2014.6.30.10Q
 
UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
_________________________
FORM 10-Q
_________________________
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2014
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.)
777 Third Avenue, New York, N.Y. 10017-1307
(Address of principal executive offices) (Zip code)

(212) 282-5000
(Telephone Number, including area code) 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  Q    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  Q    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Q
  
Accelerated filer
¨
Non-accelerated filer
¨  (do not check if a smaller reporting company)
  
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  Q
The number of shares of Common Stock (par value $0.25) outstanding at June 30, 2014 was 434,620,667.
 




TABLE OF CONTENTS
 
 
 
Page
Numbers
 
 
 
Item 1.
 
 
 
 
 
Consolidated Statements of Income
Three
 and Six Months Ended June 30, 2014 and June 30, 2013
3-4
 
 
 
 
Three and Six Months Ended June 30, 2014 and June 30, 2013
5-6
 
 
 
 
June 30, 2014 and December 31, 2013
 
 
 
 
Consolidated Statements of Cash Flows
Three
and Six Months Ended June 30, 2014 and June 30, 2013
8-9
 
 
 
 
10-27
 
 
 
Item 2.
28-50
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 


2


PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS

AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
Three Months Ended
(In millions, except per share data)
June 30, 2014
 
June 30, 2013
Net sales
$
2,139.8

 
$
2,466.8

Other revenue
48.8

 
42.1

Total revenue
2,188.6

 
2,508.9

Costs, expenses and other:
 
 
 
Cost of sales
810.7

 
935.4

Selling, general and administrative expenses
1,284.7

 
1,371.3

Operating profit
93.2

 
202.2

Interest expense
28.7

 
31.1

Loss on extinguishment of debt

 
13.0

Interest income
(3.8
)
 
(2.8
)
Other expense, net
2.6

 
15.6

Total other expenses
27.5

 
56.9

Income from continuing operations, before taxes
65.7

 
145.3

Income taxes
(45.8
)
 
(60.7
)
Income from continuing operations, net of tax
19.9

 
84.6

Loss from discontinued operations, net of tax

 
(50.4
)
Net income
19.9

 
34.2

Net income attributable to noncontrolling interests
(0.9
)
 
(2.3
)
Net income attributable to Avon
$
19.0

 
$
31.9

Earnings (loss) per share:
 
 
 
Basic from continuing operations
$
0.04

 
$
0.19

Basic from discontinued operations

 
(0.12
)
Basic attributable to Avon
0.04

 
0.07

Diluted from continuing operations
0.04

 
0.19

Diluted from discontinued operations

 
(0.11
)
Diluted attributable to Avon
0.04

 
0.07

Cash dividends per common share
$
0.06

 
$
0.06

The accompanying notes are an integral part of these statements.


3


AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

 
 
 
 
 
Six Months Ended
(In millions, except per share data)
June 30, 2014
 
June 30, 2013
Net sales
$
4,281.5

 
$
4,873.9

Other revenue
90.7

 
91.0

Total revenue
4,372.2

 
4,964.9

Costs, expenses and other:
 
 
 
Cost of sales
1,766.1

 
1,860.8

Selling, general and administrative expenses
2,563.8

 
2,727.9

Operating profit
42.3

 
376.2

Interest expense
56.2

 
60.5

Loss on extinguishment of debt

 
86.0

Interest income
(7.6
)
 
(4.8
)
Other expense, net
69.0

 
59.9

Total other expenses
117.6

 
201.6

(Loss) income from continuing operations, before taxes
(75.3
)
 
174.6

Income taxes
(72.0
)
 
(101.5
)
(Loss) income from continuing operations, net of tax
(147.3
)
 
73.1

Loss from discontinued operations, net of tax

 
(51.5
)
Net (loss) income
(147.3
)
 
21.6

Net income attributable to noncontrolling interests
(2.0
)
 
(3.4
)
Net (loss) income attributable to Avon
$
(149.3
)
 
$
18.2

(Loss) earnings per share:
 
 
 
Basic from continuing operations
$
(0.34
)
 
$
0.16

Basic from discontinued operations

 
(0.12
)
Basic attributable to Avon
(0.34
)
 
0.04

Diluted from continuing operations
(0.34
)
 
0.16

Diluted from discontinued operations

 
(0.12
)
Diluted attributable to Avon
(0.34
)
 
0.04

Cash dividends per common share
$
0.12

 
$
0.12

The accompanying notes are an integral part of these statements.






4


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

 
Three Months Ended
(In millions)
June 30, 2014
 
June 30, 2013
Net income
$
19.9

 
$
34.2

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
32.5

 
(107.7
)
Change in derivative losses on cash flow hedges, net of taxes of $0.2 and $0.2
0.3

 
0.3

Adjustments of and amortization of net actuarial loss and prior service cost, net of taxes of $(5.1) and $7.1
(7.8
)
 
19.6

Total other comprehensive income (loss), net of taxes
25.0

 
(87.8
)
Comprehensive income (loss)
44.9

 
(53.6
)
Less: comprehensive income (loss) attributable to noncontrolling interests
1.2

 
(0.4
)
Comprehensive income (loss) attributable to Avon
$
43.7

 
$
(53.2
)
The accompanying notes are an integral part of these statements.


5


AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
 
 
 
Six Months Ended
(In millions)
June 30, 2014
 
June 30, 2013
Net (loss) income
$
(147.3
)
 
$
21.6

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
23.6

 
(131.1
)
Change in derivative losses on cash flow hedges, net of taxes of $0.4 and $0.6
0.6

 
1.1

Adjustments of and amortization of net actuarial loss and prior service cost, net of taxes of $(0.3) and $12.1
0.2

 
29.7

Total other comprehensive income (loss), net of taxes
24.4

 
(100.3
)
Comprehensive loss
(122.9
)
 
(78.7
)
Less: comprehensive (loss) income attributable to noncontrolling interests
(0.3
)
 
0.5

Comprehensive loss attributable to Avon
$
(122.6
)
 
$
(79.2
)
The accompanying notes are an integral part of these statements.


6


AVON PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
(In millions)
June 30,
2014
 
December 31,
2013
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
777.5

 
$
1,107.9

Accounts receivable, net
634.0

 
676.3

Inventories
965.7

 
967.7

Prepaid expenses and other
663.3

 
689.3

Total current assets
3,040.5

 
3,441.2

Property, plant and equipment, at cost
2,514.6

 
2,484.5

Less accumulated depreciation
(1,149.3
)
 
(1,091.2
)
Property, plant and equipment, net
1,365.3

 
1,393.3

Goodwill
288.9

 
282.5

Other assets
1,420.5

 
1,375.3

Total assets
$
6,115.2

 
$
6,492.3

Liabilities and Shareholders’ Equity
 
 
 
Current Liabilities
 
 
 
Debt maturing within one year
$
154.1

 
$
188.0

Accounts payable
876.3

 
896.5

Accrued compensation
213.2

 
271.2

Other accrued liabilities
674.9

 
652.6

Sales and taxes other than income
167.8

 
186.8

Income taxes
21.2

 
45.4

Total current liabilities
2,107.5

 
2,240.5

Long-term debt
2,480.0

 
2,532.7

Employee benefit plans
390.3

 
398.0

Long-term income taxes
75.3

 
53.3

Other liabilities
102.0

 
140.3

Total liabilities
$
5,155.1

 
$
5,364.8

Contingencies (Note 6)


 


Shareholders’ Equity
 
 
 
Common stock
$
187.6

 
$
189.4

Additional paid-in capital
2,196.2

 
2,175.6

Retained earnings
3,995.3

 
4,196.7

Accumulated other comprehensive loss
(846.3
)
 
(870.4
)
Treasury stock, at cost
(4,589.8
)
 
(4,581.2
)
Total Avon shareholders’ equity
943.0

 
1,110.1

Noncontrolling interests
17.1

 
17.4

Total shareholders’ equity
$
960.1

 
$
1,127.5

Total liabilities and shareholders’ equity
$
6,115.2

 
$
6,492.3

The accompanying notes are an integral part of these statements.

7


AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended
(In millions)
June 30, 2014
 
June 30, 2013
Cash Flows from Operating Activities
 
 
 
Net (loss) income
$
(147.3
)
 
$
21.6

Loss from discontinued operations, net of tax

 
51.5

(Loss) income from continuing operations, net of tax
$
(147.3
)
 
$
73.1

Adjustments to reconcile net (loss) income to net cash (used) provided by operating activities:
 
 
 
Depreciation and amortization
97.7

 
119.8

Provision for doubtful accounts
105.7

 
113.4

Provision for obsolescence
43.8

 
53.7

Share-based compensation
24.9

 
26.2

Deferred income taxes
(50.1
)
 
(27.4
)
Charge for Venezuelan monetary assets and liabilities
53.7

 
34.1

Charge for Venezuelan non-monetary assets to their net realizable value
115.7

 

Other
54.5

 
30.1

Changes in assets and liabilities:
 
 
 
Accounts receivable
(91.0
)
 
(103.3
)
Inventories
(126.4
)
 
(159.8
)
Prepaid expenses and other
(10.4
)
 
67.6

Accounts payable and accrued liabilities
14.6

 
(65.8
)
Income and other taxes
(10.0
)
 
(28.6
)
Noncurrent assets and liabilities
(82.5
)
 
(63.4
)
Net cash (used) provided by operating activities of continuing operations
(7.1
)
 
69.7

Cash Flows from Investing Activities
 
 
 
Capital expenditures
(58.6
)
 
(75.8
)
Disposal of assets
5.4

 
12.8

Purchases of investments
(13.4
)
 
(14.2
)
Proceeds from sale of investments
10.8

 
0.2

Net cash used by investing activities of continuing operations
(55.8
)
 
(77.0
)
Cash Flows from Financing Activities*
 
 
 
Cash dividends
(54.6
)
 
(53.9
)
Debt, net (maturities of three months or less)
3.4

 
31.6

Proceeds from debt
9.2

 
1,478.8

Repayment of debt
(92.0
)
 
(1,796.2
)
Interest rate swap termination

 
88.1

Net proceeds from exercise of stock options
0.2

 
16.9

Repurchase of common stock
(8.6
)
 
(7.6
)
Net cash used by financing activities of continuing operations
(142.4
)
 
(242.3
)
Cash Flows from Discontinued Operations
 
 
 
Net cash used by operating activities of discontinued operations

 
(0.5
)
Net cash used by investing activities of discontinued operations

 
(0.2
)
Net cash used by discontinued operations

 
(0.7
)
Effect of exchange rate changes on cash and equivalents
(125.1
)
 
(81.0
)
Net decrease in cash and equivalents
(330.4
)
 
(331.3
)
Cash and equivalents at beginning of year(1)
$
1,107.9

 
$
1,209.6

Cash and equivalents at end of period(2)
$
777.5

 
$
878.3

 

8


*
Non-cash financing activities in the six months ended June 30, 2013 included the change in fair market value of interest-rate swap agreements of $(.7).
(1)
Includes cash and cash equivalents of discontinued operations of $2.7 at the beginning of the year in 2013.
(2)
Includes cash and cash equivalents of discontinued operations of $5.1 at the end of the period in 2013.
The accompanying notes are an integral part of these statements.

9


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

1. ACCOUNTING POLICIES
Basis of Presentation
We prepare our unaudited interim consolidated financial statements in conformity with accounting principles generally accepted in the United States ("GAAP"). We consistently applied the accounting policies described in our 2013 Annual Report on Form 10-K ("2013 Form 10-K") in preparing these unaudited financial statements. 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 2013 Form 10-K. When used in this report, the terms "Avon," "Company," "we" or "us" mean Avon Products, Inc.
For interim consolidated financial statement purposes, our tax provision is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. We also provide for accruals under our various employee benefit plans for each quarter based on one quarter of the estimated annual expense.
During the first quarter of 2014, we revised our consolidated financial statements to reflect tooling balances in other assets, while they had been previously reported in inventories, as we believe that this is a better presentation of our tooling assets. Tooling assets are the plates and molds used in the manufacturing process of our beauty products. This revision did not impact cash flows from operating activities, our Consolidated Statements of Income or our Consolidated Statements of Comprehensive Income. We determined that the effect of this revision was not material to any of our previously issued financial statements.
Venezuela Currency
We account for Venezuela as a highly inflationary economy. In February 2014, the Venezuelan government announced a new foreign exchange system ("SICAD II") which began operating on March 24, 2014. There are multiple legal mechanisms in Venezuela to exchange currency. As SICAD II represents the rate which better reflects the economics of Avon Venezuela's business activity, we concluded that we should utilize the SICAD II exchange rate to remeasure our Venezuelan operations as of March 31, 2014. As a result of the change to the SICAD II rate, which caused the recognition of a devaluation of approximately 88% as compared to the official exchange rate we used previously, we recorded an after-tax loss of $42 ($54 in other expense, net, and a benefit of $12 in income taxes) in the first quarter of 2014, primarily reflecting the write-down of monetary assets and liabilities. In addition, as a result of using the historical U.S. dollar cost basis of non-monetary assets, such as inventories, these assets continued to be remeasured, following the change to the SICAD II rate, at the applicable rate at the time of acquisition. The remeasurement of non-monetary assets at the historical U.S. dollar cost basis causes a disproportionate expense as these assets are consumed in operations, negatively impacting operating profit and net income during the six months ended June 30, 2014. Also as a result, we determined that an adjustment of $116 to cost of sales was needed to reflect certain non-monetary assets at their net realizable value, which was recorded in the first quarter of 2014. In addition, at March 31, 2014, we reviewed Avon Venezuela's long-lived assets to determine whether the carrying amount of the assets were recoverable, and determined that they were. As such, no impairment of Avon Venezuela's long-lived assets was required.
Effective February 13, 2013, the Venezuelan government devalued its currency by approximately 32% and as such we recorded an after-tax loss of $51 ($34 in other expense, net, and $17 in income taxes) in the first quarter of 2013, primarily reflecting the write-down of monetary assets and liabilities and deferred tax benefits. In addition, as a result of using the historical U.S. dollar cost basis of non-monetary assets, such as inventories, acquired prior to the devaluation, operating profit and net income during the six months ended June 30, 2013 were negatively impacted.
Standards to be Implemented
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers, issued as a new Topic, Accounting Standards Codification Topic 606. The core principle of the guidance is that a Company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This standard is effective beginning in 2017 and can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are currently evaluating the effect that adopting this new accounting guidance will have on our consolidated financial statements.

10


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



2. EARNINGS PER SHARE AND SHARE REPURCHASES
We compute earnings (loss) per share ("EPS") using the two-class method, which is an earnings (loss) allocation formula that determines earnings (loss) per share for common stock and participating securities. Our participating securities are our grants of restricted stock and restricted stock units, which contain non-forfeitable rights to dividend equivalents. 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
 
Six Months Ended
 
 
June 30,
 
June 30,
(Shares in millions)
 
2014
 
2013
 
2014
 
2013
Numerator from continuing operations:
 
 
 
 
 
 
 
 
Income (loss) from continuing operations, less amounts attributable to noncontrolling interests
 
$
19.0

 
$
82.3

 
$
(149.3
)
 
$
69.7

Less: Loss (income) allocated to participating securities
 
.1

 
(.7
)
 
2.3

 
(.6
)
Income (loss) from continuing operations allocated to common shareholders
 
19.1

 
81.6

 
(147.0
)
 
69.1

Numerator from discontinued operations:
 
 
 
 
 
 
 
 
Loss from discontinued operations
 
$

 
$
(50.4
)
 
$

 
$
(51.5
)
Less: Loss allocated to participating securities
 

 
.4

 

 
.5

Loss allocated to common shareholders
 

 
(50.0
)
 

 
(51.0
)
Numerator attributable to Avon:
 
 
 
 
 
 
 
 
Net income (loss) attributable to Avon
 
$
19.0

 
$
31.9

 
$
(149.3
)
 
$
18.2

Less: Loss (income) allocated to participating securities
 
.1

 
(.3
)
 
2.3

 
(.2
)
Income (loss) allocated to common shareholders
 
19.1

 
31.6

 
(147.0
)
 
18.0

Denominator:
 
 
 
 
 
 
 
 
Basic EPS weighted-average shares outstanding
 
434.6

 
433.5

 
434.4

 
433.0

Diluted effect of assumed conversion of stock options
 

 
1.1

 

 
.9

Diluted EPS adjusted weighted-average shares outstanding
 
434.6

 
434.6

 
434.4

 
433.9

Income (Loss) per Common Share from continuing operations:
 
 
 
 
 
 
 
 
Basic
 
$
.04

 
$
.19

 
$
(.34
)
 
$
.16

Diluted
 
.04

 
.19

 
(.34
)
 
.16

Loss per Common Share from discontinued operations:
 
 
 
 
 
 
 
 
Basic
 
$

 
$
(.12
)
 
$

 
$
(.12
)
Diluted
 

 
(.11
)
 

 
(.12
)
Income (Loss) per Common Share attributable to Avon:
 
 
 
 
 
 
 
 
Basic
 
$
.04

 
$
.07

 
$
(.34
)
 
$
.04

Diluted
 
.04

 
.07

 
(.34
)
 
.04

Amounts in the table above may not necessarily sum due to rounding.
During the three and six months ended June 30, 2014, we did not include stock options to purchase 17.7 million shares and 19.0 million shares of Avon common stock, respectively, in the calculations of diluted EPS because the exercise prices of those options were greater than the average market price. During the three and six months ended June 30, 2013, we did not include stock options to purchase 17.3 million shares and 18.2 million shares of Avon common stock, respectively, in the calculations of diluted EPS because the exercise prices of those options were greater than the average market price. Since the inclusion of such shares would be anti-dilutive, these are excluded from the calculation.
We purchased approximately .6 million shares of Avon common stock for $9.0 during the first six months of 2014, as compared to approximately .4 million shares of Avon common stock for $7.6 during the first six months of 2013, through acquisition of

11


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


stock from employees in connection with tax payments upon vesting of restricted stock units and private transactions with a broker in connection with stock based obligations under our Deferred Compensation Plan.
3. DISCONTINUED OPERATIONS
On June 30, 2013, the Company entered into an agreement to sell its Silpada jewelry business (“Silpada”) for $85, plus an earn-out of up to $15 if Silpada achieves specific earnings targets over two years. Silpada was previously reported within our North America segment and has been classified within discontinued operations for all periods presented. The transaction closed on July 3, 2013. Proceeds from the sale were used for general corporate purposes, including the repayment of outstanding debt. The benefit associated with the earn-out will be recorded in discontinued operations only when it becomes realizable by Avon. In the second quarter of 2013, the Company recorded a pre-tax charge of $79 ($50 net of tax), reflecting the expected loss on sale, which represents the difference between the carrying value of the Silpada business and the expected proceeds.
Summarized financial information for discontinued operations is shown below:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2013
 
2013
Total revenue
 
$
24.7

 
$
52.3

Operating loss(1)
 
(80.0
)
 
(81.9
)
(1) Operating loss for the three and six months ended June 30, 2013 includes a pre-tax charge of $79, reflecting the expected loss on sale.
4. INVENTORIES
Components of Inventories
 
June 30, 2014
 
December 31, 2013
Raw materials
 
$
302.0

 
$
272.9

Finished goods
 
663.7

 
694.8

Total
 
$
965.7

 
$
967.7

5. EMPLOYEE BENEFIT PLANS 
 
 
Three Months Ended June 30,
 
 
Pension Benefits
 
 
 
 
Net Periodic Benefit Costs
 
U.S. Plans
 
Non-U.S. Plans
 
Postretirement Benefits
 
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Service cost
 
$
3.1

 
$
3.4

 
$
2.1

 
$
2.8

 
$
.3

 
$
.5

Interest cost
 
8.3

 
7.0

 
9.0

 
9.0

 
1.3

 
1.1

Expected return on plan assets
 
(9.5
)
 
(9.4
)
 
(11.1
)
 
(10.1
)
 

 

Amortization of prior service credit
 
(.1
)
 
(.1
)
 

 

 
(1.1
)
 
(1.2
)
Amortization of net actuarial losses
 
13.8

 
12.0

 
2.3

 
2.7

 
.5

 
.6

Settlements/curtailments
 
25.0

 

 

 
(7.5
)
 

 

Net periodic benefit costs
 
$
40.6

 
$
12.9

 
$
2.3

 
$
(3.1
)
 
$
1.0

 
$
1.0


12


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


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
Pension Benefits
 
 
 
 
Net Periodic Benefit Costs
 
U.S. Plans
 
Non-U.S. Plans
 
Postretirement Benefits
 
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Service cost
 
$
6.5

 
$
8.4

 
$
4.5

 
$
7.6

 
$
.6

 
$
1.0

Interest cost
 
15.0

 
13.6

 
18.6

 
18.1

 
2.6

 
2.5

Expected return on plan assets
 
(17.9
)
 
(18.8
)
 
(22.0
)
 
(19.9
)
 

 

Amortization of prior service credit
 
(.2
)
 
(.2
)
 

 
(.3
)
 
(2.2
)
 
(2.4
)
Amortization of net actuarial losses
 
24.5

 
23.3

 
4.6

 
7.3

 
1.0

 
1.4

Settlements/curtailments
 
25.0

 

 

 
(7.5
)
 

 

Net periodic benefit costs
 
$
52.9

 
$
26.3

 
$
5.7

 
$
5.3

 
$
2.0

 
$
2.5

As of June 30, 2014, we made approximately $48 and $16 of contributions to the U.S. and non-U.S. pension and postretirement benefit plans, respectively. During the remainder of 2014, we anticipate contributing approximately $5 to $10 and $14 to $19 to fund our U.S. and non-U.S. pension and postretirement benefit plans, respectively.
In an effort to reduce our pension benefit obligations, in March 2014, we offered former employees who are vested and participate in the U.S. pension plan a payment that would fully settle our pension plan obligation to those participants who elected to receive such payment. The election period ended during the second quarter of 2014 and the payments were made in June 2014 from our plan assets. As a result of the lump-sum payments made, in the second quarter of 2014, we recorded a settlement charge of $23.5. This settlement charge was allocated between Global Expenses and the operating results of North America.
6. CONTINGENCIES
FCPA Investigations
As previously reported, we have engaged outside counsel to conduct an internal investigation and compliance reviews focused on compliance with the Foreign Corrupt Practices Act ("FCPA") and related U.S. and foreign laws in China and additional countries. The internal investigation, which has been conducted under the oversight of our Audit Committee, began in June 2008. As previously reported in July 2009, in connection with the internal investigation, we commenced compliance reviews regarding the FCPA and related U.S. and foreign laws in additional countries in order to evaluate our compliance efforts. We have conducted these compliance reviews in a number of countries selected to represent each of the Company's international geographic segments. The internal investigation and compliance reviews have focused on reviewing certain expenses and books and records processes, including, but not limited to, travel, entertainment, gifts, use of third-party vendors and consultants and related due diligence, joint ventures and acquisitions, and payments to third-party agents and others, in connection with our business dealings, directly or indirectly, with foreign governments and their employees. The internal investigation and compliance reviews of these matters are substantially complete. In connection with the internal investigation and compliance reviews, certain personnel actions, including termination of employment of certain senior members of management, have been taken, and additional personnel actions may be taken in the future. In connection with the internal investigation and compliance reviews, we continue to enhance our ethics and compliance program, including our policies and procedures, FCPA compliance-related training, FCPA third-party due diligence program and other compliance-related resources.
As previously reported in October 2008, we voluntarily contacted the United States Securities and Exchange Commission ("SEC" and "Commission") and the United States Department of Justice ("DOJ") to advise both agencies of our internal investigation. We have cooperated and continue to cooperate with investigations of these matters by the SEC and the DOJ. We have, among other things, signed tolling agreements, responded to inquiries, translated and produced documents, assisted with interviews, and provided information on our internal investigation and compliance reviews, personnel actions taken and steps taken to enhance our ethics and compliance program. We also have made factual presentations which are now substantially complete.
As previously reported, we have reached an understanding with respect to terms of settlement with each of the DOJ and the staff of the SEC. Based on these understandings, the Company would, among other things: pay aggregate fines, disgorgement and prejudgment interest of $135 with respect to alleged violations of the books and records and internal control provisions of the FCPA, with $68 payable to the DOJ and $67 payable to the SEC; enter into a deferred prosecution agreement (“DPA”) with

13


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


the DOJ under which the DOJ would defer criminal prosecution of the Company for a period of three years in connection with alleged violations of the books and records and internal control provisions of the FCPA; agree to have a compliance monitor which, with the approval of the government, can be replaced after 18 months by the Company's agreement to undertake self-monitoring and reporting obligations for an additional 18 months. If the Company remains in compliance with the DPA during its term, the charges against the Company would be dismissed with prejudice. In addition, as part of any settlement with the DOJ, a subsidiary of Avon operating in China would enter a guilty plea in connection with alleged violations of the books and records provision of the FCPA. The expected terms of settlement do not require any change to our historical financial statements.
Final resolution of these matters is subject to preparation and negotiation of documentation satisfactory to all the parties, including approval by our board of directors and, in the case of the SEC, authorization by the Commission; court approval of the SEC settlement; and court approval of the DPA and acceptance of the expected guilty plea by an Avon subsidiary operating in China. We can provide no assurances that satisfactory final agreements will be reached, that authorization by the Commission or the court approvals will be obtained or that the court will accept the guilty plea or with respect to the timing or terms of any such agreements, authorization, and approvals and acceptance.
The Company recorded an additional accrual of $46 during the first quarter of 2014 with respect to these matters, bringing the total liability accrued at June 30, 2014 to $135.
If we do not reach final settlements on the expected terms or if the necessary approvals do not occur, either we may enter into further discussions with the DOJ and/or the SEC to resolve the matters under investigation on different terms and conditions or we may litigate the matters. We cannot predict the timing of any such further discussions and we expect any such alternative settlements would include civil and/or criminal fines and penalties and non-monetary remedies, such as oversight requirements and additional remediation and compliance requirements. If we do not reach settlements with the DOJ and/or the SEC, or if the necessary approvals do not occur, we cannot predict the outcome of any subsequent litigation with the government, but such litigation could have a material adverse effect.
Until these matters are resolved, either through settlement or litigation, we expect to continue to incur costs, primarily professional fees and expenses, which may be significant, in connection with the government investigations. If the currently-contemplated settlements are approved, we will incur ongoing costs related to the compliance monitor and self-monitoring and reporting obligations. Furthermore, under certain circumstances, we may also be required to advance and/or reimburse significant professional fees and expenses to certain current and former Company employees in connection with these matters.
Litigation Matters
In July and August 2010, derivative actions were filed in state court against certain present or former officers and/or directors of the Company (Carol J. Parker, derivatively on behalf of Avon Products, Inc. v. W. Don Cornwell, et al. and Avon Products, Inc. as nominal defendant (filed in the New York Supreme Court, Nassau County, Index No. 600570/2010); Lynne Schwartz, derivatively on behalf of Avon Products, Inc. v. Andrea Jung, et al. and Avon Products, Inc. as nominal defendant (filed in the New York Supreme Court, New York County, Index No. 651304/2010)). On November 22, 2013, a derivative action was filed in federal court against certain present or former officers and/or directors of the Company (Sylvia Pritika, derivatively on behalf of Avon Products, Inc. v. Ann S. Moore, et al. and Avon Products, Inc. as nominal defendant (filed in the United States District Court for the Southern District of New York, No. 13-CV-8369)). The claims asserted in one or more of these actions include alleged breach of fiduciary duty, abuse of control, waste of corporate assets, and unjust enrichment, relating to the Company's compliance with the FCPA, including the adequacy of the Company's internal controls. The relief sought against the individual defendants in one or more of these derivative actions include certain declaratory and equitable relief, restitution, damages, exemplary damages and interest. The Company is a nominal defendant, and no relief is sought against the Company itself. In the Parker case, plaintiff has agreed that defendants' time to file an answer, motion to dismiss or other response is adjourned until plaintiff files an amended pleading. In Schwartz, the parties have agreed to a stipulated schedule for further proceedings, which includes the potential for plaintiff to file a further amended complaint and for defendants to file a motion to dismiss. In Pritika, defendants moved to dismiss the complaint on March 7, 2014. We are unable to predict the outcome of these matters.
On July 6, 2011, a purported shareholder's class action complaint (City of Brockton Retirement System v. Avon Products, Inc., et al., No. 11-CIV-4665) was filed in the United States District Court for the Southern District of New York against certain present or former officers and/or directors of the Company. On September 29, 2011, the Court appointed LBBW Asset Management Investmentgesellschaft mbH and SGSS Deutschland Kapitalanlagegesellschaft mbH as lead plaintiffs and Motley Rice LLC as lead counsel. Lead plaintiffs have filed an amended complaint on behalf of a purported class consisting of all persons or entities who purchased or otherwise acquired shares of Avon's common stock from July 31, 2006 through and including October 26, 2011. The amended complaint names the Company and two individual defendants and asserts violations of Sections 10(b) and

14


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


20(a) of the Exchange Act based on allegedly false or misleading statements and omissions with respect to, among other things, the Company's compliance with the FCPA, including the adequacy of the Company's internal controls. Plaintiffs seek compensatory damages as well as injunctive relief. Defendants moved to dismiss the amended complaint on June 14, 2012. We are unable to predict the outcome of this matter. However, it is reasonably possible that we may incur a loss in connection with this matter. We are unable to reasonably estimate the amount or range of such reasonably possible loss.
Under some circumstances, any losses incurred in connection with adverse outcomes in the litigation matters described above could be material.
Brazilian Tax Matters
In 2002, our Brazilian subsidiary received an excise tax (IPI) assessment from the Brazilian tax authorities for alleged tax deficiencies during the years 1997-1998. In December 2012, additional assessments were received for the year 2008 with respect to excise tax (IPI) and taxes charged on gross receipts (PIS and COFINS), totaling approximately $386, $57 and $266 each, including penalties and accrued interest, at the exchange rate on June 30, 2014. The 2002 and the 2012 assessments assert that the establishment in 1995 of separate manufacturing and distribution companies in Brazil was done without a valid business purpose and that Avon Brazil did not observe minimum pricing rules to define the taxable basis of excise tax. The structure adopted in 1995 is comparable to that used by many other companies in Brazil. We believe that our Brazilian corporate structure is appropriate, both operationally and legally, and that the 2002 and 2012 assessments are unfounded.
These matters are being vigorously contested. In January 2013, we filed a protest seeking a first administrative level review with respect to the 2012 assessments. In July 2013, the 2012 IPI assessment was upheld at the first administrative level and we have appealed this decision to the second administrative level. In October 2013, the 2012 PIS and COFINS assessments were canceled in our favor by the first administrative level. This decision was subject to a mandatory appeal to the second administrative level by the Brazilian tax authorities. In March 2014, the second administrative level rendered a favorable decision in regard to the 2012 PIS and COFINS assessments resulting in the dismissal of these assessments, totaling approximately $57 and $266, respectively, including penalties and accrued interest, at the exchange rate on June 30, 2014. Although the Brazilian tax authorities had the right to appeal this decision, no such appeal was filed and in May 2014 the case was officially closed in favor of Avon Brazil. In October 2010, the 2002 assessment was upheld at the first administrative level at an amount reduced to approximately $30 from approximately $72, including penalties and accrued interest, at the exchange rate on June 30, 2014. We have appealed this decision to the second administrative level.
In the event that the 2002 or 2012 IPI assessments are upheld at the last administrative level, it may be necessary for us to provide security to pursue further appeals, which, depending on the circumstances, may result in a charge to earnings. It is not possible to reasonably estimate the amount or range of potential loss that we could incur related to the 2002 and 2012 IPI assessments or any additional assessments that may be issued for subsequent periods (tax years up through 2007 are closed by statute). However, other similar excise tax (IPI) assessments involving different periods (1998-2001) have been canceled and officially closed in our favor by the second administrative level, and management believes that the likelihood that the 2002 and 2012 IPI assessments will be upheld is remote.
Other Matters
Various other lawsuits and claims, arising in the ordinary course of business or related to businesses previously sold, are pending or threatened against Avon. In management's opinion, based on its review of the information available at this time, the total cost of resolving such other contingencies at June 30, 2014, is not expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

15


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


7. ACCUMULATED OTHER COMPREHENSIVE INCOME
The tables below present the changes in accumulated other comprehensive loss ("AOCI") by component and the reclassifications out of AOCI for the three months ended June 30, 2014 and 2013:
Three Months Ended June 30, 2014:
 
Foreign Currency Translation Adjustments
 
Cash Flow Hedges
 
Net Investment Hedges
 
Pension and Postretirement Benefits
 
Total
Balance at March 31, 2014
 
$
(438.3
)
 
$
(4.8
)
 
$
(4.3
)
 
$
(423.7
)
 
$
(871.1
)
Other comprehensive income other than reclassifications
 
32.3

 

 

 

 
32.3

Reclassifications into earnings:
 
 
 
 
 
 
 
 
 
 
Derivative losses on cash flow hedges, net of tax of $.2(1)
 

 
.3

 

 

 
.3

Adjustments of and amortization of net actuarial gain and prior service cost, net of tax of $(5.1)(2)
 

 

 

 
(7.8
)
 
(7.8
)
Total reclassifications into earnings
 

 
.3

 

 
(7.8
)
 
(7.5
)
Balance at June 30, 2014
 
$
(406.0
)
 
$
(4.5
)
 
$
(4.3
)
 
$
(431.5
)
 
$
(846.3
)
Three Months Ended June 30, 2013:
 
Foreign Currency Translation Adjustments
 
Cash Flow Hedges
 
Net Investment Hedges
 
Pension and Postretirement Benefits
 
Total
Balance at March 31, 2013
 
$
(341.0
)
 
$
(6.0
)
 
$
(4.3
)
 
$
(537.9
)
 
$
(889.2
)
Other comprehensive loss other than reclassifications
 
(107.7
)
 

 

 

 
(107.7
)
Reclassifications into earnings:
 
 
 
 
 
 
 
 
 
 
Derivative losses on cash flow hedges, net of tax of $.2(1)
 

 
.3

 

 

 
.3

Adjustments of and amortization of net actuarial loss and prior service cost, net of tax of $7.1(2)
 

 

 

 
19.6

 
19.6

Total reclassifications into earnings
 

 
.3

 

 
19.6

 
19.9

Balance at June 30, 2013
 
$
(448.7
)
 
$
(5.7
)
 
$
(4.3
)
 
$
(518.3
)
 
$
(977.0
)
The tables below present the changes in AOCI by component and the reclassifications out of AOCI for the six months ended June 30, 2014 and 2013:
Six Months Ended June 30, 2014:
 
Foreign Currency Translation Adjustments
 
Cash Flow Hedges
 
Net Investment Hedges
 
Pension and Postretirement Benefits
 
Total
Balance at December 31, 2013
 
$
(429.3
)
 
$
(5.1
)
 
$
(4.3
)
 
$
(431.7
)
 
$
(870.4
)
Other comprehensive income other than reclassifications
 
23.3

 

 

 

 
23.3

Reclassifications into earnings:
 
 
 
 
 
 
 
 
 
 
Derivative losses on cash flow hedges, net of tax of $.4(1)
 

 
.6

 

 

 
.6

Adjustments of and amortization of net actuarial loss and prior service cost, net of tax of $(.3)(2)
 

 

 

 
.2

 
.2

Total reclassifications into earnings
 

 
.6

 

 
.2

 
.8

Balance at June 30, 2014
 
$
(406.0
)

$
(4.5
)

$
(4.3
)

$
(431.5
)

$
(846.3
)

16


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


Six Months Ended June 30, 2013:
 
Foreign Currency Translation Adjustments
 
Cash Flow Hedges
 
Net Investment Hedges
 
Pension and Postretirement Benefits
 
Total
Balance at December 31, 2012
 
$
(317.6
)
 
$
(6.8
)
 
$
(4.3
)
 
$
(548.0
)
 
$
(876.7
)
Other comprehensive loss other than reclassifications
 
(131.1
)
 

 

 

 
(131.1
)
Reclassifications into earnings:
 
 
 
 
 
 
 
 
 
 
Derivative losses on cash flow hedges, net of tax of $.6(1)
 

 
1.1

 

 

 
1.1

Adjustments of and amortization of net actuarial loss and prior service cost, net of tax of $12.1(2)
 

 

 

 
29.7

 
29.7

Total reclassifications into earnings
 

 
1.1

 

 
29.7

 
30.8

Balance at June 30, 2013
 
$
(448.7
)
 
$
(5.7
)
 
$
(4.3
)
 
$
(518.3
)
 
$
(977.0
)
(1) Gross amount reclassified to interest expense, and related taxes reclassified to income taxes.
(2) Gross amount reclassified to pension and postretirement expense, within selling, general & administrative expenses, and related taxes reclassified to income taxes.
Foreign exchange net gains of $5.4 and $1.3 for the three months ended June 30, 2014 and 2013, respectively, and a foreign exchange net gain of $.1 and net loss of $9.3 for the six months ended June 30, 2014 and 2013, respectively, resulting from the translation of actuarial losses and prior service cost recorded in AOCI are included in changes in foreign currency translation adjustments in the Consolidated Statements of Comprehensive Income.
8. SEGMENT INFORMATION
Summarized financial information concerning our reportable segments was as follows:
 
Three Months Ended June 30,
 
2014
 
2013
 
Revenue
 
Operating
Profit (Loss)
 
Revenue
 
Operating
Profit (Loss)
Latin America
$
1,053.8

 
$
98.0

 
$
1,252.1

 
$
147.8

Europe, Middle East & Africa
658.1

 
76.8

 
678.4

 
104.1

North America
304.1

 
(27.3
)
 
380.3

 
(11.5
)
Asia Pacific
172.6

 
(1.1
)
 
198.1

 
16.4

Total from operations
$
2,188.6

 
$
146.4

 
$
2,508.9

 
$
256.8

Global and other

 
(53.2
)
 

 
(54.6
)
Total
$
2,188.6

 
$
93.2

 
$
2,508.9

 
$
202.2

 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
2014
 
2013
 
Revenue
 
Operating
Profit (Loss)
 
Revenue
 
Operating
Profit (Loss)
Latin America
$
2,120.5

 
$
54.6

 
$
2,396.5

 
$
249.2

Europe, Middle East & Africa
1,312.9

 
144.2

 
1,411.5

 
215.5

North America
599.8

 
(35.8
)
 
758.8

 
(20.8
)
Asia Pacific
339.0

 
6.6

 
398.1

 
27.5

Total from operations
$
4,372.2

 
$
169.6

 
$
4,964.9

 
$
471.4

Global and other

 
(127.3
)
 

 
(95.2
)
Total
$
4,372.2

 
$
42.3

 
$
4,964.9

 
$
376.2

 


17


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



9. SUPPLEMENTAL BALANCE SHEET INFORMATION
At June 30, 2014 and December 31, 2013, prepaid expenses and other included the following:
Components of Prepaid Expenses and Other
 
June 30, 2014
 
December 31, 2013
Deferred tax assets
 
$
243.7

 
$
233.6

Prepaid taxes and tax refunds receivable
 
136.5

 
145.9

Prepaid brochure costs, paper, and other literature
 
80.8

 
95.7

Receivables other than trade
 
74.0

 
86.6

Short-term investments
 
32.9

 
31.7

Other
 
95.4

 
95.8

Prepaid expenses and other
 
$
663.3

 
$
689.3

At June 30, 2014 and December 31, 2013, other assets included the following: 
Components of Other Assets
 
June 30, 2014
 
December 31, 2013
Deferred tax assets
 
$
979.9

 
$
944.7

Long-term receivables
 
187.7

 
168.0

Capitalized software
 
118.8

 
122.9

Investments
 
34.2

 
33.8

Other intangible assets, net (Note 11)

 
33.1

 
33.5

Tooling
 
30.4

 
37.9

Other
 
36.4

 
34.5

Other assets
 
$
1,420.5

 
$
1,375.3


10. RESTRUCTURING INITIATIVES
$400M Cost Savings Initiative
In 2012, we announced a cost savings initiative (the "$400M Cost Savings Initiative") in an effort to stabilize the business and return Avon to sustainable growth, which is expected to be achieved through restructuring actions as well as other cost-savings strategies that will not result in restructuring charges. The $400M Cost Savings Initiative is designed to reduce our operating expenses as a percentage of total revenue to help us achieve a targeted low double-digit operating margin by 2016. The restructuring actions under the $400M Cost Savings Initiative primarily consist of global headcount reductions and related actions, as well as the closure of certain smaller, under-performing markets, including South Korea, Vietnam, Republic of Ireland, Bolivia and France. Other costs to implement these restructuring initiatives consist primarily of professional service fees and accelerated depreciation, and also include professional service fees associated with our North America business. The professional service fees associated with the North America business are contingent upon the achievement of operating profit targets. These fees are recognized over the period that the services are expected to be provided and are based upon our estimate of the total amount expected to be paid, which may change based on actual results.
As a result of the actions approved to-date, we have recorded total costs to implement these restructuring initiatives of $192.2 before taxes, of which $73.1 before taxes was recorded in the first half of 2014. For the actions approved to-date, we expect our total costs to implement restructuring to be in the range of $210 to $220 before taxes. The additional charges not yet incurred associated with the actions approved to-date of approximately $20 to $30 before taxes are expected to be recorded primarily in 2014. At this time we are unable to quantify the total costs to implement these restructuring initiatives that will be incurred through the time the initiative is fully implemented. In connection with the restructuring actions approved to-date associated with the $400M Cost Savings Initiative, we expect to realize annualized savings of approximately $250 to $260 (both before taxes). For market closures, the annualized savings represent the foregone selling, general and administrative expenses as a result of no longer operating in the respective markets. For actions that did not result in the closure of a market, the annualized savings represent the net reduction of expenses that will no longer be incurred by Avon. The annualized savings do not

18


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


incorporate the impact of the decline in revenue associated with these actions (including market closures), which is not expected to be material.
Restructuring Charges – Three and Six Months Ended June 30, 2014
During the three and six months ended June 30, 2014, we recorded costs to implement of $51.0 and $73.1, respectively, in selling, general and administrative expenses, in the Consolidated Statements of Income, related to the $400M Cost Savings Initiative. The costs consisted of the following:
charges of $34.6 and $49.5, respectively, primarily for employee-related costs, primarily severance benefits;
contract termination and other charges of $6.2 and $7.5, respectively, primarily related to the costs associated with the closure of the France market and the exit of the Service Model Transformation ("SMT") facility;
accelerated depreciation of $6.1 and $7.5, respectively, associated with the closure and rationalization of certain facilities and other assets;
charges of $3.7 and $3.7, respectively, primarily related to the accumulated foreign currency translation adjustments associated with the closure of the France market; and
implementation costs of $.4 during the three months ended June 30, 2014, primarily associated with the closure of the France market, and $4.9 during the six months ended June 30, 2014, primarily for professional service fees associated with our North America business.
The majority of cash payments, if applicable, associated with these charges are expected to be made during 2014.
Restructuring Charges – Three and Six Months Ended June 30, 2013
During the three and six months ended June 30, 2013, we recorded costs to implement of $8.5 and $28.8, respectively, related to the $400M Cost Savings Initiative. The costs consisted of the following:
net charges of $3.2 and $16.5, respectively, primarily for employee-related costs, including severance benefits;
contract termination and other charges of $3.9 and $3.9, respectively, primarily related to costs associated with the closure of the Republic of Ireland market;
accelerated depreciation of $4.9 and $11.8, respectively, associated with the closure and rationalization of certain facilities;
net benefits of $3.5 and $3.5, respectively, primarily related to the accumulated foreign currency translation adjustments associated with the closure of the Vietnam market;
implementation costs of $.4 and $.8, respectively, for professional service fees; and
net benefits of $.4 and $.7, respectively, related to inventory adjustments.
For the three months ended June 30, 2013, $8.9 of total costs to implement was recorded in selling, general and administrative expenses and a net benefit of $.4 was recorded in cost of sales, in the Consolidated Statements of Income. For the six months ended June 30, 2013, $29.5 of the total costs to implement was recorded in selling, general and administrative expenses and a net benefit of $.7 was recorded in cost of sales, in the Consolidated Statements of Income.

19


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


The liability balance for the $400M Cost Savings Initiative as of June 30, 2014 is as follows:
 
 
Employee-
Related
Costs
 
Currency Translation Adjustment Write-offs
 
Contract Terminations/Other
 
Total
Balance at December 31, 2013
 
$
46.7

 
$

 
$
1.8

 
$
48.5

2014 charges
 
53.4

 
3.7

 
7.8

 
64.9

Adjustments
 
(3.9
)
 

 
(.3
)
 
(4.2
)
Cash payments
 
(32.1
)
 

 
(5.8
)
 
(37.9
)
Non-cash write-offs
 
(1.6
)
 
(3.7
)
 

 
(5.3
)
Foreign exchange
 
(.5
)
 

 

 
(.5
)
Balance at June 30, 2014
 
$
62.0

 
$

 
$
3.5

 
$
65.5

Non-cash write-offs associated with employee-related costs are the result of curtailments, settlements and special termination benefits for pension plans due to the initiatives implemented.
The following table presents the restructuring charges incurred to-date, net of adjustments, under our $400M Cost Savings Initiative, along with the estimated charges expected to be incurred on approved initiatives under the plan:
 
 
Employee-
Related
Costs
 
Inventory/Asset
Write-offs
 
Currency
Translation
Adjustment
Write-offs
 
Contract
Terminations/Other
 
Total
Charges incurred to date
 
$
145.1

 
$
.7

 
.2

 
$
14.2

 
$
160.2

Estimated charges to be incurred on approved initiatives
 
2.7

 

 

 
.4

 
3.1

Total expected charges on approved initiatives
 
$
147.8

 
$
.7

 
$
.2

 
$
14.6

 
$
163.3

The charges, net of adjustments, of initiatives under the $400M Cost Savings Initiative by reportable business segment were as follows:
 
 
Latin
America
 
Europe, Middle East & Africa
 
North
America
 
Asia
Pacific
 
Corporate
 
Total
2012
 
$
12.9

 
$
1.1

 
$
18.0

 
$
12.9

 
$
3.6

 
$
48.5

2013
 
11.1

 
15.6

 
5.3

 
1.3

 
17.7

 
51.0

First quarter 2014
 
13.8

 
2.0

 
.7

 
.3

 
(.6
)
 
16.2

Second quarter 2014
 
1.6

 
13.2

 
9.8

 
2.6

 
17.3

 
44.5

Charges incurred to date
 
39.4

 
31.9

 
33.8

 
17.1

 
38.0

 
160.2

Estimated charges to be incurred on approved initiatives
 
4.3

 

 
(1.1
)
 
.3

 
(.4
)
 
3.1

Total expected charges on approved initiatives
 
$
43.7

 
$
31.9

 
$
32.7

 
$
17.4

 
$
37.6

 
$
163.3

As noted previously, for the initiatives approved to-date, we expect to record total costs to implement restructuring in the range of $210 to $220 before taxes under the $400M Cost Savings Initiative. The amounts shown in the tables above as charges recorded to-date relate to initiatives that have been approved and recorded in the financial statements as the costs are probable and estimable. The amounts shown in the tables above as total expected charges on approved initiatives represent charges recorded to-date plus charges yet to be recorded for approved initiatives as the relevant accounting criteria for recording an expense have not yet been met. In addition to the charges included in the tables above, we have incurred and will incur other costs to implement restructuring initiatives such as other professional service fees and accelerated depreciation.
Additional Restructuring Charges 2012
In an effort to improve operating performance, we identified certain actions in 2012 that we believe will enhance our operating model, reduce costs and improve efficiencies. In addition, we have relocated our corporate headquarters in New York City.
During the three and six months ended June 30, 2014, we recorded benefits of $.1 and $.1, respectively, in selling, general and administrative expenses, in the Consolidated Statements of Income. During the three and six months ended June 30, 2013, we

20


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


recorded benefits of $.4 and $.2, respectively, in selling, general and administrative expenses, in the Consolidated Statements of Income.
The liability balance for these various restructuring initiatives as of June 30, 2014 is as follows:
 
 
Employee-
Related
Costs
 
Contract Terminations/Other
 
Total
Balance at December 31, 2013
 
$
2.0

 
$
12.3

 
$
14.3

Adjustments
 
(.1
)
 

 
(.1
)
Cash payments
 
(1.1
)
 
(2.9
)
 
(4.0
)
Balance at June 30, 2014
 
$
.8

 
$
9.4

 
$
10.2

The actions associated with these various restructuring initiatives are substantially complete.
In addition, during the three and six months ended June 30, 2014, we recorded total costs to implement of $.3 and $.9, respectively, in selling, general and administrative expenses, and during the three and six months ended June 30, 2013, we recorded total costs to implement of $.4 and $.2, respectively, in selling, general and administrative expenses, in the Consolidated Statements of Income, associated with the restructuring programs launched in 2005 and 2009, which are substantially complete.

11. GOODWILL AND INTANGIBLE ASSETS
Goodwill
 
Latin
America
 
Europe, Middle East & Africa
 
Asia
Pacific
 
Total
Gross balance at December 31, 2013
$
112.6

 
$
167.3

 
$
85.0

 
$
364.9

Accumulated impairments

 

 
(82.4
)
 
(82.4
)
Net balance at December 31, 2013
$
112.6

 
$
167.3

 
$
2.6

 
$
282.5

 
 
 
 
 
 
 
 
Changes during the period ended June 30, 2014:
 
 
 
 
 
 
 
Foreign exchange
$
2.8

 
$
3.6

 
$

 
$
6.4

 
 
 
 
 
 
 
 
Gross balance at June 30, 2014
$
115.4

 
$
170.9

 
$
85.0

 
$
371.3

Accumulated impairments

 

 
(82.4
)
 
(82.4
)
Net balance at June 30, 2014
$
115.4

 
$
170.9

 
$
2.6

 
$
288.9

Other intangible assets
 
June 30, 2014
 
December 31, 2013
 
Gross
Amount
 
Accumulated
Amortization
 
Gross
Amount
 
Accumulated
Amortization
Finite-Lived Intangible Assets
 
 
 
 
 
 
 
Customer relationships
$
40.9

 
$
(38.2
)
 
$
39.9

 
$
(36.5
)
Licensing agreements
53.6

 
(49.1
)
 
52.3

 
(47.3
)
Noncompete agreements
8.2

 
(8.2
)
 
8.1

 
(8.1
)
Trademarks
6.6

 
(6.6
)
 
6.6

 
(6.6
)
Indefinite-Lived Trademarks
25.9

 

 
25.1

 

Total
$
135.2

 
$
(102.1
)
 
$
132.0

 
$
(98.5
)
Aggregate amortization expense was not material for the three and six months ended June 30, 2014 and 2013, and is not expected to be material for future periods.

21


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



12. FAIR VALUE
Assets and Liabilities Recorded at Fair Value
The fair value measurement provisions required by GAAP establish a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
Level 3 - Unobservable inputs based on our own assumptions.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of June 30, 2014:
 
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
Available-for-sale securities
$
2.6

 
$

 
$
2.6

Foreign exchange forward contracts

 
.9

 
.9

Total
$
2.6

 
$
.9

 
$
3.5

Liabilities:
 
 
 
 
 
Foreign exchange forward contracts
$

 
$
.9

 
$
.9

Total
$

 
.9

 
.9


The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis
as of December 31, 2013:
 
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
Money market funds
$
.5

 
$

 
$
.5

Available-for-sale securities
2.5

 

 
2.5

Foreign exchange forward contracts

 
3.4

 
3.4

Total
$
3.0

 
$
3.4

 
$
6.4

Liabilities:
 
 
 
 
 
Foreign exchange forward contracts
$

 
$
.3

 
$
.3

Total
$

 
$
.3

 
$
.3

 
 
 
 
 
 
 
 
Fair Value of Financial Instruments
Our financial instruments include cash and cash equivalents, available-for-sale securities, short-term investments, money market funds, accounts receivable, loans receivable, debt maturing within one year, accounts payable, long-term debt and foreign exchange forwards contracts. The carrying value for cash and cash equivalents, accounts receivable, accounts payable and short-term investments approximate fair value because of the short-term nature of these instruments.

22


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


The net asset (liability) amounts recorded in the balance sheet (carrying amount) and the estimated fair values of our remaining financial instruments at June 30, 2014 and December 31, 2013, respectively, consisted of the following:
 
June 30, 2014
 
December 31, 2013
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Available-for-sale securities
$
2.6

 
$
2.6

 
$
2.5

 
$
2.5

Money market funds

 

 
.5

 
.5

Debt maturing within one year(1)
(154.1
)
 
(154.1
)
 
(188.0
)
 
(188.0
)
Long-term debt(1)
(2,480.0
)
 
(2,536.9
)
 
(2,532.7
)
 
(2,511.6
)
Foreign exchange forward contracts

 

 
3.1

 
3.1

(1) The carrying value of debt maturing within one year and long-term debt includes any related discount or premium and unamortized deferred gains on terminated interest-rate swap agreements, as applicable.
The methods and assumptions used to estimate fair value are as follows:
Available-for-sale securities and money market funds - The fair values of these investments were the quoted market prices for issues listed on securities exchanges.
Debt maturing within one year and long-term debt - The fair values of our debt and other financing were determined using Level 2 inputs based on indicative market prices.
Foreign exchange forward contracts - The fair values of forward contracts were estimated based on quoted forward foreign exchange prices at the reporting date.
13. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We operate globally, with manufacturing and distribution facilities in various countries around the world. We may reduce our exposure to fluctuations in the fair value and cash flows associated with changes in interest rates and foreign exchange rates by creating offsetting positions through the use of derivative financial instruments. If we use foreign currency-rate sensitive and interest-rate sensitive instruments to hedge a certain portion of our existing and forecasted transactions, we would expect that any gain or loss in value of the hedge instruments generally would be offset by decreases or increases in the value of the underlying forecasted transactions. As of June 30, 2014, we do not have any interest-rate swap agreements.
We do not enter into derivative financial instruments for trading or speculative purposes, nor are we a party to leveraged derivatives. The master agreements governing our derivative contracts generally contain standard provisions that could trigger early termination of the contracts in certain circumstances, including if we were to merge with another entity and the creditworthiness of the surviving entity were to be "materially weaker" than that of Avon prior to the merger.
Derivatives are recognized on the balance sheet at their fair values. The following table presents the fair value of derivative instruments outstanding at June 30, 2014:
 
Asset
 
Liability
 
Balance Sheet
Classification
 
Fair
Value
 
Balance Sheet
Classification
 
Fair
Value
Derivatives not designated as hedges:
 
 
 
 
 
 
 
Foreign exchange forward contracts
Prepaid expenses and other
 
$
.9

 
Accounts payable
 
$
.9

Total derivatives not designated as hedges
 
 
$
.9

 
 
 
$
.9

Total derivatives
 
 
$
.9

 
 
 
$
.9

 

23


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


The following table presents the fair value of derivative instruments outstanding at December 31, 2013:
 
Asset
 
 
 
Liability
 
Balance Sheet
Classification
 
Fair
Value
 
Balance Sheet
Classification
 
Fair
Value
Derivatives not designated as hedges:
 
 
 
 
 
 
 
Foreign exchange forward contracts
Prepaid expenses and other
 
$
3.4

 
Accounts payable
 
$
.3

Total derivatives not designated as hedges
 
 
$
3.4

 
 
 
$
.3

Total derivatives
 
 
$
3.4

 
 
 
$
.3

Accounting Policies
If applicable, derivatives are recognized on the balance sheet at their fair values. When we become a party to a derivative instrument and intend to apply hedge accounting, we designate the instrument, for financial reporting purposes, as a fair value hedge, a cash flow hedge, or a net investment hedge. The accounting for changes in fair value (gains or losses) of a derivative instrument depends on whether we had designated it and it qualified as part of a hedging relationship and further, on the type of hedging relationship. We apply the following accounting policies:
Changes in the fair value of a derivative that is designated as a fair value hedge, along with the loss or gain on the hedged asset or liability that is attributable to the hedged risk are recorded in earnings.
Changes in the fair value of a derivative that is designated as a cash flow hedge are recorded in AOCI to the extent effective and reclassified into earnings in the same period or periods during which the transaction hedged by that derivative also affects earnings.
Changes in the fair value of a derivative that is designated as a hedge of a net investment in a foreign operation are recorded in foreign currency translation adjustments within AOCI to the extent effective as a hedge.
Changes in the fair value of a derivative that is not designated as a hedging instrument are recognized in earnings in other expense, net in the Consolidated Statements of Income.
Realized gains and losses on a derivative are reported in the Consolidated Statements of Cash Flows consistent with the nature of the underlying hedged item.
For derivatives designated as hedges, we assess, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Highly effective means that cumulative changes in the fair value of the derivative are between 80% and 125% of the cumulative changes in the fair value of the hedged item. The ineffective portion of a derivative’s gain or loss, if any, is recorded in earnings in other expense, net in the Consolidated Statements of Income. In addition, when we determine that a derivative is not highly effective as a hedge, hedge accounting is discontinued. When it is probable that a hedged forecasted transaction will not occur, we discontinue hedge accounting for the affected portion of the forecasted transaction, and reclassify gains or losses that were accumulated in AOCI to earnings in other expense, net in the Consolidated Statements of Income.
Interest Rate Risk
A portion of our borrowings is subject to interest rate risk. In the past we have used interest-rate swap agreements, which effectively converted the fixed rate on long-term debt to a floating interest rate, to manage our interest rate exposure. The agreements were designated as fair value hedges. As of December 31, 2013 and June 30, 2014, all designated interest-rate swap agreements have been terminated either in conjunction with repayment of the associated debt or in the January 2013 and March 2012 transactions described below. Approximately 6% and approximately 8% of our debt portfolio at June 30, 2014 and December 31, 2013, respectively, was exposed to floating interest rates.
In January 2013, we terminated eight of our interest-rate swap agreements previously designated as fair value hedges, with notional amounts totaling $1,000. As of the interest-rate swap agreements’ termination date, the aggregate favorable adjustment to the carrying value (deferred gain) of our debt was $90.4, which is being amortized as a reduction to interest expense over the remaining term of the underlying debt obligations. We incurred termination fees of $2.3 which were recorded in other expense, net in the Consolidated Statements of Income. For the three and six months ended June 30, 2014, the net impact of the gain amortization was $3.7 and $7.2, respectively. For the three and six months ended June 30, 2013, the net impact of the gain amortization was $13.8 and $19.0, respectively. The interest-rate swap agreements were terminated in order to improve our capital structure, including increasing our ratio of fixed-rate debt. At June 30, 2014, the unamortized deferred gain associated

24


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


with the January 2013 interest-rate swap termination was $57.1, and was included within long-term debt in the Consolidated Balance Sheets.
In March 2012, we terminated two of our interest-rate swap agreements previously designated as fair value hedges, with notional amounts totaling $350. As of the interest-rate swap agreements’ termination date, the aggregate favorable adjustment to the carrying value (deferred gain) of our debt was $46.1, which is being amortized as a reduction to interest expense over the remaining term of the underlying debt obligations through March 2019. We incurred termination fees of $2.5 which were recorded in other expense, net in the Consolidated Statements of Income. For the three and six months ended June 30, 2014, the net impact of the gain amortization was $1.5 and $3.1, respectively. For the three and six months ended June 30, 2013, the net impact of the gain amortization was $1.5 and $3.0, respectively. The interest-rate swap agreements were terminated in order to increase our ratio of fixed-rate debt. At June 30, 2014, the unamortized deferred gain associated with the March 2012 interest-rate swap termination was $32.6, and was included within long-term debt in the Consolidated Balance Sheets.
During the six months ended June 30, 2013, we recorded a net loss of $.7 in interest expense in the Consolidated Statements of Income for these interest-rate swap agreements previously designated as fair value hedges; however, no net gain or loss was recorded during the three and six months ended June 30, 2014 or the three months ended June 30, 2013 as the interest-rate swaps were terminated in the second quarter of 2013. The impact on interest expense of these interest-rate swap agreements was offset by an equal and offsetting impact in interest expense on our fixed-rate debt.
At times, we may de-designate the hedging relationship of a receive-fixed/pay-variable interest-rate swap agreement. In these cases, we enter into receive-variable/pay-fixed interest-rate swap agreements that are designated to offset the gain or loss on the de-designated contract. At June 30, 2014, we do not have undesignated interest-rate swap agreements. As the remaining undesignated interest-rate swap agreements were terminated in conjunction with the repayment of the associated debt in the second quarter of 2013, no net gain or loss was recorded during the three or six months ended June 30, 2014 or the three months ended June 30, 2013. During the six months ended June 30, 2013, we recorded an immaterial net loss in other expense, net in the Consolidated Statements of Income associated with the undesignated interest-rate swap agreements. There was no hedge ineffectiveness for the six months ended June 30, 2013 related to these interest-rate swaps.
Foreign Currency Risk
We use foreign exchange forward contracts to manage a portion of our foreign currency exchange rate exposures. At June 30, 2014, we had outstanding foreign exchange forward contracts with notional amounts totaling approximately $205 for the various currencies.
We use foreign exchange forward contracts to manage foreign currency exposure of intercompany loans. These contracts are not designated as hedges. The change in fair value of these contracts is immediately recognized in earnings and substantially offsets the foreign currency impact recognized in earnings relating to the intercompany loans. During the three and six months ended June 30, 2014, we recorded losses of $.2 and $.1, respectively, in other expense, net in the Consolidated Statements of Income related to these undesignated foreign exchange forward contracts. During the three and six months ended June 30, 2014, we recorded gains of $1.0 and $1.1, respectively, related to the intercompany loans, caused by changes in foreign currency exchange rates. During the three and six months ended June 30, 2013, we recorded losses of $5.1 and $8.1, respectively, in other expense, net in the Consolidated Statements of Income related to these undesignated foreign exchange forward contracts. During the three and six months ended June 30, 2013, we recorded gains of $5.5 and $8.6, respectively, related to the intercompany loans, caused by changes in foreign currency exchange rates.

14. DEBT
Revolving Credit Facility
In March 2013, we entered into a four-year $1 billion revolving credit facility (the “revolving credit facility”), which expires in March 2017. The revolving credit facility replaced the previous $1 billion revolving credit facility (the "2010 revolving credit facility"), which was terminated in March 2013 prior to its scheduled expiration in November 2013. There were no amounts drawn under the 2010 revolving credit facility on the date of termination and no early termination penalties were incurred. In the first quarter of 2013, $1.2 was recorded for the write-off of issuance costs related to the 2010 revolving credit facility. As discussed below under "Commercial Paper Program," the $1 billion available under the revolving credit facility is effectively reduced by the principal amount of any commercial paper outstanding (which was $0 at June 30, 2014). Borrowings under the revolving credit facility bear interest, at our option, at a rate per annum equal to LIBOR plus an applicable margin or a floating base rate plus an applicable margin, in each case subject to adjustment based on our credit ratings. As of June 30, 2014, there were no amounts outstanding under the revolving credit facility.

25


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


Public Notes
On April 15, 2013, we prepaid our 5.625% Notes, due March 1, 2014 (the "2014 Notes") at a prepayment price equal to 100% of the principal amount of $500.0, plus accrued interest of $3.4 and a make-whole premium of $21.7. In connection with the prepayment of our 2014 Notes, we incurred a loss on extinguishment of debt of $13.0 in the second quarter of 2013 consisting of the $21.7 make-whole premium for the 2014 Notes and the write-off of $1.1 of debt issuance costs and discounts related to the initial issuance of the 2014 Notes, partially offset by a deferred gain of $9.8 associated with the January 2013 interest-rate swap agreement termination. See Note 13, Derivative Instruments and Hedging Activities for further details. In addition, the $250.0 principal amount of our 4.80% Notes due March 1, 2013 and the $125.0 principal amount of our 4.625% Notes due May 15, 2013 were repaid in full at maturity.
In March 2013, we issued, in a public offering, $250.0 principal amount of 2.375% Notes, due March 15, 2016, $500.0 principal amount of 4.60% Notes, due March 15, 2020, $500.0 principal amount of 5.00% Notes, due March 15, 2023 and $250.0 principal amount of 6.95% Notes, due March 15, 2043 (collectively, the "Notes"). The net proceeds from these Notes were used to repay $380.0 of the outstanding principal amount of the term loan agreement, to prepay the Private Notes (as defined below) and 2014 Notes (plus make-whole premium and accrued interest), and to repay the 4.625% Notes, due May 15, 2013 at maturity. Interest on the Notes is payable semi-annually on March 15 and September 15 of each year. At June 30, 2014, we also have outstanding $250.0 principal amount of our 5.75% Notes due March 1, 2018, $250.0 principal amount of our 4.20% Notes due July 15, 2018 and $350.0 principal amount of our 6.50% Notes due March 1, 2019.
Debt Covenants
The revolving credit facility contains covenants limiting our ability to incur liens and enter into mergers and consolidations or sales of substantially all our assets. The revolving credit facility also contains covenants that limit our subsidiary debt to existing subsidiary debt at February 28, 2013 plus $500.0, with certain other exceptions. In addition, the revolving credit facility contains financial covenants which require our interest coverage ratio at the end of each fiscal quarter to equal or exceed 4:1 and our leverage ratio to not be greater than 3.75:1 at the end of the fiscal quarters ended June 30, 2014 and September 30, 2014, and 3.5:1 at the end of each fiscal quarter thereafter. In addition, the revolving credit facility contains customary events of default and cross-default provisions. The interest coverage ratio is determined by dividing our consolidated EBIT (as defined in the revolving credit facility) by our consolidated interest expense, in each case for the period of four fiscal quarters ending on the date of determination. The leverage ratio is determined by dividing the amount of our consolidated funded debt on the date of determination by our consolidated EBITDA (as defined in the revolving credit facility) for the period of four fiscal quarters ending on the date of determination. When calculating the interest coverage and leverage ratios, the revolving credit facility allows us, subject to certain conditions and limitations, to add back to our consolidated net income, among other items: (i) extraordinary and other non-cash losses and expenses, (ii) one-time fees, cash charges and other cash expenses, premiums or penalties incurred in connection with any asset sale, equity issuance or incurrence or repayment of debt or refinancing or modification or amendment of any debt instrument and (iii) cash charges and other cash expenses, premiums or penalties incurred in connection with any restructuring or relating to any legal or regulatory action, settlement, judgment or ruling, in an aggregate amount not to exceed $400.0 for the period from October 1, 2012 until the termination of commitments under the revolving credit facility; provided, that restructuring charges incurred after December 31, 2014 shall not be added back to our consolidated net income. We were in compliance with our interest coverage and leverage ratios under the revolving credit facility for the four fiscal quarters ended June 30, 2014. As of June 30, 2014, and based on then applicable interest rates, approximately $940 of the $1 billion revolving credit facility could have been drawn down without violating any covenant.
The indentures governing our outstanding notes described under the caption “Public Notes” above contain certain covenants, including limitations on the incurrence of liens and restrictions on the incurrence of sale/leaseback transactions and transactions involving a merger, consolidation or sale of substantially all of our assets. In addition, these indentures contain customary events of default and cross-default provisions. Further, we would be required to make an offer to repurchase our 5.75% Notes due March 1, 2018, our 6.50% Notes due March 1, 2019 and each series of the Notes at a price equal to 101% of their aggregate principal amount plus accrued and unpaid interest in the event of a change in control involving Avon and a corresponding credit ratings downgrade to below investment grade. In addition, the indenture governing the Notes contains interest rate adjustment provisions depending on our credit ratings.
Term Loan Agreement
On June 29, 2012, we entered into a $500.0 term loan agreement (the “term loan agreement”). Subsequently on August 2, 2012, we borrowed an incremental $50.0 of principal from subscriptions by new lenders under the term loan agreement. Borrowings under the term loan agreement bore interest, at our option, at a rate per annum equal to LIBOR plus an applicable margin or a floating base rate plus an applicable margin, in each case subject to adjustment based on our credit ratings.

26


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


In March 2013, we repaid $380.0 of the outstanding principal amount of the term loan agreement with a portion of the proceeds from the issuance of the Notes, which repayment resulted in a loss in the first quarter of 2013 of $1.6 on extinguishment of debt associated with the write-off of debt issuance costs related to the term loan agreement. On July 25, 2013, we prepaid $117.5 of the outstanding principal balance under the term loan agreement, without prepayment penalties. On June 30, 2014, we paid the $52.5 remaining outstanding principal balance under the term loan agreement, of which $39.4 was not yet due, without prepayment penalties. Amounts associated with the term loan agreement may not be reborrowed.
Private Notes
On March 29, 2013, we prepaid the $535.0 senior notes issued in 2010 in a private placement exempt from registration under the Securities Act of 1933, as amended (the "Private Notes"). In connection with the prepayment of our Private Notes, we incurred a loss on extinguishment of debt of $71.4 in the first quarter of 2013, which included a make-whole premium of $68.0 and the write-off of $3.4 of debt issuance costs related to the Private Notes.
Commercial Paper Program
We also maintain a $1 billion commercial paper program, which is supported by the revolving credit facility. Under this program, we may issue from time to time unsecured promissory notes in the commercial paper market in private placements exempt from registration under federal and state securities laws, for a cumulative face amount not to exceed $1 billion outstanding at any one time and with maturities not exceeding 270 days from the date of issue. The commercial paper short-term notes issued under the program are not redeemable prior to maturity and are not subject to voluntary prepayment. Outstanding commercial paper effectively reduces the amount available for borrowing under the revolving credit facility. Subsequent to the March 2013 public offering, we have not sought to issue commercial paper, but we believe that demand for our commercial paper would be limited as a result of our credit ratings. As of June 30, 2014, we did not have any outstanding commercial paper under this program.
Additional Information
Our long-term credit ratings are Baa3 (Negative Outlook) with Moody's and BBB- (Negative Outlook) with S&P, which are on the low end of investment grade, and BB (Negative Outlook) with Fitch, which is below investment grade. Additional rating agency reviews could result in a change in outlook or downgrade, which could limit our access to new financing, particularly short-term financing, reduce our flexibility with respect to working capital needs, affect the market price of some or all of our outstanding debt securities, as well as most likely result in an increase in financing costs, including interest expense under certain of our debt instruments, and less favorable covenants and financial terms of our financing arrangements.

27


AVON PRODUCTS, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(U.S. dollars in millions, except per share data)

OVERVIEW
We are a global manufacturer and marketer of beauty and related products. Our bus