Avon Reports Fourth-Quarter and Full-Year 2018 Results
Published: Feb 14, 2019

Q4: 02-10-19 Earnings Summary

PS of $0.07 

Revenue of $1.4B (- 10.8% Y/Y) misses by $-30M

PR Newswire

LONDON, Feb. 14, 2019 /PRNewswire/ -- Avon Products, Inc. (AVP) today announced its results for the fourth quarter and fiscal year ended December 31, 2018.

Jan Zijderveld, Avon CEO, said, "We are in the initial stages of our turn-around plan with fourth-quarter results showing sequential improvement in revenue trends in 4 of our top 5 markets, as well as some early signs of progress against our core strategies. As we look over the course of 2018, we are seeing tangible signs of increased productivity by our Representatives, with sequential increases in Average Representative Sales, Net Price Per Unit and e-commerce. We have begun to identify repeatable business models in training and recruiting, while reducing our cost structure and taking steps to simplify our business infrastructure. Revenue growth management across our portfolio and positive momentum in premium products, bundles and regimens are driving improved price/mix."

Mr. Zijderveld continued, "As I wrap up my first year at Avon, we have a clear strategy to Open Up Avon and are taking the necessary steps to return this company to growth. We understand that the foundation of our success lies in the training and retention of our Representatives. Empowering women to build successful businesses and generate relevant earnings in countries around the world will, in turn, enable us to grow. This is a large task that involves the efforts of every employee and Representative. It will take time but introducing training programs that empower women to become trusted advisors to their customers and sell higher value products, bundles and regimens help to improve Her earnings, and thereby Her success."

Jamie Wilson, Avon CFO, said, "We have taken significant steps in our strategy of building a simpler, leaner and more agile organization, including the announced sale of our China manufacturing facility and our strategic manufacturing and supply agreements with LG. We also recently announced our intention to reduce our global workforce by an additional 10% in 2019, on top of our already completed 8% reduction in 2018. These recent announcements include a goal to reduce our overall SKUs by 25%, an $88 million inventory write-off recorded in the fourth quarter, along with a restructuring charge of approximately $100 million that will be recorded in 2019. During the fourth quarter, we realized approximately $20 million in savings against our Open Up Avon initiative outlined at our Investor Day in the Fall. In the fourth quarter, we repaid an additional $50 million of debt which brought our total fiscal 2018 debt reduction to approximately $300 million. In addition, we announced today that we entered into a new 3-year, €200 million senior secured credit facility, our first Euro-denominated facility, which enhances our financial flexibility and begins to more closely align our capital structure to our operations." 

 

   

THREE MONTHS ENDED DECEMBER 31, 2018

 
   

Reported (GAAP)

 

Adjusted1(Non-GAAP)

 

Like-for-like1

 

Total C$ Reportable Segment Revenue Growth (vs 4Q17)

 

2%

 

2%

 

(1)%

 

Gross Margin

 

49.6%

 

56.1%

 

59.7%

 

Operating Margin

 

(3.5)%

 

5.5%

 

5.7%

 

Diluted EPS

 

$(0.19)

 

$0.07

 

$0.07

 

Effective Tax Rate

 

7.8%

 

8.8%

 

7.2%

 

 

 

   

TWELVE MONTHS ENDED DECEMBER 31, 2018

 
   

Reported (GAAP)

 

Adjusted1(Non-GAAP)

 

Like-for-like1

 

Total C$ Reportable Segment Revenue Growth (vs FY17)

 

5%

 

1%

 

(3)%

 

Gross Margin

 

57.6%

 

57.9%

 

61.4%

 

Operating Margin

 

4.2%

 

4.6%

 

4.5%

 

Diluted EPS

 

$(0.10)

 

$0.03

 

$0.01

 

Effective Tax Rate

 

120.2%

 

63.9%

 

69.0%

 

 

Highlights for Fourth Quarter 2018:

  • Total Reportable Segment Revenue in reported currency decreased 10%. Like-for-like Total Reportable Segment Revenue decreased 1% in constant dollars1
  • Gross Margin of 49.6%. Like-for-like Gross Margin decreased 140 basis points to 59.7%, unfavorably impacted primarily by foreign exchange
  • Active Representatives and Ending Representatives, both from Reportable Segments, declined 6% and 8%, respectively
  • Operating Margin of (3.5)%. Like-for-like Operating Margin decreased 420 bps to 5.7%, unfavorably impacted primarily by foreign exchange and field investments
  • Diluted Loss Per Share of $0.19. Like-for-like Diluted Earnings Per Share of $0.07
  • Foreign currency unfavorably impacted Diluted Earnings Per Share by an estimated $0.04 per share and Adjusted Diluted Earnings Per Share by an estimated $0.05 per share, driven by the strength of the U.S. dollar against the currencies of the countries in which the Company operates

Highlights for Fiscal Year 2018:

  • Completed the restructuring actions associated with the cost savings program initiated in 2016, exiting 2018 with run rate savings in excess of the targeted $350 million
  • Realized approximately $40 million of savings against the Open Up Avon cost savings initiative outlined at Investor Day

New Revenue Recognition Standard (Accounting Standards Codification Topic 606 ("ASC" 606))

As previously disclosed, during the first quarter of 2018, the Company adopted the new GAAP revenue recognition standard, ASC 606. The Company adopted the standard as a cumulative-effect adjustment as of January 1, 2018, therefore, comparative information for prior periods was not restated. The new standard has a significant impact on the presentation of sales incentives and Representative fees and associated costs, primarily for brochures.

The impact of the change in accounting for revenue recognition on fourth-quarter and full-year 2018 performance is summarized on pages 18-20 of this release.

Fourth-Quarter 2018 Income Statement Review (compared with fourth-quarter 2017)

  • From reportable segments:
    • Total revenue decreased 10%. Like-for-like Total revenue decreased 1% in constant dollars.
    • Active Representatives declined 6% with decreases reported in South Latin America, Europe, Middle East & Africa, and Asia Pacific.
    • Ending Representatives declined 8% with decreases reported in all segments.
    • Average order in constant dollars increased 8%. On a like-for-like basis, average order in constant dollars increased 5%, driven by increases in all segments, primarily South Latin America and Europe, Middle East & Africa.
       
  • Gross margin was 49.6%. Like-for-like Gross margin decreased 140 basis points to 59.7%, unfavorably impacted by foreign exchange, and higher material and logistics costs, partially offset by the favorable net impact of mix and pricing.
     
  • Operating margin was (3.5)%. Like-for-like Operating margin was 5.7% in the quarter, down 420 basis points, driven by lower gross margin, investments in Representative, sales leader and field expense, primarily in Brazil to recover activity levels disrupted by the national transportation strike in the second quarter of 2018, investments in advertising, higher transportation costs, primarily increased fuel prices, and revenue deleverage and unfavorable foreign currency translation, partially offset by lower bad debt, primarily in Brazil due to improved credit control and collections processes.
     
  • Diluted Loss per Share was $0.19. Like-for-like Diluted Earnings per Share was $0.07, compared with $0.12 for fourth-quarter 2017.

Adjustments to Fourth-Quarter 2018 GAAP Results to Arrive at Adjusted Results

During the fourth quarter of 2018, the following adjustments were made to GAAP results to arrive at Adjusted results and, in total, increased Diluted earnings per share by approximately $0.26:

  • The Company recorded costs to implement ("CTI") restructuring within operating profit of approximately $126 million before tax ($113 million after tax), primarily related to the Open Up Avon initiative. The recorded costs primarily related to the recently announced inventory write-off, employee-related costs, and implementation costs, primarily professional services. 
     
  • The Company recorded a one-time US state and local tax expense of approximately $3 million associated with the internal restructuring of its intellectual property.

 

 

THREE MONTHS ENDED DECEMBER 31, 2018

                                       

SEGMENT RESULTS

                                   

($ in millions)

                       

Average

           
 

Revenue

 

Active

 

 Order

 

Units

 

Price/

 

Ending

 

US$

 

US$

 

C$

 

Representatives

 

C$

 

Sold

 

Mix C$

 

Representatives

Revenue & Drivers

Reported
(GAAP)

 

% var.
vs
4Q17

 

Adjusted
(non-
GAAP)

 

% var.
vs

4Q17

 

% var.
vs
4Q17

 

% var. vs
4Q17

 

% var.
vs
4Q17

 

% var.
vs
4Q17

 

% var.
vs
4Q17

 

% var. vs
4Q17

                                                           

Europe, Middle
   East & Africa

$

581.8

 

(9)%

 

$

581.8

 

(9)%

 

(2)%

 

(8)%

 

6%

 

(9)%

 

7%

 

(10)%

South Latin
   America

488.3

 

(15)

 

488.3

 

(15)

 

6

 

(7)

 

13

 

(10)

 

16

 

(9)

North Latin
   America

199.4

 

(3)

 

199.4

 

(3)

 

2

 

 

2

 

1

 

1

 

(7)

Asia Pacific

125.8

 

 

125.8

 

 

4

 

(2)

 

6

 

4

 

 

(3)

Total from
   reportable
   segments

1,395.3

 

(10)

 

1,395.3

 

(10)

 

2

 

(6)

 

8

 

(7)

 

9

 

(8)

Other operating
   segments and
   business
   activities

6.4

 

(69)

 

6.4

 

(69)

 

(69)

 

*

 

*

 

*

 

*

 

Total Avon

$

1,401.7

 

(11)%

 

$

1,401.7

 

(11)%

 

1%

 

(6)%

 

7%

 

(8)%

 

9%

 

(8)%

 

Operating Profit/Margin

 

2018

Operating

Profit US$

 

 2018

Operating

Margin US$

 

2018 Adjusted
Operating
Profit US$

 

2018 Adjusted
Operating
Margin US$

 

Change in
US$ vs
4Q17

 

Change in
C$ vs 
4Q17

                         

Segment profit/margin

                       

Europe, Middle East & Africa

 

$

72.6

 

12.5%

 

$

72.6

 

12.5%

 

(420) bps

 

(420) bps

South Latin America

 

38.1

 

7.8

 

38.1

 

7.8

 

(430)

 

(370)

North Latin America

 

16.3

 

8.2

 

16.3

 

8.2

 

(460)

 

(460)

Asia Pacific

 

14.7

 

11.7

 

14.7

 

11.7

 

90

 

90

Total from reportable segments

 

141.7

 

10.2

 

141.7

 

10.2

 

(380)

 

(370)

                             

Other operating segments and
   business activities

 

0.9

     

0.9

           

Unallocated global expenses

 

(66.1)

     

(66.1)

           

CTI restructuring initiatives

 

(126.1)

                   

Total Avon

 

$

(49.6)

 

(3.5)%

 

$

76.5

 

5.5%

 

(440) bps

 

(390) bps

                         
 

*Calculation not meaningful

 

CTI restructuring initiatives of $126.1 is excluded from Adjusted Operating Profit.

 

Other operating segments and business activities include revenue from the sale of products to New Avon LLC since the separation of the Company's North America business into New Avon LLC on March 1, 2016 and ongoing royalties from the licensing of the Company's name and products. Other operating segments and business activities also include the business results for Australia and New Zealand, which the Company exited in 2018.

Fourth-Quarter 2018 Segment and Top Market Review (compared with fourth-quarter 2017)

   

THREE MONTHS ENDED DECEMBER 31, 2018

Revenue - % var. vs
4Q17

 

Reported
US$

 

Like-for-
like US$

 

Like-for-
like C$

 

Top Market Revenue Drivers

Europe, Middle East &
Africa

 

(9)%

 

(12)%

 

(4)%

   

South Latin America

 

(15)%

 

(20)%

 

1%

   

North Latin America

 

(3)%

 

(4)%

 

0%

   

Asia Pacific

 

0%

 

(1)%

 

3%

   
                       

Russia

 

(13)%

 

(14)%

 

(1)%

 

impacted by a decrease in Active Representatives,
partially offset by higher average order

UK

 

(14)%

 

(19)%

 

(16)%

 

impacted by a decrease in Active Representatives,
partially offset by higher average order

Brazil

 

(13)%

 

(20)%

 

(5)%

 

impacted by a decrease in Active Representatives,
partially offset by higher average order

Mexico

 

(1)%

 

(3)%

 

2%

 

impacted by higher average order, as well as an increase
in Active Representatives

Philippines

 

2%

 

1%

 

5%

 

impacted by higher average order, as well as an increase
in Active Representatives

Full-Year 2018 Income Statement Review (compared with full-year 2017)

From reportable segments:

    • Total revenue decreased 2%. Like-for-like Total revenue decreased 3% in constant dollars.
    • Active Representatives declined 5% with decreases reported in all segments.
    • Ending Representatives declined 8% with decreases reported in all segments.
    • Average order in constant dollars increased 10%. On a like-for-like basis, average order in constant dollars increased 2%, primarily driven by increases in South Latin America, North Latin America and Asia Pacific.
       
  • Gross margin was 57.6%. Like-for-like Gross margin decreased 10 basis points to 61.4%, unfavorably impacted by higher material costs and unfavorable foreign exchange, partially offset by the favorable net impact of mix and pricing.
     
  • Operating margin was 4.2%. Like-for-like Operating margin was 4.5% in the quarter, down 180 basis points, driven by investments in Representative, sales leader and field expense, primarily in Brazil to recover activity levels disrupted by the national transportation strike in the second quarter of 2018, investments in advertising, higher transportation costs, primarily increased fuel prices, and higher net brochure costs, primarily due to an increase in brochure volumes in Brazil, partially offset by lower bad debt, primarily in Brazil due to improved credit control and collections processes.
     
  • Diluted Loss per Share was $0.10. Like-for-like Diluted Earnings per Share was $0.01, compared with Diluted earnings per share of $0.06 for 2017.

Adjustments to Full-Year 2018 GAAP Results to Arrive at Adjusted Results

During 2018, the following adjustments were made to GAAP results to arrive at Adjusted results and, in total, reduced Diluted earnings per share by approximately $0.13:

  • The Company released the liability accrued as of September 30, 2018 related to Brazil IPI taxes of approximately $195 million before tax ($129 million after tax).
  • The Company recorded costs to implement ("CTI") restructuring within operating profit of approximately $181 million before tax ($163 million after tax), related to both the Open Up Avon initiative and the Transformation Plan. The recorded costs primarily related to the recently announced inventory write-off, employee-related costs, and implementation costs, primarily professional services.
  • The Company recorded approximately $21 million of special tax items, approximately $18 million associated with its uncertain tax positions and approximately $3 million associated with the internal restructuring of its intellectual property.

 

 

TWELVE MONTHS ENDED DECEMBER 31, 2018

                                       

SEGMENT RESULTS

                                   

($ in millions)

                                     
 

Revenue

 

Active
Representatives

 

Average
Order
C$

 

Units
Sold

 

Price/
Mix C$

 

Ending
Representatives

 

US$

 

US$

 

C$

         

Revenue & Drivers

Reported
(GAAP)

 

% var.
vs
FY17

 

Adjusted
(non-
GAAP)

 

% var.
vs
FY17

 

% var. vs
FY17

 

% var. vs
FY17

 

% var.
vs
FY17

 

% var.
vs
FY17

 

% var.
vs
FY17

 

% var. vs
FY17

                                                           

Europe, Middle
   East & Africa

$

2,093.8

 

(2)%

 

$

2,093.8

 

(2)%

 

(1)%

 

(4)%

 

3%

 

(5)%

 

4%

 

(10)%

South Latin
   America

2,146.9

 

(3)

 

1,978.5

 

(11)

 

3

 

(6)

 

9

 

(8)

 

11

 

(9)

North Latin
   America

809.3

 

 

809.3

 

 

2

 

(4)

 

6

 

(3)

 

5

 

(7)

Asia Pacific

470.8

 

 

470.8

 

 

2

 

(2)

 

4

 

1

 

1

 

(3)

Total from
   reportable
   segments

5,520.8

 

(2)

 

5,352.4

 

(5)

 

1

 

(5)

 

6

 

(5)

 

6

 

(8)

Other operating
   segments and
   business
   activities

50.5

 

(39)

 

50.5

 

(39)

 

(40)

 

*

 

*

 

*

 

*

 

Total Avon

$

5,571.3

 

(3)%

 

$

5,402.9

 

(5)%

 

1%

 

(5)%

 

6%

 

(6)%

 

7%

 

(8)%

 

Operating Profit/Margin

 

2018

Operating

Profit US$

 

 2018

Operating

Margin US$

 

2018 Adjusted
Operating
Profit US$

 

2018 Adjusted
Operating
Margin US$

 

Change in
US$ vs
FY17

 

Change in
C$ vs 
FY17

                         

Segment profit/margin

                           

Europe, Middle East & Africa

 

$

267.5

 

12.8%

 

$

267.5

 

12.8%

 

(270) bps

 

(280) bps

South Latin America

 

314.6

 

14.7

 

146.2

 

7.4

 

(140)

 

(110)

North Latin America

 

70.4

 

8.7

 

70.4

 

8.7

 

(160)

 

(170)

Asia Pacific

 

42.0

 

8.9

 

42.0

 

8.9

 

(190)

 

(150)

Total from reportable segments

 

694.5

 

12.6

 

526.1

 

9.8

 

(190)

 

(190)

                         

Other operating segments and
  business activities

 

3.6

     

3.6

           

Unallocated global expenses

 

(282.4)

     

(282.4)

           

CTI restructuring initiatives

 

(180.5)

                   

Total Avon

 

$

235.2

 

4.2%

 

$

247.3

 

4.6%

 

(170) bps

 

(140) bps

                         
 

*Calculation not meaningful

 

The Brazil IPI tax release of $168.4 is excluded from Adjusted Revenue and Adjusted Operating Profit, and CTI restructuring initiatives of $180.5 is excluded from Adjusted Operating Profit.

Other operating segments and business activities include revenue from the sale of products to New Avon LLC since the separation of the Company's North America business into New Avon LLC on March 1, 2016 and ongoing royalties from the licensing of the Company's name and products. Other operating segments and business activities also include the business results for Australia and New Zealand, which the Company exited in 2018.

Full-Year 2018 Segment and Top Market Review (compared with full-year 2017)

   

TWELVE MONTHS ENDED DECEMBER 31, 2018

Revenue - % var. vs
FY17

 

Reported
US$

 

Like-for-
like US$

 

Like-for-
like C$

 

Top Market Revenue Drivers

Europe, Middle East &
Africa

 

(2)%

 

(5)%

 

(4)%

   

South Latin America

 

(3)%

 

(16)%

 

(3)%

   

North Latin America

 

0%

 

(4)%

 

(2)%

   

Asia Pacific

 

0%

 

(1)%

 

1%

   
                       

Russia

 

(6)%

 

(10)%

 

(3)%

 

impacted by a decrease in Active Representatives,
partially offset by higher average order

UK

 

(6)%

 

(11)%

 

(13)%

 

impacted by a decrease in Active Representatives,
partially offset by higher average order

Brazil

 

0%

 

(21)%

 

(10)%

 

impacted by a decrease in Active Representatives, as well
as lower average order

Mexico

 

2%

 

(1)%

 

1%

 

impacted by higher average order, partially offset by a
decrease in Active Representatives

Philippines

 

(1)%

 

(3)%

 

2%

 

impacted by an increase in Active Representatives, as well
as higher average order

Full-Year 2018 Cash Flow Review (compared with full-year 2017)

  • Net cash provided by operating activities of continuing operations was $93 million for the twelve months ended December 31, 2018, compared with $271 million in the same period in 2017. The approximate $178 million decrease in net cash provided by operating activities of continuing operations was primarily due to lower cash-related earnings and higher inventory purchases, partially offset by the judicial deposit receipt of approximately $68 million related to Brazil IPI taxes and lower net receivables.
     
  • Net cash used by investing activities of continuing operations was $93 million for the twelve months ended December 31, 2018, compared with $70 million in the same period in 2017. The approximate $23 million increased use of net cash from continuing investing activities was primarily due to a $22 million cash distribution received from New Avon LLC in the third quarter of 2017.
     
  • Net cash used by financing activities of continuing operations was $307 million for the twelve months ended December 31, 2018, compared with net cash provided by financing activities of continuing operations of $0 million in the same period in 2017. The approximate $307 million increased use of net cash from continuing financing activities was primarily due to prepayment of a portion of the Company's debt in the second quarter of 2018, as well as open market debt repurchases in the fourth quarter of 2018 of $23 million of the 4.60% notes and $27 million of the 5.00% notes.

Subsequent Event

On Tuesday, February 12, 2019, the Company and certain of its subsidiaries entered into a new €200 million three-year senior secured revolving credit facility. The new facility replaces the previous $400 million secured revolving credit facility.

Key features of the new facility include the following:

  • Available for general corporate and working capital purposes,
  • Allows for increased ability to issue 1st lien debt,
  • Contains financial maintenance covenants, but with less restrictive definitions, and with certain other modifications, from the previous facility,
  • Guaranteed in full by the Company and by certain domestic and foreign subsidiaries, and
  • Secured by certain assets including substantially all U.S. and U.K. assets and capital stock of certain subsidiaries

Conference call

Avon will conduct a conference call at 9:00 a.m. Eastern Time today to discuss its quarterly and full-year results. The dial-in number for the call is (877) 407-0789 in North America or (201) 689-8562 from international locations. The call and related slide presentation will be webcast live at www.avoninvestor.comand can be accessed or downloaded from that site for a period of one year. A telephonic playback of the call will also be available from 12:00 p.m. Eastern Time, February 14, 2019 through February 28, 2019. North American listeners may dial (844) 512-2921 and international listeners may dial (412) 317-6671; the passcode is 13686770. Please note that the Company intends to file its Form 10-K on February 21, 2019.

About Avon Products, Inc.

For 130 years Avon has stood for women: providing innovative, quality beauty products which are primarily sold to women, through women. Millions of independent Representatives across the world sell iconic Avon brands such as Avon Color and ANEW through their social networks, building their own beauty businesses on a full- or part-time basis. Avon supports women's empowerment, entrepreneurship and well-being and has donated over $1 billion to women's causes through Avon and the Avon Foundation. Learn more about Avon and its products at www.avonworldwide.com. #Stand4Her

Footnotes

"Adjusted" items refer to financial measures that are derived from measures calculated in accordance with GAAP, but which have been adjusted to exclude certain items. "Like-for-like" refers to comparable year-over-year figures that take Adjusted figures and additionally exclude the impact of the adoption of ASC 606. Other Adjusted financial measures that the Company refers to include constant dollar ("C$") items. All of these adjusted items are Non-GAAP financial measures as described below under "Non-GAAP Financial Measures." These Non-GAAP measures should not be considered in isolation, or as a substitute for, or superior to, financial measures calculated in accordance with GAAP.  Please refer to the Company's "Non-GAAP Financial Measures" description at the end of this release and the reconciliations the Company provides of these Non-GAAP financial measures to their comparable GAAP measures.

Forward-Looking Statements

This press release contains "forward-looking statements" that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements relating to the Company's growth and long-term success, and improved representative engagement and service. Because forward-looking statements inherently involve risks and uncertainties, actual future results may differ materially from those expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, the possibility of business disruption, competitive uncertainties, and general economic and business conditions in Avon's markets as well as the other risks detailed in Avon's filings with the Securities and Exchange Commission. Avon undertakes no obligation to update any statements in this press release for changes that happen after the date of this release.

 

 

AVON PRODUCTS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In millions, except per share data)

 
   

Three Months Ended

 

Percent

Change

 

Twelve Months Ended

 

Percent

Change

   
   

December 31

     

December 31

       
   

2018

 

2017

     

2018

 

2017

       

Net sales

 

$

1,323.0

   

$

1,535.3

   

(14)%

 

$

5,247.7

   

$

5,565.1

   

(6)%

   

Other revenue

 

78.7

   

33.5

       

323.6

   

150.5

         

Total revenue

 

1,401.7

   

1,568.8

   

(11)%

 

5,571.3

   

5,715.6

   

(3)%

   
                             

Cost of sales

 

706.2

   

611.2

       

2,364.0

   

2,203.3

         

Selling, general and administrative expenses(1)

 

745.1

   

826.1

       

2,972.1

   

3,231.0

         

Operating profit

 

(49.6)

   

131.5

   

*

 

235.2

   

281.3

   

(16)%

   
                             

Interest expense

 

32.6

   

34.8

       

134.6

   

140.8

         

(Gain) loss on extinguishment of debt

 

(2.2)

   

       

0.7

   

         

Interest income

 

(3.3)

   

(3.6)

       

(15.3)

   

(14.8)

         

Other expense, net(1)

 

7.4

   

8.7

       

7.1

   

34.6

         

Total other expenses

 

34.5

   

39.9

       

127.1

   

160.6

         
                             

(Loss) income, before income taxes

 

(84.1)

   

91.6

   

*

 

108.1

   

120.7

   

(10)%

   

Income taxes

 

6.6

   

(1.2)

       

(129.9)

   

(100.7)

         
                             

Net (loss) income

 

(77.5)

   

90.4

   

*

 

(21.8)

   

20.0

   

*

   

Net (income) loss attributable to noncontrolling
interests

 

(0.1)

   

1.1

       

2.3

   

2.0

         

Net (loss) income attributable to Avon

 

(77.6)

   

91.5

   

*

 

(19.5)

   

22.0

   

*

   
                             
                             

(Loss) earnings per share(2)

                           

Basic

 

$

(0.19)

   

$

0.17

   

*

 

$

(0.10)

   

$

   

*

   

Diluted

 

$

(0.19)

   

$

0.17

   

*

 

$

(0.10)

   

$

   

*

   
                             

Weighted-average shares outstanding:

                           

Basic

 

442.4

   

440.2

       

441.9

   

439.7

         

Diluted

 

442.4

   

440.2

       

441.9

   

439.7

         
                             

* Calculation not meaningful

                           
                             

(1) We adopted ASU 2017-07, Compensation - Retirement Benefits effective January 1, 2018. The new accounting guidance was applied retrospectively and net pension expense (other than service cost) of $1.5 and $8.0 was reclassified from SG&A to Other expense, net for the three and twelve months ended December 31, 2017 respectively.

 

(2) Under the two-class method, earnings (loss) per share is calculated using net gain allocable to common shares, which is derived by reducing net income (loss) by the income (loss) allocable to participating securities and earnings allocated to convertible preferred stock. Net (loss) income allocable to common shares used in the basic and diluted earnings per share calculation was ($82.9) and $75.4 for the three months ended December 31, 2018 and 2017, respectively. Net loss allocable to common shares used in the basic and diluted loss per share calculation was ($43.6) and ($1.4) for the twelve months ended December 31, 2018 and 2017, respectively.

 

 

 

AVON PRODUCTS, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2017 (Audited) and December 31, 2018 (Unaudited)

(In millions)

 
   

December 31,

 

December 31,

   

2018

 

2017

Assets

       

Current Assets

       

Cash and cash equivalents

 

$

532.7

   

$

881.5

 

Accounts receivable, net

 

349.7

   

457.2

 

Inventories

 

542.0

   

598.2

 

Prepaid expenses and other

 

272.0

   

296.4

 

Held for sale assets

 

65.6

   

 

Total current assets

 

1,762.0

   

2,233.3

 
     

Property, plant and equipment, at cost

 

1,207.8

   

1,481.9

 

Less accumulated depreciation

 

(650.2)

   

(779.2)

 

Property, plant and equipment, net

 

557.6

   

702.7

 
         

Goodwill

 

87.4

   

95.7

 

Other assets

 

603.0

   

666.2

 

Total assets

 

$

3,010.0

   

$

3,697.9

 
         

Liabilities, Series C Convertible Preferred Stock and Shareholders' Deficit

       

Current Liabilities

       

Debt maturing within one year

 

$

12.0

   

$

25.7

 

Accounts payable

 

816.5

   

832.2

 

Accrued compensation

 

85.5

   

130.3

 

Other accrued liabilities

 

451.3

   

405.6

 

Sales taxes and taxes other than income

 

103.9

   

153.0

 

Income taxes

 

15.9

   

12.8

 

Held for sale liabilities

 

11.4

     

Total current liabilities

 

1,496.5

   

1,559.6

 

Long-term debt

 

1,581.6

   

1,872.2

 

Employee benefit plans

 

128.3

   

150.6

 

Long-term income taxes

 

136.2

   

84.9

 

Long-term sales taxes and taxes other than income

 

   

193.1

 

Other liabilities

 

72.1

   

84.4

 

Total liabilities

 

3,414.7

   

3,944.8

 

Series C convertible preferred stock

 

492.1

   

467.8

 

Shareholders' Deficit

       

Common stock

 

190.3

   

189.7

 

Additional paid-in capital

 

2,303.6

   

2,291.2

 

Retained earnings

 

2,234.3

   

2,320.3

 

Accumulated other comprehensive loss

 

(1,030.4)

   

(926.2)

 

Treasury (TSRMF) stock, at cost

 

(4,602.3)

   

(4,600.0)

 

Total Avon shareholders' deficit

 

(904.5)

   

(725.0)

 

Noncontrolling interests

 

7.7

   

10.3

 

Total shareholders' deficit

 

(896.8)

   

(714.7)

 

Total liabilities, series C convertible preferred stock and shareholders' deficit

 

$

3,010.0

   

$

3,697.9

 
         

 

 

AVON PRODUCTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In millions)

 
   

Twelve Months Ended

   

December 31

   

2018

 

2017

Cash Flows from Operating Activities

       

Net (loss) income

 

$

(21.8)

   

$

20.0

 

Depreciation

 

81.1

   

84.3

 

Amortization

 

26.6

   

29.7

 

Provision for doubtful accounts

 

162.4

   

221.9

 

Provision for obsolescence

 

113.5

   

36.7

 

Share-based compensation

 

13.8

   

24.2

 

Foreign exchange losses

 

21.2

   

18.1

 

Deferred income taxes

 

(53.8)

   

(30.2)

 

Charge for Argentinian monetary assets and liabilities

 

(6.3)

   

 

Brazil IPI tax release

 

(194.7)

   

 

Other

 

18.5

   

39.6

 
         

Changes in assets and liabilities:

       

Accounts receivable

 

(102.8)

   

(214.6)

 

Inventories

 

(99.6)

   

(19.2)

 

Prepaid expenses and other

 

(49.3)

   

14.8

 

Accounts payable and accrued liabilities

 

73.1

   

12.3

 

Income and other taxes

 

68.0

   

4.1

 

Noncurrent assets and liabilities

 

42.8

   

29.5

 

Net cash provided by operating activities of continuing operations

 

92.7

   

271.2

 
         

Cash Flows from Investing Activities

       

Capital expenditures

 

(94.9)

   

(97.3)

 

Disposal of assets

 

4.8

   

5.9

 

Distribution from New Avon LLC

 

   

22.0

 

Other investing activities

 

(3.3)

   

(0.2)

 

Net cash used by investing activities of continuing operations

 

(93.4)

   

(69.6)

 
         

Cash Flows from Financing Activities

       

Debt, net (maturities of three months or less)

 

(10.7)

   

10.3

 

Repayment of debt

 

(289.1)

   

(2.9)

 

Repurchase of common stock

 

(3.2)

   

(7.2)

 

Other financing activities

 

(3.9)

   

(0.2)

 

Net cash used by financing activities of continuing operations

 

(306.9)

   

 
     

Cash Flows from Discontinued Operations

Net cash used by operating activities of discontinued operations

 

   

(8.6)

 

Net cash used by discontinued operations

 

   

(8.6)

 
   

Effect of exchange rate changes on cash and cash equivalents

 

(37.5)

   

34.1

 

Net (decrease) increase in cash and cash equivalents

 

(345.1)

   

227.1

 

Cash and cash equivalents at beginning of year

 

881.5

   

654.4

 

Cash and cash equivalents at end of year(1)

 

$

536.4

   

$

881.5

 
   

(1)

Includes cash and cash equivalents of $3.7 classified as Held for sale assets in our Consolidated Balance Sheets at the end 
of the year in 2018

 

 

 

AVON PRODUCTS, INC.

SUPPLEMENTAL SCHEDULE

(Unaudited)

(In millions)

 

CATEGORY SALES FROM REPORTABLE
SEGMENTS (US$)

                       
   

Consolidated

   

Reported

 

Excluding the impact
of adopting ASC 606

   

Three Months Ended
December 31

 

US$

 

C$

 

US$

 

C$

   

2018

 

2017

 

% var.
vs
4Q17

 

% var.
vs
4Q17

 

% var. vs
4Q17

 

% var. vs
4Q17

Beauty:

                       

Skincare

 

$

374.2

   

$

434.7

   

(14)%

 

(3)%

 

(14)%

 

(3)%

Fragrance

 

394.4

   

450.4

   

(12)

 

 

(12)

 

Color

 

205.3

   

251.1

   

(18)

 

(7)

 

(18)

 

(7)

Total Beauty

 

973.9

   

1,136.2

   

(14)

 

(3)

 

(14)

 

(2)

Fashion & Home:

                       

Fashion (jewelry/watches/apparel/
 footwear/accessories/children's)

 

201.6

   

226.9

   

(11)

 

(3)

 

(11)

 

(3)

Home (gift & decorative products/housewares/
 entertainment & leisure/children's/nutrition)

 

147.5

   

159.9

   

(8)

 

6

 

(8)

 

6

Total Fashion & Home

 

349.1

   

386.8

   

(10)

 

1

 

(10)

 

1

Net sales from reportable segments

 

1,323.0

   

1,523.0

   

(13)

 

(2)

 

(13)

 

(2)

Other revenue from reportable segments

 

72.3

   

25.1

   

*

 

*

 

 

18

Total revenue from reportable segments

 

1,395.3

   

1,548.1

   

(10)

 

2

 

(13)

 

(1)

Total revenue from Other operating segments and
  business activities

 

6.4

   

20.7

   

(69)

 

(69)

 

(69)

 

(69)

Total revenue

 

$

1,401.7

   

$

1,568.8

   

(11)

 

1

 

(14)

 

(2)

                         
 

*Calculation not meaningful

 

 

AVON PRODUCTS, INC.

SUPPLEMENTAL SCHEDULE

(Unaudited)

(In millions)

 

CATEGORY SALES FROM REPORTABLE
SEGMENTS (US$)

                       
   

Consolidated

   

Reported

 

Excluding the impact
of adopting ASC 606

   

Twelve Months Ended
December 31

 

US$

 

C$

 

US$

 

C$

   

2018

 

2017

 

% var.
vs
FY17

 

% var.
vs
FY17

 

% var. vs
FY17

 

% var. vs
FY17

Beauty:

                       

Skincare

 

$

1,474.7

   

$

1,606.4

   

(8)%

 

(3)%

 

(9)%

 

(3)%

Fragrance

 

1,428.1

   

1,547.2

   

(8)

 

(1)

 

(8)

 

(1)

Color

 

845.3

   

968.0

   

(13)

 

(7)

 

(13)

 

(7)

Total Beauty

 

3,748.1

   

4,121.6

   

(9)

 

(3)

 

(10)

 

(3)

Fashion & Home:

                       

Fashion (jewelry/watches/apparel/
 footwear/accessories/children's)

 

750.8

   

812.5

   

(8)

 

(4)

 

(8)

 

(4)

Home (gift & decorative products/housewares/
 entertainment & leisure/children's/nutrition)

 

561.3

   

587.2

   

(4)

 

5

 

(5)

 

4

Total Fashion & Home

 

1,312.1

   

1,399.7

   

(6)

 

 

(7)

 

(1)

Brazil IPI tax release

 

168.4

   

   

*

 

*

 

*

 

*

Net sales from reportable segments

 

5,228.6

   

5,521.3

   

(5)

 

2

 

(6)

 

1

Other revenue from reportable segments

 

292.2

   

111.3

   

*

 

*

 

(17)

 

(10)

Total revenue from reportable segments

 

5,520.8

   

5,632.6

   

(2)

 

5

 

(6)

 

1

Total revenue from Other operating segments and
  business activities

 

50.5

   

83.0

   

(39)

 

(40)

 

(41)

 

(41)

Total revenue

 

$

5,571.3

   

$

5,715.6

   

(3)

 

5

 

(7)

 

                         
 

*Calculation not meaningful

 

 

 

AVON PRODUCTS, INC.

SUPPLEMENTAL SCHEDULE

NON-GAAP FINANCIAL MEASURES

(Unaudited)

(In millions, except per share data)

 

This supplemental schedule provides adjusted Non-GAAP financial information and a quantitative reconciliation of the difference between the Non-GAAP financial measure and the most directly comparable financial measure calculated and reported in accordance with GAAP.

 
   

THREE MONTHS ENDED DECEMBER 31, 2018

   

Reported

(GAAP)

 

CTI

restructuring

initiatives

 

Special tax
item

 

Adjusted

(Non-
GAAP)

 

Impact of
revenue
recognition

 

Like-for-like

Total revenue

 

$

1,401.7

   

$

   

$

   

$

1,401.7

   

$

(45.3)

   

$

1,356.4

 

Cost of sales

 

706.2

   

90.5

   

   

615.7

   

(68.9)

   

546.8

 

Selling, general and administrative
  expenses

 

745.1

   

35.6

   

   

709.5

   

22.8

   

732.3

 

Operating (loss) profit

 

(49.6)

   

126.1

   

   

76.5

   

0.8

   

77.3

 

(Loss) income before income taxes

 

(84.1)

   

126.1

   

   

42.0

   

0.8

   

42.8

 

Income taxes

 

6.6

   

(13.0)

   

2.7

   

(3.7)

   

0.6

   

(3.1)

 

Net (loss) income

 

$

(77.5)

   

$

113.1

   

$

2.7

   

$

38.3

   

$

1.4

   

$

39.7

 
                         

Diluted EPS

 

$

(0.19)

           

$

0.07

       

$

0.07

 
                         

Gross margin

 

49.6

%

 

6.5

   

   

56.1

%

     

59.7

%

SG&A as a % of revenue

 

53.2

%

 

(2.5)

   

   

50.6

%

     

54.0

%

Operating margin

 

(3.5)

%

 

9.0

   

   

5.5

%

     

5.7

%

Effective tax rate

 

7.8

%

         

8.8

%

     

7.2

%

                         
 

Amounts in the table above may not necessarily sum because the computations are made independently.

 

Note: The diluted EPS impact for each Non-GAAP item on the table above is not provided due to the participation rights of the Series C convertible preferred stock. The Reported and Adjusted diluted EPS are calculated independently and factor in the participation rights of the Series C convertible preferred stock, and, therefore, would cause the amounts not to sum to Adjusted diluted EPS.

 

 

 

AVON PRODUCTS, INC.

SUPPLEMENTAL SCHEDULE

NON-GAAP FINANCIAL MEASURES

(Unaudited)

(In millions, except per share data)

 

This supplemental schedule provides adjusted Non-GAAP financial information and a quantitative reconciliation of the difference between the Non-GAAP financial measure and the most directly comparable financial measure calculated and reported in accordance with GAAP.

 
   

TWELVE MONTHS ENDED DECEMBER 31, 2018

   

Reported

(GAAP)

 

Brazil IPI
release

 

CTI

restructuring

initiatives

 

Special
tax items

 

Adjusted

(Non-GAAP)

 

Impact of
revenue
recognition

 

Like-for-like

Total revenue

 

$

5,571.3

   

$

168.4

   

$

   

$

   

$

5,402.9

   

$

(229.2)

   

$

5,173.7

 

Cost of sales

 

2,364.0

   

   

91.5

   

   

2,272.5

   

(277.4)

   

1,995.1

 

Selling, general and administrative
  expenses

 

2,972.1

   

   

89.0

   

   

2,883.1

   

60.4

   

2,943.5

 

Operating profit

 

235.2

   

(168.4)

   

180.5

   

   

247.3

   

(12.2)

   

235.1

 

Income before income taxes

 

108.1

   

(194.7)

   

180.5

   

   

93.9

   

(12.2)

   

81.7

 

Income taxes

 

(129.9)

   

66.2

   

(17.4)

   

21.1

   

(60.0)

   

3.6

   

(56.4)

 

Net (loss) income

 

$

(21.8)

   

$

(128.5)

   

$

163.1

   

$

21.1

   

$

33.9

   

$

(8.6)

   

$

25.3

 
                             

Diluted EPS

 

$

(0.10)

               

$

0.03

       

$

0.01

 
                             

Gross margin

 

57.6

%

 

(1.3)

   

1.6

   

   

57.9

%

     

61.4

%

SG&A as a % of revenue

 

53.3

%

 

1.7

   

(1.6)

   

   

53.4

%

     

56.9

%

Operating margin

 

4.2

%

 

(2.8)

   

3.2

   

   

4.6

%

     

4.5

%

Effective tax rate

 

120.2

%

             

63.9

%

     

69.0

%

                             

Amounts in the table above may not necessarily sum because the computations are made independently.

 

Note: The diluted EPS impact for each Non-GAAP item on the table above is not provided due to the participation rights of the Series C convertible preferred stock. The Reported and Adjusted diluted EPS are calculated independently and factor in the participation rights of the Series C convertible preferred stock, and, therefore, would cause the amounts not to sum to Adjusted diluted EPS.

 

 

AVON PRODUCTS, INC.

SUPPLEMENTAL SCHEDULE

NON-GAAP FINANCIAL MEASURES

(Unaudited)

(In millions, except per share data)

 

This supplemental schedule provides adjusted Non-GAAP financial information and a quantitative reconciliation of the difference between the Non-GAAP financial measure and the financial measure calculated and reported in accordance with GAAP.

 
   

THREE MONTHS ENDED DECEMBER 31, 2017

   

Reported

(GAAP)

 

CTI

restructuring

initiatives

 

Special tax
items

 

Adjusted

(Non-GAAP)

Total revenue

 

$

1,568.8

   

$

   

$

   

$

1,568.8

 

Cost of sales

 

611.2

   

0.7

   

   

610.5

 

Selling, general and administrative expenses

 

826.1

   

23.0

   

   

803.1

 

Operating profit

 

131.5

   

23.7

   

   

155.2

 

Income before income taxes

 

91.6

   

23.7

   

   

115.3

 

Income taxes

 

(1.2)

   

0.2

   

(49.8)

   

(50.8)

 

Net income

 

$

90.4

   

$

23.9

   

$

(49.8)

   

$

64.5

 
                 

Diluted EPS

 

$

0.17

           

$

0.12

 
                 

Gross margin

 

61.0

%

 

   

   

61.1

%

SG&A as a % of revenue

 

52.7

%

 

(1.5)

   

   

51.2

%

Operating margin

 

8.4

%

 

1.5

   

   

9.9

%

Effective tax rate

 

1.3

%

         

44.1

%

                 

Amounts in the table above may not necessarily sum because the computations are made independently.

 

Note: The diluted EPS impact for each Non-GAAP item on the table above is not provided due to the participation rights of the Series C convertible preferred stock. The Reported and Adjusted diluted EPS are calculated independently and factor in the participation rights of the Series C convertible preferred stock, and, therefore, would cause the amounts not to sum to Adjusted diluted EPS.

 

 

 

AVON PRODUCTS, INC.

SUPPLEMENTAL SCHEDULE

NON-GAAP FINANCIAL MEASURES

(Unaudited)

(In millions, except per share data)

 

This supplemental schedule provides adjusted Non-GAAP financial information and a quantitative reconciliation of the difference between the Non-GAAP financial measure and the financial measure calculated and reported in accordance with GAAP.

 
   

TWELVE MONTHS ENDED DECEMBER 31, 2017

   

Reported

(GAAP)

 

CTI

restructuring

initiatives

 

Loss
contingency

 

Special tax
items

 

Adjusted

(Non-GAAP)

Total revenue

 

$

5,715.6

   

$

   

$

   

$

   

$

5,715.6

 

Cost of sales

 

2,203.3

   

0.6

   

   

   

2,202.7

 

Selling, general and administrative
  expenses

 

3,231.0

   

59.6

   

18.2

   

   

3,153.2

 

Operating profit

 

281.3

   

60.2

   

18.2

   

   

359.7

 

Income before income taxes

 

120.7

   

60.2

   

18.2

   

   

199.1

 

Income taxes

 

(100.7)

   

(1.7)

   

   

(49.8)

   

(152.2)

 

Net income

 

$

20.0

   

$

58.5

   

$

18.2

   

$

(49.8)

   

$

46.9

 
                     

Diluted EPS

 

$

               

$

0.06

 
                     

Gross margin

 

61.5

%

 

   

   

   

61.5

%

SG&A as a % of revenue

 

56.5

%

 

(1.0)

   

(0.3)

   

   

55.2

%

Operating margin

 

4.9

%

 

1.1

   

0.3

   

   

6.3

%

Effective tax rate

 

83.4

%

             

76.4

%

                     

Amounts in the table above may not necessarily sum because the computations are made independently.

 

Note: The diluted EPS impact for each Non-GAAP item on the table above is not provided due to the participation rights of the Series C convertible preferred stock. The Reported and Adjusted diluted EPS are calculated independently and factor in the participation rights of the Series C convertible preferred stock, and, therefore, would cause the amounts not to sum to Adjusted diluted EPS.

 

 

 

AVON PRODUCTS, INC.

SUPPLEMENTAL SCHEDULE

(Unaudited)

(In millions, except per share data)

 

Approximate Impact of Foreign Currency

       
 

Fourth-Quarter 2018

 

Full-Year 2018

 

Estimated impact
($ in millions)

 

Estimated impact 
on diluted EPS

 

Estimated impact
($ in millions)

 

Estimated impact
on diluted EPS

Year-on-Year impact on Reported
  (GAAP) results:

             

Total revenue

(12) pts

       

(7) pts

     

Operating profit - transaction

$

(15)

   

$

(0.02)

   

$

(30)

   

$

(0.05)

 

Operating profit - translation

(10)

   

(0.01)

   

(70)

   

(0.12)

 

Total operating profit

$

(25)

   

$

(0.04)

   

$

(100)

   

$

(0.17)

 

Operating margin

 (180) bps

       

 (130) bps

     

Revaluation of working capital

$

   

$

   

$

(20)

   

$

(0.03)

 

Diluted EPS

   

$

(0.04)

       

$

(0.20)

 
               

Year-on-Year impact on Adjusted (Non-
  GAAP) results:

             

Adjusted revenue

(12) pts

       

(6) pts

     

Adjusted operating profit - transaction

$

(15)

   

$

(0.02)

   

$

(30)

   

$

(0.04)

 

Adjusted operating profit - translation

(20)

   

(0.03)

   

(35)

   

(0.06)

 

Total Adjusted operating profit

$

(35)

   

$

(0.05)

   

$

(65)

   

$

(0.10)

 

Adjusted operating margin

 (150) bps

       

 (80) bps

     

Revaluation of working capital

$

   

$

   

$

(20)

   

$

(0.03)

 

Adjusted diluted EPS

   

$

(0.05)

       

$

(0.13)

 
               

Amounts in the table above may not necessarily sum because the computations are made
independently.

       

 

 

AVON PRODUCTS, INC.
SUPPLEMENTAL SCHEDULE
(Unaudited)
(In millions)

The Company adopted ASC 606, as a cumulative-effect adjustment to retained earnings, as of January 1, 2018. Comparative information for prior periods has not been restated. Therefore, this supplemental schedule provides balances without the adoption of ASC 606 to enhance comparability to the prior year. The Company applied the transition guidance to all outstanding contracts at January 1, 2018.

The Company recorded a cumulative-effect adjustment upon adoption of the new revenue recognition standard as of January 1, 2018 comprised of the following:

  • a reduction to retained earnings of $52.7 before taxes ($41.1 after tax), with a corresponding impact to deferred income taxes of $11.6; 
     
  • a reduction to prepaid expenses and other of $54.9; 
     
  • an increase to inventories of $39.3; and 
     
  • an increase to other accrued liabilities of $37.1 due to the net impact of the establishment of a contract liability of $91.8 for deferred revenue where the Company's performance obligations are not yet satisfied, which is partially offset by a reduction in the sales incentive accrual of $54.7.

The impact of the change in accounting standard on fourth-quarter 2018 performance is:

 

 

Impact of change in revenue recognition standard

Line items impacted within the Consolidated
Statements of Operations

Per consolidated 
financial statements

 

Adjustments

 

Balances excluding the
impact of adopting
ASC 606

Revenue

         

Net sales

$

1,323.0

   

$

1.8

(1)

$

1,324.8

 

Other revenue

78.7

   

(47.1)

(2)

31.6

 

Total revenue

1,401.7

   

(45.3)

 

1,356.4

 
             

Costs and expenses

               

Cost of sales

706.2

   

(68.9)

(3)

637.3

 

Selling, general and administrative expenses

745.1

   

22.8

(4)

767.9

 

Operating loss

(49.6)

   

0.8

 

(48.8)

 

(Loss) before income taxes

(84.1)

   

0.8

 

(83.3)

 

Income taxes

6.6

   

.6

 

7.2

 

Net loss

(77.5)

   

1.4

 

(76.1)

 

Net loss attributable to Avon

(77.6)

   

1.4

 

(76.2)

 
 
 

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

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

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

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

 

The impact of the change in accounting standard on full-year 2018 performance is:

 

Impact of change in revenue recognition standard

Line items impacted within the Consolidated
Statements of Operations

Per consolidated
financial statements

 

Adjustments

 

Balances excluding the
impact of adopting
ASC 606

Revenue

         

Net sales

$

5,247.7

   

$

(28.5)

(1)

$

5,219.2

 

Other revenue

323.6

   

(200.7)

(2)

122.9

 

Total revenue

5,571.3

   

(229.2)

 

5,342.1

 
                 

Costs and expenses

               

Cost of sales

2,364.0

   

(277.4)

(3)

2,086.6

 

SG&A expenses

2,972.1

   

60.4

(4)

3,032.5

 

Operating profit

235.2

   

(12.2)

 

223.0

 

Income before income taxes

108.1

   

(12.2)

 

95.9

 

Income taxes

(129.9)

   

3.6

 

(126.3)

 

Net income

(21.8)

   

(8.6)

 

(30.4)

 

Net income attributable to Avon

(19.5)

   

(8.6)

 

(28.1)

 
 
 

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

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

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

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

 

 

 

Impact of change in revenue recognition standard

Line items impacted within the Consolidated
Balance Sheets

Per consolidated
financial statements

 

Adjustments

 

Balances excluding the
impact of adopting 
ASC 606

Accounts receivable, net

$

349.7

   

$

(8.2)

(1)

$

341.5

 

Inventories

542.0

   

(42.8)

(2)

499.2

 

Prepaid expenses and other

272.0

   

47.8

(2)

319.8

 

Other assets

603.0

   

(10.1)

(3)

592.9

 

Total assets

3,010.0

   

(13.3)

 

2,996.7

 

Liabilities, Series C Convertible Preferred Stock
and Shareholders' Deficit

           

Other accrued liabilities

451.3

   

(38.0)

(4)

413.3

 

Income taxes

15.9

   

(3.6)

 

12.3

 

Total current liabilities

1,496.5

   

(41.6)

 

1,454.9

 

Other liabilities

72.1

   

(0.7)

 

71.4

 

Total liabilities

3,414.7

   

(42.3)

 

3,372.4

 

Retained earnings

2,234.3

   

32.5

(5)

2,266.8

 

Accumulated other comprehensive loss

(1,030.4)

   

(3.5)

 

(1,033.9)

 

Total Avon shareholders' deficit

(904.5)

   

29.0

 

(875.5)

 

Total shareholders' deficit

(896.8)

   

29.0

 

(867.8)

 

Total liabilities, series C convertible preferred
   stock and shareholders' deficit

3,010.0

   

(13.3)

 

2,996.7

 
 
 

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

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

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

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

(5) Relates to the $41.1 million cumulative-effect adjustment upon adoption of ASC 606, partially offset by the $8.6 million net loss adjustment.

 

 

 

Impact of change in revenue recognition standard

Line items impacted within the Consolidated
Statements of Cash Flows

Per consolidated 
financial statements

 

Adjustments

 

Balances excluding the 
impact of adopting
ASC 606

Cash Flows from Operating Activities

         

Net income (loss)

$

(21.8)

   

$

(8.6)

   

$

(30.4)

 

Other

 

18.5

     

(3.5)

     

15.0

 

Accounts receivable

 

(102.8)

     

(.4)

     

(103.2)

 

Inventories

 

(99.6)

     

3.5

     

(96.1)

 

Prepaid expenses and other

 

(49.3)

     

3.9

     

(45.4)

 

Accounts payable and accrued liabilities

 

73.1

     

10.5

     

83.6

 

Income and other taxes

 

68.0

     

(3.6)

     

64.4

 

Noncurrent assets and liabilities

 

42.8

     

(1.8)

     

41.0

 

 

 

Non-GAAP Financial Measures

To supplement the Company's financial results presented in accordance with GAAP, the Company discloses operating results that have been adjusted to exclude the impact of changes due to the translation of foreign currencies into U.S. dollars, including changes in: revenue, Adjusted revenue, operating profit, Adjusted operating profit, operating margin, Adjusted operating margin and diluted earnings (loss) per share. "Like-for-like" refers to Adjusted figures that exclude the impact of the adoption of ASC 606. The Company also refers to these adjusted financial measures as constant dollar items, which are Non-GAAP financial measures. The Company believes these measures provide investors an additional perspective on trends and underlying business results. To exclude the impact of changes due to the translation of foreign currencies into U.S. dollars, the Company calculates current-year results and prior-year results at constant exchange rates, which are updated on an annual basis as part of the Company's budgeting process. Foreign currency impact is determined as the difference between actual growth rates and constant-dollar growth rates.

The Company also presents revenue, cost of sales, gross margin, selling, general and administrative expenses, selling, general and administrative expenses as a percentage of revenue, operating profit, operating margin, income (loss) before taxes, income taxes, net income (loss), diluted earnings (loss) per share and effective tax rate on a Non-GAAP basis. The Company refers to these Non-GAAP financial measures as "Adjusted." The Company has provided quantitative reconciliations of the Non-GAAP financial measures to the most directly comparable financial measures calculated and reported in accordance with GAAP. See "Supplemental Schedule -  Non-GAAP Financial Measures" within this release for these quantitative reconciliations.

The Company uses Non-GAAP financial measures to evaluate its operating performance. These Non-GAAP measures should not be considered in isolation, or as a substitute for, or superior to, financial measures calculated in accordance with GAAP. The Company believes investors find the Non-GAAP information helpful in understanding the ongoing performance of operations separate from items that may have a disproportionate positive or negative impact on the Company's financial results in any particular period. The Company believes that it is meaningful for investors to be made aware of the impacts of: 1) CTI restructuring initiatives; 2) the Brazil IPI tax release; 3) a charge for a loss contingency related to a non-US pension plan ("Loss contingency") and 4) one-time tax items that are not associated with recurring, normal operations ("Special tax items").

The Brazil IPI tax release includes the impact on the Consolidated Statement of Operations during the third quarter of 2018 of the release of the liability related to IPI tax on cosmetics in Brazil. The release was recorded in net sales and other expense, net in the amounts of approximately $168 million and approximately $27 million, respectively. The Brazil IPI tax release also includes approximately $66 million recorded in income taxes.

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

The Special tax items include the impact on the provision for income taxes in the Consolidated Statements of Operations during 2018 due to one-time tax reserves of approximately $18 million associated with the Company's uncertain tax positions, and an expense of approximately $3 million associated with the internal restructuring of intellectual property. Special tax items also include the impact on the provision for income taxes in the Company's Consolidated Statements of Operations during 2017 due to an approximate $30 million net benefit recognized as a result of the enactment of the Tax Cuts and Jobs Act in the U.S., a release of valuation allowances of approximately $26 million associated with a number of markets in Europe, Middle East & Africa, and an approximate $10 million benefit as a result of a favorable court decision in Brazil, partially offset by a charge of approximately $16 million associated with valuation allowances to adjust deferred tax assets in Mexico.

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SOURCE Avon Products, Inc.