Avon Reports Second-Quarter 2016 Results

Second-Quarter 2016

First-Half 2016

Estimated impact
($ in millions)

Estimated impact
on diluted EPS

Estimated impact 
($ in millions)

Estimated impact
on diluted EPS

Impact on Reported (GAAP) results:

Total revenue

(12) pts

(15) pts

Operating profit - transaction

$

(45)

$

(0.06)

$

(115)

$

(0.17)

Operating profit - translation

(25)

(0.04)

(50)

(0.07)

      Total operating profit

(70)

(0.10)

(165)

(0.24)

Operating margin

(350) bps

(460) bps

Revaluation of working capital

$

3

$

—

$

8

$

0.01

Diluted EPS

$

(0.10)

$

(0.23)

Impact on Adjusted (Non-GAAP)
   results:

Adjusted operating profit - transaction

$

(45)

$

(0.06)

$

(115)

$

(0.17)

Adjusted operating profit - translation

(25)

(0.04)

(55)

(0.08)

      Total Adjusted operating profit

$

(70)

$

(0.10)

$

(170)

$

(0.25)

Adjusted operating margin

(350) bps

(450) bps

Revaluation of working capital

$

3

$

—

$

13

$

0.02

Adjusted diluted EPS

$

(0.10)

$

(0.23)

Second-Quarter 2016 Segment Highlights (compared with second-quarter 2015)

THREE MONTHS ENDED JUNE 30, 2016

SEGMENT RESULTS

($ in millions)

Revenue

Active
Representatives

Average
Order
C$

Units
Sold

Price/
Mix C$

Ending
Representatives

US $

C$

Revenue & Drivers

% var.
vs 2Q15

% var.
vs 2Q15

% var.
vs 2Q15

% var.
vs 2Q15

% var.
vs 2Q15

% var.
 vs 2Q15

% var.
vs 2Q15

Europe, Middle East &
    Africa

$

520.9

(2)%

7%

4%

3%

2%

5%

6%

South Latin America

535.7

(12)

5

—

5

(2)

7

1

North Latin America

224.4

(5)

6

4

2

(6)

12

—

Asia Pacific

141.9

(10)

(5)

(8)

3

(4)

(1)

(4)

Total from reportable
   segments

1,422.9

(7)

5

1

4

(2)

7

2

Other operating
    segments and
    business activities

11.4

(66)

(61)

(100)

*

(100)

*

(100)

Total revenue

$

1,434.3

(8)%

4%

(2)%

6%

(3)%

7%

(1)%

Operating Profit/Margin

2016 Operating
Profit US$

2016
Operating
Margin US$

Change in
US$ vs
2Q15

Change in
C$ vs
2Q15

Segment profit/margin

Europe, Middle East & Africa

$

83.4

16.0%

220 bps

250 bps

South Latin America

61.0

11.4

—

10

North Latin America

32.1

14.3

90

110

Asia Pacific

14.8

10.4

—

30

Total from reportable segments

191.3

13.4

100

130

Other operating segments and business
    activities

0.7

6.1

*

*

Unallocated global expenses

(87.5)

—

*

*

CTI restructuring initiatives

(9.4)

*

*

*

Operating profit

95.1

160 bps

* Calculation not meaningful

Other operating segments and business activities include the business results for Liz Earle, which was sold in July 2015, and Venezuela, which was deconsolidated effective March 31, 2016. Other operating segments and business activities also include revenue from the sale of products to New Avon LLC since the separation of the Company's North America business into New Avon LLC on March 1, 2016 and ongoing royalties from the licensing of the Company's name and products.

1.

The Company deconsolidated its Venezuela business as of March 31, 2016 due to the continued lack of exchangeability of the Venezuelan currency and its impact on the Company's ability to exercise sufficient control over the operations of the business in Venezuela. For reporting purposes, this means that the operating results (revenue and expenses) of Venezuela are included in the first quarter of 2016 and all periods prior, but Venezuela's financial results are not included in subsequent periods beginning with the second quarter of 2016. The associated net assets of Venezuela were written off as of March 31, 2016. As discussed further below, the operating results of Venezuela are not included in a reportable segment and instead are presented in Other operating segments and business activities;

2.

The Company has changed its segment reporting:

a.

To align with the revised operating model, the Company has changed its reportable segments to now be: Europe, Middle East & Africa; South Latin America; North Latin America; and Asia Pacific;

b.

Avon is including the items below in Other operating segments and business activities: 

i.

Venezuela operating results, which have been deconsolidated as of March 31, 2016;

ii.

The historical results of the Liz Earle business, which was sold in July 2015;

iii.

Royalties for the use of the Company's name and products in various countries; and

iv.

Product sales to the recently separated North America business.

The Company believes these segment changes, as well as the inclusion of totals of reportable segments, provide a clearer comparison of its core operating results;

c.

Avon has changed the methodology of allocating global expenses to the segments. Segment profit excludes any allocation of global expenses other than global marketing expenses. The Company has allocated global marketing expenses to the reportable segments to ensure comparability between periods; and

d.

Avon has changed the measure of profit disclosed for segments and refers to it as Segment profit and Segment margin, which is similar to what the Company previously used in its segment reporting as Adjusted operating profit and Adjusted operating margin, which will simplify the disclosure of segment profit.

3.

The Company has begun disclosing the Change in Ending Representatives, which the Company believes can be a useful indicator of potential revenue performance; and

4.

In the Form 10-Q filed for the quarter ended June 30, 2016, the Company has included a discussion of the Series C Convertible Preferred Stock that was issued to an affiliate of Cerberus Capital Management for $435 million during the first quarter of 2016.

a.

The Series C Convertible Preferred Stock has cumulative dividends that accrue daily and are payable at a rate of 1.25% per quarter. These dividends are not presented on the Consolidated Statements of Operations; however, these preferred dividends and shares are considered when determining earnings per share through a series of calculations.

b.

If a loss is reported in a period, the preferred dividends increase the loss allocated to common shareholders. The preferred shares do not impact the number of shares used in the basic or diluted EPS calculation as doing so would be antidilutive to the loss per share.

c.

If income is reported for the period, the following two calculations are performed and the calculation with the lower result is presented:

i.

Reported income is reduced by the larger of the preferred dividends accrued in the period or the percentage of earnings allocable to the preferred stock as if they had been converted to common stock, and the resulting amount is divided by the basic or diluted weighted shares outstanding; or

ii.

The amount of shares that would be issued if the preferred shares had been converted are added to the weighted average basic or diluted shares outstanding and this total is divided into the reported income.

AVON PRODUCTS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In millions, except per share data)

Three Months Ended

Percent
Change

Six Months Ended

Percent
Change

June 30

June 30

2016

2015

2016

Net sales

$

1,399.5

$

1,544.5

(9)%

$

2,679.5

$

3,077.4

(13)%

Other revenue

34.8

20.4

61.3

39.6

Total revenue

1,434.3

1,564.9

(8)%

2,740.8

3,117.0

(12)%

Cost of sales

565.0

611.0

1,083.8

1,222.7

Selling, general and administrative expenses

774.2

864.2

1,554.1

1,837.5

Operating profit

95.1

89.7

6%

102.9

56.8

81%

Interest expense

33.2

30.5

65.9

58.6

Interest income

(5.3)

(3.1)

(9.3)

(6.1)

Other (income) expense, net

(4.7)

1.1

132.5

19.8

Total other expenses

23.2

28.5

189.1

72.3

Income (loss) from continuing operations, before taxes

71.9

61.2

17%

(86.2)

(15.5)

*

Income taxes

(36.1)

(32.3)

(33.8)

(98.2)

Income (loss) from continuing operations, net of tax

35.8

28.9

24%

(120.0)

(113.7)

(6)%

(Loss) income from discontinued operations, net of tax

(2.6)

0.8

(12.2)

(3.0)

Net income (loss)

33.2

29.7

(132.2)

(116.7)

Net income attributable to noncontrolling interests

(0.2)

(0.9)

(0.7)

(1.8)

Net income (loss) attributable to Avon

$

33.0

$

28.8

15%

$

(132.9)

$

(118.5)

(12)%

Earnings (loss) per share:⁽¹⁾

Basic

Basic EPS from continuing operations

$

0.07

$

0.06

17%

$

(0.29)

$

(0.26)

(12)%

Basic EPS from discontinued operations

(0.01)

—

(0.03)

(0.01)

Basic EPS attributable to Avon

$

0.06

$

0.07

(14)%

$

(0.32)

$

(0.27)

(19)%

Diluted

Diluted EPS from continuing operations

$

0.07

$

0.06

17%

$

(0.29)

$

(0.26)

(12)%

Diluted EPS from discontinued operations

(0.01)

—

(0.03)

(0.01)

Diluted EPS attributable to Avon

$

0.06

$

0.07

(14)%

$

(0.32)

$

(0.27)

(19)%

Weighted-average shares outstanding:

Basic

436.9

435.2

436.4

435.0

436.9

435.2

436.4

435.0

* Calculation not meaningful

  (1) Under the two-class method, earnings (loss) per share is calculated using net income (loss) allocable to common shares, which is derived by reducing net income (loss) by the earnings (loss) allocable to participating securities and earnings allocated to convertible preferred stock. Net income (loss) allocable to common shares used in the basic and diluted loss per share calculation was $26.7 and $28.7 for the three months ended June 30, 2016 and 2015, respectively. Net loss allocable to common shares used in the basic and diluted loss per share calculation was ($138.4) and ($116.2) for the six months ended June 30, 2016 and 2015, respectively.

AVON PRODUCTS, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In millions)

June 30

December 31

2016

2015

Assets

Current Assets

Cash and cash equivalents

$

741.5

$

686.9

Accounts receivable, net

466.2

443.0

Inventories

665.5

624.0

Prepaid expenses and other

314.0

296.1

Current assets of discontinued operations

7.0

291.1

Total current assets

2,194.2

2,341.1

Property, plant and equipment, at cost

1,507.6

1,495.7

Less accumulated depreciation

(764.3)

(728.8)

Property, plant and equipment, net

743.3

766.9

Goodwill

96.1

92.3

Other assets

604.5

490.0

Noncurrent assets of discontinued operations

—

180.1

Total assets

$

3,638.1

$

3,870.4

Liabilities and Shareholders' Deficit

Current Liabilities

Debt maturing within one year

$

48.8

$

55.2

Accounts payable

723.7

774.2

Accrued compensation

138.8

157.6

Other accrued liabilities

417.9

419.6

Sales and taxes other than income

144.3

174.9

Income taxes

6.6

23.9

Payable to discontinued operations

—

100.0

Current liabilities of discontinued operations

12.0

489.7

Total current liabilities

1,492.1

2,195.1

Long-term debt

2,139.6

2,150.5

Employee benefit plans

164.9

177.5

Long-term income taxes

76.7

65.1

Other liabilities

162.1

78.4

Noncurrent liabilities of discontinued operations

—

260.2

Total liabilities

4,035.4

4,926.8

Series C convertible preferred stock

433.6

—

Shareholders' Deficit

Common stock

188.5

187.9

Additional paid-in capital

2,266.1

2,254.0

Retained earnings

2,308.0

2,448.1

Accumulated other comprehensive loss

(1,009.8)

(1,366.2)

Treasury stock, at cost

(4,597.8)

(4,594.1)

Total Avon shareholders' deficit

(845.0)

(1,070.3)

Noncontrolling interests

14.1

13.9

Total shareholders' deficit

(830.9)

(1,056.4)

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

$

3,638.1

$

3,870.4

AVON PRODUCTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In millions)

Six Months Ended

June 30

2016

2015

Cash Flows from Operating Activities

Net loss

$

(132.2)

$

(116.7)

Loss from discontinued operations, net of tax

12.2

3.0

Loss from continuing operations, net of tax

$

(120.0)

$

(113.7)

Adjustments to reconcile net loss to net cash used by operating activities:

Depreciation

41.7

49.7

Amortization

14.7

17.4

Provision for doubtful accounts

73.8

68.1

Provision for obsolescence

18.5

22.7

Share-based compensation

16.0

11.9

Foreign exchange losses

—

6.1

Deferred income taxes

(15.0)

29.2

Charge for Venezuelan monetary assets and liabilities

—

(4.2)

Charge for Venezuelan non-monetary assets

—

101.7

Loss on deconsolidation of Venezuela

120.5

—

Other

1.7

3.7

Changes in assets and liabilities:

Accounts receivable

(90.4)

(80.1)

Inventories

(69.6)

(70.5)

Prepaid expenses and other

2.3

(51.4)

Accounts payable and accrued liabilities

(65.5)

(42.8)

Income and other taxes

(24.2)

(25.5)

Noncurrent assets and liabilities

(34.7)

(29.2)

Net cash used by operating activities of continuing operations

(130.2)

(106.9)

Cash Flows from Investing Activities

Capital expenditures

(42.7)

(40.4)

Disposal of assets

1.9

4.3

Purchases of investments

—

(11.9)

Proceeds from sale of investments

—

0.6

Reduction of cash due to Venezuela deconsolidation

(4.5)

—

Other investing activities

1.6

—

Net cash used by investing activities of continuing operations

(43.7)

(47.4)

Cash Flows from Financing Activities

Cash dividends

—

(53.6)

Debt, net (maturities of three months or less)

(11.6)

(0.3)

Proceeds from debt

8.8

7.6

Repayment of debt

(6.2)

(4.4)

Repurchase of common stock

(3.7)

(2.5)

Net proceeds from the sale of series C convertible preferred stock

426.3

—

Other financing activities

(1.0)

(5.8)

Net cash provided (used) by financing activities of continuing operations

412.6

(59.0)

Cash Flows from Discontinued Operations

Net cash used by operating activities of discontinued operations

(65.9)

(3.0)

Net cash used by investing activities of discontinued operations

(96.7)

(1.7)

Net cash used by financing activities of discontinued operations

—

(10.1)

Net cash used by discontinued operations

(162.6)

(14.8)

Effect of exchange rate changes on cash and cash equivalents

(19.3)

(29.4)

Net increase (decrease) in cash and cash equivalents

56.8

(257.5)

Cash and cash equivalents at beginning of year⁽¹⁾

684.7

960.5

Cash and cash equivalents at end of period⁽²⁾

$

741.5

$

703.0

(1)

Includes cash and cash equivalents of discontinued operations of $(2.2) and $24.1 at the beginning of the year in 2016 and 2015.

(2)

Includes cash and cash equivalents of discontinued operations of $1.0 and cash and cash equivalents held for sale of $6.1 at June 30, 2015.

AVON PRODUCTS, INC.

SUPPLEMENTAL SCHEDULE

SEGMENT PERFORMANCE METRICS

(Unaudited)

(In millions)

THREE MONTHS ENDED JUNE 30, 2016

SEGMENT RESULTS

Average

Revenue

Active

Order

Units

Price/

Ending

US $

C$

Representatives

C$

Sold

Mix C$

Representatives

Revenue & Drivers

% var.
vs 2Q15

% var.
vs 2Q15

% var. 
vs 2Q15

% var.
vs 2Q15

% var.
vs 2Q15

% var.
vs 2Q15

% var.
vs 2Q15

Europe, Middle East &
    Africa

$

520.9

(2)%

7%

4%

3%

2%

5%

6%

South Latin America

535.7

(12)

5

—

5

(2)

7

1

North Latin America

224.4

(5)

6

4

2

(6)

12

—

Asia Pacific

141.9

(10)

(5)

(8)

3

(4)

(1)

(4)

Total from reportable
    segments

1,422.9

(7)

5

1

4

(2)

7

2

Other operating
    segments and
    business activities

11.4

(66)

(61)

(100)

*

(100)

*

(100)

Total revenue

$

1,434.3

(8)%

4%

(2)%

6%

(3)%

7%

(1)%

Operating Profit/Margin

2016 Operating
Profit US$

2016
Operating
Margin US$

Change in
US$ vs
2Q15

Change in
C$ vs
2Q15

Segment profit/margin

Europe, Middle East & Africa

$

83.4

16.0%

220 bps

250 bps

South Latin America

61.0

11.4

—

10

North Latin America

32.1

14.3

90

110

Asia Pacific

14.8

10.4

—

30

Total from reportable segments

191.3

13.4

100

130

Other operating segments and business
    activities

0.7

6.1

*

*

Unallocated global expenses

(87.5)

—

*

*

CTI restructuring initiatives

(9.4)

*

*

*

Operating profit

$

95.1

6.6%

90 bps

160 bps

*Calculation not meaningful

Other operating segments and business activities include the business results for Liz Earle, which was sold in July 2015, and Venezuela, which was deconsolidated effective March 31, 2016. Other operating segments and business activities also include revenue from the sale of products to New Avon LLC since the separation of the Company's North America business into New Avon LLC on March 1, 2016 and ongoing royalties from the licensing of the Company's name and products.

AVON PRODUCTS, INC.

SUPPLEMENTAL SCHEDULE

SEGMENT PERFORMANCE METRICS

(Unaudited)

(In millions)

SIX MONTHS ENDED JUNE 30, 2016

SEGMENT RESULTS

Average

Revenue

Active

Order

Units

Price/

Ending

US $

C$

Representatives

C$

Sold

Mix C$

Representatives

Revenue & Drivers

% var.
vs 1H15

% var.
vs 1H15

% var.
vs 1H15

% var.
vs 1H15

% var.
vs 1H15

% var.
vs 1H15

% var.
vs 1H15

Europe, Middle East &
    Africa

$

1,041.3

9%

6%

3%

5%

4%

6%

South Latin America

962.1

(20)

2

(2)

4

(7)

9

1

North Latin America

429.1

(8)

4

—

4

(5)

9

—

Asia Pacific

278.6

(14)

(7)

(9)

2

(6)

(1)

(4)

Total from reportable
    segments

2,711.1

(11)

4

—

4

(3)

7

2

Other operating
    segments and
    business activities

29.7

(57)

(52)

(75)

*

(84)

*

(100)

Total revenue

$

2,740.8

(12)%

3%

(2)%

5%

(4)%

7%

(1)%

Operating Profit/Margin

2016 Operating
Profit US$

2016
Operating
Margin US$

Change in
US$ vs
1H15

Change in
C$ vs
1H15

Segment profit/margin

Europe, Middle East & Africa

$

152.1

14.6%

170 bps

220 bps

South Latin America

84.1

8.7

(270)

(270)

North Latin America

60.6

14.1

120

140

Asia Pacific

29.5

10.6

(140)

(100)

Total from reportable segments

326.3

12.0

(20)

10

Other operating segments and business
    activities

4.9

16.5

*

*

Unallocated global expenses

(172.1)

—

*

*

CTI restructuring initiatives

(56.2)

*

*

*

Operating profit

$

102.9

3.8%

200 bps

(50) bps

*Calculation not meaningful

Other operating segments and business activities include the business results for Liz Earle, which was sold in July 2015, and Venezuela, which was deconsolidated effective March 31, 2016. Other operating segments and business activities also include revenue from the sale of products to New Avon LLC since the separation of the Company's North America business into New Avon LLC on March 1, 2016 and ongoing royalties from the licensing of the Company's name and products.

AVON PRODUCTS, INC.

SUPPLEMENTAL SCHEDULE

(Unaudited)

(In millions)

CATEGORY SALES FROM REPORTABLE SEGMENTS (US$)

Consolidated

Three Months Ended June 30

US$

C$

2016

2015

% var. vs
 2Q15

% var. vs
2Q15

Beauty:

Skincare

$

417.6

$

451.2

(7)%

4%

Fragrance

361.4

394.9

(8)

5

Color

254.3

270.6

(6)

6

Total Beauty

1,033.3

1,116.7

(7)

5

Fashion & Home:

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

217.0

225.6

(4)

6

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

149.2

169.4

(12)

3

Total Fashion & Home

366.2

395.0

(7)

5

Net sales from reportable segments

1,399.5

1,511.7

(7)

5

Net sales from Other operating segments and business activities

—

32.8

(100)

(100)

Net sales

1,399.5

1,544.5

(9)

2

Other revenue

34.8

20.4

71

96

Total revenue

$

1,434.3

$

1,564.9

(8)

4

CATEGORY SALES FROM REPORTABLE SEGMENTS (US$)

Consolidated

Six Months Ended June 30

US$

C$

2016

2015

% var. vs
1H15

% var. vs
1H15

Beauty: