value. In determining the allowance for estimated obsolescence, we classify inventory into various categories based upon its stage in the product life cycle, future marketing sales plans and the disposition process. We assign a degree of obsolescence risk to products based on this classification to estimate the level of obsolescence provision. If actual sales are less favorable than those projected, additional inventory allowances may need to be recorded for such additional obsolescence. Annual obsolescence expense was $38 in 2020, $37 in 2017, $372019 and $114 in 2016 and $45 in 2015,2018, or less thanapproximately 1% of total revenue in each year.
both 2020 and 2019 and 2% of total revenue in 2018. As discussed in the Overview section, 2018 includes inventory obsolescence charges of $88 related to our inventory reset program, most of which was utilized in 2019.
Pension and Postretirement Expense
We maintain defined benefit pension plans, the most significant of which are in the United Kingdom ("UK"),UK, Germany and the U.S. However, our U.S. defined benefit pension plan is closed to employees hired on or after January 1, 2015 and the UK defined benefit pension plan iswas frozen for future accruals as of April 1, 2013 and closed to employees hired on or after April 1, 2013.September 30, 2006. Additionally, we have unfunded supplemental pension benefit plans for some current and retired executives and provide retiree health care benefits subject to certain limitations to certain retired employees in the U.S. and certain foreign countries. See Note 13, Employee Benefit Plans, on pages F-34 through F-42 of our 2017 Annual Reportto the Consolidated Financial Statements included herein for more information on our benefit plans.
Pension and postretirement expense and the requirements for funding our major pension plans are determined based on a number of actuarial assumptions, which are generally reviewed and determined on an annual basis. These assumptions include the discount rate applied to plan obligations, the expected rate of return on plan assets, the rate of compensation increase of plan
participants, interest crediting rates, price inflation, cost-of-living adjustments, mortality rates and certain other demographic assumptions, and other factors. We use a December 31 measurement date for all of our employee benefit plans.
For 2017,2020, the weighted average assumed rate of return on all pension plan assets was 5.12%2.74%, as compared with 6.65%5.29% for 2016.2019. In determining the long-term rates of return, we consider the nature of the plans’ investments, an expectation for the plans’ investment strategies, historical rates of return and current economic forecasts. We generally evaluate the expected long-term rates of return annually and adjust as necessary.
In some of our defined benefit pension plans, we have adopted investment strategies which are designed to match the movements in the pension liability through an increased allocation towards debt securities. In addition, we also utilize derivative instruments in our UK defined benefit pension plans to achieve the desired market exposures or to hedge certain risks. Derivative instruments may include, but are not limited to, futures, options, swaps or swaptions. Investment types, including the use of derivatives are based on written guidelines established for each investment manager and monitored by the plan's investment committee.
A significant portion of our pension plan assets relate to the UK defined benefit pension plan. The assumed rate of return for determining 20172020 net periodic benefit cost for the UK defined benefit pension plan was 5.15%2.20%. In addition, the 20182020 rate of return assumption for the UK defined benefit pension plan was based on an asset allocation of approximately 80%78% in corporate and government bonds and mortgage-backed securities (which are expected to earnliability driven investments, approximately 2% to 4% in the long-term) and approximately 20%22% in equity securities, emerging market debt and high yield securities (which are expected to earn approximately 5% to 9% in the long-term).securities. In addition to the physical assets, the asset portfolio for the UK defined benefit pension plan has derivative instruments which increase our exposure to fixed income (in order to better match liabilities) and, to a lesser extent, impact our equity exposure.. The rate of return on the plan assets in the UK was approximately 9%11.4% in 20172020 and approximately 36%16.4% in 2016.
Historically, the pension plan with the most significant pension plan assets was the U.S. defined benefit pension plan. As part of the separation of the North America business, in 2016 we transferred $499.6 of pension liabilities under the U.S. defined benefit pension plan associated with current and former employees of the North America business and certain other former Avon employees, along with $355.9 of assets held by the U.S. defined benefit pension plan, to a defined benefit pension plan sponsored by New Avon. We also transferred $60.4 of other postretirement liabilities (namely, retiree medical and supplemental pension liabilities) in respect of such employees and former employees. See Note 3, Discontinued Operations and Divestitures on pages F-19 through F-20 of our 2017 Annual Report. We continue to retain certain U.S. pension and other postretirement liabilities primarily associated with employees who are actively employed by Avon in the U.S. providing services other than with respect to the North America business.Prior to this separation, our net periodic benefit costs for the U.S. pension and postretirement benefit plans were allocated between Discontinued Operations and Global as the plan included both North America and U.S. Corporate Avon associates, and as such, our ongoing net periodic benefit costs within Global were not materially impacted by the separation of the North America business.
The assumed rate of return for determining 2017 net periodic benefit cost for the U.S. defined benefit pension plan was 5.50%, which was based on an asset allocation of approximately 70% in corporate and government bonds (which are expected to earn approximately 3% to 5% in the long-term) and approximately 30% in equity securities (which are expected to earn approximately 6% to 8% in the long-term). The rate of return on the plan assets in the U.S. was approximately 15% in 2017 and approximately 6% in 2016.2019.
The discount rate used for determining the present value of future pension obligations for each individual plan is based on a review of bonds that receive a high-quality rating from a recognized rating agency. The discount rates for calculating the balance sheet obligations of our more significant plans, including our UK defined benefit pension plan and our U.S. defined benefit pension plan, were based on the internal rates of return for a portfolio of high-quality bonds with maturities that are consistent with the projected future benefit payment obligations of each plan. The weighted-average discount rate for U.S. and non-U.S. defined benefit pension plans determined on this basis was 2.66%1.53% at December 31, 2017,2020, and 2.81%2.15% at December 31,
2016. 2019. For the determination of the expected rates of return on assets and the discount rates, we take external actuarial and investment advice into consideration.
Effective as of January 1, 2018, we are changing the method we use to estimate the service and interest cost components of net periodic benefit cost for the U.S. defined benefit pension plan and the majority of our significant non-U.S. pension plans, including the UK defined benefit pension plan. Historically, including in 2017, we estimated the service and interest cost components using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. Beginning in 2018, we have now elected to use a full yield curve approach in the estimation of these components of net periodic benefit cost by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. We have made this change to improve the correlation between projected benefit cash flows and the corresponding yield curve spot rates, which we believe will result in a more precise measurement of service and interest costs. This change does not affect the measurement of our benefit obligation and does not impact our 2017 net periodic benefit cost. We will account for this change in estimate on a prospective basis beginning in 2018. We do not expect this change to result in a material reduction of our future net periodic benefit costs.
Our funding requirements may be impacted by standards and regulations or interpretations thereof. Our calculations of pension and postretirement costs are dependent on the use of assumptions, including discount rates, hybrid plan maximum interest crediting rates and expected return on plan assets discussed above, rate of compensation increase of plan participants, interest cost, benefits earned, mortality rates, the number of participants and certain demographics and other factors. Actual results that differ from assumptions are accumulated and amortized to expense over future periods and, therefore, generally affect recognized expense in future periods. At December 31, 2017,2020, we had pretax actuarial losses and prior service credits totaling approximately $41$20 for the U.S. defined benefit pension and postretirement plans and approximately $176$206 for the non-U.S. defined benefit pension and postretirement plans that have not yet been charged to expense. These actuarial losses have been charged to AOCI within shareholders’ equity. While we believe that the assumptions used are reasonable, differences in actual experience or changes in assumptions may materially affect our pension and postretirement obligations and future expense. For 2018,2021, our assumption for the expected rate of return on assets is 5.50%4.15% for our U.S. defined benefit pension plan and 5.20%2.32% for our non-U.S. defined benefit pension plans (which includes 5.20%2.10% for our UK defined benefit pension plan). Our assumptions are generally reviewed and determined on an annual basis.
A 50 basis point change (in either direction) in the expected rate of return on plan assets, the discount rate or the rate of compensation increases, would have had approximately the following effect on 20172020 pension expense and the pension benefit obligation at December 31, 2017:2020:
| | | | Increase/(Decrease) in Pension Expense | | Increase/(Decrease) in Pension Obligation | | Increase/(Decrease) in Pension Expense | | Increase/(Decrease) in Pension Obligation |
| | 50 Basis Point | | 50 Basis Point | | | 50 Basis Point | | 50 Basis Point |
| | Increase | | Decrease | | Increase | | Decrease | | | Increase | | Decrease | | Increase | | Decrease |
Rate of return on assets | | $ | (3.1 | ) | | $ | 3.1 |
| | N/A |
| | N/A |
| Rate of return on assets | | $ | (3.4) | | | $ | 3.4 | | | N/A | | N/A |
Discount rate | | (.7 | ) | | .4 |
| | $ | (59.9 | ) | | $ | 64.9 |
| Discount rate | | (.2) | | | (.1) | | | $ | (63.8) | | | $ | 71.6 | |
Rate of compensation increase | | .7 |
| | (.6 | ) | | 3.2 |
| | (3.0 | ) | Rate of compensation increase | | .5 | | | (.4) | | | 2.4 | | | (2.3) | |
Restructuring Reserves
We record the estimated expense for our restructuring initiatives when such costs are deemed probable and estimable, when approved by the appropriate corporate authority and by accumulating detailed estimates of costs for such plans. These expenses include the estimated costs of employee severance and related benefits, inventory write-offs, impairment or accelerated depreciation of property, plant and equipment and capitalized software, and any other qualifying exit costs. These estimated
costs are grouped by specific projects within the overall plan and are then monitored on a quarterly basis by finance personnel. Such costs represent our best estimate, but require assumptions about the programs that may change over time, including attrition rates. Estimates are evaluated periodically to determine whether an adjustment is required.
Taxes
We record a valuation allowance to reduce our deferred tax assets to an amount that is "more likely than not" to be realized. Evaluating the need for and quantifying the valuation allowance often requires significant judgment and extensive analysis of all the weighted positive and negative evidence available to the Company in order to determine whether all or some portion of the deferred tax assets will not be realized. In performing this analysis, the Company’s forecasted U.S. and foreign taxable income, and the existence of potential prudent and feasible tax planning strategies that would enable the Company to utilize some or all of its excess foreigndeferred tax credits,assets, are taken into consideration. At December 31, 2017,2020, we had net deferred tax assets of approximately $182$134 (net of valuation allowances of approximately $3,218$2,328 and deferred tax liabilities of $75)$91).
With respect to our deferred tax assets, at December 31, 2017,2020, we had recognized deferred tax assets of approximately $2,022$2,020 relating to foreign and state tax loss carryforwards, for which a valuation allowance of approximately $1,962$1,932 has been provided. At December 31, 2017,2020, we had recognized deferred tax assets of approximately $981$119 primarily relating to excess U.S. foreign tax and other U.S. general business credit carryforwards for which a valuation allowance of approximately $947$119 had been provided. We have a history of U.S. source losses, and our excess U.S. foreign tax and general business credits have primarily resulted from having a greater U.S. source loss in recent years which reduces our ability to credit foreign taxes or utilize the general business credits which we generate.
Our ability to realize our U.S. deferred tax assets, such as our foreign tax and general business credit carryforwards, is dependent on future U.S. taxable income within the carryforward period.
At December 31, 2017,2020, we would need to generate approximately $4.7 billionare asserting that substantially all of excess net foreign source income in order to realize the U.S. foreign tax and general business credits before they expire.
Following a valuation allowance recorded in 2014 to reduce our U.S. deferred tax assets to an amount that is "more likely than not" to be realized, during 2015, the Company recorded an additional valuation allowance for the remaining U.S. deferred tax assets of approximately $670. The increase in the valuation allowance resulted from reduced tax benefits expected to be obtained from tax planning strategies associated with an anticipated accelerated receipt in the U.S. of foreign source income. As the U.S. dollar had further strengthened against currencies of some of our key markets during 2015, the benefits associated with the Company’s tax planning strategies were no longer sufficient for the Company to continue to conclude that its tax planning strategies were prudent. In the absence of any alternative prudent tax planning strategies and other sources of future taxable income, it was determined that a full valuation allowance should be recorded. Although the Company continues to expect that it will generate taxable income from intercompany transactions and consequently, tax liability in the U.S., the Company is expected to offset its current and future tax liability with foreign tax credits, and as a result, the expected level of future taxable income and tax liability is not adequate to realize the benefit of previously recorded deferred tax assets. Although the Company may not be able to recognize a financial statement benefit associated with its deferred tax assets, the Company will continue to manage and plan for the utilization of its deferred tax assets to avoid the expiration of deferred tax assets that may have limited lives.
In addition, in the fourth quarter of 2015, we recognized a benefit of approximately $19 associated with the implementation of the initial stages of foreign tax planning strategies. We completed the implementation of these tax planning strategies and recognized an additional benefit of approximately $29 in the first quarter of 2016.
At December 31, 2017, as a result of our U.S. liquidity profile, we continue to assert that our foreign earnings are not indefinitely reinvested. Accordingly, we adjusted our deferred tax liability each period to account forreverse the deferred tax liabilities associated with our undistributed earnings of foreign subsidiaries and for the tax effect of earnings that were actually repatriated to the U.S. during the year. subsidiaries. The net impact on the deferred tax liability associated with the Company’s undistributed earnings is a decrease of approximately $64,$4.6, resulting in a deferred tax liability balance of approximately $23 related tozero. At December 31, 2020 the incremental tax cost oncompany’s undistributed foreign earnings approximately $1.5 billion and would generate an approximate $6.3 of undistributed foreign earnings at December 31, 2017. The approximate $64 decrease was primarily a result of the enactment of the Tax Cuts and Jobs Act in the U.S.income tax if repatriated.
With respect to our uncertain tax positions, we recognize the benefit of a tax position, if that position is more likely than not of being sustained on examination by the taxing authorities, based on the technical merits of the position. We believe that our assessment of more likely than not is reasonable, but because of the subjectivity involved and the unpredictable nature of the subject matter at issue, our assessment may prove ultimately to be incorrect, which could materially impact our Consolidated Financial Statements.
We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. In 2018, a number of open tax years are scheduled to close due to the expiration of the statute of limitations and it is possible that a number of tax examinations may be completed. If our tax positions are ultimately upheld or denied, it is possible that the 2018 provision for income taxes, as well as tax related cash receipts or payments, may be impacted.
Loss Contingencies
We determine whether to disclose and/or accrue for loss contingencies based on an assessment of whether the risk of loss is remote, reasonably possible or probable. We record loss contingencies when it is probable that a liability has been incurred and the amount of loss is reasonably estimable. Our assessment is developed in consultation with our outside counsel and other advisors and is based on an analysis of possible outcomes under various strategies. Loss contingency assumptions involve judgments that are inherently subjective and can involve matters that are in litigation, which, by its nature is unpredictable. We believe that our assessment of the probability of loss contingencies is reasonable, but because of the subjectivity involved and the unpredictable nature of the subject matter at issue, our assessment may prove ultimately to be incorrect, which could materially impact our Consolidated Financial Statements.
Impairment of Assets
Plant, Property and Equipment and Capitalized Software
We evaluate our plant, property and equipment and capitalized software for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated pre-tax undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. The fair value of the asset is determined using revenue and cash flow projections, and royalty and discount rates, as appropriate.
In February 2015, we reviewed Avon Venezuela's long-lived assets to determine whether the carrying amount of the assets was recoverable. Based on our expected cash flows associated with the asset group, we determined that the carrying amount of the assets, carried at their historical U.S. dollar cost basis, was not recoverable. As such, an impairment charge of approximately $90 to selling, general and administrative expenses was recorded to reflect the write-down of the long-lived assets to their estimated fair value of approximately $16, which was recorded in the first quarter of 2015. The fair value of Avon Venezuela's long-lived assets was determined using both market and cost valuation approaches. The valuation analysis performed required several estimates, including market conditions and inflation rates. As discussed in Note 1, Description of the Business and Summary of Significant Accounting Policies, we concluded that, effective March 31, 2016, we deconsolidated our Venezuelan operations. Our Consolidated Balance Sheets no longer includes the assets and liabilities of our Venezuelan operations, and we no longer include the results of our Venezuelan operations in our Consolidated Financial Statements. See Note 1, Description of the Business and Summary of Significant Accounting Policies on pages F-11 through F-17 of our 2017 Annual Report for more information on Avon Venezuela.
Goodwill
We test goodwill for impairment annually, and more frequently if circumstances warrant, using various fair value methods. We completed our annual goodwill impairment assessment for 20172020 in November and determined that the estimated fair values were considered substantially in excess of the carrying values of each of our reporting units.
The impairment analyses performed for goodwill require several estimates in computing the estimated fair value of a reporting unit. As part of our goodwill impairment analysis, we typically use a discounted cash flow ("DCF") approach to estimate the fair value of a reporting unit, which we believe is the most reliable indicator of fair value of a business, and is most consistent with the approach that we would generally expect a market participant would use. In estimating the fair value of our reporting units utilizing a DCF approach, we typically forecast revenue and the resulting cash flows for periods of five to ten years and include an estimated terminal value at the end of the forecasted period. When determining the appropriate forecast period for the DCF approach, we consider the amount of time required before the reporting unit achieves what we consider a normalized, sustainable level of cash flows. The estimation of fair value utilizing a DCF approach includes numerous uncertainties which require significant judgment when making assumptions of expected growth rates and the selection of discount rates, as well as assumptions regarding general economic and business conditions, and the structure that would yield the highest economic value, among other factors.
During the 2015 year-end close process, our analysis of the Egypt business indicated an impairment as the carrying value of the business exceeded the estimated fair value. This was primarily the result of reducing our long-term projections of the business. During 2015, Egypt performed generally in line with our revenue and earnings projections, which assumed growth as compared to 2014. However, as a result of currency restrictions for the payment of goods in Egypt, we lowered our long-term revenue and earnings projections for the business. Accordingly, a non-cash impairment charge of approximately $7 was recorded to reduce the carrying amount of goodwill. There is no amount remaining associated with goodwill for our Egypt reporting unit as a result of this impairment charge.
Key assumptions used in measuring the fair value of Egypt during this impairment assessment included projections of revenue and the resulting cash flows, as well as the discount rate (based on the estimated weighted-average cost of capital). To estimate the fair value of Egypt, we forecasted revenue and the resulting cash flows over five years using a DCF model which included a terminal value at the end of the projection period. We believed that a five-year period was a reasonable amount of time in order to return cash flows of Egypt to normalized, sustainable levels.
See Note 19, Goodwill on page F-51 of our 2017 Annual Report for more information regarding Egypt.
Results Of Operations - Consolidated
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31 | | Basis Point Change |
| | 2020 | | 2019 | | 2018 | | 2020 vs. 2019 | | 2019 vs. 2018 |
Select Consolidated Financial Information | | | | | | | | | | |
Total revenue | | $ | 3,625.2 | | $ | 4,763.2 | | $ | 5,571.3 | | (24) | % | | (15) | % |
Cost of sales | | (1,594.5) | | (2,010.1) | | (2,364.0) | | (21) | % | | (15) | % |
SG&A expenses | | (2,152.9) | | (2,627.5) | | (2,972.1) | | (18) | % | | (12) | % |
Operating (loss) profit | | (122.2) | | 125.6 | | 235.2 | | * | | (47) | % |
Interest expense | | (127.1) | | (127.6) | | (134.6) | | — | % | | (5) | % |
Loss on extinguishment of debt | | (37.7) | | (11.6) | | (.7) | | * | | * |
Interest income | | 2.1 | | 7.7 | | 15.3 | | (73) | % | | (50) | % |
Gain on sale of business / assets | | 1.5 | | 50.1 | | — | | (97) | % | | * |
Other (expense) income, net | | (20.2) | | 94.2 | | (7.1) | | * | | * |
(Loss) Income from continuing operations, before taxes | | (303.6) | | 138.4 | | 108.1 | | * | | 28 | % |
(Loss) Income from continuing operations, net of tax | | (337.6) | | 35.3 | | (21.8) | | * | | * |
Net (loss) income attributable to Avon | | $ | (362.8) | | $ | (.3) | | $ | (19.5) | | * | | (98) | % |
| | | | | | | | * | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Advertising expenses(1) | | $ | 59.9 | | | $ | 72.9 | | | $ | 127.6 | | | (18) | % | | (43) | % |
| | | | | | | | | | |
Reconciliation of Non-GAAP Financial Measures | | | | | | | | | | |
Total revenue | | $ | 3,625.2 | | | $ | 4,763.2 | | | $ | 5,571.3 | | | (24) | % | | (15) | % |
Certain Brazil indirect taxes | | — | | | (67.7) | | | (168.4) | | | | | |
Adjusted revenue | | $ | 3,625.2 | | | $ | 4,695.5 | | | $ | 5,402.9 | | | (23) | % | | (13) | % |
| | | | | | | | | | |
Gross margin | | 56.0 | % | | 57.8 | % | | 57.6 | % | | (1.8) | | | .2 | |
Certain Brazil indirect taxes | | — | | | (.6) | | | (1.3) | | | .6 | | | .7 | |
CTI restructuring | | — | | | .3 | | | 1.6 | | | (.3) | | | (1.3) | |
Adjusted gross margin | | 56.0 | % | | 57.5 | % | | 57.9 | % | | (1.5) | | | (.4) | |
| | | | | | | | | | |
SG&A as a % of total revenue | | 59.4 | % | | 55.2 | % | | 53.3 | % | | 4.2 | | | 1.9 | |
Certain Brazil indirect taxes | | .3 | | | .7 | | | 1.7 | | | (.4) | | | (1.0) | |
CTI restructuring | | (.7) | | | (2.7) | | | (1.6) | | | 2.0 | | | (1.1) | |
Costs related to the Transaction | | (2.4) | | | (1.3) | | | — | | | (1.1) | | | (1.3) | |
| | | | | | | | | | |
Adjusted SG&A as a % of total revenue | | 56.6 | % | | 51.9 | % | | 53.4 | % | | 4.7 | | | (1.5) | |
| | | | | | | | | | |
Operating (loss) profit | | $ | (122.2) | | | $ | 125.6 | | | $ | 235.2 | | | * | | (47) | % |
Certain Brazil indirect taxes | | (10.6) | | | (67.7) | | | (168.4) | | | | | |
CTI restructuring | | 23.7 | | | 139.3 | | | 180.5 | | | | | |
Costs related to the Transaction | | 85.8 | | | 64.3 | | | — | | | | | |
| | | | | | | | | | |
Adjusted operating (loss) profit | | $ | (23.3) | | | $ | 261.5 | | | $ | 247.3 | | | * | | 6 | % |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | |
| | Years ended December 31 | | %/Point Change |
| | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
Select Consolidated Financial Information | | | | | | | | | | |
Total revenue | | $ | 5,715.6 |
| | $ | 5,717.7 |
| | $ | 6,160.5 |
| | — | % | | (7 | )% |
Cost of sales | | 2,203.3 |
| | 2,257.0 |
| | 2,445.4 |
| | (2 | )% | | (8 | )% |
Selling, general and administrative expenses | | 3,239.0 |
| | 3,138.8 |
| | 3,543.2 |
| | 3 | % | | (11 | )% |
Impairment of goodwill | | — |
| | — |
| | 6.9 |
| | * |
| | * |
|
Operating profit | | 273.3 |
| | 321.9 |
| | 165.0 |
| | (15 | )% | | 95 | % |
Interest expense | | 140.8 |
| | 136.6 |
| | 120.5 |
| | 3 | % | | 13 | % |
(Gain) loss on extinguishment of debt | | — |
| | (1.1 | ) | | 5.5 |
| | * |
| | * |
|
Interest income | | (14.8 | ) | | (15.8 | ) | | (12.5 | ) | | (6 | )% | | 26 | % |
Other expense, net | | 26.6 |
| | 171.0 |
| | 73.7 |
| | * |
| | * |
|
Gain on sale of business | | — |
| | — |
| | (44.9 | ) | | * |
| | * |
|
Income from continuing operations, before taxes | | 120.7 |
| | 31.2 |
| | 22.7 |
| | * |
| | 37 | % |
Income (loss) from continuing operations, net of tax | | 20.0 |
| | (93.4 | ) | | (796.5 | ) | | * |
| | * |
|
Net income (loss) attributable to Avon | | $ | 22.0 |
| | $ | (107.6 | ) | | $ | (1,148.9 | ) | | * |
| | * |
|
| | | | | | | | | | |
Diluted loss per share from continuing operations | | $ | (.00 | ) | | $ | (.25 | ) | | $ | (1.81 | ) | | * |
| | * |
|
Diluted loss per share attributable to Avon | | $ | (.00 | ) | | $ | (.29 | ) | | $ | (2.60 | ) | | * |
| | * |
|
| | | | | | | | | | |
Advertising expenses(1) | | $ | 118.4 |
| | $ | 108.9 |
| | $ | 128.0 |
| | 9 | % | | (15 | )% |
| | | | | | | | | | |
Reconciliation of Non-GAAP Financial Measures | | | | | | | | | | |
Gross margin | | 61.5 | % | | 60.5 | % | | 60.3 | % | | 1.0 |
| | .2 |
|
CTI restructuring | | — |
| | — |
| | — |
| | — |
| | — |
|
Venezuelan special items | | — |
| | — |
| | .5 |
| | — |
| | (.5 | ) |
Adjusted gross margin | | 61.5 | % | | 60.5 | % | | 60.8 | % | | 1.0 |
| | (.3 | ) |
| | | | | | | | | | |
Selling, general and administrative expenses as a % of total revenue | | 56.7 | % | | 54.9 | % | | 57.5 | % | | 1.8 |
| | (2.6 | ) |
CTI restructuring | | (1.0 | ) | | (1.3 | ) | | (.8 | ) | | .3 |
| | (.5 | ) |
Loss contingency | | (.3 | ) | | — |
| | — |
| | (.3 | ) | | — |
|
Legal settlement | | — |
| | .5 |
| | — |
| | (.5 | ) | | .5 |
|
Venezuelan special items | | — |
| | — |
| | (1.5 | ) | | — |
| | 1.5 |
|
Pension settlement charge | | — |
| | — |
| | (.1 | ) | | — |
| | .1 |
|
Other items | | — |
| | — |
| | (.1 | ) | | — |
| | .1 |
|
Adjusted selling, general and administrative expenses as a % of total revenue | | 55.3 | % | | 54.0 | % | | 55.1 | % | | 1.3 |
| | (1.1 | ) |
| | | | | | | | | | |
Operating profit | | $ | 273.3 |
| | $ | 321.9 |
| | $ | 165.0 |
| | (15 | )% | | 95 | % |
CTI restructuring | | 60.2 |
| | 77.4 |
| | 49.1 |
| | | | |
Loss contingency | | 18.2 |
| | — |
| | — |
| | | | |
Legal settlement | | — |
| | (27.2 | ) | | — |
| | | | |
Venezuelan special items | | — |
| | — |
| | 120.2 |
| | | | |
Pension settlement charge | | — |
| | — |
| | 7.3 |
| | | | |
Other items | | — |
| | — |
| | 3.1 |
| | | | |
Asset impairment charge | | — |
| | — |
| | 6.9 |
| | | | |
Adjusted operating profit | | $ | 351.7 |
| | $ | 372.1 |
| | $ | 351.6 |
| | (5 | )% | | 6 | % |
| | | | | | | | | | |
Operating margin | | 4.8 | % | | 5.6 | % | | 2.7 | % | | (.8 | ) | | 2.9 |
|
CTI restructuring | | 1.1 |
| | 1.4 |
| | .8 |
| | (.3 | ) | | .6 |
|
Loss contingency | | .3 |
| | — |
| | — |
| | .3 |
| | — |
|
|
| | | | | | | | | | | | | | | | | | |
| | Years ended December 31 | | %/Point Change |
| | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
Legal settlement | | — |
| | (.5 | ) | | — |
| | .5 |
| | (.5 | ) |
Venezuelan special items | | — |
| | — |
| | 2.0 |
| | — |
| | (2.0 | ) |
Pension settlement charge | | — |
| | — |
| | .1 |
| | — |
| | (.1 | ) |
Other items | | — |
| | — |
| | .1 |
| | — |
| | (.1 | ) |
Asset impairment charge | | — |
| | — |
| | .1 |
| | — |
| | (.1 | ) |
Adjusted operating margin | | 6.2 | % | | 6.5 | % | | 5.7 | % | | (.3 | ) | | .8 |
|
| | | | | | | | | | |
Change in Constant $ Adjusted operating margin(2) | | | | | | | | (.3 | ) | | 1.7 |
|
| | | | | | | | | | |
Performance Metrics | | | | | | | | | | |
Change in Active Representatives | | | | | | | | (3 | )% | | (2 | )% |
Change in units sold | | | | | | | | (4 | )% | | (4 | )% |
Change in Ending Representatives | | | | | | | | — | % | | (2 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31 | | Basis Point Change |
| | 2020 | | 2019 | | 2018 | | 2020 vs. 2019 | | 2019 vs. 2018 |
Operating margin | | (3.4) | % | | 2.6 | % | | 4.2 | % | | (6.0) | | | (1.6) | |
Certain Brazil indirect taxes | | (.3) | | | (1.2) | | | (2.8) | | | .9 | | | 1.6 | |
CTI restructuring | | .7 | | | 2.9 | | | 3.2 | | | (2.2) | | | (.3) | |
Costs related to the Transaction | | 2.4 | | | 1.3 | | | — | | | 1.1 | | | 1.3 | |
| | | | | | | | | | |
Adjusted operating margin | | (0.6) | % | | 5.6 | % | | 4.6 | % | | (6.2) | | | 1.0 | |
| | | | | | | | | | |
Change in Constant $ Adjusted operating margin(2) | | | | | | | | (540) | | | 140 | |
| | | | | | | | | | |
(Loss) income before taxes | | $ | (303.6) | | | $ | 138.4 | | | $ | 108.1 | | | * | | 28 | % |
Certain Brazil indirect taxes | | (10.6) | | | (118.3) | | | (194.7) | | | | | |
CTI restructuring | | 22.2 | | | 116.0 | | | 180.5 | | | | | |
Costs related to the Transaction | | 85.8 | | | 64.3 | | | — | | | | | |
Loss on extinguishment of debt and credit facilities | | 37.7 | | | 8.9 | | | — | | | | | |
Adjusted (loss) income before taxes | | $ | (168.5) | | | $ | 209.3 | | | $ | 93.9 | | | * | | * |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Effective tax rate | | (11.2) | % | | 74.5 | % | | 120.2 | % | | | | |
Adjusted effective tax rate | | (18.8) | % | | 44.0 | % | | 63.9 | % | | | | |
| | | | | | | | | | |
Performance Metrics | | | | | | | | | | |
Change in Active Representatives | | | | | | | | (14) | % | | (10) | % |
Change in units sold | | | | | | | | (14) | % | | (14) | % |
Amounts in the table above may not necessarily sum due to rounding.
* Calculation not meaningful
| |
(1) | Advertising expenses are recorded in selling, general and administrative expenses. |
| |
(2) | Change in Constant $ Adjusted operating margin for all years presented is calculated using the current-year Constant $ rates. |
2017(1)Advertising expenses are recorded in SG&A.
(2)Change in Constant $ Adjusted operating margin for all years presented is calculated using the current-year Constant $ rates.
2020 Compared to 20162019
Revenue
During 2017,Total revenue decreased 24% compared to the prior-year period, impacted by certain indirect taxes recognized in Brazil in the prior year. Excluding these items, Adjusted revenue was down 23%, unfavorably impacted by foreign exchange, which was driven by the strengthening of the U.S. dollar relative to multiple currencies, primarily the Brazilian real. Adjusted Constant $ Revenue decreased 14%.
Revenue and Constant $ Adjusted revenue were impacted by a decrease in Active Representatives of 14%, across all markets. Average Representative Sales decreased 10% on a reported basis, unfavorably impacted by foreign exchange, and Constant $ Adjusted Average Representative Sales remained flat. Revenue and Constant $ Adjusted revenue were affected by the COVID-19 pandemic, which negatively impacted the initial signs of recovery from a lower Representative base in 2019. The third quarter showed improving trends across most markets and resulted in revenue growth in Brazil and Mexico which continued in the fourth quarter, while Avon International has again been impacted by the new COVID-19 restrictions imposed in parts of Europe, although not to the extent felt during the second quarter as we were able to continue with normal operations in our manufacturing facilities and distribution centers.
Units sold decreased 14%, across all markets, with Brazil relatively unchanged compared to the prior-year period, partially benefiting from foreign exchange, while Constant $ revenue decreased 2%. Our Constant $ revenue decline was primarily driven by declines in Brazil, Russia and the United Kingdom, partially offset by growth in Argentina and South Africa. The decline in revenue and Constant $ revenue was primarily due to a 3% decrease in Active Representatives, which was partially offset by higher average order. The decrease in Active Representatives was impacted by declines in all reportable segments, most significantly in South Latin America (driven by Brazil) and Europe, Middle East & Africa. The net impact of price and mix increased 2%, primarily due to the inflationary impact on pricing in Argentina, Russia and Mexico. Units sold decreased 4%, primarily due to declines in Russia, Brazil, Mexico and the United Kingdom. The revenue performance was negatively impacted most significantly by a decline in Color sales, as we experienced issues in some markets while we segmented our Color category into three distinct brands. The timing of innovation also impacted the decline in Color sales.
Ending Representatives were relatively unchanged. Ending Representatives at December 31, 2017 as compared to the prior-year period benefited from growth in Russia, which was offset by a decline in Brazil.
On a category basis, our net sales from reportable segments and associated growth rates were as follows:
|
| | | | | | | | | | | | | |
| Years ended December 31 | | %/Point Change |
| 2017 | | 2016 | | US$ | | Constant $ |
Beauty: | | | | | | | |
Skincare | $ | 1,620.3 |
| | $ | 1,605.3 |
| | 1 | % | | (2 | )% |
Fragrance | 1,554.0 |
| | 1,512.8 |
| | 3 |
| | 1 |
|
Color | 977.6 |
| | 996.3 |
| | (2 | ) | | (4 | ) |
Total Beauty | 4,151.9 |
| | 4,114.4 |
| | 1 |
| | (1 | ) |
Fashion & Home: | | | | | | | |
Fashion | 821.2 |
| | 849.2 |
| | (3 | ) | | (5 | ) |
Home | 591.9 |
| | 595.4 |
| | (1 | ) | | (2 | ) |
Total Fashion & Home | 1,413.1 |
| | 1,444.6 |
| | (2 | ) | | (3 | ) |
Net sales from reportable segments | 5,565.0 |
| | 5,559.0 |
| | — |
| | (2 | ) |
Net sales from Other operating segments and business activities | .1 |
| | 19.8 |
| | * |
| | * |
|
Net sales | $ | 5,565.1 |
| | $ | 5,578.8 |
| | — |
| | (2 | ) |
prior year period.See "Segment Review" in this MD&A for additional information related to changes in revenue by segment.
Operating Margin
Operating margin decreased 600 basis points, impacted by costs related to the Natura transaction in both the current and prior year and by higher CTI restructuring charges in the prior year. Excluding these items, Adjusted operating margin decreased 80620 basis points, and 30 basis points, respectively, comparedmostly due to 2016.the impact of lower revenue on SG&A expenses as well as a decline in gross margin. The decreasesmovements in operating margin and Adjusted operating margin includeare discussed further below in "Gross Margin" and "Selling, General and Administrative Expenses."
Gross Margin
Gross margin decreased 180 basis points, impacted by certain indirect tax items recognized in Brazil in the prior year. Excluding these items, Adjusted gross margin decreased 150 basis points as the positive impact of price/mix did not fully offset the impact of higher supply chain costs, primarily due to lower volume on fixed overhead costs and increased material costs, and the unfavorable impact of foreign currency. The unfavorable impact of foreign currency is largely due to currency devaluations in Brazil and Argentina.
Selling, General and Administrative Expenses ("SG&A")
SG&A as a percentage of total revenue increased 420 basis points, impacted by costs related to the Natura transaction in the current and prior year and higher CTI restructuring charges in the prior year. Adjusted SG&A as a percentage of Adjusted revenue increased 470 basis points, compared to the same period of 2019.
The increase in SG&A as a percentage of total revenue and Adjusted SG&A as a percentage of Adjusted revenue were largely due to the impact of COVID-19, which caused deleverage of our fixed expenses as a percentage of lower revenue. In addition, SG&A as a percentage of total revenue and Adjusted SG&A as a percentage of Adjusted revenue were impacted by increased investment in sales leaders and field to maintain engagement in response to COVID-19, drive productivity and accelerate revenue recovery, as well as increased distribution costs across multiple markets, including enhanced safety actions relating to COVID-19.
Other Expenses
Interest expense decreased by approximately $1 and interest income decreased by approximately $6 compared to 2019.
Loss on extinguishment of debt and credit facilities of approximately $38 in 2020 is primarily comprised of the costs of redemption of the remaining principal amounts of our 2016 Notes due August 15, 2022 and our 2019 Notes due August 15, 2022 in November 2020, the repurchase of a portion of our 6.95% Notes due March 15, 2043 in September 2020 and the costs of termination of our 2019 revolving credit facility in January 2020. Loss on extinguishment of debt and credit facilities of approximately $12 in 2019 consists primarily of the costs of termination of a portion of the 2020 bonds repaid in the third and fourth quarters of 2019. Refer to Note 7, Debt, to the Consolidated Financial Statements included herein for more information relating to these extinguishments of debt and credit facilities.
Other expense, net, of $20 decreased by approximately $114 compared to other income, net of $94 in the prior-year period. The prior period income was primarily attributable to the impact of interest on certain indirect tax items recognized in Brazil of
approximately $50 and the favorable impact of foreign exchange net gains in 2019 compared to losses in 2020.
Gain on sale of business/assets in 2020 of $2 related primarily to the sale of the China Wellness Plant in August 2020. Gain on sale of business/assets in 2019 related to the sale of the Rye Office, Maximin Corporation Sdn Bhd and Avon Manufacturing (Guangzhou), Ltd in June, May and February 2019, respectively, and the sale of our investment in New Avon in August 2019. Refer to Note 3, Discontinued Operations and Assets and Liabilities Held for Sale, to the Consolidated Financial Statements contained herein, for more information relating to these disposals.
Effective Tax Rate
The Adjusted effective tax rates and the effective tax rates in 2020 and 2019 continue to be impacted by our inability to recognize additional deferred tax assets in various jurisdictions related to our current-year operating results. In addition, the Adjusted effective tax rates and the effective tax rates in 2020 and 2019 continue to be impacted by withholding taxes associated with certain intercompany payments, including royalties, service charges and dividends, which in the aggregate are relatively consistent each year due to the need to repatriate funds to cover U.S.-based costs, such as interest on debt and corporate overhead.
The Adjusted effective tax rate and the effective tax rate in 2020 were impacted by an approximate net $3 benefit recognized due to a $13 reduction of uncertain tax positions offset with a net charge of approximately $4 associated with an increase in valuation allowances and approximately $6 of other various taxes associated with changes in tax estimates. The effective tax rate in 2020 was also impacted by CTI restructuring and debt extinguishments for which tax benefits cannot currently be claimed in all affected jurisdictions.
The Adjusted effective tax rate and the effective tax rate in 2019 were impacted by an approximate net $13 benefit recognized primarily due to reduced costs of repatriating subsidiary earnings and approximately $7 of other various net tax benefits associated with law changes, uncertain tax positions, and changes in tax estimates partially offset by a net charge of approximately $5 primarily associated with an increase in valuation allowances. The effective tax rate in 2019 was also impacted by the Transformation Plan, primarily reductionsaccrual of non-taxable income associated with indirect tax refunds and CTI restructuring for which tax benefits cannot currently be claimed in headcount,all affected jurisdictions.
In addition, the Adjusted effective tax rates and the effective tax rates in 2020 and 2019 were negatively impacted by the country mix of earnings.
Impact of Foreign Currency
As compared to the prior-year period, foreign currency in 2020 impacted our consolidated financial results in the form of:
•foreign currency transaction net losses (classified within cost of SG&A expenses), which had an unfavorable impact to operating profit and Adjusted operating profit of an estimated $60 or approximately 130 basis points to operating margin and Adjusted operating margin;
•foreign currency translation, which had an unfavorable impact to operating profit and Adjusted operating profit of approximately $35 and $30 respectively, or approximately 110 basis points and 80 basis points, respectively, to operating margin and Adjusted operating margin; and
•foreign exchange net losses on our working capital (classified within other income (expense), net in our Consolidated Statements of Operations) as compared to gains in the prior year, resulting in an unfavorable impact of approximately $45 before tax on both a reported and Adjusted basis.
2019 Compared to 2018
Revenue
Total revenue decreased 15% compared to the prior-year period, impacted by certain indirect taxes recognized in Brazil as well as other cost reductions.IPI in the prior year. These savings were largely offsetindirect taxes and IPI positively impacted revenue in both 2018 and 2019, but to a larger extent in 2018. Excluding the impact of these indirect taxes in Brazil, Adjusted revenue was down 13%, impacted by the inflationaryunfavorable impact of foreign exchange. Adjusted Constant $ Revenue decreased 7%.
Revenue, Adjusted revenue and Adjusted Constant $ revenue decline was primarily driven by Europe Middle East & Africa markets, in particular Russia. Russia was negatively impacted by a decrease in Active Representatives and a decrease in Average Representative Sales. Revenue and Constant $ revenue in Russia continued to be impacted by lower consumer confidence, as well as weaker sales leader engagement in the first half of the year.
Revenue and Constant $ revenue were impacted by a decrease in Active Representatives of 10%, across multiple markets. Average Representative Sales decreased 5% on costs outpacinga reported basis, unfavorably impacted by foreign exchange and Adjusted Constant $ Average Representative Sales increased 2%. While Revenue, Adjusted revenue growth.and Constant $ Adjusted revenue have declined, this is a consequence of our intent to improve productivity by increasing Average Representative Sales. Adjusted Constant $ Average Representative Sales were impacted by improved price/mix. In addition, Average Representative Sales were favorably impacted by certain indirect tax items, as well as a positive impact from the Brazil IPI tax compared to the prior-year period. For additional details on the IPI tax on cosmetics in Brazil, see Note 18, Contingencies, to the Consolidated Financial Statements included herein.
Units sold decreased 14%, driven by declines in Brazil and Russia.
See "Segment Review" in this MD&A for additional information related to changes in revenue by segment.
Operating Margin
Operating margin decreased 160 basis points, significantly impacted by certain indirect taxes recognized in Brazil in the current year as well as the IPI tax benefit in the prior year. These indirect taxes and IPI positively impacted operating margin in both 2019 and 2018, but to a larger extent in 2018. Excluding the impact of these indirect taxes in Brazil, Adjusted operating margin increased 100 basis points, driven by improved price/mix and savings across multiple cost lines. This margin improvement was delivered despite the unfavorable impact of foreign currency. The decreasesmovements in operating margin and Adjusted operating margin are discussed further below in "Gross Margin" and "Selling, General and Administrative Expenses."
Gross Margin
Gross margin increased 20 basis points and Adjusted gross margin both increased 100decreased 40 basis points compared to 2016, in each case primarily due to an increase of 120 basis points from the favorable net impact of mix and pricing, driven by inflationary pricing in South Latin America.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 2017 increased approximately $100 compared to 2016. This increase is primarily due toas the unfavorable impact of foreign currency translation, asand higher supply chain costs more than offset the weakeningpositive impact of the U.S. dollar against manyprice/mix (unfavorable impact of our160 basis and unfavorable impact of 110 basis points offset by benefit of 240 basis point). Price/mix improvements were driven by effective pricing, optimized discounts and promotions, more effective incentives and more favorable product mix in most markets. The unfavorable impact of foreign currencies resulted in higher reported selling, general and administrative expenses. The increase in selling, general and administrative expensescurrency is alsolargely due to the approximate $27 of net proceeds recognized as a result of a legal settlementcurrency devaluations in 2016,Argentina and Brazil. Higher supply chain costs were driven by higher bad debt expense, higher transportation costs, the loss contingency related to a non-U.S. pension plan and higher Representative, sales leader and field expense. Partially offsetting the increase in selling, general and administrative expenses was lower expenses associated with employee incentive compensation plans and lower CTI restructuring.material costs.
Selling, generalGeneral and administrative expensesAdministrative Expenses ("SG&A")
SG&A as a percentage of total revenue andincreased 190 basis points, significantly impacted by CTI restructuring charges. Adjusted selling, general, and administrative expensesSG&A as a percentage of total revenue increased 180decreased 150 basis pointspoints.
Savings in SG&A and 130 basis points, respectively, compared to 2016. The selling, general and administrative expenses as a percentage of revenue comparison was negatively impacted by:
approximately 50 basis points for the approximate $27 of net proceeds recognized as a result of a legal settlement in the 2016; and
approximately 30 basis points for a loss contingency related to a non-U.S. pension plan.
These itemsAdjusted SG&A were partially offset by:
approximately 30 basis points for lower CTI restructuring.
The remaining increase in selling, general and administrative expenses as a percentage of revenue and the increase of 130 basis points in Adjusted selling, general and administrative expenses as a percentage of revenue were, in each case, primarily due to the following:
an increaselower advertising expenses (benefit of 80 basis points) and better bad debt management (benefit of 50 basis pointspoints). Advertising expense benefited from highercertain indirect tax items in Brazil as well as optimizing our portfolio by concentrating investments in selected channels and focusing on digital advertising. We have further reduced our bad debt expense, drivenprimarily in Brazil, from continued focus on credit control and collections processes.
Other Expenses
Interest expense decreased by Brazil dueapproximately $7 and interest income decreased by approximately $8 compared to 2018. Loss on extinguishment of debt and credit facilities of approximately $12 is primarily comprised of the costs of termination of a portion of the 2020 bonds repaid in the third and fourth quarters of 2019.
Other income (expense), net, of $94 increased by approximately $101 compared to the lower than anticipated collection of receivables,prior-year period. The current period income is primarily impacted by the macroeconomic environment, as well as resulting from an adjustment to credit terms available to new Representatives during 2016;
an increase of 50 basis points primarily due to higher Representative, sales leader and field expense, most significantly in Brazil to support efforts to activate the field and improve Representative recruitment, as well as in the Philippines;
an increase of 40 basis points from higher transportation costs, most significantly in Russia which was driven by new delivery rates; and
an increase of 20 basis points primarily dueattributable to the impact of the Constant $ revenue decline causing deleverage of our fixed expenses, partially offset by lower fixed expenses. Fixed expenses include the benefits associated with the Transformation Plan, primarily reductionsinterest on certain indirect tax items recognized in headcount, as well as other cost reductions. These savings were largely offset by the inflationary impact on costs outpacing revenue growth.
These items were partially offset by the following:
a decrease of 30 basis points due to lower expenses associated with employee incentive compensation plans; and
a decreaseBrazil of approximately 20 basis points due to$50 and the favorable impact of foreign currency translation and foreign currency transaction losses.
See Note 14, Segment Information on pages F-42 through F-44 of our 2017 Annual Report for more information on the legal settlement, Note 13, Employee Benefit Plans on pages F-34 through F-42 of our 2017 Annual Report for more information on the loss contingency related to a non-U.S. pension plan and Note 16, Restructuring Initiatives on pages F-45 through F-48 of our 2017 Annual Report for more information on CTI restructuring.
Other Expenses
Interest expense increased by approximately $4 compared to the prior-year period, primarily due to the interest associated with $500 principal amount of 7.875% Senior Secured Notes issued in August 2016 and lower amortization of gains associated with the termination of interest rate swaps. These items were partially offset by the interest savings associated with the repayment of certain of our debt in 2016 and lower interest due to a reduction of the international debt balances. Refer to Note 7, Debt and Other Financing on pages F-22 through F-25 of our 2017 Annual Report and Note 10, Financial Instruments and Risk Management on pages F-29 through F-30 of our 2017 Annual Report for additional information.
Gain on extinguishment of debt in 2016 of approximately $1 was comprised of a gain of approximately $4 associated with the cash tender offers in August 2016 and a gain of approximately $1 associated with the debt repurchases in December 2016, partially offset by a loss of approximately $3 associated with the prepayment of the remaining principal amount of our 4.20% Notes and 5.75% Notes in November 2016 and a loss of approximately $1 associated with the debt repurchases in October 2016. Refer to Note 7, Debt and Other Financing on pages F-22 through F-25 of our 2017 Annual Report for additional information.
Interest income decreased by approximately $1 compared to the prior-year period.
Other expense, net, decreased by approximately $144 compared to the prior-year period, primarily due to the deconsolidation of our Venezuelan operations, as we recorded a loss of approximately $120 in the first quarter of 2016. In addition, other expense, net was positively impacted by foreign exchange net gains in the current year as2019 compared to net losses in 2018.
Gain on sale of business/assets related to the prior year, resultingRye Office, Maximin Corporation Sdn Bhd and Avon Manufacturing (Guangzhou), Ltd in a year-over-year benefitJune, May and February 2019, respectively, and the sale of approximately $28. The amounts recorded for our proportionate share of New Avon's losses was approximately $12 in both 2017 and 2016. As the recorded investment balance in New Avon was zero atin August 2019. Refer to Note 3, Discontinued Operations and Assets and Liabilities Held for Sale, to the end of the third quarter of 2017, we have not recorded any additional losses associated with New Avon since the third quarter of 2017. See "Venezuela Discussion" in this MD&A and Note 1, Description of the Business and Summary of Significant Accounting Policies on pages F-11 through F-17 of our 2017 Annual Report for further discussion of our Venezuelan operations. See Note 4, Investment in New Avon on page F-20 of our 2017 Annual ReportConsolidated Financial Statements contained herein, for more information on New Avon.relating to these disposals.
Effective Tax Rate
The Adjusted effective tax rates and the effective tax rates in 20172019 and 20162018 continue to be impacted by our inability to recognize additional deferred tax assets in various jurisdictions related to our current-year operating results. In addition, the Adjusted effective tax rates and the effective tax rates in 20172019 and 20162018 continue to be impacted by withholding taxes associated with certain intercompany payments, including royalties, service charges and dividends, which in the aggregate are relatively consistent each year due to the need to repatriate funds to cover U.S.-based costs, such as interest on debt and corporate overhead. These factors resulted in unusually high effective tax rates in 20172019 and 2016.2018.
The Adjusted effective tax rate and the effective tax rate in 2019 were impacted by an approximate net $13 benefit recognized primarily due to reduced costs of repatriating subsidiary earnings and approximately $7 of other various net tax benefits associated with law changes, uncertain tax positions, and changes in tax estimates partially offset by a net charge of approximately $5 primarily associated with an increase in valuation allowances. The effective tax rate in 2017 was impacted by an approximate net $30 benefit recognized as a result of the enactment of the Tax Cuts and Jobs Act in U.S., a release of valuation allowances of approximately $26 associated with a number of markets in Europe, Middle East & Africa as a result of a business model change related to the headquarters move, and an approximate $10 benefit as a result of a favorable court decision in Brazil, partially offset by a charge of approximately $16 associated with valuation allowances to adjust deferred tax assets in Mexico. The effective tax rate in 20172019 was also impacted by a loss contingency related to a non-U.S. pension planthe accrual of non-taxable income associated with indirect tax refunds and CTI restructuring both for which tax benefits cannot currently be claimed.claimed in all affected jurisdictions.
The Adjusted effective tax rate and the effective tax rate in 2018 was impacted by an approximate net $25 benefit recognized primarily due to Avon's interpretation of case law and/or guidance provided during 2018 in the U.S. and Latin America and the release of valuation allowances of approximately $5 associated with improved profitability of certain Markets partially offset by a net charge of approximately $11 primarily associated with an increase in reserves for uncertain tax positions. The effective tax rate in 20162018 was also impacted by the deconsolidationaccrual of our Venezuelan operations, valuation allowances for deferred tax assets outsidetaxes associated with the reversal of the U.S. of approximately $9Brazil IPI loss contingency and CTI restructuring partially offset by a benefit of approximately $29 as a result of the implementation of foreignfor which tax planning strategies, a net benefit of approximately $7 primarily due to the release of a valuation allowance associated with Russia and a benefit from the net proceeds recognized as a result of a legal settlement.benefits cannot currently be claimed in all affected jurisdictions.
In addition, the Adjusted effective tax rates and the Adjusted effective tax rates in 20172019 and 20162018 were negatively impacted by the country mix of earnings.
See Note 9, Income Taxes on pages F-26 through F-29 of our 2017 Annual Report for more information on tax items, Note 13, Employee Benefit Plans on pages F-34 through F-42 of our 2017 Annual Report for more information on the loss contingency related to a non-U.S. pension plan, Note 16, Restructuring Initiatives on pages F-45 through F-48 of our 2017 Annual Report for more information on CTI restructuring and "Venezuela Discussion" in this MD&A and Note 1, Description of the Business and Summary of Significant Accounting Policies on pages F-11 through F-17 of our 2017 Annual Report for more information for further discussion of our Venezuelan operations.
Impact of Foreign Currency
As compared to the prior-year period, foreign currency in 20172019 impacted our consolidated financial results in the form of:
foreign currency transaction net gains (classified within cost of sales, and selling, general and administrative expenses), which had an immaterial impact to operating profit and Adjusted operating profit, and operating margin and Adjusted operating margin;
foreign currency translation, which had a favorable impact to operating profit and Adjusted operating profit of approximately $20, or approximately 30 basis points to operating margin and approximately 20 basis points to Adjusted operating margin; and
foreign exchange net gains on our working capital (classified within other expense, net) as compared to net losses in the prior year, resulting in a year-over-year benefit of approximately $28 before tax on both a reported and Adjusted basis.
Discontinued Operations
There were no amounts recorded in discontinued operations for the year ended December 31, 2017. Loss from discontinued operations, net of tax was approximately $14 for the year ended December 31, 2016. See Note 3, Discontinued Operations and Divestitures on pages F-19 through F-20 of our 2017 Annual Report for further discussion.
Venezuela Discussion
Avon Venezuela operates in the direct-selling channel offering Beauty and Fashion & Home products. Avon Venezuela has a manufacturing facility that produces the Beauty products that it sells. Avon Venezuela imports many of its Fashion & Home products and raw materials and components needed to manufacture its Beauty products.
Currency restrictions enacted by the Venezuelan government since 2003 impacted the ability of Avon Venezuela to obtain foreign currency to pay for imported products. In 2010, we began accounting for our operations in Venezuela under accounting guidance associated with highly inflationary economies. Under U.S. GAAP, the financial statements of a foreign entity operating in a highly inflationary economy are required to be remeasured as if the functional currency is the company’s reporting currency, the U.S. dollar. This generally results in translation adjustments, caused by changes in the exchange rate, being reported in earnings currently for monetary assets (e.g., cash, accounts receivable) and liabilities (e.g., accounts payable, accrued expenses) and requires that different procedures be used to translate non-monetary assets (e.g., inventories, fixed assets). Non-monetary assets and liabilities are remeasured at the historical U.S. dollar cost basis. This diverges significantly from the application of accounting rules prior to designation as highly inflationary accounting, where such gains and losses would have been recognized only in other comprehensive income (loss) (shareholders' deficit).
Venezuela's restrictive foreign exchange control regulations and our Venezuelan operations' increasingly limited access to U.S. dollars resulted in lack of exchangeability between the Venezuelan bolivar and the U.S. dollar, and restricted our Venezuelan operations' ability to pay dividends and settle intercompany obligations. The severe currency controls imposed by the Venezuelan government significantly limited our ability to realize the benefits from earnings of our Venezuelan operations and access the resulting liquidity provided by those earnings. We expected that this lack of exchangeability would continue for the foreseeable future, and as a result, we concluded that, effective March 31, 2016, this condition was other-than-temporary and we no longer met the accounting criteria of control in order to continue consolidating our Venezuelan operations. As a result, since March 31, 2016, we account for our Venezuelan operations using the cost method of accounting.
As a result of the change to the cost method of accounting, in the first quarter of 2016 we recorded a loss of approximately $120 in other expense, net. The loss was comprised of approximately $39 in net assets of the Venezuelan business and approximately $81 in accumulated foreign currency translation adjustments within AOCI associated with foreign currency movements before Venezuela was accounted for as a highly inflationary economy. The net assets of the Venezuelan business were comprised of inventories of approximately $24, property, plant and equipment, net of approximately $15, other assets of approximately $11, accounts receivable of approximately $5, cash of approximately $4, and accounts payable and accrued liabilities of approximately $20. 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.
In February 2015, the Venezuelan government announced the creation of a new foreign exchange system referred to as the SIMADI exchange ("SIMADI"), which represented the rate which better reflected the economics of Avon Venezuela's business activity, in comparison to the other then available exchange rates; as such, we concluded that we should utilize the SIMADI exchange rate to remeasure our Venezuelan operations. As a result of the change to the SIMADI rate, which caused the recognition of a devaluation of approximately 70% as compared to the exchange rate we had used previously, we recorded an
after-tax benefit of approximately $3 (a benefit of approximately $4 in other expense, net, and a loss of approximately $1 in income taxes) in the first quarter of 2015, primarily reflecting the write-down of net monetary assets. In addition, as a result of using the historical U.S. dollar cost basis of non-monetary assets, such as inventories, these assets continued to be remeasured, following the change to the SIMADI rate, at the applicable rate at the time of their acquisition. The remeasurement of non-monetary assets at the historical U.S. dollar cost basis caused a disproportionate expense as these assets were consumed in operations, negatively impacting operating profit and net income by approximately $19 during 2015. Also as a result of the change to the SIMADI rate, we determined that an adjustment of approximately $11 to cost of sales was needed to reflect certain non-monetary assets, primarily inventories, at their net realizable value, which was recorded in the first quarter of 2015.
In addition, in February 2015, we reviewed Avon Venezuela's long-lived assets to determine whether the carrying amount of the assets was recoverable. Based on our expected cash flows associated with the asset group, we determined that the carrying amount of the assets, carried at their historical U.S. dollar cost basis, was not recoverable. As such, an impairment charge of approximately $90 to selling, general and administrative expenses was needed to reflect the write-down of the long-lived assets to their estimated fair value of approximately $16, which was recorded in the first quarter of 2015.
2016 Compared to 2015
Revenue
Total revenue in 2016 declined 7% compared to the prior-year period, primarily due to unfavorable foreign exchange, while Constant $ revenue increased 2%. A number of items affected the year-over-year comparison of Constant $ revenue, the most significant being the sale of Liz Earle, which was completed in July 2015, that negatively impacted Constant $ revenue growth by approximately 1 point. The other items affecting the year-over-year comparison netted to an immaterial impact. In addition, our Constant $ revenue benefited from growth in Argentina, South Africa, Russia, Mexico and Brazil. Argentina contributed approximately 1 point to Avon's consolidated Constant $ revenue growth, as this market's results were impacted by the inflationary impact on pricing. The growth in Constant $ revenue was driven by higher average order, partially offset by a 2% decrease in Active Representatives. Average order benefited from the net impact of price and mix which increased 6%, while units sold decreased 4%, primarily due to declines in units sold in Brazil and Mexico, and the impact of the deconsolidation of Venezuela. TThe decrease in Active Representatives was primarily due to the impact of the deconsolidation of Venezuela and a decline in Asia Pacific, which included the impact caused by a reduction in the number of sales campaigns in the Philippines. These declines in Active Representatives were partially offset by growth in Europe, Middle East & Africa, most significantly Russia, which was primarily due to sustained momentum in recruitment and retention.
Ending Representatives decreased by 2%. The decrease in Ending Representatives at December 31, 2016 as compared to the prior-year period was primarily due to the impact of the deconsolidation of Venezuela, which had a negative impact of 2 points, and declines in Asia Pacific. These decreases were partially offset by growth in Europe, Middle East & Africa, most significantly South Africa and Russia, as well as growth in South Latin America, most significantly Brazil.
See "Venezuela Discussion" in this MD&A and Note 1, Description of the Business and Summary of Significant Accounting Policies on pages F-11 through F-17 of our 2017 Annual Report to the consolidated financial statements included herein for further discussion of our Venezuelan operations.
On a category basis, our net sales from reportable segments and associated growth rates were as follows: |
| | | | | | | | | | | | | |
| Years ended December 31 | | %/Point Change |
| 2016 | | 2015 | | US$ | | Constant $ |
Beauty: | | | | | | | |
Skincare | $ | 1,605.3 |
| | $ | 1,731.4 |
| | (7 | )% | | 1 | % |
Fragrance | 1,512.8 |
| | 1,613.5 |
| | (6 | ) | | 3 |
|
Color | 996.3 |
| | 1,068.6 |
| | (7 | ) | | 2 |
|
Total Beauty | 4,114.4 |
| | 4,413.5 |
| | (7 | ) | | 2 |
|
Fashion & Home: | | | | | | | |
Fashion | 849.2 |
| | 902.3 |
| | (6 | ) | | 2 |
|
Home | 595.4 |
| | 658.5 |
| | (10 | ) | | 3 |
|
Total Fashion & Home | 1,444.6 |
| | 1,560.8 |
| | (7 | ) | | 2 |
|
Net sales from reportable segments | 5,559.0 |
| | 5,974.3 |
| | (7 | ) | | 2 |
|
Net sales from Other operating segments and business activities | 19.8 |
| | 102.2 |
| | (81 | ) | | (80 | ) |
Net sales | $ | 5,578.8 |
| | $ | 6,076.5 |
| | (8 | ) | | 1 |
|
See "Segment Review" in this MD&A for additional information related to changes in revenue by segment.
Operating Margin
Operating margin and Adjusted operating margin increased 290 basis points and 80 basis points, respectively, compared to 2015. The increases in operating margin and Adjusted operating margin include the benefits associated with costs savings initiatives, including the Transformation Plan, primarily reductions in headcount, as well as other cost reductions. The increases in operating margin and Adjusted operating margin are discussed further below in "Gross Margin," "Selling, General and Administrative Expenses" and "Impairment of Goodwill."
Gross Margin
Gross margin and Adjusted gross margin increased 20 basis points and decreased 30 basis points, respectively, compared to 2015. The gross margin comparison was impacted by approximately 50 basis points in the prior year by the devaluation of the Venezuelan currency in conjunction with highly inflationary accounting, as approximately $29 was recognized in the prior-year period associated with carrying certain non-monetary assets at the historical U.S. dollar cost following a devaluation. See "Venezuela Discussion" in this MD&A for a further discussion of our Venezuelan operations.
The remaining decrease in gross margin and the decrease of 30 basis points in Adjusted gross margin were, in each case, primarily due to the following:
a decrease of approximately 260 basis points due to the unfavorable impact of foreign currency transaction losses and foreign currency translation;
a decrease of 30 basis points due to sales of products to New Avon since the separation of the Company's North America business into New Avon on March 1, 2016; and
various other insignificant items that decreased gross margin.
These items were partially offset by the following:
an increase of 190 basis points due to the favorable net impact of mix and pricing, primarily due to inflationary and strategic pricing in South Latin America, Europe, Middle East & Africa and North Latin America; and
an increase of 90 basis points due to lower supply chain costs, primarily from lower material costs and cost savings initiatives in Europe, Middle East & Africa and South Latin America.
See Note 5, Related Party Transactions on pages F-21 through F-22 of our 2017 Annual Report for more information on New Avon.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 2016 decreased approximately $404 compared to 2015. This decrease is primarily due to the favorable impact of foreign currency translation, as the strengthening of the U.S. dollar against many of our foreign currencies resulted in lower reported selling, general and administrative expenses. The decrease in selling, general and administrative expenses is also due to approximate $90 impairment charge recorded in the prior-year period to reflect the write-down of the long-lived assets to their estimated fair value associated with the devaluation of the Venezuelan currency in conjunction with highly inflationary accounting, lower fixed expenses resulting primarily from our cost savings initiatives, lower expenses associated with employee incentive compensation plans, the approximate $27 of net proceeds recognized as a result of a legal settlement in 2016 and lower advertising expense. Partially offsetting the decrease in selling, general and administrative expenses was higher bad debt expense, higher amount of CTI restructuring, higher foreign currency transaction costs and higher Representative, sales leader and field expense.
Selling, general and administrative expenses as a percentage of revenue and Adjusted selling, general, and administrative expenses as a percentage of revenue decreased 260 basis points and 110 basis points, respectively, compared to 2015. The selling, general and administrative expenses as a percentage of revenue comparison benefited from:
approximately 150 basis points by the devaluation of the Venezuelan currency in conjunction with highly inflationary accounting in the prior-year period, primarily as an approximate $90 impairment charge was recognized in the prior-year period to reflect the write-down of the long-lived assets to their estimated fair value following a devaluation;
approximately 50 basis points by the approximate $27 of net proceeds recognized as a result of a legal settlement in 2016;
approximately 10 basis points by the approximate $7 aggregate settlement charges associated with the payments made to former employees who were vested and participated in the U.S. defined benefit pension plan recorded in the prior-year period, which did not occur in 2016; and
approximately 10 basis points by the approximately $3 of transaction-related costs associated with the separation of North America that were included in continuing operations recorded in the prior-year period.
These items were partially offset by:
approximately 50 basis points for higher CTI restructuring.
See "Venezuela Discussion" in this MD&A and Note 1, Description of the Business and Summary of Significant Accounting Policies on pages F-11 through F-17 of our 2017 Annual Report for a further discussion of our Venezuelan operations, Note 14, Segment Information on pages F-42 through F-44 of our 2017 Annual Report for more information on the legal settlement, Note 13, Employee Benefit Plans on pages F-34 through F-42 of our 2017 Annual Report for a further discussion of the pension settlement charges, and Note 16, Restructuring Initiatives on pages F-45 through F-48 of our 2017 Annual Report for more information on CTI restructuring.
The remaining decrease in selling, general and administrative expenses as a percentage of revenue and the decrease of 110 basis points in Adjusted selling, general and administrative expenses as a percentage of revenue were, in each case, primarily due to the following:
a decrease of 210 basis points primarily due to lower fixed expenses, as well as the impact of the Constant $ revenue growth with respect to our fixed expenses. Lower fixed expenses resulted primarily from our costs savings initiatives, mainly reductions in headcount, but were partially offset by the inflationary impact on our expenses;
a decrease of 40 basis points due to lower expenses associated with employee incentive compensation plans; and
a decrease of 30 basis points from lower advertising expense, primarily in Europe, Middle East & Africa.
These items were partially offset by the following:
an increase of 80 basis points from higher bad debt expense, driven by Brazil primarily due to the macroeconomic environment, coupled with actions taken to recruit new Representatives;
an increase of approximately 50 basis points due to the unfavorable impact of foreign currency translation and foreign currency transaction losses; and
an increase of 20 basis points as a result of the Industrial Production Tax ("IPI") tax law on cosmetics in Brazil that went into effect in May 2015, which reduced revenue as we did not raise the prices paid by Representatives to the same extent as the IPI tax.
See "Segment Review - South Latin America" in this MD&A for a further discussion of the IPI tax law in Brazil.
Impairment of Goodwill
During the fourth quarter of 2015, we recorded a non-cash impairment charge of approximately $7 for goodwill associated with our Egypt business. See Note 19, Goodwill on page F-51 of our 2017 Annual Report for more information on Egypt.
See “Segment Review” in this MD&A for additional information related to changes in segment margin.
Other Expense
Interest expense increased by approximately $16 compared to the prior-year period, primarily due to the interest associated with the $500 principal amount of 7.875% Senior Secured Notes issued in August 2016 and the increase in the interest rates on the Notes issued in March 2013 as a result of the downgrades of our long-term credit ratings. These items were partially offset by the interest savings associated with the repayment of certain of our debt in 2016 and the prepayment of the $250 principal amount of our 2.375% Notes due March 15, 2016 (the "2.375% Notes") in the third quarter of 2015. Refer to Note 7, Debt and Other Financing on pages F-22 through F-25 of our 2017 Annual Report for additional information.
Gain on extinguishment of debt in 2016 of approximately $1 was comprised of a gain of approximately $4 associated with the cash tender offers in August 2016 and a gain of approximately $1 associated with the debt repurchases in December 2016, partially offset by a loss of approximately $3 associated with the prepayment of the remaining principal amount of our 4.20% Notes and our 5.75% Notes in November 2016 and a loss of approximately $1 associated with the debt repurchases in October 2016. Loss on extinguishment of debt in 2015 of approximately $6 was associated with the prepayment of our 2.375% Notes. Refer to Note 7, Debt and Other Financing on pages F-22 through F-25 of our 2017 Annual Report for additional information.
Interest income increased by approximately $3 compared to the prior-year period.
Other expense, net, increased by approximately $97 compared to the prior-year period, primarily due to the year-on-year impact of the Venezuelan special items as we recorded a loss of approximately $120 in the first quarter of 2016 as compared to a benefit of approximately $4 in the first quarter of 2015. In addition, other expense, net was positively impacted by lower net losses on foreign exchange, partially offset by our proportionate share of New Avon's loss of approximately $12. Foreign exchange net losses decreased by approximately $40 compared to the prior-year period, despite the unfavorable impact of approximately $17 as a result of the devaluation of the Egyptian pound in the fourth quarter of 2016. See "Venezuela Discussion" in this MD&A for a further discussion of our Venezuelan operations. See Note 4, Investment in New Avon on page F-20 of our 2017 Annual Report for more information on New Avon.
Gain on sale of business in 2015 was the result of the sale of Liz Earle in July 2015. Refer to Note 3, Discontinued Operations and Divestitures on pages F-19 through F-20 of our 2017 Annual Report, for additional information regarding the sale of Liz Earle.
Effective Tax Rate
The effective tax rates in 2016 and 2015 continue to be impacted by our inability to recognize additional deferred tax assets in various jurisdictions related to our current-year operating results. In addition, the effective tax rates in 2016 and 2015 continue to be impacted by withholding taxes associated with certain intercompany payments, including royalties, service charges and dividends, which in the aggregate are relatively consistent each year due to the need to repatriate funds to cover U.S.-based costs, such as interest on debt and corporate overhead. These factors resulted in unusually high effective tax rates in 2016 and 2015. Our inability to recognize additional deferred tax assets in various jurisdictions related to our current-year operating results, along with these withholding taxes, resulted in unusually high effective tax rates in 2016 and 2015.
The effective tax rate in 2016 was impacted by the deconsolidation of our Venezuelan operations, valuation allowances for deferred tax assets outside of the U.S. of approximately $9 and CTI restructuring, partially offset by a benefit of approximately $29 as a result of the implementation of foreign tax planning strategies, a net benefit of approximately $7 primarily due to the release of a valuation allowance associated with Russia and a benefit from the net proceeds recognized as a result of a legal settlement.
The effective tax rate in 2015 was negatively impacted by additional valuation allowances for U.S. deferred tax assets of approximately $670. The additional valuation allowances in 2015 were due to the continued strengthening of the U.S. dollar against currencies of some of our key markets and the impact on the benefits from our tax planning strategies associated with the realization of our deferred tax assets. In addition, the effective tax rate in 2015 was negatively impacted by valuation allowances for deferred tax assets outside of the U.S. of approximately $15, primarily in Russia, which was largely due to lower earnings, which were significantly impacted by foreign exchange losses on working capital balances. During 2015, we also recognized a benefit of approximately $19 as a result of the implementation of the initial stages of foreign tax planning strategies. The valuation allowances for deferred tax assets in 2015 caused income taxes to be significantly in excess of income before taxes. In addition, the effective tax rate in 2015 was negatively impacted by the devaluation of the Venezuelan currency in conjunction with highly inflationary accounting.
In addition, the effective tax rates and the Adjusted effective tax rates in 2016 and 2015 were negatively impacted by the country mix of earnings.
See Note 9, Income Taxes on pages F-26 through F-29 of our 2017 Annual Report, for more information. In addition, see "Venezuela Discussion" in this MD&A and Note 1, Description of the Business and Summary of Significant Accounting Policies on pages F-11 through F-17 of our 2017 Annual Report for further discussion of our Venezuelan operations, Note 16, Restructuring Initiatives on pages F-45 through F-48 of our 2017 Annual Report for more information on CTI restructuring, and Note 14, Segment Information on pages F-42 through F-44 of our 2017 Annual Report for more information on the legal settlement.
Impact of Foreign Currency
During 2016, foreign currency continued to have a significant impact on our financial results. Specifically, as compared to the prior-year period, foreign currency in 2016 impacted our consolidated financial results in the form of:
•foreign currency transaction net losses as compared to net gains in the prior year (classified within cost of sales, and selling, general and administrativeSG&A expenses), which had an unfavorable impact to operating profit and Adjusted operating profit of an estimated $165,$80 or approximately 270140 basis points and 150 basis points, respectively to operating margin and Adjusted operating margin;
•foreign currency translation, which had an unfavorable impact, as compared to a favorable impact in the prior year to operating profit of approximately $60 and Adjusted operating profit of approximately $65,$15 and $30 respectively, or approximately 4010 basis points and 20 basis points, respectively, to operating margin and Adjusted operating margin; and
•higher foreign exchange net lossesgains on our working capital (classified within other expense, net)income (expense), which were lower bynet in our Consolidated Statements of Operations) as compared to loss in the prior year, resulting in a favorable impact of approximately $35 before tax and $40$60 before tax on anboth a reported and Adjusted basis, despite the unfavorable impact of approximately $17 as a result of the devaluation of the Egyptian pound in the fourth quarter of 2016.basis.
Loss from discontinued operations, net of tax was approximately $14 in 2016 compared to approximately $349 for 2015. During 2016, we recorded charges of approximately $16 before tax (approximately $5 after tax) in the aggregate associated with the separation of the North America business which closed on March 1, 2016. During 2015, we recorded a charge of approximately $340 before tax (approximately $340 after tax) associated with the estimated loss on the separation of the North America business. See Note 3, Discontinued Operations and Divestitures on pages F-19 through F-20 of our 2017 Annual Report for further discussion.
Other Comprehensive (Loss) Income (Loss)
Other comprehensive income,loss, net of taxes was approximately $108$94 in 20172020 compared with other comprehensive loss of approximately $333$9 in 2016.2019. The year-over-year comparison was unfavorably impacted by the recognition offoreign currency translation losses of $259 fromapproximately $163 compared to losses of $1 in the prior year. This was partially offset by the favorable impact of unrealized gains on the revaluation of long-term intercompany balances of $68 compared to losses of $6 in the prior year. These impacts relate to certain intercompany loans of a long term nature for which foreign currency transaction gains and losses are accounted for as translation adjustments in equity. Gains in the current year were primarily attributable to a long-term euro denominated intercompany loan receivable held by an entity with a U.S. dollar functional currency.
Other comprehensive loss, net of taxes was approximately $9 in 2019 compared with other comprehensive income into our Consolidated Statementsloss of Operationsapproximately $104 in 2016 as a result of the separation of the North America business, primarily related to unamortized losses associated with the employee benefit plans, and the approximate $82 impact of the deconsolidation of Venezuela.2018. The remaining approximate $116 benefit to the year-over-year comparison was primarily duefavorably impacted by unrealized losses on the revaluation of long-term intercompany balances of $6 compared to foreign$58 in the prior-year period. These long-term intercompany balances are denominated in Mexican peso and the British pound. Foreign currency translation adjustments which benefitedfavorably impacted other comprehensive loss by approximately $117$48 as compared to 20162018, primarily due to the favorable year-over-year comparison of movements of the Polish zlotyRussian ruble.
Segment Review
The Company has updated its reportable segments to align with how the business is operated and Mexican peso, partially offset bymanaged since the unfavorable year-over-year comparison of movements ofmerger
with Natura, we have identified two reportable segments based on geographic operations: Avon International and Avon Latin
America. In prior periods, the Brazilian real.Company reported four segments: Europe, Middle East and Africa, Asia Pacific, South Latin
Other comprehensive income (loss), net of taxes was approximately $333 in 2016 compared with approximately ($151) in 2015, driven byAmerica and North Latin America. Previously reported segment information has been recast throughout the recognition of losses of $259 from other comprehensive income (loss) into our Consolidated Statements of Operations in 2016consolidated
financial statements, as a result ofapplicable, for all periods presented to reflect the separation of the North America business, as noted above. Other comprehensive income (loss), net of taxes was also favorably impacted in 2016 by foreign currency translation adjustments, which benefited by approximately $240 as compared to 2015 primarily due to the favorable year-over-year comparison of movements of the Brazilian real, Colombian peso and Argentine peso, partially offset by the unfavorable year-over-year comparison of movements of the British pound.
In addition, other comprehensive income (loss) in 2016 as compared with 2015 was favorably impacted by the approximate $82 impact of the deconsolidation of Venezuela. These favorable impacts to other comprehensive income (loss) were partially offset by the unfavorable impacts of lower amortization of net actuarial losses of approximately $64, largely as a result of the separation of the North America business, and lower net actuarial gains, which were approximately $3 in 2016 as compared with approximately $41 in 2015. In 2016, net actuarial gains decreased as a result of lower discount rates for the non-U.S. and U.S. pension plans, partially offset by higher asset returnschanges in the U.S. and non-U.S. pension plans in 2016 as compared to 2015.
See Note 3, Discontinued Operations and Divestitures on pages F-19 through F-20 of our 2017 Annual Report for more information on the separation of the North America business, see "Venezuela Discussion" in this MD&A and Note 1, Description of the Business and Summary of Significant Accounting Policies on pages F-11 through F-17 of our 2017 Annual Report for a further discussion of our Venezuelan operations, and Note 13, Employee Benefit Plans on pages F-34 through F-42 of our 2017 Annual Report for more information on our benefit plans.
Segment ReviewCompany’s reportable segments.
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 certain global expenses, other than the allocation of marketing, CTI restructuring initiatives, certain significant asset impairment charges, and other items, which are not allocated to a particular segment, if applicable.segment. This is consistent with
the manner in which we assess our performance and allocate resources. See Note 14, Segment Information, on pages F-42 through F-44 of our 2017 Annual Reportto the Consolidated Financial Statements included herein for a reconciliation of segment profit to operating profit.
Summarized financial information concerning our reportable segments was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Years ended December 31 | | 2020 | | 2019 | | 2018 |
| | Total revenue | | Segment profit | | Total revenue | | Segment profit | | Total revenue | | Segment profit |
Avon International | | $ | 1,772.6 | | | $ | 27.4 | | | $ | 2,234.3 | | | $ | 170.9 | | | $ | 2,568.5 | | | $ | 198.6 | |
Avon Latin America | | 1,845.9 | | | (39.1) | | | 2,528.9 | | | 194.1 | | | 2,976.8 | | | 254.4 | |
Total from reportable segments | | $ | 3,618.5 | | | $ | (11.7) | | | $ | 4,763.2 | | | $ | 365.0 | | | $ | 5,545.3 | | | $ | 453.0 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Years ended December 31 | | 2017 | | 2016 | | 2015 |
| | Total revenue | | Segment profit | | Total revenue | | Segment profit | | Total revenue | | Segment profit |
Europe, Middle East & Africa | | $ | 2,126.5 |
| | $ | 330.6 |
| | $ | 2,138.2 |
| | $ | 329.9 |
| | $ | 2,229.2 |
| | $ | 311.2 |
|
South Latin America | | 2,222.4 |
| | 194.1 |
| | 2,145.9 |
| | 200.5 |
| | 2,309.6 |
| | 238.9 |
|
North Latin America | | 811.8 |
| | 81.8 |
| | 829.9 |
| | 114.4 |
| | 901.0 |
| | 107.2 |
|
Asia Pacific | | 518.3 |
| | 47.7 |
| | 549.7 |
| | 60.6 |
| | 616.8 |
| | 69.4 |
|
Total from reportable segments | | $ | 5,679.0 |
| | $ | 654.2 |
| | $ | 5,663.7 |
| | $ | 705.4 |
| | $ | 6,056.6 |
| | $ | 726.7 |
|
Below is an analysis of the key factors affecting revenue and segment profit by reportable segment for each of the years in the three-year period ended December 31, 2017.2020. Foreign currency impact is determined as the difference between actual growth rates and Constant $ growth rates. Refer to "Non-GAAP Financial Measures" in this MD&A for more information.
Europe, Middle East & AfricaAvon International – 20172020 Compared to 20162019
| | | | | | | | %/Point Change | | | | | | | %/Point Change |
| | 2017 | | 2016 | | US$ | | Constant $ | | | 2020 | | 2019 | | US$ | | Constant $ |
Total revenue | | $ | 2,126.5 |
| | $ | 2,138.2 |
| | (1 | )% | | (4 | )% | Total revenue | | $ | 1,772.6 | | | $ | 2,234.3 | | | (21) | % | | (18) | % |
Segment profit | | 330.6 |
| | 329.9 |
| | — | % | | (5 | )% | Segment profit | | 27.4 | | | 170.9 | | | (84) | % | | (79) | % |
| | | | | | | | | |
| | Segment margin | | 15.5 | % | | 15.4 | % | | .1 |
| | (.2 | ) | Segment margin | | 1.5 | % | | 7.6 | % | | (610) | | | (570) | |
| | | | | | | | | | |
Change in Active Representatives | | | | | | | | (2 | )% | Change in Active Representatives | | (19) | % |
Change in units sold | | | | | | | | (7 | )% | Change in units sold | | (19) | % |
Change in Ending Representatives | | | | | | | | 3 | % | |