UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________

FORM 10-Q

_________________________



x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended ~~September~~June 30, ~~2017~~2018



¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission file number 1-4881

_________________________

AVON PRODUCTS, INC.

(Exact name of registrant as specified in its charter)

_________________________



New York		13-0544597
(State or other jurisdiction of Incorporation or organization)		(I.R.S. Employer Identification No.)

Building 6, Chiswick Park, London W4 5HR

United Kingdom

(Address of principal executive offices)

+44-1604-232425

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨ (do not check if a smaller reporting company)	Smaller reporting company	¨
		Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ NoNo�� x

The number of shares of Common Stock (par value $0.25) outstanding at ~~September~~June 30, ~~2017~~2018 was ~~439,997,691.~~442,344,872.

TABLE OF CONTENTS



		Page Numbers
Part I. Financial Information

Item 1.	Financial Statements (Unaudited)

	Consolidated Statements of Operations Three ~~and Nine~~ Months Ended ~~September~~June 30, ~~2017~~2018 and ~~September~~June 30, ~~2016~~2017	3 -

	Consolidated Statements of Operations Six Months Ended June 30, 2018 and June 30, 2017	4

	Consolidated Statements of Comprehensive ~~Income (Loss)~~ Loss Three ~~and Nine~~ Months Ended ~~September~~June 30, ~~2017~~2018 and ~~September~~June 30, ~~2016~~2017	5 ~~- 6~~

	Consolidated Statements of Comprehensive Loss Six Months Ended June 30, 2018 and June 30, 2017	5

	Consolidated Balance Sheets ~~September~~ June 30, ~~2017~~2018 and December 31, ~~2016~~2017	7

	Consolidated Statements of Cash Flows ~~Nine~~ Six Months Ended ~~September~~June 30, ~~2017~~2018 and ~~September~~June 30, ~~2016~~2017	8

	Notes to Consolidated Financial Statements	9 - 2532

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2633 - 4452

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4553

Item 4.	Controls and Procedures	4553

Part II. Other Information

Item 1.	Legal Proceedings	4654

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4654

Item 6.	Exhibits	4655

	Signature	4756

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AVON PRODUCTS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended						Three Months Ended
(In millions, except per share data)	September 30, 2017			September 30, 2016			June 30, 2018			June 30, 2017
Net sales	$	1,378.2		$	1,367.5		$	1,268.8		$	1,353.5
Other revenue	39.6			41.3			83.1			42.4
Total revenue	1,417.8			1,408.8			1,351.9			1,395.9
Costs, expenses and other:
Cost of sales	550.0			550.9			539.7			525.0
Selling, general and administrative expenses	784.8			745.9			759.2			838.2
Operating profit	83.0			112.0			53.0			32.7
Interest expense	34.8			34.4			34.5			36.1
Gain on extinguishment of debt	—			(3.9		)
Loss on extinguishment of debt							2.9			—
Interest income	(3.4		)	(3.5		)	(3.5		)	(3.1		)
Other expense, net	3.6			10.4			19.4			11.9
Total other expenses	35.0			37.4			53.3			44.9
Income before taxes	48.0			74.6
Loss before income taxes							(0.3		)	(12.2		)
Income taxes	(36.1		)	(38.3		)	(36.7		)	(33.6		)
Income from continuing operations, net of tax	11.9			36.3
Loss from discontinued operations, net of tax	—			(0.7		)
Net income	11.9			35.6
Net loss							(37.0		)	(45.8		)
Net loss attributable to noncontrolling interests	0.6			0.4			0.9			0.3
Net income attributable to Avon	$	12.5		$	36.0
Earnings per share:
Basic from continuing operations	$	0.01		$	0.07
Basic from discontinued operations	—			—
Net loss attributable to Avon							$	(36.1	)	$	(45.5	)
Loss per share:
Basic attributable to Avon	0.01			0.07			$	(0.09	)	$	(0.12	)
Diluted from continuing operations	$	0.01		$	0.07
Diluted from discontinued operations	—			—
Diluted attributable to Avon	0.01			0.07			(0.09		)	(0.12		)

The accompanying notes are an integral part of these statements.

AVON PRODUCTS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Nine Months Ended						Six Months Ended
(In millions, except per share data)	September 30, 2017			September 30, 2016			June 30, 2018			June 30, 2017
Net sales	$	4,029.8		$	4,047.0		$	2,578.4		$	2,651.6
Other revenue	117.0			102.6			167.0			77.4
Total revenue	4,146.8			4,149.6			2,745.4			2,729.0
Costs, expenses and other:
Cost of sales	1,592.1			1,634.7			1,119.4			1,042.1
Selling, general and administrative expenses	2,411.4			2,300.0			1,528.1			1,624.4
Operating profit	143.3			214.9			97.9			62.5
Interest expense	106.0			100.3			70.7			71.2
Gain on extinguishment of debt	—			(3.9		)
Loss on extinguishment of debt							2.9			—
Interest income	(11.2		)	(12.8		)	(7.7		)	(7.8		)
Other expense, net	19.4			142.9			21.9			18.0
Total other expenses	114.2			226.5			87.8			81.4
Income (loss) before taxes	29.1			(11.6		)
Income (loss), before income taxes							10.1			(18.9		)
Income taxes	(99.5		)	(72.1		)	(68.2		)	(63.4		)
Loss from continuing operations, net of tax	(70.4		)	(83.7		)
Loss from discontinued operations, net of tax	—			(12.9		)
Net loss	(70.4		)	(96.6		)	(58.1		)	(82.3		)
Net loss (income) attributable to noncontrolling interests	0.9			(0.3		)
Net loss attributable to noncontrolling interests							1.7			0.3
Net loss attributable to Avon	$	(69.5	)	$	(96.9	)	(56.4		)	$	(82.0	)
Loss per share:
Basic from continuing operations	$	(0.20	)	$	(0.22	)
Basic from discontinued operations	—			(0.03		)
Basic attributable to Avon	(0.20		)	(0.25		)	(0.15		)	(0.21		)
Diluted from continuing operations	$	(0.20	)	$	(0.22	)
Diluted from discontinued operations	—			(0.03		)
Diluted attributable to Avon	(0.20		)	(0.25		)	(0.15		)	(0.21		)

The accompanying notes are an integral part of these statements.

AVON PRODUCTS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ~~(LOSS)~~

(Unaudited)

Three Months Ended
(In millions) September 30, 2017 September 30, 2016
Net income $ 11.9
$ 35.6
Other comprehensive income:
Foreign currency translation adjustments 13.6
15.2
Change in derivative losses on cash flow hedges, net of taxes of $0.0 and $0.0 —
1.8
Adjustments of and amortization of net actuarial loss and prior service cost, net of taxes of $0.0 and $0.2 6.5
3.6
Total other comprehensive income, net of taxes 20.1
20.6
Comprehensive income 32.0
56.2
Less: comprehensive loss attributable to noncontrolling interests (0.6 ) (0.6 )
Comprehensive income attributable to Avon $ 32.6
$ 56.8



	Three Months Ended
(In millions)	June 30, 2018			June 30, 2017
Net loss	$	(37.0	)	$	(45.8	)
Other comprehensive income:
Foreign currency translation adjustments	(126.6		)	9.5
Adjustments of and amortization of net actuarial loss and prior service cost, net of taxes of $0.1 and $0.0	2.8			3.1
Other comprehensive income related to New Avon investment, net of taxes of $0.0	—			0.1
Total other comprehensive (loss) income, net of income taxes	(123.8		)	12.7
Comprehensive loss	(160.8		)	(33.1		)
Less: comprehensive loss attributable to noncontrolling interests	(1.2		)	(0.2		)
Comprehensive loss attributable to Avon	$	(159.6	)	$	(32.9	)

The accompanying notes are an integral part of these statements.

AVON PRODUCTS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ~~(LOSS)~~

(Unaudited)


	Nine Months Ended						Six Months Ended
(In millions)	September 30, 2017			September 30, 2016			June 30, 2018			June 30, 2017
Net loss	$	(70.4	)	$	(96.6	)	$	(58.1	)	$	(82.3	)
Other comprehensive income:
Foreign currency translation adjustments	85.1			103.0			(93.9		)	71.5
Change in derivative losses on cash flow hedges, net of taxes of $0.0 and $0.0	—			2.7
Adjustments of and amortization of net actuarial loss and prior service cost, net of taxes of $0.0 and $10.6	12.7			271.8
Adjustments of and amortization of net actuarial loss and prior service cost, net of taxes of $0.3 and $0.0							5.7			6.2
Other comprehensive income related to New Avon investment, net of taxes of $0.0	1.2			—			—			1.2
Total other comprehensive income, net of taxes	99.0			377.5
Comprehensive income	28.6			280.9
Total other comprehensive (loss) income, net of income taxes							(88.2		)	78.9
Comprehensive loss							(146.3		)	(3.4		)
Less: comprehensive loss attributable to noncontrolling interests	(0.7		)	(0.4		)	(1.8		)	(0.1		)
Comprehensive income attributable to Avon	$	29.3		$	281.3
Comprehensive loss attributable to Avon							$	(144.5	)	$	(3.3	)

The accompanying notes are an integral part of these statements.

AVON PRODUCTS, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In millions) September 30,
2017 December 31,
2016
Assets
Current Assets
Cash and cash equivalents $ 663.8
$ 654.4
Accounts receivable, net 473.5
458.9
Inventories 662.5
586.4
Prepaid expenses and other 292.2
291.3
Current assets of discontinued operations 0.5
1.3
Total current assets 2,092.5
1,992.3
Property, plant and equipment, at cost 1,488.3
1,424.1
Less accumulated depreciation (781.8 ) (712.8 )
Property, plant and equipment, net 706.5
711.3
Goodwill 96.8
93.6
Other assets 620.8
621.7
Total assets $ 3,516.6
$ 3,418.9
Liabilities, Series C Convertible Preferred Stock and Shareholders’ Deficit
Current Liabilities
Debt maturing within one year $ 16.1
$ 18.1
Accounts payable 796.7
768.1
Accrued compensation 149.0
129.2
Other accrued liabilities 360.6
401.9
Sales taxes and taxes other than income 137.5
147.0
Income taxes 9.1
10.7
Current liabilities of discontinued operations 2.5
10.7
Total current liabilities 1,471.5
1,485.7
Long-term debt 1,873.0
1,875.8
Employee benefit plans 160.9
164.5
Long-term income taxes 82.9
78.6
Long-term sales taxes and taxes other than income 185.2
124.5
Other liabilities 90.6
81.3
Total liabilities 3,864.1
3,810.4

Commitments and contingencies (Note 8)

Series C convertible preferred stock 461.9
444.7

Shareholders’ Deficit
Common stock 189.7
188.8
Additional paid-in capital 2,290.7
2,273.9
Retained earnings 2,235.4
2,322.2
Accumulated other comprehensive loss (934.6 ) (1,033.2 )
Treasury stock, at cost (4,601.7 ) (4,599.7 )
Total Avon shareholders’ deficit (820.5 ) (848.0 )
Noncontrolling interests 11.1
11.8
Total shareholders’ deficit (809.4 ) (836.2 )
Total liabilities, series C convertible preferred stock and shareholders’ deficit $ 3,516.6
$ 3,418.9



(In millions)	June 30, 2018			December 31, 2017
Assets
Current Assets
Cash and cash equivalents	$	443.9		$	881.5
Accounts receivable, net	386.4			457.2
Inventories	662.2			598.2
Prepaid expenses and other	290.9			296.4
Total current assets	1,783.4			2,233.3
Property, plant and equipment, at cost	1,402.9			1,481.9
Less accumulated depreciation	(768.7		)	(779.2		)
Property, plant and equipment, net	634.2			702.7
Goodwill	94.9			95.7
Other assets	573.9			666.2
Total assets	$	3,086.4		$	3,697.9
Liabilities, Series C Convertible Preferred Stock and Shareholders’ Deficit
Current Liabilities
Debt maturing within one year	$	12.0		$	25.7
Accounts payable	729.5			832.2
Accrued compensation	109.2			130.3
Other accrued liabilities	400.9			405.6
Sales taxes and taxes other than income	123.4			153.0
Income taxes	8.6			12.8
Total current liabilities	1,383.6			1,559.6
Long-term debt	1,630.3			1,872.2
Employee benefit plans	134.2			150.6
Long-term income taxes	97.6			84.9
Long-term sales taxes and taxes other than income	191.1			193.1
Other liabilities	80.3			84.4
Total liabilities	3,517.1			3,944.8

Commitments and contingencies (Note 7)
Series C convertible preferred stock	479.8			467.8

Shareholders’ Deficit
Common stock	190.3			189.7
Additional paid-in capital	2,297.5			2,291.2
Retained earnings	2,210.0			2,320.3
Accumulated other comprehensive loss	(1,014.4		)	(926.2		)
Treasury stock, at cost	(4,602.3		)	(4,600.0		)
Total Avon shareholders’ deficit	(918.9		)	(725.0		)
Noncontrolling interests	8.4			10.3
Total shareholders’ deficit	(910.5		)	(714.7		)
Total liabilities, series C convertible preferred stock and shareholders’ deficit	$	3,086.4		$	3,697.9

The accompanying notes are an integral part of these statements.

AVON PRODUCTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended						Six Months Ended
(In millions)	September 30, 2017			September 30, 2016			June 30, 2018			June 30, 2017
Cash Flows from Operating Activities
Net loss	$	(70.4	)	$	(96.6	)	$	(58.1	)	$	(82.3	)
Loss from discontinued operations, net of tax	—			12.9
Loss from continuing operations, net of tax	$	(70.4	)	$	(83.7	)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
Adjustments to reconcile net loss to net cash (used) provided by operating activities:
Depreciation	63.4			62.5			41.6			41.7
Amortization	22.2			22.4			13.8			15.0
Provision for doubtful accounts	168.5			114.6			86.2			113.0
Provision for obsolescence	27.7			26.6			13.3			16.5
Share-based compensation	22.0			23.1			7.5			16.2
Foreign exchange losses (gains)	12.0			(0.3		)
Foreign exchange losses							13.5			8.5
Deferred income taxes	15.4			(16.3		)	(0.2		)	12.0
Loss on deconsolidation of Venezuela	—			120.5
Other	37.0			3.0			3.2			16.1
Changes in assets and liabilities:
Accounts receivable	(170.1		)	(167.1		)	(50.0		)	(92.0		)
Inventories	(71.6		)	(109.5		)	(99.7		)	(36.1		)
Prepaid expenses and other	18.0			(16.8		)	1.7			14.2
Accounts payable and accrued liabilities	(51.1		)	(41.7		)	(76.6		)	(53.2		)
Income and other taxes	(15.3		)	(15.3		)	(0.3		)	(5.0		)
Noncurrent assets and liabilities	27.3			(26.3		)	(2.6		)	26.6
Net cash provided (used) by operating activities of continuing operations	35.0			(104.3		)
Net cash (used) provided by operating activities of continuing operations							(106.7		)	11.2
Cash Flows from Investing Activities
Capital expenditures	(66.7		)	(68.2		)	(48.0		)	(43.0		)
Disposal of assets	3.3			3.3			1.4			2.7
Distribution from New Avon LLC	22.0			—
Reduction of cash due to Venezuela deconsolidation	—			(4.5		)
Other investing activities	(0.1		)	1.6			(3.3		)	(0.1		)
Net cash used by investing activities of continuing operations	(41.5		)	(67.8		)	(49.9		)	(40.4		)
Cash Flows from Financing Activities
Debt, net (maturities of three months or less)	(0.7		)	(31.4		)	(10.4		)	(4.4		)
Proceeds from debt	—			508.7
Repayment of debt	(2.3		)	(311.9		)	(238.6		)	(2.0		)
Repurchase of common stock	(6.6		)	(5.3		)	(3.2		)	(6.4		)
Net proceeds from the sale of series C convertible preferred stock	—			426.3
Other financing activities	(0.2		)	(17.2		)	(0.1		)	(0.2		)
Net cash (used) provided by financing activities of continuing operations	(9.8		)	569.2
Net cash used by financing activities of continuing operations							(252.3		)	(13.0		)
Cash Flows from Discontinued Operations
Net cash used by operating activities of discontinued operations	(7.5		)	(67.6		)	—			(6.4		)
Net cash used by investing activities of discontinued operations	—			(94.6		)
Net cash used by discontinued operations	(7.5		)	(162.2		)	—			(6.4		)
Effect of exchange rate changes on cash and cash equivalents	33.2			(17.9		)	(28.7		)	28.0
Net increase in cash and cash equivalents	9.4			217.0
Cash and cash equivalents at beginning of year⁽¹⁾	654.4			684.7
Net decrease in cash and cash equivalents							(437.6		)	(20.6		)
Cash and cash equivalents at beginning of year							881.5			654.4
Cash and cash equivalents at end of period	$	663.8		$	901.7		$	443.9		$	633.8

The accompanying notes are an integral part of these statements.

~~(1)~~ ~~Includes cash and cash equivalents of discontinued operations of $(2.2) at the beginning of the year in 2016.~~

Table of Contents

AVON PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in millions, except per share data)

1. ACCOUNTING POLICIES

Basis of Presentation

We prepare our unaudited interim Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States ("GAAP"). We consistently applied the accounting policies described in our ~~2016~~2017 Annual Report on Form 10-K ("~~2016~~2017 Form 10-K") in preparing these unaudited interim Consolidated Financial ~~Statements.~~Statements, other than those impacted by new accounting standards as described below. In our opinion, the unaudited interim Consolidated Financial Statements reflect all adjustments of a normal recurring nature that are necessary for a fair statement of the results for the interim periods presented. Results for interim periods are not necessarily indicative of results for a full year. You should read these unaudited interim Consolidated Financial Statements in conjunction with our Consolidated Financial Statements contained in our ~~2016~~2017 Form 10-K. When used in this report, the terms "Avon," "Company," "we" or "us" mean Avon Products, Inc.

For interim Consolidated Financial Statements purposes, we generally provide for accruals under our various employee benefit plans for each quarter based on one quarter of the estimated annual expense, and adjust these accruals as estimates are refined. In addition, our income tax provision is determined using an estimate of our consolidated annual effective tax rate, adjusted in the current period for discrete income tax items including:

the effects of significant, unusual or extraordinary pretax and income tax items, if any;

withholding taxes recognized associated with cash repatriations; and

the impact of loss-making subsidiaries for which we cannot recognize an income tax benefit and subsidiaries ~~that reduce the reliability of the estimated annual consolidated~~for which an effective tax ~~rate.~~rate cannot be reliably estimated.

~~Venezuela~~Revenue

AsNature of ~~March 31, 2016, we deconsolidated~~goods and services

We are a global manufacturer and marketer of beauty and 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. Our reportable segments are based on geographic operations in four regions: Europe, Middle East & Africa; South Latin America; North Latin America; and Asia Pacific. We primarily sell our ~~Venezuelan operations, and since then, we account for this business using the cost method of accounting. The decision to deconsolidate our Venezuelan operations was due~~products to the ~~lack~~ultimate consumer through the direct selling channel principally through Representatives, who are independent contractors and not our employees.

Revenue recognition

Revenue is recognized when control of ~~exchangeability between~~a product or service is transferred to a customer, which is generally the ~~Venezuelan bolivar~~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 (“VAT”) collected for taxing authorities.

Principal revenue streams and significant judgments

Our principal revenue streams can be distinguished into: i) the sale of Beauty and Fashion & Home products to Representatives (recorded in net sales); ii) Representative fees, primarily for the sale of brochures to Representatives and fulfillment activities related to the contract, which include fees for shipping and handling (recorded in other revenue); and iii) other, which includes the sale of products to New Avon and royalties from the licensing of our name and products (recorded in other revenue).

i) Sale of Beauty and Fashion & Home products to Representatives

We generate the majority of our revenue through the sale of Beauty and Fashion & Home products. A Representative contacts her customers directly, selling primarily through our brochure, 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. A purchase order is processed and the ~~U.S. dollar. This was caused by Venezuela's restrictive foreign exchange control regulations~~products are picked at a distribution center and ~~our Venezuelan operations' increasingly limited access to U.S. dollars, which restricted our Venezuelan operations' ability to pay dividends and settle intercompany obligations.~~

~~As a result of the change~~delivered to the ~~cost method~~Representative usually through a combination of ~~accounting, in~~local and national delivery companies. Generally, the ~~first quarter of 2016, we recorded a loss of $120.5 in other expense, net. The loss was comprised of $39.2 in net assets of~~Representative then delivers the ~~Venezuelan business~~merchandise and $81.3 in accumulated foreign currency translation adjustments within accumulated other comprehensive loss ("AOCI") (shareholders' deficit) associated with foreign currency changes before Venezuela was accounted for as a highly inflationary economy. The net assets of the Venezuelan business were comprised of inventories of $23.7, property, plant and equipment, net of $15.0, other assets of $11.4, accounts receivable of $4.6, cash of $4.5, and accounts payable and accrued liabilities of $20.0. Our Consolidated Balance Sheets no longer include the assets and liabilities of our Venezuelan operations. We no longer include the results of our Venezuelan operations in our Consolidated Financial Statements, and will include income relating to our Venezuelan operations only to the extent that we receive cash for dividends or royalties remitted by Avon Venezuela.

~~Revisions~~

In our 2016 Form 10-K, our Consolidated Statements of Cash Flows presented supplemental information of the cash paid for interest of $87.1 for the year ended December 31, 2016; however, this amount should have been disclosed as $142.8. We determined that the effect of this revision was not material to our 2016 Form 10-K.

~~New Accounting Standards Implemented~~

~~In March 2016, the FASB issued ASU 2016-09,~~ ~~Compensation - Stock Compensation~~, which is intended to simplify the accounting for share-based payment transactions. This new guidance changes several aspects of the accounting for share-based payment transactions, including accounting for income taxes, forfeitures and employer-tax withholding requirements. ASU 2016-09 also clarifies the Statements of Cash Flows presentation for certain components of share-based payment awards. We adopted this new accounting guidance in the first quarter of 2017, which did not have a material impact on our Consolidated Financial Statements.collects

AVON PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in millions, except per share data)

payment from the customer for her or his own account. A Representative generally receives a refund of the price the Representative paid for a product if the Representative chooses to return it.

A Representative Agreement, which outlines the basic terms of the agreement between Avon and the Representative, combined with a purchase order, constitutes a contract for the purposes of Accounting Standards ~~to be Implemented~~

~~ASU 2014-09, Revenue from Contracts with Customers~~

~~In May 2014, the FASB issued ASU 2014-09,~~Codification Topic ("ASC 606"), Revenue from Contracts with Customers.

We account for individual products and services separately in the contract if they are distinct (i.e., if a product or service is separately identifiable from the other items in the contract and if a Representative can benefit from the product or service on its own or with other resources that are readily available). This revenue is recognized at a point in time, when control of a product is transferred to a Representative. In addition, we offer incentives to Representatives to support sales growth. Certain of these sales incentives are distinct promises to a Representative, and therefore are a separate performance obligation. As a result, revenue is allocated to the performance obligation for sales incentives and is deferred on the balance sheet until the associated performance obligations are satisfied.

Typically included within a contract 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. Variable consideration is generally estimated using the expected value method, which considers possible outcomes weighted by their probability. Specifically for sales returns, a ~~new Topic, Accounting Standards Codification Topic ("ASC") 606.~~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. Sales returns are estimated and updated at the end of each month. The ~~core principle~~measurement of the ~~guidance~~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).

The Representative generally receives a credit period of one sales campaign if they meet certain criteria; however, the specific credit terms are outlined in the Representative Agreement. Generally, the Representative remits payment 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.

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 ~~an entity~~ should ~~recognize~~be accounted for separately may require significant judgment. In addition, in assessing the recognition of revenue ~~to depict~~for the ~~transfer~~following 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 in order to ~~customers~~determine and allocate the transaction price.

Performance obligation - Avon products

The Representative purchases Avon products through a purchase order. We recognize revenue for Avon products in annet sales in our Consolidated Statements of Operations when the Representative obtains control of the products, which occurs upon delivery of the product to the Representative. Transaction price is the amount ~~that reflects the consideration~~we expect to ~~which the entity expects to be entitled~~receive in exchange for those ~~goods~~products adjusted for variable consideration as discussed above and the estimated SSP of other performance obligations as discussed below.

Performance obligation - Sales incentives

Types of sales incentives include status programs, loyalty points, prospective discounts, and gift with purchase, among others. A Representative is eligible for certain status programs if specified sales levels are met. Status programs offer additional benefits such as free or discounted products and services. Loyalty points offer the option to redeem for additional Avon or other products or services. ~~This new accounting guidance may be adopted either retrospectively or as~~Prospective discounts are offered in some countries when certain sales levels are reached in a ~~cumulative-effect adjustment as of~~given time period. The revenue attributable to the ~~date of adoption. We intend~~prospective discount performance obligation is for the option to ~~adopt this new accounting guidance as~~purchase additional product at a ~~cumulative-effect adjustment as of January 1, 2018. Based~~discounted amount.

Certain benefits within status programs, loyalty points, prospective discounts and certain other sales incentives constitute a material right and, therefore, a distinct performance obligation in the contract with the Representative. Transaction price is allocated to the material right (performance obligation) based on estimated SSP and is deferred on the ~~evaluation completed to-date, we believe that we will need to:~~

consider some of our sales incentive programs as a separate deliverable and allocate a portion of the sales transaction price to this deliverable, and thus defer a portion of the sales transaction pricebalance sheet until the ~~incentive prize~~associated performance obligations are satisfied. The cost of sales incentives is ~~redeemed;~~

consider some of our prospective discounts achieved based on sales targets as a separate deliverable and allocate a portion of the sales transaction prices to this deliverable, thus deferring a portion of the sales transaction price until future discounts are realized;

~~adjust the manner~~presented in ~~which we present our allowance for sales returns~~inventories in our Consolidated Balance ~~Sheets,~~Sheets. We recognize revenue allocated to ~~reflect a refund liability~~the material right in net sales in our Consolidated

AVON PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in millions, except per share data)

Statements of Operations at the point in time that the Representative receives the benefits of the material right or obtains control of the products, which occurs upon delivery to the Representative or upon expiration of the material right. For sales incentives that are delivered with the associated products order (such as gift with purchase), no deferral is required.

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 ~~a returns asset;~~other observable inputs.

~~reflect~~ii) Representative fees, ~~paid~~primarily for the sale of brochures to Representatives and fulfillment activities related to the contract ("Representative fees")

The purchase order in the contract with the Representative explicitly identifies activities that we will perform. This includes fees that we charge Representatives, primarily for the sale of brochures to Representatives and fulfillment activities, and also includes late payment fees (discussed above). Brochures represent promotional materials that are given directly by the Representatives to their customers as a marketing activity. Under ASC 606, brochures that are sold by Avon to Representatives through purchase orders represent separate performance obligations in the contract as these are promises made between Avon and the Representative. Although the brochures are used similar to marketing materials, the Representative generally orders and pays for the brochures, and we allocate consideration for purposes of revenue recognition. The revenue associated with brochures that are sold to Representatives is recognized in other revenue and the related cost is recognized in cost of sales in our Consolidated Statements of Operations. We recognize revenue when the Representative obtains control of the brochures, which occurs upon delivery to the ~~Company~~Representative. When brochures are given away for free to Representatives as promotional items, ~~such as brochures, sales aids and late payments as revenue, rather than as a reduction to~~the cost is recognized in selling, general and administrative expenses in our Consolidated Statements of Operations.

We often charge the Representative for shipping and handling (including order processing) and payment processing activities on the invoice, and such activities are considered to be fulfillment costs. The consideration received represents part of the transaction price in the contract that is allocated to the performance obligations in the contract. We recognize revenue for fulfillment activities in other revenue in our Consolidated Statements of Operations when the Representative obtains control of the associated products, which occurs upon delivery of the products to the Representative. The cost of these activities is recognized in selling, general and administrative expenses in our Consolidated Statements of Operations.

iii) Other revenue

We also recognize revenue from the sale of products to New Avon LLC ("~~SG&A"~~New Avon"), as ~~these represent separate performance obligations;~~

~~reflect certain~~part of a manufacturing and supply agreement, since the separation of the ~~costs associated with~~Company's North America business into New Avon on March 1, 2016, and royalties from the ~~fees paid~~licensing of our name and products, in other revenue in our Consolidated Statements of Operations.

AVON PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in millions, except per share data)

Disaggregation of revenue

In the following table, revenue is disaggregated by product or service type. All revenue is recognized at a point in time, when control of a product is transferred to a customer:



	Three Months Ended June 30, 2018
	Reportable segments
	Europe, Middle East & Africa		South Latin America		North Latin America		Asia Pacific		Total reportable segments		Other operating segments and business activities		Total
Beauty:
Skincare	$	154.4	$	143.9	$	43.8	$	30.3	$	372.4	$	2.3	$	374.7
Fragrance	143.8		131.5		52.4		20.1		347.8		0.7		348.5
Color	98.1		80.6		20.8		12.9		212.4		1.4		213.8
Total Beauty	396.3		356.0		117.0		63.3		932.6		4.4		937.0
Fashion & Home:
Fashion	72.9		49.9		22.5		40.7		185.8		1.3		187.1
Home	7.6		72.5		56.6		7.5		144.3		.4		144.7
Total Fashion & Home	80.5		122.4		79.1		48.2		330.1		1.7		331.8
Net sales	476.8		478.4		196.1		111.5		1,262.7		6.1		1,268.8
Representative fees	23.7		35.2		11.2		1.5		71.6		0.5		72.1
Other	0.2		2.6		—		0.1		2.9		8.1		11.0
Other revenue	23.9		37.8		11.2		1.6		74.5		8.6		83.1
Total revenue	$	500.7	$	516.1	$	207.3	$	113.1	$	1,337.2	$	14.7	$	1,351.9



	Six Months Ended June 30, 2018
	Reportable segments
	Europe, Middle East & Africa		South Latin America		North Latin America		Asia Pacific		Total reportable segments		Other operating segments and business activities		Total
Beauty:
Skincare	$	323.8	$	285.7	$	90.5	$	61.6	$	761.5	$	7.0	$	768.5
Fragrance	307.0		250.0		106.0		38.7		701.8		2.9		704.7
Color	218.8		161.5		41.6		26.1		448.1		4.7		452.8
Total Beauty	849.6		697.2		238.1		126.4		1,911.4		14.6		1,926.0
Fashion & Home:
Fashion	152.6		96.4		45.1		80.4		374.5		3.0		377.5
Home	16.9		144.4		97.9		14.5		273.6		1.3		274.9
Total Fashion & Home	169.5		240.8		143.0		94.9		648.1		4.3		652.4
Net sales	1,019.1		938.0		381.1		221.3		2,559.5		18.9		2,578.4
Representative fees	49.7		71.5		21.8		3.1		146.1		1.9		148.0
Other	0.3		3.7		—		0.1		4.1		14.9		19.0
Other revenue	50.0		75.2		21.8		3.2		150.2		16.8		167.0
Total revenue	$	1,069.1	$	1,013.2	$	402.9	$	224.5	$	2,709.7	$	35.7	$	2,745.4

AVON PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in millions, except per share data)

Contract balances

The timing of revenue recognition generally is different from the ~~Representative~~timing of a promise made to a Representative. As a result, we have contract liabilities, which primarily relate to the advance consideration received from Representatives prior to transfer of the related good or service for material rights, such as loyalty points and status programs, and are primarily classified within other accrued liabilities (with the long-term portion in ~~cost of sales, rather than SG&A; and~~

~~recharacterize certain costs related to sales incentives, brochures and sales aids~~other liabilities) in our Consolidated Balance ~~Sheets~~Sheets.

Generally, we record accounts receivable when we invoice a Representative. In addition, we record an estimate of an allowance for doubtful accounts on receivable balances based on an analysis of historical data and current circumstances, including seasonality and changing trends. 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 ultimate consumer of our products beyond the Representative. We have no legal recourse against the ultimate consumer for the collection of any accounts receivable balances due from ~~prepaid expenses~~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.

The following table provides information about receivables and ~~other~~contract liabilities from contracts with customers at June 30, 2018:



	June 30, 2018
Accounts receivable, net of allowances of $108.5	$	386.4
Contract liabilities	$	70.3

At January 1, 2018 and June 30, 2018 we had a contract liability of $91.8 and $70.3 , respectively, relating to ~~inventories.~~

~~As a~~certain material rights (loyalty points, status program and prospective discounts). During the six months ended June 30, 2018, we recognized $80.8 of revenue related to the contract liability balance at January 1, 2018, as the result of ~~adopting this new~~performance obligations satisfied. In addition, we deferred an additional $59.7 related to certain material rights granted during the period, for which the performance obligations are not yet satisfied. Of the amount deferred during the period, substantially all will be recognized within a year, with the significant majority to be captured within a quarter; therefore, the contract liability at June 30, 2018 will primarily be recognized in the remainder of 2018. The remaining movement in the contract liability balance is attributable to foreign exchange differences arising on the translation of the balance as at June 30, 2018 as compared with December 31, 2017.

Contract costs

Incremental costs to obtain contracts, such as bonuses or commissions, are recognized as an asset if the entity expects to recover them. However, ASC 340-40, Other Assets and Deferred Costs, offers a practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less. We elected the practical expedient and expense costs to obtain contracts when incurred because our amortization period is one year or less.

Costs to fulfill contracts with Representatives are comprised of shipping and handling (including order processing) and payment processing services, which are expensed as incurred. The fees for these services are included in the transaction price.

Changes in accounting ~~guidance,~~policies

Except for the changes below, we ~~estimate that had we~~have consistently applied the accounting policies to all periods presented in these consolidated financial statements.

We adopted ASC 606 with a date of the ~~new standard as~~initial application of January 1, ~~2016,~~2018, as a cumulative-effect adjustment to retained earnings. Therefore, the ~~impact on our full-year 2016 Consolidated Statement of Operations would have been:~~

•comparative information for prior periods has not been adjusted and continues to be reported under ASC 605, ~~an increase in total revenue by approximately 5%;~~Revenue Recognition. We applied ASC 606 to all outstanding contracts at January 1, 2018.

•We recorded a ~~decrease in gross margin by approximately 350 to 500 basis points; and~~

•~~a decrease in operating margin by approximately 10 to 30 basis points.~~

These impacts are associated with reclassifications of items in the Consolidated Statements of Operations only, which will have no impact on operating profit. These impacts do not reflect the impact due to the change in timing of recognition of revenue and associated costs that would be deferred until sales incentive programs and prospective discounts are fulfilled, which we do not believe is material to the estimated impacts discussed above. In addition, upon adoption, we do not expect the change in timing of recognition of revenue and associated costs to have a significant impact on our full-year Consolidated Statements of Operations; however, the impact may vary depending on the types of incentive programs, the volume of incentives offered, and the timing of the programs. The cumulative-effect adjustment upon adoption of the new revenue recognition standard as of January 1, 2018 ~~will depend on open~~comprised of the following:

a reduction to retained earnings of $52.7 before taxes ($41.1 after tax), with a corresponding impact to deferred income taxes of $11.6;

a reduction to prepaid expenses and other of $54.9;

an increase to inventories of $39.3; and

AVON PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in millions, except per share data)

an increase to other accrued liabilities of $37.1 due to the net impact of the establishment of a contract liability of $91.8 for deferred revenue where our performance obligations are not yet satisfied, which is partially offset by a reduction in the sales incentive accrual of $54.7.

This cumulative-effect adjustment impacting our Consolidated Balance Sheets is primarily driven by sales incentives and brochures. The other changes resulting from the new revenue recognition standard were not material.

The details of the significant changes to our accounting policy for revenue recognition and the quantitative impact of the changes on our Consolidated Financial Statements are set out below.

Performance obligations - Avon products

We recognize revenue for Avon products in net sales in our Consolidated Statements of Operations when the Representative obtains control of the products, which occurs upon delivery of the product to the Representative. Transaction price is the amount we expect to receive in exchange for those products adjusted for variable consideration, such as sales returns and past due fees, and the estimated SSP of other performance obligations, such as sales incentives. Revenue allocated to the material right (performance obligation) for sales incentives is deferred on the balance sheet until the associated performance obligations are satisfied.

Under our historical accounting, we recognized revenue for Avon products in net sales in our Consolidated Statements of Operations upon delivery of the product to the Representative. Revenue was adjusted for expected sales returns.

Performance obligations/ material rights - sales incentives

Certain benefits within status programs, ~~and~~loyalty points, prospective discounts ~~existing~~and certain other sales incentives constitute a material right and, therefore, a distinct performance obligation in the contract with the Representative. Transaction price is allocated to the material right based on estimated SSP and is deferred on the balance sheet until the associated performance obligations are satisfied. The cost of sales incentives is presented in inventories in our Consolidated Balance Sheets. We recognize revenue allocated to the material right in net sales and the associated cost of sales incentives is recognized in cost of sales in our Consolidated Statements of Operations, at ~~December 31, 2017,~~the point in time that the Representative receives the benefits of the material right or obtains control of the products, which ~~cannot~~occurs upon delivery to the Representative or upon expiration of the material right. For sales incentives that are delivered with the associated products order (such as gift with purchase), no deferral is required.

Under our historical accounting, the cost of sales incentives was generally presented in other accrued liabilities and prepaid expenses and other in our Consolidated Balance Sheets and recognized in selling, general and administrative expenses in our Consolidated Statements of Operations over the period that the sales incentive was earned.

Representative fees, primarily for the sale of brochures to Representatives and fulfillment activities related to the contract

This includes fees that we charge Representatives, primarily for the sale of brochures to Representatives and fulfillment activities, and also includes late payment fees.

Brochures - Brochures represent promotional materials that are given directly by the Representatives to their customers as a marketing activity. Under ASC 606, brochures that are sold by Avon to Representatives through purchase orders represent separate performance obligations in the contract as these are promises made between Avon and the Representative. Although the brochures are used similar to marketing materials, the Representative generally orders and pays for the brochures, and Avon allocates consideration for purposes of revenue recognition. The revenue associated with brochures that are sold to Representatives is recognized in other revenue and the related cost is recognized in cost of sales in our Consolidated Statements of Operations. We recognize revenue when the Representative obtains control of the brochures, which occurs upon delivery to the Representative. When brochures are given away for free to Representatives as promotional items, the cost is recognized in selling, general and administrative expenses in our Consolidated Statements of Operations.

Under our historical accounting, all brochure costs were initially deferred to prepaid expenses and other in our Consolidated Balance Sheets and were charged to selling, general, and administrative expenses in our Consolidated Statements of Operations over the campaign length. In addition, fees charged to Representatives for brochures were initially deferred and presented as a reduction of prepaid expenses and other in our Consolidated Balance Sheets, and were recorded as a reduction of selling, general, and administrative expenses in our Consolidated Statements of Operations over the campaign length.

Fulfillment activities and late payment fees - We often charge the Representative for shipping and handling (including order processing) and payment processing activities on the invoice, and such activities are considered to be ~~reliably estimated at this time.~~fulfillment

AVON PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in millions, except per share data)

costs. The consideration received represents part of the transaction price in the contract that is allocated to the performance obligations in the contract. We recognize revenue for fulfillment activities in other revenue in our Consolidated Statements of Operations when the Representative obtains control of the associated products, which occurs upon delivery of the products to the Representative. The cost of these activities is recognized in selling, general and administrative expenses in our Consolidated Statements of Operations. Late payment fees are recorded in other revenue in our Consolidated Statements of Operations when collected.

Under our historical accounting, revenue for shipping and handling (including order processing) activities was recorded in other revenue in our Consolidated Statements of Operations. However, the revenue for payment processing activities and late payment fees were recognized as a reduction of selling, general, and administrative expenses in our Consolidated Statements of Operations. The cost of these activities was recognized in selling, general and administrative expenses in our Consolidated Statements of Operations.

Impacts on consolidated financial statements

The following tables summarize the impacts of adopting ASC 606 on the Company's consolidated financial statements for the three months ended June 30, 2018:



	Impact of change in revenue recognition standard
Line items impacted within the Consolidated Statements of Operations	Per consolidated financial statements			Adjustments				Balances excluding the impact of adopting ASC 606
Revenue
Net sales	$	1,268.8		$	(7.6	)	⁽¹⁾	$	1,261.2
Other revenue	83.1			(50.5		)	⁽²⁾	32.6
Total revenue	1,351.9			(58.1		)		1,293.8

Costs and expenses
Cost of sales	539.7			(65.6		)	⁽³⁾	474.1
Selling, general and administrative expenses	759.2			9.5			⁽⁴⁾	768.7
Operating profit	53.0			(2.0		)		51.0
Loss before income taxes	(0.3		)	(2.0		)		(2.3		)
Income taxes	(36.7		)	(0.1		)		(36.8		)
Net loss	(37.0		)	(2.1		)		(39.1		)
Net loss attributable to Avon	(36.1		)	(2.1		)		(38.2		)

(1) Primarily relates to net impact of the timing of recognition of sales incentives.

(2) Relates to Representative fees (primarily brochure fees, late payment fees and certain other fees), which were reclassified from SG&A. Brochure fees were also impacted by the timing of recognition.

(3) Primarily relates to the cost of sales incentives and the cost of brochures paid for by Representatives, both of which were reclassified from SG&A and were also impacted by the timing of recognition.

(4) Relates to the cost of sales incentives, which were reclassified to cost of sales and were also impacted by the timing of recognition. This was partially offset by Representative fees, which were reclassified to other revenue.

AVON PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in millions, except per share data)



	Impact of change in revenue recognition standard
Line items impacted within the Consolidated Statements of Other Comprehensive Income	Per consolidated financial statements		Adjustments			Balances excluding the impact of adopting ASC 606
Net loss	(37.0	)	$	(2.1	)	$	(39.1	)
Other comprehensive income:
Total other comprehensive income, net of income taxes	(123.8	)	(2.0		)	(125.8		)
Comprehensive loss	(160.8	)	(4.1		)	(164.9		)
Comprehensive loss attributable to Avon	(159.6	)	(4.1		)	(163.7		)

The following tables summarize the impacts of adopting ASC 606 on the Company's consolidated financial statements for the six months ended June 30, 2018:



	Impact of change in revenue recognition standard
Line items impacted within the Consolidated Statements of Operations	Per consolidated financial statements			Adjustments				Balances excluding the impact of adopting ASC 606
Revenue
Net sales	$	2,578.4		$	(33.1	)	⁽¹⁾	$	2,545.3
Other revenue	167.0			(105.3		)	⁽²⁾	61.7
Total revenue	2,745.4			(138.4		)		2,607.0

Costs and expenses
Cost of sales	1,119.4			(138.6		)	⁽³⁾	980.8
Selling, general and administrative expenses	1,528.1			21.3			⁽⁴⁾	1,549.4
Operating profit	97.9			(21.1		)		76.8
Income (loss) before income taxes	10.1			(21.1		)		(11.0		)
Income taxes	(68.2		)	3.7				(64.5		)
Net loss	(58.1		)	(17.4		)		(75.5		)
Net loss attributable to Avon	(56.4		)	(17.4		)		(73.8		)

(1) Primarily relates to net impact of the timing of recognition of sales incentives.

AVON PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in millions, except per share data)



	Impact of change in revenue recognition standard
Line items impacted within the Consolidated Statements of Other Comprehensive Income	Per consolidated financial statements			Adjustments			Balances excluding the impact of adopting ASC 606
Net loss	$	(58.1	)	$	(17.4	)	$	(75.5	)
Other comprehensive income:
Total other comprehensive income, net of income taxes	(88.2		)	(1.3		)	(89.5		)
Comprehensive loss	(146.3		)	(18.7		)	(165.0		)
Comprehensive loss attributable to Avon	(144.5		)	(18.7		)	(163.2		)



	Impact of change in revenue recognition standard
Line items impacted within the Consolidated Balance Sheets	Per consolidated financial statements			Adjustments				Balances excluding the impact of adopting ASC 606
Assets
Accounts receivable, net	$	386.4		$	(6.2	)	⁽¹⁾	$	380.2
Inventories	662.2			(40.9		)	⁽²⁾	621.3
Prepaid expenses and other	290.9			47.1			⁽²⁾	338.0
Other assets	573.9			(10.9		)	⁽³⁾	563.0
Total assets	3,086.4			(10.9		)		3,075.5
Liabilities, Series C Convertible Preferred Stock and Shareholders’ Deficit
Other accrued liabilities	400.9			(28.2		)	⁽⁴⁾	372.7
Income taxes	8.6			(3.7		)		4.9
Total current liabilities	1,383.6			(31.9		)		1,351.7
Other liabilities	80.3			(1.4		)		78.9
Total liabilities	3,517.1			(33.3		)		3,483.8

Retained earnings	2,210.0			23.7			⁽⁵⁾	2,233.7
Accumulated other comprehensive loss	(1,014.4		)	(1.3		)		(1,015.7		)
Total Avon shareholders’ deficit	(918.9		)	22.4				(896.5		)
Total shareholders’ deficit	(910.5		)	22.4				(888.1		)
Total liabilities, series C convertible preferred stock and shareholders’ deficit	3,086.4			(10.9		)		3,075.5

(1) Relates to sales returns, which were reclassified from a reduction of accounts receivable to a refund liability (within other accrued liabilities) and a returns asset (within prepaid expenses and other).

(2) Primarily relates to sales incentives and brochures, both of which were reclassified from prepaid expenses and other to inventories, and were also impacted by the timing of recognition. In addition, prepaid expenses and other was impacted by the timing of recognition of brochures, as well as the reclassification of sales returns (described above).

(3) Relates to deferred tax assets associated with the cumulative-effect adjustment.

(4) Primarily relates to the contract liability for sales incentives, which is partially offset by the lower accrual for sales incentives. In addition, other accrued liabilities was impacted by the reclassification of sales returns (described above).

(5) Relates to the $41.1 cumulative-effect adjustment upon adoption of ASC 606, partially offset by the $17.4 net loss adjustment.

AVON PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in millions, except per share data)



	Impact of change in revenue recognition standard
Line items impacted within the Consolidated Statements of Cash Flows	Per consolidated financial statements			Adjustments			Balances excluding the impact of adopting ASC 606
Net loss	$	(58.1	)	$	(17.4	)	$	(75.5	)
Other	3.2			1.7			$	4.9
Changes in assets and liabilities:
Accounts receivable	(50.0		)	(2.4		)	$	(52.4	)
Inventories	(99.7		)	1.6			$	(98.1	)
Prepaid expenses and other	1.7			4.6			$	6.3
Accounts payable and accrued liabilities	(76.6		)	20.3			$	(56.3	)
Income and other taxes	(.3		)	(3.7		)	$	(4.0	)
Noncurrent assets and liabilities	(2.6		)	(4.7		)	$	(7.3	)

Other Accounting Standards Implemented

ASU 2017-07, Compensation - Retirement Benefits

In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits. This new guidance requires entities to (1) disaggregate the service cost component from the other components of net periodic benefit costs and present it with other current employee compensation costs in the Consolidated Statements of Operations and (2) present the other components of net periodic benefit costs below operating profit in other expense, ~~(income),~~ net. We ~~intend to adopt~~adopted this new accounting guidance effective January 1, 2018. The new accounting guidance iswas applied retrospectively and ~~will increase~~increased our operating profit for the three and ~~nine~~six months ended ~~September~~June 30, 2017 by $1.1 and ~~the full year 2016 by $3.9, $5.8 and $2.1,~~$2.2 respectively, but ~~will have~~had no impact on net ~~income (loss).~~loss.

Accounting Standards to be Implemented

ASU 2016-02, Leases

In February 2016, the FASB issued ASU 2016-02, Leases, which requires all assets and liabilities arising from leases to be recognized in ~~the~~our Consolidated Balance Sheets. We intend to adopt this new accounting guidance effective January 1, 2019. WeWhile we are ~~currently~~still evaluating the full effect that adopting this new accounting guidance will have on our Consolidated Financial ~~Statements.~~Statements, we believe that it will significantly increase the assets and liabilities in our Consolidated Balance Sheets.

ASU 2018-02, Income Statement - Reporting Comprehensive Income

10In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income, which permits entities to reclassify the disproportionate income tax effects of the 2017 enactment of U.S. tax reform legislation on items within accumulated other comprehensive income (loss) to retained earnings. These disproportionate income tax effect items are referred to as "stranded tax effects." We intend to adopt this new accounting guidance effective January 1, 2019. We are currently assessing the impact on our consolidated financial statements.

ASU 2016-13, Financial Instruments - Credit Losses

In January 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which requires measurement and recognition of expected credit losses for financial assets held. We intend to adopt this new accounting guidance effective January 1, 2020. We are currently assessing the impact on our consolidated financial statements.

~~AVON PRODUCTS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(U.S. dollars in millions, except per share data)~~

2. EARNINGS (LOSS) PER SHARE AND SHARE REPURCHASES

We compute earnings (loss) per share ("EPS") using the two-class method, which is an earnings (loss) allocation formula that determines earnings (loss) per share for common stock, and earnings (loss) allocated to convertible preferred stock and participating securities, as appropriate. The earnings allocated to convertible preferred stock are the larger of 1) the preferred dividends accrued in the period or 2) the percentage of earnings from continuing operations allocable to the preferred stock as if they had been converted to common stock. Our participating securities are our grants of restricted stock and restricted stock units, which contain non-forfeitable rights to dividend equivalents to the extent any dividends are declared and paid on our common stock. We compute basic EPS by dividing net income (loss) allocated to common shareholders by the weighted-average number of shares outstanding during the period. Diluted EPS is calculated to give effect to all potentially dilutive common shares that were outstanding during the period.


	Three Months Ended September 30,					Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
(Shares in millions)	2017		2016			2017			2016			2018			2017			2018			2017
Numerator from continuing operations:
Income (loss) from continuing operations, less amounts attributable to noncontrolling interests	$	12.5	$	36.7		$	(69.5	)	$	(84.0	)
Less: Earnings (loss) allocated to participating securities	.2		.5			(.9		)	(1.1		)
Numerator attributable to Avon:
Net loss attributable to Avon												$	(36.1	)	$	(45.5	)	$	(56.4	)	$	(82.0	)
Less: Loss allocated to participating securities												(.4		)	(.6		)	(.6		)	(1.0		)
Less: Earnings allocated to convertible preferred stock	5.8		6.1			17.2			12.8			6.0			5.7			12.0			11.4
Income (loss) from continuing operations allocated to common shareholders	6.5		30.1			(85.8		)	(95.7		)
Numerator from discontinued operations:
Loss from discontinued operations	$	—	$	(.7	)	$	—		$	(12.9	)
Less: Loss allocated to participating securities	—		—			—			(.2		)
Loss allocated to common shareholders	—		(.7		)	—			(12.7		)	(41.7		)	(50.6		)	(67.8		)	(92.4		)
Numerator attributable to Avon:
Net income (loss) attributable to Avon	$	12.5	$	36.0		$	(69.5	)	$	(96.9	)
Less: Earnings (loss) allocated to participating securities	.2		.5			(.9		)	(1.3		)
Less: Earnings allocated to convertible preferred stock	5.8		6.1			17.2			12.8
Income (loss) allocated to common shareholders	6.5		29.4			(85.8		)	(108.4		)
Denominator:
Basic EPS weighted-average shares outstanding	440.0		437.4			439.5			436.7			442.2			439.9			441.5			439.3
Diluted effect of assumed conversion of stock options	—		—			—			—			—			—			—			—
Diluted effect of assumed conversion of preferred stock	—		—			—			—			—			—			—			—
Diluted EPS adjusted weighted-average shares outstanding	440.0		437.4			439.5			436.7			442.2			439.9			441.5			439.3
Earnings (Loss) per Common Share from continuing operations:
Loss per Common Share attributable to Avon:
Basic	$	.01	$	.07		$	(.20	)	$	(.22	)	$	(.09	)	$	(.12	)	$	(.15	)	$	(.21	)
Diluted	.01		.07			(.20		)	(.22		)	(.09		)	(.12		)	(.15		)	(.21		)
Loss per Common Share from discontinued operations:
Basic	$	—	$	—		$	—		$	(.03	)
Diluted	—		—			—			(.03		)
Earnings (Loss) per Common Share attributable to Avon:
Basic	$	.01	$	.07		$	(.20	)	$	(.25	)
Diluted	.01		.07			(.20		)	(.25		)

Amounts in the table above may not necessarily sum due to rounding.

During the three months and six months ended ~~September~~June 30, ~~2017 and 2016,~~2018, we did not include stock options to purchase ~~18.4~~18.5 million shares and 15.0 million shares, respectively, of Avon common stock in the calculation of diluted EPS because the exercise prices of those options were greater than the average market price, and therefore, their inclusion would be anti-dilutive. During the nine months ended September 30, 2017 and 2016, we did not include stock options to purchase 16.9 million shares and 14.2

~~AVON PRODUCTS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(U.S. dollars in millions, except per share data)~~

17.4 million shares, respectively, of Avon common stock in the calculation of diluted EPS as we had a net loss ~~from continuing operations, net of tax. The~~and the inclusion of these shares would decrease the net loss per ~~share, and therefore, their~~share. Since the inclusion of such shares would be ~~anti-dilutive.~~

anti-dilutive, these are excluded from the calculation. During the three and ~~nine~~six months ended ~~September~~June 30, 2017, we did not include stock options to purchase 18.1 million shares and ~~2016,~~16.1 million shares, respectively, for the same reason.

For the three and six months ended June 30, 2018 and 2017, it is more dilutive to assume the series C convertible preferred stock is not converted into common stock; therefore, the weighted-average shares outstanding were not adjusted by the as-if

AVON PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in millions, except per share data)

converted series C convertible preferred stock because the effect would be ~~anti-dilutive. The inclusion of the series C convertible preferred stock~~anti-dilutive as it would ~~increase the net earnings per share for the three months ended September 30, 2017 and 2016 and~~ decrease the net loss per ~~share for the nine months ended September 30, 2017 and 2016.~~share. If the as-if converted series C convertible preferred stock had been dilutive, approximately 87.1 million additional shares would have been included in the diluted weighted average number of shares outstanding for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016.~~2017. See Note 5,4, Related Party Transactions.

We purchased approximately 1.1 million shares of Avon common stock for $3.2 during the first six months of 2018, as compared to approximately 1.5 million shares of Avon common stock for ~~$6.6 during the first nine months of 2017, as compared to approximately 1.3 million shares of Avon common stock for $5.3~~$6.4 during the first ~~nine~~six months of ~~2016,~~2017, through acquisition of stock from employees in connection with tax payments upon the vesting of restricted stock units and performance restricted stock units.

3. ~~DISCONTINUED OPERATIONS~~

On December 17, 2015, the Company entered into definitive agreements with affiliates controlled by Cerberus Capital Management, L.P. ("Cerberus"). The agreements include an investment agreement providing for a $435.0 investment by Cleveland Apple Investor L.P. (“Cerberus Investor”) (an affiliate of Cerberus) in the Company through the purchase of perpetual convertible preferred stock (see Note 5, Related Party Transactions) and a separation and investment agreement providing for the separation of the Company's North America business, which represented the Company's operations in the United States, Canada and Puerto Rico, from the Company into New Avon LLC ("New Avon"), a privately-held company that is majority-owned and managed by Cerberus NA Investor LLC (“Cerberus NA”) (an affiliate of Cerberus). These transactions closed on March 1, 2016.

~~The major classes of financial statement components comprising the loss on discontinued operations, net of tax for North America are shown below:~~

Three Months Ended September 30, Nine Months Ended September 30,
2016 2016
Total revenue $ —
$ 135.2
Cost of sales —
53.2
Selling, general and administrative expenses 1.0
90.0
Operating loss (1.0 ) (8.0 )
Other income items —
.6
Loss from discontinued operations, before tax (1.0 ) (7.4 )
Gain (loss) on sale of discontinued operations, before tax .3
(16.0 )
Income taxes —
10.5
Loss from discontinued operations, net of tax $ (.7 ) $ (12.9 )

~~There were no amounts recorded in discontinued operations for the three or nine months ended September 30, 2017.~~

4. INVESTMENT IN NEW AVON

In connection with the separation of the Company's North America business, ~~(as discussed in Note 3, Discontinued Operations),~~ which closed on March 1, 2016, the Company retained a 19.9% ownership interest in New ~~Avon.~~Avon, a privately-held company that is majority-owned and managed by an affiliate of Cerberus Capital Management L.P. ("Cerberus"). The Company has accounted for its ownership interest in New Avon using the equity method of accounting, which resulted in the Company recognizing its proportionate share of New Avon's income or loss and other comprehensive income or loss. Our recorded investment balance in New Avon at ~~September~~June 30, 2018 and December 31, 2017 was zero.

During the three and nine months ended September 30, 2017, the Company's proportionate share of the losses of New Avon was $6.2 and $16.0 respectively, of which $1.7 and $11.5, respectively, of these amounts was recorded within other expense, net. In addition, during the third quarter of 2017, the Company received a cash distribution of $22.0 from New Avon, which reduced our recorded investment balance in New Avon. During the third quarter of 2017, we recorded only $1.7 of the

~~AVON PRODUCTS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(U.S. dollars in millions, except per share data)~~

Company's proportionate share of the losses in New Avon, as this reduced our recorded investment balance in New Avon to zero. As a result, we have not recorded our proportionate share of New Avon's loss since the third quarter of 2017. If New Avon experiences future losses while our recorded investment balance is zero, we would not record our proportionate share of such loss. The Company's proportionate share of the losses of New Avon was ~~$4.5~~$5.8 and ~~$9.0~~$9.8 during the three and ~~seven~~six months ended ~~September~~June 30, ~~2016,~~2017, respectively, which was recorded within other expense, net. In addition, the Company's proportionate share of the post-separation other comprehensive income of New Avon was ~~a benefit of~~ an immaterial amount ~~and $.1~~ during the three and ~~nine~~six months ended ~~September~~June 30, 2017, ~~respectively,~~ and was recorded within other comprehensive income (loss).

The Company also recorded an additional loss of $.5 within other expense, net and a benefit of $1.1 within other comprehensive income (loss), during the ~~nine~~six months ended ~~September~~June 30, 2017, primarily associated with purchase accounting adjustments reported by New Avon.

Summarized financial information related to New Avon is shown below:


							Six Months Ended June 30,
	Nine Months Ended September 30, 2017			Seven Months Ended September 30, 2016			2018			2017
Total revenue	$	527.7		$	523.0		$	320.1		$	361.8
Gross profit	$	322.9		$	317.4		186.6			225.6
Net loss	$	(80.5	)	$	(45.2	)	(42.3		)	(49.4		)

AVON PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in millions, except per share data)

4. RELATED PARTY TRANSACTIONS

The following tables present the related party transactions with New Avon, ~~and~~ affiliates of ~~Cerberus.~~Cerberus and the Instituto Avon in Brazil. There are no other related party transactions. New Avon is ~~majority owned~~majority-owned and managed by Cerberus NA. See Note 3, ~~Discontinued Operations and Note 4,~~ Investment in New Avon for further details.


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Statement of Operations Data
Revenue from sale of product to New Avon⁽¹⁾	$	8.3		$	6.9		$	25.9		$	20.4		$	7.1		$	9.6		$	13.0		$	17.6
Gross profit from sale of product to New Avon⁽¹⁾	$	.2		$	.5		$	1.5		$	1.4		$	.4		$	.7		$	.7		$	1.3

Cost of sales for purchases from New Avon⁽²⁾	$	.9		$	1.2		$	3.0		$	4.1		$	.7		$	1.3		$	1.2		$	2.1

Selling, general and administrative expenses:
Transition services, intellectual property, research and development and subleases⁽³⁾	$	(7.4	)	$	(10.2	)	$	(22.5	)	$	(25.1	)
Selling, general and administrative expenses related to New Avon:
Transition services, intellectual property, technical support and innovation and subleases⁽³⁾													$	(.5	)	$	(7.2	)	$	(3.7	)	$	(15.1	)
Project management team⁽⁴⁾	$	.6		.8			$	2.2		1.8			.2			$	.8		$	.8		$	1.6
Net reduction of selling, general and administrative expenses	$	(6.8	)	$	(9.4	)	$	(20.3	)	$	(23.3	)	$	(.3	)	$	(6.4	)	$	(2.9	)	$	(13.5	)

Interest income from Instituto Avon⁽⁵⁾													$	—		$	—		$	—		$	—


	September 30, 2017		December 31, 2016		June 30, 2018		December 31, 2017
Balance Sheet Data
Inventories⁽⁵⁾⁽⁶⁾	$	.4	$	1.0	$	.4	$	.4
Receivables due from New Avon⁽⁶⁾⁽⁷⁾	$	9.1	$	11.6	$	6.7	$	9.8
Payables due to New Avon⁽⁷⁾	$	.3	$	.7
Payables due to an affiliate of Cerberus⁽⁸⁾	$	.5	$	.6
Receivables due from Instituto Avon⁽⁵⁾					$	3.6	$	—
Payables due to New Avon⁽⁸⁾					$	.3	$	.2
Payables due to an affiliate of Cerberus⁽⁹⁾					$	.4	$	.4

(1) The Company supplies product to New Avon as part of a manufacturing and supply agreement. The Company recorded revenue of $8.3 and $6.9, within other revenue, and gross profit of $.2 and $.5 associated with this agreement during the three months ended September 30, 2017 and 2016, respectively. The Company recorded revenue of $25.9 and $20.4, within other revenue, and gross profit of $1.5 and $1.4 associated with this agreement during the nine months ended September 30, 2017 and 2016, respectively.

(2) New Avon supplies product to the Company as part of the same manufacturing and supply agreement noted above. The Company purchased ~~$.8~~$.5 and ~~$1.0~~$.9 from New Avon associated with this agreement during the three months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, and recorded ~~$.9~~$.7 and ~~$1.2~~$1.3 associated with these purchases within cost of sales in our Consolidated Statement of Operations during the three

~~AVON PRODUCTS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(U.S. dollars in millions, except per share data)~~

months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively. The Company purchased ~~$2.7~~$1.2 and ~~$4.6~~$1.9 from New Avon associated with this agreement during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, and recorded ~~$3.0~~$1.2 and ~~$4.1~~$2.1 associated with these purchases within cost of sales in our Consolidated Statement of Operations during the ~~nine~~six months ended ~~September~~June 30, 2018 and 2017, ~~and 2016,~~ respectively.

(3) The Company also entered into a transition services agreement to provide certain services to New Avon, as well as an intellectual property ("IP") license agreement, an agreement for ~~research~~technical support and ~~development~~innovation and ~~subleases~~sublease for office space. In addition, New Avon ~~is performing~~performed certain services for the Company under a similar transition services ~~agreement.~~agreement, which expired during the third quarter of 2017. The Company recorded a net ~~$7.4~~$.5 and ~~$10.2~~$7.2 reduction of selling, general and administrative expenses associated with these agreements during the three months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, and a net ~~$22.5~~$3.7 and ~~$25.1~~$15.1 reduction of selling, general and administrative expenses associated with these agreements during the ~~nine~~six months ended ~~September~~June 30, 2018 and 2017, ~~and 2016, respectively. The net reduction of selling, general and administrative expenses associated with these agreements~~respectively, which generally represents a recovery of the related costs.

(4) The Company also entered into agreements with an affiliate of Cerberus, which provide for the secondment of Cerberus affiliate personnel to the Company's project management team responsible for assisting with the execution of the transformation plan (the "Transformation Plan") announced in January 2016. The Company recorded ~~$.6~~$.2 and $.8 in selling, general and administrative expenses associated with these agreements during the three months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, and recorded ~~$2.2~~$.8 and ~~$1.8~~$1.6 in selling, general and administrative expenses associated with these agreements during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively. See Note ~~12,~~11, Restructuring Initiatives for additional information related to the Transformation Plan.

AVON PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in millions, except per share data)

(5) During the second quarter of 2018, the Company entered into an agreement to loan the Instituto Avon, an independent non-government charitable organization in Brazil, $3.6 for an unsecured 5-year term at a fixed interest rate of 7% per annum, to be paid back in 5 equal annual installments. The Instituto Avon was created by an Avon subsidiary in Brazil, with board and executive team comprising of Avon Brazil management. The purpose of the loan is to provide the Instituto Avon with the means to donate funds to Fundação Pio XII (a leading cancer prevention and treatment organization in Brazil and owner of the Hospital do Câncer de Barretos), in order to invest in equipment with the objective of expanding breast cancer prevention and treatment.

~~(5)~~(6) Inventories relate to purchases from New Avon, associated with the manufacturing and supply agreement, which have not yet been sold, and were classified within inventories in ~~the~~our Consolidated Balance Sheets.

~~(6)~~(7) The receivables due from New Avon relate to the agreements for transition services, the IP license, ~~research~~technical support and ~~development~~innovation and subleases for office space, as well as the manufacturing and supply agreement, and were classified within prepaid expenses and other in ~~the~~our Consolidated Balance Sheets.

~~(7)~~(8) The payables due to New Avon relate to the manufacturing and supply agreement, and were classified within other accrued liabilities in ~~the~~our Consolidated Balance Sheets.

~~(8)~~(9) The payables due to an affiliate of Cerberus relate to the agreement for the project management team, and were classified within other accrued liabilities in ~~the~~our Consolidated Balance Sheets.

In addition, the Company also issued standby letters of credit to the lessors of certain equipment, a lease for which was transferred to New Avon in connection with the separation of the Company's North America business. As of ~~September~~June 30, ~~2017,~~2018, the Company has a liability of ~~$1.6~~$1.4 for the estimated value of such standby letters of credit. The recognition of the initial liability of $2.1 was included in the estimated loss on sale of the North America business in loss from discontinued operations, net of tax during the year ended December 31, 2016.

Series C Preferred Stock

On March 1, 2016, the Company issued and sold to Cerberus Investor 435,000 shares of newly issued series C preferred stock for an aggregate purchase price of $435.0. Cumulative preferred dividends accrue daily on the series C preferred stock at a rate of 1.25% per quarter. The series C preferred stock had accrued unpaid dividends of ~~$35.6~~$53.5 as of ~~September~~June 30, ~~2017.~~2018. There were no dividends declared in the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016.~~2017.

5. INVENTORIES



Components of Inventories	June 30, 2018		December 31, 2017
Raw materials	$	191.3	$	190.6
Finished goods	470.9		407.6
Total	$	662.2	$	598.2

6. ~~INVENTORIES~~EMPLOYEE BENEFIT PLANS

Components of Inventories September 30, 2017 December 31, 2016
Raw materials $ 228.6
$ 179.3
Finished goods 433.9
407.1
Total $ 662.5
$ 586.4



	Three Months Ended June 30,
	Pension Benefits
Net Periodic Benefit Costs	U.S. Plans						Non-U.S. Plans						Postretirement Benefits
	2018			2017			2018			2017			2018			2017
Service cost	$	.9		$	1.3		$	1.2		$	1.2		$	—		$	—
Interest cost	.6			.8			4.0			4.4			.3			.3
Expected return on plan assets	(.8		)	(.8		)	(8.2		)	(6.9		)	—			—
Amortization of prior service credit	—			—			—			(.1		)	(.1		)	(.1		)
Amortization of net actuarial losses	1.3			1.3			1.8			2.0			—			.1
Net periodic benefit costs⁽¹⁾	$	2.0		$	2.6		$	(1.2	)	$	.6		$	.2		$	.3

1421

AVON PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in millions, except per share data)

~~7. EMPLOYEE BENEFIT PLANS~~


	Three Months Ended September 30,																		Six Months Ended June 30,
	Pension Benefits																		Pension Benefits
Net Periodic Benefit Costs	U.S. Plans						Non-U.S. Plans						Postretirement Benefits						U.S. Plans						Non-U.S. Plans						Postretirement Benefits
	2017			2016			2017			2016			2017			2016			2018			2017			2018			2017			2018			2017
Service cost	$	.8		$	1.3		$	1.1		$	1.2		$	—		$	—		$	1.8		$	2.7		$	2.4		$	2.4		$	.1		$	—
Interest cost	.7			.8			4.7			4.9			.1			.3			1.2			1.5			8.2			8.8			.6			.7
Expected return on plan assets	(.8		)	(1.0		)	(7.4		)	(7.5		)	—			—			(1.6		)	(1.6		)	(16.6		)	(13.6		)	—			—
Amortization of prior service credit	—			—			—			—			(.1		)	(.2		)	—			—			—			(.1		)	(.2		)	(.2		)
Amortization of net actuarial losses	1.3			1.5			2.1			1.5			—			.1			2.6			2.5			3.6			3.8			—			.1
Settlements/curtailments	—			—			3.3			—			—			—
Net periodic benefit costs⁽¹⁾	$	2.0		$	2.6		$	3.8		$	.1		$	—		$	.2		$	4.0		$	5.1		$	(2.4	)	$	1.3		$	.5		$	.6

Nine Months Ended September 30,
Pension Benefits
Net Periodic Benefit Costs U.S. Plans Non-U.S. Plans Postretirement Benefits
2017 2016 2017 2016 2017 2016
Service cost $ 3.5
$ 4.9
$ 3.5
$ 3.8
$ —
$ .1
Interest cost 2.2
5.9
13.5
16.6
.8
1.2
Expected return on plan assets (2.4 ) (7.2 ) (21.0 ) (25.0 ) —
—
Amortization of prior service credit —
(.1 ) (.1 ) —
(.3 ) (1.1 )
Amortization of net actuarial losses 3.8
9.2
5.9
4.9
.1
.2
Settlements/curtailments —
.1
3.3
—
—
—
Net periodic benefit costs⁽¹⁾
$ 7.1
$ 12.8
$ 5.1
$ .3
$ .6
$ .4

⁽¹⁾ ~~Includes $4.4~~Service cost is presented in selling, general and administrative expenses in our Consolidated Statements of ~~U.S. pension and immaterial amounts~~Operations. The components of ~~the postretirement~~net periodic benefit ~~plans (related to the U.S.) for the nine months ended September 30, 2016, which~~costs other than service cost are ~~included~~presented in ~~discontinued operations. Amounts associated with the pension and postretirement benefit plans~~other expense, net in Canada and the postretirement benefit plan in Puerto Rico, which are included in discontinued operations, have been excluded from all amounts in the table above. See Note 3, Discontinued Operations for discussionour Consolidated Statements of ~~the separation of the Company's North America business.~~Operations.

During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, we made approximately ~~$12~~$11.4 and approximately ~~$18~~$8 of contributions to the U.S. and non-U.S. defined benefit pension and postretirement benefit plans, respectively. During the remainder of ~~2017,~~2018, we anticipate contributing approximately $0 to $3$4 and approximately $2$12 to $7$17 to fund our U.S. and non-U.S. defined benefit pension and postretirement benefit plans, respectively.

In addition to the amounts in the ~~table~~tables above, during the second quarter of 2017, we recorded an $18.2 charge for a loss contingency related to a non-U.S. pension plan, for which an amendment to the plan that occurred in a prior year may not have been appropriately implemented.

8.7. CONTINGENCIES

Settlements of FCPA Investigations

As previously reported, we engaged outside counsel to conduct an internal investigation and compliance reviews focused on compliance with the Foreign Corrupt Practices Act ("FCPA") and related U.S. and foreign laws in China and additional countries. The internal investigation, which was conducted under the oversight of our Audit Committee, began in June 2008 and along with the compliance reviews, was completed in 2014.

Following our voluntary reporting of the internal investigation to both the U.S. Department of Justice (the "DOJ") and the U.S. Securities and Exchange Commission (the "SEC") and our subsequent cooperation with those agencies, the United States District Court for the Southern District of New York (the "USDC") approved in December 2014 a deferred prosecution agreement (“DPA”) entered into between the Company and the DOJ related to charges of violations of the books and records and internal controls provisions of the FCPA. In addition, Avon Products (China) Co. Ltd., a subsidiary of the Company operating in China, pleaded guilty to conspiring to violate the books and records provision of the ~~FCPA and was sentenced by~~FCPA. The USDC also entered a judgment in January 2015 approving our consent agreement with the ~~USDC~~SEC (the "Consent") to ~~pay a $68 fine. The SEC also filed a~~settle the SEC’s complaint ~~against the Company~~ charging violations of the books and records

~~AVON PRODUCTS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(U.S. dollars in millions, except per share data)~~

and internal ~~controls~~control provisions of the ~~FCPA and a consent~~FCPA.

As part of these resolutions, the Company agreed, among other things, to ~~settlement (the "Consent") which was approved in a judgment entered by the USDC in January 2015, and included $67 in~~pay fines, disgorgement and prejudgment ~~interest. The DPA, the above-mentioned guilty plea~~interest in an aggregate amount of $135 and the Consent resolved the SEC’s and the DOJ’s investigations of the Company’s compliance with the FCPA and related U.S. laws in China and additional countries. The fine was paid in December 2014 and the payment to the SEC was made in January 2015.

Under the DPA, the DOJ will defer criminal prosecution of the Company for a term of three years. If the Company remains in compliance with the DPA during its term, the charges against the Company will be dismissed with prejudice. Under the DPA, the Company also represented that it has implemented and agreed that it will continue to implement a compliance and ethics program designed to prevent and detect violations of the FCPA and other applicable anti-corruption laws throughout its operations.

~~Under the DPA and the Consent, among other things, the Company agreed~~ to have a compliance monitor (the "monitor"). ~~During July 2015, the Company engaged a~~The monitor ~~who had been approved by the DOJ and SEC. With the approval of the DOJ and the SEC, the monitor can be~~was replaced by the Company, ~~if the Company agrees to undertake~~which undertook self-reporting obligations for the remainder of the monitoring period. The DPA has expired, and the charges against the Company were dismissed with prejudice on February 5, 2018.

The Company was subject to a continued self-monitoring period, including the filing of periodic self-monitoring reports with the SEC, until the July 2018 expiry of the monitoring period ~~is scheduled to expire in~~under the Consent. The Company’s final self-monitoring report and certification of completion were filed on July ~~2018. There can be no assurance as to whether or when the DOJ and~~9, 2018, but the SEC ~~will approve replacing~~retains the ~~monitor with~~right under the ~~Company’s self-reporting. If the DOJ determines that~~Consent to request additional compliance-related information from the Company ~~has knowingly violated the DPA, the DOJ may commence prosecution or extend the term~~as part of the ~~DPA, including the monitoring provisions described above, for up to one year.~~

~~The monitor has assessed and monitored the~~ Company's compliance with the terms of the DPA and the Consent by evaluating, among other things, the Company's internal accounting controls, recordkeeping and financial reporting policies and procedures as they relate to the Company's current and ongoing compliance with the FCPA and other applicable anti-corruption laws. The monitor has recommended some changes to our policies and procedures that we have substantially adopted and are in the process of completing. The monitor may make additional recommendations that we must adopt unless they are unduly burdensome or otherwise inadvisable, in which case we may propose alternatives, which the DOJ and the SEC may or may not accept.

~~The third-party~~self-monitoring. Third-party costs incurred in connection with ~~ongoing~~self-monitoring and compliance with the ~~DPA and the~~ Consent ~~including the monitorship,~~ have not been material to ~~date and~~date. While we do not anticipate material costs going ~~forward. We currently cannot estimate~~forward, the costs that we are likely to incur in connection with self-reporting, if applicable, and any additional costs of implementing the changes, if any, to our policies and procedures required by the monitor.Company's related obligations may be costly and/or time-consuming.

Brazilian Tax Assessments

In 2002, our Brazilian subsidiary received an excise tax (IPI) assessment from the Brazilian tax authorities for alleged tax deficiencies during the years 1997-1998, which was officially closed in favor of Avon Brazil in July 2017. In December 2012,

AVON PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in millions, except per share data)

additional assessments were received for the year 2008 with respect to excise tax (IPI) and taxes charged on gross receipts (PIS and COFINS). In the second quarter of 2014, the PIS and COFINS assessments were officially closed in favor of Avon Brazil. As in the 2002 IPI case, the 2012 IPI assessment asserts that the establishment in 1995 of separate manufacturing and distribution companies in Brazil was done without a valid business purpose and that Avon Brazil did not observe minimum pricing rules to define the taxable basis of excise tax. The structure adopted in 1995 is comparable to that used by many other companies in Brazil. We believe that our Brazilian corporate structure is appropriate, both operationally and legally, and that the 2012 IPI assessment is unfounded.

These matters are being vigorously contested. In January 2013, we filed a protest seeking a first administrative level review with respect to the 2012 IPI assessment. In July 2013, the 2012 IPI assessment was upheld at the first administrative level and we appealed this decision to the second administrative level. The 2012 IPI assessment totals approximately ~~$356,~~$303, including penalties and accrued interest. On April 18, 2018, Avon received official notification that the second administrative level has issued a partially favorable and partially unfavorable decision. In this decision, the original assessment was reduced by approximately $64 (including associated penalty and interest), subject to Federal Revenue appeal. The remaining $239 of the assessment was upheld at the second administrative level. On April 20, 2018, we appealed this decision in the third administrative level.

On October 3, 2017, Avon Brazil received a new tax assessment notice regarding IPI for ~~2014, in the total amount of~~2014. The 2017 IPI assessment totals approximately ~~$270,~~$232, including penalties and accrued interest. In line with the other assessments received in the past, the Brazilian tax authorities assert that the structure adopted in 2005 has no valid business ~~purpose.~~purpose and that Avon Brazil did not observe minimum pricing rules to define the taxable basis of excise tax. Avon will vigorously contest this assessment, and presented the first defense on November 1, 2017. On April 2, 2018, Avon was notified of an unfavorable decision at the first administrative level. On April 27, 2018, we filed an appeal in the second administrative level.

In the event that the 2012 and the 2017 IPI assessments are upheld in the third and final administrative level, it may be necessary for us to provide security to pursue further appeals in the judicial levels, which, depending on the circumstances, may result in a charge to earnings and an adverse effect on the Company's Consolidated Statements of Cash Flows. It is not possible to reasonably estimate the likelihood or potential amount of assessments that may be issued for subsequent periods (tax years up through 2010 are closed by statute). However, other similar IPI assessments involving different periods (1998-2001) have been ~~canceled~~cancelled and officially closed in our favor by the second administrative level and in July 2017 we received the official cancellation of the 2002 assessment pursuant to the

~~AVON PRODUCTS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(U.S. dollars in millions, except per share data)~~

favorable decision discussed above. We believe that the ~~likelihood that the~~ 2012 and the 2017 IPI assessments are unfounded, however, based on the likelihood that these will be upheld, iswe assess the risks as disclosed above as reasonably possible. ~~As stated above, we believe that the 2012 and 2017 IPI assessments are unfounded.~~ At ~~September~~June 30, ~~2017,~~2018, we have not recognized a liability for the 2012 or 2017 IPI assessments.

Brazil IPI Tax on Cosmetics

In May 2015, an Executive Decree on certain cosmetics went into effect in Brazil which increased the amount of IPI taxes that are to be remitted by Avon Brazil to the taxing authority on the sales of cosmetic products subject to IPI. Avon Brazil filed an objection to this IPI tax increase on the basis that it is not constitutional. In December 2016, Avon Brazil received a favorable decision from the Federal District Court regarding this objection. This decision has been appealed by the tax authorities.

From May 2015 through April 2016, Avon Brazil remitted the taxes associated with this IPI tax increase into a judicial deposit which would be remitted to the taxing authorities in the event that we are not successful in our objection to the tax increase. In May 2016, Avon Brazil received a favorable preliminary decision on its objection to the tax and was granted a preliminary injunction. As a result, beginning in May 2016, Avon Brazil is no longer required to remit the taxes associated with IPI into a judicial deposit. AsWhile an increasing number of recent preliminary decisions have been in favor of the ~~IPI tax increase remains in effect, Avon Brazil~~taxpayer, as of

June 30, 2018, we have concluded that it is ~~continuing~~appropriate to continue to recognize the associated IPI taxes ~~associated with the May 2015 Executive Decree~~ as a liability. At ~~September~~June 30, ~~2017,~~2018, the liability to the taxing authorities for this IPI tax increase was approximately ~~$185~~$191 and was classified within long-term sales taxes and taxes other than income

in our Consolidated Balance Sheets, and the judicial deposit was approximately ~~$76~~$65 and was classified within prepaid expenses and other ~~assets~~ in our Consolidated Balance Sheets. The net liability that ~~does~~did not have a corresponding judicial deposit was approximately ~~$109~~$126 at ~~September~~June 30, ~~2017,~~2018, and the interest associated with this net liability has been and will continue to be recognized in other expense, net. Our cash flow from operations has benefited as compared to our earnings as we have recognized the expense and associated interest related to this IPI tax in our Consolidated Statements of Operations; however, since May 2016, we have not made a corresponding cash payment into a judicial ~~deposit.~~deposit based on the preliminary injunction that is still in force. On June 12, 2018, we received a decision authorizing Avon to withdraw the amount held as a judicial deposit, substituting it by letter of guarantee, which was presented; on July 30, 2018, the funds were received in our bank account. The tax authorities have presented an appeal against that decision.

An unfavorable ruling to our objection of this IPI tax increase would have an adverse effect on the Company's Consolidated Statements of Cash Flows as Avon Brazil would have to remit the liability owed to the taxing ~~authorities. This amount would be partially offset by~~authorities (including the ~~amount of the~~ judicial

AVON PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in millions, except per share data)

deposit ~~held by Avon Brazil.~~that was returned to us on July 30, 2018). We are not able to reliably predict the timing of the outcome of our objection to this tax increase.

Talc-Related Litigation

The Company has been named a defendant in numerous personal injury lawsuits filed in U.S. courts, alleging that certain talc products the Company sold in the past were contaminated with asbestos. Many of these actions involve a number of codefendants from a variety of different industries, including manufacturers of cosmetics and manufacturers of other products that, unlike the Company’s products, were designed to contain asbestos. We believe that the claims against us are without merit. We are defending vigorously against these claims and will continue to do so. To date, there have been no findings of liability against the Company in any of these cases but we are unable to predict the ultimate outcome of each case. Additional similar cases arising out of the use of the Company's talc products are reasonably anticipated. At this time, we are unable to estimate our reasonably possible losses, if any. Also, in light of the inherent litigation uncertainties, potential costs to litigate these cases are not known, but they may be significant, though some costs will be covered by insurance.

Brazilian Labor-Related Litigation

On an ongoing basis, the Company is subject to numerous and diverse labor-related lawsuits filed by employees in Brazil. These cases are assessed on an aggregated and ongoing basis based on historical outcomes of similar cases. The claims made are often for significantly larger sums than have historically been paid out by the Company. Our practice continues to be to recognize a liability based on our assessment of historical payments in similar cases. Our best estimate of the probable loss for such current cases at June 30, 2018 is approximately $13 and, accordingly, we have recognized a liability for this amount.

Other Matters

Various other lawsuits and claims, arising in the ordinary course of business or related to businesses previously sold, are pending or threatened against Avon. In management's opinion, based on its review of the information available at this time, the total cost of resolving such other contingencies at ~~September~~June 30, ~~2017,~~2018, is not expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

9.8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The tables below present the changes in AOCI by component and the reclassifications out of AOCI for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016:~~2017:

Three Months Ended September 30, 2017: Foreign Currency Translation Adjustments Net Investment Hedges Pension and Postretirement Benefits Investment in New Avon Total
Balance at June 30, 2017 $ (839.7 ) $ (4.3 ) $ (114.0 ) $ 3.4
$ (954.6 )
Other comprehensive income other than reclassifications 13.5
—
—
—
13.5
Reclassifications into earnings:
Amortization of net actuarial loss and prior service cost, net of tax of $0.0⁽¹⁾
—
—
6.5
—
6.5
Total reclassifications into earnings —
—
6.5
—
6.5
Balance at September 30, 2017 $ (826.2 ) $ (4.3 ) $ (107.5 ) $ 3.4
$ (934.6 )



Three Months Ended June 30, 2018	Foreign Currency Translation Adjustments			Net Investment Hedges			Pension and Postretirement Benefits			Investment in New Avon		Total
Balance at March 31, 2018	$	(797.3	)	$	(4.3	)	$	(92.8	)	$	3.4	$	(891.0	)
Other comprehensive income other than reclassifications	(126.2		)	—			—			—		(126.2		)
Reclassifications into earnings:
Amortization of net actuarial loss and prior service cost, net of tax of $.1⁽¹⁾	—			—			2.8			—		2.8
Total reclassifications into earnings	—			—			2.8			—		2.8
Balance at June 30, 2018	$	(923.5	)	$	(4.3	)	$	(90.0	)	$	3.4	$	(1,014.4	)



Three Months Ended June 30, 2017:	Foreign Currency Translation Adjustments			Net Investment Hedges			Pension and Postretirement Benefits			Investment in New Avon		Total
Balance at March 31, 2017	$	(849.0	)	$	(4.3	)	$	(117.1	)	$	3.3	$	(967.1	)
Other comprehensive income other than reclassifications	9.3			—			—			.1		9.4
Reclassifications into earnings:
Amortization of net actuarial loss and prior service cost, net of tax of $0.0⁽¹⁾	—			—			3.1			—		3.1
Total reclassifications into earnings	—			—			3.1			—		3.1
Balance at June 30, 2017	$	(839.7	)	$	(4.3	)	$	(114.0	)	$	3.4	$	(954.6	)

1724

AVON PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in millions, except per share data)

Three Months Ended September 30, 2016: Foreign Currency Translation Adjustments Cash Flow Hedges Net Investment Hedges Pension and Postretirement Benefits Total
Balance at June 30, 2016 $ (862.7 ) $ (.4 ) $ (4.3 ) $ (142.4 ) $ (1,009.8 )
Other comprehensive income other than reclassifications 15.4
—
—
.7
16.1
Reclassifications into earnings:
Derivative losses on cash flow hedges, net of tax of $0.0⁽²⁾
—
1.8
—
—
1.8
Amortization of net actuarial loss and prior service cost, net of tax of $.2⁽¹⁾
—
—
—
2.9
2.9
Total reclassifications into earnings —
1.8
—
2.9
4.7
Balance at September 30, 2016 $ (847.3 ) $ 1.4
$ (4.3 ) $ (138.8 ) $ (989.0 )



Six Months Ended June 30, 2018:	Foreign Currency Translation Adjustments			Net Investment Hedges			Pension and Postretirement Benefits			Investment in New Avon		Total
Balance at December 31, 2017	$	(829.6	)	$	(4.3	)	$	(95.7	)	$	3.4	$	(926.2	)
Other comprehensive income other than reclassifications	(93.9		)	—			—			—		(93.9		)
Reclassifications into earnings:
Amortization of net actuarial loss and prior service cost, net of tax of $0.3⁽¹⁾	—			—			5.7			—		5.7
Total reclassifications into earnings	—			—			5.7			—		5.7
Balance at June 30, 2018	$	(923.5	)	$	(4.3	)	$	(90.0	)	$	3.4	$	(1,014.4	)


Nine Months Ended September 30, 2017:	Foreign Currency Translation Adjustments			Net Investment Hedges			Pension and Postretirement Benefits			Investment in New Avon		Total
Six Months Ended June 30, 2017:															Foreign Currency Translation Adjustments			Net Investment Hedges			Pension and Postretirement Benefits			Investment in New Avon		Total
Balance at December 31, 2016	$	(910.9	)	$	(4.3	)	$	(120.2	)	$	2.2	$	(1,033.2	)	$	(910.9	)	$	(4.3	)	$	(120.2	)	$	2.2	$	(1,033.2	)
Other comprehensive income other than reclassifications	84.7			—			—			1.2		85.9			71.2			—			—			1.2		72.4
Reclassifications into earnings:
Amortization of net actuarial loss and prior service cost, net of tax of $0.0⁽¹⁾	—			—			12.7			—		12.7			—			—			6.2			—		6.2
Total reclassifications into earnings	—			—			12.7			—		12.7			—			—			6.2			—		6.2
Balance at September 30, 2017	$	(826.2	)	$	(4.3	)	$	(107.5	)	$	3.4	$	(934.6	)
Balance at June 30, 2017															$	(839.7	)	$	(4.3	)	$	(114.0	)	$	3.4	$	(954.6	)

Nine Months Ended September 30, 2016: Foreign Currency Translation Adjustments Cash Flow Hedges Net Investment Hedges Pension and Postretirement Benefits Total
Balance at December 31, 2015 $ (950.0 ) $ (1.3 ) $ (4.3 ) $ (410.6 ) $ (1,366.2 )
Other comprehensive income (loss) other than reclassifications 31.4
—
—
(10.6 ) 20.8
Reclassifications into earnings:
Derivative losses on cash flow hedges, net of tax of $0.0⁽²⁾
—
2.7
—
—
2.7
Amortization of net actuarial loss and prior service cost, net of tax of $.6⁽¹⁾
—
—
—
12.4
12.4
Deconsolidation of Venezuela, net of tax of $0.0 81.3
—
—
.8
82.1
Separation of North America, net of tax of $10.2 (10.0 ) —
—
269.2
259.2
Total reclassifications into earnings 71.3
2.7
—
282.4
356.4
Balance at September 30, 2016 $ (847.3 ) $ 1.4
$ (4.3 ) $ (138.8 ) $ (989.0 )

(1) Gross amount reclassified to pension and postretirement expense, within ~~selling, general & administrative expenses,~~other expense, net in our Consolidated Statements of Operations, and related taxes reclassified to income ~~taxes.~~taxes in our Consolidated Statements of Operations.

~~(2)~~ ~~Gross amount reclassified to interest expense,~~Foreign exchange net loss of $9.6 and ~~related taxes reclassified to income taxes.~~

~~A foreign exchange~~ net gain of ~~$5.0 and net loss of $1.9~~$6.4 for the three months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, and a foreign exchange net losses of $3.7 and net gain of ~~$14.8 and net loss of $12.8~~$9.8 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, resulting from the translation of actuarial losses and prior service cost recorded in AOCI, are included in foreign currency translation adjustments in our Consolidated Statements of Comprehensive ~~Income (Loss).~~Loss.

~~AVON PRODUCTS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(U.S. dollars in millions, except per share data)~~

~~10.~~9. SEGMENT INFORMATION

We determine segment profit by deducting the related costs and expenses from segment revenue. ~~In order to ensure comparability between periods, segment~~Segment profit includes an allocation of global marketing expenses based on actual revenues. Segment profit excludes global expenses other than the allocation of marketing, costs to implement ("CTI") restructuring initiatives (see Note ~~12,~~11, Restructuring Initiatives), a loss contingency related to a ~~non-U.S.~~non U.S. pension plan (see Note 7,6, Employee Benefit Plans), certain significant asset impairment charges, and other items, which are not allocated to a particular segment, if applicable. This is consistent with the manner in which we assess our performance and allocate resources.

Summarized financial information concerning our reportable segments was as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
Total Revenue	2017		2016		2017		2016		2018		2017		2018		2017
Europe, Middle East & Africa	$	482.8	$	476.4	$	1,484.9	$	1,517.7	$	500.7	$	494.6	$	1,069.1	$	1,002.1
South Latin America	589.7		594.8		1,647.0		1,556.9		516.1		558.1		1,013.2		1,057.3
North Latin America	206.0		196.8		607.0		625.9		207.3		207.8		402.9		401.0
Asia Pacific	130.1		131.4		379.0		406.4		113.1		113.9		224.5		227.3
Total revenue from reportable segments	1,408.6		1,399.4		4,117.9		4,106.9		1,337.2		1,374.4		2,709.7		2,687.7
Other operating segments and business activities	9.2		9.4		28.9		42.7		14.7		21.5		35.7		41.3
Total revenue	$	1,417.8	$	1,408.8	$	4,146.8	$	4,149.6	$	1,351.9	$	1,395.9	$	2,745.4	$	2,729.0

AVON PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in millions, except per share data)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
Operating Profit	2017			2016			2017			2016			2018			2017			2018			2017
Segment Profit
Europe, Middle East & Africa	$	65.9		$	66.2		$	222.5		$	218.3		$	74.4		$	80.8		$	148.8		$	154.3
South Latin America	66.3			73.8			124.8			157.9			55.2			45.7			82.4			59.4
North Latin America	17.2			24.4			56.0			85.0			19.0			18.2			39.8			39.6
Asia Pacific	13.0			12.9			34.1			43.1			7.3			10.2			17.7			23.5
Total profit from reportable segments	$	162.4		$	177.3		$	437.4		$	504.3		$	155.9		$	154.9		$	288.7		$	276.8
Other operating segments and business activities	1.1			(1.0		)	3.9			3.2			(.6		)	(.3		)	1.6			.6
Unallocated global expenses	(74.3		)	(77.5		)	(243.3		)	(249.6		)	(78.6		)	(83.3		)	(157.8		)	(166.4		)
CTI restructuring initiatives	(6.2		)	(14.0		)	(36.5		)	(70.2		)	(23.7		)	(20.4		)	(34.6		)	(30.3		)
Loss contingency	—			—			(18.2		)	—			—			(18.2		)	—			(18.2		)
Legal settlement	—			27.2			—			27.2
Operating profit	$	83.0		$	112.0		$	143.3		$	214.9		$	53.0		$	32.7		$	97.9		$	62.5

Other operating segments and business activities include ~~the first quarter of 2016 results of Venezuela, as it was deconsolidated effective March 31, 2016, as well as~~ markets that have been exited. Effective in the first quarter of ~~2017,~~2018, given that we ~~exited Thailand~~are exiting Australia and New Zealand during ~~2016,~~2018, the results of ~~Thailand~~Australia and New Zealand are now reported in Other operating segments and business activities for all periods presented, while previously the results had been reported in the Asia ~~Pacific.~~Pacific segment. Other operating segments and business activities also include revenue from the sale of products to New Avon since the separation of the Company's North America business into New Avon on March 1, 2016 and ongoing royalties from the licensing of our name and products.

10. SUPPLEMENTAL BALANCE SHEET INFORMATION

At June 30, 2018 and December 31, 2017, prepaid expenses and other included the following:



Components of Prepaid Expenses and Other	June 30, 2018		December 31, 2017
Prepaid taxes and tax refunds receivable	$	113.3	$	111.6
Receivables other than trade	54.8		67.2
Prepaid brochure costs, paper and other literature⁽¹⁾	13.9		64.8
Judicial deposit for Brazil IPI tax on cosmetics (Note 7)	65.0		—
Other	43.9		52.8
Prepaid expenses and other	$	290.9	$	296.4

(1) The decrease in prepaid brochure costs, paper and other literature is primarily due to the adoption of ASC 606. Effective January 1, 2018, the costs associated with brochures that will be purchased by the Representative are presented within inventories in our Consolidated Balance Sheets, while the costs associated with brochures that will be given away for free as promotional items are reflected within prepaid expenses and other in our Consolidated Balance Sheets. Previously, the net of the costs and fees charged to Representatives for all brochures were presented within prepaid expenses and other in our Consolidated Balance Sheets. See Note 1, Accounting Policies for further details.

1926

AVON PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in millions, except per share data)

~~11. SUPPLEMENTAL BALANCE SHEET INFORMATION~~

At ~~September~~June 30, ~~2017~~ ~~and~~ ~~December 31, 2016, prepaid expenses and other included the following:~~

Components of Prepaid Expenses and Other September 30, 2017 December 31, 2016
Prepaid taxes and tax refunds receivable $ 107.4
$ 99.3
Prepaid brochure costs, paper and other literature 72.6
73.2
Receivables other than trade 55.8
68.3
Other 56.4
50.5
Prepaid expenses and other $ 292.2
$ 291.3

At ~~September 30, 2017~~2018 and December 31, ~~2016,~~2017, other assets included the following:


Components of Other Assets	September 30, 2017		December 31, 2016		June 30, 2018		December 31, 2017
Deferred tax assets	$	162.9	$	162.1	$	199.8	$	203.8
Net overfunded pension plans					90.6		82.0
Capitalized software					81.8		85.2
Judicial deposits other than Brazil IPI tax (see below)	84.3		78.0		71.7		82.2
Capitalized software	81.4		83.9
Judicial deposit for Brazil IPI tax on cosmetics (Note 7)					—		73.8
Long-term receivables	81.4		78.9		71.1		75.6
Judicial deposit for Brazil IPI tax on cosmetics (Note 8)	75.6		69.0
Net overfunded pension plans	73.0		54.8
Trust assets associated with supplemental benefit plans	36.7		35.2		37.4		37.1
Tooling (plates and molds associated with our beauty products)	13.2		14.7		10.2		12.5
Investment in New Avon (Note 4)	—		32.8
Other	12.3		12.3		11.3		14.0
Other assets	$	620.8	$	621.7	$	573.9	$	666.2

~~12.~~11. RESTRUCTURING INITIATIVES

Transformation Plan

In January 2016, we ~~announced the~~initiated a Transformation Plan, which ~~includes~~included cost reduction efforts to continue to improve our cost structure and to enable us to reinvest in growth. ~~As a result of~~Under this plan, we ~~have~~had targeted pre-tax annualized cost savings of approximately $350 after three years, with an estimated $200 from supply chain reductions and an estimated $150 from other cost reductions, which ~~are~~were expected to be achieved through restructuring actions, as well as other cost-savings strategies that ~~will~~would 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 ~~order~~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 and mid single-digit constant-dollar revenue growth.~~margin. As part of the Transformation Plan, we identified certain actions, that we believe will reduce ongoing costs, primarily consisting of global headcount reductions relating to operating model changes, as well as the closure of Australia, New Zealand and Thailand, awhich were smaller, under-performing ~~market. These~~markets. The operating model changes include the streamlining of our corporate functions to align with the current and future needs of the business and an information technology infrastructure outsourcing initiative.

As a result of these restructuring actions approved to-date, we have recorded total costs to implement these restructuring initiatives of ~~$143.6~~$202.4 before taxes, of which ~~$37.5~~$35.3 was recorded during the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, in our Consolidated Statements of Operations. The additional charges not yet incurred associated with the restructuring actions approved to-date of approximately $5$20 to ~~$10~~$30 before taxes are expected to be recorded primarily in 2018. At this time we are unable to quantify the total costs to implement the restructuring initiatives that will be incurred through the time the Transformation Plan is fully implemented as we have not yet identified all actions to be taken.

Costs to Implement Restructuring Initiatives - Three and Six Months Ended June 30, 2018

During the three and six months ended June 30, 2018, we recorded costs to implement of $24.5 and $35.3 respectively, related to the Transformation Plan, in our Consolidated Statements of Operations. The costs consisted of the following:

net charges of $17.3 and $25.5, respectively, for employee-related costs, including severance benefits;

implementation costs of $4.7 and $5.7, respectively, primarily related to professional service fees;

accelerated depreciation of $.9 and $1.6, respectively;

inventory write-offs of $.4 and $1.1, respectively;

foreign currency translation adjustment charges of $.7 and $.7, respectively; and

contract termination and other net charges of $.5 and $.7, respectively.

Of the total costs to implement during the three months ended June 30, 2018, $24.1 was recorded in selling, general and administrative expenses and $.5 was recorded in cost of sales in our Consolidated Statement of Operations. Of the total costs to implement during the six months ended June 30, 2018, $34.2 was recorded in selling, general and administrative expenses and $1.1 was recorded in cost of sales.

2027

AVON PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in millions, except per share data)

Costs to Implement Restructuring ~~Charges~~Initiatives - Three and ~~Nine~~Six Months Ended ~~September~~June 30, 2017

During the three and ~~nine~~six months ended ~~September~~June 30, 2017, we recorded costs to implement of ~~$6.5~~$21.0 and ~~$37.5, respectively, related to the Transformation Plan, in our Consolidated Statements of Operations. The costs consisted of the following:~~

~~net charges of $2.3 and $19.4, respectively, for employee-related costs, including severance benefits;~~

~~contract termination and other net charges of $2.0 and $14.2, respectively, associated with vacating our previous corporate headquarters, including the impairment of fixed assets;~~

~~implementation costs of $1.8 and $2.5, respectively, primarily related to professional service fees; and~~

~~accelerated depreciation of $.4 and $1.4, respectively.~~

Of the total costs to implement during the three months ended September 30, 2017, all $6.5 was recorded in selling, general and administrative expenses. Of the total costs to implement during the nine months ended September 30, 2017, $37.6 was recorded in selling, general and administrative expenses and a benefit of $.1 was recorded in cost of sales.

~~Restructuring Charges - Three and Nine Months Ended September 30, 2016~~

~~During the three and nine months ended September 30, 2016, we recorded costs to implement of $14.0 and $71.5,~~$31.0, respectively, related to the Transformation Plan, in the Consolidated Statement of Operations. The costs consisted of the following:

net charges of ~~$11.8~~$9.5, and ~~$61.7,~~$17.1, respectively, for employee-related costs, including severance benefits;

contract termination and other net charges of ~~$1.0~~$10.8 and ~~$5.6, respectively;~~$12.2, respectively, associated with vacating our previous corporate headquarters;

implementation costs of ~~$1.1~~$.2 and ~~$2.6,~~$.7, respectively, primarily related to professional service fees; and

accelerated depreciation of ~~$.1~~$.5 and ~~$1.3, respectively; and~~

~~inventory write-offs of $.3 for the nine months ended September 30, 2016.~~$1.0, respectively.

Of the total costs to implement during the three months ended ~~September~~June 30, ~~2016, all $14.0~~2017, $21.0 was recorded in selling, general and administrative expenses. Of the total costs to implement during the ~~nine~~six months ended ~~September~~June 30, ~~2016, $71.2~~2017, $31.1 was recorded in selling, general and administrative expenses and ~~$.3~~a benefit of $.1 was recorded in cost of ~~sales.~~sales in our Consolidated Statement of Operations.

The tables below include restructuring costs such as employee-related costs, inventory write-offs, foreign currency translation write-offs and contract terminations, and do not include other costs to implement restructuring initiatives such as professional services fees and accelerated depreciation.

The liability balance for the Transformation Plan as of ~~September~~June 30, ~~2017~~2018 is as follows:


	Employee-Related Costs			Contract Terminations/Other			Total			Employee-Related Costs			Inventory Write-offs			Contract Terminations/Other			Foreign Currency Translation Adjustment			Total
Balance at December 31, 2016	$	48.6		$	2.8		$	51.4
2017 charges	21.7			—			21.7
Balance at December 31, 2017										$	41.2		$	—		$	8.0		$	—		$	49.2
2018 charges										30.1			1.1			1.4			.7			33.3
Adjustments	(2.3		)	14.2			11.9			(4.6		)	—			(0.7		)	—			(5.3		)
Cash payments	(28.2		)	(.1		)	(28.3		)	(13.3		)	—			(3.8		)	—			(17.1		)
Non-cash write-offs	—			(14.0		)	(14.0		)	—			(1.1		)	—			(.7		)	(1.8		)
Foreign exchange	.5			—			.5			(2.0		)	—			—			—			(2.0		)
Balance at September 30, 2017	$	40.3		$	2.9		$	43.2
Balance at June 30, 2018										$	51.4		$	—		$	4.9		$	—		$	56.3

The majority of cash payments, if applicable, associated with these charges are expected to be made during ~~2017.~~2018.

The following table presents the restructuring charges incurred to date, under the Transformation Plan, along with the estimated charges expected to be incurred on approved initiatives under the plan:


	Employee- Related Costs		Inventory Write-offs		Foreign Currency Translation Adjustment Write-offs		Contract Terminations/Other		Total		Employee- Related Costs		Inventory Write-offs		Foreign Currency Translation Adjustment Write-offs		Contract Terminations/Other		Total
Charges incurred to-date	$	103.4	$	.4	$	2.7	$	22.9	$	129.4	$	136.5	$	2.0	$	3.4	$	36.7	$	178.6
Estimated charges to be incurred on approved initiatives	6.3		—		—		1.2		7.5		6.6		—		—		6.8		13.4
Total expected charges on approved initiatives	$	109.7	$	.4	$	2.7	$	24.1	$	136.9	$	143.1	$	2.0	$	3.4	$	43.5	$	192.0

2128

AVON PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in millions, except per share data)

The charges, net of adjustments, of initiatives under the Transformation Plan, along with the estimated charges expected to be incurred on approved initiatives under the plan, by reportable segment are as follows:


	Europe, Middle East & Africa			South Latin America			North Latin America			Asia Pacific			Global & Other Operating Segments		Total		Europe, Middle East & Africa		South Latin America			North Latin America			Asia Pacific			Global & Other Operating Segments		Total
2015	$	—		$	—		$	—		$	—		$	21.4	$	21.4	$	—	$	—		$	—		$	—		$	21.4	$	21.4
2016	30.9			13.2			4.4			11.7			14.2		74.4		30.9		13.2			4.4			9.1			16.8		74.4
First quarter 2017	3.0			2.7			(.1		)	(.5		)	3.9		9.0
Second quarter 2017	(.1		)	3.0			—			(.1		)	17.5		20.3
Third quarter 2017	(.1		)	(.1		)	—			—			4.5		4.3
2017																	.9		5.6			(.6		)	(.5		)	49.4		54.8
First quarter 2018																	3.2		5.3			0.6			—			—		9.1
Second quarter 2018																	4.7		(.1		)	—			—			14.3		18.9
Charges incurred to-date	33.7			18.8			4.3			11.1			61.5		129.4		39.7		24.0			4.4			8.6			101.9		178.6
Estimated charges to be incurred on approved initiatives	1.2			—			—			—			6.3		7.5		.5		—			—			6.5			6.4		13.4
Total expected charges on approved initiatives	$	34.9		$	18.8		$	4.3		$	11.1		$	67.8	$	136.9	$	40.2	$	24.0		$	4.4		$	15.1		$	108.3	$	192.0

The charges above are not included in segment profit, as this excludes costs to implement restructuring initiatives. We expect our total costs to implement restructuring on approved initiatives to be an estimated ~~$150~~$220 to ~~$155~~$230 before taxes under the Transformation Plan. The amounts shown in the tables above as charges recorded to-date relate to initiatives that have been approved and recorded in the consolidated financial statements as the costs are probable and estimable. The amounts shown in the tables above as total expected charges on approved initiatives represent charges recorded to-date plus charges yet to be recorded for approved initiatives as the relevant accounting criteria for recording an expense have not yet been met. In addition to the charges included in the tables above, we have incurred and will continue to incur other costs to implement restructuring initiatives such as professional services fees and accelerated depreciation.

Other Restructuring Initiatives

During the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, we recorded net benefits of ~~$.3~~$.8 and ~~$1.0,~~$.7, respectively, in selling, general and administrative expenses, in ~~the~~our Consolidated Statements of Operations, associated with ~~the~~other restructuring programs launched in 2005 and 2009, the restructuring initiatives launched in 2012 (including the cost savings initiative known as the "$400M Cost Savings Initiative"), and the restructuring actions identified during 2015 (collectively, the "Other Restructuring Initiatives"), which are substantially complete. initiatives.

During the three and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, we recorded ~~an immaterial amount~~net benefits of $.7 and ~~a net benefit of $1.3,~~$.7, respectively, in selling, general and administrative expenses, in ~~the~~our Consolidated Statements of Operations, associated with the Other Restructuring Initiatives. The liability balance associated with the Other Restructuring Initiatives, which primarily consists of employee-related costs, as of September 30, 2017 is not material.other restructuring initiatives.

12. GOODWILL



	Europe, Middle East & Africa			South Latin America		Asia Pacific		Total
Net balance at December 31, 2017	$	20.4		$	72.7	$	2.6	$	95.7

Changes during the period ended June 30, 2018:
Foreign exchange	(1.7		)	.9		—		(.8		)
Net balance at June 30, 2018	$	18.7		$	73.6	$	2.6	$	94.9

13. ~~GOODWILL~~

~~Goodwill~~

Europe, Middle East & Africa
South Latin
America

Asia
Pacific
Total
Net balance at December 31, 2016 $ 18.7
$ 72.3
$ 2.6
$ 93.6
Changes during the period ended September 30, 2017:
Foreign exchange 1.6
1.6
—
3.2
Net balance at September 30, 2017 $ 20.3
$ 73.9
$ 2.6
$ 96.8

~~14.~~ FAIR VALUE

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The assets and liabilities measured at fair value on a recurring basis were immaterial at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016.~~2017.

Fair Value of Financial Instruments

Our financial instruments include cash and cash equivalents, available-for-sale securities, short-term investments, accounts receivable, debt maturing within one year, accounts payable, long-term debt and foreign exchange forward contracts. The

~~AVON PRODUCTS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(U.S. dollars in millions, except per share data)~~

carrying value for cash and cash equivalents, accounts receivable, accounts payable and short-term investments approximate fair value because of the short-term nature of these instruments.

The net asset (liability) amounts recorded in the balance sheet (carrying amount) and the estimated fair values of our remaining financial instruments at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively, consisted of the following:


	September 30, 2017						December 31, 2016						June 30, 2018						December 31, 2017
	Carrying Amount			Fair Value			Carrying Amount			Fair Value			Carrying Amount			Fair Value			Carrying Amount			Fair Value
Available-for-sale securities	$	3.4		$	3.4		$	2.8		$	2.8		$	3.7		$	3.7		$	3.7		$	3.7
Debt maturing within one year⁽¹⁾	(16.1		)	(16.1		)	(18.1		)	(18.1		)	(12.0		)	(12.0		)	(25.7		)	(25.7		)
Long-term debt⁽¹⁾	(1,873.0		)	(1,789.9		)	(1,875.8		)	(1,877.5		)	(1,630.3		)	(1,502.3		)	(1,872.2		)	(1,718.6		)
Foreign exchange forward contracts	(.2		)	(.2		)	(2.4		)	(2.4		)	(.6		)	(.6		)	—			—

(1) The carrying value of debt maturing within one year and long-term debt is presented net of debt issuance costs and includes any related discount or premium and unamortized deferred gains on terminated interest-rate swap agreements, as applicable.

The methods and assumptions used to estimate fair value are as follows:

Available-for-sale securities - The fair values of these investments were the quoted market prices for issues listed on securities exchanges.

Debt maturing within one year and long-term debt - The fair values of our debt and other financing were determined using Level 2 inputs based on indicative market prices.

Foreign exchange forward contracts - The fair values of forward contracts were estimated based on quoted forward foreign exchange prices at the reporting date.

~~15.~~14. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We operate globally, with manufacturing and distribution facilities in various countries around the world. We may reduce our exposure to fluctuations in the fair value and cash flows associated with changes in interest rates and foreign exchange rates by creating offsetting positions, including through the use of derivative financial instruments. If we use foreign currency-rate sensitive and interest-rate sensitive instruments to hedge a certain portion of our existing and forecasted transactions, we would expect that any gain or loss in value of the hedge instruments generally would be offset by decreases or increases in the value of the underlying forecasted transactions.

We do not enter into derivative financial instruments for trading or speculative purposes, nor are we a party to leveraged derivatives. The master agreements governing our derivative contracts generally contain standard provisions that could trigger early termination of the contracts in certain circumstances, including if we were to merge with another entity and the creditworthiness of the surviving entity were to be "materially weaker" than that of Avon prior to the merger.

Derivatives are recognized in the Consolidated Balance Sheets at their fair values. The following table presents the fair value of derivative instruments outstanding ~~were immaterial~~ at ~~September~~June 30, ~~2017~~2018:



	Asset			Liability
	Balance Sheet Classification	Fair Value		Balance Sheet Classification	Fair Value
Derivatives not designated as hedges:
Foreign exchange forward contracts	Prepaid expenses and other	$	.5	Accounts payable	$	1.1
Total derivatives not designated as hedges		$	.5		$	1.1
Total derivatives		$	.5		$	1.1

~~and~~The following table presents the fair value of derivative instruments outstanding at December 31, ~~2016.~~2017:



	Asset			Liability
	Balance Sheet Classification	Fair Value		Balance Sheet Classification	Fair Value
Derivatives not designated as hedges:
Foreign exchange forward contracts	Prepaid expenses and other	$	.2	Accounts payable	$	.2
Total derivatives not designated as hedges		$	.2		$	.2
Total derivatives		$	.2		$	.2

AVON PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in millions, except per share data)

Interest Rate Risk

A portion of our borrowings is subject to interest rate risk. In the past we have used interest-rate swap agreements, which effectively converted the fixed rate on long-term debt to a floating interest rate, to manage our interest rate exposure. The agreements were designated as fair value hedges. As of ~~September~~June 30, ~~2017,~~2018, we do not have any interest-rate swap agreements. Approximately 1% of our debt portfolio at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017, was exposed to floating interest rates.

~~In January 2013, we terminated eight of our interest-rate swap agreements previously designated as fair value hedges, with notional amounts totaling $1,000. As of the interest-rate swap agreements’ termination date, the aggregate favorable adjustment to the carrying value (deferred gain) of our debt was $90.4~~, which was amortized as a reduction to interest expense over the remaining term of the underlying debt obligations. The net impact of the gain amortization was $11.7 and $19.1, respectively, for the three and nine months ended September 30, 2016, both of which included $9.2 related to the extinguishment of debt (see Note 16, Debt). At September 30, 2017, there is no unamortized deferred gain associated with the January 2013 interest-rate swap termination, as the underlying debt obligations have been paid.

In March 2012, we terminated two of our interest-rate swap agreements previously designated as fair value hedges, with notional amounts totaling $350. As of the interest-rate swap agreements’ termination date, the aggregate favorable adjustment to the carrying value (deferred gain) of our debt was $46.1, which ~~is being~~was amortized as a reduction toof interest expense ~~over the~~

~~AVON PRODUCTS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(U.S. dollars in millions, except per share data)~~

~~remaining term~~until repayment of the underlying debt obligations ~~through March 2019.~~in June 2018, at which point the remaining unamortized balance was fully released to the Consolidated Statement of Operations. The net impact of the gain amortization was ~~$1.2~~$1.3 and ~~$3.6~~$6.0 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, respectively, and ~~$5.1~~$1.2 and ~~$8.5~~$2.4 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016, respectively, both of which included $3.6 related to extinguishment of debt (see Note 16, Debt).~~2017, respectively. At ~~September~~June 30, ~~2017, the~~2018, there was no unamortized deferred gain associated with the March 2012 interest-rate swap ~~termination was $7.2, and was classified within long-term debt in our Consolidated Balance Sheets.~~termination.

Foreign Currency Risk

We may use foreign exchange forward contracts to manage a portion of our foreign currency exchange rate exposures. At ~~September~~June 30, ~~2017,~~2018, we had outstanding foreign exchange forward contracts with notional amounts totaling approximately ~~$26~~$57.0 for various currencies.

We may use foreign exchange forward contracts to manage foreign currency exposure of certain intercompany loans. These contracts are not designated as hedges. The change in fair value of these contracts is immediately recognized in earnings and substantially offsets the foreign currency impact recognized in earnings relating to the associated intercompany loans. During the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~,2018, we recorded ~~gains~~a loss of ~~$.6~~$4.0 and ~~$2.8,~~a loss of $3.1, respectively, in other expense, net in our Consolidated Statements of Operations related to these undesignated foreign exchange forward contracts. Also during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, we recorded ~~losses~~a gain of ~~$1.2~~$4.9 and ~~$4.7, respectively,~~a gain of $3.7, respectively, related to the associated intercompany loans, caused by changes in foreign currency exchange ~~rates.~~rates. During the three and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, we recorded ~~losses~~gains of ~~$1.2~~$1.7 and ~~$8.7,~~$2.2, respectively, in other expense, net in our Consolidated Statements of Operations related to these undesignated foreign exchange forward contracts. Also during the three and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, we recorded ~~gains~~losses of ~~$.1~~$2.7 and ~~$5.5,~~$3.9, respectively, related to the associated intercompany loans, caused by changes in foreign currency exchange rates.

~~16.~~15. DEBT

Revolving Credit Facility

In June 2015, ~~the Company and~~ Avon International Operations, Inc. ("AIO"), a wholly-owned domestic subsidiary of the Company, entered into a five-year $400.0 senior secured revolving credit facility (the “2015 facility”). Borrowings under the 2015 facility bear interest, at our option, at a rate per annum equal to LIBOR plus 250 basis points or a floating base rate plus 150 basis points, in each case subject to adjustment based upon a leverage-based pricing grid. In December 2017, AIO entered into an amendment to the 2015 facility, which, among other things, modified the financial covenants (interest coverage and total leverage ratios) to provide the Company additional flexibility. As of ~~September~~June 30, ~~2017,~~2018, there were no amounts outstanding under the 2015 facility.

All obligations of AIO under the 2015 facility are (i) unconditionally guaranteed by each material domestic restricted subsidiary of the Company (other than AIO, the borrower), in each case, subject to certain exceptions and (ii) fully guaranteed on an unsecured basis by the Company. The obligations of AIO and the subsidiary guarantors are secured by first priority liens on and security interest in substantially all of the assets of AIO and the subsidiary guarantors, in each case, subject to certain exceptions.

The 2015 facility will terminate in June 2020; provided, however, that it shall terminate on the 91^st day prior to the maturity of ~~the 6.50% Notes (as defined below) and~~ the 4.60% Notes (as defined below), if on such 91^st day, the applicable notes are not redeemed, repaid, discharged, defeased or otherwise refinanced in full.

Public Notes

AVON PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in millions, except per share data)

In March 2013, we issued, in a public offering, ~~$250.0 principal amount of 2.375% Notes due March 15, 2016 (the "2.375% Notes"),~~ $500.0 principal amount of 4.60% Notes due March 15, 2020 (the "4.60% Notes"), $500.0 principal amount of 5.00% Notes due March 15, 2023 (the "5.00% Notes") and $250.0 principal amount of 6.95% Notes due March 15, 2043 (the "6.95% Notes") (collectively, the "2013 Notes"). In March ~~2008,~~2009, we issued $350.0 principal amount of 6.50% Notes due March 1, 2019 (the "6.50% Notes"). Interest on the 2013 Notes is payable semi-annually on March 15 and September 15 of each year, and interest on the 6.50% Notes are payable semi-annually on March 1 and September 1 of each year.

~~In August 2015,~~On June 18, 2018, we prepaid the ~~entire~~remaining principal amount of our ~~2.375% Notes plus accrued interest and a make-whole premium. In 2016, we completed cash tender offers totaling~~6.50% Notes. The prepayment price was equal to ~~a $300.6 reduction for certain of our outstanding public notes, repurchased~~

~~AVON PRODUCTS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(U.S. dollars in millions, except per share data)~~

~~$180.5 of certain of our outstanding public notes, and prepaid~~ the remaining principal ~~amounts totaling $238.4~~amount of ~~our 4.20% Notes due July 15, 2018 and our 5.75% Notes due March 1, 2018,~~$237.8, plus ~~accrued interest and~~ a make-whole premium ~~(the "2016~~of $6.2 and accrued interest of $4.6. In connection with

the prepayment, we incurred a loss on extinguishment of debt ~~transactions")~~of $2.9 before tax in the second quarter of 2018 consisting of the $6.2 make-whole premium, and the write-off of $.3 of debt issuance costs and discounts related to the initial issuances of the notes that were prepaid, partially offset by a write off of a deferred gain of $3.6 associated with the March 2012 interest-rate swap agreement termination (see Note 14, Derivative Instruments and Hedging Activities).

The indenture governing the 2013 Notes contains interest rate adjustment provisions depending on the long-term credit ratings assigned to the 2013 Notes by S&P and Moody's. As described in the indenture, the interest rates on the 2013 Notes increase by .25% for each one-notch downgrade below investment grade on each of our long-term credit ratings assigned to the 2013 Notes by S&P or Moody's. These adjustments are limited to a total increase of 2% above the respective interest rates in effect on the date of issuance of the 2013 Notes. As a result of the long-term credit rating downgrades by S&P and Moody's since issuance of the 2013 Notes, the interest rates on these notes have increased by the maximum allowable increase.

In August 2016, we completed cash tender offers which resulted in a reduction of principal of $108.6 of our 5.75% Notes due March 1, 2018 (the "5.75% Notes"), $73.8 of our 4.20% Notes due July 15, 2018 (the "4.20% Notes"), $68.1 of our 6.50% Notes due March 1, 2019 (the "6.50% Notes") and $50.1 of our 4.60% Notes. In connection with the cash tender offers, we incurred a gain on extinguishment of debt of $3.9 in the third quarter of 2016, consisting of a deferred gain of $12.8 associated with the March 2012 and January 2013 interest-rate swap agreement terminations (see Note 15, Derivative Instruments and Hedging Activities), partially offset by the $5.8 of early tender premium paid for the cash tender offers, $1.2 of a deferred loss associated with treasury lock agreements designated as cash flow hedges of the anticipated interest payments on the 5.75% Notes, $1.0 of deal costs and the write-off of $.9 of debt issuance costs and discounts related to the initial issuances of the notes that were the subject of the cash tender offers.

The indentures governing our outstanding notes described above contain certain customary covenants and customary events of default and cross-default provisions. Further, we would be required to make an offer to repurchase all of our outstanding notes described above at a price equal to 101% of their aggregate principal amount plus accrued and unpaid interest in the event of a change in control involving Avon and, at such time, the outstanding notes are rated below investment grade.

Senior Secured Notes

In August 2016, AIO issued, in a private placement exempt from registration under the Securities Act of 1933, as amended, $500.0 in aggregate principal amount of 7.875% Senior Secured Notes, which will mature on August 15, 2022 (the "Senior Secured Notes"). Interest on the Senior Secured Notes is payable semi-annually on February 15 and August 15 of each year.

All obligations of AIO under the Senior Secured Notes are unconditionally guaranteed by each current and future wholly-owned domestic restricted subsidiary of the Company that is a guarantor under the 2015 facility and fully guaranteed on an unsecured basis by the Company. The obligations of AIO and the subsidiary guarantors are secured by first priority liens on and security interest in substantially all of the assets of AIO and the subsidiary guarantors, in each case, subject to certain exceptions.

The indenture governing our Senior Secured Notes contains certain customary covenants and restrictions as well as customary events of default and cross-default provisions. The indenture also contains a covenant requiring AIO and its restricted subsidiaries to, at the end of each year, own at least a certain percentage of the total assets of API and its restricted subsidiaries, subject to certain qualifications. Further, we would be required to make an offer to repurchase all of our Senior Secured Notes, at a price equal to 101% of their aggregate principal amount plus accrued and unpaid interest, in the event of a change in control involving Avon.

~~Long-Term Credit Ratings~~

16. INCOME TAXES

Our ~~long-term credit ratings are: Moody’s ratings~~quarterly income tax provision is calculated using an estimated annual effective income tax approach. The quarterly effective tax rate can differ from our estimated annual effective tax rate as the Company cannot apply an effective tax rate approach for all of ~~Stable Outlook~~its operations. For those entities that can apply an effective tax rate approach, as of June 30, 2018, our annual effective tax rate, excluding discrete items, is 25.6% for 2018, as compared to 25.9% for 2017. The remaining entities, which are operations that generate pre-tax losses which cannot be tax benefited and/or have an effective tax rate which cannot be reliably estimated, have to account for their income taxes on a discrete year-to-date basis as of the end of each quarter and are excluded from the effective tax rate approach. The estimated annual effective tax rate for 2018 also excludes the unfavorable impact of withholding taxes associated with ~~B1 for corporate family debt, B3 for senior unsecured~~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 ~~Ba1~~corporate overhead. Withholding taxes are accounted for discretely and accrued in the provision for income taxes as they become due.

The provision for income taxes for the ~~Senior Secured Notes; S&P ratings of Stable Outlook with B for corporate family debt~~three months ended June 30, 2018 and ~~senior unsecured debt~~2017 was $36.7 and ~~BB-~~$33.6, respectively. Our effective tax rates for the ~~Senior Secured Notes;~~three months ended June 30, 2018 and ~~Fitch rating~~2017 were (12,233.3)% and (275.4)%, respectively. The provision for income taxes for the six months ended June 30, 2018 and 2017 was $68.2 and $63.4, respectively. Our effective tax rates for the six months ended June 30, 2018 and 2017 were 675.2% and (335.4)%, respectively.

The effective tax rates in 2018 and 2017 were impacted by CTI restructuring charges, country mix of ~~Negative Outlook~~earnings and withholding taxes that are relatively consistent. The effective tax rate in 2018 was also negatively impacted by one-time tax reserves of $5.5 for the three months ended June 30, 2018 and $14.7 for the six months ended June 30, 2018 associated 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.uncertain tax positions.

2531

AVON PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in millions, except per share data)

In its initial analysis of the impacts of the Tax Cuts and Job Act (the “Act”) at year end 2017, the Company made provisional estimates that may be adjusted in future periods as required. As part of the 2017 provisional estimate, we provided for the Global Intangible Low-Taxed Income tax ("GILTI"), a US tax on certain foreign earnings, as a period cost. While still provisional, the first-quarter and second-quarter 2018 provisions for income taxes has been calculated treating GILTI as a period cost. The Act has significant complexity. Expected implementation guidance from the Internal Revenue Service, clarifications of state tax law and the information analyzed during the completion of the Company’s 2017 tax return filings could impact these provisional estimates.

AVON PRODUCTS, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(U.S. dollars in millions, except per share data)

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, wholly owned and controlled subsidiaries.

OVERVIEW

We are a global manufacturer and marketer of beauty and related products. Our business is conducted primarily in the direct-selling channel. During ~~2016,~~2017, we had sales operations in 5756 countries and territories, and distributed products in 18 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; South Latin America; North Latin America; and Asia Pacific. Our product categories are Beauty and Fashion & Home. Beauty consists of skincare, ~~(which includes personal care),~~ fragrance and color (cosmetics). Fashion & Home consists of fashion jewelry, watches, apparel, footwear, accessories, gift and decorative products, housewares, entertainment and leisure products, children’s products and nutritional products. Sales are made to the ultimate consumer principally through direct selling by Representatives, who are independent contractors and not our employees.

During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, revenue ~~was relatively unchanged~~increased 1% compared to the prior-year period, partially ~~benefiting from~~impacted by the unfavorable impact of foreign ~~exchange, while~~exchange. Constant $ revenue ~~decreased~~increased by 2%. ~~Our~~Revenue and Constant $ revenue ~~decline~~included a benefit of approximately 6% due to the impact of adopting the new revenue recognition standard. The 6% benefit was driven primarily by (i) the reclassification of fees paid by Representatives for brochures, late payments and payment processing from SG&A, and (ii) the timing of revenue recognition for sales incentives, as revenue recognized during the period for prior quarter sales incentives exceeded revenue deferred during the period for sales incentives not yet satisfied. Constant $ revenue was impacted by declines primarily in Brazil, partially due to a national transportation strike that affected sales and distribution, and to a lesser extent, in the United Kingdom, Mexico and South Africa. Constant $ revenue was negatively impacted by approximately 1% due to the national transportation strike in Brazil. These declines were partially offset by improved revenue growth management including inflationary pricing in Argentina. Revenue and Constant $ revenue were impacted by a decrease in Active Representatives of 4%, which was primarily driven by ~~declines~~a decline in ~~Russia,~~ Brazil, and included an estimated 1% decline attributable to the ~~United Kingdom, partially offset by growth in Argentina and South Africa. The decline~~national transportation strike. Average order in Constant $ ~~revenue was primarily due to~~increased 6%, including a 3% decrease in Active Representatives, which was partially offset by higher average order. The decrease in Active Representatives was primarily due to South Latin America (driven by Brazil) and Europe, Middle East & Africa. The net impactbenefit of ~~price and mix increased 4%, primarily~~approximately 6% due to the ~~inflationary~~ impact ~~on pricing in Argentina and Brazil.~~of adopting the new revenue recognition standard. Units sold decreased 6%4%, ~~primarily due to declines in Russia and Brazil. The revenue performance was negatively impacted most significantly~~driven by a decline in Color sales, as we experienced issues in some markets as we have begun the segmentation of our Color category into three distinct brands. The timing of innovation also contributed to the decline in Color sales; however, we expect to strengthen our Color category in the last quarter of 2017 through innovation.Brazil.

Ending Representatives decreased by 2%4%. The decrease in Ending Representatives at ~~September~~June 30, ~~2017~~2018 as compared to the prior-year period was ~~most significantly due~~attributable to all segments, and primarily Brazil, North Latin America and Russia.

The impact of the new revenue recognition standard was primarily driven by the following accounting changes effective as of January 1, 2018:

Certain of our sales incentives and prospective discounts are now considered to be a ~~decline~~separate deliverable, thus initially revenue is deferred generally until delivery of the incentive prize to the Representative or future discounts are realized, and at that time the associated cost is recognized in ~~Brazil.~~cost of sales. Historically, the cost of sales incentives was recognized in SG&A over the period that the sales incentive was earned; and

Fees paid by Representatives to the Company for brochures, late payments and payment processing are now reflected as revenue, rather than reflected as a reduction of SG&A. The associated cost for brochures that are sold is now recognized in cost of sales rather than in SG&A. Further, the fees and costs associated with brochures are now recognized upon delivery to the Representatives, rather than recognized over the campaign length.

See Note 1, Accounting Policies, to the Consolidated Financial Statements included herein for additional information on the new revenue recognition standard.

See "Segment Review" in this management's discussion and analysis of financial condition and results of operations ("MD&A") for additional information related to changes in revenue by segment.

Transformation Plan

In January 2016, we initiated a transformation plan (the “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. The Transformation Plan ~~includes~~ included

AVON PRODUCTS, INC.

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(U.S. dollars in millions, except per share data)

three pillars: invest in growth, reduce costs in an effort 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 we achieved cost savings of $120 before taxes when comparing to our costs in 2015, and we significantly strengthened the balance sheet. In 2017, ~~our~~we estimate that we achieved cost savings ~~target related to the Transformation Plan is $230~~of $255 before taxes when comparing to our costs in ~~2015, which includes~~2015. These savings include both run-rate savings from 2016, along with in-year savings from current year initiatives. ~~Based on~~These savings have mostly been offset by the ~~estimated~~impact of inflation.

During the second quarter of 2018, we estimate that we achieved cost savings of ~~$205~~$15 before taxes, ~~realized through the first nine months of 2017,~~and we ~~believe we are on track~~expect to achieve ~~this target.~~

~~To achieve the Transformation Plan, we recognize the need to focus on the foundations~~our cost savings target of our business and drive a performance-based culture. This will increase our ability to drive results and deliver steady execution going forward. While we are addressing challenges in the business, we are moving forward$65 before taxes for 2018. These savings include both run-rate savings from 2017, along with ~~urgency, focusing on the following key elements of our roadmap to growth:~~

~~Deliver a seamless, competitive Representative experience - investment to upgrade systems and drive mobile connectivity in our markets to make doing business easier for our Representatives;~~

Insightful data and analytics - improve our ability to support the Representative and help her run her business more effectively through deeper insight and analytics into Representative behavior and needs;

~~AVON PRODUCTS, INC.~~

~~MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~(U.S. dollars in millions, except per share data)~~

~~Rigorous performance management - the new executive team is a key enabler to driving a performance-based culture for ownership of results; and~~

~~Relentless focus on execution capabilities - focus on developing a service mindset, and enable the implementation changes, with minimal disruptions, through pilot programs that cover service~~in-year savings from ~~end to end.~~current year initiatives.

In connection with the actions and associated savings discussed above, we have incurred costs to implement ("CTI") restructuring initiatives of approximately ~~$144~~$202.4 before taxes associated with the Transformation Plan to-date. In connection with the restructuring actions approved to-date associated with the Transformation Plan, we expect to realize annualized cost savings of an estimated ~~$105~~$120 to ~~$115 before taxes. During the first nine months of 2017, we have realized an estimated $55~~$130 before taxes, ~~of savings~~when comparing to our costs in 2015 before the Transformation Plan initiated. Also associated with the restructuring actions, ~~and~~during the second quarter of 2018, we realized cost savings of an estimated $30 before taxes, when comparing to our costs in 2015 before the Transformation Plan initiated. We are expected to achieve the majority of the annualized savings in ~~2017.~~2018. In addition, we have realized savings from other cost-savings strategies that did not result in restructuring charges. For the market closures in Australia, New Zealand and Thailand, the expected annualized savings represented the operating loss no longer included within Avon's operating results as a result of no longer operating in the respective market. For actions that did not result in the closure of a market, the annualized savings represent the net reduction of expenses that will no longer be incurred by Avon.

For additional details on restructuring initiatives, see Note ~~12,~~11, Restructuring Initiatives, to the Consolidated Financial Statements included herein. ~~For additional details~~

Immediate operational priorities

The Company is focusing on immediate corrective priorities and regaining competitive momentum, while also finalizing plans for Avon's long-term success. Our corrective priorities include focusing on Brazil to re-energize Representatives and strengthening ~~the balance sheet, see Note 16, Debt,~~our marketing plans, improving service quality, instituting a performance culture, training Representatives, strengthening and accelerating innovation core plans and expanding digital routes to ~~the Consolidated Financial Statements included herein and "Liquidity and Capital Resources" in this MD&A for additional information.~~market.

NEW ACCOUNTING STANDARDS

Information relating to new accounting standards is included in Note 1, Accounting Policies, to the Consolidated Financial Statements included herein.

RESULTS OF OPERATIONS—THE THREE AND ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~2018 AS COMPARED TO THE THREE AND ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2016~~2017

Non-GAAP Financial Measures

To supplement our financial results presented in accordance with generally accepted accounting principles in the United States ("GAAP"), we disclose operating results that have been adjusted to exclude the impact of changes due to the translation of foreign currencies into U.S. dollars, including changes in: revenue, operating profit, Adjusted operating profit, operating margin and Adjusted operating margin. We also refer to these adjusted financial measures as Constant $ items, which are Non-GAAP financial measures. We believe these measures provide investors an additional perspective on trends 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 gross margin, selling, general and administrative expenses as a percentage of revenue, operating profit, operating margin, income (loss) before taxes, income taxes and effective tax rate on a Non-GAAP basis. We refer to these Non-GAAP financial measures as "Adjusted." We have provided a quantitative reconciliation of the difference between the Non-GAAP financial measures and the financial measures calculated and reported in accordance with GAAP. See "Reconciliation of Non-GAAP Financial Measures" within "Results of ~~Operations - Consolidated"~~Operations" 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) CTI

AVON PRODUCTS, INC.

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(U.S. dollars in millions, except per share data)

restructuring initiatives; 2) one-time tax reserves associated with our uncertain tax positions ("Special tax items"); and 3) a charge for a loss contingency related to a ~~non-U.S.~~non-US pension plan ("Loss contingency")~~; 3)~~.

The Special tax items includes the ~~net proceeds recognized as a result~~impact on the provision for income taxes in our Consolidated Statements of settling claims relating to professional services ("Legal settlement"); 4) charges related to the deconsolidation of our Venezuelan operations as of March 31, 2016 ("Venezuelan special items"); 5) a net gain related to the extinguishment of debt ("Gain on extinguishment of debt"); and, as it relates to our effective tax rate discussion, 6) income tax benefits realized inOperations during the first ~~quarter~~and second quarters of ~~2016 as a result of tax planning strategies and in the second quarter of 2016 primarily~~2018 due to ~~the release~~one-time tax reserves of ~~a valuation allowance~~approximately $9 and $6, respectively, associated with ~~Russia ("Special~~our uncertain tax ~~items").~~positions.

The Loss contingency includes the impact on the Consolidated Statements of Operations during the second quarter of 2017 caused by a charge of approximately $18 for a loss contingency related to a ~~non-U.S.~~non-US pension plan, for which an amendment to the plan that occurred in a prior year ~~may~~many not have been ~~appropriately~~properly implemented.

~~AVON PRODUCTS, INC.~~

~~MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~(U.S. dollars in millions, except per share data)~~

The Legal settlement includes the impact on the Consolidated Statements of Operations during the third quarter of 2016 associated with the net proceeds of approximately $27 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.

The Venezuelan special items include the impact on the Consolidated Statements 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 Gain on extinguishment of debt includes the impact on the Consolidated Statements of Operations during the third quarter of 2016 due to a net gain on extinguishment of debt caused by the deferred gain associated with interest-rate swap agreement terminations, partially offset by the early tender premium paid, the deferred loss associated with treasury lock agreements, deal costs and the write-off of debt issuance costs and discounts associated with the cash tender offers in August 2016.

In addition, the effective tax rate discussion includes Special tax items, including the impact on the provision for income taxes in the 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 the Consolidated Statements of Operations during the first quarter of 2016 due to an income tax benefit of approximately $29 recognized as the result of the implementation of foreign tax planning strategies.

See Note ~~12,~~11, Restructuring Initiatives, Note 7,6, Employee Benefit Plans ~~Note 1, Accounting Policies, Note 16, Debt, to the Consolidated Financial Statements included herein and "Venezuela Discussion"~~ and "Effective Tax Rate" in this MD&A for more information on these items.

AVON PRODUCTS, INC.

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(U.S. dollars in millions, except per share data)


		Three Months Ended September 30,								Nine Months Ended September 30,									Three Months Ended June 30,								Six Months Ended June 30,
		2017			2016			%/Point Change		2017			2016			%/Point Change			2018			2017			%/Basis Point Change		2018			2017			%/Basis Point Change
Select Consolidated Financial Information
Total revenue		$	1,417.8		$	1,408.8		1	%	$	4,146.8		$	4,149.6		—	%		$	1,351.9		$	1,395.9		(3	)%	$	2,745.4		$	2,729.0		1	%
Cost of sales		550.0			550.9			—	%	1,592.1			1,634.7			(3	)%		539.7			525.0			3	%	1,119.4			1,042.1			7	%
Selling, general and administrative expenses		784.8			745.9			5	%	2,411.4			2,300.0			5	%		759.2			838.2			(9	)%	1,528.1			1,624.4			(6	)%
Operating profit		83.0			112.0			(26	)%	143.3			214.9			(33	)%		53.0			32.7			62	%	97.9			62.5			57	%
Interest expense		34.8			34.4			1	%	106.0			100.3			6	%		34.5			36.1			(4	)%	70.7			71.2			(1	)%
Gain on extinguishment of debt		—			(3.9		)	*		—			(3.9		)	*
Interest income		(3.4		)	(3.5		)	(3	)%	(11.2		)	(12.8		)	(13	)%		(3.5		)	(3.1		)	13	%	(7.7		)	(7.8		)	(1	)%
Other expense, net		3.6			10.4			(65	)%	19.4			142.9			(86	)%		19.4			11.9			63	%	21.9			18.0			22	%
Income (loss) before taxes		48.0			74.6			(36	)%	29.1			(11.6		)	*			(0.3		)	(12.2		)	*		10.1			(18.9		)	*
Income (loss) from continuing operations, net of tax		11.9			36.3			(67	)%	(70.4		)	(83.7		)	16	%
Net income (loss) attributable to Avon		$	12.5		$	36.0		(65	)%	$	(69.5	)	$	(96.9	)	28	%
Net loss attributable to Avon																			$	(36.1	)	$	(45.5	)	21	%	$	(56.4	)	$	(82.0	)	31	%

Diluted earnings (loss) per share from continuing operations		$	.01		$	.07		(86	)%	$	(.20	)	$	(.22	)	9	%
Diluted earnings (loss) per share attributable to Avon		$	.01		$	.07		(86	)%	$	(.20	)	$	(.25	)	20	%
Diluted loss per share attributable to Avon																			$	(.09	)	$	(.12	)	25	%	$	(.15	)	$	(.21	)	29	%

Advertising expenses⁽¹⁾		$	29.5		$	30.3		(3	)%	$	93.2		$	78.6		19	%		$	31.9		$	33.3		(4	)%	$	61.1		$	63.4		(4	)%

Reconciliation of Non-GAAP Financial Measures	Reconciliation of Non-GAAP Financial Measures																	Reconciliation of Non-GAAP Financial Measures
Gross margin		61.2		%	60.9		%	.3		61.6		%	60.6		%	1.0			60.1		%	62.4		%	(230	)	59.2		%	61.8		%	(260	)
CTI restructuring		—			—			—		—			—			—			—		%	—		%	—		—		%	—		%	—
Adjusted gross margin		61.2		%	60.9		%	.3		61.6		%	60.6		%	1.0			60.1		%	62.4		%	(230	)	59.2		%	61.8		%	(260	)

Selling, general and administrative expenses as a % of total revenue		55.4		%	52.9		%	2.5		58.2		%	55.4		%	2.8			56.2		%	60.1		%	(390	)	55.7		%	59.5		%	(380	)
CTI restructuring		(.4		)	(1.0		)	.6		(.9		)	(1.7		)	.8			(1.8		)	(1.5		)	20	%	(1.2		)	(1.1		)	9	%
Loss contingency		—			—			—		(.4		)	—			(.4	)		—			(1.3		)	(100	)%	—			(.7		)	(100	)%
Legal settlement		—			1.9			(1.9	)	—			.7			(.7	)
Adjusted selling, general and administrative expenses as a % of total revenue		54.9		%	53.9		%	1.0		56.8		%	54.4		%	2.4			54.4		%	57.3		%	(290	)	54.4		%	57.7		%	(330	)

Operating profit		$	83.0		$	112.0		(26	)%	$	143.3		$	214.9		(33	)%		$	53.0		$	32.7		62	%	$	97.9		$	62.5		57	%
CTI restructuring		6.2			14.0					36.5			70.2						23.7			20.3			17	%	34.6			30.3			14	%
Loss contingency		—			—					18.2			—						—			18.2			(100	)%	—			18.2			(100	)%
Legal settlement		—			(27.2		)						(27.2		)
Adjusted operating profit		$	89.2		$	98.8		(10	)%	$	198.0		$	257.9		(23	)%		$	76.7		$	71.2		8	%	$	132.5		$	111.0		19	%

Operating margin		5.9		%	8.0		%	(2.1	)	3.5		%	5.2		%	(1.7	)		3.9		%	2.3		%	160		3.6		%	2.3		%	130
CTI restructuring		.4			1.0			(.6	)	.9			1.7			(.8	)		1.8			1.5			20	%	1.2			1.1			9	%
Loss contingency		—			—			—		.4			—			.4			—			1.3			(100	)%	—			.7			(100	)%
Legal settlement		—			(1.9		)	1.9		—			(.7		)	.7
Adjusted operating margin		6.3		%	7.0		%	(.7	)	4.8		%	6.2		%	(1.4	)		5.7		%	5.1		%	60		4.8		%	4.1		%	70

Change in Constant $ Adjusted operating margin⁽²⁾								(.8	)							(1.4	)

Performance Metrics
Change in Active Representatives								(3	)%							(3	)%
Change in units sold								(5	)%							(6	)%
Change in Ending Representatives								(2	)%							(2	)%
Income (loss) before taxes																			$	(0.3	)	$	(12.2	)	(98	)%	$	10.1		$	(18.9	)	(153	)%
CTI restructuring																			23.7			20.3			17	%	34.6			30.3			14	%
Loss contingency																			$	—		$	18.2		(100	)%	$	—		$	18.2		(100	)%
Adjusted income before taxes																			$	23.4		$	26.3		(11	)%	$	44.7		$	29.6		51	%

Income taxes																			(36.7		)	(33.6		)	9	%	(68.2		)	(63.4		)	8	%
CTI restructuring																			—			(0.8		)	(100	)%	(2.1		)	(1.8		)	17	%
Special tax items																			5.5			—			—		14.7			—			100.0
Adjusted income taxes																			$	(31.2	)	$	(34.4	)	(9	)%	$	(55.6	)	$	(65.2	)	(15	)%

Effective tax rate																			(12,233.3		)%	(275.4		)%	*		675.2		%	(335.4		)%	*
Adjusted effective tax rate																			133.3		%	130.8		%	250		124.4		%	220.3		%	*

AVON PRODUCTS, INC.

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(U.S. dollars in millions, except per share data)



	Three Months Ended June 30,				Six Months Ended June 30,
	2018	2017	%/Basis Point Change		2018	2017	%/Basis Point Change

Performance Metrics
Change in Active Representatives			(4	)%			(4	)%
Change in units sold			(5	)%			(4	)%
Change in Ending Representatives			(4	)%			(4	)%

* Calculation not meaningful

Amounts in the table above may not necessarily sum due to rounding.


(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.

Three Months Ended June 30, 2018

Revenue

During the three months ended June 30, 2018, revenue decreased 3% compared to the prior-year period, primarily due to the unfavorable impact of foreign exchange. Constant $ revenue increased 1%. Revenue and Constant $ revenue included a benefit of approximately 4% due to the impact of adopting the new revenue recognition standard. The 4% benefit was driven primarily by the reclassification of fees paid by Representatives for brochures, late payments and payment processing from SG&A. The impact of timing of revenue recognition for sales incentives was negligible. Constant $ revenue declined primarily in Brazil, partially due to a national transportation strike that affected sales and distribution, and to a lesser extent, the United Kingdom and South Africa. Constant $ revenue was negatively impacted by approximately 1% due to the national transportation strike in Brazil. These declines were partially offset by improved revenue growth management including inflationary pricing in Argentina. Revenue and Constant $ revenue were impacted by a decrease in Active Representatives of 4%, which was driven by South Latin America, primarily in Brazil, Europe, Middle East & Africa and North Latin America, and included an estimated 1% decline attributable to the national transportation strike in Brazil. The decrease in Active Representatives was partially offset by higher average order. Average order in Constant $ increased 6%, including a benefit of approximately 4% due to the impact of adopting the new revenue recognition standard. Units sold decreased 5%, driven by a decline in Brazil.

Ending Representatives decreased by 4%. The decrease in Ending Representatives at June 30, 2018 as compared to the prior-year period was attributable to all segments, and primarily Brazil, North Latin America and Russia.

The impact of the new revenue recognition standard was primarily driven by the following accounting changes effective as of January 1, 2018:

Certain of our sales incentives and prospective discounts are now considered to be a separate deliverable, thus initially revenue is deferred generally until delivery of the incentive prize to the Representative or future discounts are realized, and at that time the associated cost is recognized in cost of sales. Historically, the cost of sales incentives was recognized in SG&A over the period that the sales incentive was earned; and

See Note 1, Accounting Policies, to the Consolidated Financial Statements included herein for additional information on the new revenue recognition standard.

2937

AVON PRODUCTS, INC.

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(U.S. dollars in millions, except per share data)

~~Three Months Ended September 30, 2017~~

~~Revenue~~

During the three months ended September 30, 2017, revenue increased 1% compared to the prior-year period, benefiting from foreign exchange, while Constant $ revenue was relatively unchanged. Constant $ revenue growth in Argentina and the Philippines was offset by declines in Brazil and the United Kingdom. Constant $ revenue was impacted by a 3% decrease in Active Representatives which was offset by higher average order. The decrease in Active Representatives was primarily driven by a decline in Brazil. The net impact of price and mix increased 5%, primarily due to the inflationary impact on pricing in Argentina and Brazil. Units sold decreased 5%, driven by declines in Brazil, Mexico, Russia and the United Kingdom.

~~Ending Representatives decreased by 2%. The decrease in Ending Representatives at September 30, 2017 as compared to the prior-year period was most significantly due to a decline in Brazil.~~

On a category basis, our net sales from reportable segments and associated growth rates were as follows:

Three Months Ended September 30, %/Point Change
2017 2016 US$ Constant $
Beauty:
Skincare $ 397.1
$ 396.7
— % (2 )%
Fragrance 389.8
373.2
4
4
Color 246.3
243.9
1
—
Total Beauty 1,033.2
1,013.8
2
1
Fashion & Home:
Fashion 195.2
201.9
(3 ) (4 )
Home 149.8
150.4
—
(1 )
Total Fashion & Home 345.0
352.3
(2 ) (2 )
Net sales from reportable segments $ 1,378.2
$ 1,366.1
1
—
Net sales from Other operating segments and business activities —
1.4
*
*
Net sales $ 1,378.2
$ 1,367.5
1
—

* Calculation not meaningful



	Three Months Ended June 30,				% Change
	2018		2017		US$		Constant $
Beauty:
Skincare	$	372.4	$	396.3	(6	)%	(2	)%
Fragrance	347.8		366.7		(5	)	—
Color	212.4		234.1		(9	)	(5	)
Total Beauty	932.6		997.1		(6	)	(2	)
Fashion & Home:
Fashion	185.9		200.8		(7	)	(5	)
Home	144.3		145.5		(1	)	7
Total Fashion & Home	330.2		346.3		(5	)	—
Net sales from reportable segments	$	1,262.8	$	1,343.4	(6	)	(2	)
Net sales from Other operating segments and business activities	6.0		10.1		(41	)	(32	)
Net sales	$	1,268.8	$	1,353.5	(6	)	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 ~~decreased 210~~increased 160 basis points and 7060 basis points, respectively, compared to the same period of ~~2016.~~2017, including a decline of 10 basis points due to the impact of adopting the new revenue recognition standard. The ~~decreases~~decline of 10 basis points was driven by the net negative impact to operating margin of prior quarter sales incentives satisfied during the period and sales incentives deferred during the period, impacted by the mix of products.The changes in operating margin and Adjusted operating margin include the benefits associated with the Transformation Plan, primarily reductions in headcount, as well as other cost reductions. These savings were ~~largely~~ offset by the inflationary impact on costs outpacing revenue growth. The ~~decreases~~increases in operating margin and Adjusted operating margin are discussed further below in "Gross Margin" and "Selling, General and Administrative Expenses."

Gross Margin

Gross margin and Adjusted gross margin ~~both increased 30~~decreased 230 basis points and 230 basis points, respectively, compared to the same period of ~~2016, in each case~~2017, including a decline of 330 basis points due to the impact of adopting the new revenue recognition standard. The decline of 330 basis points was driven by (i) the reclassification of sales incentive costs from SG&A to cost of sales; and (ii) the reclassification of fees paid by Representatives for late payments, payment processing and brochures from SG&A to other revenue and cost of sales, respectively.

Gross margin and Adjusted gross margin were primarily ~~due to~~impacted by the following:

an increase of 8070 basis points due to non-recurring net tax recoveries in Brazil; and

an increase of 40 basis points due to the favorable net impact of mix and pricing, ~~primarily due to~~driven by inflationary pricing in ~~South Latin America.~~Argentina.

~~This item was~~These items were partially offset by the following:

a decrease of 2030 basis points due to higher supply chain costs, driven by higher material costs primarily in ~~North~~South Latin America, ~~due to higher obsolescence and material costs,~~ partially offset by ~~lower distribution costs;~~Europe, Middle East and Africa.

Selling, General and Administrative Expenses

Selling, general and administrative expenses as a ~~decrease~~percentage of ~~approximately 20~~revenue and Adjusted selling, general, and administrative expenses as a percentage of revenue decreased 390 basis points and 290 basis points, respectively, compared to the same period of 2017, in each case including a benefit of 320 basis points due to the ~~net unfavorable~~ impact of ~~foreign currency transaction losses~~adopting the new revenue recognition standard. The 320 basis point benefit was driven by (i) the reclassification of sales incentive costs from SG&A to cost of sales; and ~~foreign currency translation.~~(ii) the reclassification of fees paid by Representatives for late payments, payment processing and brochures from SG&A to other revenue and cost of sales, respectively. In addition, the selling, general and administrative expenses as a percentage of revenue comparison was favorably impacted by approximately 130 basis from a loss contingency recorded in the prior-year period related to a non-U.S. pension plan and approximately.

3038

AVON PRODUCTS, INC.

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(U.S. dollars in millions, except per share data)

Selling, ~~General and Administrative Expenses~~

~~Selling,~~ general and administrative expenses as a percentage of revenue and Adjusted selling, general, and administrative expenses as a percentage of revenue ~~increased 250 basis points and 100 basis points, respectively, compared to the same period of 2016. The selling, general and administrative expenses as a percentage of revenue comparison was~~were primarily impacted by approximately 190 basis points for the approximate $27 of net proceeds recognized as a result of a legal settlement in the third quarter of 2016, partially offset by approximately 60 basis for lower CTI restructuring. See Note 12, Restructuring Initiatives, to the Consolidated Financial Statements included herein for more information on CTI restructuring.

The remaining increase in selling, general and administrative expenses as a percentage of revenue and the increase of 100 basis points in Adjusted selling, general and administrative expenses as a percentage of revenue were, in each case, primarily due to the following:

an increase of ~~110~~50 basis points from higher ~~bad debt expense, driven~~transportation costs, primarily in Brazil relating to inefficiencies caused by ~~Brazil~~the national transportation strike, in the United Kingdom due to ~~the lower collection of receivables, primarily impacted by the macroeconomic environment;~~

increased flexibility in order processing, further increases in delivery rates in Russia and an increase ~~of 100 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; and~~fuel prices in Mexico;

an increase of 40 basis points from higher ~~transportation costs, most significantly~~net brochure cost, primarily in ~~Russia which was driven by new delivery rates.~~

~~These items were partially offset by~~Brazil, and to a lesser extent, in the ~~following:~~United Kingdom and South Africa; and

a decrease of 8060 basis points due to lower ~~expenses associated~~Representative, sales leader and field expense, primarily in South Latin America and North Latin America in line with ~~employee incentive compensation plans;~~sales performance.

a decrease of 20 basis points primarily due to lower fixed expenses, including the benefits associated with the Transformation Plan, primarily reductions in headcount, as well as other cost reductions; and

various other insignificant items that partially offset the increase in selling, general and administrative expenses as a percentage of revenue and Adjusted selling, general, and administrative expenses as a percentage of revenue.

Other Expenses

Interest expense decreased by approximately $2 and interest income ~~each increased by less than $1~~was relatively unchanged compared to the prior-year period.

A loss on extinguishment of debt of $2.9 before tax was recorded in the second quarter of 2018 in connection with the prepayment of our 6.50% Notes. The loss of $2.9 consisted of the $6.2 make-whole premium, and the write-off of $.3 of debt issuance costs and discounts related to the initial issuances of the notes that were prepaid, partially offset by a write off of a deferred gain of $3.6 associated with the March 2012 interest-rate swap agreement termination (see Note 15, Debt, to the Consolidated Financial Statements).

Other expense, net, ~~decreased~~increased by approximately $7$8 compared to the prior-year period, primarily due to higher foreign exchange ~~net gains in the current year as compared to~~ net losses in the ~~prior year,~~current period as compared to the prior-year period, resulting in ~~a year-over-year favorable~~an unfavorable impact of approximately ~~$4. In addition, other expense, net~~$15. This was ~~favorably impacted~~partially offset by ~~the amounts~~approximately $6 recorded for our proportionate share of New Avon's ~~loss, which decreased approximately $3 as compared to~~losses during the ~~prior-year period.~~three months ended June 30, 2017. As the recorded investment balance in New Avon was zero at 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 Note 4,3, Investment in New Avon, to the Consolidated Financial Statements included herein for more information on New Avon.

Effective Tax Rate

The effective tax rates and the Adjusted effective tax rates in ~~2017~~2018 and ~~2016~~2017 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 and the Adjusted effective tax rates in ~~2017~~2018 and ~~2016~~2017 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 ~~unusual effective tax rates in 2017 and 2016.~~

The effective tax rates in 2017 and 2016 were impacted by CTI restructuring. The effective tax rate in 2016 was also impacted by the benefit from the net proceeds recognized as a result of a legal settlement.

~~In addition, the~~unusually high effective tax rates and the Adjusted effective tax rates in 2018 and 2017.

Our effective tax rates for the three months ended June 30, 2018 and 2017 were (12,233.3)% and ~~2016~~(275.4)%, respectively. The effective tax rates in 2018 and 2017 were also impacted by CTI restructuring charges, country mix of earnings and withholding taxes that are relatively consistent. The effective tax rate in the second quarter of 2018 was also negatively impacted by one-time tax reserves of approximately $6 associated with our uncertain tax positions.

Our Adjusted effective tax rates for the ~~country mix~~three months ended June 30, 2018 and 2017 were 133.3% and 130.8%, respectively. While the Adjusted effective tax rate is still high during the six months ended June 30, 2018, the absolute amount of ~~earnings.~~

~~To the extent that taxable~~Adjusted income intaxes declined relative to 2017 as a result of our ~~subsidiaries is less favorable than currently projected, we may be required to recognize additional valuation allowances on our subsidiaries’ deferred tax assets.~~global business transformation.

See Note ~~12,~~16, Income Taxes, to the Consolidated Financial Statements included herein for more information on the effective tax rate, and Note 11, Restructuring Initiatives, to the Consolidated Financial Statements included herein for more information on CTI restructuring.

~~AVON PRODUCTS, INC.~~

~~MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~(U.S. dollars in millions, except per share data)~~

Impact of Foreign Currency

As compared to the prior-year period, foreign currency has impacted our consolidated financial results in the form of:

foreign currency transaction losses (classified within cost of sales, and ~~selling, general and administrative expenses)~~SG&A in our Consolidated Statements of Operations), which had an unfavorable impact to operating profit and Adjusted operating profit of ~~an estimated $10,~~approximately $5, or approximately 30 basis points to operating margin and Adjusted operating margin;

foreign currency translation, which had a favorable impact to operating profit and Adjusted operating profit of approximately $5, or approximately 10 basis points to operating margin and 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 favorable impact of approximately $4 before tax on both a reported and Adjusted basis.

~~Discontinued Operations~~

~~Loss from discontinued operations, net of tax was approximately $1 for 2016. See Note 3, Discontinued Operations, to the Consolidated Financial Statements included herein for more information.~~

~~Nine Months Ended September 30, 2017~~

~~Revenue~~

During the nine months ended September 30, 2017, revenue was 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 Russia, Brazil, and the United Kingdom, partially offset by growth in Argentina and South Africa. The decline in 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 primarily due to South Latin America (driven by Brazil) and Europe, Middle East & Africa. The net impact of price and mix increased 4%, primarily due to the inflationary impact on pricing in Argentina and Brazil. Units sold decreased 6%, primarily due to declines in Russia and Brazil. The revenue performance was negatively impacted most significantly by a decline in Color sales, as we experienced issues in some markets as we have begun the segmentation of our Color category into three distinct brands. The timing of innovation also impacted the decline in Color sales; however, we expect to strengthen our Color category in the last quarter of 2017 through innovation.

~~On a category basis, our net sales from reportable segments and associated growth rates were as follows:~~

Nine Months Ended September 30, %/Point Change
2017 2016 US$ Constant $
Beauty:
Skincare $ 1,182.0
$ 1,175.9
1 % (2 )%
Fragrance 1,101.3
1,065.2
3
2
Color 724.3
743.7
(3 ) (5 )
Total Beauty 3,007.6
2,984.8
1
(2 )
Fashion & Home:
Fashion 591.8
615.0
(4 ) (5 )
Home 430.3
428.6
—
(1 )
Total Fashion & Home 1,022.1
1,043.6
(2 ) (3 )
Net sales from reportable segments $ 4,029.7
$ 4,028.4
—
(2 )
Net sales from Other operating segments and business activities .1
18.6
*
*
Net sales $ 4,029.8
$ 4,047.0
—
(2 )

* Calculation not meaningful

~~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 decreased 170 basis points and 140 basis points, respectively, compared to the same period of 2016. The decreases in operating margin and Adjusted operating margin include the benefits associated with the Transformation Plan, primarily reductions in headcount, as well as other cost reductions. These savings were largely offset by

3239

AVON PRODUCTS, INC.

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(U.S. dollars in millions, except per share data)

foreign currency translation, which had an unfavorable impact to operating profit and Adjusted operating profit of approximately $5, or approximately 20 basis points to operating margin and Adjusted operating margin; and

higher foreign exchange net losses on our working capital (classified within other expense, net in our Consolidated Statements of Operations) as compared to the prior year, resulting in an unfavorable impact of approximately $15 before tax on both a reported and Adjusted basis.

Six Months Ended June 30, 2018

Revenue

During the six months ended June 30, 2018, revenue increased 1% compared to the prior-year period, partially impacted by the unfavorable impact of foreign exchange. Constant $ revenue increased by 2%. Revenue and Constant $ revenue included a benefit of approximately 6% due to the impact of adopting the new revenue recognition standard. The 6% benefit was driven primarily by (i) the reclassification of fees paid by Representatives for brochures, late payments and payment processing from SG&A, and (ii) the timing of revenue recognition for sales incentives, as revenue recognized during the period for prior quarter sales incentives exceeded revenue deferred during the period for sales incentives not yet satisfied. Constant $ revenue was impacted by declines primarily in Brazil, partially due to a national transportation strike that affected sales and distribution, the United Kingdom, Mexico and South Africa. Constant $ revenue was negatively impacted by approximately 1% due to the national transportation strike in Brazil. These declines were partially offset by improved revenue growth management including inflationary pricing in Argentina. Revenue and Constant $ revenue were impacted by a decrease in Active Representatives of 4%, which was primarily driven by a decline in Brazil, and included an estimated 1% decline attributable to the national transportation strike. Average order in Constant $ increased 6%, including a benefit of approximately 6% due to the impact of adopting the new revenue recognition standard. Units sold decreased 4%, driven by a decline in Brazil.

On a category basis, our net sales from reportable segments and associated growth rates were as follows:



	Six Months Ended June 30,				% Change
	2,018		2017		US$		Constant $
Beauty:
Skincare	$	761.5	$	778.0	(2	)%	(2	)%
Fragrance	701.8		708.7		(1	)	1
Color	448.1		473.3		(5	)	(5	)
Total Beauty	1,911.4		1,960.0		(2	)	(2	)
Fashion & Home:
Fashion	374.5		392.7		(5	)	(5	)
Home	273.7		278.6		(2	)	2
Total Fashion & Home	648.2		671.3		(3	)	(2	)
Net sales from reportable segments	$	2,559.6	$	2,631.3	(3	)	(2	)
Net sales from Other operating segments and business activities	185.8		97.7		90		(15	)
Net sales	$	2,745.4	$	2,729.0	1		2

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 130 basis points and 70 basis points, respectively, compared to the same period of 2017, including a benefit of 50 basis points due to the impact of adopting the new revenue recognition standard. The benefit of 50 basis points was driven by the net positive contribution to operating margin of fourth quarter 2017 sales incentives satisfied during the six months ended June 30, 2018 and sales incentives deferred during the period, impacted by the mix of products. The changes in operating margin and Adjusted operating margin include the benefits associated with the Transformation Plan, primarily reductions in headcount, as well as other cost reductions. These savings were offset by the inflationary impact on costs outpacing revenue growth. The ~~decreases~~increases in operating margin and Adjusted operating margin are discussed further below in "Gross Margin" and "Selling, General and Administrative Expenses."

Gross Margin

Gross margin and Adjusted gross margin both ~~increased 100~~decreased 260 basis points compared to the same period of ~~2016, in each case primarily due to the following:~~

~~an increase~~2017, including a decline of ~~110~~310 basis points due to the ~~favorable net~~ impact of ~~mix and pricing, primarily due to inflationary pricing in South Latin America and Europe, Middle East & Africa.~~

~~This item~~adopting the new revenue recognition standard. The 320 basis point decline was ~~partially offset by the following:~~

a decrease of 20 basis points due to higher supply chain costs, primarily in South Latin America and North Latin America due to higher material and overhead costs, which was partially offset by lower distribution and material costs in Europe, Middle East & Africa.

~~Selling, General and Administrative Expenses~~

Selling, general and administrative expenses as a percentage of revenue and Adjusted selling, general, and administrative expenses as a percentage of revenue increased 280 basis points and 240 basis points, respectively, compared to the same period of 2016. The selling, general and administrative expenses as a percentage of revenue comparison was impacted by approximately 70 basis points for the approximate $27 of net proceeds recognized as a result of a legal settlement in the third quarter of 2016 and approximately 40 basis points for a loss contingency related to a non-U.S. pension plan as discussed above, partially offset by approximately 80 basis for lower CTI restructuring. See Note 7, Employee Benefit Plans, to the Consolidated Financial Statements included herein for more information on the loss contingency related to a non-U.S. pension plan and Note 12, Restructuring Initiatives, to the Consolidated Financial Statements included herein for more information on CTI restructuring.

The remaining increase in selling, general and administrative expenses as a percentage of revenue and the increase of 240 basis points in Adjusted selling, general and administrative expenses as a percentage of revenue were, in each case, primarily due to the following:

an increase of 120 basis points from higher bad debt expense, driven by Brazil due to the lower than anticipated collection of receivables, 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 60 basis points primarily due to the impact of the Constant $ revenue decline causing deleverage of our fixed expenses, partially offset by lower fixed expenses, including the benefits associated with the Transformation Plan, primarily reductions in headcount, as well as other cost reductions;

~~an increase of 50 basis points from higher transportation costs, primarily in Russia which was driven by new delivery rates;~~

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; and

~~an increase of 30 basis points from higher advertising expense, primarily in Brazil.~~

~~These items were partially offset by the following:~~

~~a decrease of approximately 50 basis points due to the favorable impact of foreign currency translation and foreign currency transaction gains; and~~

~~a decrease of 50 basis points due to lower expenses associated with employee incentive compensation plans.~~

~~Other Expenses~~

Interest expense increased by approximately $6 compared to the prior-year period, primarily due to the interest associated with $500 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 prepayment of the remaining principal amount of our 4.20% Notes and 5.75% Notes in November 2016, the August 2016 cash tender offers and the October 2016 and December 2016 repurchases of certain of our outstanding public notes. Refer to Note 16, Debt, and Note 15, Derivative Instruments and Hedging Activities, to the Consolidated Financial Statements included herein for additional information.

3340

AVON PRODUCTS, INC.

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(U.S. dollars in millions, except per share data)

~~Gain on extinguishment~~driven by (i) the reclassification of ~~debt~~sales incentive costs from SG&A to cost of sales; and (ii) the reclassification of fees paid by Representatives for late payments, payment processing and brochures from SG&A to other revenue and cost of sales, respectively.

Gross margin and Adjusted gross margin were primarily impacted by the following:

an increase of 30 basis points due to non-recurring net tax recoveries in Brazil;

an increase of 60 basis points due to the favorable net impact of mix and pricing, driven by inflationary pricing in Argentina;

These items were partially offset by the following:

a decrease of 50 basis points due to higher supply chain costs, driven by higher material costs primarily in South Latin America.

Selling, General and Administrative Expenses

Selling, general and administrative expenses as a percentage of revenue and Adjusted selling, general, and administrative expenses as a percentage of revenue decreased 380 basis points and 330 basis points, respectively, compared to the same period of 2017, in each case including a benefit of 370 basis points due to the impact of adopting the new revenue recognition standard. The 370 basis point benefit was driven by (i) the reclassification of sales incentive costs from SG&A to cost of sales; and (ii) the reclassification of fees paid by Representatives for late payments, payment processing and brochures from SG&A to other revenue and cost of sales, respectively. In addition, the selling, general and administrative expenses as a percentage of revenue comparison was favorably impacted by approximately 70 basis from a loss contingency recorded in the ~~first nine months~~prior-year period related to a non-U.S. pension plan and approximately.

Selling, general and administrative expenses as a percentage of ~~2016~~revenue and Adjusted selling, general, and administrative expenses as a percentage of revenue were primarily impacted by the following:

an increase of 50 basis points from higher transportation costs, primarily in Brazil relating to inefficiencies caused by the national transportation strike, in the United Kingdom due to increased flexibility in order processing, further increases in delivery rates in Russia and an increase in fuel prices in Mexico; and

an increase of 30 basis points due to the impact higher net brochure expense primarily in Brazil, and to a lesser extent, in the United Kingdom and South Africa.

These items were partially offset by the following:

a decrease of 50 basis points from lower bad debt expense, primarily in Brazil, as the prior-year period was impacted by lower than anticipated collection of receivables;

Our expenses associated with employee incentive compensation plans did not have a significant year-on-year impact, as a benefit of approximately ~~$4 was~~$9 mainly associated with a change in the ~~cash tender offers~~way that we record our accrual in ~~August 2016. Refer to Note 16, Debt,~~interim periods for 2018 employee incentive compensation plans was offset by an approximate $6 true-up to the ~~consolidated financial statements included herein~~accrual for ~~additional information.~~2017 employee incentive compensation plans which were paid in 2018. Our accrual for 2018 employee incentive compensation plan uses a phased approach that takes into account the relative contribution of the quarter’s performance to the total annual target. In both the six month ended June 30, 2018 and 2017, the accrual was adjusted for the latest estimate of bonus payout (based on full year performance), however, the year-on-year impact was immaterial.

Other Expenses

Interest ~~income~~expense decreased by approximately $2$1 and interest income was relatively unchanged compared to the prior-year period.

A loss on extinguishment of debt of $2.9 before tax was recorded in the second quarter of 2018 in connection with the prepayment of our 6.50% Notes. The loss of $2.9 consisted of the $6.2 make-whole premium, and the write-off of $.1 of debt issuance costs and discounts related to the initial issuances of the notes that were prepaid, partially offset by a write off of a deferred gain of $3.6 associated with the March 2012 interest-rate swap agreement termination (see Note 15, Debt, to the Consolidated Financial Statements).

Other expense, net, ~~decreased~~increased by approximately ~~$123~~$4 compared to the prior-year period, primarily due to ~~the deconsolidation of our Venezuelan operations, as we recorded a loss of approximately $120~~foreign exchange net losses in the ~~first quarter of 2016. In addition, other expense, net was positively impacted by foreign exchange~~current period as compared to net gains in the ~~current year as compared to net losses in the prior year,~~prior-year period, resulting in ~~a year-over-year benefit~~an unfavorable impact of approximately ~~$9. These items were~~$15. This is partially offset by ~~the unfavorable impact of the amounts~~approximately $10 recorded for our proportionate share of New Avon's ~~loss, which increased approximately $3 as compared to~~losses during the ~~prior-year period.~~six months ended June 30, 2017. As the recorded investment balance in New Avon was zero at the end of the third

AVON PRODUCTS, INC.

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(U.S. dollars in millions, except per share data)

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, Accounting Policies, to the Consolidated Financial Statements included herein for further discussion of our Venezuela operations, and see Note 4,~~3, Investment in New Avon, to the Consolidated Financial Statements included herein for more information on New Avon.

Effective Tax Rate

AVON PRODUCTS, INC.

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(U.S. dollars in millions, except per share data)

effective tax rates and the Adjusted effective tax rates in ~~2017~~2018 and ~~2016~~2017 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 ~~unusual effective tax rates in 2017 and 2016.~~

The effective tax rate in 2017 was impacted by a loss contingency related to a non-U.S. pension plan and CTI restructuring. The effective tax rate in 2016 was impacted by the deconsolidation of our Venezuelan operations 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.

~~In addition, the~~unusually high effective tax rates and the Adjusted effective tax rates in 2018 and 2017.

Our effective tax rates for the six months ended June 30, 2018 and 2017 were 675.2% and ~~2016~~(335.4)%, respectively. The effective tax rates in 2018 and 2017 were also impacted by CTI restructuring charges, country mix of earnings and withholding taxes that are relatively consistent. The effective tax rate in 2018 was also negatively impacted by one-time tax reserves of approximately $15 associated with our uncertain tax positions.

Our Adjusted effective tax rates for the ~~country mix~~six months ended June 30, 2018 and 2017 were 124.4% and 220.3%, respectively. While the Adjusted effective tax rate is still high during the six months ended June 30, 2018, both the Adjusted effective tax rate and the absolute amount of ~~earnings.~~Adjusted income taxes declined relative to 2017, as a result of our global business transformation.

See Note ~~7, Employee Benefit Plans,~~16, Income Taxes, to the Consolidated Financial Statements included herein for more information on the ~~loss contingency related to a non-U.S. pension plan,~~effective tax rate, and Note ~~12,~~11, Restructuring Initiatives, to the Consolidated Financial Statements included herein for more information on CTI ~~restructuring and "Venezuela Discussion" in this MD&A and Note 1, Accounting Policies, to the Consolidated Financial Statements included herein for further discussion of our Venezuela operations.~~restructuring.

Impact of Foreign Currency

As compared to the prior-year period, foreign currency has impacted our consolidated financial results in the form of:

foreign currency transaction gains (classified within cost of sales, and selling, general and administrative expenses), which had ~~a favorable~~an unfavorable impact to operating profit and Adjusted operating profit of an estimated $10, or approximately 30 basis points to operating margin and Adjusted operating margin;

foreign currency translation, which had ~~a favorable~~an immaterial net impact to operating profit and Adjusted operating ~~profit of approximately $15, or approximately 30 basis points to operating margin and approximately 20 basis points to Adjusted operating margin;~~profit; and

foreign exchange net ~~gains~~losses on our working capital (classified within other expense, net) as compared to net ~~losses~~gains in the prior year, resulting in a year-over-year ~~benefit~~unfavorable impact of approximately $9$15 before tax on both a reported and Adjusted basis.

~~Discontinued Operations~~

Loss from discontinued operations, net of tax was approximately $13 for 2016. During the first nine months of 2016, we recorded charges of approximately $16 before tax ($6 after tax) in the aggregate associated with the sale of the North America business which closed on March 1, 2016. See Note 3, Discontinued Operations, to the Consolidated Financial Statements included herein for more information.

~~Venezuela Discussion~~

As of March 31, 2016, we deconsolidated our Venezuelan operations, and since then, we account for this business using the cost method of accounting. The decision to deconsolidate our Venezuelan operations was due to the lack of exchangeability between the Venezuelan bolivar and the U.S. dollar. This was caused by Venezuela's restrictive foreign exchange control

~~AVON PRODUCTS, INC.~~

~~MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~(U.S. dollars in millions, except per share data)~~

~~regulations and our Venezuelan operations' increasingly limited access to U.S. dollars, which restricted our Venezuelan operations' ability to pay dividends and settle intercompany obligations.~~

As a result of the change to the cost method of accounting, in the first quarter of 2016 we recorded a loss of 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.

Segment Review

We determine segment profit by deducting the related costs and expenses from segment revenue. ~~In order to ensure comparability between periods, segment~~Segment profit includes an allocation of global marketing expenses based on actual revenues. Segment profit excludes 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. This is consistent with the manner in which we assess our performance and allocate resources. See Note ~~10,~~9, Segment Information, to the Consolidated Financial Statements included herein for a reconciliation of segment profit to operating profit.

Europe, Middle East & Africa


	Three Months Ended September 30,										Nine Months Ended September 30,										Three Months Ended June 30,										Six Months Ended June 30,
							%/Point Change										%/Point Change										%/Basis Point Change										%/ Basis Point Change
	2017			2016			US$		Constant $		2017			2016			US$		Constant $		2018			2017			US$		Constant $		2018			2017			US$		Constant $
Total revenue	$	482.8		$	476.4		1	%	(2	)%	$	1,484.9		$	1,517.7		(2	)%	(4	)%	$	500.7		$	494.6		1	%	—	%	$	1,069.1		$	1,002.1		7	%	1	%
Segment profit	65.9			66.2			—	%	(9	)%	222.5			218.3			2	%	(3	)%	74.4			80.8			(8	)%	(9	)%	148.8			154.3			(4	)%	(9	)%

Segment margin	13.6		%	13.9		%	(.3	)	(.9	)	15.0		%	14.4		%	.6		.2		14.9		%	16.3		%	(140	)	(150	)	13.9		%	15.4		%	(150	)	(160	)

Change in Active Representatives									(2	)%									(3	)%									(3	)%									(2	)%
Change in units sold									(5	)%									(9	)%									(3	)%									(1	)%
Change in Ending Representatives									1	%									1	%									(2	)%									(2	)%

Amounts in the table above may not necessarily sum due to rounding.

Three Months Ended ~~September~~June 30, ~~2017~~2018

Total revenue increased 1% compared to the prior-year period, primarily due to the favorable impact of foreign exchange which was primarily driven by the weakening of the U.S. dollar relative to ~~the Russian ruble and the South African rand, partially offset by the strengthening of the U.S. dollar relative to the Turkish lira.~~multiple currencies. On a Constant $ basis, revenue ~~decreased 2%, driven by a decrease in Active Representatives. The increase in Ending Representatives~~ was ~~primarily driven by increases in Turkey and South Africa, partially offset by declines in Russia and the United Kingdom.~~

In Russia, revenue increased 3%, benefiting significantly from the favorable impact of foreign exchange. On a Constant $ basis, Russia's revenue declined 6%, primarily due to a decrease in Active Representatives, as well as lower average order. The Constant $ revenue decline in Russia was impacted by competitive pressures which negatively impacted Active Representatives. In the United Kingdom, revenue declined 13%, or 12% on a Constant $ basis, primarily due to a decrease in Active Representatives. In South Africa, revenue grew 17%, which was favorably impacted by foreign exchange. On a Constant $ basis, South Africa’s revenue grew 8%, driven by an increase in Active Representatives, partially offset by lower average order.

3543

AVON PRODUCTS, INC.

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(U.S. dollars in millions, except per share data)

~~Segment margin decreased .3 points, or .9 points on a~~relatively unchanged. Revenue and Constant $ ~~basis, in each case primarily as a result of:~~

a decline of 1.0 point from higher bad debt expense, primarily in Russia, and to a lesser extent in South Africa. Higher bad debt expense in Russia was driven primarily by a payment facilitation agency that has not remitted to us the funds it received from certain Representatives, and in South Africa was driven primarily by lower collection of receivables as a result of deteriorating economic conditions;

~~a decline of 1.0 point from higher transportation costs, driven primarily by new delivery rates in Russia;~~

~~a decline of .7 points due to higher Representative, sales leader and field expense, most significantly in Turkey;~~

revenue includeda benefit of ~~1.0 point primarily~~approximately 3% due to ~~lower fixed expenses, benefiting from lower expenses associated with employee incentive compensation plans. In addition, fixed expenses included~~ the benefits associated with the Transformation Plan, primarily reductions in headcount, as well as other cost reductions. These items were partially offset by a settlement charge in the third quarter of 2017 associated with the United Kingdom pension plan which negatively impacted segment margin by .7 points; and

~~a benefit of .6 points due to lower advertising expense, primarily in Russia and South Africa.~~

~~Nine Months Ended September 30, 2017~~

~~Total revenue decreased 2% compared to the prior-year period, despite the favorable~~ impact of ~~foreign exchange which was primarily driven by~~adopting the ~~weakening of the U.S. dollar relative to the Russian ruble~~new revenue recognition standard. Revenue and the South African rand, partially offset by the strengthening of the U.S. dollar relative to the British pound and the Turkish lira. On a Constant $ basis, revenue decreased 4%, most significantly impacted by declines in Russia and the United Kingdom, partially offset by growth in South Africa. The segment's Constant $ revenue ~~decline was~~were negatively impacted primarily ~~driven~~ by a decrease in Active ~~Representatives.~~Representatives, driven by a decline in Russia.

In Russia, revenue ~~increased 8%, benefiting significantly from the favorable impact of foreign exchange.~~has decreased 5%. On a Constant $ basis, Russia's revenue ~~declined 8%, primarily due to a decrease in Active Representatives along with lower average order. The~~increased 3%. Russia's revenue and Constant $ revenue ~~decline in Russia was impacted by competitive pressures which negatively impacted Active Representatives, as well as~~included a ~~comparison~~benefit of approximately 4% due to ~~strong volume growth in~~ the ~~prior-year period, which benefited primarily from a pricing lag during an inflationary period. In addition,~~impact of adopting the new revenue recognition standard. Revenue and Constant $ revenue in Russia was negatively impacted by ~~service issues related to our delivery provider, particularly~~a decrease in Active Representatives, offset by higher average order driven by growth in the ~~first quarter of 2017~~Fragrance category. Revenue and Constant $ revenue in Russia was also impacted by lower consumption in the ~~early part of the second quarter of 2017.~~ market.

In the United Kingdom, revenue ~~declined 17%~~decreased 3%, ~~which was unfavorably impacted by~~despite the favorable impact of foreign exchange. On a Constant $ basis, the United Kingdom's revenue declined ~~10%, primarily~~9%. The United Kingdom's revenue and Constant $ revenue included a benefit of 4% due to the impact of adopting the new revenue recognition standard. Revenue and Constant $ revenue in the United Kingdom were negatively impacted by a decrease in Active Representatives, ~~as well as lower~~driven by the continuation of underlying field issues, partially offset by higher average order. The Constant $ revenue decline in the United Kingdom was partially due to the anniversary of the launch of Matte lipstick in the first quarter of 2016 as well as the strong product launches in the second quarter of 2016.

In South Africa, revenue ~~grew 27%~~decreased 4%, which was favorably impacted by foreign exchange. On a Constant $ basis, South Africa’s revenue grew 12%, primarily due to an increase in Active Representatives, partially offset by lower average order.

~~Segment margin increased .6 points, or .2 points on a Constant $ basis, in each case primarily as a result of:~~

~~a benefit of 2.5 points due to higher gross margin caused primarily by 1.2 points from~~despite the favorable net impact of mix and pricing, an estimated 1 point from the favorable impact of foreign currency transaction net gains and .6 points due to lower supply chain costs. Supply chain costs benefited primarily from lower distribution and material costs, partially due to productivity initiatives;

~~a decline of 1.1 points from higher transportation costs, driven primarily by new delivery rates in Russia;~~

a decline of .6 points from higher bad debt expense, primarily in Russia, South Africa and the United Kingdom. Higher bad debt expense in Russia was driven primarily by a payment facilitation agency that has not remitted to us the funds it received from certain Representatives, and in South Africa was driven primarily by lower collection of receivables as a result of deteriorating economic conditions. In addition, higher bad debt expense in the United Kingdom, primarily in the second quarter of 2017, was due to a declining Representative count which has impacted collections;

a decline of .4 points primarily due to the impact of the Constant $ revenue decline causing deleverage of our fixed expenses, partially offset by lower fixed expenses, including the benefits associated with the Transformation Plan, primarily reductions in headcount, as well as other cost reductions. In addition, fixed expenses benefited from lower expenses associated with employee incentive compensation plans; and

~~a decline of .3 points related to the net impact of declining revenue with respect to Representative, sales leader and field expense.~~

~~AVON PRODUCTS, INC.~~

~~MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~(U.S. dollars in millions, except per share data)~~

~~South Latin America~~

Three Months Ended September 30, Nine Months Ended September 30,
%/Point Change %/Point Change
2017 2016 US$ Constant $ 2017 2016 US$ Constant $
Total revenue $ 589.7
$ 594.8
(1 )% — % $ 1,647.0
$ 1,556.9
6 % 1 %
Segment profit 66.3
73.8
(10 )% (9 )% 124.8
157.9
(21 )% (22 )%

Segment margin 11.2 % 12.4 % (1.2 ) (1.1 ) 7.6 % 10.1 % (2.5 ) (2.2 )

Change in Active Representatives (6 )% (4 )%
Change in units sold (7 )% (5 )%
Change in Ending Representatives (6 )% (6 )%

~~Amounts in the table above may not necessarily sum due to rounding.~~

~~Three Months Ended September 30, 2017~~

~~Total revenue decreased 1% compared to the prior-year period, primarily due to the unfavorable~~ impact of foreign exchange. On a Constant $ basis, South Africa's revenue ~~was relatively unchanged compared~~declined 7%. South Africa's revenue and Constant $ revenue included a benefit of 2% due to the ~~prior year, primarily driven~~impact of adopting the new revenue recognition standard. Revenue and Constant $ revenue in South Africa were negatively impacted by a decrease in Active Representatives, ~~offset by higher average order which was driven by inflationary~~resulting from uncompetitive pricing ~~in Argentina. The decline in Ending Representatives was primarily driven by declines in Brazil,~~ and ~~to a lesser extent, Colombia.~~

Revenue in Brazil decreased 3%, favorably impacted by foreign exchange. Brazil’s Constant $ revenue declined 5%, primarily due to a decrease in Active Representatives, partially offset by higher average order. On a Constant $ basis, Brazil’s sales from Beauty products and Fashion & Home products declined 2% and 9%, respectively. The decline in Constant $ Beauty sales in Brazil was driven by weaker performance in Color. Revenue in Brazil, as well as Active Representatives and Ending Representatives, continued to be impacted by a difficult macroeconomic environment combined with the application of stricter credit requirements for the acceptance of new Representatives as compared to the requirements in the prior year. Revenue in Argentina grew 4%, or 19% on a Constant $ basis, which was primarily due to higher average order which was impacted by the inflationary impact on pricing, and to a lesser extent, an increase in Active Representatives.

Segment margin decreased ~~1.2~~140 basis points, or ~~1.1~~150 basis points on a Constant $ basis, including a decline of 40 basis points due to the impact of the new revenue recognition standard. The decrease in ~~each case~~reported and Constant $ segment margin was primarily as a result of:

a decline of ~~1.6~~60 basis points from higher ~~bad debt~~advertising expense, ~~driven by Brazil~~primarily due to increased investment in the ~~lower collection of receivables, primarily impacted by the macroeconomic environment;~~United Kingdom and Russia;

a decline of ~~1.2~~50 basis points due to higher ~~Representative, sales leader~~net brochure cost, primarily in the United Kingdom and ~~field expense, most significantly~~ in ~~Brazil~~South Africa;

a decline of 50 basis points due to ~~support efforts~~higher transportation costs, primarily in the United Kingdom, primarily relating to ~~activate~~increased flexibility in order processing in the ~~field~~United Kingdom and ~~improve Representative recruitment;~~further increases in delivery rates in Russia;

a decline of 30 basis points from higher variable distribution cost, primarily relating to increased flexibility in order processing in the United Kingdom; and

a benefit of ~~1.3~~90 basis points due to higher gross margin ~~caused primarily by 1.4 points from the favorable net impact of mix and pricing, primarily due to inflationary pricing; and~~

~~a benefit of .3 points~~ primarily due to lower ~~fixed expenses, benefiting from lower expenses associated with employee incentive compensation plans, partially offset~~supply chain costs driven by ~~the inflationary impact on costs outpacing revenue growth.~~material costs.

~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2018

Total revenue increased 6%7% compared to the prior-year period, primarily due to the favorable impact of foreign exchange which was primarily driven by the weakening of the U.S. dollar relative to ~~the Brazilian real.~~multiple currencies. On a Constant $ basis, revenue increased 1%. ~~The segment's~~Revenue and Constant $ revenue ~~benefited from higher average order, which was driven by inflationary pricing in Argentina, partially offset~~includeda benefit of approximately 4% due to the impact of adopting the new revenue recognition standard. Revenue and Constant $ revenue were negatively impacted by a decrease in Active ~~Representatives.~~Representatives and lower average order. The decrease in Ending Representatives was primarily driven by decreases in the UK and South Africa.

~~Revenue in Brazil~~In Russia, revenue increased 8%3%, ~~favorably impacted by~~despite the unfavorable impact of foreign exchange. ~~Brazil’s~~On a Constant $ basis, Russia's revenue increased 4%. Russia's revenue and Constant $ revenue ~~declined 2%, primarily~~included a benefit of approximately 6% due to the impact of adopting the new revenue recognition standard. Revenue and Constant $ revenue in Russia were negatively impacted by a decrease in Active Representatives. Revenue and Constant $ revenue in Russia was also negatively impacted by continued competitive pressures, lower consumption in the market and a decline in the Fashion & Home category.

In the United Kingdom, revenue decreased 1%, despite the favorable impact of foreign exchange. On a Constant $ basis, the United Kingdom's revenue declined 9%. The United Kingdom's revenue and Constant $ revenue included a benefit of 5% due to the impact of adopting the new revenue recognition standard. Revenue and Constant $ revenue in the United Kingdom were negatively impacted by a decrease in Active Representatives, driven by the continuation of underlying field issues, partially offset by higher average order.

In South Africa, revenue grew 5%, primarily due to the favorable impact of foreign exchange. On a Constant $ basis, ~~Brazil’s sales from Beauty products~~South Africa's revenue declined 3%. South Africa's revenue and ~~Fashion & Home products decreased 2% and 4%, respectively. The decline in~~ Constant $ ~~Beauty sales in Brazil was driven by weaker performance in Color. Revenue in Brazil, as well as Active Representatives and Ending Representatives, continued to be impacted by~~revenue included a ~~difficult macroeconomic environment combined with the application~~benefit of ~~stricter credit requirements for the acceptance of new Representatives as compared~~2% due to the ~~requirements in the prior year. Revenue in Argentina grew 9%, or 22% on a Constant $ basis, which was primarily due to higher average order which was impacted by the inflationary~~ impact ~~on pricing.~~of

3744

AVON PRODUCTS, INC.

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(U.S. dollars in millions, except per share data)

adopting the new revenue recognition standard. Revenue and Constant $ revenue in South Africa were negatively impacted by a decrease in Active Representatives.

Segment margin decreased ~~2.5~~150 basis points, or ~~2.2~~160 basis points on a Constant $ basis, including a benefit of 20 basis points due to the impact of the new revenue recognition standard. The decrease in ~~each case~~reported and Constant $ segment margin was primarily as a result of:

a decline of ~~2.3~~60 basis points due to lower gross margin primarily caused by 70 basis points from ~~higher bad debt expense, driven by Brazil due to~~ the ~~lower than anticipated collection~~unfavorable impact of ~~receivables, primarily impacted by the macroeconomic environment, as well as resulting from an adjustment to credit terms available to new Representatives during 2016;~~foreign currency transaction net losses;

a decline of .750 basis points ~~primarily due to~~from higher ~~fixed expenses,~~transportation costs, driven by further increases in delivery rates in Russia and increased flexibility in order processing in the ~~inflationary impact on costs outpacing revenue growth, partially offset by lower expenses associated with employee incentive compensation plans;~~United Kingdom;

a decline of ~~.6 points from higher advertising expense, primarily in Brazil which was driven by product launches;~~

~~a decline of .5~~30 basis points due to the higher Representative, sales leader and field expense ~~most significantly~~ in ~~Brazil~~Russia and Turkey, driven by increased investment and higher pay-outs to ~~support efforts to activate~~ the field ~~and improve Representative recruitment;~~compared to the prior-year period; and

a ~~benefit~~decline of ~~2.0 points due to higher gross margin caused by 2.2~~20 basis points from ~~the favorable net impact of mix and pricing,~~higher advertising expense, primarily due to ~~inflationary pricing,~~increased investment in the United Kingdom and approximately .4 points from the favorable impact of foreign currency net gains. These were partially offset by .5 points from higher supply chain costs, which were primarily negatively impacted by higher material costs which included inflationary pressures in Argentina.Russia.

~~North~~South Latin America


	Three Months Ended September 30,										Nine Months Ended September 30,										Three Months Ended June 30,										Six Months Ended June 30,
							%/Point Change										%/Point Change										%/Basis Point Change										%/Basis Point Change
	2017			2016			US$		Constant $		2017			2016			US$		Constant $		2018			2017			US$		Constant $		2018			2017			US$		Constant $
Total revenue	$	206.0		$	196.8		5	%	2	%	$	607.0		$	625.9		(3	)%	—	%	$	516.1		$	558.1		(8	)%	3	%	$	1,013.2		$	1,057.3		(4	)%	4	%
Segment profit	17.2			24.4			(30	)%	(28	)%	56.0			85.0			(34	)%	(31	)%	55.2			45.7			21	%	32	%	82.4			59.4			39	%	51	%

Segment margin	8.3		%	12.4		%	(4.1	)	(3.5	)	9.2		%	13.6		%	(4.4	)	(4.1	)	10.7		%	8.2		%	250		230		8.1		%	5.6		%	250		260

Change in Active Representatives									1	%									(1	)%									(5	)%									(6	)%
Change in units sold									(3	)%									(2	)%									(6	)%									(6	)%
Change in Ending Representatives									1	%									1	%									(4	)%									(4	)%

Amounts in the table above may not necessarily sum due to rounding.

Three Months Ended ~~September~~June 30, ~~2017~~2018

~~North Latin America consists largely of our Mexico business.~~ Total revenue ~~for the segment increased 5%~~decreased 8% compared to the prior-year period, partially due to the favorable impact of foreign exchange which was primarily driven by the weakening of the U.S. dollar relative to the Mexican peso. On a Constant $ basis, revenue increased 2%, primarily due to higher average order and an increase in Active Representatives, despite the impact of product fulfillment shortfalls in the region. The segment's Constant $ revenue increase was primarily due to growth in Central America, partially offset by a Constant $ revenue decline in Mexico. Revenue in Mexico increased 4%, and was favorably impacted by foreign exchange. On a Constant $ basis, Mexico's revenue declined 1%, primarily due to a decrease in Active Representatives. We anticipate that the earthquake in Mexico in late September 2017 will adversely impact Mexico's fourth quarter 2017 results.

~~Segment margin decreased 4.1 points, or 3.5 points on a Constant $ basis, in each case primarily as a result of:~~

~~a decline of 2.1 points due to lower gross margin caused primarily by 1.5 points from~~including the unfavorable impact of foreign currency transaction net losses and 1.0 point from higher supply chain costs, partially offset by .4 points from the favorable net impact of mix and pricing. Supply chain costs were negatively impacted by higher obsolescence and material costs, partially offset by lower distribution costs;

~~a decline of .6 points from higher bad debt expense, primarily in Mexico partially due to the implementation of a new collection process as a result of changes in regulations;~~

~~a decline of .5 points from higher transportation costs, driven by Mexico primarily due to increased fuel prices; and~~

~~a decline of .4 points due to higher Representative, sales leader and field expense.~~

~~AVON PRODUCTS, INC.~~

~~MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~(U.S. dollars in millions, except per share data)~~

~~Nine Months Ended September 30, 2017~~

~~Total revenue for the segment decreased 3% compared to the prior-year period, primarily due to the unfavorable impact from~~ foreign exchange, which was primarily driven by the strengthening of the U.S. dollar relative to the ~~Mexican peso.~~Argentinian peso and the Brazilian real. On a Constant $ basis, revenue ~~was relatively unchanged compared~~increased 3%. Revenue and Constant $ revenue included a benefit of approximately 5% due to the ~~prior year, as higher average order was offset~~impact of adopting the new revenue recognition standard. Revenue and Constant $ revenue were negatively impacted by a decrease in Active ~~Representatives. In addition, Constant $ revenue was impacted by product fulfillment shortfalls in the region. The segment's Constant $ revenue benefited from growth in Central America,~~Representatives, partially offset by ~~a Constant $ revenue~~higher average order. The decline in ~~Mexico.~~ both Active Representatives and Ending Representatives was primarily driven by a decline in Brazil.

Revenue in ~~Mexico declined 5%~~Brazil decreased 13%, ~~and was~~ unfavorably impacted by foreign exchange. On a Constant $ basis, ~~Mexico's~~Brazil's revenue ~~declined~~decreased 2%~~, primarily~~. Brazil's revenue and Constant $ revenue included a benefit of approximately 9% due to the impact of adopting the new revenue recognition standard. Revenue and Constant $ revenue in Brazil were negatively impacted by a decrease in Active ~~Representatives.~~

~~Segment margin decreased 4.4 points, or 4.1 points on~~Representatives, as well as lower average order. On a Constant $ basis, ~~in each case primarily as~~Brazil’s sales from Beauty products and Fashion & Home products declined 7% and 6%, respectively, including a ~~result of:~~

~~a decline~~benefit of ~~1.5 points~~2% and 2% due to ~~lower gross margin caused primarily by 1.2 points from higher supply chain costs and .6 points from~~ the ~~unfavorable~~ impact of ~~foreign currency transaction net losses, partially offset~~the new revenue recognition standard. Constant $ revenue for the segment and for Brazil were both negatively impacted by ~~.4 points from the favorable net impact of mix~~approximately 3% and ~~pricing. The impact of supply chain costs on gross margin was primarily~~6%, respectively, due to ~~lower volume~~a national transportation strike that affected sales and ~~fixed overhead costs,~~distribution. In addition, revenue and Constant $ revenue in Brazil, as well as ~~higher material costs;~~

~~a decline of .8 points from higher bad debt expense, primarily in Mexico partially due~~Active Representatives and Ending Representatives, continued to ~~the implementation of a new collection process as a result of changes in regulations discussed above;~~

~~a decline of .8 points due to higher Representative, sales leader and field expense, primarily as a result of increasing incentives to mitigate impact of the product fulfillment shortfalls~~be impacted by lower consumption in the ~~region;~~market.

~~a decline of .5 points from higher transportation costs driven~~

Revenue in Argentina declined 16%, unfavorably impacted by ~~Mexico primarily due to increased fuel prices; and~~

~~a decline of .3 points from higher net brochure costs, partly due to an increase in the number of pages in support of the segmentation of our Color category.~~

~~Asia Pacific~~

Three Months Ended September 30, Nine Months Ended September 30,
%/Point Change %/Point Change
2017 2016 US$ Constant $ 2017 2016 US$ Constant $
Total revenue $ 130.1
$ 131.4
(1 )% 3 % $ 379.0
$ 406.4
(7 )% (3 )%
Segment profit 13.0
12.9
1 % 15 % 34.1
43.1
(21 )% (13 )%

Segment margin 10.0 % 9.8 % .2
1.1
9.0 % 10.6 % (1.6 ) (1.0 )

Change in Active Representatives — % (5 )%
Change in units sold 3 % (1 )%
Change in Ending Representatives (3 )% (3 )%

~~Amounts in the table above may not necessarily sum due to rounding.~~

Effective in the first quarter of 2017, given that we exited Thailand during 2016, the results of Thailand are now reported in Other operating segments and business activities for all periods presented, while previously the results had been reported in Asia Pacific. The impact was not material to Asia Pacific or Other operating segments and business activities and is consistent with how we present other market exits.

~~Three Months Ended September 30, 2017~~

~~Total revenue decreased 1% compared to the prior-year period, primarily due to the unfavorable impact from~~ foreign exchange. On a Constant $ basis, Argentina's revenue ~~increased 3%, primarily~~grew 22%. Argentina's revenue and Constant $ revenue included a decline of approximately 2% due to the impact of adopting the new revenue recognition standard. Revenue and Constant $ revenue in Argentina benefited from higher average ~~order. The decrease in Ending Representatives~~order, which was impacted by declines in all markets except the Philippines, most significantly in Malaysia. Revenue in the Philippines increased 4%, or 12% on a Constant $ basis, primarily due to higher average order and an increase in Active Representatives. Revenueimproved revenue growth ~~in the Philippines was driven by strong commercial offers,~~management including pricing, which, along with television advertising associated with our Color category, helped drive momentum in the field. In addition, actions implemented to improve inventory availability provided benefits to revenue growth.inflationary pricing.

3945

AVON PRODUCTS, INC.

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(U.S. dollars in millions, except per share data)

Segment margin increased .2250 basis points, or ~~1.1~~230 basis points on a Constant $ basis, including a decline of 90 basis points due to the impact of adopting the new revenue recognition standard. The increase in ~~each case~~reported and Constant $ segment margin was primarily as a result of:

a benefit of ~~2.9 points primarily due to lower fixed expenses, including the benefits associated with the Transformation Plan, primarily reductions in headcount;~~

~~a benefit of .7~~240 basis points due to higher gross margin primarily caused ~~primarily~~ by .9170 basis points due to non-recurring net tax recoveries in Brazil and 120 basis points from the favorable net impact of mix and pricing, partially offset by 70 basis points due to higher supply chain costs ~~primarily lower obsolescence;~~driven by higher material costs;

a benefit of .690 basis points due to lower Representative, sales leader and field expense, in line with sales performance;

a benefit of 60 basis points from lower bad debt expense, primarily in Brazil, as the ~~Philippines, driven mainly~~prior-year period was impacted by ~~improved collection;~~lower than anticipated collection of receivables;

a decline of ~~1.7~~70 basis points primarily related to higher transportation costs in Brazil, primarily driven by inefficiencies caused by the national transportation strike; and

a decline of 40 basis points due to higher net brochure cost, primarily due to an increase in brochure volumes in Brazil.

During the quarter ended June 30, 2018, primarily based on published estimates which indicate that Argentina's three-year cumulative inflation rate has exceeded 100%, we concluded that Argentina has become a highly inflationary economy. Beginning July 1, 2018, we expect to apply highly inflationary accounting for our Argentinian subsidiary. As such, the functional currency for Argentina will change to U.S. dollar, which is the consolidated group's functional currency. When an entity operates in a highly inflationary economy, exchange gains and losses associated with monetary assets and liabilities resulting from changes in the exchange rate are recorded in income. Nonmonetary assets and liabilities, which include inventories and property, plant and equipment, are carried forward at their historical dollar cost, which will be calculated using the exchange rate at July 1, 2018. Our Argentinian operations contributed $150, or 5.5% of revenues, or $167, or 6.1% of Constant $ revenue in the six months ended June 30, 2018. Based on a sensitivity analysis, we anticipate that a 10% devaluation of the Argentinian peso from July 1, 2018 to September 30, 2018 would result in an immaterial impact on net income for the third quarter of 2018, driven by the net monetary liability position of Argentina as at June 30, 2018.

Six Months Ended June 30, 2018

Total revenue decreased 4% compared to the prior-year period, including the unfavorable impact of foreign exchange, which was primarily driven by the strengthening of the U.S. dollar relative to the Argentinian peso and the Brazilian real. On a Constant $ basis, revenue increased 4%. Revenue and Constant $ revenue included a benefit of approximately 8% due to the impact of adopting the new revenue recognition standard. Revenue and Constant $ revenue were negatively impacted by a decrease in Active Representatives, partially offset by higher average order driven by Argentina. The decline in Ending Representatives was primarily driven by a decline in Brazil.

Revenue in Brazil decreased 8%, unfavorably impacted by foreign exchange. On a Constant $ basis, Brazil's revenue decreased 2%. Brazil's revenue and Constant $ revenue included a benefit of approximately 10% due to the impact of adopting the new revenue recognition standard. Revenue and Constant $ revenue in Brazil were negatively impacted by a decrease in Active Representatives, as well as lower average order. On a Constant $ basis, Brazil’s sales from Beauty products and Fashion & Home products declined 8% and 6%, respectively, including a benefit of 2% and 3% due to the impact of the new revenue recognition standard. The decline in Constant $ Beauty sales in Brazil was driven by weaker performance in Color, which was negatively impacted by competition. The challenging macroeconomic environment and lower consumption in the market continued to impact revenue and Constant $ revenue in Brazil, as well as Active Representatives and Ending Representatives. In addition, revenue and Constant $ revenue in Brazil, as well as Active Representatives and Ending Representatives, were also impacted by a national transportation strike which affected sales and distribution.

Revenue in Argentina declined 9%, unfavorably impacted by foreign exchange. On a Constant $ basis, Argentina's revenue grew 23%. Argentina's revenue and Constant $ revenue included a benefit of approximately 1% due to the impact of adopting the new revenue recognition standard. Revenue and Constant $ revenue in Argentina benefited from higher average order, which was impacted by the continuous inflationary impact on pricing.

Segment margin increased 250 basis points, or 260 basis points on a Constant $ basis, with no net impact from adoption of the new revenue recognition standard. The increase in reported and Constant $ segment margin was primarily as a result of:

a benefit of 210 basis points due to higher gross margin including 90 basis points due to non-recurring net tax recoveries in Brazil, 110 basis points from the favorable net impact of mix and pricing and 40 basis points from the favorable impact of foreign currency net gains. These items were partially offset by 60 basis points due to higher supply chain costs driven by higher material costs;

AVON PRODUCTS, INC.

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(U.S. dollars in millions, except per share data)

a benefit of 150 basis points from lower net bad debt expense, primarily in Brazil, as the prior-year period was impacted by lower than anticipated collection of receivables;

a decline of 70 basis points due to higher transportation costs in Brazil, primarily driven by inefficiencies caused by the national transportation strike, and the unfavorable impact of declining revenue with respect to transportation costs; and

a decline of 70 basis points due to higher net brochure cost, primarily due to an increase in brochure volumes in Brazil.

North Latin America



	Three Months Ended June 30,										Six Months Ended June 30,
							%/Basis Point Change										%/Basis Point Change
	2018			2017			US$		Constant $		2018			2017			US$		Constant $
Total revenue	$	207.3		$	207.8		—	%	3	%	$	402.9		$	401.0		—	%	—	%
Segment profit	19.0			18.2			4	%	9	%	39.8			39.6			1	%	(1	)%

Segment margin	9.2		%	8.8		%	40		50		9.9		%	9.9		%	—		—

Change in Active Representatives									(5	)%									(6	)%
Change in units sold									(6	)%									(8	)%
Change in Ending Representatives									(8	)%									(8	)%

Amounts in the table above may not necessarily sum due to rounding.

Three Months Ended June 30, 2018

North Latin America consists largely of our Mexico business. Total revenue for the segment was relatively unchanged compared to the prior-year period, unfavorably impacted by foreign exchange, which was primarily driven by the strengthening of the U.S. dollar relative to the Mexican peso. On a Constant $ basis, revenue increased 3%. Revenue and constant dollar revenue included a benefit of approximately 5% due to the impact of adopting the new revenue recognition standard. Revenue and Constant $ revenue were negatively impacted by a decrease in Active Representatives, primarily in Mexico, partially offset by higher average order.

Revenue in Mexico increased 2%, despite the unfavorable impact of foreign exchange. On a Constant $ basis, Mexico's revenue increased 6%. Mexico's revenue and Constant $ revenue included a benefit of approximately 6% due to the impact of the new revenue recognition standard. The benefit of higher average order on revenue and Constant $ revenue was offset by a decrease in Active Representatives, impacted by lower Representative satisfaction, primarily resulting from quality issues in the Fashion & Home category in the first quarter of 2018.

Segment margin increased 40 basis points, or 50 basis points on a Constant $ basis, including a benefit of 60 basis points due to the impact of adopting the new revenue recognition standard. In each case, segment margin was also impacted by:

a net decline of 170 basis points due to higher fixed expenses, primarily related to personnel cost;

a decline of 70 basis points due to increased net bad debt expense primarily driven by lower payments in Mexico and political unrest in Nicaragua;

a decline of 40 basis points due to higher transportation costs, primarily related to an increase in fuel prices in Mexico;

a benefit of 210 basis points due to lower Representative, sales leader and field expense in line with sales performance; and

a benefit of 60 basis points from lower advertising expense as compared to the prior-year period.

Six Months Ended June 30, 2018

North Latin America consists largely of our Mexico business. Total revenue for the segment remained relatively unchanged compared to the prior-year period. On a Constant $ basis, revenue was also relatively unchanged. Revenue and constant dollar revenue included a benefit of approximately 5% due to the impact of the adopting new revenue recognition standard. Revenue and Constant $ revenue were negatively impacted by a decrease in Active Representatives.

Revenue in Mexico increased 4%, which was favorably impacted by foreign exchange. On a Constant $ basis, Mexico's revenue increased 2%. Mexico's revenue and Constant $ revenue included a benefit of approximately 5% due to the impact of

AVON PRODUCTS, INC.

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(U.S. dollars in millions, except per share data)

the new revenue recognition standard. Revenue and Constant $ revenue in Mexico were negatively impacted by a decrease in Active Representatives primarily due to quality issues in the Fashion & Home category.

Segment margin was relatively unchanged. On a Constant $ basis, segment margin was also relatively unchanged, and included a benefit of 80 basis points due to the impact of adopting the new revenue recognition standard. The decrease in reported and Constant $ segment margin was primarily as a result of:

a net decline of 190 basis points primarily due to higher fixed expenses, primarily related to personnel cost and the impact of the Constant $ revenue decline causing deleverage of our fixed expenses;

a decline of 60 basis points primarily due to an increase in fuel prices in Mexico;

a benefit of 120 basis points due to lower Representative, sales leader and field expense in line with sales performance; and

a benefit of 40 basis points from lower advertising expense as compared to the prior-year period.

Asia Pacific



	Three Months Ended June 30,										Six Months Ended June 30,
							%/Basis Point Change										%/Basis Point Change
	2018			2017			US$		Constant $		2018			2017			US$		Constant $
Total revenue	$	113.1		$	113.9		(1	)%	1	%	$	224.5		$	227.3		(1	)%	(1	)%
Segment profit	7.3			10.2			(28	)%	(21	)%	17.7			23.5			(25	)%	(19	)%

Segment margin	6.5		%	9.0		%	(250	)	(200	)	7.9		%	10.3		%	(240	)	(180	)

Change in Active Representatives									(1	)%									(1	)%
Change in units sold									—	%									(3	)%
Change in Ending Representatives									(4	)%									(4	)%

Amounts in the table above may not necessarily sum due to rounding.

Effective from the first quarter of 2018, given that we will exit Australia and New Zealand during 2018, the results of Australia and New Zealand are now reported in Other operating segments and business activities for all periods presented, while previously the results had been reported in the Asia Pacific segment. The impact was not material to Asia Pacific or Other operating segments and business activities and is consistent with how we present other market exits.

Three Months Ended June 30, 2018

Total revenue decreased 1% compared to the prior-year period, due to the unfavorable impact of foreign exchange. On a Constant $ basis, revenue increased 1%. Revenue and constant dollar revenue included an increase of 1% due to the impact of adopting the new revenue recognition standard. Revenue and Constant $ revenue benefited from higher average order, offset by a decrease in Active Representatives, most significantly in Malaysia. The decline in Ending Representatives was primarily driven by a decline in Malaysia.

Revenue in the Philippines decreased 3%, negatively impacted by the unfavorable impact of foreign exchange. On a Constant $ basis, revenue in the Philippines increased 2%. Revenue and Constant $ revenue in the Philippines included a benefit of 2% due to the impact of adopting the new revenue recognition standard, and continued to be negatively impacted by inventory system issues resulting in service disruption. The benefit of an increase in Active Representatives on revenue and Constant $ revenue in the Philippines was offset by lower average order.

Segment margin decreased 250 basis points, or 200 basis points on a Constant $ basis, including a decrease of 40 basis points due to the impact of adopting the new revenue recognition standard. The decrease in reported and Constant $ segment margin was primarily as a result of:

a decline of 90 basis points from lower gross margin, primarily due to higher logistics cost in the Philippines to address service disruptions caused by the inventory system implementation earlier in the year;

AVON PRODUCTS, INC.

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(U.S. dollars in millions, except per share data)

a decline of 50 basis points due to higher fixed expenses primarily relating to the impairment of the inventory system implemented in the Philippines; and

a decline of 30 basis points due to higher advertising expense, primarily in China, related to celebrity and digital advertising to support growth.

Six Months Ended June 30, 2018

Total revenue decreased 1% compared to the prior-year period, due to the unfavorable impact of foreign exchange. On a Constant $ basis, revenue decreased 1%. Revenue and constant dollar revenue included a negligible benefit due to the impact of adopting the new revenue recognition standard. Revenue and Constant $ revenue were negatively impacted by a decrease in Active Representatives, most significantly in Malaysia. The decline in Ending Representatives was primarily driven by a decline in Malaysia.

Revenue in the Philippines declined 4%, negatively impacted by the unfavorable impact of foreign exchange. On a Constant $ basis, revenue in the Philippines remained relatively unchanged. Revenue and Constant $ revenue in the Philippines included a benefit of 1% due to the impact of adopting the new revenue recognition standard. Revenue and Constant $ revenue in the Philippines were negatively impacted by lower average order, partially offset by an increase in Active Representatives. Revenue and Constant $ revenue in the region and the Philippines was also negatively impacted by inventory system implementation issues resulting in service disruption.

Segment margin decreased 240 basis points, or 180 basis points on a Constant $ basis, including a decline of 30 basis points due to the impact of adopting the new revenue recognition standard. The decrease in reported and Constant $ segment margin was primarily as a result of:

a decline of 70 basis points related to higher Representative, sales leader and field expense, primarily due to investments in ~~the Philippines;~~store upgrades and e-commerce in China;

a decline of .960 basis points primarily relating to the impairment of the inventory system implemented in the Philippines;

a decline of 50 basis points due to higher advertising expense, primarily in the Philippines, related to television advertising associated with our Color ~~category.~~

~~Nine Months Ended September 30, 2017~~

~~Total revenue decreased 7% compared~~category, and in China, related to ~~the prior-year period, partially due~~celebrity and digital advertising to the unfavorable impact from foreign exchange. On a Constant $ basis, revenue decreased 3%, primarily due to a decrease in Active Representatives, most significantly in Malaysia, partially offset by higher average order. Revenue in the Philippines decreased 3%, or increased 3% on a Constant $ basis, primarily due to a higher average ordersupport growth; and an increase in Active Representatives. Revenue growth in the Philippines was driven by the third quarter of 2017, as strong commercial offers, including pricing, which, along with television advertising associated with our Color category, helped drive momentum in the field. In addition, actions implemented to improve inventory availability provided benefits to revenue growth.

~~Segment margin decreased 1.6 points, or 1.0 point on a Constant $ basis, in each case primarily as a result of:~~

a ~~decline~~benefit of ~~1.1~~30 basis points due to ~~lower~~higher gross margin caused ~~primarily~~ by .7160 basis points from ~~the unfavorable net impact of mix and pricing and .7 points from supply chain costs. The impact of~~benefits in supply chain costs ~~on gross margin was primarily~~ due to lower ~~volume on fixed~~obsolescence and overhead costs, partially offset by ~~lower obsolescence;~~

~~a decline of 1.0 point primarily related to the net impact of declining revenue with respect to Representative, sales leader and field expense;~~

~~a decline of .4~~100 basis points due to ~~lower advertising expense, primarily~~higher logistics cost in the Philippines ~~related~~ to ~~television advertising associated with our Color category during~~address service disruptions caused by the ~~third quarter of 2017;~~

~~a benefit of 1.1 points due to the lower fixed expenses, including the benefits associated with the Transformation Plan, primarily reductions in headcount; and~~

~~a benefit of .4 points from lower bad debt expense, primarily~~inventory system implementation earlier in the ~~Philippines, driven mainly by improved collection.~~

~~Earlier this year, we completed the review of our China operations and have determined that we will retain China in our portfolio of businesses.~~year.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of funds historically have been cash flows from operations, public offerings of notes, bank financings, issuance of commercial paper, borrowings under lines of credit and a private placement of notes. At ~~September~~June 30, ~~2017,~~2018, we had cash and cash equivalents totaling approximately ~~$664.~~$444. We believe that our sources of funding will be sufficient to satisfy our currently anticipated cash requirements through at least the next twelve months. ~~For~~On June 12, 2018, we received a decision authorizing Avon to withdraw the amount held as a judicial deposit relating to Brazil IPI taxes, substituting it by letter of guarantee, which was presented; on July 30, 2018, $68 was received (described more ~~information with respect~~fully in Note 7, Contingencies, to currency restrictions, see "Segment Review - South Latin America" in this MD&A above, and "Risk Factors - We are subject to financial risks related to our international operations, including exposure to foreign currency fluctuations and the ~~impact of foreign currency restrictions" contained in our 2016 Form 10-K.~~Consolidated Financial Statements included herein).

We may seek to repurchase our equity or to retire our outstanding debt in open market purchases, privately negotiated transactions, through derivative instruments, cash tender offers or otherwise. Repurchases of equity and debt may be funded by the incurrence of additional debt or the issuance of equity (including shares of preferred stock) or convertible securities and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors, and the amounts involved may be material. We may also elect to incur additional debt or issue equity (including shares of preferred stock) or convertible securities to finance ongoing operations or to meet our other liquidity needs. Any issuances of equity (including shares of preferred stock) or convertible securities could have a dilutive effect on the ownership interest of our current shareholders and may adversely impact earnings per share in future periods. Our credit ratings were downgraded during the past several years, which may impact our ability to access such transactions on favorable terms, if at all. For more information, see "Risk Factors - Our credit ratings were downgraded ~~in each of~~during the ~~last three~~past several years, which could limit our access to

~~AVON PRODUCTS, INC.~~

~~MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~(U.S. dollars in millions, except per share data)~~

financing, affect the market price of our financing and increase financing costs. A further downgrade in our credit ratings may adversely affect our access to liquidity," "Risk Factors - 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," and "Risk Factors - A general economic downturn, a recession globally or in one or more of our geographic regions

AVON PRODUCTS, INC.

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(U.S. dollars in millions, except per share data)

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" contained in our ~~2016~~2017 Form 10-K.

Our liquidity could also be negatively impacted by restructuring initiatives, dividends, capital expenditures, acquisitions, and certain contingencies, including any legal or regulatory settlements, described more fully in Note 8,7, Contingencies, to the Consolidated Financial Statements included herein. See our Cautionary Statement for purposes of the “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995 contained in this report.

Cash Flows

Net Cash Provided (Used) by Continuing Operating Activities

Net cash ~~provided~~used by continuing operating activities during the first ~~nine~~six months of ~~2017~~2018 was approximately ~~$35,~~$107, as compared to net cash ~~used~~provided by continuing ~~operating activities~~operations of approximately ~~$104~~$11 during the first ~~nine~~six months of ~~2016.~~2017.

The year-over-year comparison benefited from an injunction we received in May 2016 for cash deposits associated with Industrial Production Tax (“IPI”) in Brazil. As a result, we were not required to make cash deposits in 2017, while we paid approximately $19 for these cash deposits in 2016, prior to May. See Note 8, Contingencies, to the Consolidated Financial Statements included herein for additional information on the IPI taxes.

~~The remaining~~ approximate ~~$120 benefit~~$118 unfavorable impact to the year-over-year comparison of net cash ~~provided (used)~~used by continuing operating activities was primarily due to ~~improvements in working capital, most significantly from lower purchases of~~higher inventory ~~and~~purchase, the timing of payments ~~as well as~~and a $10 contribution to the U.S. pension plan, partially offset by lower net receivables. Net cash used by continuing operations was also impacted by the make-whole payment and payment of accrued interest related to the 2019 bond prepayment, which totaled $11.

Net Cash Used by Continuing Investing Activities

Net cash used by continuing investing activities during the first ~~nine~~six months of ~~2017~~2018 was approximately ~~$42,~~$50, as compared to approximately ~~$68~~$40 during the first ~~nine~~six months of ~~2016.~~2017. The approximate ~~$26 decrease~~$10 increase to net cash used by continuing investing activities was primarily due to an approximate $22 cash distribution received from New Avon in the third quarter of 2017. Capital expenditures for the full year 2017 are estimated to be approximately $100 and are expected to be funded by cash from operations. See Note 4, Investment in New Avon, to the Consolidated Financial Statements included herein for more information on the cash distribution received from New Avon.higher capital expenditures.

Net Cash ~~(Used) Provided~~Used by Continuing Financing Activities

Net cash used by continuing financing activities during the first ~~nine~~six months of ~~2017~~2018 was ~~approximately $10,~~less than $252, as compared to ~~net cash provided by continuing financing activities of~~ approximately ~~$569~~$13 during the first ~~nine~~six months of ~~2016.~~2017. The approximate ~~$579 decrease~~$239 unfavorable impact to net cash ~~(used) provided~~used by continuing financing activities was primarily due to ~~the net proceeds related to the $500 principal amount~~repayment of 7.875% Senior Secured Notes issued in the third quarter of 2016 and the net proceeds from the sale of Series C Preferred Stock, partially offset by the payments for the August 2016 cash tender offers of approximately $301. See Note 16, Debt, and Note 5, Related Party Transactions, to the Consolidated Financial Statements included herein for more information.debt.

Capital Resources

Revolving Credit Facility

~~AVON PRODUCTS, INC.~~

~~MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~(U.S. dollars in millions, except per share data)~~

The 2015 facility will terminate in June 2020; provided, however, that it shall terminate on the 91^st day prior to the maturity of ~~6.50% Notes due March 1, 2019 and~~the 4.60% Notes ~~due March 15, 2020,~~(as defined below), if on such 91^st day, the applicable notes are not redeemed, repaid, discharged, defeased or otherwise refinanced in full.

The 2015 facility contains affirmative and negative covenants, which are customary for secured financings of this type, as well as financial covenants (interest coverage and total leverage ratios). As of ~~September~~June 30, ~~2017,~~2018, we were in compliance with our interest coverage and total leverage ratios under the 2015 ~~facility.~~facility, as amended. The amount of the facility available to be drawn down on is reduced by any standby letters of credit granted by AIO, which, as of ~~September~~June 30, ~~2017,~~2018, was approximately ~~$39.~~$33. As of ~~September~~June 30, ~~2017,~~2018, based on then applicable interest rates, the entire amount of the remaining 2015 facility, which is approximately ~~$130~~$367, could have been drawn down without violating any covenant. Depending on our business results (including the impact of any adverse foreign exchange movements and significant restructuring charges), it is possible that we may be non-compliant with our interest coverage or total leverage ratio absent the Company undertaking other alternatives to avoid noncompliance, such as obtaining additional amendments to the 2015 facility or repurchasing certain debt. If we were to be non-compliant with

AVON PRODUCTS, INC.

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(U.S. dollars in millions, except per share data)

our interest coverage or total leverage ratio, we would no longer have access to our 2015 facility and our credit ratings may be downgraded. As of ~~September~~June 30, ~~2017,~~2018, there were no amounts outstanding under the 2015 facility.

FINANCIAL INSTRUMENTS AND RISK MANAGEMENT STRATEGIES

Interest Rate Risk

In the past we have used interest-rate swaps to manage our interest rate exposure. The interest-rate swaps were used to either convert our fixed rate borrowing to a variable interest rate or to unwind an existing variable interest-rate swap on a fixed rate borrowing. As of ~~September~~June 30, ~~2017~~2018, we do not have any interest-rate swap agreements. Approximately 1% of our debt portfolio at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017, was exposed to floating interest rates.

Foreign Currency Risk

We conduct business globally, with operations in various locations around the world. Over the past three years, all of our consolidated revenue was derived from operations of subsidiaries outside of the U.S. The functional currency for most of our foreign operations is their local currency. We may reduce our exposure to fluctuations in cash flows associated with changes in foreign exchange rates by creating offsetting positions, including through the use of derivative financial instruments.

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~~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, stabilization 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 ~~our~~the Representatives. 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:

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,~~transformation plan, 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, Internet platform and technology strategies including e-commerce, marketing and

~~AVON PRODUCTS, INC.~~

~~MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~(U.S. dollars in millions, except per share data)~~

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. ~~("Cerberus")~~;

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,~~transformation plan, 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 ~~such as Brazil,~~ and developing and emerging markets, such as Brazil, Mexico and Russia;

our ability to improve working capital and effectively manage doubtful accounts and inventory and implement initiatives to reduce inventory levels, including 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, ~~in China and additional countries,~~ as well as any disruption or adverse consequencesresulting from such investigations, reviews, related actions or litigation, including the retention of a compliance monitor as required by the deferred prosecution agreement with the U.S. Department of Justice and a consent to settlement with the Securities and Exchange Commission ("SEC"), any changes in Company policy or procedure suggested by the compliance monitor or undertaken by the Company, the duration of the compliance monitor and whether and when the Company will be permitted to undertake self-reporting, the Company’s compliance with the deferred prosecution agreement and whether and when the charges against the Company are dismissed with prejudice;

litigation;

the effect of political, legal, tax, including changes in tax rates, and other regulatory risks imposed on us abroad and in the U.S., our operations or ~~our~~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 security 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

~~AVON PRODUCTS, INC.~~

~~MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~(U.S. dollars in millions, except per share data)~~

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 cyber security breaches;

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 ~~a continued decline in~~ our business results ~~which includes~~(including the impact of any adverse foreign exchange movements and significant restructuring ~~charges and significant legal settlements or judgments,~~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;

AVON PRODUCTS, INC.

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(U.S. dollars in millions, except per share data)

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~~series C ~~Preferred Stock (as defined herein)~~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.

Additional information identifying such factors is contained in Item 1A of our ~~2016~~2017 Form 10-K for the year ended December 31, ~~2016,~~2017, and other reports and documents we file with the SEC. We undertake no obligation to update any such forward-looking statements.

4452

AVON PRODUCTS, INC.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in market risk from the information provided in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of our ~~2016~~2017 Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, our principal executive and principal financial officers carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon their evaluation, the principal executive and principal financial officers concluded that our disclosure controls and procedures were effective as of ~~September~~June 30, ~~2017~~2018, at the reasonable assurance level. Disclosure controls and procedures are designed to ensure that information relating to Avon (including our consolidated subsidiaries) required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the United States Securities and Exchange Commission’s rules and forms and to ensure that information required to be disclosed is accumulated and communicated to management to allow timely decisions regarding disclosure.

Changes in Internal Control over Financial Reporting

Our management has evaluated, with the participation of our principal executive and principal financial officers, whether any changes in our internal control over financial reporting that occurred during our last fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on the evaluation we conducted, our management has concluded that no such changes have occurred.

4553

AVON PRODUCTS, INC.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 8,7, Contingencies, to the Consolidated Financial Statements included herein.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information about our purchases of our common stock during the quarterly period ended ~~September~~June 30, ~~2017~~2018:

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
7/1 - 7/31/17 25,137
⁽¹⁾
$ 5.38
* *
8/1 - 8/31/17 5,944
⁽¹⁾
3.47
* *
9/1 - 9/30/17 —
—
* *
Total 31,081

$ 5.02
* *



	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
4/1 - 4/30/18	120,511	⁽¹⁾	2.77		*	*
5/1 - 5/31/18	48,667	⁽¹⁾	$	2.65	*	*
6/1 - 6/30/18	9,089		2.69		*	*
Total	178,267		$	2.73	*	*


*	These amounts are not applicable as the Company does not have a share repurchase program in effect.


(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 delay from the actual transaction date.

AVON PRODUCTS, INC.

ITEM 6. EXHIBITS



4.1**	~~Indenture, dated August 15, 2016, among Avon International Operations, Inc., the guarantors party thereto and Deutsche Bank Trust Company Americas, as trustee and collateral agent.~~
10.1	~~Letter~~Performance-Contingent Restricted Stock Unit Award Agreement, ~~by and~~for award granted effective March 14, 2018, between Avon Products, Inc. and ~~Sherilyn McCoy, dated as of August 2, 2017 (incorporated by reference to Exhibit 10.1 to Avon’s Current Report on Form 8-K filed on August 4, 2017).~~Jan Zijderveld.

10.2	~~Severance Benefit Letter~~Option Agreement, ~~and General Release of Claims, by and~~for award granted effective March 14, 2018, between Avon Products, Inc. and ~~James Scully, dated as of August 12, 2017.~~Jan Zijderveld.

10.3	~~Termination~~Sign-On Performance-Contingent Restricted Stock Unit Award Agreement, ~~by and~~for award granted effective March 27, 2018, between Avon Products, Inc.~~, Avon Cosmetics GmbH~~ and ~~John Higson, dated as of September 19, 2017.~~Jan Zijderveld.

10.4	Severance Benefit Letter Agreement and General Release of Claims, byentered into on April 9, 2018 between the Company and ~~between Avon Products, Inc. and Fernando Acosta, dated as of August 31, 2017.~~Sheri McCoy.

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101	The following materials formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Statements of Operations, (ii) Consolidated Statements of Comprehensive ~~Income (Loss),~~Loss, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements


**	~~This indenture was filed as exhibit 4.1 to Form 8-K filed with the SEC on August 16, 2016 and inadvertently omitted the language found in section 4.16.~~

4655

AVON PRODUCTS, INC.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		AVON PRODUCTS, INC.
		(Registrant)

Date:	~~November 2, 2017~~August 3, 2018	/s/ ~~Robert Loughran~~Laura Barbrook
		~~Robert Loughran~~Laura Barbrook
		~~Group~~ Vice President and Corporate
		~~Chief~~ Controller - Principal Accounting Officer

		Signed both on behalf of the
		registrant and as chief
		accounting officer.

4756



(In millions)	September 30, 2017			December 31, 2016
Assets
Current Assets
Cash and cash equivalents	$	663.8		$	654.4
Accounts receivable, net	473.5			458.9
Inventories	662.5			586.4
Prepaid expenses and other	292.2			291.3
Current assets of discontinued operations	0.5			1.3
Total current assets	2,092.5			1,992.3
Property, plant and equipment, at cost	1,488.3			1,424.1
Less accumulated depreciation	(781.8		)	(712.8		)
Property, plant and equipment, net	706.5			711.3
Goodwill	96.8			93.6
Other assets	620.8			621.7
Total assets	$	3,516.6		$	3,418.9
Liabilities, Series C Convertible Preferred Stock and Shareholders’ Deficit
Current Liabilities
Debt maturing within one year	$	16.1		$	18.1
Accounts payable	796.7			768.1
Accrued compensation	149.0			129.2
Other accrued liabilities	360.6			401.9
Sales taxes and taxes other than income	137.5			147.0
Income taxes	9.1			10.7
Current liabilities of discontinued operations	2.5			10.7
Total current liabilities	1,471.5			1,485.7
Long-term debt	1,873.0			1,875.8
Employee benefit plans	160.9			164.5
Long-term income taxes	82.9			78.6
Long-term sales taxes and taxes other than income	185.2			124.5
Other liabilities	90.6			81.3
Total liabilities	3,864.1			3,810.4

Commitments and contingencies (Note 8)
Series C convertible preferred stock	461.9			444.7

Shareholders’ Deficit
Common stock	189.7			188.8
Additional paid-in capital	2,290.7			2,273.9
Retained earnings	2,235.4			2,322.2
Accumulated other comprehensive loss	(934.6		)	(1,033.2		)
Treasury stock, at cost	(4,601.7		)	(4,599.7		)
Total Avon shareholders’ deficit	(820.5		)	(848.0		)
Noncontrolling interests	11.1			11.8
Total shareholders’ deficit	(809.4		)	(836.2		)
Total liabilities, series C convertible preferred stock and shareholders’ deficit	$	3,516.6		$	3,418.9



Three Months Ended September 30, 2017:	Foreign Currency Translation Adjustments			Net Investment Hedges			Pension and Postretirement Benefits			Investment in New Avon		Total
Balance at June 30, 2017	$	(839.7	)	$	(4.3	)	$	(114.0	)	$	3.4	$	(954.6	)
Other comprehensive income other than reclassifications	13.5			—			—			—		13.5
Reclassifications into earnings:
Amortization of net actuarial loss and prior service cost, net of tax of $0.0⁽¹⁾	—			—			6.5			—		6.5
Total reclassifications into earnings	—			—			6.5			—		6.5
Balance at September 30, 2017	$	(826.2	)	$	(4.3	)	$	(107.5	)	$	3.4	$	(934.6	)



Three Months Ended September 30, 2016:	Foreign Currency Translation Adjustments			Cash Flow Hedges			Net Investment Hedges			Pension and Postretirement Benefits			Total
Balance at June 30, 2016	$	(862.7	)	$	(.4	)	$	(4.3	)	$	(142.4	)	$	(1,009.8	)
Other comprehensive income other than reclassifications	15.4			—			—			.7			16.1
Reclassifications into earnings:
Derivative losses on cash flow hedges, net of tax of $0.0⁽²⁾	—			1.8			—			—			1.8
Amortization of net actuarial loss and prior service cost, net of tax of $.2⁽¹⁾	—			—			—			2.9			2.9
Total reclassifications into earnings	—			1.8			—			2.9			4.7
Balance at September 30, 2016	$	(847.3	)	$	1.4		$	(4.3	)	$	(138.8	)	$	(989.0	)



Nine Months Ended September 30, 2016:	Foreign Currency Translation Adjustments			Cash Flow Hedges			Net Investment Hedges			Pension and Postretirement Benefits			Total
Balance at December 31, 2015	$	(950.0	)	$	(1.3	)	$	(4.3	)	$	(410.6	)	$	(1,366.2	)
Other comprehensive income (loss) other than reclassifications	31.4			—			—			(10.6		)	20.8
Reclassifications into earnings:
Derivative losses on cash flow hedges, net of tax of $0.0⁽²⁾	—			2.7			—			—			2.7
Amortization of net actuarial loss and prior service cost, net of tax of $.6⁽¹⁾	—			—			—			12.4			12.4
Deconsolidation of Venezuela, net of tax of $0.0	81.3			—			—			.8			82.1
Separation of North America, net of tax of $10.2	(10.0		)	—			—			269.2			259.2
Total reclassifications into earnings	71.3			2.7			—			282.4			356.4
Balance at September 30, 2016	$	(847.3	)	$	1.4		$	(4.3	)	$	(138.8	)	$	(989.0	)