|
| | | | | | | | | | | | | | | | | | | |
Products Corporation and Subsidiaries Condensed Consolidating Statement of Operations and Comprehensive (Loss) Income |
Nine Months Ended September 30, 2019 |
| Products Corporation | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
Net Sales | $ | 429.4 |
| | $ | 428.9 |
| | $ | 865.4 |
| | $ | (3.5 | ) | | $ | 1,720.2 |
|
Cost of sales | 205.1 |
| | 217.3 |
| | 331.8 |
| | (3.5 | ) | | 750.7 |
|
Gross profit | 224.3 |
| | 211.6 |
| | 533.6 |
| | — |
| | 969.5 |
|
Selling, general and administrative expenses | 329.5 |
| | 238.7 |
| | 399.9 |
| | — |
| | 968.1 |
|
Acquisition and integration costs | 0.6 |
| | 0.1 |
| | — |
| | — |
| | 0.7 |
|
Restructuring charges and other, net | 3.4 |
| | 3.4 |
| | 4.8 |
| | — |
| | 11.6 |
|
Operating (loss) income | (109.2 | ) | | (30.6 | ) | | 128.9 |
| | — |
| | (10.9 | ) |
Other (income) expense: | | | | | | | | | |
Intercompany interest, net | (3.5 | ) | | 2.0 |
| | 1.5 |
| | — |
| | — |
|
Interest expense | 140.5 |
| | — |
| | 5.2 |
| | — |
| | 145.7 |
|
Amortization of debt issuance costs | 10.4 |
| | — |
| | — |
| | — |
| | 10.4 |
|
Foreign currency losses, net | 1.2 |
| | 0.2 |
| | 7.6 |
| | — |
| | 9.0 |
|
Miscellaneous, net | (26.4 | ) | | (36.2 | ) | | 70.2 |
| | — |
| | 7.6 |
|
Other expense (income), net | 122.2 |
| | (34.0 | ) | | 84.5 |
| | — |
| | 172.7 |
|
(Loss) income from continuing operations before income taxes | (231.4 | ) | | 3.4 |
| | 44.4 |
| | — |
| | (183.6 | ) |
(Benefit from) provision for income taxes | (36.8 | ) | | 19.3 |
| | 15.1 |
| | — |
| | (2.4 | ) |
(Loss) income from continuing operations, net of taxes | (194.6 | ) | | (15.9 | ) | | 29.3 |
| | — |
| | (181.2 | ) |
Income from discontinued operations, net of taxes | — |
| | — |
| | 2.0 |
| | — |
| | 2.0 |
|
Equity in income (loss) of subsidiaries | 39.3 |
| | 11.8 |
| | — |
| | (51.1 | ) | | — |
|
Net (loss) income | $ | (155.3 | ) | | $ | (4.1 | ) | | $ | 31.3 |
| | $ | (51.1 | ) | | $ | (179.2 | ) |
Other comprehensive income (loss) | 6.7 |
| | 2.7 |
| | (1.8 | ) | | (0.9 | ) | | 6.7 |
|
Total comprehensive (loss) income | $ | (148.6 | ) | | $ | (1.4 | ) | | $ | 29.5 |
| | $ | (52.0 | ) | | $ | (172.5 | ) |
COMBINED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Products Corporation and Subsidiaries Condensed Consolidating Statements of Cash Flows | | | | | | | | | |
Three Months Ended March 31, 2019 | | | | | | | | | |
| Products Corporation | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | |
Net cash used in operating activities | $ | (24.0) | | | $ | 2.7 | | | $ | (7.1) | | | $ | — | | | $ | (28.4) | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | |
Net cash used in investing activities | (3.4) | | | — | | | (2.4) | | | — | | | (5.8) | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | |
Net decrease in short-term borrowings and overdraft | (12.5) | | | (4.2) | | | (0.5) | | | — | | | (17.2) | |
Repayments under the 2016 Term Loan Facility | (4.5) | | | — | | | — | | | — | | | (4.5) | |
| | | | | | | | | |
Net borrowings under the Amended 2016 Revolving Credit Facility | 40.6 | | | — | | | — | | | — | | | 40.6 | |
| | | | | | | | | |
Payments of financing costs | (0.3) | | | — | | | (0.6) | | | — | | | (0.9) | |
Tax withholdings related to net share settlements of restricted stock and RSUs | (1.6) | | | — | | | — | | | — | | | (1.6) | |
Other financing activities | (0.2) | | | — | | | — | | | — | | | (0.2) | |
Net cash provided by financing activities | 21.5 | | | (4.2) | | | (1.1) | | | — | | | 16.2 | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | — | | | 0.1 | | | 0.2 | | | — | | | 0.3 | |
Net decrease in cash, cash equivalents and restricted cash | (5.9) | | | (1.4) | | | (10.4) | | | — | | | (17.7) | |
Cash, cash equivalents and restricted cash at beginning of period | $ | 7.2 | | | $ | 6.6 | | | $ | 73.7 | | | $ | — | | | 87.5 | |
Cash, cash equivalents and restricted cash at end of period | $ | 1.3 | | | $ | 5.2 | | | $ | 63.3 | | | $ | — | | | $ | 69.8 | |
|
| | | | | | | | | | | | | | | | | | | |
Products Corporation and Subsidiaries Condensed Consolidating Statement of Operations and Comprehensive (Loss) Income |
Nine Months Ended September 30, 2018 |
| Products Corporation | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
Net Sales | $ | 478.3 |
| | $ | 485.3 |
| | $ | 860.8 |
| | $ | (1.5 | ) | | $ | 1,822.9 |
|
Cost of sales | 231.9 |
| | 239.4 |
| | 337.4 |
| | (1.5 | ) | | 807.2 |
|
Gross profit | 246.4 |
| | 245.9 |
| | 523.4 |
| | — |
| | 1,015.7 |
|
Selling, general and administrative expenses | 326.6 |
| | 314.0 |
| | 441.5 |
| | — |
| | 1,082.1 |
|
Acquisition and integration costs | 7.8 |
| | 1.4 |
| | 2.8 |
| | — |
| | 12.0 |
|
Restructuring charges and other, net | 5.1 |
| | 2.2 |
| | 6.6 |
| | — |
| | 13.9 |
|
Loss on disposal of minority investment | 20.1 |
| | — |
| | — |
| | — |
| | 20.1 |
|
Operating income | (113.2 | ) | | (71.7 | ) | | 72.5 |
| | — |
| | (112.4 | ) |
Other (income) expenses: | | | | | | | | | |
Intercompany interest, net | (4.7 | ) | | 1.8 |
| | 2.9 |
| | — |
| | — |
|
Interest expense | 127.0 |
| | — |
| | 2.1 |
| | — |
| | 129.1 |
|
Amortization of debt issuance costs | 9.1 |
| | — |
| | — |
| | — |
| | 9.1 |
|
Foreign currency losses, net | 2.5 |
| | 0.4 |
| | 7.8 |
| | — |
| | 10.7 |
|
Miscellaneous, net | (15.0 | ) | | (41.8 | ) | | 57.4 |
| | — |
| | 0.6 |
|
Other expense (income), net | 118.9 |
| | (39.6 | ) | | 70.2 |
| | — |
| | 149.5 |
|
(Loss) income from continuing operations before income taxes | (232.1 | ) | | (32.1 | ) | | 2.3 |
| | — |
| | (261.9 | ) |
(Benefit from) provision for income taxes | (49.7 | ) | | 6.5 |
| | 1.2 |
| | — |
| | (42.0 | ) |
(Loss) income from continuing operations, net of taxes | (182.4 | ) | | (38.6 | ) | | 1.1 |
| | — |
| | (219.9 | ) |
Loss from discontinued operations, net of taxes | — |
| | — |
| | (0.1 | ) | | — |
| | (0.1 | ) |
Equity in (loss) income of subsidiaries | (37.6 | ) | | 1.6 |
| | — |
| | 36.0 |
| | — |
|
Net (loss) income | $ | (220.0 | ) | | $ | (37.0 | ) | | $ | 1.0 |
| | $ | 36.0 |
| | $ | (220.0 | ) |
Other comprehensive (loss) income | (5.1 | ) | | (3.3 | ) | | (9.3 | ) | | 12.6 |
| | (5.1 | ) |
Total comprehensive (loss) income | $ | (225.1 | ) | | $ | (40.3 | ) | | $ | (8.3 | ) | | $ | 48.6 |
| | $ | (225.1 | ) |
COMBINED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
19. SUBSEQUENT EVENTS
Amendment of Revolving Credit Agreement; Extension of Senior Secured First In, Last Out Tranche B to Revolving Credit Facility
On April 17, 2020 (the “FILO Closing Date”), Products Corporation, Revlon and certain of their subsidiaries entered into Amendment No. 3 (“Amendment No. 3”) of Products Corporation’s asset-based revolving credit agreement with Citibank, N.A., acting as administrative agent, collateral agent, issuing lender, local fronting lender and swingline lender and the other issuing lenders (as amended by Amendment No. 1, dated as of April 17, 2018, and Amendment No. 2, dated as of March 6, 2019, the “Existing Revolving Credit Agreement,” and as further amended by Amendment No. 3, the “Amended Revolving Credit Agreement”) in respect of Products Corporation’s existing senior secured asset-based revolving credit facility (as amended by Amendment No. 1 and Amendment No. 2, the “Existing Revolving Credit Facility” and as in effect after Amendment No. 3, the “Amended Revolving Credit Facility”).
Pursuant to the terms of Amendment No. 3, the maturity date applicable to $36.3 million of loans under the $41.5 million senior secured first in, last out Tranche B of the Existing Revolving Credit Facility (the “FILO Tranche”) was extended from April 17, 2020 to May 17, 2020 (the “Extended Maturity Date”). The remaining approximately $5.2 million of FILO Tranche loans were repaid as of the FILO Closing Date. The Existing Revolving Credit Agreement permits restricted payments subject to certain conditions and limitations. Amendment No. 3 prohibits any restricted payments from the FILO Closing Date until the earlier of the Extended Maturity Date and the date the FILO Tranche is terminated and repaid or refinanced in full, subject to certain exceptions for intercompany restricted payments. The Existing Revolving Credit Agreement also permits Products Corporation and its restricted subsidiaries to incur additional debt, make investments or restricted payments, dispose of assets or prepay junior lien indebtedness, provided that certain “payment conditions” are satisfied. Amendment No. 3, among other things, prohibits such actions made in reliance on the payment conditions (other than investments) from the FILO Closing Date until the earlier of the Extended Maturity Date and the date the FILO Tranche is terminated and repaid or refinanced in full. In addition, Amendment No. 3 increases the applicable interest margin for the FILO Tranche by 0.75%, subject to a LIBOR floor of 0.75%.
Commitment Letter with Ad Hoc Group of Term Loan Lenders
On April 14, 2020, Products Corporation entered into a binding commitment letter (the “AHG Commitment Letter”) with certain financial institutions (the “AHG Commitment Parties”) that are lenders or the affiliates of lenders (the “Ad Hoc Group” or the “AHG”) under Products Corporation’s 2016 Term Loan Facility. Pursuant to the AHG Commitment Letter and subject to the terms and conditions set forth therein, the AHG Commitment Parties have committed to provide the Company with senior secured term loan facilities (the “AHG Facilities” and, together with the use of proceeds thereof and the Extension Amendment (as defined below), the “AHG 2020 Refinancing Transactions”). See “Consummation of 2020 Refinancing Transactions” below for information on the May 7, 2020 closing of the AHG 2020 Refinancing Transactions.
Under the AHG Commitment Letter, the funding of the AHG Facilities was contingent on the satisfaction of a limited number of customary conditions, including the execution of definitive loan documentation for the AHG Facilities and the Extension Amendment, absence of material adverse change and certain other customary conditions. In addition, the funding of the AHG Facilities was contingent on Products Corporation receiving the consent of lenders holding more than 50% of the loans outstanding under the 2016 Term Loan Facility. The commitments under the AHG Commitment Letter were available to the Company until May 14, 2020.
Principal and Maturity: The AHG Facilities will consist of (i) a senior secured term loan facility in a principal amount of up to $850 million (the “AHG New BrandCo Facility”), (ii) a senior secured term loan facility in a principal amount of up to $950 million (the “AHG Roll-up BrandCo Facility”) and (iii) a senior secured term loan facility in a principal amount to be based on participation in the Extension Amendment as further described below (the “AHG Junior Roll-up BrandCo Facility”). Jefferies Finance LLC will act as administrative agent and collateral agent in respect of the AHG Facilities and Jefferies LLC will act as sole lead arranger and sole bookrunner in respect of the AHG Facilities. On April 27, 2020, the parties amended the AHG Commitment Letter to increase the AHG New BrandCo Facility to $880 million, consisting of $815 million available on the closing date and $65 million available, at the Company’s sole option, as a single delayed borrowing on or after 10 days after the closing date until the date that is 15 business days after the closing date, the proceeds of which will be used to repay loans outstanding under the 2020 Incremental Facility (as hereinafter defined).
The proceeds of the AHG New BrandCo Facility will be used (i) to repay in full indebtedness outstanding under Products Corporation’s 2019 Term Loan Facility (the “AHG Refinancing”), (ii) to pay fees and expenses in connection with the AHG Facilities and the AHG Refinancing and (iii) to the extent of any excess, for general corporate purposes, including repurchasing and retiring Products Corporation’s outstanding 5.75% Senior Notes at prevailing market prices. The proceeds of the AHG
|
| | | | | | | | | | | | | | | | | | | |
Products Corporation and Subsidiaries Condensed Consolidating Statements of Cash Flows |
Nine Months Ended September 30, 2019 |
| Products Corporation | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | |
Net cash (used in) provided by operating activities | $ | (169.1 | ) | | $ | 5.6 |
| | $ | (3.3 | ) | | $ | — |
| | $ | (166.8 | ) |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | |
Net cash used in investing activities | (10.9 | ) | | (2.0 | ) | | (7.1 | ) | | — |
| | (20.0 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | |
Net decrease in short-term borrowings and overdraft | (11.5 | ) | | (7.2 | ) | | (3.7 | ) | | — |
| | (22.4 | ) |
Net borrowings under the Amended 2016 Revolving Credit Facility | 13.4 |
| | — |
| | — |
| | — |
| | 13.4 |
|
Net borrowings under the 2019 Term Loan Facility | 200.0 |
| | — |
| | — |
| | — |
| | 200.0 |
|
Repayments under the 2016 Term Loan Facility | (13.5 | ) | | — |
| | — |
| | — |
| | (13.5 | ) |
Payment of financing costs | (12.2 | ) | | — |
| | (1.2 | ) | | — |
| | (13.4 | ) |
Tax withholdings related to net share settlements of restricted stock units and awards | (1.6 | ) | | — |
| | — |
| | — |
| | (1.6 | ) |
Other financing activities | (0.6 | ) | | (0.1 | ) | | (0.2 | ) | | — |
| | (0.9 | ) |
Net cash provided by (used in) financing activities | 174.0 |
| | (7.3 | ) | | (5.1 | ) | | — |
| | 161.6 |
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash | — |
| | 0.4 |
| | (1.8 | ) | | — |
| | (1.4 | ) |
Net decrease in cash, cash equivalents and restricted cash | (6.0 | ) | | (3.3 | ) | | (17.3 | ) | | — |
| | (26.6 | ) |
Cash, cash equivalents and restricted cash at beginning of period | $ | 7.2 |
| | $ | 6.6 |
| | $ | 73.7 |
| | $ | — |
| | $ | 87.5 |
|
Cash, cash equivalents and restricted cash at end of period | $ | 1.2 |
| | $ | 3.3 |
| | $ | 56.4 |
| | $ | — |
| | $ | 60.9 |
|
COMBINED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
Roll-up BrandCo Facility will be used to purchase an equivalent amount of term loans under the 2016 Term Loan Facility held by the lenders participating in the AHG New BrandCo Facility.
Lenders under the 2016 Term Loan Facility who did not participate in the AHG New BrandCo Facility and the AHG Roll-up BrandCo Facility, but who nonetheless consented to the Extension Amendment were entitled to participate in the AHG Junior Roll-up BrandCo Facility with respect to a portion of their holdings of loans under the 2016 Term Loan Facility.The proceeds of the AHG Junior Roll-up BrandCo Facility will be used to purchase an equivalent amount of term loans under the 2016 Term Loan Facility held by such lenders.
The AHG Facilities will mature on June 30, 2025, subject to a springing maturity 91 days prior to the maturity date of Products Corporation’s 6.25% Senior Notes due August 1, 2024 if, on such date, $100 million or more in aggregate principal amount of the 6.25% Senior Notes remains outstanding.
Borrower, Guarantees and Security:The borrower under the AHG Facilities will be Products Corporation, and the AHG Facilities will be guaranteed by certain indirect foreign subsidiaries (or the domestic subsidiaries of foreign subsidiaries) of Products Corporation (the “AHG BrandCos”), which will hold certain intellectual property assets related to the Elizabeth Arden and American Crew brands, certain other portfolio brands and certain owned fragrance brands (the “AHG Specified Brand Assets”). The AHG BrandCos will not guarantee the 2016 Term Loan Facility, but all guarantors of the 2016 Term Loan Facility will guarantee the AHG Facilities. All of the assets of the AHG BrandCos (including the equity of the AHG BrandCos) will be pledged to secure the AHG New BrandCo Facility on a first-priority basis, the AHG Roll-up BrandCo Facility on a second-priority basis and the AHG Junior Roll-up BrandCo Facility on a third-priority basis and will not secure the 2016 Term Loan Facility, but the AHG Facilities will be secured on a pari passu basis by the assets securing the 2016 Term Loan Facility.
Contribution and License Agreements:In connection with the pledge of the AHG Specified Brand Assets, Products Corporation will enter into intercompany arrangements pursuant to which the AHG Specified Brand Assets will be contributed to the AHG BrandCos. Products Corporation and/or its operating subsidiaries will enter into license and royalty arrangements on arm’s length terms with the relevant AHG BrandCos to provide for their continued use of the AHG Specified Brand Assets during the term of the AHG Facilities.
Interest and Fees: Interest will accrue on the AHG Facilities at a rate per annum of adjusted LIBOR plus a fixed margin. Products Corporation will pay customary fees and expenses in connection with the AHG Facilities.
Affirmative and Negative Covenants:The AHG Facilities will contain certain affirmative and negative covenants that, among other things, limit Products Corporation and its restricted subsidiaries ability to: (i) incur additional debt; (ii) incur liens; (iii) sell, transfer or dispose of assets; (iv) make investments; (v) make dividends and distributions on, or repurchases of, equity; (vi) make prepayments of contractually subordinated, unsecured or junior lien debt; (vii) enter into certain transactions with their affiliates; (viii) enter into sale-leaseback transactions; (ix) change their lines of business; (x) restrict dividends from their subsidiaries or restrict liens; (xi) change their fiscal year; and (xii) modify the terms of certain debt.The AHG Facilities will also restrict distributions and other payments from the AHG BrandCos based on certain minimum thresholds of net sales with respect to the AHG Specified Brand Assets. The AHG Facilities will also contain certain customary representations, warranties and events of default.
Prepayments:The AHG Facilities will be subject to certain mandatory prepayments, including from the net proceeds from the issuance of certain additional debt and asset sale proceeds of certain non-ordinary course asset sales or other dispositions of property, subject to certain exceptions. The AHG Facilities may be repaid at any time, subject to customary prepayment premiums.
2016 Term Loan Facility Extension Amendment: In addition to the AHG Commitment Parties, the other lenders under the 2016 Term Loan Facility will be offered the opportunity to participate at par in the AHG Facilities based on their holdings of loans under the 2016 Term Loan Facility.Any lenders participating in the AHG Facilities will agree to consent to an amendment to the 2016 Term Loan Facility (the “Extension Amendment”) to, among other things, make certain modifications to the covenants thereof and extend the maturity date of the 2016 Term Loan Facility to June 30, 2025, subject to a springing maturity equal to the existing maturity date of the 2016 Term Loan Facility if, on such date, $75 million or more in aggregate principal amount of the loans under the 2016 Term Loan Facility held by lenders that do not consent to the Extension Amendment remains outstanding, and subject to a springing maturity 91 days prior to the maturity date of the 6.25% Senior Notes if, on such date, $100 million or more in aggregate principal amount of the 6.25% Senior Notes remains outstanding. The effectiveness of the Extension Amendment, and therefore the completion of the AHG 2020 Refinancing Transactions, is contingent on Products Corporation receiving the consent of lenders holding more than 50% of the loans outstanding under the 2016 Term Loan Facility.
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| | | | | | | | | | | | | | | | | | | |
Products Corporation and Subsidiaries Condensed Consolidating Statements of Cash Flows |
Nine Months Ended September 30, 2018 |
| Products Corporation | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | |
Net cash used in operating activities | $ | (196.0 | ) | | $ | (0.5 | ) | | $ | (100.2 | ) | | $ | — |
| | $ | (296.7 | ) |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | |
Net cash used in investing activities | (24.4 | ) | | (5.0 | ) | | (12.2 | ) | | — |
| | (41.6 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | |
Net decrease (increase) in short-term borrowings and overdraft | (3.6 | ) | | 7.3 |
| | (1.4 | ) | | — |
| | 2.3 |
|
Net borrowings under the Amended 2016 Revolving Credit Facility | 251.3 |
| | — |
| | — |
| | — |
| | 251.3 |
|
Net borrowings under the 2018 Foreign Asset-Based Term Loan | — |
| | — |
| | 89.4 |
| | — |
| | 89.4 |
|
Repayments under the 2016 Term Loan Facility | (13.5 | ) | | — |
| | — |
| | — |
| | (13.5 | ) |
Payments of financing costs | (4.7 | ) | | — |
| | (4.7 | ) | | — |
| | (9.4 | ) |
Tax withholdings related to net share settlements of restricted stock units and awards | (3.6 | ) | | — |
| | — |
| | — |
| | (3.6 | ) |
Other financing activities | 0.3 |
| | — |
| | (0.2 | ) | | — |
| | 0.1 |
|
Net cash provided by financing activities | 226.2 |
| | 7.3 |
| | 83.1 |
| | — |
| | 316.6 |
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash | — |
| | (0.1 | ) | | (3.1 | ) | | — |
| | (3.2 | ) |
Net increase (decrease) in cash, cash equivalents and restricted cash | 5.8 |
| | 1.7 |
| | (32.4 | ) | | — |
| | (24.9 | ) |
Cash, cash equivalents and restricted cash at beginning of period | $ | 0.3 |
| | $ | 5.3 |
| | $ | 81.8 |
| | $ | — |
| | 87.4 |
|
Cash, cash equivalents and restricted cash at end of period | $ | 6.1 |
| | $ | 7.0 |
| | $ | 49.4 |
| | $ | — |
| | $ | 62.5 |
|
REVLON, INC. AND SUBSIDIARIES
COMBINED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
Incremental Revolving Credit Facility under the 2016 Term Loan Agreement
20. SUBSEQUENT EVENTS
ExtensionOn April 30, 2020, Products Corporation entered into a Joinder Agreement (the “2020 Joinder Agreement”), with Revlon, certain of their subsidiaries and certain existing lenders (the “Incremental Lenders”) under Products Corporation’s 2016 Term Loan Agreement to provide for a $65 million incremental revolving credit facility (the “2020 Incremental Facility”). On the closing of the Maturity2020 Incremental Facility, Products Corporation borrowed $63.5 million of revolving loans for working capital purposes. The commitments in respect of the 20192020 Incremental Facility terminate on September 7, 2021, subject to a springing maturity 91 days prior to the maturity date of Products Corporations 5.75% Senior Lineif, on such date, any such notes remain outstanding and certain liquidity requirements are not satisfied. Outstanding amounts under the 2020 Incremental Facility bear interest at a rate of Credit(x) LIBOR plus 16% or (y) an Alternate Base Rate plus 15%, at Products Corporation’s option. Except as to pricing, maturity and differences due to its revolving nature, the terms of the 2020 Incremental Facility are otherwise substantially consistent with the existing term loans under the 2016 Term Loan Agreement.
Consummation of 2020 Refinancing Transactions
On NovemberMay 7, 2019,2020 (the “Facilities Closing Date”), Revlon Consumer Products Corporation (“Products Corporation”), the direct wholly-owned operating subsidiary of Revlon, Inc. (“Revlon” and together with Products Corporation and MacAndrews & Forbes Group, LLC, Revlon’s majority stockholder,its subsidiaries, the “Company”), entered into a term credit agreement (the “BrandCo Credit Agreement”) with Revlon, Jefferies Finance LLC, as administrative agent and collateral agent, and certain financial institutions (the “2020 Facilities Lenders”) that are lenders or the Amended and Restated 2019 Senior Unsecured Lineaffiliates of lenders under Products Corporation’s Term Credit Agreement, dated as of September 7, 2016 and amended on April 30, 2020 (as amended to date, the “2016 Term Loan Facility”) and as amended on the Facilities Closing Date, as further described below. Pursuant to the BrandCo Credit Agreement, the 2020 Facilities Lenders provided the Company with new and roll-up senior secured term loan facilities (the “Amended 2019 Line“2020 Facilities” and, together with the use of proceeds thereof and the Extension Amendment (as defined below), the “2020 Refinancing Transactions”).
Principal and Maturity: The 2020 Facilities consist of: (i) a senior secured term loan facility in an aggregate principal amount outstanding on the Facilities Closing Date of $815 million, plus the amount of certain fees that have been capitalized (the “2020 BrandCo Facility”); (ii) commitments in respect of a senior secured term loan facility in an aggregate principal amount of $950 million (the “Roll-up BrandCo Facility”); and (iii) a senior secured term loan facility in an aggregate principal amount outstanding on the Facilities Closing Date of $3 million (the “Junior Roll-up BrandCo Facility”). Additionally, within 15 business days after the Facilities Closing Date, Products Corporation may borrow from the 2020 Facilities Lenders an additional $65 million of term loans under the 2020 Brandco Facility to refinance revolving loans under the 2016 Term Loan Facility, upon which the 2020 BrandCo Facility would have an aggregate principal amount outstanding of $880 million.
The proceeds of the 2020 BrandCo Facility were used: (i) to repay in full approximately $200 million of indebtedness outstanding under Products Corporation’s Term Credit Agreement”)Agreement, dated as of August 6, 2019; and (ii) to extendpay fees and expenses in connection with the 2020 Facilities and the 2020 Refinancing Transactions. The Company will use the remaining net proceeds for general corporate purposes, including repurchasing and retiring Products Corporation’s outstanding 5.75% Senior Notes at prevailing market prices. The proceeds of the Roll-up BrandCo Facility are available prior to the third anniversary of the Facilities Closing Date to purchase an equivalent amount of term loans under the 2016 Term Loan Facility held by the lenders participating in the 2020 BrandCo Facility or their transferees. The proceeds of the Junior Roll-up BrandCo Facility were used to purchase at par an equivalent amount of term loans under the 2016 Term Loan Facility held by such lenders.
The 2020 Facilities will mature on June 30, 2025, subject to a springing maturity 91 days prior to the maturity date of Products Corporation’s 6.25% Senior Notes due August 2024 (the “6.25% Senior Notes”) if, on such date, $100 million or more in aggregate principal amount of the 20196.25% Senior LineNotes remain outstanding.
Borrower, Guarantees and Security: The borrower under the 2020 Facilities is Products Corporation, and the 2020 Facilities are guaranteed by certain indirect subsidiaries of Credit AgreementProducts Corporation (the “BrandCos”), which hold certain intellectual property assets related to the Elizabeth Arden and American Crew brands, certain other Portfolio segment brands and certain owned Fragrance segment brands (the “Specified Brand Assets”). While the BrandCos do not guarantee the 2016 Term Loan Facility, all guarantors of the 2016 Term Loan Facility guarantee the 2020 Facilities. All of the assets of the BrandCos (including the equity of the BrandCos) have been pledged to secure the 2020 BrandCo Facility on a first-priority basis, the Roll-up BrandCo Facility on a second-priority basis and the Junior Roll-up BrandCo Facility on a third-priority basis and while such assets do not secure the 2016 Term Loan Facility, the 2020 Facilities are secured on a pari passu basis by the assets securing the 2016 Term Loan Facility.
Contribution and License Agreements: In connection with the pledge of the Specified Brand Assets, Products Corporation and certain of its subsidiaries contributed the Specified Brand Assets to the BrandCos. Products Corporation has entered into on June 27, 2019 by 1-year, expiring December 31, 2020. As of September 30, 2019 and as of the November 7, 2019 extension date, there were no borrowings outstanding under this facility. As of September 30, 2019, MacAndrews & Forbes Group, LLC and its affiliates beneficially owned 46,223,321 shares of Revlon’s Class A common stock, representing approximately 87.2% of Revlon’s outstanding shares of voting capital stock as of such date.
license
COMBINED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
and royalty arrangements on arm’s length terms with the relevant BrandCos to provide for the continued use of the Specified Brand Assets by Products Corporation and its subsidiaries during the term of the Facilities.
Interest and Fees: Loans under the 2020 BrandCo Facility bear interest at a rate equal to LIBOR (with a LIBOR floor of 1.50%) plus (x) 10.50% per annum, payable not less than quarterly in arrears in cash and (y) 2.00% per annum payable not less than quarterly in-kind by adding such amount to the principal amount of outstanding loans under the 2020 Brandco Facility. Loans under the Roll-up BrandCo Facility and the Junior Roll-up BrandCo Facility bear interest at a rate equal to LIBOR (with a LIBOR floor of 0.75%) plus 3.50% per annum, payable not less than quarterly in arrears in cash.
Affirmative and Negative Covenants: The 2020 Facilities contain certain affirmative and negative covenants that, among other things, limit Products Corporation’s and its restricted subsidiaries’ ability to: (i) incur additional debt; (ii) incur liens; (iii) sell, transfer or dispose of assets; (iv) make investments; (v) make dividends and distributions on, or repurchases of, equity; (vi) make prepayments of contractually subordinated, unsecured or junior lien debt; (vii) enter into certain transactions with their affiliates; (viii) enter into sale-leaseback transactions; (ix) change their lines of business; (x) restrict dividends from their subsidiaries or restrict liens; (xi) change their fiscal year; and (xii) modify the terms of certain debt. The 2020 Facilities also restrict distributions and other payments from the BrandCos based on certain minimum thresholds of net sales with respect to the Specified Brand Assets. The 2020 Facilities also contain certain customary representations, warranties and events of default.
Prepayments: The 2020 Facilities are subject to certain mandatory prepayments, including from the net proceeds from the issuance of certain additional debt and asset sale proceeds of certain non-ordinary course asset sales or other dispositions of property, subject to certain exceptions. The 2020 Facilities may be repaid at any time, subject to customary prepayment premiums.
2016 Term Loan Facility Extension Amendment: Term loan lenders under the 2016 Term Loan Facility were offered the opportunity to participate at par in the 2020 Facilities based on their holdings of term loans under the 2016 Term Loan Facility. Lenders participating in the 2020 Facilities, as well as other consenting lenders representing, in the aggregate, a majority of the loans and commitments under the 2016 Term Loan Facility, consented to an amendment to the 2016 Term Loan Facility (the “Extension Amendment”) that, among other things, made certain modifications to the covenants thereof and extended the maturity date of their term loans (“Extended Term Loans”) to June 30, 2025, subject to a springing maturity equal to the September 7, 2023 maturity date of the non-extended term loans under the 2016 Term Loan Facility if, on such date, $75 million or more in aggregate principal amount of the non-extended term loans under the 2016 Term Loan Facility remains outstanding, and subject to a springing maturity of 91 days prior to the maturity date of the 6.25% Senior Notes if, on such date, $100 million or more in aggregate principal amount of the 6.25% Senior Notes remains outstanding. The Extension Amendment became effective on the Facilities Closing Date. Following the Facilities Closing Date, approximately $267.1 million in aggregate principal amount of Extended Term Loans were outstanding after giving effect to the 2020 Refinancing Transactions. The Extended Term Loans bear interest at a rate of LIBOR (with a LIBOR floor of 0.75%) plus 3.50% per annum, payable not less than quarterly in arrears in cash, consistent with the interest rate applicable to the non-extended term loans.
Amendments to 2016 ABL Facility: In addition, in connection with the 2020 Refinancing Transactions the Company completed amendments to Products Corporation’s Asset-Based Revolving Credit Agreement dated as of September 7, 2016, as amended (the “2016 ABL Facility”) on the Facilities Closing Date. The amendments, among other things, make certain amendments or waivers relating to the 2020 Refinancing Transactions under the 2016 ABL Facility. In exchange for such amendments and waivers, the interest rate margin applicable to loans under Tranche A of the 2016 ABL Facility increased by 0.75%.
Table of Contents
REVLON, INC AND SUBSIDIARIES
COMBINED MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
Item 2. Combined Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Overview of the Business
Revlon, Inc. ("Revlon" and together with its subsidiaries, the "Company") conducts its business exclusively through its direct wholly-owned operating subsidiary, Revlon Consumer Products Corporation ("Products Corporation"), and its subsidiaries. Revlon is an indirect majority-owned subsidiary of MacAndrews & Forbes Incorporated (together with certain of its affiliates other than the Company, "MacAndrews & Forbes"), a corporation beneficially owned by Ronald O. Perelman.
The Company operates in four brand-centric reporting segments that are aligned with its organizational structure based on four global brand teams: Revlon; Elizabeth Arden; Portfolio; and Fragrances. The Company manufactures, markets and sells an extensive array of beauty and personal care products worldwide, including color cosmetics; fragrances; skin care; hair color, hair care and hair treatments; beauty tools; men's grooming products; anti-perspirant deodorants; and other beauty care products.
Business Strategy
The Company remains focused on its 3 key strategic pillars to drive its future success and growth. First, strengthening its iconic brands through innovation and relevant product portfolios; second, building its capabilities to better communicate and connect with its consumers through media channels where they spend the most time; and third, ensuring availability of its productproducts where consumers shop, both in-store and increasingly online. On
Strategic Review
In August 16, 2019, it was disclosed that MacAndrews & Forbes and Revlon havethe Company determined to explore strategic transactions involving Revlonthe Company and third partiesparties. This review is ongoing and remains focused on exploring potential options for the Company's portfolio and regional brands (the “Strategic Review”).
For additional information regardingCOVID-19 Impact on the Company's business, see "Part 1, Item 1 - Business" in the Company's 2018 Form 10-K.Company’s Business
Certain capitalized terms used in this Form 10-Q are defined throughout this Item 2.
Overview of Net Sales and Earnings Results
Consolidated net sales in the third quarter of 2019 were $596.8 million,With COVID-19 contributing to a $58.6 million decrease, or 8.9%, compared to $655.4 million in the third quarter of 2018. Excluding the $12.1 million unfavorable impact of foreign currency fluctuations (referred to herein as "FX," "XFX" or on an "XFX basis"), consolidated net sales decreased by $46.5$54 million, or 7.1%9.8% (10.0% "XFX," as hereinafter defined), during the third quarter of 2019. The XFX net sales decreasedecline in the third quarter of 2019 was primarily due to: a $27.8 million, or 11.1%, decrease in Revlon segment net sales, a $17.2 million, or 12.4%, decrease in Portfolio segment net sales and a $5.6 million, or 3.9%, decrease in Fragrances segment net sales; partially offset by a $4.1 million, or 3.4%, increase in Elizabeth Arden segment net sales.
Consolidated net sales in the first nine monthsquarter of 2019 were $1,720.2 million, a $102.7 million decrease, or 5.6%,2020, compared to $1,822.9 million in the first nine months of 2018. Excludingprior year quarter, the $48.8 million unfavorable FXCompany believes that the COVID-19 impact consolidated net sales decreased by $53.7 million, or 2.9%,on its business will peak during the first nine months of 2019. The XFX net sales decrease in the first nine months of 2019 was primarily due to: a $54.2 million, or 12.9%, decrease in Portfolio segment net sales; a $28.0 million, or 8.4%, decrease in Fragrances segment net sales and a $1.3 million, or 0.2%, decrease in Revlon segment net sales; partially offset by a $29.8 million, or 8.9%, increase in Elizabeth Arden segment net sales.
Consolidated loss from continuing operations, net of taxes, in the thirdsecond quarter of 2019 was $44.4 million, compared to $10.7 million in2020. This top-line impact has not been experienced uniformly across the third quarter of 2018. The $33.7 million increase in consolidated loss from continuing operations, net of taxes, in the third quarter of 2019 was primarily due to:
a $36.6 million decrease in the benefit from income taxes, of which $34.3 million was non-cash, primarily due to:Company’s multiple, diverse business segments, as, among other things: (i) the decreased loss from continuing operations before income taxes; (ii) the mix and level of earnings; (iii) the impact of the 2017 Tax Act mainly dueCompany continues to an adjustmentexperience strong growth in the third quarter of 2018 related to a new U.S. Treasury regulation issued in September 2018;
$22.6 millionof lower gross profit,China, primarily due to lower net sales;
the strength of the Elizabeth Arden brand, being largely an online business and less dependent on brick and mortar retailers; (ii) travel retail, prestige and professional (which is dependent on in-salon visits) channels of trade are being significantly impacted globally; and (iii) the mass retail channel is being impacted by a shift in consumer buying patterns from color cosmetics to anti-perspirant deodorants, hair color, nail care and color and other beauty essentials, both in store and online. The impact of delayed shipments of components from China continues to be limited in scope and not material to the Company’s overall production capabilities. In the current environment, the Company’s three largest manufacturing facilities continue to operate unencumbered, as are the Company’s various distribution centers around the world. In April 2020, the Company took several financial measures designed to mitigate the adverse impacts of COVID-19, including, without limitation: (i) optimizing brand support; (ii) continuing to monitor the Company’s sales and order flow and periodically re-evaluating the possibility to scale down operations and/or cancel programs; and (iii) closely managing cash flow and liquidity and prioritizing cash to ensure there is no impact to the Company’ production capabilities. In April 2020, the Company also implemented various organizational interim measures designed to reduce costs in response to COVID-19, including, without limitation: (i) switching to a reduced work week in the U.S. and reducing executive and employee compensation in the range of 20% to 40% and exploring similar opportunities in other locations; (ii) furloughing approximately 40% of the Company’s U.S.-based office-based employees and 30% factory-based employees, as well as employees in certain other locations; (iii) suspending the Company’s 2020 merit base salary increases, discretionary profit sharing contributions and matching contributions to the Company’s 401(k) plan; (iv) reducing Board and committee compensation by 50% and eliminating Board and committee meeting fees; and (v) ceasing services and payments under consulting agreements with 2 directors. The Company is also exploring its qualifications and eligibility for various subsidies and tax and other incentive programs worldwide. For further information on certain risks to the Company’s business related to COVID-19, see Part II, Item 1A of this Form 10-Q, “Risk Factors-The ongoing occurrence of the coronavirus and any possible recurrence of other similar types of$6.5 millionof unfavorable variance in foreign currency, resulting from $7.6 million in foreign currency losses during the third quarter of 2019, compared to $1.1 million in foreign currency losses during the third quarter of 2018; and47
a $3.8 million increase in interest expense, primarily due to higher average interest rates and higher debt balances primarily from the 2019 Term Loan Facility entered into in August 2019;
REVLON, INC AND SUBSIDIARIES
COMBINED MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
pandemics, or any other widespread public health problems, could result in decreased sales of the Company's products, which could have a material adverse effect on the Company's business, results of operations, financial condition and/or cash flows.”
with
For additional information regarding the foregoing partially offset by:Company's business, see "Part 1, Item 1 - Business" in the Company's 2019 Form 10-K. Certain capitalized terms used in this Form 10-Q are defined throughout this Item 2.
$32.7
Overview of Net Sales and Earnings Results
Consolidated net sales in the first quarter of 2020 were $453.0 million, a $100.2 million decrease, or 18.1%, compared to $553.2 million in the first quarter of lower SG&A expenses,2019. Excluding the $8.9 million unfavorable impact of foreign currency fluctuations (referred herein as "FX", "XFX" or on an "XFX basis"), consolidated net sales decreased by $91.3 million, or 16.5%, during the first quarter of 2020. The XFX net sales decrease in the first quarter of 2020 was primarily driven by cost reductions relateddue to: a $62.0 million, or 25.1%, decrease in Revlon segment net sales; a $13.7 million, or 12.3%, decrease in Elizabeth Arden segment net sales; a $10.4 million, or 13.5%, decrease in Fragrances segment net sales; and a $5.2 million, or 4.4%, decrease in Portfolio segment net sales. COVID-19 contributed to a $54 million, or 9.8% (10.0% XFX), decline in net sales in the first quarter of 2020, compared to the Company's cost optimization initiatives and lower incentive compensation; and
$3.3 million of lower acquisition and integration costs.
prior year quarter.Consolidated loss from continuing operations, net of taxes, in the first nine monthsquarter of 20192020 was $185.5$213.9 million, compared to $223.8consolidated loss from continuing operations, net of taxes, of $75.8 million in the first nine monthsquarter of 2018.2019. The $38.3$138.1 million decreaseincrease in consolidated loss from continuing operations, net of taxes, in the first nine monthsquarter of 20192020, compared to the prior year quarter, was primarily due to:
$113.9•a $124.3 million increase in non-cash impairment charges recorded for the first quarter of 2020, compared to having had no impairment charges for the first quarter of 2019. This increase is attributable to non-cash impairment charges of $99.8 million recorded on the Company's goodwill and to $24.5 million of lower SG&A expenses, primarily driven by lower brand support expenses as a resultnon-cash impairment charges recorded on certain of planned lower activity inthe Company's indefinite-lived intangible assets following the Company's interim impairment assessments for the first nine monthsquarter of 2019 and lower general and administrative expenses, primarily driven by cost reductions related to the Company's cost optimization initiatives and lower incentive compensation;2020;
•$20.160.2 million of lower loss on disposal of minority investment; and
$11.3 million of lower acquisition and integration costs;
with the foregoing partially offset by:
$46.2 millionof lower gross profit, primarily due to lower net sales;
sales in the first quarter of 2020;•a $39.9$19.3 million increase in restructuring charges, primarily related to higher expenditures under the Revlon 2020 Restructuring Program in the first quarter of 2020, compared to the expenditures incurred primarily under the 2018 Optimization Program in the first quarter of 2019;
•$16.4 million of unfavorable variance in foreign currency, resulting from $16.6 million in foreign currency losses during the first quarter of 2020, compared to $0.2 million in foreign currency losses during the first quarter of 2019;
•$1.5 million of higher acquisition, integration and divestiture costs; and
•a $0.8 million net increase in loss on divested assets in the first quarter of 2020, consisting primarily of a loss on inventory that was written off as a result of a contract termination;
with the foregoing partially offset by:
•$43.2 million of lower SG&A expenses, primarily driven by: (i) lower brand support expenses resulting from the Company's ongoing cost reduction initiatives, and decreased media spend that aligned with the lower net sales; and (ii) lower general and administrative expenses, primarily associated with the Company's cost optimization initiatives (including the 2018 Optimization Program and the Revlon 2020 Restructuring Program), lower incentive compensation and lower travel and other expenses as a result of COVID-19; and
•a $37.3 million decrease in the benefitprovision from income taxes, of which $34.3 million was non-cash, primarily due to: (i) the decreasedincreased loss from continuing operations before income taxes; (ii) the mix and level of earnings; (iii) the impactU.S. tax on the Company's foreign earnings; and (iv) the release of uncertain tax positions for the 2017 Tax Act mainly duethree months ended March 31, 2020, compared to an adjustmentestablishment of uncertain tax positions for the three months ended March 31, 2019, partially offset by the net change in valuation allowances recorded for the third quarter of 2018three months ended March 31, 2020 related to a new U.S. Treasury regulation issued in September 2018; and
a $16.6 million increase in interest expense, primarily due to higher average interest rates and higher borrowings under the Amended 2016 Revolving Credit Facility and higher indebtedness resulting from entering into the 2019 Term Loan Facility in August 2019 and the 2018 Foreign Asset-Based Term Facility in July 2018.
During 2018, the Company's ERP launch impacted the Company's ability to manufacture certain quantities of finished goods and fulfill shipments to retail customers in the U.S. and internationally and resulted in lost net sales and in the Company incurring incremental charges, mainly related to actions that the Company implemented to remediate the decline in customer service levels. Difficulties in implementing the Company’s new ERP system also impacted its internal control over financial reporting ("ICFR") and resulted in a material weakness in its ICFR as described in the Company’s 2018 Form 10-K. See Part I, Item 4, “Controls and Procedures,” in this Form 10-Q for a discussion of the Company’s adoption of a plan designed to improve its internal controls to remediate this material weakness in its ICFR and for a summary of the actions taken by the Company to implement such plan.
Recent Debt Transactions
2019 Term Loan Facility
Principal and Maturity: On August 6, 2019, Products Corporation entered into a senior secured term loan facility among certain affiliated funds, investment vehicles or accounts managed or advised by Ares Management LLC, as lender, in an initial aggregate principal amount of $200 million (the “2019 Term Loan Facility” and such agreement being the “2019 Term Loan Agreement”), and Wilmington Trust, National Association (“Wilmington Trust”), as administrative and collateral agent. Net proceeds from the 2019 Term Loan Facility, which will be used for general corporate purposes, were approximately $188 million, after taking into account approximately $12 million of related fees and expenses. The 2019 Term Loan Facility will maturelimitation on the earliest of: (x) the fourth anniversarydeductibility of the Closing Date; (y) the 180th day prior to the maturity of Products Corporation’s existing 2016 Term Loan Facility, if any loans under the 2016 Term Loan Facility remain outstanding and have not been replaced or refinanced by such date; and (z) the date of any springing maturity of the 2016 Term Loan Facility (i.e., the 91st day prior to the maturity of the 5.75% Senior Notes due February 15, 2021 if any 5.75% Senior Notes remain outstanding by such date). See “Financial Condition, Liquidity and Capital Resources - 2019 Term Loan Facility” for additional details regarding the 2019 Term Loan Facility.interest.
REVLON, INC AND SUBSIDIARIES
COMBINED MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
Recent Developments
2019 Senior Line
Revlon 2020 Restructuring Program
Building upon its previously-announced 2018 Optimization Program, in March 2020 the Company announced that it is implementing a worldwide organizational restructuring (the “Revlon 2020 Restructuring Program”) designed to reduce the Company’s selling, general and administrative expenses, as well as cost of Credit Agreementgoods sold, improve the Company’s gross profit and Adjusted EBITDA and maximize productivity, cash flow and liquidity. The Revlon 2020 Restructuring Program includes rightsizing the organization and operating with more efficient workflows and processes. The leaner organizational structure is also expected to improve communication flow and cross-functional collaboration, leveraging the more efficient business processes. As a result of the Revlon 2020 Restructuring Program, the Company expects to eliminate approximately 1,000 positions worldwide, including approximately 650 current employees and approximately 350 open positions of which approximately 700 were eliminated by March 31, 2020. In March 2020, the Company began informing certain employees that were affected by the Revlon 2020 Restructuring Program. While certain aspects of the Revlon 2020 Restructuring Program may be subject to consultations with employees, works councils, unions and/or governmental authorities, the Company currently expects to substantially complete the employee-related actions by the end of 2020 and the other consolidation and outsourcing actions during 2021 and 2022. As a result of the Revlon 2020 Restructuring Program, the Company expects to deliver in the range of $200 million to $230 million of annualized cost reductions by the end of 2022, with approximately 50% of these annualized cost reductions to be realized from the headcount reductions occurring in 2020. During 2020, the Company expects to realize approximately $105 million to $115 million of in-year cost reductions. See “Restructuring charges and other, net” below in this Item 2 for additional information regarding the Revlon 2020 Restructuring Program.
Recent Debt Transactions
See Part II, Item 5. “Other Information” in this Form 10-Q for details regarding the Company’s consummation of the 2020 Refinancing Transactions.
Jefferies 2020 Committed Debt Financing
In June 2019,March 2020, Products Corporation entered into a 2019 Senior Unsecured Linebinding Commitment Letter with Jefferies Finance LLC (the “Jefferies Commitment Party” and the “Jefferies Commitment Letter,” respectively). Pursuant to the Jefferies Commitment Letter and subject to the terms and conditions set forth therein, the Jefferies Commitment Party has committed to provide senior secured term loan facilities in an aggregate principal amount of Credit Agreementup to $850 million (the "2019 Senior Line of Credit Agreement") providing Products Corporation with a $30 million senior unsecured line of credit (the "2019 Senior Line of CreditFacility") from MacAndrews & Forbes Group, LLC, a subsidiary of Revlon’s majority stockholder. The 2019 Senior Line of CreditFacility allows Products Corporation to request loans thereunder“Jefferies Facilities” and to use the “Jefferies 2020 Refinancing Transactions”). The proceeds of such loans for working capital and other general corporate purposes until the facility matures on December 31, 2019. See Part II, Item 5, “Other Information,” regarding the extension of the maturity of the 2019 Senior Line of Credit AgreementJefferies Facilities were expected to December 31, 2020. As of September 30, 2019, there were no borrowings outstanding under this facility. See also Part II, Item 5. Other Information, “Extension of the Maturity of the 2019 Senior Line of Credit,” regarding the Amended 2019 Senior Line of Credit Agreement.
Any loans outstanding under the 2019 Senior Line of CreditFacility shall bear interest at an annual rate of 8%, which is payable quarterly in arrears in cash. Products Corporation may, at its option, prepay any borrowings under the 2019 Senior Line of CreditFacility, in whole or in part (together with accrued and unpaid interest), at any time prior to maturity, without premium or penalty. Products Corporation is requiredbe used: (i) to repay any outstanding loansin full indebtedness outstanding under the 2019 Senior Line of CreditFacility, together with accrued interest thereon, if for any reason Products Corporation or any of its subsidiaries has available unrestricted cash that Products Corporation determines, in its reasonable judgment, is not required to run their operations in the ordinary course of business, provided that such repayment would not result in material adverse tax consequences.
The 2019 Senior Line of Credit Agreement includes customary events of default, including a cross default provision making it an event of default under the 2019 Senior Line of Credit Agreement if there exists and continues an event default under Products Corporation’s existing bank term loan and revolver credit agreements, the 2018 Foreign Asset-Based Term Agreement or the indentures for Products Corporation’s 5.75% Senior Notes or 6.25% Senior Notes. Ifdue February 2021 and Products Corporation’s 2019 Term Loan Facility (the “Jefferies Refinancing”); (ii) to pay fees and expenses in connection with the Jefferies Facilities and the Refinancing; and (iii) to the extent of any such eventexcess, for general corporate purposes. The funding of default occurs, MacAndrews & Forbes Group, LLC may declare all outstanding loansthe Jefferies Facilities was contingent on the satisfaction of a limited number of customary conditions, including the execution of definitive loan documentation for the Jefferies Facilities, absence of material adverse change and certain other customary conditions. The commitments under the 2019 Senior Line of CreditFacility to be due and payable immediately. For the three and nine months ended September 30, 2019, thereJefferies Commitment Letter were no borrowings outstanding or repayments under this facility.
March 2019 Amendmentavailable to the 2016 Revolving Credit Facility
On March 6, 2019,Company until June 30, 2020, unless the Jefferies Refinancing was consummated or the maturity of certain other material indebtedness of Products Corporation Revlon was accelerated prior to such date. As of March 31, 2020, the Jefferies 2020 Refinancing Transactions had not been consummatedand certainfollowing such date it was superseded by the closing of their subsidiaries entered into Amendment No. 2 (“Amendment No. 2”the 2020 Refinancing Transactions with the Ad Hoc Group (as hereinafter defined). See Part II, Item 5. “Other Information” in this Form 10-Q for details regarding the Company’s consummation of the AHG 2020 Refinancing Transactions.
Principal and Maturity: The Jefferies Facilities would consist of (i) a senior secured term loan facility in a principal amount of up to $300 million (the “Jefferies Brandco Facility”) and (ii) a senior secured term loan facility in a principal amount of up to the 2016 Revolving Credit Agreement (as amended by Amendment No. 2, the “Amended 2016 Revolving Credit Agreement”$550 million (the “Jefferies Specified Brands Facility”). Jefferies Finance LLC would act as administrative agent and collateral agent in respect of the 2016 Revolving Credit Facility (as in effect after Amendment No. 2,Jefferies Facilities.
The Jefferies Facilities would mature on the “Amended 2016 Revolving Credit Facility”fifth anniversary of the closing date of the Jefferies Facilities (the “Jefferies Closing Date”). Pursuant, subject to the terms of Amendment No. 2,a springing maturity 91 days prior to the maturity date applicable to the $41.5of Products Corporation’s 6.25% Senior Notes due 2024 (the “6.25% Senior Notes”) if, on such date, $100 million senior secured firstor more in last out Tranche Baggregate principal amount of the Amended 2016 Revolving Credit Facility was extended from April 17, 2019 to April 17, 2020. The Amended 2016 Revolving Credit Agreement provided that the “Liquidity Amount” (defined in the Amended 2016 Revolving Credit Agreement as the sum of each borrowing base less the sum of (x) the aggregate outstanding extensions of credit under the Amended 2016 Revolving Credit Facility, and (y) any availability reserve in effect on such date) may exceed the aggregate commitments under the Amended 2016 Revolving Credit Facility by up to 5%. Amendment No. 2 limits the Liquidity Amount to no more than the aggregate commitments under the Amended 2016 Revolving Credit Facility. Under the Amended 2016 Revolving Credit Agreement, a “Liquidity Event Period” generally occurred if Products Corporation’s Liquidity Amount fell below the greater of $35 million and 10% of the maximum availability under the Amended 2016 Revolving Credit Facility. Amendment No. 2 changes these thresholds to $50 million and 15%, respectively, only for purposes of triggering certain notification obligations of Products Corporation, increased borrowing base reporting frequency and the ability of the administrative agent to apply amounts collected in controlled accounts for the repayment of loans under the Amended 2016 Revolving Credit Facility. After entering into Amendment No. 2, in March 2019 Products Corporation’s availability under the Amended 2016 Revolving Credit Facility was $37.3 million, which was less than the greater of $35 million and 10% of the maximum availability under the Amended 2016 Revolving Credit Facility, which at such date equated to $41.3 million. Accordingly, effective beginning in March 2019 Products Corporation is required to maintain a FCCR of a minimum of 1.0 to 1.0 (which it currently satisfies), the administrative agent may apply amounts collected in controlled accounts for the repayment of loans under the Amended 2016 Revolving Credit Facility, which the administrative agent began applying in March 2019, and Products Corporation is required to provide the administrative agent with weekly borrowing base certificates. Products Corporation will be required to: (i) maintain such 1.0 to 1.0 minimum FCCR until such time that availability under the Amended 2016 Revolving Credit Facility equals or exceeds the greater of $35 million and 10% of the maximum availability under such facility for at least 20 consecutive business days; and (ii) Products Corporation will continue to provide the administrative agent with weekly borrowing base certificates and the administrative agent may continue to apply amounts collected in controlled accounts as set forth above in each case until such time that availability under such facility is equal or exceeds the greater of $50 million and 15% of the maximum availability under such facility for at least 20 consecutive business days. Amendment No. 2 also adjusts, among other things, the “payment conditions” required to make unlimited restricted payments.6.25% Senior Notes remains outstanding.
REVLON, INC AND SUBSIDIARIES
COMBINED MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
Borrowers, Guarantees and Security:
Jefferies Brandco Facility. The borrower under the Jefferies Brandco Facility would be Products Corporation, and the Jefferies Brandco Facility would be guaranteed by certain indirect foreign subsidiaries of Products Corporation (the “Jefferies BrandCos”), whose direct and indirect subsidiaries (the “Jefferies Specified Brands Subsidiaries”) would be “Unrestricted Subsidiaries” for purposes of the existing debt agreements of Products Corporation and would hold various intellectual property assets related to the Elizabeth Arden and American Crew brands and certain other portfolio brands (the “Jefferies Specified Brand Assets”). The Jefferies BrandCos would not guarantee Products Corporation’s 2016 Term Loan Facility, but all guarantors of the 2016 Term Loan Facility would guarantee the Jefferies Brandco Facility. All of the assets of the Jefferies BrandCos (including the equity of the first-tier Jefferies Specified Brands Subsidiary) would be pledged to secure the Jefferies Brandco Facility on a first-priority basis and would not secure the 2016 Term Loan Facility, but the Jefferies Brandco Facility would be secured on a pari passu basis by the assets securing the 2016 Term Loan Facility.
Jefferies Specified Brands Facility. The borrower of the Jefferies Specified Brands Facility would be a Jefferies Specified Brands Subsidiary that is an indirect subsidiary of the Jefferies BrandCos (the “Jefferies Specified Brands Borrower”). The Jefferies Specified Brands Facility would be guaranteed by the direct parent of the Jefferies Specified Brands Borrower and each of the subsidiaries of the Jefferies Specified Brands Borrower. The Jefferies Specified Brands Facility would be secured by substantially all of the assets of the Jefferies Specified Brands Borrower and the other Jefferies Specified Brands Subsidiaries, which would include the Jefferies Specified Brand Assets.
Contribution and License Agreements:In connection with the pledge of the Jefferies Specified Brand Assets, Products Corporation would enter into intercompany arrangements pursuant to which the Jefferies Specified Brand Assets would be contributed to the Jefferies Specified Brand Subsidiaries. Products Corporation and/or its operating subsidiaries would enter into license and royalty arrangements on arm’s length terms with the relevant Jefferies Specified Brand Subsidiary to provide for their continued use of the Jefferies Specified Brand Assets during the term of the Jefferies Facilities.
Interest and Fees: Interest would accrue on the Jefferies Facilities at a rate per annum of adjusted LIBOR plus a fixed margin. Products Corporation was also obligated to pay customary fees and expenses in connection with the Jefferies Facilities.
Affirmative and Negative Covenants: The Jefferies Facilities would contain certain affirmative and negative covenants that, among other things, limit the Jefferies Restricted Group’s (as defined below) ability to: (i) incur additional debt; (ii) incur liens; (iii) sell, transfer or dispose of assets; (iv) make investments; (v) make dividends and distributions on, or repurchases of, equity; (vi) make prepayments of contractually subordinated or junior lien debt; (vii) enter into certain transactions with their affiliates; (viii) enter into sale-leaseback transactions; (ix) change their lines of business; (x) restrict dividends from their subsidiaries or restrict liens; (xi) change their fiscal year; and (xii) modify the terms of certain debt. The “Jefferies Restricted Group” means (a) with respect to the Jefferies Brandco Facility, Products Corporation and its restricted subsidiaries under the Jefferies Brandco Facility and (b) with respect to the Jefferies Specified Brands Facility, the Jefferies Specified Brands Subsidiaries. The Jefferies Facilities would also contain certain customary representations, warranties and events of default.
Prepayments: The Jefferies Facilities would be subject to certain mandatory prepayments, including from the net proceeds from the issuance of certain additional debt and asset sale proceeds of certain non-ordinary course asset sales or other dispositions of property, subject to certain exceptions. The Jefferies Facilities would be repayable at any time, subject to customary prepayment premiums.
Amendment of Revolving Credit Agreement; Extension of Senior Secured First In, Last Out Tranche B to Revolving Credit Facility
On April 17, 2020 (the “FILO Closing Date”), Products Corporation, Revlon and certain of their subsidiaries entered into Amendment No. 3 (“Amendment No. 3”) of Products Corporation’s asset-based revolving credit agreement with Citibank, N.A., acting as administrative agent, collateral agent, issuing lender, local fronting lender and swingline lender and the other issuing lenders (as amended by Amendment No. 1, dated as of April 17, 2018, and Amendment No. 2, dated as of March 6, 2019, the “Existing Revolving Credit Agreement,” and as further amended by Amendment No. 3, the “Amended Revolving Credit Agreement”) in respect of Products Corporation’s existing senior secured asset-based revolving credit facility (as amended by Amendment No. 1 and Amendment No. 2, the “Existing Revolving Credit Facility” and as in effect after Amendment No. 3, the “Amended Revolving Credit Facility”).
Table of Contents
REVLON, INC AND SUBSIDIARIES
COMBINED MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
Pursuant to the terms of Amendment No. 3, the maturity date applicable to $36.3 million of loans under the $41.5 million senior secured first in, last out Tranche B of the Existing Revolving Credit Facility (the “FILO Tranche”) was extended from April 17, 2020 to May 17, 2020 (the “Extended Maturity Date”). The remaining approximately $5.2 million of FILO Tranche loans were repaid as of the FILO Closing Date. The Existing Revolving Credit Agreement permits restricted payments subject to certain conditions and limitations. Amendment No. 3 prohibits any restricted payments from the FILO Closing Date until the earlier of the Extended Maturity Date and the date the FILO Tranche is terminated and repaid or refinanced in full, subject to certain exceptions for intercompany restricted payments. The Existing Revolving Credit Agreement also permits Products Corporation and its restricted subsidiaries to incur additional debt, make investments or restricted payments, dispose of assets or prepay junior lien indebtedness, provided that certain “payment conditions” are satisfied. Amendment No. 3, among other things, prohibits such actions made in reliance on the payment conditions (other than investments) from the FILO Closing Date until the earlier of the Extended Maturity Date and the date the FILO Tranche is terminated and repaid or refinanced in full. In addition, Amendment No. 3 increases the applicable interest margin for the FILO Tranche by 0.75%, subject to a LIBOR floor of 0.75%.
Commitment Letter with Ad Hoc Group of Term Loan Lenders
On April 14, 2020, Products Corporation entered into a binding commitment letter (the “AHG Commitment Letter”) with certain financial institutions (the “AHG Commitment Parties”) that are lenders or the affiliates of lenders (the “Ad Hoc Group” or the “AHG”) under Products Corporation’s 2016 Term Loan Facility. Pursuant to the AHG Commitment Letter and subject to the terms and conditions set forth therein, the AHG Commitment Parties have committed to provide the Company with senior secured term loan facilities (the “AHG Facilities” and, together with the use of proceeds thereof and the Extension Amendment (as defined below), the “AHG 2020 Refinancing Transactions”). See Part II, Item 5. “Other Information” in this Form 10-Q for details regarding the Company’s consummation of the 2020 Refinancing Transactions.
Under the AHG Commitment Letter, the funding of the AHG Facilities was contingent on the satisfaction of a limited number of customary conditions, including the execution of definitive loan documentation for the AHG Facilities and the Extension Amendment, absence of material adverse change and certain other customary conditions. In addition, the funding of the AHG Facilities was contingent on Products Corporation receiving the consent of lenders holding more than 50% of the loans outstanding under the 2016 Term Loan Facility, as described below. The commitments under the AHG Commitment Letter were available to the Company until May 14, 2020.
Principal and Maturity: The AHG Facilities will consist of (i) a senior secured term loan facility in a principal amount of up to $850 million (the “AHG New BrandCo Facility”), (ii) a senior secured term loan facility in a principal amount of up to $950 million (the “AHG Roll-up BrandCo Facility”) and (iii) a senior secured term loan facility in a principal amount to be based on participation in the Extension Amendment as further described below (the “AHG Junior Roll-up BrandCo Facility”). Jefferies Finance LLC will act as administrative agent and collateral agent in respect of the AHG Facilities and Jefferies LLC will act as sole lead arranger and sole bookrunner in respect of the AHG Facilities. On April 27, 2020, the parties amended the AHG Commitment Letter to increase the AHG New BrandCo Facility to $880 million, consisting of $815 million available on the closing date and $65 million available, at the Company’s sole option, as a single delayed borrowing on or after 10 days after the closing date until the date that is 15 business days after the closing date, the proceeds of which will be used to repay loans outstanding under the 2020 Incremental Facility (as hereinafter defined).
The proceeds of the AHG New BrandCo Facility will be used (i) to repay in full indebtedness outstanding under Products Corporation’s 2019 Term Loan Facility (the “AHG Refinancing”), (ii) to pay fees and expenses in connection with the AHG Facilities and the AHG Refinancing and (iii) to the extent of any excess, for general corporate purposes, including repurchasing and retiring Products Corporation’s outstanding 5.75% Senior Notes at prevailing market prices. The proceeds of the AHG Roll-up BrandCo Facility will be used to purchase an equivalent amount of term loans under the 2016 Term Loan Facility held by the lenders participating in the AHG New BrandCo Facility.
Lenders under the 2016 Term Loan Facility who did not participate in the AHG New BrandCo Facility and the AHG Roll-up BrandCo Facility, but who nonetheless consented to the Extension Amendment were entitled to participate in the AHG Junior Roll-up BrandCo Facility with respect to a portion of their holdings of loans under the 2016 Term Loan Facility.The proceeds of the AHG Junior Roll-up BrandCo Facility will be used to purchase an equivalent amount of term loans under the 2016 Term Loan Facility held by such lenders.
Table of Contents
REVLON, INC AND SUBSIDIARIES
COMBINED MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
The AHG Facilities will mature on June 30, 2025, subject to a springing maturity 91 days prior to the maturity date of Products Corporation’s 6.25% Senior Notes due August 1, 2024 if, on such date, $100 million or more in aggregate principal amount of the 6.25% Senior Notes remains outstanding.
Borrower, Guarantees and Security:The borrower under the AHG Facilities will be Products Corporation, and the AHG Facilities will be guaranteed by certain indirect foreign subsidiaries (or the domestic subsidiaries of foreign subsidiaries) of Products Corporation (the “AHG BrandCos”), which will hold certain intellectual property assets related to the Elizabeth Arden and American Crew brands, certain other portfolio brands and certain owned fragrance brands (the “AHG Specified Brand Assets”). The AHG BrandCos will not guarantee the 2016 Term Loan Facility, but all guarantors of the 2016 Term Loan Facility will guarantee the AHG Facilities. All of the assets of the AHG BrandCos (including the equity of the AHG BrandCos) will be pledged to secure the AHG New BrandCo Facility on a first-priority basis, the AHG Roll-up BrandCo Facility on a second-priority basis and the AHG Junior Roll-up BrandCo Facility on a third-priority basis and will not secure the 2016 Term Loan Facility, but the AHG Facilities will be secured on a pari passu basis by the assets securing the 2016 Term Loan Facility.
Contribution and License Agreements:In connection with the pledge of the AHG Specified Brand Assets, Products Corporation will enter into intercompany arrangements pursuant to which the AHG Specified Brand Assets will be contributed to the AHG BrandCos. Products Corporation and/or its operating subsidiaries will enter into license and royalty arrangements on arm’s length terms with the relevant AHG BrandCos to provide for their continued use of the AHG Specified Brand Assets during the term of the AHG Facilities.
Interest and Fees: Interest will accrue on the AHG Facilities at a rate per annum of adjusted LIBOR plus a fixed margin. Products Corporation will pay customary fees and expenses in connection with the AHG Facilities.
Affirmative and Negative Covenants:The AHG Facilities will contain certain affirmative and negative covenants that, among other things, limit Products Corporation and its restricted subsidiaries ability to: (i) incur additional debt; (ii) incur liens; (iii) sell, transfer or dispose of assets; (iv) make investments; (v) make dividends and distributions on, or repurchases of, equity; (vi) make prepayments of contractually subordinated, unsecured or junior lien debt; (vii) enter into certain transactions with their affiliates; (viii) enter into sale-leaseback transactions; (ix) change their lines of business; (x) restrict dividends from their subsidiaries or restrict liens; (xi) change their fiscal year; and (xii) modify the terms of certain debt.The AHG Facilities will also restrict distributions and other payments from the AHG BrandCos based on certain minimum thresholds of net sales with respect to the AHG Specified Brand Assets. The AHG Facilities will also contain certain customary representations, warranties and events of default.
Prepayments:The AHG Facilities will be subject to certain mandatory prepayments, including from the net proceeds from the issuance of certain additional debt and asset sale proceeds of certain non-ordinary course asset sales or other dispositions of property, subject to certain exceptions. The AHG Facilities may be repaid at any time, subject to customary prepayment premiums.
2016 Term Loan Facility Extension Amendment:In addition to the AHG Commitment Parties, the other lenders under the 2016 Term Loan Facility will be offered the opportunity to participate at par in the AHG Facilities based on their holdings of loans under the 2016 Term Loan Facility.Any lenders participating in the AHG Facilities will agree to consent to an amendment to the 2016 Term Loan Facility (the “Extension Amendment”) to, among other things, make certain modifications to the covenants thereof and extend the maturity date of the 2016 Term Loan Facility to June 30, 2025, subject to a springing maturity equal to the existing maturity date of the 2016 Term Loan Facility if, on such date, $75 million or more in aggregate principal amount of the loans under the 2016 Term Loan Facility held by lenders that do not consent to the Extension Amendment remains outstanding, and subject to a springing maturity 91 days prior to the maturity date of the 6.25% Senior Notes if, on such date, $100 million or more in aggregate principal amount of the 6.25% Senior Notes remains outstanding. The effectiveness of the Extension Amendment, and therefore the completion of the AHG 2020 Refinancing Transactions, is contingent on Products Corporation receiving the consent of lenders holding more than 50% of the loans outstanding under the 2016 Term Loan Facility.
See Part II, Item 5. “Other Information” in this Form 10-Q for details regarding the Company’s consummation of the 2020 Refinancing Transactions. See also, “Financial Condition, Liquidity and Capital Resources - 2020 Committed Debt Financing” and Note 7, "Debt," to the Company's Unaudited Consolidated Financial Statements in this Form 10-Q for additional details.
Table of Contents
REVLON, INC AND SUBSIDIARIES
COMBINED MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
Operating Segments
The Company operates in four reporting segments: Revlon; Elizabeth Arden; Portfolio; and Fragrances:
•Revlon - The Revlon segment is comprised of the Company's flagship Revlon brands. Revlon segment products are primarily marketed, distributed and sold in the mass retail channel, large volume retailers, chain drug and food stores, chemist shops, hypermarkets, general merchandise stores, e-commerce sites, television shopping, department stores, professional hair and nail salons, one-stop shopping beauty retailers and specialty cosmetic stores in the U.S. and internationally under brands such as Revlon in color cosmetics; Revlon ColorSilk and Revlon Professional in hair color; and Revlon in beauty tools.
•Elizabeth Arden - The Elizabeth Arden segment is comprised of the Company's Elizabeth Arden branded products. The Elizabeth Arden segment markets, distributes and sells fragrances, skin care and color cosmetics primarily to prestige retailers, department and specialty stores, perfumeries, boutiques, e-commerce sites, the mass retail channel, travel retailers and distributors, as well as direct sales to consumers via its Elizabeth Arden branded retail stores and elizabetharden.com e-commerce business under brands such as Elizabeth Arden Ceramide, Prevage, Eight Hour, SUPERSTART, Visible Difference and Skin Illuminating in the Elizabeth Arden skin care brands; and Elizabeth Arden White Tea, Elizabeth Arden Red Door, Elizabeth Arden 5th Avenue andElizabeth Arden Green Tea in Elizabeth Arden fragrances.
•Portfolio - The Company’s Portfolio segment markets, distributes and sells a comprehensive line of premium, specialty and mass products primarily to the mass retail channel, hair and nail salons and professional salon distributors in the U.S. and internationally and large volume retailers, specialty and department stores under brands such as Almay and SinfulColors in color cosmetics; American Crew in men's grooming products (which are also sold direct-to-consumer on its americancrew.com website); CND in nail polishes, gel nail color and nail enhancements; Cutex in nail care products; Pure Ice in nail polishes; and Mitchum in anti-perspirant deodorants. The Portfolio segment also includes a multi-cultural hair care line consisting of Creme of Nature hair care products, which are sold in both professional salons and in large volume retailers and other retailers, primarily in the U.S.; and a body care line under the Natural Honey brand and hair color line under the Llongueras brand (licensed from a third party) that are bothis sold in the mass retail channel, large volume retailers and other retailers, primarily in Spain.
•Fragrances - The Fragrances segment includes the development, marketing and distribution of certain owned and licensed fragrances, as well as the distribution of prestige fragrance brands owned by third parties. These products are typically sold to retailers in the U.S. and internationally, including prestige retailers, specialty stores, e-commerce sites, the mass retail channel, travel retailers and other international retailers. The owned and licensed fragrances include brands such as as: (i) Juicy Couture (which are also sold direct-to-consumer on its juicycouturebeauty.com website), John Varvatos and AllSaints in prestige fragrances; (ii) Britney Spears, Elizabeth Taylor, Curve, John Varvatos,Christina Aguilera, Jennifer Aniston and Mariah Carey in celebrity fragrances; and (iii) Curve, Giorgio Beverly Hills, Ed Hardy, Charlie, Lucky Brand, ‹PS› (logo of former Paul Sebastian brand), Alfred Sung, Jennifer Aniston, Mariah Carey Halston, Halston, Geoffrey Beene, La Perla, andWhite Shoulders, AllSaints and Wildfox.
Diamonds in mass fragrances.
Results of Operations — Revlon, Inc.
Consolidated Net Sales:
Third quarter results:
Consolidated net sales in the third quarter of 2019 were $596.8 million, a $58.6 million, or 8.9%, decrease, compared to $655.4 million in the third quarter of 2018. Excluding the $12.1 million unfavorable FX impact, consolidated net sales decreased by $46.5 million, or 7.1%, during the third quarter of 2019. The XFX net sales decrease in the third quarter of 2019 was primarily due to: a $27.8 million, or 11.1%, decrease in Revlon segment net sales, a $17.2 million, or 12.4%, decrease in Portfolio segment net sales and a $5.6 million, or 3.9%, decrease in Fragrances segment net sales; partially offset by a $4.1 million, or 3.4%, increase in Elizabeth Arden segment net sales.
REVLON, INC AND SUBSIDIARIES
COMBINED MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
Results of Operations — Revlon, Inc.
Year-to-date results:
Consolidated Net Sales:
Consolidated net sales in the first nine monthsquarter of 20192020 were $1,720.2$453.0 million, a $102.7$100.2 million decrease, or 5.6%18.1%, decrease compared to $1,822.9$553.2 million in the first nine monthsquarter of 2018. 2019.Excluding the $48.8$8.9 million unfavorable FX impact of foreign currency fluctuations (referred herein as "FX", "XFX" or on an "XFX basis"), consolidated net sales decreased by $53.7$91.3 million, or 2.9%16.5%, during the first nine monthsquarter of 2019.2020. The XFX net sales decrease in the first nine monthsquarter of 20192020 was primarily due primarily to: a $54.2$62.0 million, or 12.9%, decrease in Portfolio segment net sales, a $28.0 million, or 8.4%, decrease in Fragrances segment net sales and a $1.3 million, or 0.2%25.1%, decrease in Revlon segment net sales; partially offset by a $29.8$13.7 million, or 8.9%12.3%, increasedecrease in Elizabeth Arden segment net sales; a $10.4 million, or 13.5%, decrease in Fragrances segment net sales; and a $5.2 million, or 4.4%, decrease in Portfolio segment net sales. COVID-19 contributed to a $54 million, or 9.8% (10.0% XFX), decline in net sales in the first quarter of 2020, compared to the prior year quarter.
See "Segment Results" below for further information on net sales by segment.
Segment Results:
The Company's management evaluates segment profit for each of the Company's reportable segments. The Company allocates corporate expenses to each reportable segment to arrive at segment profit, as these expenses are included in the internal measure of segment operating performance. The Company defines segment profit as income from continuing operations before interest, taxes, depreciation, amortization, stock-based compensation expense, gains/losses on foreign currency fluctuations, gains/losses on the early extinguishment of debt and miscellaneous expenses. Segment profit also excludes the impact of certain items that are not directly attributable to the segments' underlying operating performance. The Company does not have any material inter-segment sales. For a reconciliation of segment profit to loss from continuing operations before income taxes, see Note 15,14, "Segment Data and Related Information," to the Company's Unaudited Consolidated Financial Statements in this Form 10-Q.
The following tables provide a comparative summary of the Company's segment results for the periods presented.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Sales | | Segment Profit |
| Three Months Ended September 30, | | Change | | XFX Change (a) | | Three Months Ended September 30, | | Change | | XFX Change (a) |
| 2019 | | 2018 | | $ | | % | | $ | | % | | 2019 | | 2018 | | $ | | % | | $ | | % |
Revlon | $ | 217.3 |
| | $ | 249.5 |
| | $ | (32.2 | ) | | (12.9 | )% | | $ | (27.8 | ) | | (11.1 | )% | | $ | 7.3 |
| | $ | 36.8 |
| | $ | (29.5 | ) | | (80.2 | )% | | $ | (29.0 | ) | | (78.8 | )% |
Elizabeth Arden | 123.2 |
| | 122.1 |
| | 1.1 |
| | 0.9 | % | | 4.1 |
| | 3.4 | % | | 12.5 |
| | 6.6 |
| | 5.9 |
| | 89.4 | % | | 6.5 |
| | 98.5 | % |
Portfolio | 118.2 |
| | 138.4 |
| | (20.2 | ) | | (14.6 | )% | | (17.2 | ) | | (12.4 | )% | | 14.4 |
| | 2.1 |
| | 12.3 |
| | N.M. |
| | 12.8 |
| | N.M. |
|
Fragrances | 138.1 |
| | 145.4 |
| | (7.3 | ) | | (5.0 | )% | | (5.6 | ) | | (3.9 | )% | | 34.2 |
| | 26.9 |
| | 7.3 |
| | 27.1 | % | | 7.7 |
| | 28.6 | % |
Total | $ | 596.8 |
| | $ | 655.4 |
| | $ | (58.6 | ) | | (8.9 | )% | | $ | (46.5 | ) | | (7.1 | )% | | $ | 68.4 |
| | $ | 72.4 |
| | $ | (4.0 | ) | | (5.5 | )% | | $ | (2.0 | ) | | (2.8 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Sales | | | | | | | | | | | | Segment Profit | | | | | | | | | | |
| Three Months Ended March 31, | | | | Change | | | | XFX Change (a) | | | | Three Months Ended March 31, | | | | Change | | | | XFX Change (a) | | |
| 2020 | | 2019 | | $ | | % | | $ | | % | | 2020 | | 2019 | | $ | | % | | $ | | % |
Revlon | $ | 181.8 | | | $ | 247.3 | | | $ | (65.5) | | | (26.5) | % | | $ | (62.0) | | | (25.1) | % | | $ | 15.6 | | | $ | 25.6 | | | $ | (10.0) | | | (39.1) | % | | $ | (9.3) | | | (36.3) | % |
Elizabeth Arden | 95.2 | | | 111.4 | | | (16.2) | | | (14.5) | % | | (13.7) | | | (12.3) | % | | 4.2 | | | 1.9 | | | 2.3 | | | 121.1 | % | | 2.8 | | | 147.4 | % |
Portfolio | 110.0 | | | 117.2 | | | (7.2) | | | (6.1) | % | | (5.2) | | | (4.4) | % | | 7.2 | | | 4.5 | | | 2.7 | | | 60.0 | % | | 2.9 | | | 64.4 | % |
Fragrances | 66.0 | | | 77.3 | | | (11.3) | | | (14.6) | % | | (10.4) | | | (13.5) | % | | 1.4 | | | 6.8 | | | (5.4) | | | (79.4) | % | | (5.3) | | | (77.9) | % |
Total | $ | 453.0 | | | $ | 553.2 | | | $ | (100.2) | | | (18.1) | % | | $ | (91.3) | | | (16.5) | % | | $ | 28.4 | | | $ | 38.8 | | | $ | (10.4) | | | (26.8) | % | | $ | (8.9) | | | (22.9) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Sales | | Segment Profit |
| Nine Months Ended September 30, | | Change | | XFX Change (a) | | Nine Months Ended September 30, | | Change | | XFX Change (a) |
| 2019 | | 2018 | | $ | | % | | $ | | % | | 2019 | | 2018 | | $ | | % | | $ | | % |
Revlon | $ | 716.1 |
| | $ | 736.9 |
| | $ | (20.8 | ) | | (2.8 | )% | | $ | (1.3 | ) | | (0.2 | )% | | $ | 58.5 |
| | $ | 75.6 |
| | $ | (17.1 | ) | | (22.6 | )% | | $ | (14.4 | ) | | (19.0 | )% |
Elizabeth Arden | 352.0 |
| | 333.9 |
| | 18.1 |
| | 5.4 | % | | 29.8 |
| | 8.9 | % | | 17.1 |
| | 2.3 |
| | 14.8 |
| | N.M. |
| | 16.5 |
| | N.M. |
|
Portfolio | 354.1 |
| | 420.5 |
| | (66.4 | ) | | (15.8 | )% | | (54.2 | ) | | (12.9 | )% | | 25.0 |
| | (5.8 | ) | | 30.8 |
| | N.M. |
| | 31.4 |
| | N.M. |
|
Fragrances | 298.0 |
| | 331.6 |
| | (33.6 | ) | | (10.1 | )% | | (28.0 | ) | | (8.4 | )% | | 53.6 |
| | 41.2 |
| | 12.4 |
| | 30.1 | % | | 13.1 |
| | 31.8 | % |
Total | $ | 1,720.2 |
| | $ | 1,822.9 |
| | $ | (102.7 | ) | | (5.6 | )% | | $ | (53.7 | ) | | (2.9 | )% | | $ | 154.2 |
| | $ | 113.3 |
| | $ | 40.9 |
| | 36.1 | % | | $ | 46.6 |
| | 41.1 | % |
(a) XFX excludes the impact of foreign currency fluctuations.
N.M. - Not meaningful
Revlon Segment
Third quarter results:
Revlon segment net sales in the thirdfirst quarter of 20192020 were $217.3$181.8 million, a $32.2$65.5 million, or 12.9%26.5%, decrease, compared to $249.5$247.3 million in the thirdfirst quarter of 2018.2019. Excluding the $4.4$3.5 million unfavorable FX impact, total Revlon segment net sales in the thirdfirst quarter of 20192020 decreased by $27.8$62.0 million, or 11.1%25.1%, compared to the thirdfirst quarter of 2018.2019. This decrease was primarily driven by lower net sales of Revlon color cosmetics, primarily in the U.S. mass retail channel, due to overall category declines, as well as lower net sales of Revlon ColorSilk hair color and Revlon-branded beauty tools,professional products primarily in North America.attributable to salon closures due to COVID-19.
REVLON, INC AND SUBSIDIARIES
COMBINED MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
Revlon segment profit in the thirdfirst quarter of 20192020 was $7.3$15.6 million, a $29.5$10.0 million, or 80.2%39.1%, decrease, compared to $36.8$25.6 million in the thirdfirst quarter of 2018.2019. Excluding the $0.6$0.7 million unfavorable FX impact, Revlon segment profit in the thirdfirst quarter of 20192020 decreased by $29.0$9.3 million, or 78.8%36.3%, compared to the thirdfirst quarter of 2018.2019. This decrease was primarily driven by the Revlon segment's lower net sales, described above and lower gross profit margin.
Year-to-date results:
Revlon segment net sales in the first nine months of 2019 were $716.1 million, a $20.8 million, or 2.8%, decrease, compared to $736.9 million in the first nine months of 2018. Excluding the $19.5 million unfavorable FX impact, total Revlon segment net sales in the first nine months of 2019 decreased by $1.3 million, or 0.2%, compared to the first nine months of 2018. This decrease was primarily driven by lower net sales of Revlon color cosmetics, as well as lower net sales of Revlon-branded beauty tools and Revlon ColorSilk hair color, primarily in North America, partially offset by increases in net sales of Revlon-branded hair care and professional products.
Revlon segment profit in the first nine months of 2019 was $58.5 million, a $17.1 million, or 22.6%, decrease, compared to $75.6 million in the first nine months of 2018. Excluding the $2.7 million unfavorable FX impact, Revlon segment profit in the first nine months of 2019 decreased by $14.4 million, or 19.0%, compared to the first nine months of 2018. This decrease was primarily driven by the Revlon segment's lower net sales described above, and lower gross profit margin, partially offset primarily by lower brand support expenses.
Elizabeth Arden Segment
Third quarter results:
Elizabeth Arden segment net sales in the third quarter of 2019 were $123.2 million, a $1.1 million, or 0.9%, increase, compared to $122.1 million in the third quarter of 2018. Excluding the $3.0 million unfavorable FX impact, Elizabeth Arden net sales in the third quarter of 2019 increased by $4.1 million, or 3.4%, compared to the third quarter of 2018. This increase was primarily driven by higher net sales of Elizabeth ArdenCeramide and Prevage skin care products, as well as higher net sales of certain Elizabeth Arden-branded fragrances, primarily internationally, partially offset by lower net sales of Elizabeth Arden-branded color cosmetics and certain other skin care products, primarily in North America.
Elizabeth Arden segment profit in the third quarter of 2019 was $12.5 million, a $5.9 million, or 89.4%, increase, compared to $6.6 million in third quarter of 2018. Excluding the $0.7 million unfavorable FX impact, Elizabeth Arden segment profit in the third quarter of 2019 increased by $6.5 million, or 98.5%, compared to the third quarter of 2018. This increase was primarily driven by the Elizabeth Arden segment's higher net sales described above, as well as improved gross profit margin.
Year-to-date results:
Elizabeth Arden segment net sales in the first nine monthsquarter of 20192020 were $352.0$95.2 million, an $18.1a $16.2 million, or 5.4%14.5%, increase,decrease, compared to $333.9$111.4 million in the first nine monthsquarter of 2018.2019. Excluding the $11.7$2.5 million unfavorable FX impact, Elizabeth Arden segment net sales in the first nine monthsquarter of 2019 increased2020 decreased by $29.8$13.7 million, or 8.9%12.3%, compared to the first nine monthsquarter of 2018.2019. This increasedecrease was primarily driven by lower net sales of certain Elizabeth Arden-branded skin care products and color cosmetics and of certain Elizabeth Arden-branded fragrances due to the closure of department stores and travel retail outlets as a result of COVID-19, partially offset by higher net sales of Ceramide and Prevage skin care products and of certain Elizabeth Arden-branded fragrances, primarily internationally, partially offset by lower net sales of Elizabeth Arden-branded color cosmetics and certain other skin care products.internationally.
Elizabeth Arden segment profit in the first nine monthsquarter of 20192020 was $17.1$4.2 million, a $14.8$2.3 million, or 121.1%, increase, compared to $2.3$1.9 million in the first nine monthsquarter of 2018.2019. Excluding the $1.8$0.5 million unfavorable FX impact, Elizabeth Arden segment profit in the first nine monthsquarter of 20192020 increased by $16.5$2.8 million, or 147.4%, compared to the first nine monthsquarter of 2018.2019. This increase was primarily driven by the Elizabeth Arden segment's lower brand support and other SG&A expenses and higher gross profit margin, partially offset by the segment's lower net sales described above.
Portfolio Segment
Third quarter results:
Portfolio segment net sales in the thirdfirst quarter of 20192020 were $118.2$110.0 million, a $20.2$7.2 million, or 14.6%6.1%, decrease, compared to $138.4$117.2 million in the thirdfirst quarter of 2018.2019. Excluding the $3.0$2.0 million unfavorable FX impact, total Portfolio segment net sales in the thirdfirst quarter of 20192020 decreased by $17.2$5.2 million, or 12.4%4.4%, compared to the thirdfirst quarter of 2018.2019. This decrease was driven primarily by the Portfolio segment's lower net sales of Almay and SinfulColors color cosmetics, American Crew men's grooming products and CND nail products, Pure Ice and SinfulColors color cosmetics, as well as lower net salesdriven, in part, by the closure of local and regional brands, primarily in North America. These decreases weresalons globally due to COVID-19. This decrease was partially offset by higher net sales of Mitchum anti-perspirant deodorants and Cutex nail care products, internationally.primarily in North America.
Portfolio segment profit in the first quarter of 2020 was $7.2 million, a $2.7 million, or 60.0%, increase compared to $4.5 million in the first quarter of 2019. Excluding the $0.2 million unfavorable FX impact, Portfolio segment profit in the first quarter of 2020 increased by $2.9 million compared to the first quarter of 2019. This increase was primarily driven by the Portfolio segment's lower SG&A and brand support expenses and higher gross profit margin, partially offset by the segment's lower net sales, as described above.
Fragrances Segment
Fragrances segment net sales in the first quarter of 2020 were $66.0 million, a $11.3 million, or 14.6%, decrease, compared to $77.3 million in the first quarter of 2019. Excluding the $0.9 million unfavorable FX impact, total Fragrances segment net sales in the first quarter of 2020 decreased by $10.4 million, or 13.5%, compared to the first quarter of 2019. This decrease was driven primarily by impacts from COVID-19 and category declines in the U.S. mass channel.
Fragrances segment profit in the first quarter of 2020 was $1.4 million, a $5.4 million, or 79.4%, decrease, compared to $6.8 million in the first quarter of 2019. Excluding the $0.1 million unfavorable FX impact, Fragrances segment profit in the first quarter of 2020 decreased by $5.3 million, or 77.9%, compared to the first quarter of 2019. This decrease was primarily driven by the Fragrances segment's lower net sales, as described above, partially offset by higher gross profit margin.
REVLON, INC AND SUBSIDIARIES
COMBINED MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
Geographic Results:
Portfolio segment profit inThe following tables provide a comparative summary of the third quarter of 2019 was $14.4 million, a $12.3 million increase compared to $2.1 million inCompany's North America and International net sales for the third quarter of 2018. Excluding the $0.5 million unfavorable FX impact, Portfolio segment profit in the third quarter of 2019 increased by $12.8 million, compared to the third quarter of 2018. This increase was primarily driven by the Portfolio segment's lower brand support expenses and distribution expenses, partially offset byperiods presented:
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| Three Months Ended March 31, | | | | Change | | | | XFX Change (a) | | |
| 2020 | | 2019 | | $ | | % | | $ | | % |
Revlon | | | | | | | | | | | |
North America | $ | 99.1 | | | $ | 133.2 | | | $ | (34.1) | | | (25.6) | % | | $ | (34.0) | | | (25.5) | % |
International | 82.7 | | | 114.1 | | | (31.4) | | | (27.5) | % | | (28.0) | | | (24.5) | % |
Elizabeth Arden | | | | | | | | | | | |
North America | $ | 21.4 | | | $ | 28.2 | | | $ | (6.8) | | | (24.1) | % | | $ | (6.6) | | | (23.4) | % |
International | 73.8 | | | 83.2 | | | (9.4) | | | (11.3) | % | | (7.1) | | | (8.5) | % |
Portfolio | | | | | | | | | | | |
North America | $ | 70.8 | | | $ | 70.1 | | | $ | 0.7 | | | 1.0 | % | | $ | 0.6 | | | 0.9 | % |
International | 39.2 | | | 47.1 | | | (7.9) | | | (16.8) | % | | (5.8) | | | (12.3) | % |
Fragrances | | | | | | | | | | | |
North America | $ | 42.2 | | | $ | 47.2 | | | $ | (5.0) | | | (10.6) | % | | $ | (5.0) | | | (10.6) | % |
International | 23.8 | | | 30.1 | | | (6.3) | | | (20.9) | % | | (5.4) | | | (17.9) | % |
Total Net Sales | $ | 453.0 | | | $ | 553.2 | | | $ | (100.2) | | | (18.1) | % | | $ | (91.3) | | | (16.5) | % |
(a) XFX excludes the impact of the lower net sales, as described above.foreign currency fluctuations.
Year-to-date results:
PortfolioRevlon Segment
North America
In North America, Revlon segment net sales in the first nine monthsquarter of 2019 were $354.1 million, a $66.42020 decreased by $34.1 million, or 15.8%25.6%, decrease,to $99.1 million, compared to $420.5$133.2 million in the first nine monthsquarter of 2018.2019. Excluding the $12.2$0.1 million unfavorable FX impact, total PortfolioRevlon segment net sales in North America in the first nine monthsquarter of 20192020 decreased by $54.2$34.0 million, or 12.9%25.5%, compared to the first nine months of 2018.2019. This decrease was driven primarily bydue to the PortfolioRevlon segment's lower net sales of CND nail products, Almay, Pure Ice and SinfulColors Revloncolor cosmetics, as well as lower net sales of local and regional brands. These decreases wereRevlon-branded beauty tools, partially offset primarily by higher net sales of Cutex nail careRevlon ColorSilk hair color products American Crew men's grooming products and Mitchum anti-perspirant deodorants.within the U.S. mass retail channel.
Portfolio segment profit in the first nine months of 2019 was $25.0 million, a $30.8 million increase compared to a $5.8 million segment loss in the first nine months of 2018. Excluding the $0.6 million unfavorable FX impact, Portfolio segment profit in the first nine months of 2019 increased by $31.4 million compared to the first nine months of 2018. This increase was primarily driven by the Portfolio segment's lower brand support expenses and distribution expenses, partially offset by lower net sales, as described above, and lower gross profit margin.
Fragrances SegmentInternational
Third quarter results:
FragrancesInternationally, Revlon segment net sales in the thirdfirst quarter of 2019 were $138.1 million, a $7.32020 decreased by $31.4 million, or 5%27.5%, decrease,to $82.7 million, compared to $145.4$114.1 million in the thirdfirst quarter of 2018.2019. Excluding the $1.7$3.4 million unfavorable FX impact, total FragrancesRevlon segment International net sales in the thirdfirst quarter of 20192020 decreased by $5.6$28.0 million, or 3.9%24.5%, compared to the thirdfirst quarter of 2018.2019. This decrease was driven primarily by the Revlon segment's lower net sales of Revlon color cosmetics, primarily within the Company's Asia, EMEA and Pacific regions, as well as lower net sales of Revlon-branded hair-care professional products, due, in part, to COVID-related salon closures,and Revlon ColorSilk hair color products, primarily within the ongoing overall weakness in the mass retail channel, including certain retail store closures,Company's EMEA region. This decrease was partially offset primarily by higher net sales attributable to certain product launches in 2019 in North America.
Fragrances segment profitof Revlon-brandedbeauty tool products in the third quarter of 2019 was $34.2 million, a $7.3 million, or 27.1%, increase, compared to $26.9 million in the third quarter of 2018. Excluding the $0.4 million unfavorable FX impact, Fragrances segment profit in the third quarter of 2019 increased by $7.7 million, or 28.6%, compared to the third quarter of 2018. This increase was primarily driven by the Fragrances segment's lower brand support expensesCompany's Pacific and distribution costs, as well as improved gross profit margin, partially offset by the segment's lower net sales.Latin America regions.
Year-to-date results:
Fragrances segment net sales in the first nine months of 2019 were $298.0 million, a $33.6 million, or 10.1%, decrease, compared to $331.6 million in the first nine months of 2018. Excluding the $5.6 million unfavorable FX impact, total Fragrances segment net sales in the first nine months of 2019 decreased by $28.0 million, or 8.4%, compared to the first nine months of 2018. This decrease was driven primarily by lower net sales in the Fragrances segment due to the ongoing overall weakness in the mass retail channel, including certain retail store closures in North America, partially offset by higher net sales attributable to new products launches in 2019, primarily internationally.
Fragrances segment profit in the first nine months of 2019 was $53.6 million, a $12.4 million, or 30.1%, increase, compared to $41.2 million in the first nine months of 2018. Excluding the $0.7 million unfavorable FX impact, Fragrances segment profit in the first nine months of 2019 increased by $13.1 million, or 31.8%, compared to the first nine months of 2018. This increase was primarily driven by the Fragrances segment's lower brand support expenses and distribution costs, partially offset by the impact of the segment's lower net sales.
REVLON, INC AND SUBSIDIARIES
COMBINED MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
Elizabeth Arden Segment
Geographic Results:
The following tables provide a comparative summary of the Company's North America and International net sales for the periods presented:
|
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| Three Months Ended September 30, |
| Change | | XFX Change (a) |
| 2019 | | 2018 | | $ | | % | | $ | | % |
Revlon | | | | | | | | | | | |
North America | $ | 100.0 |
| | $ | 123.1 |
| | $ | (23.1 | ) | | (18.8 | )% | | $ | (23.1 | ) | | (18.8 | )% |
International | 117.3 |
| | 126.4 |
| | (9.1 | ) | | (7.2 | )% | | (4.7 | ) | | (3.7 | )% |
Elizabeth Arden |
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North America | $ | 29.5 |
|
| $ | 40.3 |
| | $ | (10.8 | ) | | (26.8 | )% | | $ | (10.7 | ) | | (26.6 | )% |
International | 93.7 |
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| 81.8 |
| | 11.9 |
| | 14.5 | % | | 14.8 |
| | 18.1 | % |
Portfolio |
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North America | $ | 71.4 |
|
| $ | 88.1 |
| | $ | (16.7 | ) | | (19.0 | )% | | $ | (16.7 | ) | | (19.0 | )% |
International | 46.8 |
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| 50.3 |
| | (3.5 | ) | | (7.0 | )% | | (0.5 | ) | | (1.0 | )% |
Fragrance |
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North America | $ | 98.6 |
|
| $ | 99.3 |
| | $ | (0.7 | ) | | (0.7 | )% | | $ | (0.6 | ) | | (0.6 | )% |
International | 39.5 |
|
| 46.1 |
| | (6.6 | ) | | (14.3 | )% | | (5.0 | ) | | (10.8 | )% |
Total Net Sales | $ | 596.8 |
| | $ | 655.4 |
| | $ | (58.6 | ) | | (8.9 | )% | | $ | (46.5 | ) | | (7.1 | )% |
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| Change | | XFX Change (a) |
| 2019 | | 2018 | | $ | | % | | $ | | % |
Revlon | | | | | | | | | | | |
North America | $ | 367.9 |
| | $ | 388.2 |
| | $ | (20.3 | ) | | (5.2 | )% | | $ | (19.5 | ) | | (5.0 | )% |
International | 348.2 |
| | 348.7 |
| | (0.5 | ) | | (0.1 | )% | | 18.2 |
| | 5.2 | % |
Elizabeth Arden | | | | | | | | | | | |
North America | $ | 83.9 |
| | $ | 96.2 |
| | $ | (12.3 | ) | | (12.8 | )% | | $ | (11.5 | ) | | (12.0 | )% |
International | 268.1 |
| | 237.7 |
| | 30.4 |
| | 12.8 | % | | 41.3 |
| | 17.4 | % |
Portfolio | | | | | | | | | | | |
North America | $ | 214.5 |
| | $ | 264.8 |
| | $ | (50.3 | ) | | (19.0 | )% | | $ | (49.9 | ) | | (18.8 | )% |
International | 139.6 |
| | 155.7 |
| | (16.1 | ) | | (10.3 | )% | | (4.3 | ) | | (2.8 | )% |
Fragrances | | | | | | | | | | | |
North America | $ | 198.4 |
| | $ | 216.9 |
| | $ | (18.5 | ) | | (8.5 | )% | | $ | (18.3 | ) | | (8.4 | )% |
International | 99.6 |
| | 114.7 |
| | (15.1 | ) | | (13.2 | )% | | (9.7 | ) | | (8.5 | )% |
Total Net Sales | $ | 1,720.2 |
| | $ | 1,822.9 |
| | $ | (102.7 | ) | | (5.6 | )% | | $ | (53.7 | ) | | (2.9 | )% |
(a) XFX excludes the impact of foreign currency fluctuations.
Revlon Segment
Third quarter results:
North America
In North America, RevlonElizabeth Arden segment net sales in the thirdfirst quarter of 20192020 decreased by $23.1$6.8 million, or 18.8%24.1%, to $100.0$21.4 million, compared to $123.1$28.2 million in the thirdfirst quarter of 2018.2019. Excluding the $0.2 million unfavorable FX impact, Elizabeth Arden segment net sales in North America in the first quarter of 2020 decreased by $6.6 million, or 23.4%, compared to the first quarter of 2019. This decrease was driven primarily due toby the RevlonElizabeth Arden segment's lower net sales of RevlonElizabeth Arden-branded skin care and color cosmetics products, as well asElizabeth Arden-branded fragrances, due, in part, to store closures resulting from COVID-19 containment measures, partially offset by higher net sales of ElizabethArdenVisible Difference skin care products.
International
Internationally, Elizabeth Arden segment net sales in the first quarter of 2020 decreased by $9.4 million, or 11.3%, to $73.8 million, compared to $83.2 million in the first quarter of 2019. Excluding the $2.3 million unfavorable FX impact, Elizabeth Arden segment International net sales in the first quarter of 2020 decreased by $7.1 million, or 8.5%, compared to the first quarter of 2019. This decrease was driven primarily by lower net sales of Revloncertain Elizabeth Arden-branded beauty toolsskin care products and Revlon ColorSilk hair color cosmetics products and of certain Elizabeth Arden-branded fragrances, primarily within the U.S.Company's Asia, Latin America and EMEA regions. This decrease was partially offset by higher net sales of Ceramide skin care products primarily within the Company's Asia region.
Portfolio Segment
North America
In North America, Portfolio segment net sales in the first quarter of 2020 increased by $0.7 million, or 1.0%, to $70.8 million, as compared to $70.1 million in the first quarter of 2019. Excluding the $0.1 million favorable FX impact, Portfolio segment net sales in North America in the first quarter of 2020 increased by $0.6 million, or 0.9%, compared to the first quarter of 2019. This increase was driven primarily by the Portfolio segment's higher net sales of Mitchum anti-perspirant deodorants, as well as higher net sales of certain local and regional skin care products brands and of CND and Cutex nail products. This increase was partially offset primarily by lower net sales of Almay color cosmetics and American Crew men's grooming products.
International
Internationally, Portfolio segment net sales in the first quarter of 2020 decreased by $7.9 million, or 16.8%, to $39.2 million, compared to $47.1 million in the first quarter of 2019. Excluding the $2.1 million unfavorable FX impact, Portfolio segment International net sales decreased by $5.8 million, or 12.3%, in the first quarter of 2020, compared to the first quarter of 2019. This decrease was driven primarily by the Portfolio segment's lower net sales of local and regional brands and of American Crew men's grooming products and CND nail products, primarily in the Company's EMEA region. This decrease was partially offset by higher net sales of Mitchum anti-perspirant deodorants in the Company's EMEA, Pacific and Latin America regions.
Fragrances Segment
North America
In North America, Fragrances segment net sales in the first quarter of 2020 decreased by $5.0 million, or 10.6%, to $42.2 million, as compared to $47.2 million in the first quarter of 2019. This decrease was primarily driven by the Fragrances segment's lower net sales due to weakness in the mass retail channel.
International
Internationally, Fragrances segment net sales in the first quarter of 2020 decreased by $6.3 million, or 20.9%, to $23.8 million, compared to $30.1 million in the first quarter of 2019. Excluding the $0.9 million unfavorable FX impact, Fragrances segment International net sales decreased by $5.4 million, or 17.9%, in the first quarter of 2020, compared to the first quarter of
REVLON, INC AND SUBSIDIARIES
COMBINED MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
International
Internationally, Revlon segment net sales in the third quarter of 2019 decreased by $9.1 million, or 7.2%, to $117.3 million, compared to $126.4 million in the third quarter of 2018. Excluding the $4.4 million unfavorable FX impact, Revlon segment International net sales in the third quarter of 2019 decreased by $4.7 million, or 3.7%, compared to the third quarter of 2018.2019. This decrease was primarily driven by the RevlonFragrances segment's lower net sales of Revlon ColorSilk hair color and Revlon color cosmetics, withincertain licensed fragrances in the Company's EMEA, and Latin America and Asia regions.
Year-to-date results:Gross profit:
The table below shows the Company's gross profit and gross margin for the periods presented:
North America | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Three Months Ended March 31, | | | | | | | |
| | | | | | | 2020 | | 2019 | | Change | | | |
Gross profit | | | | | | | $ | 255.2 | | | $ | 315.4 | | | $ | (60.2) | | | | |
Percentage of net sales | | | | | | | 56.3 | % | | 57.0 | % | | (0.7) | % | | | |
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In North America, Revlon segment net sales in the first nine months of 2019Gross profit decreased by $20.3 million, or 5.2%, to $367.9 million, compared to $388.2$60.2 million in the first nine monthsquarter of 2018. Excluding the $0.8 million unfavorable FX impact, Revlon segment net sales in North America in the first nine months of 2019 decreased by $19.5 million, or 5%,2020, as compared to the first nine monthsquarter of 2018. This decrease was primarily due to the Revlon segment's lower net2019. Unfavorable sales of Revlon color cosmetics, as well as lower net sales of Revlon-branded beauty tools and Revlon ColorSilk hair color, partially offset by higher net sales of Revlon-branded hair care products within the U.S. mass retail channel.
International
Internationally, Revlon segment net salesvolume decreased gross profit in the first nine monthsquarter of 2019 decreased2020 by $0.5 million, or 0.1%, to $348.2approximately $71 million, compared to $348.7the first quarter of 2019, with no impact on gross margin. Gross profit as a percentage of net sales (i.e., gross margin) in the first quarter of 2020 decreased by 0.7 percentage points, as compared to the first quarter of 2019. The drivers of the decrease in gross margin in the first quarter of 2020, as compared to the first quarter of 2019, primarily included:
•higher sales allowances, which decreased gross margin by approximately 1.0 percentage points; and
•higher inventory obsolescence reserves, which decreased gross margin by 0.1 percentage points;
with the foregoing partially offset primarily by:
•the impact of the cost reductions resulting from the Company's restructuring initiatives, which increased gross margin by 0.4 percentage points.
SG&A expenses:
The table below shows the Company's SG&A expenses for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Three Months Ended March 31, | | | | | | | |
| | | | | | | 2020 | | 2019 | | Change | | | |
SG&A expenses | | | | | | | $ | 289.4 | | | $ | 332.6 | | | $ | (43.2) | | | | |
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SG&A expenses decreased by $43.2 million in the first nine monthsquarter of 2018. Excluding the $18.7 million unfavorable FX impact, Revlon segment International net sales in the first nine months of 2019 increased by $18.2 million, or 5.2%,2020, compared to the first nine months of 2018. This increase was driven primarily by the Revlon segment's higher net sales of Revlon color cosmetics, primarily within the Company's Pacific and Latin America regions, due mainly to improved service levels at the Oxford, N.C. facility, and higher net sales of Revlon-branded hair-care professional products, following new product launches in Europe.
Elizabeth Arden Segment
Third quarter results:
North America
In North America, Elizabeth Arden segment net sales in the third quarter of 2019, decreased by $10.8 million, or 26.8%, to $29.5 million, compared to $40.3primarily driven by:
•a decrease of approximately $22 million in brand support expenses, resulting from the third quarter of 2018. ExcludingCompany's ongoing cost reduction initiatives, and decreased media spend that aligned with the $0.1 million unfavorable FX impact, Elizabeth Arden segmentlower net sales, primarily in North America inwithin the third quarter of 2019 decreased by $10.7 million, or 26.6%, comparedRevlon segment and, to a lesser extent, within the third quarter of 2018. This decrease was primarily due toPortfolio and the Elizabeth Arden segment's decrease insegments;
•lower general and administrative expenses of approximately $12 million, primarily associated with the Company's cost optimization initiatives (including the 2018 Optimization Program and the Revlon 2020 Restructuring Program), lower incentive compensation and lower travel and other expenses as a result of COVID-19;
•lower distribution expenses of approximately $5 million, driven by the net sales driven by certain retail store closures, partially offset by the segment's higher net sales of Ceramide skin care products.decline; and
International
Internationally, Elizabeth Arden segment net sales in the third quarter of 2019 increased by $11.9 million, or 14.5%, to $93.7 million, compared to $81.8 million in the third quarter of 2018. Excluding the $2.9 million unfavorable•favorable FX impact Elizabeth Arden segment International net sales in the third quarter of 2019 increased by $14.8 million, or 18.1%, compared to the third quarter of 2018. This increase was driven primarily by the Elizabeth Arden segment's higher net sales of Ceramideapproximately $4 million.
Acquisition, integration and Prevage skin care products, and of certain Elizabeth Arden-branded fragrance brands, withindivestiture costs:
The table below shows the Company's Asia region, particularly in China,acquisition, integration and indivestiture costs for the Travel Retail business.periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Three Months Ended March 31, | | | | | | | |
| | | | | | | 2020 | | 2019 | | Change | | | |
| | | | | | | | | | | | | | |
Integration Costs | | | | | | | $ | — | | | $ | 0.6 | | | $ | (0.6) | | | | |
Divestiture Costs | | | | | | | 2.1 | | | — | | | 2.1 | | | | |
Total acquisition, integration and divestiture costs | | | | | | | $ | 2.1 | | | $ | 0.6 | | | $ | 1.5 | | | | |
| | | | | | | | | | | | | | |
REVLON, INC AND SUBSIDIARIES
COMBINED MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
Year-to-date results:
North America
In North America, Elizabeth Arden segment net salesThe Company incurred $2.1 million of divestiture costs in the first nine monthsquarter of 2020 including $0.7 million in professional fees incurred in connection with the exploration of strategic transactions involving Revlon and third parties pursuant to the Strategic Review and approximately $1.4 million relating to the amortization of the cash-based awards under Tier 1 and Tier 2 of the Revlon 2019 decreased by $12.3Transaction Incentive Program (the "2019 TIP"; see Note 11, "Stock Compensation Plan," to the Company's Unaudited Consolidated Financial Statements in this Form 10-Q for additional details on the 2019 TIP).
The Company incurred $0.6 million or 12.8%, to $83.9 million, compared to $96.2 millionof integration costs in the first nine monthsquarter of 2018. Excluding2019, primarily related to the $0.8Company's integration of Elizabeth Arden's operations into the Company's business, including professional fees and employee-related costs.
Restructuring charges and other, net:
The table below shows the Company's restructuring charges and other, net for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Three Months Ended March 31, | | | | | | | |
| | | | | | | 2020 | | 2019 | | Change | | | |
Restructuring charges and other, net | | | | | | | $ | 24.8 | | | $ | 5.5 | | | $ | 19.3 | | | | |
| | | | | | | | | | | | | | |
Restructuring charges and other, net increased $19.3 million unfavorable FX impact, Elizabeth Arden segment net sales in North America induring the first nine monthsquarter of 2019 decreased by $11.5 million, or 12%,2020, compared to the first nine months of 2018. This decrease was driven primarily by the Elizabeth Arden segment's lower net sales of certain other Elizabeth Arden-branded skin care and color cosmetics products resulting from certain retail store closures, partially offset primarily by higher net sales of the segment's Ceramide skin care brand.
International
Internationally, Elizabeth Arden segment net sales in the first nine monthsquarter of 2019, increased by $30.4 million, or 12.8%,primarily due to $268.1 million, compared to $237.7 million higher charges in connection with the first nine months of 2018. Excluding the $10.9 million unfavorable FX impact, Elizabeth Arden segment International net sales in the first nine months of 2019 increased by $41.3 million, or 17.4%, compared to the first nine months of 2018. This increase was driven primarily by higher net sales of the Elizabeth Arden segment's Ceramide and Prevage skin care products, primarily withinRevlon 2020 Restructuring Program (as defined below). Further information on the Company's Asia region, particularlyrestructuring charges in China,relation to its restructuring initiatives follows.
Revlon 2020 Restructuring Program
Building upon its previously-announced 2018 Optimization Program, in March 2020 the Company announced that it is implementing a worldwide organizational restructuring (the “Revlon 2020 Restructuring Program”) designed to reduce the Company’s selling, general and in the Travel Retail business,administrative expenses, as well as higher net salescost of goods sold, improve the Company’s gross profit and Adjusted EBITDA and maximize productivity, cash flow and liquidity. The Revlon 2020 Restructuring Program includes rightsizing the organization and operating with more efficient workflows and processes. The leaner organizational structure is also expected to improve communication flow and cross-functional collaboration, leveraging the more efficient business processes.
As a result of the Revlon 2020 Restructuring Program, the Company expects to eliminate approximately 1,000 positions worldwide, including approximately 650 current employees and approximately 350 open positions of which approximately 700 were eliminated by March 31, 2020.
In March 2020, the Company began informing certain Elizabeth Arden fragrance brands. These increasesemployees that were partially offsetaffected by lower net salesthe Revlon 2020 Restructuring Program. While certain aspects of Elizabeth Arden-branded color cosmetics products.the Revlon 2020 Restructuring Program may be subject to consultations with employees, works councils, unions and/or governmental authorities, the Company currently expects to substantially complete the employee-related actions by the end of 2020 and the other consolidation and outsourcing actions during 2021 and 2022.
Portfolio Segment
Third quarter results:
North America
In North America, Portfolio segment net salesconnection with implementing the Revlon 2020 Restructuring Program, the Company expects to recognize during 2020 approximately $60 million to $70 million of total pre-tax restructuring and related charges (the “2020 Restructuring Charges”), consisting primarily of employee-related costs, such as severance, retention and other contractual termination benefits. In addition, the Company expects restructuring charges in the thirdrange of $75 million to $85 million to be charged and paid during 2021 and 2022. The Company expects that substantially all of these restructuring charges will be paid in cash, with approximately $55 million to $65 million of the total charges expected to be paid in 2020, approximately $40 million to $45 million expected to be paid in 2021, with the balance expected to be paid in 2022. As of first quarter of 2019 decreased by $16.72020, the Company recorded $34.4 million or 19%of restructuring and related charges under the 2020 Restructuring Program consisting of: (i) $25.6 million of severance and other personnel costs; and (ii) $8.8 million of lease and other restructuring-related charges that were recorded within SG&A. Of these charges, approximately $0.8 million were paid through March 31, 2020.
As a result of the Revlon 2020 Restructuring Program, the Company expects to $71.4 million, compared to $88.1 milliondeliver in the third quarterrange of 2018. This decrease was primarily driven$200 million to $230 million of annualized cost reductions by the Portfolio segment's lower net salesend of Almay and Pure Ice color cosmetics, Mitchum anti-perspirant deodorants and CND nail products, mainly due2022, with approximately 50% of these annualized cost reductions to declinesbe realized from the headcount reductions occurring in 2020. During 2020, the mass retail channel, as well as lower net salesCompany expects to realize approximately $105 million to $115 million of local and regional brands.in-year cost reductions.
International
Internationally, Portfolio segment net sales in the third quarter of 2019 decreased by $3.5 million, or 7%, to $46.8 million, compared to $50.3 million in the third quarter of 2018. Excluding the $3.0 million unfavorable FX impact, Portfolio segment International net sales decreased by $0.5 million, or 1%, in the third quarter of 2019, compared to the third quarter of 2018. This decrease was primarily driven by the Portfolio segment's lower net sales of CND nail care products, primarily in the Company's EMEA region, as well as lower net sales of local and regional brands. These decreases were partially offset by the segment's higher net sales of Mitchum anti-perspirant deodorants and of Cutex nail care products, primarily in the EMEA region.
Year-to-date results:
North America
In North America, Portfolio segment net sales in the first nine months of 2019 decreased by $50.3 million, or 19%, to $214.5 million, as compared to $264.8 million in the first nine months of 2018. Excluding the $0.4 million unfavorable FX impact, Portfolio segment net sales in North America in the first nine months of 2019 decreased by $49.9 million, or 18.8%, compared to the first nine months of 2018. This decrease was driven primarily by the Portfolio segment's lower net sales of Almay color cosmetics and of CND nail products, as well as lower net sales of Pure Ice and SinfulColors color cosmetics, local and regional brands and Mitchum anti-perspirant deodorants. These decreases were partially offset by higher net sales of American Crew men's grooming products.
REVLON, INC AND SUBSIDIARIES
COMBINED MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
International
Internationally, Portfolio segment net sales in the first nine months of 2019 decreased by $16.1 million, or 10.3%, to $139.6 million, compared to $155.7 million in the first nine months of 2018. Excluding the $11.8 million unfavorable FX impact, Portfolio segment International net sales decreased by $4.3 million, or 2.8%, in the first nine months of 2019, compared to the first nine months of 2018. This decrease was driven primarily by the Portfolio segment's lower net sales of local and regional brands and of CND nail products, primarily in the Company's EMEA region, partially offset by higher net sales of Mitchum anti-perspirant deodorants in the EMEA region, and higher net sales of Cutex nail care products primarily in Latin America.
Fragrances Segment
Third quarter results:
North America
In North America, Fragrances segment net sales in the third quarter of 2019 decreased by $0.7 million, or 0.7%, to $98.6 million, as compared to $99.3 million in the third quarter of 2018. Excluding the $0.1 million unfavorable FX impact, Fragrances segment North America net sales decreased by $0.6 million, or 0.6%, in the third quarter of 2019, compared to the third quarter of 2018, primarily driven by the segment's lower net sales in the mass retail channel, as well as certain retail store closures in the prestige channel, partially offset by the effect of certain product launches.
International
Internationally, Fragrances segment net sales in the third quarter of 2019 decreased by $6.6 million, or 14.3%, to $39.5 million, compared to $46.1 million in the third quarter of 2018. Excluding the $1.6 million unfavorable FX impact, Fragrances segment International net sales decreased by $5.0 million, or 10.8%, in the third quarter of 2019, compared to the third quarter of 2018, primarily due to the Fragrances segment's lower net sales of certain licensed fragrance brands in the mass retail channel.
Year-to-date results:
North America
In North America, Fragrances segment net sales in the first nine months of 2019 decreased by $18.5 million, or 8.5%, to $198.4 million, as compared to $216.9 million in the first nine months of 2018. Excluding the $0.2 million unfavorable FX impact, Fragrances segment net sales in North America in the first nine months of 2019 decreased by $18.3 million, or 8.4%, compared to the first nine months of 2018. This decrease was primarily driven by the Fragrances segment's lower net sales due to weakness in the mass retail channel, as well as certain retail store closures in the prestige channel.
International
Internationally, Fragrances segment net sales in the first nine months of 2019 decreased by $15.1 million, or 13.2%, to $99.6 million, compared to $114.7 million in the first nine months of 2018. Excluding the $5.4 million unfavorable FX impact, Fragrances segment International net sales decreased by $9.7 million, or 8.5%, in the first nine months of 2019, compared to the first nine months of 2018, primarily due to the Fragrances segment's lower net sales of certain licensed fragrance brands primarily in the mass retail channel, partially offset by new product launches in the Company's EMEA region.
Gross profit:
The table below shows the Company's gross profit and gross margin for the periods presented:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2019 | | 2018 | | Change | | 2019 | | 2018 |
| Change |
Gross profit | $ | 327.8 |
| | $ | 350.4 |
| | $ | (22.6 | ) | | $ | 969.5 |
| | $ | 1,015.7 |
| | $ | (46.2 | ) |
Percentage of net sales | 54.9 | % | | 53.5 | % | | 1.4 | % | | 56.4 | % | | 55.7 | % | | 0.7 | % |
REVLON, INC AND SUBSIDIARIES
COMBINED MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
Third quarter results:
Gross profit decreased by $22.6 million in the third quarter of 2019, as compared to the third quarter of 2018. Unfavorable sales volume decreased gross profit in the third quarter of 2019 by approximately $21 million, compared to the third quarter of 2018, with no impact on gross margin. Gross profit as a percentage of net sales (i.e., gross margin) in the third quarter of 2019 increased by 1.4% compared to the third quarter of 2018. The drivers of the gross margin in the third quarter of 2019, as compared to the third quarter of 2018, primarily included:
the impact of additional costs related to the service level disruptions at the Company's Oxford, N.C. manufacturing facility in the third quarter of 2018, which did not occur in the third quarter of 2019, resulting in increased gross margin by approximately 5 percentage points;
cost reductions and savings associated with the Company's cost optimization initiatives, which increased gross margin by approximately 3.2 percentage points; and
lower inventory obsolescence reserves, which increased gross margin by 1.2 percentage points;
with the foregoing offset primarily by:
•higher sales allowances and returns, which decreased gross margin by approximately 6 percentage points; and
•unfavorable FX impacts, which decreased gross margin by 2.1 percentage points.
Year-to-date results:
Gross profit decreased by $46.2 million in the first nine months of 2019, as compared to the first nine months of 2018. Unfavorable sales volume decreased gross profit in the first nine months of 2019 by approximately $26 million, compared to the first nine months of 2018, with no impact on gross margin. Gross profit as a percentage of net sales (i.e., gross margin) in the first nine months of 2019 increased by 0.7 percentage points, as compared to the first nine months of 2018. The drivers of the increase in gross margin in the first nine months of 2019, as compared to the first nine months of 2018, primarily included:
the impact of additional costs related to the service level disruptions at the Company's Oxford, N.C. manufacturing facility in the first nine months of 2018, which did not occur in the first nine months of 2019, resulting in increased gross margin of 4.3 percentage points; and
lower inventory obsolescence reserves, which increased gross margin by 0.4 percentage points;
with the foregoing partially offset primarily by:
•unfavorable FX impacts, which decreased gross margin by 3.1 percentage points; and
•the impact of tariffs, which decreased gross margin by approximately 1 percentage point.
SG&A expenses:
The table below shows the Company's SG&A expenses for the periods presented:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
SG&A expenses | $ | 308.1 |
| | $ | 340.8 |
| | $ | (32.7 | ) | | $ | 973.2 |
| | $ | 1,087.1 |
| | $ | (113.9 | ) |
SG&A expenses decreased by $32.7 million in the third quarter of 2019, compared to the third quarter of 2018, primarily driven by:
lower general and administrative expenses of approximately $24 million, driven by lower costs in the third quarter of 2019 primarily associated with the Company's cost optimization initiatives and lower incentive compensation;
favorable FX impact of approximately $5 million; and
lower distribution expenses of approximately $3 million, driven by the net sales decline.
REVLON, INC AND SUBSIDIARIES
COMBINED MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
SG&A expenses decreased by $113.9 million in the first nine months of 2019, compared to the first nine months of 2018, primarily driven by:
a decrease of approximately $48 million in brand support expenses, driven by planned lower activity in the first nine months of 2019, primarily in North America and within the Portfolio segment and, to a lesser extent, the Revlon and Fragrances segments;
lower general and administrative expenses of approximately $41 million, primarily associated with the Company's cost optimization initiatives and lower incentive compensation in the first nine months of 2019 and higher costs in the first nine months of 2018 associated with the departure of certain executives; and
favorable FX impact of approximately $23 million.
Acquisition and Integration Costs:
The table below shows the Company's acquisition and integration costs for the periods presented:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Acquisition Costs | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.1 |
| | $ | (0.1 | ) |
Integration Costs | 0.1 |
| | 3.4 |
| | (3.3 | ) | | 0.7 |
| | 11.9 |
| | (11.2 | ) |
Total acquisition and integration costs | $ | 0.1 |
| | $ | 3.4 |
| | $ | (3.3 | ) | | $ | 0.7 |
| | $ | 12.0 |
| | $ | (11.3 | ) |
The Company incurred $0.1 million and $3.4 million of acquisition and integration costs in the third quarter of 2019 and 2018, respectively, primarily related to the Company's integration of Elizabeth Arden's operations into the Company's business, including professional fees and employee-related costs.
The Company incurred $0.7 million and $12 million of acquisition and integration costs in the first nine months of 2019 and 2018, respectively, primarily related to the Company's integration of Elizabeth Arden's operations into the Company's business, including professional fees and employee-related costs.
Restructuring charges and other, net:
The table below shows the Company's restructuring charges and other, net for the periods presented:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Restructuring charges and other, net | $ | 2.9 |
| | $ | 3.9 |
| | $ | (1.0 | ) | | $ | 11.6 |
| | $ | 13.9 |
| | $ | (2.3 | ) |
Restructuring charges and other, net decreased $1 million and $2.3 million during the three and nine months ended September 30, 2019, respectively, compared to the prior periods of 2018, primarily due to adjustments to previously accrued charges in connection with the Company's restructuring programs. A discussion of the Company's restructuring charges in relation to its restructuring initiatives follows.
2018 Optimization Program
During 2018, the Company announced a new 2018 Optimization Program designed to streamline the Company’s operations, reporting structures and business processes, with the objective of maximizing productivity and improving profitability, cash flows and liquidity. During the thirdfirst quarter of 2019,2020, the Company recorded $5.9$0.3 million of net restructuring and related charges under the 2018 Optimization Program consisting of: (i) $3.7 million of severance, personnel benefits and other restructuring costs; and (ii) $2.2$0.7 million of other restructuring-related charges that were recorded within SG&A and cost of sales. Duringsales, partially offset by (ii) $0.4 million due to the reversal during the first nine monthsquarter of 2019, the Company recorded $28.1 million2020 of restructuring and related charges under the 2018 Optimization Program consisting of: (i) $12.5 million ofpreviously accrued severance, personnel benefits and other restructuring costs; and (ii) $15.6costs. The Company recognized approximately $39.8 million of other restructuring-related charges that were recorded within SG&A and cost of sales. The Company expects to recognize approximately $30 million to $40 million ofcumulative total pre-tax restructuring and related charges under the 2018 Optimization Program since its inception in November 2018, consisting of employee-related costs, such as severance, pension and other termination costs, as well as other related charges within SG&A and cost of sales and approximately $10$6.5 million of additional capital expenditures. The Company expects that approximately 85%As of theseMarch 31, 2020, restructuring and related charges willto be paid in cash are approximately $35 million of the total charges, of which approximately $29.1 million were already paid through March 31, 2020, with any residual balance expected to be paid during the remainder of 2020.
During the first quarter of 2019, the Company recorded $11.7 million of restructuring and related charges under the 2018 Optimization Program consisting of: (i) $5.1 million of severance and other personnel costs; and (ii) $6.6 million of other restructuring-related charges that were recorded within SG&A.
For further information on the Revlon 2020 Restructuring Program, the 2018 Optimization Program and on the Company's other restructuring initiatives, see Note 2, "Restructuring Charges," to the Company's Unaudited Consolidated Financial Statements in this Form 10-Q.
Impairment Charges:
The table below shows the Company's impairment charges for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Three Months Ended March 31, | | | | | | | | |
| | | | | | | 2020 | | 2019 | | Change | | | | |
Impairment charges | | | | | | | $ | 124.3 | | | $ | — | | | $ | 124.3 | | | | | |
| | | | | | | | | | | | | | | |
During the first quarter of 2020, as a result of COVID-19’s impact on the Company’s operations, the Company determined that indicators of potential impairment existed requiring the Company to perform interim impairment analyses. These indicators included a deterioration in the general economic conditions, developments in equity and credit markets, deterioration in some of the economic channels in which the Company's operates (especially in the mass retail channel), the recent trading values of the Company's capital stock and the corresponding decline in the Company’s market capitalization and the revision of the Company's internal forecasts as a result of COVID-19. Based on the interim impairment analyses, the Company recorded $124.3 million of total non-cash impairment charges for the first quarter of 2020. For further information on these non-cash impairment charges, see Note 5, “Goodwill and Intangible Assets, Net,” to the Company's Unaudited Consolidated Financial Statements in this Form 10-Q.
Interest expense:
The table below shows the Company's interest expense for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Three Months Ended March 31, | | | | | | | | |
| | | | | | | 2020 | | 2019 | | Change | | | | |
Interest expense | | | | | | | $ | 48.4 | | | $ | 47.7 | | | $ | 0.7 | | | | | |
| | | | | | | | | | | | | | | |
The $0.7 million increase in interest expense in the first quarter of 2020, as compared to the first quarter of 2019, was primarily due to higher debt balances resulting from the 2019 Term Loan Facility entered into in August 2019, partially offset by lower average interest rates. For information on the terms and conditions of these debt instruments, see Note 7, “Debt” to the Company's Unaudited Consolidated Financial Statements in this Form 10-Q and Note 9, "Debt," in the Audited Consolidated Financial Statements in the Company's 2019 Form 10-K. Also, please refer to "Financial Condition, Liquidity and Capital Resources - Long-Term Debt Instruments" in Item 2 of this Form 10-Q for further information.
REVLON, INC AND SUBSIDIARIES
COMBINED MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
be paid in cash, of which approximately $15.8 million were paid through September 30, 2019. Substantially all of the remaining balance is expected to be paid by the end of 2019, with any residual amount to be paid in 2020. The Company currently projects that the 2018 Optimization Program will result in between $90 million and $95 million of in-year cost reductions during 2019, of which approximately $65 million had been realized as of September 30, 2019, and annualized cost reductions in the range of approximately $125 million to $150 million by the end of 2019. Approximately half of the annualized cost reductions are expected to be realized within cost of sales and the remainder in selling, general and administrative expenses.
EA Integration Restructuring Program
The EA Integration Restructuring Program was substantially completed by December 31, 2018 and the Company expects to incur limited further charges under this program, primarily related to its exit from certain leased spaces. During the three and nine months ended September 30, 2019, the Company recorded $0.4 million related to restructuring and related actions under the EA Integration Restructuring Program. As of September 30, 2019, the Company had recognized a total of $82.6 million of pre-tax restructuring and related charges consisting of: (i) $72.6 million of employee-related costs, including severance, retention and other contractual termination benefits; (ii) $5.1 million of lease termination costs; and (iii) $4.9 million of other related charges. The Company expects that cash payments will total $80 million to $85 million in connection with the EA Integration Restructuring Charges, of which $72 million were paid through September 30, 2019, with substantially all of the remaining balance expected to be paid by the end of 2020.
For further information on EA Integration Restructuring Program, the 2018 Optimization Program and on the Company's other restructuring initiatives, see Note 2, "Restructuring Charges," to the Unaudited Consolidated Financial Statements in this Form 10-Q.
During the three and nine months ended 2018, the Company recorded $3.9 million and $13.9 million, respectively, of charges primarily related to the EA Integration Restructuring Program.
Interest expense:
The table below shows the Company's interest expense for the periods presented:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Interest expense | $ | 50.2 |
| | $ | 46.4 |
| | $ | 3.8 |
| | $ | 145.7 |
| | $ | 129.1 |
| | $ | 16.6 |
|
The $3.8 million increase in interest expense in the third quarter of 2019, as compared to the third quarter of 2018, was primarily due to higher average interest rates and higher debt balances primarily from the 2019 Term Loan Facility entered into in August 2019.
The $16.6 million increase in interest expense in nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018, was primarily due to higher average interest rates and higher debt balances resulting from the 2019 Term Loan Facility entered into in August 2019, the 2018 Foreign Asset-Based Term Facility entered into during the third quarter of 2018, as well as higher borrowings under the Amended 2016 Revolving Credit Facility.
Please refer to "Financial Condition, Liquidity and Capital Resources - Long-Term Debt Instruments" in Item 2 of this Form 10-Q for further information.
Foreign currency losses, (gains), net:
The table below shows the Company's foreign currency losses, net for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Three Months Ended March 31, | | | | | | | |
| | | | | | | 2020 | | 2019 | | Change | | | |
Foreign currency losses, net | | | | | | | $ | 16.6 | | | $ | 0.2 | | | $ | 16.4 | | | | |
| | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Foreign currency losses, net | $ | 7.6 |
| | $ | 1.1 |
| | $ | 6.5 |
| | $ | 9.0 |
| | $ | 10.7 |
| | $ | (1.7 | ) |
The $7.6$16.4 million increase in foreign currency losses, net, during the thirdfirst quarter of 2019,2020, compared to $1.1 million in foreign currency losses, net, during the thirdfirst quarter of 2018,2019, was primarily driven by the net unfavorable impact of the revaluation offoreign currency fluctuations on certain U.S. Dollar denominated intercompany payables and foreign currency denominated receivables.
REVLON, INC AND SUBSIDIARIES
COMBINED MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
The $9 million in foreign currency losses, net, during the nine months ended September 30, 2019,receivables compared to $10.7 million in foreign currency losses, net, during the nine months ended September 30, 2018, was primarily driven by the net favorable impact of the revaluation of certain U.S. Dollar denominated intercompany payables and foreign currency denominated receivables.prior year's quarter.
Provision(Benefit from) provision for income taxes:
The table below shows the Company's benefit from(benefit from) provision for income taxes for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Three Months Ended March 31, | | | | | | | |
| | | | | | | 2020 | | 2019 | | Change | | | |
(Benefit from) provision for income taxes | | | | | | | $ | (37.2) | | | $ | 0.1 | | | $ | (37.3) | | | | |
| | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Benefit from income taxes | $ | (2.1 | ) | | $ | (38.7 | ) | | $ | 36.6 |
| | $ | (3.2 | ) | | $ | (43.1 | ) | | $ | 39.9 |
|
For the three and nine months ended September 30, 2019, the Company used the cut-off method to calculate the interim effective tax rate for all jurisdictions, because the annual rate method would not be reliable due to its sensitivity to minimal changes in forecasted annual pre-tax earnings. For the three and nine months ended September 30, 2018, the tax rate at the end of the period was calculated using an estimate of the annual effective tax rate expected to be applicable for the full fiscal year.
The Company recorded a benefit from income taxes of $2.1$37.2 million and a provision for income taxes $0.1 million for the three months ended September 30,first quarter of 2020 and the first quarter of 2019, and a benefit from incomes taxes of $38.7 million for the three months ended September 30, 2018, respectively. The $36.6$37.3 million decrease in the Company's benefit fromprovision for income taxes for the first quarter of which $34.3 million was non-cash,2020, compared to same period in 2019, was primarily due to: (i) the decreasedincreased loss from continuing operations before income taxes; (ii) the mix and level of earnings; (iii) the impact of the 2017 Tax Act mainly due to an adjustment in the third quarter of 2018 related to a new U.S. Treasury regulation issued in September 2018.
The Company recorded a benefit from income taxes of $3.2 million for the nine months ended September 30, 2019 and a benefit from income taxes of $43.1 million for the nine months ended September 30, 2018. The $39.9 million decrease in the benefit from income taxes, of which $34.3 million was non-cash, was primarily due to: (i) the decreased loss from continuing operations before income taxes; (ii) the mix and level of earnings; (iii) the impact of the 2017 Tax Act mainly due to an adjustment in the third quarter of 2018 related to a new U.S. Treasury regulation issued in September 2018. For a further discussion, see Note 13, "Income Taxes," to the Unaudited Consolidated Financial Statements in this Form 10-Q, as well as Note 15, "Income Taxes," to the Consolidated Financial Statements in the Company's 2018 Form 10-K and Item 1A. “Risk Factors-Uncertainties in the interpretation and application of the U.S. income tax provisions could have a material impact on the Company's financial condition, resultsforeign earnings; and (iv) the release of operations and/or cash flows”uncertain tax positions for the three months ended March 31, 2020, compared to establishment of uncertain tax positions for the three months ended March 31, 2019, partially offset by the net change in valuation allowances recorded for the Company's 2018 Form 10-K.three months ended March 31, 2020 related to the limitation on the deductibility of interest.
The Company's effective tax rate for the three months ended March 31, 2020 was lower than the federal statutory rate of 21% primarily due to the impact of non-deductible impairment charges and ninethe valuation allowance related to the limitation on the deductibility of interest, partially offset by the impact of the "Coronavirus Aid, Relief and Economic Security Act" (the "CARES Act"), signed into law on March 27, 2020 by President Trump, which resulted in a partial release of a valuation allowance on the Company's 2019 federal tax attributes associated with the limitation on the deductibility of interest.
The Company's effective tax rate for the three months ended September 30,March 31, 2019 was lower than the federal statutory rate of 21%, primarily due to the valuation allowance related to the limitation on the deductibility of interest and the U.S. tax on the Company's foreign earnings.
The CARES Act, among other things, includes provisions providing for refundable payroll tax credits, the deferral of employer social security tax payments, acceleration of alternative minimum tax credit refunds and the increase of the net interest deduction limitation from 30% to 50%. The Company continues to examine the impact that the CARES Act may have on its results of operations, financial condition and/or financial statement disclosures.
The Company expects that its tax provision and effective tax rate in any individual quarter and year-to-date period will vary and may not be indicative of the Company's tax provision and effective tax rate for the full year.
The
As of the first quarter of 2020, the Company concluded that, based on its evaluation of objective verifiable evidence, it does not require a valuation allowance on its federal deferred tax assets, other than those associated with the limitation on the deductibility of interest. The Company does have a valuation allowance on deferred tax assets associated with its activity in certain U.S. states and foreign jurisdictions. These conclusions regarding the establishment of valuation allowances on the Company's deferred tax assets as of the nine months ended September 30, 2019first quarter of 2020 are consistent with the Company's conclusions on such matters as of the year ended December 31, 2018.2019. However, if the Company does not generate sufficient taxable income in future periods, its deferred tax assets may not be realizable on a more-likely-than-not basis, which would result in the Company having to establish an additional valuation allowance against its deferred tax assets. The Company will continue to assess all available evidence, both negative and positive, to determine whether such additional valuation allowance is warranted.
For a further discussion,information, see Note 13,12, "Income Taxes," to the Company's Unaudited Consolidated Financial Statements in this Form 10-Q, as well as Note 15,14, "Income Taxes," to the Consolidated Financial Statements in the Company's 20182019 Form 10-K and Item 1A. “Risk Factors-Uncertainties in the interpretation and application of the U.S. income tax provisions could have a material impact on the Company's financial condition, results of operations and/or cash flows” in the Company's 2018 Form 10-K.
REVLON, INC AND SUBSIDIARIES
COMBINED MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
material impact on the Company's financial condition, results of operations and/or cash flows” in the Company's 2019 Form 10-K.
Results of Operations — Products Corporation
The condensed consolidated statementsProducts Corporation's Unaudited Consolidated Statements of income of Products CorporationOperations and Comprehensive Loss are essentially identical to the condensed consolidated statementsRevlon, Inc.'s Unaudited Consolidated Statements of income of Revlon, Inc.Operations and Comprehensive Loss, except for the following:
| | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, | | |
| | | | | 2020 | | 2019 |
Net loss - Revlon, Inc. | | | | | $ | (213.9) | | | $ | (75.1) | |
Selling, general and administrative expenses - public company costs | | | | | 2.0 | | | 1.8 | |
Provision for income taxes | | | | | (0.3) | | | (0.2) | |
Net loss - Products Corporation | | | | | $ | (212.2) | | | $ | (73.5) | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Net loss - Revlon, Inc. | $ | (44.7 | ) | | $ | (11.1 | ) | | $ | (183.5 | ) | | $ | (223.9 | ) |
Selling, general and administrative expenses - public company's costs | 1.8 |
| | 1.7 |
| | 5.1 |
| | 5.0 |
|
Provision for income taxes | (0.3 | ) | | (0.5 | ) | | (0.8 | ) | | (1.1 | ) |
Net loss - Products Corporation | $ | (43.2 | ) | | $ | (9.9 | ) | | $ | (179.2 | ) | | $ | (220.0 | ) |
Refer to Revlon’s “Management Discussion and Analysis of Financial Condition and Results of Operations” herein.
REVLON, INC AND SUBSIDIARIES
COMBINED MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
Financial Condition, Liquidity and Capital Resources
At September 30, 2019,March 31, 2020, the Company had a liquidity position of $166.8$121.0 million, consisting of: (i) $60.7$62.8 million of unrestricted cash and cash equivalents; (ii) $81.2$34.3 million in available borrowing capacity under Products Corporation's Amended 2016 Revolving Credit Facility (which had $348.4$341.5 million drawn at such date); (iii) $30 million in available borrowing capacity under the Amended 2019 Senior Line of Credit Facility, which had no borrowings at such date; and less (iv) $5.1$6.1 million of outstanding checks. Under the Amended 2016 Revolving Credit Facility, as Products Corporation’s consolidated fixed charge coverage ratio ("FCCR") was greater than 1.0 to 1.0 as of September 30, 2019,March 31, 2020, all of the $81.2$34.3 million of availability under the Amended 2016 Revolving Credit Facility was available as of such date. See “Part 1, Item 2. Combined Management’s DiscussionNote 7, "Debt," to the Company's Unaudited Consolidated Financial Statements in this Form 10-Q and Analysis ofNote 9, "Debt," to the Company's Audited Consolidated Financial ConditionStatements in the Company’s 2019 Form 10-K for detailed information on the term and Results of Operations--Recent Debt Transactions” for a discussionconditions of the Company’s credit facilities and amendments entered into during 2019.various debt instruments. See Part II, Item 5. “Other Information” in this Form 10-Q for details regarding the Company’s consummation of the 2020 Refinancing Transactions.
2019 Term Loan FacilityJefferies 2020 Committed Debt Financing
Principal and Maturity: On August 6, 2019,
In March 2020, Products Corporation entered into a binding Commitment Letter with Jefferies Finance LLC (the “Jefferies Commitment Party” and the “Jefferies Commitment Letter,” respectively). Pursuant to the Jefferies Commitment Letter and subject to the terms and conditions set forth therein, the Jefferies Commitment Party committed to provide senior secured term loan facilities in an aggregate principal amount of up to $850 million (the “Jefferies Facilities” and the “Jefferies 2020 Refinancing Transactions”). The proceeds of the Jefferies Facilities were expected to be used: (i) to repay in full indebtedness outstanding under Products Corporation’s 5.75% Senior Notes due February 2021 and Products Corporation’s 2019 Term Loan Facility which is(the “Jefferies Refinancing”); (ii) to pay fees and expenses in connection with the Jefferies Facilities and the Refinancing; and (iii) to the extent of any excess, for general corporate purposes. The funding of the Jefferies Facilities was contingent on the satisfaction of a limited number of customary conditions, including the execution of definitive loan documentation for the Jefferies Facilities, absence of material adverse change and certain other customary conditions. The commitments under the Jefferies Commitment Letter were available to the Company until June 30, 2020, unless the Jefferies Refinancing was consummated or the maturity of certain other material indebtedness of Products Corporation was accelerated prior to such date. As of March 31, 2020, the Jefferies 2020 Refinancing Transactions had not been consummated and following such date it was superseded by the closing of the 2020 Refinancing Transactions with the Ad Hoc Group. See Part II, Item 5. “Other Information” in this Form 10-Q for details regarding the Company’s consummation of the AHG 2020 Refinancing Transactions.
Principal and Maturity: The Jefferies Facilities would consist of (i) a senior secured term loan facility among certain affiliated funds, investment vehiclesin a principal amount of up to $300 million (the “Jefferies Brandco Facility”) and (ii) a senior secured term loan facility in a principal amount of up to $550 million (the “Jefferies Specified Brands Facility”). Jefferies Finance LLC would act as administrative agent and collateral agent in respect of the Jefferies Facilities.
The Jefferies Facilities would mature on the fifth anniversary of the closing date of the Jefferies Facilities (the “Jefferies Closing Date”), subject to a springing maturity 91 days prior to the maturity date of Products Corporation’s 6.25% Senior Notes due 2024 (the “6.25% Senior Notes”) if, on such date, $100 million or accounts managed or advised by Ares Management LLC, as lender,more in an initial aggregate principal amount of $200 million,the 6.25% Senior Notes remains outstanding.
Borrowers, Guarantees and Wilmington Trust, as administrativeSecurity:
Jefferies Brandco Facility. The borrower under the Jefferies Brandco Facility would be Products Corporation, and collateral agent. Net proceeds from the 2019 Term LoanJefferies Brandco Facility which will would be usedguaranteed by certain indirect foreign subsidiaries of Products Corporation (the “Jefferies BrandCos”), whose direct and indirect subsidiaries (the “Jefferies Specified Brands Subsidiaries”) would be “Unrestricted Subsidiaries” for general corporate purposes were approximately $188 million, after taking into account approximately $12 million of related fees and expenses. The 2019 Term Loan Facility will mature on the earliest of: (x) the fourth anniversary of the Closing Date; (y) the 180th day priorexisting debt agreements of Products Corporation and would hold various intellectual property assets related to the maturity ofElizabeth Arden and American Crew brands and certain other portfolio brands (the “Jefferies Specified Brand Assets”). The Jefferies BrandCos would not guarantee Products Corporation’s existing 2016 Term Loan Facility, if any loans under the 2016 Term Loan Facility remain outstanding and have not been replaced or refinanced by such date; and (z) the date of any springing maturitybut all guarantors of the 2016 Term Loan Facility (i.e.,would guarantee the 91st day prior to the maturityJefferies Brandco Facility. All of the 5.75% Senior Notes due February 15, 2021 if any 5.75% Senior Notes remain outstanding by such date).
Guarantees and Security: Products Corporation and its restricted subsidiaries under the 2019 Term Loan Facility (collectively, the “Restricted Group”) are subject to the covenants under the 2019 Term Loan Agreement. The 2019 Term Loan Facility is guaranteed by each existing and future direct or indirect wholly-owned domestic restricted subsidiary of Products Corporation (subject to various exceptions), as well as by Revlon, on a limited recourse basis, and Elizabeth Arden (U.K.) Ltd., Revlon Canada Inc. and Elizabeth Arden (Canada) Limited. The obligations of Revlon, Products Corporation and the subsidiary guarantors under the 2019 Term Loan Facility are secured by pledgesassets of the equity of Products Corporation andJefferies BrandCos (including the equity of the Restricted Group held by Products Corporationfirst-tier Jefferies Specified Brands Subsidiary) would be pledged to secure the Jefferies Brandco Facility on a first-priority basis and each subsidiary guarantor (subject to customary exceptions, including equity of first-tier foreign subsidiaries in excess of 66% ofwould not secure the voting equity interests of such entity) and by substantially all tangible and intangible personal and real property of Products Corporation and the subsidiary guarantors (subject to customary exclusions). The 2019 Term Loan Facility and the existing 2016 Term Loan Facility, sharebut the same guarantors and collateral, except that the 2019 Term LoanJefferies Brandco Facility is alsowould be secured byon a first-priority lien on certain intellectual property of the American Crew business (the “Additional Collateral”) and is guaranteedpari passu basis by the entities established to hold such Additional Collateral. Pursuant to a first lien pari passu intercreditor agreement, dated August 6, 2019, among Revlon, Products Corporation, the subsidiary guarantors, Wilmington Trust and Citibank, N.A. (acting as administrative agent and collateral agent for the 2016 Term Loan Facility), the liens on the shared collateral securing the 2019 Term Loan Facility rank pari passu in priority with the liens on the shared collateralassets securing the 2016 Term Loan Facility.
Jefferies Specified Brands Facility. The borrower of the Jefferies Specified Brands Facility would be a Jefferies Specified Brands Subsidiary that is an indirect subsidiary of the Jefferies BrandCos (the “Jefferies Specified Brands Borrower”). The Jefferies Specified Brands Facility would be guaranteed by the direct parent of the Jefferies Specified Brands Borrower and each of the subsidiaries of the Jefferies Specified Brands Borrower. The Jefferies Specified Brands Facility would be secured by substantially all of the assets of the Jefferies Specified Brands Borrower and the other Jefferies Specified Brands Subsidiaries, which would include the Jefferies Specified Brand Assets.
Contribution and License Agreement:Agreements: In connection with the pledge of such Additional Collateral,the Jefferies Specified Brand Assets, Products Corporation enteredwould enter into intercompany arrangements pursuant to which the Additional Collateral wasJefferies Specified Brand Assets would be contributed to a newly-formed subsidiary, Beautyge I, which then further contributed the Additional Collateral to its new wholly-owned subsidiary, Beautyge II, LLC.Jefferies Specified Brand Subsidiaries. Products Corporation enteredand/or its operating subsidiaries would enter into a license and royalty arrangementarrangements on arm’s length terms with Beautyge II, LLCthe relevant Jefferies Specified Brand Subsidiary to provide for the Company’stheir continued use of the Additional CollateralJefferies Specified Brand Assets during the term of the 2019 Term Loan Facility.Jefferies Facilities.
Interest and Fees: Interest accrueswould accrue on the 2019 Term Loan FacilityJefferies Facilities at a rate per annum of one-month adjusted LIBOR (which has a floor of 0%) plus a margin of 9.50%.fixed margin. Products Corporation iswas also obligated to pay customary fees and expenses in connection with the 2019 Term Loan Facility.Jefferies Facilities.
Affirmative and Negative Covenants: The 2019 Term Loan Agreement containsJefferies Facilities would contain certain affirmative and negative covenants that, among other things, limit the Jefferies Restricted Group’s (as defined below) ability to: (i) incur additional debt; (ii) incur liens; (iii) sell, transfer or dispose of assets; (iv) make investments; (v) make dividends and distributions on, or repurchases of, equity; (vi) make prepayments of contractually subordinated or junior lien debt; (vii) enter into certain transactions with their affiliates; (viii) enter into sale-leaseback transactions; (ix) change their lines of business; (x) restrict dividends from their subsidiaries or restrict liens; (xi) change their fiscal year; and (xii) modify the terms of certain debt. The 2019 Term Loan Agreement also contains additional covenants: (i) restricting“Jefferies Restricted Group” means (a) with respect to the activities of the entities established to hold the Additional Collateral; (ii) limiting the incurrence of secured debt by the Restricted Group to an aggregate principal amount of $50 million (excluding the Amended 2016 Revolving CreditJefferies Brandco Facility, and any refinancing of the 5.75% Senior Notes due 2021); (iii) restricting the transfer by the Restricted Group of material intellectual property to non-guarantor restricted subsidiaries or other affiliates; and (iv) limiting investments by Products Corporation and its subsidiary guarantors in any non-guarantor subsidiaryrestricted subsidiaries under the Jefferies Brandco Facility and (b) with respect to an outstanding amountthe Jefferies Specified Brands Facility, the Jefferies Specified Brands Subsidiaries. The Jefferies Facilities would also contain certain customary representations, warranties and events of $50 million plus $10 million for ordinary course investments consistent with past practice. These negative covenants aredefault.
Prepayments: The Jefferies Facilities would be subject to various exceptions, including an “available amount basket” based on 50% of Products Corporation’s cumulative consolidated net income from October 1, 2016, subject to Products Corporation’s compliance with a 5.0 to 1.0 ratio of Products Corporation’s net debt to Consolidated EBITDA (as defined in the 2019 Term Loan Agreement), except such compliance is not required when such baskets are used to make investments.
Financial Covenants: The 2019 Term Loan Agreement contains financial covenants. First, Products Corporation cannot permit at any time both (x) the aggregate principal amount of secured and structurally senior debt to exceed $2.5 billion and (y) the ratio of Products Corporation's net secured and structurally senior debt to Consolidated EBITDA to be greater than 5.0 to 1.0, subject to a one-time equity cure right. Second, Products Corporation’s Consolidated EBITDA cannot be less than $250 million for any test period ending on or after March 31, 2021.
Prepayments: The 2019 Term Loan Facility is subject tocertain mandatory prepayments, from: (i)including from the net proceeds from the issuance by Products Corporation or any of its restricted subsidiaries of certain additional debt; (ii) commencing with the excess cash flow calculation with respect to fiscal year ending December 31, 2020, 50% of excess cash flow, with step-downs to 25%debt and 0% upon achievement of certain first lien leverage ratios and reduced by voluntary prepayments of the 2019 Term Loan Facility, the 2016 Term Loan Facility and revolving loans under the Amended 2016 Revolving Credit Facility (to the extent commitments thereunder are permanently reduced); and (iii) asset sale proceeds of certain non-ordinary course asset sales or other dispositions of property, that have not been reinvestedsubject to certain exceptions. The Jefferies Facilities would be repayable at any time, subject to customary prepayment premiums.
Amendment of Revolving Credit Agreement; Extension of Senior Secured First In, Last Out Tranche B to Revolving Credit Facility
On April 17, 2020 (the “FILO Closing Date”), Products Corporation, Revlon and certain of their subsidiaries entered into Amendment No. 3 (“Amendment No. 3”) of Products Corporation’s asset-based revolving credit agreement with Citibank, N.A., acting as administrative agent, collateral agent, issuing lender, local fronting lender and swingline lender and the other
issuing lenders (as amended by Amendment No. 1, dated as of April 17, 2018, and Amendment No. 2, dated as of March 6, 2019, the “Existing Revolving Credit Agreement,” and as further amended by Amendment No. 3, the “Amended Revolving Credit Agreement”) in respect of Products Corporation’s existing senior secured asset-based revolving credit facility (as amended by Amendment No. 1 and Amendment No. 2, the “Existing Revolving Credit Facility” and as in effect after Amendment No. 3, the “Amended Revolving Credit Facility”).
Pursuant to the extentterms of Amendment No. 3, the maturity date applicable to $36.3 million of loans under the $41.5 million senior secured first in, excesslast out Tranche B of the Existing Revolving Credit Facility (the “FILO Tranche”) was extended from April 17, 2020 to May 17, 2020 (the “Extended Maturity Date”). The remaining approximately $5.2 million of FILO Tranche loans were repaid as of the FILO Closing Date. The Existing Revolving Credit Agreement permits restricted payments subject to certain minimum amounts (subjectconditions and limitations. Amendment No. 3 prohibits any restricted payments from the FILO Closing Date until the earlier of the Extended Maturity Date and the date the FILO Tranche is terminated and repaid or refinanced in full, subject to an aggregate reinvestment cap of $50 million).certain exceptions for intercompany restricted payments. The Existing Revolving Credit Agreement also permits Products Corporation may voluntarilyand its restricted subsidiaries to incur additional debt, make investments or restricted payments, dispose of assets or prepay junior lien indebtedness, provided that certain “payment conditions” are satisfied. Amendment No. 3, among other things, prohibits such actions made in reliance on the payment conditions (other than investments) from the FILO Closing Date until the earlier of the Extended Maturity Date and the date the FILO Tranche is terminated and repaid or refinanced in full. In addition, Amendment No. 3 increases the applicable interest margin for the FILO Tranche by 0.75%, subject to a LIBOR floor of 0.75%.
Incremental Revolving Credit Facility under the 2016 Term Loan Agreement
On April 30, 2020, Products Corporation entered into a Joinder Agreement (the “2020 Joinder Agreement”), with Revlon, certain of their subsidiaries and certain existing lenders (the “Incremental Lenders”) under Products Corporation’s 2016 Term Loan Agreement to provide for a $65 million incremental revolving credit facility (the “2020 Incremental Facility”). On the closing of the 2020 Incremental Facility, Products Corporation borrowed $63.5 million of revolving loans for working capital purposes. The commitments in respect of the 2020 Incremental Facility terminate on September 7, 2021, subject to a springing maturity 91 days prior to the maturity date of Products Corporations 5.75% Senior if, on such date, any such notes remain outstanding and certain liquidity requirements are not satisfied. Outstanding amounts under the 2020 Incremental Facility bear interest at a rate of (x) LIBOR plus 16% or (y) an Alternate Base Rate plus 15%, at Products Corporation’s option. Except as to pricing, maturity and differences due to its revolving nature, the terms of the 2020 Incremental Facility are otherwise substantially consistent with the existing term loans under the 2016 Term Loan Agreement.
Commitment Letter with Ad Hoc Group of Term Loan Lenders
On April 14, 2020, Products Corporation entered into a binding commitment letter (the “AHG Commitment Letter”) with certain financial institutions (the “AHG Commitment Parties”) that are lenders or the affiliates of lenders (the “Ad Hoc Group” or the “AHG”) under Products Corporation’s 2016 Term Loan Facility. Pursuant to the AHG Commitment Letter and subject to the terms and conditions set forth therein, the AHG Commitment Parties have committed to provide the Company with senior secured term loan facilities (the “AHG Facilities” and, together with the use of proceeds thereof and the Extension Amendment (as defined below), the “AHG 2020 Refinancing Transactions”). See Part II, Item 5. “Other Information” in this Form 10-Q for details regarding the Company’s consummation of the 2020 Refinancing Transactions.
Under the AHG Commitment Letter, the funding of the AHG Facilities was contingent on the satisfaction of a limited number of customary conditions, including the execution of definitive loan documentation for the AHG Facilities and the Extension Amendment, absence of material adverse change and certain other customary conditions. In addition, the funding of the AHG Facilities was contingent on Products Corporation receiving the consent of lenders holding more than 50% of the loans outstanding under the 2016 Term Loan Facility, as described below. The commitments under the AHG Commitment Letter were available to the Company until May 14, 2020.
Principal and Maturity: The AHG Facilities will consist of (i) a senior secured term loan facility in a principal amount of up to $850 million (the “AHG New BrandCo Facility”), (ii) a senior secured term loan facility in a principal amount of up to $950 million (the “AHG Roll-up BrandCo Facility”) and (iii) a senior secured term loan facility in a principal amount to be based on participation in the Extension Amendment as further described below (the “AHG Junior Roll-up BrandCo Facility”). Jefferies Finance LLC will act as administrative agent and collateral agent in respect of the AHG Facilities and Jefferies LLC will act as sole lead arranger and sole bookrunner in respect of the AHG Facilities. On April 27, 2020, the parties amended the AHG Commitment Letter to increase the AHG New BrandCo Facility to $880 million, consisting of $815 million available on
the closing date and $65 million available, at the Company’s sole option, as a single delayed borrowing on or after 10 days after the closing date until the date that is 15 business days after the closing date, the proceeds of which will be used to repay loans outstanding under the 2020 Incremental Facility (as hereinafter defined).
The proceeds of the AHG New BrandCo Facility will be used (i) to repay in full indebtedness outstanding under Products Corporation’s 2019 Term Loan Facility (the “AHG Refinancing”), (ii) to pay fees and expenses in connection with the AHG Facilities and the AHG Refinancing and (iii) to the extent of any excess, for general corporate purposes, including repurchasing and retiring Products Corporation’s outstanding 5.75% Senior Notes at any time. All voluntary prepayments, certain mandatory prepayments and repayments upon acceleration after an event of defaultprevailing market prices. The proceeds of the 2019AHG Roll-up BrandCo Facility will be used to purchase an equivalent amount of term loans under the 2016 Term Loan Facility must be accompaniedheld by a fee (the “Applicable Premium”)the lenders participating in an amount equal to: (i) priorthe AHG New BrandCo Facility.
Lenders under the 2016 Term Loan Facility who did not participate in the AHG New BrandCo Facility and the AHG Roll-up BrandCo Facility, but who nonetheless consented to January 1, 2021, a make-whole amountthe Extension Amendment were entitled to participate in the AHG Junior Roll-up BrandCo Facility with respect to interest payments through December 31, 2020 plus 10%a portion of their holdings of loans under the 2016 Term Loan Facility. The proceeds of the AHG Junior Roll-up BrandCo Facility will be used to purchase an equivalent amount of term loans under the 2016 Term Loan Facility held by such lenders.
The AHG Facilities will mature on June 30, 2025, subject to a springing maturity 91 days prior to the maturity date of Products Corporation’s 6.25% Senior Notes due August 1, 2024 if, on such date, $100 million or more in aggregate principal amount prepaid, repaid or required to be repaid; (ii) on and after January 1, 2021, but prior to January 1, 2022, 10% of the aggregate principal amount prepaid, repaid or required6.25% Senior Notes remains outstanding.
Borrower, Guarantees and Security: The borrower under the AHG Facilities will be Products Corporation, and the AHG Facilities will be guaranteed by certain indirect foreign subsidiaries (or the domestic subsidiaries of foreign subsidiaries) of Products Corporation (the “AHG BrandCos”), which will hold certain intellectual property assets related to be repaid; (iii) onthe Elizabeth Arden and after January 1, 2022, but prior to January 1, 2023, 7.5% ofAmerican Crew brands, certain other portfolio brands and certain owned fragrance brands (the “AHG Specified Brand Assets”). The AHG BrandCos will not guarantee the aggregate principal amount prepaid, repaid or required to be repaid; or (iv) thereafter, 5% of the aggregate principal amount prepaid, repaid or required to be repaid. A 5% exit fee is also payable upon the final scheduled maturity of the 20192016 Term Loan Facility, or ifbut all guarantors of the loans thereunder are accelerated upon an event of default. The 20192016 Term Loan AgreementFacility will guarantee the AHG Facilities. All of the assets of the AHG BrandCos (including the equity of the AHG BrandCos) will be pledged to secure the AHG New BrandCo Facility on a first-priority basis, the AHG Roll-up BrandCo Facility on a second-priority basis and the AHG Junior Roll-up BrandCo Facility on a third-priority basis and will not secure the 2016 Term Loan Facility, but the AHG Facilities will be secured on a pari passu basis by the assets securing the 2016 Term Loan Facility.
Contribution and License Agreements: In connection with the pledge of the AHG Specified Brand Assets, Products Corporation will enter into intercompany arrangements pursuant to which the AHG Specified Brand Assets will be contributed to the AHG BrandCos. Products Corporation and/or its operating subsidiaries will enter into license and royalty arrangements on arm’s length terms with the relevant AHG BrandCos to provide for their continued use of the AHG Specified Brand Assets during the term of the AHG Facilities.
Interest and Fees: Interest will accrue on the AHG Facilities at a rate per annum of adjusted LIBOR plus a fixed margin. Products Corporation will pay customary fees and expenses in connection with the AHG Facilities.
Affirmative and Negative Covenants: The AHG Facilities will contain certain affirmative and negative covenants that, among other things, limit Products Corporation and its restricted subsidiaries ability to: (i) incur additional debt; (ii) incur liens; (iii) sell, transfer or dispose of assets; (iv) make investments; (v) make dividends and distributions on, or repurchases of, equity; (vi) make prepayments of contractually subordinated, unsecured or junior lien debt; (vii) enter into certain transactions with their affiliates; (viii) enter into sale-leaseback transactions; (ix) change their lines of business; (x) restrict dividends from their subsidiaries or restrict liens; (xi) change their fiscal year; and (xii) modify the terms of certain debt. The AHG Facilities will also containsrestrict distributions and other payments from the AHG BrandCos based on certain minimum thresholds of net sales with respect to the AHG Specified Brand Assets. The AHG Facilities will also contain certain customary representations, warranties and events of default.
EventsPrepayments: The AHG Facilities will be subject to certain mandatory prepayments, including from the net proceeds from the issuance of Default: certain additional debt and asset sale proceeds of certain non-ordinary course asset sales or other dispositions of property, subject to certain exceptions. The 2019AHG Facilities may be repaid at any time, subject to customary prepayment premiums.
2016 Term Loan Agreement includes customary events of default, including a cross default provision making it an event of default under the 2019 Term Loan Agreement if there is an event of default under Products Corporation’s existing 2016 Credit Agreements, the 2018 Foreign Asset-Based Term Agreement, the Amended 2019 Senior Line of Credit Agreement or the indentures for Products Corporation’s 5.75% Senior Notes or 6.25% Senior Notes. Facility Extension Amendment: In addition to the lenders underAHG Commitment Parties, the 2019 Term Loan Agreement may declare all outstanding loans under the 2019 Term Loan Agreement to be due and payable immediately upon an event of default. Under such circumstances, theother lenders under the 2016 Credit Agreements,Term Loan Facility will be offered the Amended 2019 Senior Lineopportunity to participate at par in the AHG Facilities based on their holdings of Credit Agreement and the 2018 Foreign Asset-Based Term Agreement may also declare all outstanding loans under the 2016 Term Loan Facility. Any lenders participating in the AHG Facilities will agree to consent to an amendment to the 2016 Term Loan Facility (the “Extension Amendment”) to, among other things, make certain modifications to the covenants thereof and extend the maturity date of the 2016 Term Loan Facility to June 30, 2025, subject to a springing maturity equal to the existing maturity date of the 2016 Term Loan Facility if, on such facilities to be due and payable immediately as a result of similar cross default provisions, and upon non-payment of any accelerateddate, $75 million or more in aggregate principal amount of the trustees or noteholders forloans under the 5.75% Senior Notes2016 Term Loan Facility held by lenders that do not consent to the Extension Amendment remains outstanding, and subject to a springing maturity 91 days prior to the maturity date of the 6.25% Senior Notes may declare all outstanding notes to be due and payable immediately as a result of similar cross-acceleration provisions, subject to certain exceptions and limitations describedif, on such date, $100 million or more in the relevant instruments.
Fees and expenses incurred in connection with consummating the 2019 Term Loan Agreement of approximately $12 million were capitalized and are being amortized to interest expense over the term of the 2019 Term Loan Agreement using the effective interest method. The aggregate principal amount outstanding underof the 2019 Term Loan Facility Agreement at September 30, 2019 was $200 million.
20196.25% Senior LineNotes remains outstanding. The effectiveness of Credit Facility
In June 2019,the Extension Amendment, and therefore the completion of the AHG 2020 Refinancing Transactions, is contingent on Products Corporation entered into a 2019 Senior Unsecured Linereceiving the consent of Credit Agreement (the "2019 Senior Linelenders holding more than 50% of Credit Agreement") providing Products Corporation with a $30 million senior unsecured line of credit (the "2019 Senior Line of CreditFacility") from MacAndrews & Forbes Group, LLC, a subsidiary of Revlon’s majority stockholder. The 2019 Senior Line of CreditFacility allows Products Corporation to request loans thereunder and to use the proceeds of such loans for working capital and other general corporate purposes until the facility matures on December 31, 2019. As of September 30, 2019, there were no borrowings outstanding under this facility. See also Part II, Item 5. Other Information, “Extension of the Maturity of the 2019 Senior Line of Credit,” regarding the Amended 2019 Senior Line of Credit Agreement.
Any loans outstanding under the 2016 Term Loan Facility.
March 2019 Senior Line of CreditFacility shall bear interest at an annual rate of 8%, which is payable quarterly in arrears in cash. Products Corporation may, at its option, prepay any borrowings under the 2019 Senior Line of CreditFacility, in whole or in part (together with accrued and unpaid interest), at any time prior to maturity, without premium or penalty. Products Corporation is required to repay any outstanding loans under the 2019 Senior Line of CreditFacility, together with accrued interest thereon, if for any reason Products Corporation or any of its subsidiaries has available unrestricted cash that Products Corporation determines, in its reasonable judgment, is not required to run their operations in the ordinary course of business, provided that such repayment would not result in material adverse tax consequences.
The 2019 Senior Line of Credit Agreement includes customary events of default, including a cross default provision making it an event of default under the 2019 Senior Line of Credit Agreement if there exists and continues an event default under Products Corporation’s existing bank term loan and revolver credit agreements, the 2018 Foreign Asset-Based Term Agreement or the indentures for Products Corporation’s 5.75% Senior Notes or 6.25% Senior Notes. If any such event of default occurs, MacAndrews & Forbes Group, LLC may declare all outstanding loans under the 2019 Senior Line of CreditFacility to be due and payable immediately. For the three and nine months ended September 30, 2019, there were no borrowings or repayments under this facility.
Amendment No. 2 to the Amended 2016 Revolving Credit AgreementFacility
OnIn March 6, 2019, Products Corporation, Revlon and certain of their subsidiaries entered into Amendment No. 2 (“Amendment No. 2”) to the Amended 2016 Revolving Credit Agreement (as amended by Amendment No. 2, the “Amended 2016 Revolving Credit Agreement”) in respect of the Amended 2016 Revolving Credit Facility.Facility (as in effect after Amendment No. 2, the “Amended 2016 Revolving Credit Facility”). Pursuant to the terms of Amendment No. 2, the maturity date applicable to the $41.5 million senior secured first in, last out Tranche B of the Amended 2016 Revolving Credit Facility was extended from April 17, 2019 to April 17, 2020. The AmendedSee above in this Item 2, “Recent Developments-Recent Debt Transactions-April 2020 Amendment to the 2016 Revolving Credit Agreement provided thatFacility,” for information on, among other things, the “Liquidity Amount” (defined inextension of the Amended 2016 Revolving Credit Agreement asmaturity of the sumTranche B of each borrowing base less the sum of (x) the aggregate outstanding extensions of credit under the Amended 2016 Revolving Credit Facility and (y) any availability reserve in effect on such date) may exceed the aggregate commitments under the Amended 2016 Revolving Credit Facility by up to 5%. Amendment No. 2 limits the Liquidity Amount to no more than the aggregate commitments under the Amended 2016 Revolving Credit Facility. Under the Amended 2016 Revolving Credit Agreement, a “Liquidity Event Period” generally occurred if Products Corporation’s Liquidity Amount fell below the greater of $35 million and 10% of the maximum availability under the Amended 2016 Revolving Credit Facility. Amendment No. 2 changes these thresholds to $50 million and 15%, respectively, only for purposes of triggering certain notification obligations of Products Corporation, increased borrowing base reporting frequency and the ability of the administrative agent to apply amounts collected in controlled accounts for the repayment of loans under the Amended 2016 Revolving Credit Facility. After entering into Amendment No. 2, in March 2019 Products Corporation’s availability under the Amended 2016 Revolving Credit Facility was $37.3 million, which was less than the greater of $35 million and 10% of the maximum availability under the Amended 2016 Revolving Credit Facility, which at such date equated to $41.3 million. Accordingly, effective beginning in March 2019 Products Corporation is required to maintain a FCCR of a minimum of 1.0 to 1.0 (which it currently satisfies), the administrative agent may apply amounts collected in controlled accounts for the repayment of loans under the Amended 2016 Revolving Credit Facility, which the administrative agent began applying in March 2019, and Products Corporation is required to provide the administrative agent with weekly borrowing base certificates. Products Corporation will be required to: (i) maintain such 1.0 to 1.0 minimum FCCR until such time that availability under the Amended 2016 Revolving Credit Facility equals or exceeds the greater of $35 million and 10% of the maximum availability under such facility for at least 20 consecutive business days; and (ii) Products Corporation will continue to provide the administrative agent with weekly borrowing base certificates and the administrative agent may continue to apply amounts collected in controlled accounts as set forth above in each case until such time that availability under such facility is equal or exceeds the greater of $50 million and 15% of the maximum availability under such facility for at least 20 consecutive business days. Amendment No. 2 also adjusts, among other things, the “payment conditions” required to make unlimited restricted payments.May 17, 2020.
The Company’s foreign operationssubsidiaries held $57.3$57.7 million out of itsthe Company's total $60.7$62.8 million in cash and cash equivalents as of September 30, 2019.March 31, 2020. While the cash held by the Company’s foreign subsidiaries is primarily used to fund their operations, the Company regularly assesses its global cash needs and the available sources of cash to fund these needs, which regularly includes repatriating foreign-held cash to settle historical intercompany loans and other intercompany payables. The Company believes that it has and will have sufficient liquidity to meet its cash needs for at least the next 12 months based upon the cash generated by its operations, cash on hand, availability under the Amended 2016 Revolving Credit Facility, the Amended 2019 Senior Line of Credit Facility, the 2020 Refinancing Transactions as detailed in Part II, Item 5. “Other Information” and other permissible borrowings, along with the option to further settle historical intercompany loans and payables with certain foreign subsidiaries. See Part II, Item 5. “Other Information” in this Form 10-Q for details regarding the Company’s consummation of the 2020 Refinancing Transactions. The Company also expects to generate additional liquidity from cost reductions resulting from the implementation of the 2018 OptimizationRevlon 2020 Restructuring Program, which was initiated during the fourthfirst quarter of 2020, the 2018 Optimization Program, and cost reductions generated from other cost control initiatives. See “Part 1, Item 2. Combined Management’s Discussioninitiatives, including, without limitation, new interim measures to reduce costs in response to COVID-19 (such as: (i) switching to a reduced work week and Analysisreducing executive and employee compensation in the range of Financial Condition and Results20% to 40%; (ii) furloughing approximately 40% of Operations--Recent Debt Transactions--2019 Term Loan Facility,” “2019 Term Loan Facility” above in “Financial Condition, Liquidity and Capital Resources” and the Company’s 2018 Form 10-K,U.S.-based employees and those in certain other locations; (iii) suspending Company discretionary profit sharing contributions and matching contributions to the Company’s 401(k) plan; (iv) reducing Board and committee compensation by 50% and eliminating Board and committee meeting fees; and (v) ceasing services and payments under consulting agreements with 2 directors), as well as funds provided by selling certain assets (such as the Natural Honey and Floid brands that were sold in December 2019) in connection with the Company's ongoing Strategic Review. For information on certain risks related to the Company’s indebtedness, see Item 1A. Risk Factors -“Restrictions and covenants in Products Corporation’s various debt instruments limit its ability to take certain actions and impose consequences“Risk Factors” in the event of failure to comply.”Company's 2019 Form 10-K. During the first nine monthsquarter of 2019,2020, as part of continuing to effectively manage its working capital needs, the Company continued to repatriate funds to the U.S. using tax-effective methods, such as through the settlement of historical loans and payables due from certain foreign subsidiaries.
In December 2017, the U.S. government enacted the Tax Act, which made broad and complex changes to the U.S. tax code, including a one-time transition tax on certain non-U.S. earnings, the current U.S. taxation of certain foreign earnings in 2018 and following years and limitations on tax deductions for interest expense in 2018 and following years. The Company was not subject to the one-time transition tax due to its deficit in foreign earnings as of the applicable measurement dates. Additionally, the Company determined that the limitation on interest deductibility did not impact the Company's 2018 federal cash taxes due to its net operating loss position. Further, as a result of the Company’s anticipated net operating loss carryover to 2019, the Company expects that the Tax Act will not have a material impact on the Company's cash taxes or liquidity in 2019. As of December 31, 2018, the Company's accounting for the Tax Act was complete. For a further discussion, see Note 13, "Income Taxes," to the Unaudited Consolidated Financial Statements in this Form 10-Q, as well as Note 15, "Income Taxes," to the Consolidated Financial Statements in the Company's 2018 Form 10-K and Item 1A. “Risk Factors - Uncertainties in the interpretation and application of the U.S. income tax provisions could have a material impact on the Company's financial condition, results of operations and/or cash flows" in the Company's 2018 Form 10-K.
Changes in Cash Flows
As of September 30, 2019,March 31, 2020, the Company had cash, cash equivalents and restricted cash of $60.9$79.2 million, compared with $87.4$104.5 million at December 31, 2018.2019. The following table summarizes the Company’s cash flows from operating, investing and financing activities for the periods presented:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | |
| 2020 | | 2019 | | | | |
Net cash used in operating activities | $ | (77.6) | | | $ | (28.4) | | | | | |
Net cash used in investing activities | (1.8) | | | (5.8) | | | | | |
Net cash provided by financing activities | 57.4 | | | 16.2 | | | | | |
Effect of exchange rate changes on cash and cash equivalents | (3.3) | | | 0.3 | | | | | |
Net decrease in cash, cash equivalents and restricted cash | (25.3) | | | (17.7) | | | | | |
Cash, cash equivalents and restricted cash at beginning of period | 104.5 | | | 87.5 | | | | | |
Cash, cash equivalents and restricted cash at end of period | $ | 79.2 | | | $ | 69.8 | | | | | |
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2019 | | 2018 |
Net cash used in operating activities | $ | (166.8 | ) | | $ | (296.7 | ) |
Net cash used in investing activities | (20.0 | ) | | (41.6 | ) |
Net cash provided by financing activities | 161.6 |
| | 316.6 |
|
Effect of exchange rate changes on cash and cash equivalents | (1.4 | ) | | (3.2 | ) |
Net decrease in cash, cash equivalents and restricted cash | (26.6 | ) | | (24.9 | ) |
Cash, cash equivalents and restricted cash at beginning of period | 87.5 |
| | 87.4 |
|
Cash, cash equivalents and restricted cash at end of period | $ | 60.9 |
| | $ | 62.5 |
|
Operating Activities
Net cash used in operating activities was $166.8$77.6 million and $296.7$28.4 million for the nine months ended September 30,first quarter of 2020 and 2019, and 2018, respectively. The decreaseincrease in cash used in operating activities for the nine months ended September 30, 2019,first quarter of 2020, compared to the nine months ended September 30, 2018,first quarter of 2019, was primarily driven by favorablelower net sales and unfavorable working capital changes compared to the prior year period, as well as a lower net loss, also as a result of the charges incurred in the prior year period related to the effect of the Oxford, N.C. facility disruption.changes.
Investing Activities
Net cash used in investing activities was $20 million and $41.6$1.8 million for the nine months ended September 30, 2019 and 2018, respectively, whichfirst quarter of 2020, compared to $5.8 million of net cash used in investing activities for the first quarter of 2019. The decrease in cash used in investing activities was entirely comprised of capital expenditures. The variance inrelated to lower capital expenditures was affected, among other things, by approximately $11.2 million for Elizabeth Arden integration-related investments in the prior year period.first quarter of 2020 compared to 2019.
Financing Activities
Net cash provided by financing activities was $161.6$57.4 million and $316.6$16.2 million for the nine months ended September 30,first quarter of 2020 and 2019, and 2018, respectively.
Net cash provided by financing activities for the nine months ended September 30, 2019first quarter of 2020 primarily included:
•$200 million of borrowings under the 2019 Term Loan Facility;
$13.469.1 million of borrowings under the Amended 2016 Revolving Credit Facility;
with the foregoing partially offset by:
•$22.46.4 million of decreases in short-term borrowings and overdraft; and
•$13.50.3 million of payments of financing costs incurred in connection with the Jefferies 2020 Refinancing Transactions.
Net cash provided by financing activities for the three months ended March 31, 2019 primarily included:
•$40.6 million of borrowings under the Amended 2016 Revolving Credit Facility; and
with the foregoing partially offset by:
•$17.2 million of decreases in short-term borrowings and overdraft;
•$4.5 million of repayments under the 2016 Term Loan Facility; and
•$13.40.9 million of payment of financing costs incurred in connection with consummating the 2019 Term Loan Facility in August 2019 and Amendment No. 2 to the Amended 2016 Revolving Credit Facility in March 2019.Facility.
Net cash provided by financing activities for the nine months ended September 30, 2018 primarily included:
$251.3 million of borrowings under the 2016 Revolving Credit Facility; and
$89.4 million of borrowings under the Asset-Based Term Facility;
with the foregoing partially offset by:
$13.5 million of repayments under the 2016 Term Loan Facility.
Long-Term Debt Instruments
See Note 8, "Long Term Debt," for
For detailed information regardingon the terms and conditions of Products Corporation’s various outstanding debt instruments, including, without limitation, the 2016 Term Loan Facility, Amended 2016 Revolving Credit Facility, 2019 Term Loan Facility
(which was fully repaid as part of consummating the 2020 Refinancing Transactions), 2018 Foreign Asset-Based Term Facility, Amended 2019 Senior Line of Credit Facility, 5.75% Senior Notes and 6.25% Senior Notes. For further detail regarding Products Corporation's long-term debt instruments,Notes, see Note 10, "Long-Term Debt,9, "Debt," to the Consolidated Financial Statements in the Company's 2018Revlon's 2019 Form 10-K, as well as "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources," in Revlon's 2019 Form 10-K. See also Item 2, “Recent Developments-Recent Debt Transactions” in this MD&A and Part II, Item 5. “Other Information” in this Form 10-Q for details regarding the Company’s consummation of the 2020 Refinancing Transactions. For information regarding certain risks related to the Company’s indebtedness, see Item 1A. “Risk Factors” in the Company's 20182019 Form 10-K.
Covenants
Products Corporation was in compliance with all applicable covenants under the 2016 Credit Agreements, the 2019 Term Loan Agreement (which was fully repaid as part of consummating the 2020 Refinancing Transactions), the 2018 Foreign Asset-Based Term Agreement, and the Amended 2019 Senior Line of Credit Agreement as of September 30, 2019.March 31, 2020. As of September 30, 2019,March 31, 2020, the aggregate principal amounts outstanding and availability under Products Corporation’s various revolving credit facilities were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| Commitment | | Borrowing Base | | Aggregate principal amount outstanding at March 31, 2020 | | Availability at March 31, 2020 (a) | | |
Tranche A of the Amended 2016 Revolving Credit Facility | $ | 400.0 | | | $ | 352.0 | | | $ | 306.7 | | | $ | 34.3 | | | |
Tranche B of the Amended 2016 Revolving Credit Facility | 41.5 | | | 34.8 | | | 34.8 | | | — | | | |
Total Tranche A & B of the Amended 2016 Revolving Credit Facility(a) | $ | 441.5 | | | $ | 386.8 | | | $ | 341.5 | | | $ | 34.3 | | | |
Amended 2019 Senior Line of Credit Facility | $ | 30.0 | | | N/A | | | $ | — | | | $ | 30.0 | | | |
|
| | | | | | | | | | | | | | | |
| Commitment | | Borrowing Base | | Aggregate principal amount outstanding at September 30, 2019 | | Availability at September 30, 2019 (a) |
Tranche A of the Amended 2016 Revolving Credit Facility | $ | 400.0 |
| | $ | 400.0 |
| | $ | 307.5 |
| | $ | 81.2 |
|
Tranche B of the Amended 2016 Revolving Credit Facility | 41.5 |
| | 40.9 |
| | 40.9 |
| | — |
|
Total Tranche A & B of the Amended 2016 Revolving Credit Facility(a) | $ | 441.5 |
| | $ | 440.9 |
| | $ | 348.4 |
| | $ | 81.2 |
|
2019 Senior Line of Credit Facility | $ | 30.0 |
| | N/A |
| | $ | — |
| | $ | 30.0 |
|
(a) Availability at September 30, 2019March 31, 2020 is based upon the borrowing base then in effect of $440.9$386.8 million, less $11.3$11.0 million of outstanding undrawn letters of credit and $348.4$341.5 million then drawn. As Products Corporation’s consolidated fixed charge coverage ratio was greater than 1.0 to 1.0 as of September 30, 2019,March 31, 2020, all of the $81.2$34.3 million of availability under the Amended 2016 Revolving Credit Facility was available as of such date.
Products Corporation was in compliance with all applicable covenants under its Senior Notes Indentures as of September 30, 2019,March 31, 2020, with there being $500 million and $450 million in aggregate principal amount outstanding under the 5.75% Senior Notes and 6.25% Senior Notes, respectively, as of September 30, 2019.March 31, 2020.
Sources and Uses
The Company’s principal sources of funds are expected to be operating revenues, cash on hand and funds that may be available from time to time for borrowing under the Amended 2016 Revolving Credit Facility, the Amended 2019 Senior Line of Credit Facility, the 2020 Refinancing Transactions as detailed in Part II, Item 5. “Other Information” and other permissible borrowings. The 2016 Credit Agreements, the 2019 Term Loan Agreement (which was fully repaid as part of consummating the 2020 Refinancing Transactions), the Senior Notes Indentures and the 2018 Foreign Asset-Based Term Agreement contain certain provisions that by their terms limit Products Corporation's and its subsidiaries’ ability to, among other things, incur additional debt, subject to certain exceptions.
The Company’s principal uses of funds are expected to be the payment of operating expenses, including payments in connection with the purchase of permanent wall displays; capital expenditure requirements; debt service payments and costs; cash tax payments; pension and other post-retirement benefit plan contributions; payments in connection with the Company’s restructuring programs, such as the EA Integration Restructuring2018 Optimization Program and the 2018 OptimizationRevlon 2020 Restructuring Program; severance not otherwise included in the Company’s restructuring programs; business and/or brand acquisitions (including, without limitation, through licensing transactions), if any; debt and/or equity repurchases, if any; costs related to litigation; and payments in connection with discontinuing non-core business lines and/or exiting and/or entering certain territories and/or channels of trade. For information regarding certain risks related to the Company’s indebtedness and cash flows, see Item 1A. “Risk Factors” in the Company's 2019 Form 10-K.
The Company’s cash contributions to its pension and post-retirement benefit plans in the first nine monthsquarter of 20192020 were $7.8$3.6 million.
The Company expects that cash contributions to its pension and post-retirement benefit plans will totalbe approximately $12$18 million in the aggregate for 2019.2020. The Company’s cash taxes paid in the first nine monthsquarter of 20192020 were $6.9$1.0 million. The Company expects to pay cash taxes totaling approximately $10 million to $15 million to $20 millionin the aggregate during 2019.2020. For a further discussion, see Note 13,10, "Pension and Post-Retirement Benefits," and Note 12, "Income Taxes," to the Company's Unaudited Consolidated Financial Statements in this Form 10-Q, as well as Note 15, "Income Taxes," to the Consolidated Financial Statements in the Company's 2018 Form 10-K and Item 1A. “Risk Factors - Uncertainties in the interpretation and application of the U.S. income tax provisions could have a material impact on the Company's financial condition, results of operations and/or cash flows" in the Company's 2018 Form 10-K.
10-Q.
The Company’s purchases of permanent wall displays and capital expenditures in the first nine monthsquarter of 20192020 were $28.4$7.0 million and $20$1.8 million, respectively. The Company expects that purchases of permanent wall displays will total approximately $50$30 million to $60$40 million in the aggregate during 20192020 and expects that capital expenditures will total approximately $30$15 million to $40$25 million in the aggregate during 2019.
2020.
The Company has undertaken, and continues to assess, refine and implement, a number of programs to efficiently manage its working capital, including, among other things, initiatives intended to optimize inventory levels over time; centralized procurement to secure discounts and efficiencies; prudent management of trade receivables and accounts payable; and controls on general and administrative spending. In the ordinary course of business, the Company’s source or use of cash from operating activities may vary on a quarterly basis as a result of a number of factors, including the timing of working capital flows.
Continuing to execute the Company’s business initiatives could include taking advantage of additional opportunities to reposition, repackage or reformulate one or more brands or product lines, launching additional new products, acquiring businesses or brands (including, without limitation, through licensing transactions), divesting or discontinuing non-core business lines (which may include exiting certain territories), further refining the Company’s approach to retail merchandising and/or taking further actions to optimize its manufacturing, sourcing and organizational size and structure, including actions related to the 2018 Optimization Program.structure. Any of these actions, the intended purpose of which would be to create value through improving the Company's financial performance, could result in the Company making investments and/or recognizing charges related to executing against such opportunities. Any such activities may be funded with operating revenues, cash on hand, funds that may be available from time to time under the Amended 2016 Revolving Credit Facility, the Amended 2019 Senior Line of Credit Facility, other permissible borrowings, the 2020 Refinancing Transactions and/or other permitted additional sources of capital, which actions could increase the Company’s total debt.
The Company may also, from time-to-time, seek to retire or purchase its outstanding debt obligations and/or equity in open market purchases, block trades, privately negotiated purchase transactions or otherwise and may seek to refinance some or all of its indebtedness based upon market conditions. Any such retirement or purchase of debt and/or equity may be funded with operating cash flows of the business or other sources and will depend upon prevailing market conditions, liquidity requirements, contractual restrictions and other factors, and the amounts involved may be material.
TheThe Company expects that operating revenues, cash on hand and funds that may be available from time-to-time for borrowing under the Amended 2016 Revolving Credit Facility, the Amended 2019 Senior Line of Credit Facility, the 2020 Refinancing Transactions as detailed in Part II, Item 5. “Other Information” and otherother permissible borrowings will be sufficient to enable the Company to pay its operating expenses for 2019,2020, including payments in connection with the purchase of permanent wall displays, capital expenditures, debt service payments and costs, cash tax payments, pension and other post-retirement plan contributions, payments in connection with the Company’s restructuring programs, such as the EA Integration Restructuring2018 Optimization Program and the 2018 OptimizationRevlon 2020 Restructuring Program, severance not otherwise included in the Company’s restructuring programs, business and/or brand acquisitions (including, without limitation, through licensing transactions), if any, debt and/or equity repurchases, if any, costs related to litigation, discontinuing non-core business lines and/or entering and/or exiting certain territories and/or channels of trade. The Company also expects to generate additional liquidity from cost reductions resulting from the implementation of the Revlon 2020 Restructuring Program and the 2018 Optimization Program.Program, and cost reductions generated from other cost control initiatives, including, without limitation, new interim measures to reduce costs in response to the COVID-19 pandemic (such as: (i) switching to a reduced work week and reducing executive and employee compensation in the range of 20% to 40%; (ii) furloughing approximately 40% of the Company’s U.S.-based employees and those in certain other locations; (iii) suspending Company discretionary profit sharing contributions and matching contributions to the Company’s 401(k) plan; (iv) reducing Board and committee compensation by 50% and eliminating Board and committee meeting fees; and (v) ceasing services and payments under consulting agreements with 2 directors), as well as funds provided by selling certain assets (such as the Natural Honey and Floid brands that were sold in December 2019) in connection with the Company's ongoing Strategic Review.
There can be no assurance that available funds will be sufficient to meet the Company’s cash requirements on a consolidated basis, as, among other things, the Company’s liquidity can be impacted by a number of factors, including its level of sales, costs and expenditures, as well as accounts receivable and inventory, which serve as the principal variables impacting
the amount of liquidity available under Products Corporation’s Amended 2016 Revolving Credit Facility and the 2018 Foreign Asset-Based Term Facility. For example, subject to certain exceptions, loans under the 2018 Foreign Asset-Based Term Facility must be prepaid to the extent that outstanding loans exceed the borrowing base, consisting of accounts receivable and inventory. For information regarding certain risks related to the Company’s indebtedness and cash flows, see Item 1A. “Risk Factors” in the Company's 2019 Form 10-K.
If the Company’s anticipated level of revenues is not achieved because of, among other things, decreased consumer spending in response to weak economic conditions or weakness in the consumption of beauty products in one or more of the Company's segments; segments, whether attributable to the COVID-19 pandemic or otherwise; adverse changes in tariffs, foreign currency exchange rates, foreign currency controls and/or government-mandated pricing controls; decreased sales of the Company’s products as a result of increased competitive activities by the Company’s competitors and/or decreased performance by third-party suppliers, whether due to shortages of raw materials or otherwise; changes in consumer purchasing habits, including with respect to retailer preferences and/or sales channels, such as due to any further consumption declines that the Company has experienced; inventory management by the Company's customers; space reconfigurations or reductions in display space by the Company's customers; retail store closures in the brick-and-mortar channels where the Company sells its products, as consumers continue to shift purchases to online and e-commerce channels; changes in pricing, marketing, advertising and/or promotional strategies by the Company's customers; or less than anticipated results from the Company’s existing or new products or from its advertising, promotional, pricing and/or marketing plans; or if the Company’s expenses, including, without limitation, for the purchase of permanent displays, capital expenditures, debt service payments and costs, cash tax payments, pension and other post-retirement plan contributions, payments in connection with the Company’s restructuring programs (such as the EA Integration Restructuring2018 Optimization Program and the 2018 OptimizationRevlon 2020 Restructuring Program), severance not otherwise included in the Company’s restructuring programs, business and/or brand acquisitions (including, without limitation, through licensing transactions), if any, debt and/or equity repurchases, if any, costs related to litigation, discontinuingdiscontinuing non-core business lines and/or entering and/or exiting certain territories and/or channels of trade, advertising, promotional and marketing activities or for sales returns related to any reduction of space by the Company's customers, product discontinuances or otherwise, exceed the anticipated level of expenses, the Company’s current sources of funds may be insufficient to meet the Company’s cash requirements.
Any such developments, if significant, could reduce the Company’s revenues and operating income and could adversely affect Products Corporation’s ability to comply with certain financial and/or other covenants under the 2016 Credit Agreements, the 2019 Term Loan Agreement (which was fully repaid as part of consummating the 2020 Refinancing Transactions), the Senior Notes Indentures and/or the 2018 Foreign Asset-Based Term Agreement and in such event the Company could be required to take measures, including, among other things, reducing discretionary spending. (ForSee Part II, Item 5. “Other Information” in this Form 10-Q for details regarding the Company’s consummation of the 2020 Refinancing Transactions. For further discussion of certain risks associated with the Company's business and indebtedness, see Item 1A. "Risk Factors" in the Company’s 2018Company's 2019 Form 10-K.)
Derivative Financial Instruments
Foreign Currency Forward Exchange Contracts
Products Corporation enters into foreign currency forward exchange and option contracts ("FX Contracts") from time-to-time primarily for the purpose of hedging anticipated inventory purchases and certain intercompany payments denominated in currencies other than the local currencies of the Company’s foreign and domestic operations and generally have maturities of less than one year. The FX Contracts in the Company's hedging program matured in December 2018. The Company did not enter into any FX Contracts during nine months ended September 30, 2019. The U.S. Dollar notional amounts of the FX Contracts outstanding at each of September 30, 2019 and December 31, 2018 were nil.
Interest Rate Swap Transaction
In November 2013, Products Corporation executed a forward-starting floating-to-fixed interest rate swap transaction (the "2013 Interest Rate Swap") that, at its inception, was based on a notional amount of $400 million in respect of indebtedness under the Old Acquisition Term Loan. The 2013 Interest Rate Swap expired in May 2018. Refer to Note 10, "Financial Instruments,"10-K, as updated by Part II, Item 1A. “Risk Factors” in this Form 10-Q for more information on this interest rate swap transaction.10-Q.
Credit Risk
Exposure to credit risk in the event of nonperformance by any of the counterparties to the Company's outstanding hedging instruments is limited to the gross fair value of the derivative instruments in asset positions, which totaled nil as of September 30, 2019 and December 31, 2018. The Company has from time to time in the past attempted to minimize exposure to credit risk by generally entering into derivative contracts with counterparties that have investment-grade credit ratings and are major financial institutions. If applicable, the Company also periodically monitors any changes in the credit ratings of its counterparties. Given the credit standing of the counterparties that the Company has used from time to time to provide its derivative instruments, the Company believes the risk of loss arising from any non-performance by its counterparties under the derivative instruments that it has entered into from time to time would be remote.
Off-Balance Sheet Transactions
The Company does not maintain any off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Discussion of Critical Accounting Policies
For a discussion of the Company's critical accounting policies, see the Company's 20182019 Form 10-K.
Effect of Recently Issued Accounting Pronouncements
See discussion of recent accounting pronouncements in Note 1, "Description of Business and Summary of Significant Accounting Policies," to the Unaudited Consolidated Financial Statements in this Form 10-Q.
REVLON, INC. AND SUBSIDIARIES
(all tabular amounts in millions, except share and per share amounts)
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable as a smaller reporting company.
REVLON, INC. AND SUBSIDIARIES
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including the Company's Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the fiscal period covered by this Form 10-Q. Based upon such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that as a result of the material weakness described in "Management's Annual Report on Internal Control Over Financial Reporting," under Item 9A. “Controls and Procedures” of the Company’s 2018 Form 10-K, the Company's disclosure controls and procedures were not effective as of the end of the period covered by this Form 10-Q.March 31, 2020.
Given the material weakness, the Company performed additional procedures to determine that the Company’s Unaudited Consolidated Financial Statements included in this Form 10-Q were prepared in accordance with U.S. GAAP and fairly present in all material respects the Company's financial condition, results of operations and cash flow for the periods presented. As a result, management, including the Company's Chief Executive Officer and Chief Financial Officer, concluded that the Company’s Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q were prepared in accordance with U.S. GAAP and fairly present in all material respects the Company’s financial condition, results of operations and cash flow for the periods presented.
(b) Changes in Internal Control overOver Financial Reporting (“ICFR”("ICFR").As disclosed Other than as described in Part II, Item 9A. “Controls and Procedures” in the Company’s 20182019 Form 10-K, regarding the Company identifiedremediation of a prior material weakness, in internal control over financial reporting related to the following deficiencies:
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(i) | the Company did not perform an effective continuous risk assessment process that adequately identified and assessed risks affecting the Company's internal controls over financial reporting associated with the implementation of its new ERP system in the U.S.; |
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(ii) | the Company did not maintain a sufficient number of knowledgeable, trained personnel in the U.S. operations impacted by the ERP system implementation and in various other operations across the Company who understood and were held accountable for their assigned responsibilities for the design, implementation and operation of internal controls over financial reporting; and
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(iii) | as a result, the Company did not design, implement and consistently operate effective process-level controls to ensure that it appropriately (a) recorded and accounted for inventory, accounts receivable, net sales and cost of goods sold, (b) reconciled balance sheet accounts, (c) reviewed and approved the complete population of manual journal entries and (d) used complete and accurate information in performing manual controls. |
The Company adopted a plan designed to improve its internal controls to remediate the aforementioned material weakness beginning Q1 2019 and through the date of filing this Form 10-Q has taken certain actions within each of the following areas: (i) implemented enhancements to company-wide risk assessment processes; (ii) enhanced the review and sign-off procedures for IT implementations; (iii) enhanced staff and continued to train staff responsible for internal control over financial reporting; (iv) enhanced the Company’s process and control documentation; (v) implemented new processes and controls relative to the execution and oversight of inventory, accounts receivable, net sales and cost of goods sold; (vi) enhanced and continued to reinforce policies around account reconciliations and manual journal entries; (vii) identified and clearly communicated individual employee responsibilities; and (viii) continued to implement new controls and new reporting tools to ensure the completeness and accuracy of information used in performing manual controls. These actions are ongoing and the Company is also continuing to evaluate additional controls and procedures that may be required to remediate the material weakness.
The Company believes that the actions being taken to improve the design and operating effectiveness of its internal controls
will effectively remediate the material weakness. However, the material weaknessthere have not been any changes in the Company’s internal control over financial reporting will not be considered remediated untilduring the internal controlsquarter ended March 31, 2020 that have materially affected, or are remediated operate for a sufficient period of time and management concludes, through testing, that these internal controls are operating effectively.
REVLON, INC. AND SUBSIDIARIES
For further information regarding the Company’s material weakness, see Part I, Item 1A. “Risk Factors - Difficulties in implementing the Company’s new ERP system have disrupted the Company's business operations and have caused a material weakness inreasonably likely to materially affect, the Company’s internal control over financial reporting. IfFor further information, see the Company’s 2019 Form 10-K, Part I, Item 1A. Risk Factors – “The Company is unable to remediate thepreviously identified a material weakness in its internal control over financial reporting, it may negatively impact the Company’s abilitywhich has now been remediated. Any failure to prepare its futuremaintain effective internal control over financial statements in conformity with U.S. GAAP. If the Company experiences ongoing disruptions with such implementation and/or is unable to remediate the material weakness in the future, such eventsreporting could have a material adverse effect on the Company'sCompany’s business, prospects, results of operations, financial condition and/or cash flows” in the Company's 2018 Form 10-K and Part II, Item 9A. “Controls and Procedures” in the Company's 2018 Form 10-K.flows.”
REVLON, INC. AND SUBSIDIARIES
Forward-Looking Statements
This Quarterly Report on Form 10-Q for the period ended September 30, 2019,March 31, 2020, as well as the Company's other public documents and statements, may contain forward-looking statements that involve risks and uncertainties, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on the beliefs, expectations, estimates, projections, assumptions, forecasts, plans, anticipations, targets, outlooks, initiatives, visions, objectives, strategies, opportunities, drivers, focus and intents of the Company’sCompany's management. While the Company believes that its estimates and assumptions are reasonable, the Company cautions that it is very difficult to predict the impact of known and unknown factors, and, of course, it is impossible for the Company to anticipate all factors that could affect its results. The Company's actual results may differ materially from those discussed in such forward-looking statements. Such statements include, without limitation, the Company's expectations, plans and estimates (whether qualitative or quantitative) as to:
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(i) | the Company's future financial performance and/or sales growth; |
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(ii) | the effect on sales of decreased consumer spending in response to weak economic conditions or weakness in the consumption of beauty products in one or more of the Company's segments; adverse changes in tariffs, foreign currency exchange rates, foreign currency controls and/or government-mandated pricing controls; decreased sales of the Company’s products as a result of increased competitive activities by the Company’s competitors and/or decreased performance by third-party suppliers, whether due to shortages of raw materials or otherwise, changes in consumer purchasing habits, including with respect to retailer preferences and/or among sales channels, such as due to the continuing consumption declines in core beauty categories in the mass retail channel in North America; inventory management by the Company's customers; inventory de-stocking by certain retail customers; space reconfigurations or reductions in display space by the Company's customers; retail store closures in the brick-and-mortar channels where the Company sells its products, as consumers continue to shift purchases to online and e-commerce channels; changes in pricing, marketing, advertising and/or promotional strategies by the Company's customers; less than anticipated results from the Company’s existing or new products or from its advertising, promotional, pricing and/or marketing plans; or if the Company’s expenses, including, without limitation, for the purchase of permanent displays, capital expenditures, debt service payments and costs, cash tax payments, pension and other post-retirement plan contributions, payments in connection with the Company’s restructuring programs (such as the EA Integration Restructuring Program and the 2018 Optimization Program), severance not otherwise included in the Company’s restructuring programs, business and/or brand acquisitions (including, without limitation, through licensing transactions), if any, debt and/or equity repurchases, if any, costs related to litigation, discontinuing non-core business lines and/or entering and/or exiting certain territories and/or channels of trade, advertising, promotional and marketing activities or for sales returns related to any reduction of space by the Company's customers, product discontinuances or otherwise, exceed the anticipated level of expenses; |
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(iii) | the Company's belief that continuing to execute its business initiatives could include taking advantage of additional opportunities to reposition, repackage or reformulate one or more brands or product lines, launching additional new products, acquiring businesses or brands (including through licensing transactions, if any), divesting or discontinuing non-core business lines (which may include exiting certain territories), further refining its approach to retail merchandising and/or taking further actions to optimize its manufacturing, sourcing and organizational size and structure, any of which, the intended purpose would be to create value through improving the Company's financial performance, could result in the Company making investments and/or recognizing charges related to executing against such opportunities, which activities may be funded with operating revenues, cash on hand, funds available under the Amended 2016 Revolving Credit Facility, the Amended 2019 Senior Line of Credit Facility, other permissible borrowings and/or other permitted additional sources of capital, which actions could increase the Company's total debt; |
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(iv) | the Company’s plans to remain focused on its 3 key strategic pillars to drive its future success and growth, including (1) strengthening its iconic brands through innovation and relevant product portfolios; (2) building its capabilities to better communicate and connect with its consumers through media channels where they spend the most time; and (3) ensuring availability of its product where consumers shop, both in-store and increasingly online; |
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(v) | the effect of restructuring activities, restructuring costs and charges, the timing of restructuring payments and the benefits from such activities, including, without limitation: (A) in connection with implementing the EA Integration Restructuring Program: (1) consolidating offices, eliminating certain duplicative activities and streamlining back-office support (which are designed to reduce the Company's SG&A expenses); and (2) recognizing $82.6 million of the EA Integration Restructuring Charges (all of which are expected to be cash payments), consisting of: (x) $72.6 million of employee-related costs, including severance, retention and other contractual termination benefits; (y) $5.1 million of lease termination costs; and (z) $4.9 million of other related charges; (B) the Company's 2018 Optimization Program designed to streamline the Company’s operations, reporting structures and business processes, with the objective of maximizing productivity and improving profitability, cash flows and liquidity, with the major initiatives underlying such program including: (1) optimizing its global supply chain and realizing manufacturing efficiencies and rationalizing its global warehouse network and office locations to drive greater efficiency, lower its cost base and enhance its speed-to-market capabilities for new innovations; (2) enhancing in-market execution and optimizing its commercial and organizational structures to create more efficient global and regional capabilities; and (3) reducing overhead costs and streamlining functions and workflows by leveraging technology and shared services and standardizing and simplifying its business processes, leading to greater agility and faster decision-making; (C) the Company’s expectations regarding the amount and timing of the charges and payments related to the 2018 Optimization Program, including that: (1) it will recognize approximately $30 million to $40 million of total pre-tax restructuring and related charges, consisting of employee-related costs, such as severance, pension and other termination costs, as well as related third party expenses; (2) it will incur approximately $10 million of additional capital expenditures; (3) of the restructuring charges, it recorded pre-tax restructuring charges of $28.1 million in the nine months ended September 30, 2019, related to the 2018 Optimization Program, with substantially all of the balance to be recognized in 2019; and (4) approximately 85% of the restructuring charges are to be paid in cash, with approximately $15.8 million paid through September 30, 2019, and substantially all of the remaining balance is expected to be paid by the end of 2019, with any residual amount to be paid in 2020; (D) the Company’s expectation that the actions to be implemented under the 2018 Optimization Program will be substantially completed by December 31, 2019; and (E) the Company's projections that the 2018 Optimization Program will result in between $90 million and $95 million of in-year cost reductions during 2019, of which approximately $65 million had been realized as of September 30, 2019, that the annualized cost reductions will be in the range of approximately $125 million to $150 million by the end of 2019 and that approximately half of the annualized cost reductions are expected to be realized within cost of sales and the remainder in selling, general and administrative expenses; |
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(vi) | the Company’s expectation that operating revenues, cash on hand and funds that may be available from time to time for borrowing under Products Corporation's Amended 2016 Revolving Credit Facility, the Amended 2019 Senior Line of Credit Facility and other permissible borrowings will be sufficient to enable the Company to cover its operating expenses for 2019, including the cash requirements referred to in item (viii) below, and the Company's belief that (a) it has and will have sufficient liquidity to meet its cash needs for at least the next 12 months based upon the cash generated by its operations, cash on hand, availability under the Amended 2016 Revolving Credit Facility, the Amended 2019 Senior Line of Credit Facility and other permissible borrowings, along with the option to further settle intercompany loans and payables with certain foreign subsidiaries, and that such cash resources will be further enhanced as the Company implements its 2018 Optimization Program and cost reductions generated from other cost control initiatives and (b) restrictions and/or taxes on repatriation of foreign earnings will not have a material effect on the Company's liquidity during such period; |
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(vii) | the Company’s expected principal sources of funds, including operating revenues, cash on hand and funds available for borrowing under Products Corporation's Amended 2016 Revolving Credit Facility, the Amended 2019 Senior Line of Credit Facility and other permissible borrowings, as well as the availability of funds from the Company taking certain measures, including, among other things, reducing discretionary spending and the Company’s expectation to generate additional liquidity from cost reductions resulting from the implementation of the 2018 Optimization Program and from other cost reduction initiatives; |
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(viii) | the Company's expected principal uses of funds, including amounts required for payment of operating expenses including in connection with the purchase of permanent wall displays; capital expenditure requirements; debt service payments and costs; cash tax payments; pension and other post-retirement benefit plan contributions; payments in connection with the Company’s restructuring programs, such as the EA Integration Restructuring Program and the 2018 Optimization Program; severance not otherwise included in the Company’s restructuring programs; business and/or brand acquisitions (including, without limitation, through licensing transactions), if any; debt and/or equity repurchases, if any; costs related to litigation; and payments in connection with discontinuing non-core business lines and/or exiting and/or entering certain territories and/or channels of trade (including, without limitation, that the Company may also, from time-to-time, seek to retire or purchase its outstanding debt obligations and/or equity in open market purchases, block trades, privately negotiated purchase transactions or otherwise and may seek to refinance some or all of its indebtedness based upon market conditions and that any such retirement or purchase of debt and/or equity may be funded with operating cash flows of the business or other sources and will depend upon prevailing market conditions, liquidity requirements, contractual restrictions and other factors, and the amounts involved may be material); and its estimates of the amount and timing of such operating and other expenses; |
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(ix) | matters concerning the impact on the Company from changes in interest rates and foreign exchange rates; |
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(x) | the Company's expectation to efficiently manage its working capital, including, among other things, initiatives intended to optimize inventory levels over time; centralized procurement to secure discounts and efficiencies; prudent management of trade receivables, accounts payable and controls on general and administrative spending; and the Company’s belief that in the ordinary course of business, its source or use of cash from operating activities may vary on a quarterly basis as a result of a number of factors, including the timing of working capital flows; |
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(xi) | the Company’s expectations regarding its future net periodic benefit cost for its U.S. and international defined benefit plans; |
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(xii) | the Company's expectation that its tax provision and effective tax rate in any individual quarter and year-to-date period will vary and may not be indicative of the Company's tax provision and effective tax rate for the full year and, with respect to the Tax Act, the Company’s expectation that the Tax Act’s limitation on interest deductibility will not impact the Company’s 2019 federal cash taxes due to its net operating loss carryover position, and that the Tax Act will not have a material impact on its cash taxes or liquidity in 2019, as well as the Company's expectations regarding whether it will be required to establish additional valuation allowances on its deferred tax assets; |
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(xiii) | the Company's belief that the outcome of all pending legal proceedings in the aggregate is not reasonably likely to have a material adverse effect on the Company’s business, prospects, results of operations, financial condition and/or cash flows, but that in light of the uncertainties involved in legal proceedings generally, the ultimate outcome of a particular matter could be material to the Company’s operating results for a particular period depending on, among other things, the size of the loss or the nature of the liability imposed and the level of the Company’s income for that particular period; |
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(xiv) | the Company’s expectations regarding its implementation of the remediation plan to address the material weakness that it identified in its internal control over financial reporting, as described in Item 4. “Controls and Procedures” of this Form 10-Q; and |
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(xv) | the Company’s plans to explore strategic transactions pursuant to the Strategic Review. |
(i)the Company's future financial performance and/or sales growth;
(ii)the effect on sales of decreased consumer spending in response to weak economic conditions or weakness in the consumption of beauty products in one or more of the Company's segments; adverse changes in tariffs, foreign currency exchange rates, foreign currency controls and/or government-mandated pricing controls; decreased sales of the Company's products as a result of increased competitive activities by the Company's competitors and/or decreased performance by third-party suppliers, whether due to shortages of raw materials or otherwise, changes in consumer purchasing habits, including with respect to retailer preferences and/or among sales channels, such as due to the continuing consumption declines in core beauty categories in the mass retail channel in North America; inventory management by the Company's customers; inventory de-stocking by certain retail customers; space reconfigurations or reductions in display space by the Company's customers; retail store closures in the brick-and-mortar channels where the Company sells its products, as consumers continue to shift purchases to online and e-commerce channels; changes in pricing, marketing, advertising and/or promotional strategies by the Company's customers; less than anticipated results from the Company's existing or new products or from its advertising, promotional, pricing and/or marketing plans; or if the Company's expenses, including, without limitation, for the purchase of permanent displays, capital expenditures, debt service payments and costs, cash tax payments, pension and other post-retirement plan contributions, payments in connection with the Company's restructuring programs (such as the 2018 Optimization Program and the Revlon 2020 Restructuring Program), severance not otherwise included in the Company's restructuring programs, business and/or brand acquisitions (including, without limitation, through licensing transactions), if any, debt and/or equity repurchases, if any, costs related to litigation, discontinuing non-core business lines and/or entering and/or exiting certain territories and/or channels of trade, advertising, promotional and marketing activities or for sales returns related to any reduction of space by the Company's customers, product discontinuances or otherwise, exceed the anticipated level of expenses;
(iii)the Company's belief that continuing to execute its business initiatives could include taking advantage of additional opportunities to reposition, repackage or reformulate one or more brands or product lines, launching additional new products, acquiring businesses or brands (including through licensing transactions, if any), divesting or discontinuing non-core business lines (which may include exiting certain territories), further refining its approach to retail merchandising and/or taking further actions to optimize its manufacturing, sourcing and organizational size and structure, any of which, the intended purpose would be to create value through improving the Company's financial performance, could result in the Company making investments and/or recognizing charges related to executing against such opportunities, which activities may be funded with operating revenues, cash on hand, funds available under the Amended 2016 Revolving Credit Facility, the Amended 2019 Senior Line of Credit Facility, the 2020 Refinancing Transactions as detailed in Part II, Item 5. “Other Information,” other permissible borrowings and/or other permitted additional sources of capital, which actions could increase the Company's total debt;
(iv)the Company's plans to remain focused on its 3 key strategic pillars to drive its future success and growth, including (1) strengthening its iconic brands through innovation and relevant product portfolios; (2) building its capabilities to better communicate and connect with its consumers through media channels where they spend the most time; and (3) ensuring availability of its products where consumers shop, both in-store and increasingly online;
(v)the effect of restructuring activities, restructuring costs and charges, the timing of restructuring payments and the benefits from such activities, including, without limitation: (1) the Company’s plans to implement the Revlon 2020 Restructuring Program; including its expectation and belief that the Revlon 2020 Restructuring Program will reduce the Company’s selling, general and administrative expenses, as well as cost of goods sold, improve the
Company’s gross profit and Adjusted EBITDA and maximize productivity, cash flow and liquidity, as well as rightsizing the organization and operating with more efficient workflows and processes and that the leaner organizational structure will improve communication flow and cross-functional collaboration, leveraging the more efficient business processes; (2) the Company’s expectation that the Revlon 2020 Restructuring Program will result in the elimination of approximately 1,000 positions worldwide including approximately 650 current employees and approximately 350 open positions; (3) the Company’s expectation that it will substantially complete the employee-related actions by the end of 2020 and the other consolidation and outsourcing actions during 2021 and 2022; (4) the Company’s expectations regarding the amount and timing of the 2020 Restructuring Charges and payments related to the Revlon 2020 Restructuring Program, including that: (a) it will recognize during 2020 approximately $60 million to $70 million of total pre-tax restructuring and related charges and in addition restructuring charges in the range of $75 million to $85 million to be charged and paid during 2021 and 2022; and (b) substantially all of the 2020 Restructuring Charges will be paid in cash, with approximately $55 million to $65 million of the total charges expected to be paid in 2020, approximately $40 million to $45 million expected to be paid in 2021, with the balance expected to be paid in 2022; and (5) the Company’s expectations that as a result of the Revlon 2020 Restructuring Program, the Company will deliver in the range of $200 million to $230 million of annualized cost reductions by the end of 2022, with approximately 50% of these annualized cost reductions to be realized from the headcount reductions occurring in 2020, including the Company’s expectations that during 2020, the Company will realize approximately $105 million to $115 million of in-year cost reductions;
(vi)the Company's expectation that operating revenues, cash on hand and funds that may be available from time to time for borrowing under Products Corporation's Amended 2016 Revolving Credit Facility, the Amended 2019 Senior Line of Credit Facility, the 2020 Refinancing Transactions as detailed in Part II, Item 5. “Other Information” and other permissible borrowings will be sufficient to enable the Company to cover its operating expenses for 2020, including the cash requirements referred to in item (viii) below, and the Company's belief that (a) it has and will have sufficient liquidity to meet its cash needs for at least the next 12 months based upon the cash generated by its operations, cash on hand, availability under the Amended 2016 Revolving Credit Facility, the Amended 2019 Senior Line of Credit Facility, the 2020 Refinancing Transactions as detailed in Part II, Item 5. “Other Information” and other permissible borrowings, along with the option to further settle intercompany loans and payables with certain foreign subsidiaries, and that such cash resources will be further enhanced as the Company implements its 2018 Optimization Program and its Revlon 2020 Restructuring Program and cost reductions generated from other cost control initiatives, including, without limitation, new interim measures to reduce costs in response to the COVID-19 pandemic (such as: (i) switching to a reduced work week and reducing executive and employee compensation in the range of 20% to 40%; (ii) furloughing approximately 40% of the Company’s U.S.-based employees and those in certain other locations; (iii) suspending Company discretionary profit sharing contributions and matching contributions to the Company’s 401(k) plan; (iv) reducing Board and committee compensation by 50% and eliminating Board and committee meeting fees; and (v) ceasing services and payments under consulting agreements with 2 directors), as well as funds provided by selling certain assets (such as the Natural Honey and Floid brands that were sold in December 2019) in connection with the Company's ongoing Strategic Review, and (b) restrictions and/or taxes on repatriation of foreign earnings will not have a material effect on the Company's liquidity during such period;
(vii)the Company's expected principal sources of funds, including operating revenues, cash on hand and funds available for borrowing under Products Corporation's Amended 2016 Revolving Credit Facility, the Amended 2019 Senior Line of Credit Facility, the 2020 Refinancing Transactions as detailed in Part II, Item 5. “Other Information” and other permissible borrowings, as well as the availability of funds from the Company taking certain measures, including, among other things, reducing discretionary spending and the Company's expectation to generate additional liquidity from cost reductions resulting from the implementation of the 2018 Optimization Program and the Revlon 2020 Restructuring Program and from other cost reduction initiatives, including, without limitation, new interim measures to reduce costs in response to the COVID-19 pandemic (such as: (i) switching to a reduced work week and reducing executive and employee compensation in the range of 20% to 40%; (ii) furloughing approximately 40% of the Company’s U.S.-based employees and those in certain other locations; (iii) suspending Company discretionary profit sharing contributions and matching contributions to the Company’s 401(k) plan; (iv) reducing Board and committee compensation by 50% and eliminating Board and committee meeting fees; and (v) ceasing services and payments under consulting agreements with 2 directors), as well as funds provided by selling certain assets (such as the Natural Honey and Floid brands that were sold in December 2019) in connection with the Company's ongoing Strategic Review;
(viii)the Company's expected principal uses of funds, including amounts required for payment of operating expenses including in connection with the purchase of permanent wall displays; capital expenditure requirements; debt service payments and costs; cash tax payments; pension and other post-retirement benefit plan contributions; payments in connection with the Company's restructuring programs, such as the 2018 Optimization Program and
the Revlon 2020 Restructuring Program; severance not otherwise included in the Company's restructuring programs; business and/or brand acquisitions (including, without limitation, through licensing transactions), if any; debt and/or equity repurchases, if any; costs related to litigation; and payments in connection with discontinuing non-core business lines and/or exiting and/or entering certain territories and/or channels of trade (including, without limitation, that the Company may also, from time-to-time, seek to retire or purchase its outstanding debt obligations and/or equity in open market purchases, block trades, privately negotiated purchase transactions or otherwise and may seek to refinance some or all of its indebtedness based upon market conditions and that any such retirement or purchase of debt and/or equity may be funded with operating cash flows of the business or other sources and will depend upon prevailing market conditions, liquidity requirements, contractual restrictions and other factors, and the amounts involved may be material); and its estimates of the amount and timing of such operating and other expenses;
(ix)matters concerning the impact on the Company from changes in interest rates and foreign exchange rates;
(x)the Company's expectation to efficiently manage its working capital, including, among other things, initiatives intended to optimize inventory levels over time; centralized procurement to secure discounts and efficiencies; prudent management of trade receivables, accounts payable and controls on general and administrative spending; and the Company's belief that in the ordinary course of business, its source or use of cash from operating activities may vary on a quarterly basis as a result of a number of factors, including the timing of working capital flows;
(xi)the Company's expectations regarding its future net periodic benefit cost for its U.S. and international defined benefit plans;
(xii)the Company's expectation that its tax provision and effective tax rate in any individual quarter and year-to-date period will vary and may not be indicative of the Company's tax provision and effective tax rate for the full year and the Company's expectations regarding whether it will be required to establish additional valuation allowances on its deferred tax assets;
(xiii)the Company's belief that the outcome of all pending legal proceedings in the aggregate is not reasonably likely to have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows, but that in light of the uncertainties involved in legal proceedings generally, the ultimate outcome of a particular matter could be material to the Company's operating results for a particular period depending on, among other things, the size of the loss or the nature of the liability imposed and the level of the Company's income for that particular period;
(xiv)the Company's plans to explore certain strategic transactions pursuant to the Strategic Review; and
(xv)the Company’s belief that the COVID-19 impact on its business will peak during the second quarter of 2020.
Statements that are not historical facts, including statements about the Company's beliefs and expectations, are forward-looking statements. Forward-looking statements can be identified by, among other things, the use of forward-looking language such as "estimates," "objectives," "visions," "projects," "forecasts," "focus," "drive towards," "plans," "targets," "strategies," "opportunities," "assumptions," "drivers," "believes," "intends," "outlooks," "initiatives," "expects," "scheduled to," "anticipates," "seeks," "may," "will" or "should" or the negative of those terms, or other variations of those terms or comparable language, or by discussions of strategies, targets, long-range plans, models or intentions. Forward-looking statements speak only as of the date they are made, and except for the Company's ongoing obligations under the U.S. federal securities laws, the Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
Investors are advised, however, to consult any additional disclosures the Company made or may make in the Company's 20182019 Form 10-K and in its Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, in each case filed with the SEC in 20192020 and 20182019 (which, among other places, can be found on the SEC's website at http://www.sec.gov, as well as on the Company's corporate website at www.revloninc.com). Except as expressly set forth in this Form 10-Q, the information available from time-to-time on such websites shall not be deemed incorporated by reference into this Form 10-Q. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. (See also Item 1A. "Risk Factors" in the Company's 2018this Form 10-K10-Q for further discussion of risks associated with the Company's business). In addition to factors that may be described in the Company's filings with the SEC, including this filing, the following factors, among others, could cause the Company's actual results to differ materially from those expressed in any forward-looking statements made by the Company:
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(i) | unanticipated circumstances or results affecting the Company's financial performance and or sales growth, including: greater than anticipated levels of consumers choosing to purchase their beauty products through e-commerce and other social media channels and/or greater than anticipated declines in the brick-and-mortar retail channel, or either of those conditions occurring at a rate faster than anticipated; the Company’s inability to address the pace and impact of the new commercial landscape, such as its inability to enhance its e-commerce and social media capabilities and/or increase its penetration of e-commerce and social media channels; the Company’s inability to drive a successful long-term omni-channel strategy and significantly increase its e-commerce penetration; difficulties, delays and/or the Company's inability to (in whole or in part) develop and implement effective content to enhance its online retail position, improve its consumer engagement across social media platforms and/or transform its technology and data to support efficient management of its digital infrastructure; the Company incurring greater than anticipated levels of expenses and/or debt to facilitate the foregoing objectives, which could result in, among other things, less than anticipated revenues and/or profitability; decreased consumer spending in response to weak economic conditions or weakness in the consumption of beauty products in one or more of the Company's segments; adverse changes in tariffs, foreign currency exchange rates, foreign currency controls and/or government-mandated pricing controls; decreased sales of the Company's products as a result of increased competitive activities by the Company's competitors; decreased performance by third-party suppliers, whether due to shortages of raw materials or otherwise; and/or supply disruptions at the Company’s manufacturing facilities; changes in consumer preferences, such as reduced consumer demand for the Company's color cosmetics and other current products, including new product launches; changes in consumer purchasing habits, including with respect to retailer preferences and/or among sales channels, such as due to the continuing consumption declines in core beauty categories in the mass retail channel in North America; lower than expected customer acceptance or consumer acceptance of, or less than anticipated results from, the Company’s existing or new products; higher than expected retail store closures in the brick-and-mortar channels where the Company sells its products, as consumers continue to shift purchases to online and e-commerce channels; higher than expected purchases of permanent displays, capital expenditures, debt service payments and costs, cash tax payments, pension and other post-retirement plan contributions, payments in connection with the Company’s restructuring programs (such as the EA Integration Restructuring Program and the 2018 Optimization Program), severance not otherwise included in the Company’s restructuring programs, business and/or brand acquisitions (including, without limitation, through licensing transactions), if any, debt and/or equity repurchases, if any, costs related to litigation, discontinuing non-core business lines and/or entering and/or exiting certain territories and/or channels of trade, advertising, promotional and marketing activities or for sales returns related to any reduction of space by the Company's customers, product discontinuances or otherwise or lower than expected results from the Company’s advertising, promotional, pricing and/or marketing plans; decreased sales of the Company’s existing or new products; actions by the Company’s customers, such as greater than expected inventory management and/or de-stocking, and greater than anticipated space reconfigurations or reductions in display space and/or product discontinuances or a greater than expected impact from pricing, marketing, advertising and/or promotional strategies by the Company's customers; and changes in the competitive environment and actions by the Company's competitors, including, among other things, business combinations, technological breakthroughs, implementation of new pricing strategies, new product offerings, increased advertising, promotional and marketing spending and advertising, promotional and/or marketing successes by competitors; |
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(ii) | in addition to the items discussed in (i) above, the effects of and changes in economic conditions (such as volatility in the financial markets, inflation, increasing interest rates, monetary conditions and foreign currency fluctuations, tariffs, foreign currency controls and/or government-mandated pricing controls, as well as in trade, monetary, fiscal and tax policies in international markets) and political conditions (such as military actions and terrorist activities); |
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(iii) | unanticipated costs or difficulties or delays in completing projects associated with continuing to execute the Company’s business initiatives or lower than expected revenues or the inability to create value through improving the Company's financial performance as a result of such initiatives, including lower than expected sales, or higher than expected costs, including as may arise from any additional repositioning, repackaging or reformulating of one or more brands or product lines, launching of new product lines, including higher than expected expenses, including for sales returns, for launching its new products, acquiring businesses or brands (including through licensing transactions, if any), divesting or discontinuing non-core business lines (which may include exiting certain territories or converting the Company's go-to-trade structure in certain countries to other business models), further refining its approach to retail merchandising and/or difficulties, delays or increased costs in connection with taking further actions to optimize the Company’s manufacturing, sourcing, supply chain or organizational size and structure (including difficulties or delays in and/or the Company’s inability to optimally implement the EA Integration Restructuring Program and/or the 2018 Optimization Program and/or less than expected benefits from such programs and/or more than expected costs in implementing such programs, which could cause the Company not to realize the projected cost reductions), as well as the unavailability of cash generated by operations, cash on hand and/or funds under the Amended 2016 Revolving Credit Facility, the Amended 2019 Senior Line of Credit Facility, other permissible borrowings and/or from other permissible additional sources of capital to fund such potential activities, as well as the unavailability of funds due to potential mandatory repayment obligations under the 2018 Foreign Asset-Based Term Facility; |
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(iv) | difficulties, delays in or less than expected results from the Company’s efforts to execute on its 3 key strategic pillars to drive its future success and growth, including, without limitation: (1) less than effective new product development and innovation, less than expected acceptance of its new products and innovations by the Company’s consumers and/or customers in one or more of its segments and/or less than expected levels of execution vis-à-vis its new product launches with its customers in one or more of its segments or regions; (2) less than expected levels of advertising, promotional and/or marketing activities for its new product launches, less than expected acceptance of its advertising, promotional, pricing and/or marketing plans and/or brand communication by consumers and/or customers in one or more of its segments, less than expected investment in advertising, promotional and/or marketing activities or greater than expected competitive investment; and/or (3) difficulties or disruptions impacting the Company’s ability to ensure availability of its product where consumers shop, both in-store and increasingly online; |
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(v) | difficulties, delays or unanticipated costs or charges or less than expected cost reductions and other benefits resulting from the Company's restructuring activities, such as in connection with the 2018 Optimization Program: (1) difficulties with, delays in or the Company’s inability to successfully complete the actions underlying the 2018 Optimization Program, in whole or in part, which could result in less than expected operating and financial benefits from such actions, such as difficulties with, delays in or the Company’s inability to generate reductions in its cost base and/or overhead costs; (2) higher than anticipated restructuring charges and/or payments and/or changes in the expected timing of such charges and/or payments; (3) delays in completing the actions underlying the 2018 Optimization Program, which could reduce and/or defer the benefits expected to be realized from such activities, such as providing an additional source of liquidity; and/or (4) less than anticipated annualized cost reductions from the 2018 Optimization Program and/or changes in the timing of realizing such cost reductions, such as due to less than anticipated resources to fund such activities and/or more than expected costs to achieve the expected cost reductions; |
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(vi) | lower than expected operating revenues, cash on hand and/or funds available under the Amended 2016 Revolving Credit Facility, the Amended 2019 Senior Line of Credit Facility and/or other permissible borrowings or generated from cost reductions related to the 2018 Optimization Program and/or other cost control initiatives; higher than anticipated operating expenses, such as referred to in clause (viii) below; and/or less than anticipated cash generated by the Company's operations or unanticipated restrictions or taxes on repatriation of foreign earnings; |
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(vii) | the unavailability of funds under Products Corporation's Amended 2016 Revolving Credit Facility, the Amended 2019 Senior Line of Credit Facility and/or other permissible borrowings; the unavailability of funds under the 2018 Foreign Asset-Based Term Facility, such as due to reductions in the applicable borrowing base that could require certain mandatory prepayments; the unavailability of funds from difficulties, delays in or the Company's inability to take other measures, such as reducing discretionary spending and/or less than expected liquidity from cost reductions resulting from the implementation of the 2018 Optimization Program and from other cost reduction initiatives; |
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(viii) | higher than expected operating expenses, such as higher than expected purchases of permanent displays, capital expenditures, debt service payments and costs, cash tax payments, pension and other post-retirement plan contributions, payments in connection with the Company’s restructuring programs (such as the EA Integration Restructuring Program and the 2018 Optimization Program), severance not otherwise included in the Company’s restructuring programs, business and/or brand acquisitions (including, without limitation, through licensing transactions), if any, debt and/or equity repurchases, if any, costs related to litigation, discontinuing non-core business lines and/or entering and/or exiting certain territories and/or channels of trade, advertising, promotional and marketing activities or for sales returns related to any reduction of space by the Company's customers, product discontinuances or otherwise; |
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(ix) | unexpected significant impacts on the Company from changes in interest rates or foreign exchange rates; |
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(x) | difficulties, delays or the inability of the Company to efficiently manage its cash and working capital; |
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(xi) | lower than expected returns on pension plan assets and/or lower discount rates, which could result in higher than expected cash contributions, higher net periodic benefit costs and/or less than expected net periodic benefit income; |
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(xii) | unexpected significant variances in the Company's tax provision, effective tax rate and/or unrecognized tax benefits, whether due to the enactment of the Tax Act or otherwise, such as due to the issuance of unfavorable guidance, interpretations, technical clarifications and/or technical corrections legislation by the U.S. Congress, the U.S. Treasury Department or the IRS, unexpected changes in foreign, state or local tax regimes in response to the Tax Act, and/or changes in estimates that may impact the calculation of the Company's tax provisions, as well as changes in circumstances that could adversely impact the Company's expectations regarding the establishment of additional valuation allowances on its deferred tax assets; |
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(xiii) | unanticipated adverse effects on the Company’s business, prospects, results of operations, financial condition and/or cash flows as a result of unexpected developments with respect to the Company's legal proceedings; |
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(xiv) | difficulties or delays that could affect the Company's ability to effectively implement the remediation plan, in whole or in part, to address the material weakness that it identified in its internal control over financial reporting, as described in Item 4. "Controls and Procedures" of this Form 10-Q; and/or |
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(xv) | difficulties or delays that could affect the Company's ability to consummate one or more transactions pursuant to the Strategic Review, such as due to the Company’s respective businesses experiencing disruptions due to transaction-related uncertainty or other factors. |
(i)unanticipated circumstances or results affecting the Company's financial performance and or sales growth, including: greater than anticipated levels of consumers choosing to purchase their beauty products through e-commerce and other social media channels and/or greater than anticipated declines in the brick-and-mortar retail channel, or either of those conditions occurring at a rate faster than anticipated; the Company's inability to address the pace and impact of the new commercial landscape, such as its inability to enhance its e-commerce and social media capabilities and/or increase its penetration of e-commerce and social media channels; the Company's inability to drive a successful long-term omni-channel strategy and significantly increase its e-commerce penetration; difficulties, delays and/or the Company's inability to (in whole or in part) develop and implement effective content to enhance its online retail position, improve its consumer engagement across social media platforms and/or transform its technology and data to support efficient management of its digital infrastructure; the Company incurring greater than anticipated levels of expenses and/or debt to facilitate the foregoing objectives, which could result in, among other things, less than anticipated revenues and/or profitability; decreased consumer spending in response to weak economic conditions or weakness in the consumption of beauty products in one or more of the Company's segments, whether attributable to COVID-19 or otherwise; adverse changes in tariffs, foreign currency exchange rates, foreign currency controls and/or government-mandated pricing controls; decreased sales of the Company's products as a result of increased competitive activities by the Company's competitors; decreased performance by third-party suppliers, whether due to COVID-19, shortages of raw materials or otherwise; and/or supply disruptions at the Company's manufacturing facilities, whether attributable to COVID-19 or otherwise; changes in consumer preferences, such as reduced consumer demand for the Company's color cosmetics and other current products, including new product launches; changes in consumer purchasing habits, including with respect to retailer preferences and/or among sales channels, such as due to the continuing consumption declines in core beauty categories in the mass retail channel in North America, whether attributable to COVID-19 or otherwise; lower than expected customer acceptance or consumer acceptance of, or less than anticipated results from, the Company's existing or new products, whether attributable to COVID-19 or otherwise; higher than expected retail store closures in the brick-and-mortar channels where the Company sells its products, as consumers continue to shift purchases to online and e-commerce channels, whether attributable to COVID-19 or otherwise; higher than expected purchases of permanent displays, capital expenditures, debt service payments and costs, cash tax payments, pension and other post-retirement plan contributions, payments in connection with the Company's restructuring programs (such as the 2018 Optimization Program and the Revlon 2020 Restructuring Program), severance not otherwise included in the Company's restructuring programs, business and/or brand acquisitions (including, without limitation, through licensing transactions), if any, debt and/or equity repurchases, if any, costs related to litigation, discontinuing non-core business lines and/or entering and/or exiting certain territories and/or channels of trade, advertising, promotional and marketing activities or for sales returns related to any reduction of space by the Company's customers, product discontinuances or otherwise or lower than expected results from the Company's advertising, promotional, pricing and/or marketing plans, whether attributable to COVID-19 or otherwise; decreased sales of the Company’s existing or new products, whether attributable to COVID-19 or otherwise; actions by the Company's customers, such as greater than expected inventory management and/or de-stocking, and greater than anticipated space reconfigurations or reductions in display space and/or product discontinuances or a greater than expected impact from pricing, marketing, advertising and/or promotional strategies by the Company's customers, whether attributable to COVID-19 or otherwise; and changes in the competitive environment and actions by the Company's competitors, including, among other things, business combinations, technological breakthroughs, implementation of new pricing strategies, new product offerings, increased advertising, promotional and marketing spending and advertising, promotional and/or marketing successes by competitors;
(ii)in addition to the items discussed in (i) above, the effects of and changes in economic conditions (such as volatility in the financial markets, whether attributable to COVID-19 or otherwise, inflation, increasing interest rates, monetary conditions and foreign currency fluctuations, tariffs, foreign currency controls and/or government-mandated pricing controls, as well as in trade, monetary, fiscal and tax policies in international markets), political conditions (such as military actions and terrorist activities) and natural disasters, such as the devastating fires in Australia and the earthquakes in Puerto Rico;
(iii)unanticipated costs or difficulties or delays in completing projects associated with continuing to execute the Company's business initiatives or lower than expected revenues or the inability to create value through improving the Company's financial performance as a result of such initiatives, including lower than expected sales, or higher than expected costs, including as may arise from any additional repositioning, repackaging or reformulating of one or more brands or product lines, launching of new product lines, including higher than expected expenses, including for sales returns, for launching its new products, acquiring businesses or brands (including through licensing transactions, if any), divesting or discontinuing non-core business lines (which may include exiting certain territories or converting the Company's go-to-trade structure in certain countries to other business models), further refining its approach to retail merchandising and/or difficulties, delays or increased costs in connection with taking further actions to optimize the Company's manufacturing, sourcing, supply chain or organizational size and structure (including difficulties or delays in and/or the Company's inability to optimally implement the 2018 Optimization Program and/or the Revlon 2020 Restructuring Program and/or less than expected benefits from such programs and/or more than expected costs in implementing such programs, which could cause the Company not to realize the projected cost reductions), as well as the unavailability of cash generated by operations, cash on hand and/or funds under the Amended 2016 Revolving Credit Facility, the Amended 2019 Senior Line of Credit Facility, the 2020 Refinancing Transactions as detailed in Part II, Item 5. “Other Information” and/or other permissible borrowings and/or from other permissible additional sources of capital to fund such potential activities, as well as the unavailability of funds due to potential mandatory repayment obligations under the 2018 Foreign Asset-Based Term Facility;
(iv)difficulties, delays in or less than expected results from the Company's efforts to execute on its 3 key strategic pillars to drive its future success and growth, including, without limitation: (1) less than effective new product development and innovation, less than expected acceptance of its new products and innovations by the Company's consumers and/or customers in one or more of its segments and/or less than expected levels of execution vis-à-vis its new product launches with its customers in one or more of its segments or regions, in each case whether attributable to COVID-19 or otherwise; (2) less than expected levels of advertising, promotional and/or marketing activities for its new product launches, less than expected acceptance of its advertising, promotional, pricing and/or marketing plans and/or brand communication by consumers and/or customers in one or more of its segments, less than expected investment in advertising, promotional and/or marketing activities or greater than expected competitive investment, in each case whether attributable to COVID-19 or otherwise; and/or (3) difficulties or disruptions impacting the Company's ability to ensure availability of its products where consumers shop, both in-store and increasingly online;
(v)difficulties, delays or unanticipated costs or charges or less than expected cost reductions and other benefits resulting from the Company's restructuring activities, such as in connection with the 2018 Optimization Program and/or the Revlon 2020 Restructuring Program, higher than anticipated restructuring charges and/or payments and/or changes in the expected timing of such charges and/or payments; and/or less than expected additional sources of liquidity from such initiatives;
(vi)lower than expected operating revenues, cash on hand and/or funds available under the Amended 2016 Revolving Credit Facility, the Amended 2019 Senior Line of Credit Facility, the 2020 Refinancing Transactions as detailed in Part II, Item 5. “Other Information” and/or other permissible borrowings or generated from cost reductions resulting from the implementation of the Revlon 2020 Restructuring Program and the 2018 Optimization Program and/or other cost control initiatives,including, without limitation, new interim measures to reduce costs in response to the COVID-19 pandemic (such as: (i) switching to a reduced work week and reducing executive and employee compensation in the range of 20% to 40%; (ii) furloughing approximately 40% of the Company’s U.S.-based employees and those in certain other locations; (iii) suspending Company discretionary profit sharing contributions and matching contributions to the Company’s 401(k) plan; (iv) reducing Board and committee compensation by 50% and eliminating Board and committee meeting fees; and (v) ceasing services and payments under consulting agreements with 2 directors), and/or from selling certain assets (such as the Natural Honey and Floid brands that were sold in December 2019) in connection with the Company's ongoing Strategic Review; higher than anticipated operating expenses, such as referred to in clause (viii) below; and/or less than anticipated cash generated by the Company's operations or unanticipated restrictions or taxes on repatriation of foreign earnings;
(vii)the unavailability of funds under Products Corporation's Amended 2016 Revolving Credit Facility, the Amended 2019 Senior Line of Credit Facility, the 2020 Refinancing Transactions as detailed in Part II, Item 5. “Other Information” and/or other permissible borrowings; the unavailability of funds under the 2018 Foreign Asset-Based Term Facility, such as due to reductions in the applicable borrowing base that could require certain mandatory prepayments; the unavailability of funds from difficulties, delays in or the Company's inability to take other measures, such as reducing discretionary spending and/or less than expected liquidity from cost reductions resulting from the implementation of the Revlon 2020 Restructuring Program and the 2018 Optimization Program
and from other cost reduction initiatives,including, without limitation, new interim measures to reduce costs in response to the COVID-19 pandemic (such as: (i) switching to a reduced work week and reducing executive and employee compensation in the range of 20% to 40%; (ii) furloughing approximately 40% of the Company’s U.S.-based employees and those in certain other locations; (iii) suspending Company discretionary profit sharing contributions and matching contributions to the Company’s 401(k) plan; (iv) reducing Board and committee compensation by 50% and eliminating Board and committee meeting fees; and (v) ceasing services and payments under consulting agreements with 2 directors), and/or from selling certain assets (such as the Natural Honey and Floid brands that were sold in December 2019) in connection with the Company's ongoing Strategic Review;
(viii)higher than expected operating expenses, such as higher than expected purchases of permanent displays, capital expenditures, debt service payments and costs, cash tax payments, pension and other post-retirement plan contributions, payments in connection with the Company's restructuring programs (such as the 2018 Optimization Program and/or the Revlon 2020 Restructuring Program), severance not otherwise included in the Company's restructuring programs, business and/or brand acquisitions (including, without limitation, through licensing transactions), if any, debt and/or equity repurchases, if any, costs related to litigation, discontinuing non-core business lines and/or entering and/or exiting certain territories and/or channels of trade, advertising, promotional and marketing activities or for sales returns related to any reduction of space by the Company's customers, product discontinuances or otherwise;
(ix)unexpected significant impacts on the Company from changes in interest rates or foreign exchange rates;
(x)difficulties, delays or the inability of the Company to efficiently manage its cash and working capital;
(xi)lower than expected returns on pension plan assets and/or lower discount rates, which could result in higher than expected cash contributions, higher net periodic benefit costs and/or less than expected net periodic benefit income;
(xii)unexpected significant variances in the Company's tax provision, effective tax rate and/or unrecognized tax benefits, whether due to the enactment of the Tax Act or otherwise, such as due to the issuance of unfavorable guidance, interpretations, technical clarifications and/or technical corrections legislation by the U.S. Congress, the U.S. Treasury Department or the IRS, unexpected changes in foreign, state or local tax regimes in response to the Tax Act, and/or changes in estimates that may impact the calculation of the Company's tax provisions, as well as changes in circumstances that could adversely impact the Company's expectations regarding the establishment of additional valuation allowances on its deferred tax assets;
(xiii)unanticipated adverse effects on the Company's business, prospects, results of operations, financial condition and/or cash flows as a result of unexpected developments with respect to the Company's legal proceedings;
(xiv)difficulties or delays that could affect the Company's ability to consummate one or more transactions pursuant to the Strategic Review, such as due to the Company's respective businesses experiencing disruptions due to transaction-related uncertainty or other factors; and/or
(xv)difficulties with, delays in or the inability to achieve the Company’s expected results, such as due to, among other things, the Company’s business experiencing greater than anticipated disruptions due to COVID-19 related uncertainty or other related factors making it more difficult to maintain relationships with employees, business partners or governmental entities and/or other unanticipated circumstances, trends or events affecting the Company’s financial performance, including decreased consumer spending in response to the COVID-19 pandemic and related conditions and restrictions, weaker than expected economic conditions due to the COVID-19 pandemic and its related restrictions and conditions continuing for periods longer than currently estimated or COVID-19 expanding into more territories than currently anticipated, or other weakness in the consumption of beauty-related products, lower than expected acceptance of the Company’s new products, adverse changes in foreign currency exchange rates, decreased sales of the Company’s products as a result of increased competitive activities by the Company’s competitors and/or decreased performance by third party suppliers.
Factors other than those listed above could also cause the Company's results to differ materially from expected results. This discussion is provided pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
REVLON, INC. AND SUBSIDIARIES
Website Availability of Reports, Corporate Governance Information and Other Financial Information
The Company maintains a comprehensive corporate governance program, including Corporate Governance Guidelines for Revlon’s Board of Directors, Revlon’s Board Guidelines for Assessing Director Independence and charters for Revlon’s Audit Committee and Compensation Committee. Revlon maintains a corporate investor relations website, www.revloninc.com, where stockholders and other interested persons may review, without charge, among other things, Revlon's corporate governance materials and certain SEC filings (such as Revlon's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, annual reports, Section 16 reports reflecting certain changes in the stock ownership of Revlon’s directors and Section 16 officers, and certain other documents filed with the SEC), each of which are generally available on the same business day as the filing date with the SEC on the SEC’s website http://www.sec.gov. Products Corporation's SEC filings are also available on the SEC's website http://www.sec.gov. In addition, under the section of the website entitled, "Corporate Governance," Revlon posts printable copies of the latest versions of its Corporate Governance Guidelines, Board Guidelines for Assessing Director Independence and charters for Revlon's Audit Committee and Compensation Committee, as well as the Company's Code of Conduct and Business Ethics, which includes the Company's Code of Ethics for Senior Financial Officers, and the Audit Committee Pre-Approval Policy. From time-to-time, the Company may post on www.revloninc.com certain presentations that may include material information regarding its business, financial condition and/or results of operations. The business and financial materials and any other statement or disclosure on, or made available through, the websites referenced herein shall not be deemed incorporated by reference into this report.
REVLON, INC. AND SUBSIDIARIES
(all tabular amounts in millions, except share and per share amounts)
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various routine legal proceedings incidental to the ordinary course of its business. The Company believes that the outcome of all pending legal proceedings in the aggregate is not reasonably likely to have a material adverse effect on the Company’s business, prospects, results of operations, financial condition and/or cash flows. However, in light of the uncertainties involved in legal proceedings generally, the ultimate outcome of a particular matter could be material to the Company’s operating results for a particular period depending on, among other things, the size of the loss or the nature of the liability imposed and the level of the Company’s income for that particular period.
Item 1A. Risk Factors
The ongoing occurrence of the coronavirus and any possible recurrence of other similar types of pandemics, or any other widespread public health problems, could result in decreased sales of the Company's products, which could have a material adverse effect on the Company's business, results of operations, financial condition and/or cash flows.
While the full impact on the Company’s business from the recent outbreak of the coronavirus is unknown at this time and difficult to predict, various aspects of the Company’s business has been, and for the foreseeable future could continue to be, significantly adversely affected by the outbreak and the possible recurrence of other similar pandemic public health problems. In early 2020, China began reporting on the spread of the coronavirus and thousands of cases of the disease have since been identified throughout the rest of Asia, as well as in Europe, the U.S., Latin America and other regions that are important to the Company’s business in terms of sales, manufacturing and other aspects of its supply chain. While there are many unknowns as to the duration and severity of the coronavirus outbreak, in 2020 there has been a significant decline in air travel and consumer traffic in key shopping and tourist areas around the globe, which may adversely affect the Company’s travel retail business, among others.
With COVID-19 contributing to a $54 million, or 9.8% (10.0% "XFX," as hereinafter defined), decline in net sales in the first quarter of 2020, compared to the prior year quarter, the Company believes that the COVID-19 impact on its business will peak during the second quarter of 2020. This top-line impact has not been experienced uniformly across the Company’s multiple, diverse business segments, as, among other things: (i) the Company continues to experience strong growth in China, primarily due to the strength of the Elizabeth Arden brand, being largely an online business and less dependent on brick and mortar retailers; (ii) travel retail, prestige and professional (which is dependent on in-salon visits) channels of trade are being significantly impacted globally; and (iii) the mass retail channel is being impacted by a shift in consumer buying patterns from color cosmetics to anti-perspirant deodorants, hair color, nail care and color and other beauty essentials, both in store and online. The impact of delayed shipments of components from China continues to be limited in scope and not material to the Company’s overall production capabilities. In the current environment, the Company’s three largest manufacturing facilities continue to operate unencumbered, as are the Company’s various distribution centers around the world. In April 2020, the Company took several financial measures designed to mitigate the adverse impacts of COVID-19, including, without limitation: (i) optimizing brand support; (ii) continuing to monitor the Company’s sales and order flow and periodically re-evaluating the possibility to scale down operations and/or cancel programs; and (iii) closely managing cash flow and liquidity and prioritizing cash to ensure there is no impact to the Company’ production capabilities. In April 2020, the Company also implemented various organizational interim measures designed to reduce costs in response to COVID-19, including, without limitation: (i) switching to a reduced work week in the U.S. and reducing executive and employee compensation in the range of 20% to 40% and exploring similar opportunities in other locations; (ii) furloughing approximately 40% of the Company’s U.S.-based office-based employees and 30% factory-based employees, as well as employees in certain other locations; (iii) suspending the Company’s 2020 merit base salary increases, discretionary profit sharing contributions and matching contributions to the Company’s 401(k) plan; (iv) reducing Board and committee compensation by 50% and eliminating Board and committee meeting fees; and (v) ceasing services and payments under consulting agreements with 2 directors. The Company is also exploring its qualifications and eligibility for various subsidies and tax and other incentive programs worldwide.
Any prolonged outbreak of the coronavirus could result in the imposition of extended quarantines or closures of retailer locations, office spaces, beauty salons and spas, manufacturing facilities, travel and transportation restrictions and/or import and export restrictions, any of which could contribute to a general slowdown in the global economy. In the face of these challenges, the foregoing mitigation actionstaken by the Company may not prove to be effective in insulating the Company from the damaging economic impact of the COVID-19 pandemic.
REVLON, INC. AND SUBSIDIARIES
Any extended pandemic outbreak, such as is occurring with the coronavirus, could cause the Company’s key third party suppliers or the Company itself to temporarily close one or more manufacturing facilities, which could lead to a shortage of raw materials, components and finished products. Also, if one or more of the Company’s key customers were required to close for an extended period, the Company might not be able to ship products to them and consumers may decrease their level of purchasing activity, which would adversely impact the Company’s net sales. In addition, governmental authorities may recommend or impose other measures that could cause significant disruptions to the Company’s business operations in the regions most impacted by the coronavirus, such as in Asia and Travel Retail globally. Any of the foregoing events or other unforeseen consequences of public health problems could materially adversely affect the Company’s business, results of operations, financial condition and/or cash flows.
In addition to the other information in this report, investors should consider carefully the risk factors discussed in Part I, Item 1A. "Risk Factors" in the Company's 20182019 Form 10-K.
Item 5. Other Information
ExtensionConsummation of the Maturity of the 2019 Senior Line of Credit2020 Refinancing Transactions
On NovemberMay 7, 2019,2020 (the “Facilities Closing Date”), Revlon Consumer Products Corporation (“Products Corporation”), the direct wholly-owned operating subsidiary of Revlon, Inc. (“Revlon” and together with Products Corporation and MacAndrews & Forbes Group, LLC, Revlon’s majority stockholder, entered intoits subsidiaries, the Amended and Restated 2019 Senior Unsecured Line of Credit Agreement (the “Amended 2019 Line of Credit Agreement”“Company”) to extend the maturity of the 2019 Senior Line of Credit Agreement entered into on June 27, 2019 by 1-year, expiring December 31, 2020. As of September 30, 2019 and as of the November 7, 2019 extension date, there were no borrowings outstanding under this facility. As of September 30, 2019, MacAndrews & Forbes Group, LLC and its affiliates beneficially owned 46,223,321 shares of Revlon’s Class A common stock, representing approximately 87.2% of Revlon’s outstanding shares of voting capital stock as of such date. The foregoing description of the Amended 2019 Line of Credit Agreement is qualified in its entirety by reference to the full text of such agreement, a copy of which is incorporated by reference into this Form 10-Q as Exhibit 4.1.
Appointment of Mitra Hormozi, Esq. as a Revlon Director
Effective November 7, 2019, Revlon’s Board of Directors appointed Mitra Hormozi, Esq. to serve as a member of Revlon’s Board of Directors. Ms. Hormozi previously served as the Company’s Executive Vice President and General Counsel from April 2015 to July 2019, responsible for overseeing the Company’s worldwide legal affairs. Ms. Hormozi also acted as the Company’s Interim Chief Human Resources Officer from October 2018 to February 2019. Prior to joining the Company in April 2015, Ms. Hormozi was a litigation partner at two major law firms from 2011 to 2015 and previously served as Deputy Chief of Staff to then New York State Attorney General, Andrew Cuomo. Ms. Hormozi also served as an Assistant United States Attorney prosecuting high-profile complex racketeering cases in the Eastern District of New York. Since December 2018, Ms. Hormozi has served as a director of Athene Holding Ltd. (including one or more of its U.S. subsidiaries), which is a NYSE-listed company that offers and reinsures retirement savings products. With her background, Ms. Hormozi has extensive experience in both the public and private sectors of the legal field, as well as senior executive and business experience, governmental experience, public company board experience, combined with in-depth knowledge of the Company. Ms. Hormozi also currently sits on The New York State Commission on Legislative, Judicial, & Executive Compensation. Ms. Hormozi received a Bachelor of Arts in history from the University of Michigan and a Juris Doctor from the New York University School of Law.
In November 2019, the Company and Ms. Hormozi entered into a consultingterm credit agreement (the “Consulting“BrandCo Credit Agreement”) with Revlon, Jefferies Finance LLC, as administrative agent and collateral agent, and certain financial institutions (the “2020 Facilities Lenders”) that are lenders or the affiliates of lenders under Products Corporation’s Term Credit Agreement, dated as of September 7, 2016 and amended on April 30, 2020 (as amended to date, the “2016 Term Loan Facility”) and as amended on the Facilities Closing Date, as further described below. Pursuant to the BrandCo Credit Agreement, the 2020 Facilities Lenders provided the Company with new and roll-up senior secured term loan facilities (the “2020 Facilities” and, together with the use of proceeds thereof and the Extension Amendment (as defined below), pursuantthe “2020 Refinancing Transactions”).
Principal and Maturity: The 2020 Facilities consist of: (i) a senior secured term loan facility in an aggregate principal amount outstanding on the Facilities Closing Date of $815 million, plus the amount of certain fees that have been capitalized (the “2020 BrandCo Facility”); (ii) commitments in respect of a senior secured term loan facility in an aggregate principal amount of $950 million (the “Roll-up BrandCo Facility”); and (iii) a senior secured term loan facility in an aggregate principal amount outstanding on the Facilities Closing Date of $3 million (the “Junior Roll-up BrandCo Facility”). Additionally, within 15 business days after the Facilities Closing Date, Products Corporation may borrow from the 2020 Facilities Lenders an additional $65 million of term loans under the 2020 Brandco Facility to refinance revolving loans under the 2016 Term Loan Facility, upon which Ms. Hormozi will assist in transitioning oversightthe 2020 BrandCo Facility would have an aggregate principal amount outstanding of $880 million.
The proceeds of the Company’s worldwide legal affairs2020 BrandCo Facility were used: (i) to her successor. In exchange for performing these advisory services,repay in full approximately $200 million of indebtedness outstanding under Products Corporation’s Term Credit Agreement, dated as of August 6, 2019; and (ii) to pay fees and expenses in connection with the 2020 Facilities and the 2020 Refinancing Transactions. The Company will pay Ms. Hormoziuse the remaining net proceeds for general corporate purposes, including repurchasing and retiring Products Corporation’s outstanding 5.75% Senior Notes at prevailing market prices. The proceeds of the Roll-up BrandCo Facility are available prior to the third anniversary of the Facilities Closing Date to purchase an equivalent amount of term loans under the 2016 Term Loan Facility held by the lenders participating in the 2020 BrandCo Facility or their transferees. The proceeds of the Junior Roll-up BrandCo Facility were used to purchase at par an equivalent amount of term loans under the 2016 Term Loan Facility held by such lenders.
The 2020 Facilities will mature on June 30, 2025, subject to a feespringing maturity 91 days prior to the maturity date of $250,000 per yearProducts Corporation’s 6.25% Senior Notes due August 2024 (the “6.25% Senior Notes”) if, on such date, $100 million or more in aggregate principal amount of the 6.25% Senior Notes remain outstanding.
Borrower, Guarantees and she will continueSecurity: The borrower under the 2020 Facilities is Products Corporation, and the 2020 Facilities are guaranteed by certain indirect subsidiaries of Products Corporation (the “BrandCos”), which hold certain intellectual property assets related to remain eligiblethe Elizabeth Arden and American Crew brands, certain other Portfolio segment brands and certain owned Fragrance segment brands (the “Specified Brand Assets”). While the BrandCos do not guarantee the 2016 Term Loan Facility, all guarantors of the 2016 Term Loan Facility guarantee the 2020 Facilities. All of the assets of the BrandCos (including the equity of the BrandCos) have been pledged to be paid her 2019 annual bonus award and vest in her outstanding LTIP awards, in each casesecure the 2020 BrandCo Facility on a pro-ratedfirst-priority basis, the Roll-up BrandCo Facility on a second-priority basis and subject to the Company’s achievement of its applicable performance objectives (supplemental to the Board’s compensation program for non-employee directors). The term of the Consulting Agreement expiresJunior Roll-up BrandCo Facility on December 31, 2020, subject to earlier termination by either party on at least 30 days’ notice, among other standard termination rights. The foregoing description of the Consulting Agreement is qualified in its entirety by reference to the full text ofa third-priority basis and while such agreement, a copy of which is incorporated by reference into this Form 10-Q as Exhibit 10.2.
REVLON, INC. AND SUBSIDIARIES
assets do not secure the 2016 Term Loan Facility, the 2020 Facilities are secured on a pari passu basis by the assets securing the 2016 Term Loan Facility.
Contribution and License Agreements: In connection with the pledge of the Specified Brand Assets, Products Corporation and certain of its subsidiaries contributed the Specified Brand Assets to the BrandCos. Products Corporation has entered into license and royalty arrangements on arm’s length terms with the relevant BrandCos to provide for the continued use of the Specified Brand Assets by Products Corporation and its subsidiaries during the term of the Facilities.
Interest and Fees: Loans under the 2020 BrandCo Facility bear interest at a rate equal to LIBOR (with a LIBOR floor of 1.50%) plus (x) 10.50% per annum, payable not less than quarterly in arrears in cash and (y) 2.00% per annum payable not less than quarterly in-kind by adding such amount to the principal amount of outstanding loans under the 2020 Brandco Facility. Loans under the Roll-up BrandCo Facility and the Junior Roll-up BrandCo Facility bear interest at a rate equal to LIBOR (with a LIBOR floor of 0.75%) plus 3.50% per annum, payable not less than quarterly in arrears in cash.
Affirmative and Negative Covenants: The 2020 Facilities contain certain affirmative and negative covenants that, among other things, limit Products Corporation’s and its restricted subsidiaries’ ability to: (i) incur additional debt; (ii) incur liens; (iii) sell, transfer or dispose of assets; (iv) make investments; (v) make dividends and distributions on, or repurchases of, equity; (vi) make prepayments of contractually subordinated, unsecured or junior lien debt; (vii) enter into certain transactions with their affiliates; (viii) enter into sale-leaseback transactions; (ix) change their lines of business; (x) restrict dividends from their subsidiaries or restrict liens; (xi) change their fiscal year; and (xii) modify the terms of certain debt. The 2020 Facilities also restrict distributions and other payments from the BrandCos based on certain minimum thresholds of net sales with respect to the Specified Brand Assets. The 2020 Facilities also contain certain customary representations, warranties and events of default.
Prepayments: The 2020 Facilities are subject to certain mandatory prepayments, including from the net proceeds from the issuance of certain additional debt and asset sale proceeds of certain non-ordinary course asset sales or other dispositions of property, subject to certain exceptions. The 2020 Facilities may be repaid at any time, subject to customary prepayment premiums.
2016 Term Loan Facility Extension Amendment: Term loan lenders under the 2016 Term Loan Facility were offered the opportunity to participate at par in the 2020 Facilities based on their holdings of term loans under the 2016 Term Loan Facility. Lenders participating in the 2020 Facilities, as well as other consenting lenders representing, in the aggregate, a majority of the loans and commitments under the 2016 Term Loan Facility, consented to an amendment to the 2016 Term Loan Facility (the “Extension Amendment”) that, among other things, made certain modifications to the covenants thereof and extended the maturity date of their term loans (“Extended Term Loans”) to June 30, 2025, subject to a springing maturity equal to the September 7, 2023 maturity date of the non-extended term loans under the 2016 Term Loan Facility if, on such date, $75 million or more in aggregate principal amount of the non-extended term loans under the 2016 Term Loan Facility remains outstanding, and subject to a springing maturity of 91 days prior to the maturity date of the 6.25% Senior Notes if, on such date, $100 million or more in aggregate principal amount of the 6.25% Senior Notes remains outstanding. The Extension Amendment became effective on the Facilities Closing Date. Following the Facilities Closing Date, approximately $267.1 million in aggregate principal amount of Extended Term Loans were outstanding after giving effect to the 2020 Refinancing Transactions. The Extended Term Loans bear interest at a rate of LIBOR (with a LIBOR floor of 0.75%) plus 3.50% per annum, payable not less than quarterly in arrears in cash, consistent with the interest rate applicable to the non-extended term loans.
Amendments to 2016 ABL Facility: In addition, in connection with the 2020 Refinancing Transactions the Company completed amendments to Products Corporation’s Asset-Based Revolving Credit Agreement dated as of September 7, 2016, as amended (the “2016 ABL Facility”) on the Facilities Closing Date. The amendments, among other things, make certain amendments or waivers relating to the 2020 Refinancing Transactions under the 2016 ABL Facility. In exchange for such amendments and waivers, the interest rate margin applicable to loans under Tranche A of the 2016 ABL Facility increased by 0.75%.
REVLON, INC. AND SUBSIDIARIES
Item 6. Exhibits
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10. | Material Contracts. |
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*10.8 | Amendment, dated as of March 30, 2020, to the Consulting Agreement, dated as of November 7, 2019, between Products Corporation as borrower, and MacAndrews & Forbes Group, LLC, as lender (incorporated by reference to Exhibit 4.1 to RCPC’s Current Report on Form 10-Q filed with the SEC on November 8, 2019). |
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*101.INS | Inline XBRL Instance Document |
*101.SCH | Inline XBRL Taxonomy Extension Schema |
*101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase |
*101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase |
*101.LAB | Inline XBRL Taxonomy Extension Label Linkbase |
*101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase |
*104 | Cover Page Interactive Data File, formatted in Inline XBRL and contained in Exhibit 101 |
*Filed herewith.
**Furnished herewith.
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, each Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: November 8, 2019May 11, 2020
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Revlon, Inc. | | | | |
(Registrant) | | | | |
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Revlon, Inc. |
(Registrant) |
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By: /s/ Debra Perelman | | By: /s/ Victoria Dolan | | By: /s/ Pamela Bucher |
Debra Perelman | | Victoria Dolan | | Pamela Bucher |
President, Chief Executive Officer & | | Chief Financial Officer | | Vice President, |
Director | | | | Chief Accounting Officer |
| | | | & Controller |
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Revlon Consumer Products Corporation | | | | |
(Registrant) | | | | |
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By: /s/ Debra Perelman | | By: /s/ Victoria Dolan | | By: /s/ Pamela Bucher |
Debra Perelman | | Victoria Dolan | | Pamela Bucher |
President, Chief Executive Officer & | | Chief Financial Officer | | Vice President, |
Director | | | | Chief Accounting Officer |
| | | | & Controller |