Document
100000300000200000300000871000008710000087100000false--12-31Q220190000008868AVON PRODUCTS INC93000000720000000P5YP3Y000000000000100000300000200000300000000.1
 
UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
_________________________
FORM 10-Q
_________________________
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2019
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from              to             
Commission file number 1-4881
_________________________
AVON PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
_________________________
New York
 
13-0544597
(State or other jurisdiction of
Incorporation or organization)
 
(I.R.S. Employer
Identification No.)
Building 6, Chiswick Park, London W4 5HR
United Kingdom
(Address of principal executive offices)
+44-1604-232425
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, par value $0.25 per share
AVP
NYSE

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes     No  
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer
  
Accelerated filer
Non-accelerated filer
  
Smaller reporting company
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The number of shares of Common Stock (par value $0.25) outstanding at June 30, 2019 was 443,332,735.
 




TABLE OF CONTENTS
 
 
 
Page
Numbers
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 


 
 
 
 

 
 
 
 

 
 
 
 
 
 
 
 
13 - 40
 
 
 
Item 2.
40 - 60
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 



2



PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three Months Ended
(In millions, except per share data)
June 30, 2019
 
June 30, 2018
Product sales
$
1,108.8

 
$
1,268.8

Other revenue
66.0

 
83.1

Total revenue
1,174.8

 
1,351.9

Costs, expenses and other:
 
 
 
Cost of sales
(497.5
)
 
(539.7
)
Selling, general and administrative expenses
(646.8
)
 
(759.2
)
Operating profit
30.5

 
53.0

 
 
 
 
Interest expense
(30.7
)
 
(34.5
)
Loss on extinguishment of debt and credit facilities

 
(2.9
)
Interest income
1.5

 
3.5

Other income (expense), net
6.8

 
(19.4
)
Gain on sale of business / assets
13.2

 

Total other expenses
(9.2
)
 
(53.3
)
 
 
 
 
Income (loss) from continuing operations, before income taxes
21.3

 
(.3
)
Income taxes
(27.2
)
 
(36.7
)
Loss from continuing operations, net of tax
(5.9
)
 
(37.0
)
Loss from discontinued operations, net of tax
(13.2
)
 

Net loss
(19.1
)
 
(37.0
)
Net (income) loss attributable to noncontrolling interests
(.4
)
 
.9

Net loss attributable to Avon
$
(19.5
)
 
$
(36.1
)
 
 
 
 
Loss per share
 
 
 
Basic
 
 
 
Basic from continuing operations
$
(0.03
)
 
$
(0.09
)
Basic from discontinued operations
(0.03
)
 

Basic attributable to Avon
$
(0.06
)
 
$
(0.09
)
 
 
 
 
Diluted
 
 
 
Diluted from continuing operations
$
(0.03
)
 
$
(0.09
)
Diluted from discontinued operations
(0.03
)
 

Diluted attributable to Avon
$
(0.06
)
 
$
(0.09
)
The accompanying notes are an integral part of these statements.


3



AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Six Months Ended
(In millions, except per share data)
June 30, 2019
 
June 30, 2018
Product sales
$
2,225.0

 
$
2,578.4

Other revenue
136.7

 
167.0

Total revenue
2,361.7

 
2,745.4

Costs, expenses and other:
 
 
 
Cost of sales
(1,014.5
)
 
(1,119.4
)
Selling, general and administrative expenses
(1,320.6
)
 
(1,528.1
)
Operating profit
26.6

 
97.9

 
 
 
 
Interest expense
(63.9
)
 
(70.7
)
Loss on extinguishment of debt
(2.0
)
 
(2.9
)
Interest income
3.2

 
7.7

Other income (expense), net
29.4

 
(21.9
)
Gain on sale of business / assets
23.5

 

Total other expenses
(9.8
)
 
(87.8
)
 
 
 
 
Income before income taxes
16.8

 
10.1

Income taxes
(46.7
)
 
(68.2
)
Loss from continuing operations, net of tax
(29.9
)
 
(58.1
)
Loss from discontinued operations, net of tax
(22.7
)
 

Net loss
(52.6
)
 
(58.1
)
Net loss attributable to noncontrolling interests
.4

 
1.7

Net loss attributable to Avon
$
(52.2
)
 
$
(56.4
)
 
 
 
 
Loss per share
 
 
 
Basic
 
 
 
Basic from continuing operations
$
(0.09
)
 
$
(0.15
)
Basic from discontinued operations
(0.05
)
 

Basic attributable to Avon
$
(0.14
)
 
$
(0.15
)
 
 
 
 
Diluted
 
 
 
Diluted from continuing operations
$
(0.09
)
 
$
(0.15
)
Diluted from discontinued operations
(0.05
)
 

Diluted attributable to Avon
$
(0.14
)
 
$
(0.15
)
The accompanying notes are an integral part of these statements.


4



AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
 
Three Months Ended
(In millions)
June 30, 2019
 
June 30, 2018
Net loss
$
(19.1
)
 
$
(37.0
)
Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
4.1

 
(45.5
)
Unrealized gains (losses) on revaluation of long-term intercompany balances, net of taxes of $0.0
.3

 
(81.1
)
Change in unrealized gains/losses on cash flow hedges, net of taxes of $0.0
(.7
)
 

Adjustments of and amortization of net actuarial loss and prior service cost, net of taxes of $0.2 and $0.1
1.8


2.8

Total other comprehensive income (loss), net of income taxes
5.5

 
(123.8
)
Comprehensive (loss)
(13.6
)
 
(160.8
)
Less: comprehensive income (loss) attributable to noncontrolling interests
.3

 
(1.2
)
Comprehensive loss attributable to Avon
$
(13.9
)
 
$
(159.6
)
The accompanying notes are an integral part of these statements.





































5



AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)

 
Six Months Ended
(In millions)
June 30, 2019
 
June 30, 2018
Net loss
$
(52.6
)
 
$
(58.1
)
Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
1.2

 
(49.8
)
Unrealized (losses) on revaluation of long-term intercompany balances, net of taxes of $0.0
(.2
)
 
(44.1
)
Change in unrealized gains/losses on cash flow hedges, net of taxes of $0.0
(2.6
)
 

Adjustments of and amortization of net actuarial loss and prior service cost, net of taxes of $0.3 and $0.3
3.1

 
5.7

Total other comprehensive income (loss), net of income taxes
1.5

 
(88.2
)
Comprehensive loss
(51.1
)
 
(146.3
)
Less: comprehensive loss attributable to noncontrolling interests
(.4
)
 
(1.8
)
Comprehensive loss attributable to Avon
$
(50.7
)
 
$
(144.5
)

The accompanying notes are an integral part of these statements.


6



AVON PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2018 (Audited) and June 30, 2019 (Unaudited)
(In millions)
June 30,
2019
 
December 31,
2018
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
421.0

 
$
532.7

Accounts receivable, net
332.8

 
349.7

Inventories
515.6

 
542.0

Prepaid expenses and other
264.2

 
272.0

Assets held for sale
10.1

 
65.6

Total current assets
1,543.7

 
1,762.0

Property, plant and equipment, at cost
1,177.8

 
1,207.8

Less accumulated depreciation
(657.6
)
 
(650.2
)
Property, plant and equipment, net
520.2

 
557.6

Right-of-use assets
174.9

 

Goodwill
89.9

 
87.4

Deferred tax asset
208.2

 
212.6

Other assets
434.3

 
390.4

Total assets
$
2,971.2

 
$
3,010.0

Liabilities, Series C Convertible Preferred Stock and Shareholders’ Deficit
 
 
 
Current Liabilities
 
 
 
Debt maturing within one year
$
398.5

 
$
12.0

Accounts payable
682.2

 
816.5

Accrued compensation
94.1

 
85.5

Other accrued liabilities
436.1

 
451.3

Sales taxes and taxes other than income
116.0

 
103.9

Income taxes
11.7

 
15.9

Held for sale liabilities

 
11.4

Current liabilities of discontinued operations
18.1

 

Total current liabilities
1,756.7

 
1,496.5

Long-term debt
1,197.0

 
1,581.6

Long-term operating lease liability
144.8

 

Employee benefit plans
129.6

 
128.3

Long-term income taxes
140.9

 
136.2

Other liabilities
54.8

 
72.1

Total liabilities
3,423.8

 
3,414.7

 
 
 
 
Series C convertible preferred stock
504.7

 
492.1

 
 
 
 
Shareholders’ Deficit
 
 
 
Common stock
190.7

 
190.3

Additional paid-in capital
2,307.5

 
2,303.6

Retained earnings
2,169.5

 
2,234.3

Accumulated other comprehensive loss
(1,028.9
)
 
(1,030.4
)
Treasury stock, at cost
(4,603.3
)
 
(4,602.3
)
Total Avon shareholders’ deficit
(964.5
)
 
(904.5
)
Noncontrolling interests
7.2

 
7.7

Total shareholders’ deficit
(957.3
)
 
(896.8
)
Total liabilities, series C convertible preferred stock and shareholders’ deficit
$
2,971.2

 
$
3,010.0


7



The accompanying notes are an integral part of these statements.

8



AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended
 
Six Months Ended
(In millions)
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
Cash Flows from Operating Activities
 
 
 
 
 
 
 
Net loss
$
(19.1
)
 
$
(37.0
)
 
$
(52.6
)
 
$
(58.1
)
Loss from discontinued operations, net of tax
(13.2
)
 

 
(22.7
)
 

Loss from continuing operations, net of tax
(5.9
)
 
(37.0
)
 
(29.9
)
 
(58.1
)
Adjustments to reconcile net loss to net cash used by operating activities:
 
 
 
 
 
 
 
Depreciation
15.9

 
20.8

 
36.5

 
41.6

Amortization
6.2

 
6.7

 
12.8

 
13.8

Provision for doubtful accounts
28.8

 
43.1

 
58.7

 
86.2

Provision for obsolescence
9.5

 
3.6

 
16.2

 
13.3

Share-based compensation
5.7

 
3.7

 
5.2

 
7.5

Foreign exchange losses (gains)
11.9

 
8.9

 
(7.3
)
 
13.5

Deferred income taxes
(.9
)
 
(2.0
)
 
7.3

 
(.2
)
Impairment loss on assets
13.3

 

 
13.3

 

Gain on sale of business / assets
(13.2
)
 

 
(23.5
)
 

Other
3.5

 

 
5.2

 
3.2

Changes in assets and liabilities:
 
 
 
 
 
 
 
Accounts receivable
(16.6
)
 
(45.6
)
 
(40.9
)
 
(50.0
)
Inventories
13.2

 
(41.3
)
 
18.0

 
(99.7
)
Prepaid expenses and other
(23.2
)
 
1.6

 
15.2

 
1.7

Accounts payable and accrued liabilities
(47.1
)
 
29.7

 
(211.3
)
 
(76.6
)
Income and other taxes
19.2

 
.6

 
7.2

 
(.3
)
Noncurrent assets and liabilities
(13.2
)
 
(3.2
)
 
(18.3
)
 
(2.6
)
Net cash provided (used) by operating activities of continuing operations
7.1

 
(10.4
)
 
(135.6
)
 
(106.7
)
Cash Flows from Investing Activities
 
 
 
 
 
 
 
Capital expenditures
(11.3
)
 
(20.2
)
 
(32.5
)
 
(48.0
)
Disposal of assets
.4

 
.6

 
.8

 
1.4

Net proceeds from sale of business / assets
30.1

 

 
76.5

 

Other investing activities

 
(3.3
)
 

 
(3.3
)
Net cash provided (used) by investing activities of continuing operations
19.2

 
(22.9
)
 
44.8

 
(49.9
)
Cash Flows from Financing Activities
 
 
 
 
 
 
 
Debt, net (maturities of three months or less)
(26.7
)
 
(14.0
)
 
.5

 
(10.4
)
Repayment of debt
(.3
)
 
(238.1
)
 
(.3
)
 
(238.6
)
Repurchase of common stock
(1.1
)
 
(.5
)
 
(1.1
)
 
(3.2
)
Other financing activities

 
(.1
)
 
(9.2
)
 
(.1
)
Net cash used by financing activities of continuing operations
(28.1
)
 
(252.7
)
 
(10.1
)
 
(252.3
)
Cash Flows from Discontinued Operations
 
 
 
 
 
 
 
Net cash used by operating activities of discontinued operations
(4.6
)
 

 
(4.6
)
 

Net cash used by discontinued operations
(4.6
)
 

 
(4.6
)
 

Effect of exchange rate changes on cash and cash equivalents, and restricted cash
4.0

 
(42.6
)
 
(2.3
)
 
(28.7
)
Net decrease in cash and cash equivalents, and restricted cash
(2.4
)
 
(328.6
)
 
(107.8
)
 
(437.6
)
Cash and cash equivalents, and restricted cash at beginning of period(1)
431.0

 
772.5

 
536.4

 
881.5

Cash and cash equivalents, and restricted cash at end of period (2)
$
428.6

 
$
443.9

 
$
428.6

 
$
443.9

 

9



The accompanying notes are an integral part of these statements.
(1) 
The balance at the beginning of the six month period ended June 30, 2019 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
(2) 
Includes restricted cash of $7.6 related to the sale of Avon Manufacturing (Guangzhou), Ltd. at June 30, 2019. Refer to Note 4, Restricted Cash



10



AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
(Unaudited)

(In millions, except per 
 
Common Stock
 
Additional
 
Retained
 
Accumulated Other
 
Treasury Stock
 
Noncontrolling
 
 
share data)
 
Shares
 
Amount
 
Paid-In Capital
 
Earnings
 
Comprehensive Loss
 
Shares
 
Amount
 
Interests
 
Total
Balances at December 31, 2018
 
761.8

 
$
190.3

 
$
2,303.6

 
$
2,234.3

 
$
(1,030.4
)
 
319.4

 
$
(4,602.3
)
 
$
7.7

 
$
(896.8
)
Net loss
 

 

 

 
(32.7
)
 

 

 

 
(.8
)
 
(33.5
)
Other comprehensive (loss) income
 

 

 

 
 
 
(4.0
)
 

 

 
.1

 
(3.9
)
Dividends accrued - Series C convertible preferred stock
 

 

 

 
(6.2
)
 

 

 

 

 
(6.2
)
Exercise/ vesting/ expense of share-based compensation
 
1.3

 
.3

 
(1.5
)
 

 

 

 

 

 
(1.2
)
Purchases and sales of noncontrolling interests, net of dividends paid of $0.0
 

 

 

 

 

 

 

 
.1

 
0.1

Balances at March 31, 2019
 
763.1

 
$
190.6

 
$
2,302.1

 
$
2,195.4

 
$
(1,034.4
)
 
319.4

 
$
(4,602.3
)
 
$
7.1

 
$
(941.5
)
Net (loss) income
 

 

 

 
(19.5
)
 

 

 

 
.4

 
(19.1
)
Other comprehensive income
 

 

 

 

 
5.5

 

 

 

 
5.5

Dividends accrued - Series C convertible preferred stock
 

 

 

 
(6.4
)
 

 

 

 

 
(6.4
)
Exercise/ vesting/ expense of share-based compensation
 

 

 
5.4

 

 

 

 

 

 
5.4

Repurchase of common stock
 
.1

 
.1

 

 

 

 
.5

 
(1.0
)
 

 
(1.0
)
Purchases and sales of noncontrolling interests, net of dividends paid of $0.1
 

 

 

 

 

 

 

 
(.3
)
 
(.3
)
Balances at June 30, 2019
 
763.2

 
$
190.7

 
$
2,307.5

 
$
2,169.5

 
$
(1,028.9
)
 
319.9

 
$
(4,603.3
)
 
$
7.2

 
$
(957.3
)

The accompanying notes are an integral part of these statements.


11



(In millions, except per 
 
Common Stock
 
Additional
 
Retained
 
Accumulated Other
 
Treasury Stock
 
Noncontrolling
 
 
share data)
 
Shares
 
Amount
 
Paid-In Capital
 
Earnings
 
Comprehensive Loss
 
Shares
 
Amount
 
Interests
 
Total
Balances at December 31, 2017
 
758.7

 
$
189.7

 
$
2,291.2

 
$
2,320.3

 
$
(926.2
)
 
318.4

 
$
(4,600.0
)
 
$
10.3

 
$
(714.7
)
Net loss
 

 

 

 
(20.3
)
 

 

 

 
(.8
)
 
(21.1
)
Revenue Recognition Cumulative catch up
 

 

 

 
(41.1
)
 

 

 

 

 
(41.1
)
Other comprehensive income
 

 

 

 
 
 
35.2

 
 
 
 
 
.4

 
35.6

Dividends accrued - Series C convertible preferred stock
 

 

 

 
(6.0
)
 

 

 

 

 
(6.0
)
Exercise/ vesting/ expense of share-based compensation
 
2.2

 
.6

 
2.5

 
(.4
)
 

 
(.1
)
 
.9

 

 
3.6

Repurchase of common stock
 

 

 

 

 

 
.9

 
(2.7
)
 

 
(2.7
)
Purchases and sales of noncontrolling interests, net of dividends paid of $0.0
 

 

 

 

 

 

 

 
(.2
)
 
(.2
)
Balances at March 31, 2018
 
760.9

 
$
190.3

 
$
2,293.7

 
$
2,252.5

 
$
(891.0
)
 
319.2

 
$
(4,601.8
)
 
$
9.7

 
$
(746.6
)
Net loss
 

 

 

 
(36.1
)
 

 

 

 
(.9
)
 
(37.0
)
Other comprehensive loss
 

 

 

 

 
(123.4
)
 

 

 
(.4
)
 
(123.8
)
Dividends accrued - Series C convertible preferred stock
 

 

 

 
(6.0
)
 

 

 

 

 
(6.0
)
Exercise/ vesting/ expense of share-based compensation
 
.8

 

 
3.8

 
(.4
)
 

 

 

 

 
3.4

Repurchase of common stock
 

 

 

 

 

 
.2

 
(.5
)
 

 
(.5
)
Balances at June 30, 2018
 
761.7

 
$
190.3

 
$
2,297.5

 
$
2,210.0

 
$
(1,014.4
)
 
319.4

 
$
(4,602.3
)
 
$
8.4

 
$
(910.5
)

The accompanying notes are an integral part of these statements.


12


AVON PRODUCTS, INC.



1. ACCOUNTING POLICIES
Basis of Presentation
We prepare our unaudited interim Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States ("GAAP"). We consistently applied the accounting policies described in our 2018 Annual Report on Form 10-K ("2018 Form 10-K") in preparing these unaudited interim Consolidated Financial Statements, other than those impacted by new accounting standards as described below. In our opinion, the unaudited interim Consolidated Financial Statements reflect all adjustments of a normal recurring nature that are necessary for a fair statement of the results for the interim periods presented. Results for interim periods are not necessarily indicative of results for a full year. You should read these unaudited interim Consolidated Financial Statements in conjunction with our Consolidated Financial Statements contained in our 2018 Form 10-K. When used in this report, the terms "Avon," "Company," "we" or "us" mean Avon Products, Inc.
For interim Consolidated Financial Statements purposes, we generally provide for accruals under our various employee benefit plans for each quarter based on one quarter of the estimated annual expense, and adjust these accruals as estimates are refined. In addition, our income tax provision is determined using an estimate of our consolidated annual effective tax rate, adjusted in the current period for discrete income tax items including:
the effects of significant, unusual or extraordinary pretax and income tax items, if any;
withholding taxes recognized associated with cash repatriations; and
the impact of loss-making subsidiaries for which we cannot recognize an income tax benefit and subsidiaries for which an effective tax rate cannot be reliably estimated.
Accounting Standards Implemented
Leases
In February 2016, the FASB issued ASU 2016-02, Leases, which requires all assets and liabilities arising from leases to be recognized in our Consolidated Balance Sheets. We adopted this new accounting guidance effective January 1, 2019.
In July 2018, the FASB added an optional transition method which we elected upon adoption of the new standard. This allowed us to recognize and measure leases existing at January 1, 2019 without restating comparative information. In addition, we elected to apply the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carry forward the historical lease classification.
We determine if an arrangement is a lease at the lease commencement date. In addition to our lease agreements, we review all material new vendor arrangements for potential embedded lease obligations. The asset balance related to operating and finance leases is presented within right-of-use (ROU) asset and property, plant and equipment, respectively, on our Consolidated Balance Sheet. The short-term liability balance related to operating and finance leases is presented within other accrued liabilities on our Consolidated Balance Sheets. The long-term liability balance is presented within long-term operating lease liability and long-term debt on our Consolidated Balance Sheets for operating and finance leases, respectively.  
The lease liability is recognized based on the present value of the remaining fixed or in-substance fixed lease payments discounted using our incremental borrowing rates. We use a specific incremental borrowing rate for our material leases, which is determined based on the geography and term of the lease. These rates are determined based on inputs provided by external banks and updated periodically. The lease liability includes the exercise of a purchase option only if we are reasonably certain to exercise as of the commencement date of the lease. The residual value guarantee amount is only included in the lease liability calculation to the extent payment is probable to the lessor as of the commencement of the lease. The ROU asset is calculated based on the lease liability adjusted for any lease payments paid to the lessor at or before the commencement date (i.e. prepaid rent) and initial direct costs incurred by Avon and excluding any lease incentives received from the Lessor.

Variable lease payments are payments to the lessor not included in the lease liability calculation. We define variable lease payments as payments made by Avon to the lessor for the right to use a leased asset that vary because of changes in facts or circumstances (such as changes in an index rate, volume, usage, etc.) occurring after the lease commencement date, other than predetermined contractual changes due to the passage of time (for example, predetermined rent increase amounts that are set out in the contract). Variable lease payments or charges are accounted for as incurred.

13



AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)

The lease term for purposes of lease accounting may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option as of the commencement date of the lease. For operating leases, the lease expense is recognized on a straight-line basis over the lease term. For finance leases, the Company amortizes the ROU asset on a straight-line basis and records interest expense on the lease liability created at lease commencement over the lease term.
We account for our lease and non-lease components as a single component for most of our asset classes, and therefore both are included in the calculation of lease liability recognized on the Consolidated Balance Sheets. However, for certain lease asset classes related to identified embedded leases we account for the lease and non-lease components separately, and therefore, the non-lease component is not included in the lease liability.

Leases with an initial term of twelve months or less are not recorded on the balance sheet; we recognize lease expense for these leases over their lease term. See Note 9, Leases, for further details.
ASU 2018-02, Income Statement - Reporting Comprehensive Income
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income, which permits entities to reclassify the disproportionate income tax effects of the 2017 enactment of U.S. tax reform legislation (the "Act") on items within accumulated other comprehensive income (loss) to retained earnings. We adopted this new accounting guidance effective January 1, 2019 and elected not to reclassify the disproportionate income tax effects of the Act from accumulated other comprehensive income (loss) to retained earnings.
Accounting Standards to be Implemented
ASU 2016-13, Financial Instruments - Credit Losses
In January 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which requires measurement and recognition of expected credit losses for financial assets held. We intend to adopt this new accounting guidance effective January 1, 2020. We are currently assessing the impact on our consolidated financial statements.

14



AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)

2. LOSS PER SHARE AND SHARE REPURCHASES
We compute loss per share ("EPS") using the two-class method, which is a loss allocation formula that determines loss per share for common stock, and loss allocated to convertible preferred stock and participating securities, as appropriate. The earnings allocated to convertible preferred stock are the larger of 1) the preferred dividends accrued in the period or 2) the percentage of earnings from continuing operations allocable to the preferred stock as if they had been converted to common stock. Our participating securities are our grants of restricted stock and restricted stock units, which contain non-forfeitable rights to dividend equivalents to the extent any dividends are declared and paid on our common stock. We compute basic EPS by dividing net income (loss) allocated to common shareholders by the weighted-average number of shares outstanding during the period. Diluted EPS is calculated to give effect to all potentially dilutive common shares that were outstanding during the period.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Shares in millions)
 
2019
 
2018
 
2019
 
2018
Numerator from continuing operations:
 
 
 
 
 
 
 
 
Loss from continuing operations, less amounts attributable to noncontrolling interests
 
$
(6.3
)
 
$
(36.1
)
 
$
(29.5
)
 
$
(56.4
)
Less: Loss allocated to participating securities
 
(.1
)
 
(.4
)
 
(.4
)
 
(.6
)
Less: Cumulative dividends on preferred stock
 
6.3

 
6.0

 
12.6

 
12.0

Loss from continuing operations allocated to common shareholders
 
(12.5
)
 
(41.7
)
 
(41.7
)
 
(67.8
)
Numerator from discontinued operations:
 
 
 
 
 
 
 
 
Loss from discontinued operations
 
$
(13.2
)
 
$

 
$
(22.7
)
 
$

Less: Loss allocated to participating securities
 
(.2
)
 

 
(.3
)
 

Loss allocated to common shareholders
 
(13.0
)
 

 
(22.4
)
 

Numerator attributable to Avon:
 
 
 
 
 
 
 
 
Net loss attributable to Avon
 
$
(19.5
)
 
$
(36.1
)
 
$
(52.2
)
 
$
(56.4
)
Less: Loss allocated to participating securities
 
(.3
)
 
(.4
)
 
(.7
)
 
(.6
)
Less: Cumulative dividends on preferred stock
 
6.3

 
6.0

 
12.6

 
12.0

Loss allocated to common shareholders
 
(25.5
)
 
(41.7
)
 
(64.1
)
 
(67.8
)
Denominator:
 
 
 
 
 
 
 
 
Basic EPS weighted-average shares outstanding
 
442.3

 
442.2

 
442.5

 
441.5

Diluted effect of assumed conversion of stock options
 
.2

 

 
.1

 

Diluted effect of assumed conversion of preferred stock
 

 

 

 

Diluted EPS adjusted weighted-average shares outstanding
 
442.5

 
442.2

 
442.6

 
441.5

Loss per Common Share from continuing operations:
 
 
 
 
 
 
 
 
Basic
 
$
(.03
)
 
$
(.09
)
 
$
(.09
)
 
$
(.15
)
Diluted
 
(.03
)
 
(.09
)
 
(.09
)
 
(.15
)
Loss per Common Share from discontinued operations:
 
 
 
 
 
 
 
 
Basic
 
$
(.03
)
 
$

 
$
(.05
)
 
$

Diluted
 
(.03
)
 

 
(.05
)
 

Loss per Common Share attributable to Avon:
 
 
 
 
 
 
 
 
Basic
 
$
(.06
)
 
$
(.09
)
 
$
(.14
)
 
$
(.15
)
Diluted
 
(.06
)
 
(.09
)
 
(.14
)
 
(.15
)

Amounts in the table above may not necessarily sum due to rounding.
During the three and six months ended June 30, 2019, we did not include stock options to purchase 19.4 million and 18.8 million shares, respectively, of Avon common stock in the calculation of diluted EPS as we had a net loss and the inclusion of these shares would decrease the net loss per share. Since the inclusion of such shares would be anti-dilutive, these are excluded from the calculation. During the three and six months ended June 30, 2018, we did not include stock options to purchase 18.5 million shares and 17.4 million shares, respectively, for the same reason.

15



AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)

For the three and six months ended June 30, 2019 and 2018, respectively, it is more dilutive to assume the series C convertible preferred stock is not converted into common stock; therefore, the weighted-average shares outstanding were not adjusted by the as-if converted series C convertible preferred stock because the effect would be anti-dilutive. The inclusion of the series C convertible preferred stock would decrease the net loss per share for the three months ended June 30, 2019 and 2018. If the as-if converted series C convertible preferred stock had been dilutive, approximately 87.1 million additional shares would have been included in the diluted weighted average number of shares outstanding for the three and six months ended June 30, 2019 and 2018. See Note 6, Related Party Transactions.
We purchased approximately .4 million shares of Avon common stock for $1.1 during the first six months of 2019, as compared to approximately 1.1 million shares of Avon common stock for $3.2 during the first six months of 2018, through acquisition of stock from employees in connection with tax payments upon the vesting of restricted stock units and performance restricted stock units.

3. DISCONTINUED OPERATIONS, ASSETS AND LIABILITIES HELD FOR SALE AND DIVESTITURES

Discontinued Operations
On December 17, 2015, the Company entered into definitive agreements with affiliates controlled by Cerberus Capital Management, L.P. ("Cerberus"). The agreements include an investment agreement providing for a $435.0 investment by Cleveland Apple Investor L.P. ("Cerberus Investor") (an affiliate of Cerberus) in the Company through the purchase of perpetual convertible preferred stock (see Note 6, Related Party Transactions) and a separation and investment agreement providing for the separation of the Company's North America business, which represented the Company's operations in the United States, Canada and Puerto Rico, from the Company into New Avon LLC ("New Avon"), a privately-held company that is majority-owned and managed by Cerberus NA Investor LLC (an affiliate of Cerberus). These transactions closed on March 1, 2016.
The Company incurred costs during the three and six months ended June 30, 2019 following the resolution of certain contingent liabilities related to its ownership and operation of the North America business prior to its separation into New Avon. These costs are reported as discontinued operations related to New Avon.
The major classes of financial statement components comprising the loss on discontinued operations, net of tax for New Avon are shown below:
 
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Selling, general and administrative expenses
 
$
13.2

 
$
22.7

Operating loss
 
$
(13.2
)
 
$
(22.7
)
Loss from discontinued operations, net of tax
 
$
(13.2
)
 
$
(22.7
)

There were no amounts recorded in discontinued operations for the three and six months ended June 30, 2018. See Note 5, Investment in New Avon, for additional information relating to New Avon.

Assets and Liabilities Held for Sale
The major classes of assets and liabilities comprising Held for sale assets and Held for sale liabilities on the Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018 are shown in the following table.
 
 
June 30, 2019
Current Held for sale assets
 
 
Property, Plant & Equipment (net)
 
$
10.1

 
 
$
10.1


16



AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)

 
 
December 31, 2018
 
 
Avon Manufacturing (Guangzhou)
 
Rye Office
 
Malaysia Maximin
 
Total
Current held for sale assets
 
 
 
 
 
 
 
 
Inventories
 
$
8.7

 
$

 
$

 
$
8.7

Property, Plant & Equipment (net)
 
36.7

 
12.3

 
3.0

 
52.0

Cash and cash equivalents
 
3.7

 

 

 
3.7

Other assets
 
1.1

 

 
.1

 
1.2

 
 
$
50.2

 
$
12.3

 
$
3.1

 
$
65.6

 
 
 
 
 
 
 
 
 
Current held for sale liabilities
 
 
 
 
 
 
 
 
Accounts payable
 
$
8.6

 
$

 
$

 
$
8.6

Other liabilities
 
2.6

 

 
.2

 
2.8

 
 
$
11.2

 
$

 
$
.2

 
$
11.4


During the second quarter of 2019, the Company, in line with the Open Up Avon strategy, identified two properties to be sold which met the held for sale criteria under ASC 360 as of June 30, 2019. The Company expects to close these transactions within the year.
Refer to Divestitures section below for the sale of Avon Manufacturing (Guangzhou), Rye Office and Malaysia Maximin.

Divestitures
Rye Office
On June 26, 2019, we completed the sale of the Rye office for a selling price of $23.2, less expenses of approximately $0.8, resulting in proceeds of $22.4. These proceeds are presented as investing activities in the Consolidated Statement of Cash Flows.
In the second quarter of 2019, we recorded a gain on sale of $9.9 before and after tax, which is reported separately in the Consolidated Statements of Operations. The gain recorded represents the difference between the proceeds and the carrying value of the Rye office on the date of sale. During the first quarter of 2019, we refined the calculation for the Held for sale assets which gave rise to an additional $0.2 in assets.
Malaysia Maximin
On May 9, 2019, we completed the sale of all of the equity interests in Maximin Corporation Sdn Bhd ("Malaysia Maximin") for a total purchase price of $7.8. The cash proceeds of $7.6, net of expenses, are presented within investing activities in the Consolidated Statement of Cash Flows.
In the second quarter of 2019, we recorded a gain on sale of $3.3 before tax, which is reported separately in the Consolidated Statements of Operations, and $3.0 after tax. The gain recorded represents the difference between the proceeds and the carrying value of Malaysia Maximin on the date of sale. During the second quarter of 2019, we refined the calculation for the Held for sale assets which gave rise to an additional $1.4 in assets.
China manufacturing
On February 15, 2019, we completed the sale to TheFaceShop Co., Ltd., an affiliate of LG Household & Health Care Ltd., of all of the equity interests in Avon Manufacturing (Guangzhou), Ltd. for a total purchase price of $71.0, less expenses of approximately $1.1. The purchase price included $23.5 relating to outstanding intercompany loans payable to Avon Manufacturing (Guangzhou), Ltd. from other Avon subsidiaries, that was presented as financing activities in the Consolidated Statement of Cash Flows when settled in April 2019. The cash proceeds of $46.4, net of loan amounts, are presented as investing activities in the Consolidated Statement of Cash Flows, which includes $7.6 of restricted cash as of June 30, 2019, refer to Note 4, Restricted Cash.
In the first quarter of 2019, we recorded a gain on sale of $10.3 before tax, which is reported separately in the Consolidated Statements of Operations, and $8.2 after tax, representing the difference between the proceeds, including the settlement of the intercompany loans, and the carrying value of Avon Manufacturing (Guangzhou), Ltd. on the date of sale.


17



AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)


4. RESTRICTED CASH

Restricted cash is related to the sale of Avon Manufacturing (Guangzhou), Ltd. as described in Note 3, Discontinued Operations, Assets and Liabilities Held for Sale and Divestitures.

Restricted cash is subject to legal restrictions imposed by the Equity Purchase Agreement between TheFaceShop Co., Ltd., an affiliate of LG Household & Health Care Ltd., Avon Asia Holdings Company and Avon Products (China) Co., Ltd. related to the sale of Avon Manufacturing (Guangzhou), Ltd. These deposits are not available for general use by the Company.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheet that sum to the total of the same such amounts shown in the Consolidated Statement of Cash Flows for the six month period ended June 30, 2019.
 
 
June 30, 2019
 
December 31, 2018
Cash and cash equivalents
 
$
421.0

 
$
532.7

Long-term restricted cash(1)
 
7.6

 

Held for sale cash and cash equivalents
 

 
3.7

Cash and cash equivalents, and restricted cash at end of period per the statement of cash flows
 
$
428.6

 
$
536.4

(1) Long-term restricted cash is presented in other assets in our Consolidated Balance Sheets.


5. INVESTMENT IN NEW AVON
In connection with the separation of the Company's North America business, which closed on March 1, 2016, the Company retained a 19.9% ownership interest in New Avon, a privately-held company that is majority-owned and managed by an affiliate of Cerberus.
Our recorded investment balance in New Avon at June 30, 2019 and December 31, 2018 was zero.
In April 2019, we signed an agreement with LG Household & Health Care Ltd. to sell our 19.9% ownership interest in New Avon.
LG Household & Health Care Ltd. will acquire all of the interests of New Avon for $125.0 in cash, of which Avon will receive $24.9 in cash for our 19.9% share. The closing is expected to occur during the third quarter of 2019.
In the second quarter of 2019 we incurred costs relating to this transaction of $1.0.

18



AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in millions, except per share data)

6. RELATED PARTY TRANSACTIONS
The following tables present the related party transactions with New Avon, affiliates of Cerberus and the Instituto Avon in Brazil. There are no other related party transactions. New Avon is majority-owned and managed by Cerberus. See Note 5, Investment in New Avon for further details.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Statement of Operations Data
 
 
 
 
 
 
 
 
Revenue from sale of product to New Avon(1)
 
$
3.7

 
$
7.1

 
$
8.5

 
$
13.0

Gross profit from sale of product to New Avon(1)
 
$

 
$
.4

 
$
.1

 
$
.7

 
 
 
 
 
 
 
 
 
Cost of sales for purchases from New Avon(2)
 
$
.8

 
$
.7

 
$
1.5

 
$
1.2

 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses related to New Avon:
 
 
 
 
 
 
 
 
Transition services, intellectual property, technical support and innovation and subleases(3)
 
$
(.1
)
 
$
(.5
)
 
$
(.2
)
 
$
(3.7
)
Project management team(4)
 
2.1

 
.2

 
$
3.4

 
$
.8

Net reduction of selling, general and administrative expenses
 
$
2.0

 
$
(.3
)
 
$
3.2

 
$
(2.9
)
 
 
 
 
 
 
 
 
 
Interest income from Instituto Avon(5)