0000008868-11-000009.txt : 20110728 0000008868-11-000009.hdr.sgml : 20110728 20110728071858 ACCESSION NUMBER: 0000008868-11-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20110630 FILED AS OF DATE: 20110728 DATE AS OF CHANGE: 20110728 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVON PRODUCTS INC CENTRAL INDEX KEY: 0000008868 STANDARD INDUSTRIAL CLASSIFICATION: PERFUMES, COSMETICS & OTHER TOILET PREPARATIONS [2844] IRS NUMBER: 130544597 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04881 FILM NUMBER: 11991697 BUSINESS ADDRESS: STREET 1: 1345 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10105-0196 BUSINESS PHONE: 212-282-5000 MAIL ADDRESS: STREET 1: 1345 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10105-0196 10-Q 1 a2011630-10q.htm FORM 10-Q 2011.6.30-10Q
 
UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
_________________________
FORM 10-Q
_________________________
T
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2011
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.)
1345 Avenue of the Americas, New York, N.Y. 10105-0196
(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  ý    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  ý    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
ý
  
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  ý
The number of shares of Common Stock (par value $0.25) outstanding at June 30, 2011 was 430,706,790
 



TABLE OF CONTENTS
 
 
 
Page
Numbers
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
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, 2011
 
June 30, 2010
Net sales
$
2,815.9

 
$
2,596.9

Other revenue
40.5

 
31.6

Total revenue
2,856.4

 
2,628.5

Costs, expenses and other:
 
 
 
Cost of sales
1,018.0

 
962.1

Selling, general and administrative expenses
1,521.8

 
1,400.0

Operating profit
316.6

 
266.4

Interest expense
23.9

 
20.3

Interest income
(3.9
)
 
(3.4
)
Other expense, net
2.9

 
0.4

Total other expenses
22.9

 
17.3

Income from continuing operations, before taxes
293.7

 
249.1

Income taxes
(85.0
)
 
(84.1
)
Income from continuing operations, net of tax
208.7

 
165.0

Discontinued operations, net of tax

 
4.2

Net income
208.7

 
169.2

Net income attributable to noncontrolling interest
(2.5
)
 
(1.6
)
Net income attributable to Avon
$
206.2

 
$
167.6

Earnings per share:
 
 
 
Basic from continuing operations
$
0.48

 
$
0.38

Basic from discontinued operations
$

 
$
0.01

Basic attributable to Avon
$
0.48

 
$
0.39

Diluted from continuing operations
$
0.47

 
$
0.38

Diluted from discontinued operations
$

 
$
0.01

Diluted attributable to Avon
$
0.47

 
$
0.39

Cash dividends per common share
$
0.23

 
$
0.22

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, 2011
 
June 30, 2010
Net sales
$
5,407.4

 
$
5,013.4

Other revenue
78.1

 
61.4

Total revenue
5,485.5

 
5,074.8

Costs, expenses and other:
 
 
 
Cost of sales
1,967.8

 
1,896.8

Selling, general and administrative expenses
2,954.6

 
2,720.1

Operating profit
563.1

 
457.9

Interest expense
46.6

 
42.1

Interest income
(8.7
)
 
(8.3
)
Other expense, net
6.6

 
48.7

Total other expenses
44.5

 
82.5

Income from continuing operations, before taxes
518.6

 
375.4

Income taxes
(157.7
)
 
(167.7
)
Income from continuing operations, net of tax
360.9

 
207.7

Discontinued operations, net of tax
(8.6
)
 
4.8

Net income
352.3

 
212.5

Net income attributable to noncontrolling interest
(2.5
)
 
(2.4
)
Net income attributable to Avon
$
349.8

 
$
210.1

Earnings per share:
 
 
 
Basic from continuing operations
$
0.83

 
$
0.48

Basic from discontinued operations
$
(0.02
)
 
$
0.01

Basic attributable to Avon
$
0.81

 
$
0.49

Diluted from continuing operations
$
0.82

 
$
0.47

Diluted from discontinued operations
$
(0.02
)
 
$
0.01

Diluted attributable to Avon
$
0.80

 
$
0.48

Cash dividends per common share
$
0.46

 
$
0.44

The accompanying notes are an integral part of these statements.



4


AVON PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
In millions
June 30,
2011
 
December 31,
2010
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
1,011.0

 
$
1,179.9

Accounts receivable, net
828.8

 
826.3

Inventories
1,341.0

 
1,152.9

Prepaid expenses and other
1,104.2

 
1,025.2

Total current assets
$
4,285.0

 
$
4,184.3

Property, plant and equipment, at cost
2,861.2

 
2,750.9

Less accumulated depreciation
(1,169.4
)
 
(1,123.5
)
Property, plant and equipment, net
1,691.8

 
1,627.4

Goodwill
687.9

 
675.1

Other intangible assets, net
357.8

 
368.3

Other assets
1,094.3

 
1,018.6

Total assets
$
8,116.8

 
$
7,873.7

Liabilities and Shareholders’ Equity
 
 
 
Current Liabilities
 
 
 
Debt maturing within one year
$
807.4

 
$
727.6

Accounts payable
832.7

 
809.8

Accrued compensation
236.1

 
293.2

Other accrued liabilities
719.1

 
771.6

Sales and taxes other than income
212.7

 
207.6

Income taxes
111.3

 
146.5

Total current liabilities
2,919.3

 
2,956.3

Long-term debt
2,417.3

 
2,408.6

Employee benefit plans
492.9

 
561.3

Long-term income taxes
106.9

 
128.9

Other liabilities
142.1

 
146.0

Total liabilities
$
6,078.5

 
$
6,201.1

Contingencies (Note 5)


 


Shareholders’ Equity
 
 
 
Common stock
$
187.3

 
$
186.6

Additional paid-in capital
2,064.4

 
2,024.2

Retained earnings
4,761.4

 
4,610.8

Accumulated other comprehensive loss
(423.1
)
 
(605.8
)
Treasury stock, at cost
(4,565.7
)
 
(4,559.3
)
Total Avon shareholders’ equity
2,024.3

 
1,656.5

Noncontrolling interest
14.0

 
16.1

Total shareholders’ equity
$
2,038.3

 
$
1,672.6

Total liabilities and shareholders’ equity
$
8,116.8

 
$
7,873.7

The accompanying notes are an integral part of these statements.


5


AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Six Months Ended
In millions
June 30, 2011
 
June 30, 2010
Cash Flows from Operating Activities
 
 
 
Net income
$
352.3

 
$
212.5

Discontinued operations, net of tax
8.6

 
(4.8
)
Income from continuing operations
$
360.9

 
$
207.7

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
115.5

 
88.5

Provision for doubtful accounts
125.3

 
104.3

Provision for obsolescence
54.5

 
48.4

Share-based compensation
24.0

 
32.0

Deferred income taxes
(51.1
)
 
(18.8
)
Charge for Venezuelan monetary assets and liabilities

 
46.1

Other
55.1

 
23.0

Changes in assets and liabilities:
 
 
 
Accounts receivable
(103.0
)
 
(109.6
)
Inventories
(204.6
)
 
(108.8
)
Prepaid expenses and other
(13.0
)
 
(25.3
)
Accounts payable and accrued liabilities
(120.2
)
 
31.3

Income and other taxes
(58.5
)
 
(77.1
)
Noncurrent assets and liabilities
(96.7
)
 
(9.5
)
Net cash provided by operating activities of continuing operations
88.2

 
232.2

Cash Flows from Investing Activities
 
 
 
Capital expenditures
(144.5
)
 
(139.4
)
Disposal of assets
6.9

 
10.8

Purchases of investments
(26.8
)
 
(0.3
)
Proceeds from sale of investments
6.2

 
9.4

Acquisitions and other investing activities

 
(144.3
)
Net cash used by investing activities of continuing operations
(158.2
)
 
(263.8
)
Cash Flows from Financing Activities*
 
 
 
Cash dividends
(203.3
)
 
(189.5
)
Debt, net (maturities of three months or less)
(36.4
)
 
(36.4
)
Proceeds from debt
642.5

 
19.8

Repayment of debt
(535.9
)
 
(20.5
)
Proceeds from exercise of stock options
15.3

 
15.4

Excess tax benefit realized from share-based compensation
1.9

 
2.6

Repurchase of common stock
(7.0
)
 
(10.9
)
Net cash used by financing activities of continuing operations
(122.9
)
 
(219.5
)
Cash Flows from Discontinued Operations
 
 
 
Net cash provided by operating activities of discontinued operations

 
3.5

Net cash used by investing activities of discontinued operations
(1.2
)
 
(0.1
)
Net cash used by financing activities of discontinued operations

 
(0.2
)
Net cash (used) provided by Discontinued Operations
(1.2
)
 
3.2


6


 
Six Months Ended
In millions
June 30, 2011
 
June 30, 2010
Effect of exchange rate changes on cash and equivalents
25.2

 
(79.6
)
Net decrease in cash and equivalents
(168.9
)
 
(327.5
)
Cash and equivalents at beginning of year (1)
$
1,179.9

 
$
1,311.6

Cash and equivalents at end of period (2)
$
1,011.0

 
$
984.1

 
_____________
*    Non-cash financing activities in 2011 and 2010 included the change in fair market value of interest-rate swap agreements of $10.4 and $82.8, respectively.
(1)
Includes cash and cash equivalents of discontinued operations of $13.5 at January 1, 2010.
(2)
Includes cash and cash equivalents of discontinued operations of $10.6 at June 30, 2010.
The accompanying notes are an integral part of these statements.


7


AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 2010 Annual Report on Form 10-K (“2010 Form 10-K”) in preparing these unaudited financial statements. In our opinion, we made all adjustments of a normal recurring nature that are necessary for a fair statement of the results for the interim periods. 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 2010 Form 10-K. When used in these notes, 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.
We have revised some immaterial amounts in the Consolidated Statements of Cash Flows for the six months ended June 30, 2010 for comparative purposes. We reclassified $5.5 from Noncurrent assets and liabilities to Proceeds from sale of investments.
New Accounting Standards Implemented
In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends FASB Codification Topic 820, Fair Value Measurements and Disclosures, to require additional disclosures regarding fair value measurements. Effective January 1, 2011, ASU 2010-06 required additional disclosures regarding activity in Level 3 Fair Value measurements. This disclosure requirement did not have an impact on our interim Fair Value disclosures.
New Accounting Standards to be Implemented

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. ASU 2011-04 provides a consistent definition of fair value and ensures that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for level 3 fair value measurements. ASU 2011-04 will be effective for Avon as of January 1, 2012 and will be applied prospectively. Avon is currently evaluating the impact of adopting ASU 2011-04, but currently believes there will be no significant impact on its consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income. ASU 2011-05 requires entities to present items of net income and other comprehensive income either in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive, statements of net income and other comprehensive income. ASU 2011-05 will be effective as of January 1, 2012 for Avon and is not expected to have a significant impact on our financial statements, other than presentation.

Out-of-Period Items
During 2011, the Company determined that the net after tax gain on sale of Avon Products Company Limited (“Avon Japan”), reported in our financial statements for the year ended December 31, 2010, should have been reported as a net after tax loss of $3, to correctly include all balances relating to Avon Japan that were previously included in Accumulated Other Comprehensive Income (“AOCI”). In addition, in the first quarter of 2011 the Company released a liability relating to a previously owned health care business, which should have been released in a prior period, resulting in a $4 increase in net income. The results of these businesses were originally reported within discontinued operations upon disposition. The net impact of these two items decreased net income for the first quarter of 2011 by $9. We evaluated these adjustments in relation to the current period, which is when they were corrected, as well as the periods in which they originated and concluded that these adjustments are immaterial to both the consolidated quarterly and annual financial statements for all periods.


8

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


2. EARNINGS PER SHARE AND SHARE REPURCHASES
We compute earnings per share using the two-class method, which is an earnings allocation formula that determines earnings 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.
 
 
Three months ended 
June 30,
 
Six months ended 
June 30,
(Shares in millions)
2011
 
2010
 
2011
 
2010
Numerator from continuing operations
 
 
 
 
 
 
 
Income from continuing operations less amounts attributable to noncontrolling interests
$
206.2

 
$
163.7

 
$
358.4

 
$
205.2

Less: Earnings allocated to participating securities
(1.7
)
 
(1.2
)
 
(3.0
)
 
(1.5
)
Income from continuing operations allocated to common shareholders
204.5

 
162.5

 
355.4

 
203.7

Numerator from discontinued operations
 
 
 
 
 
 
 
Income (loss) from discontinued operations plus/less amounts attributable to noncontrolling interests
$

 
$
3.9

 
$
(8.6
)
 
$
4.9

Less: Earnings allocated to participating securities

 

 

 

Income (loss) allocated to common shareholders

 
3.9

 
(8.6
)
 
4.9

Numerator attributable to Avon
 
 
 
 
 
 
 
Income attributable to Avon less amounts attributable to noncontrolling interests
$
206.2

 
$
167.6

 
$
349.8

 
$
210.1

Less: Earnings allocated to participating securities
(1.7
)
 
(1.2
)
 
(3.0
)
 
(1.5
)
Income allocated to common shareholders
204.5

 
166.4

 
346.8

 
208.6

Denominator:
 
 
 
 
 
 
 
Basic EPS weighted-average shares outstanding
430.46

 
428.80

 
430.13

 
428.30

Diluted effect of assumed conversion of stock options
3.29

 
3.30

 
3.29

 
3.30

Diluted EPS adjusted weighted-average shares outstanding
433.75

 
432.10

 
433.42

 
431.60

Earnings Per Common Share from continuing operations:
 
 
 
 
 
 
 
Basic
$
0.48

 
$
0.38

 
$
0.83

 
$
0.48

Diluted
$
0.47

 
$
0.38

 
$
0.82

 
$
0.47

Income (loss) per Common Share from discontinued operations:
 
 
 
 
 
 
 
Basic
$

 
$
0.01

 
$
(0.02
)
 
$
0.01

Diluted
$

 
$
0.01

 
$
(0.02
)
 
$
0.01

Earnings per Common Share attributable to Avon:
 
 
 
 
 
 
 
Basic
$
0.48

 
$
0.39

 
$
0.81

 
$
0.49

Diluted
$
0.47

 
$
0.39

 
$
0.80

 
$
0.48

At June 30, 2011 and 2010, we did not include stock options to purchase 19.1 million shares and 18.1 million shares of Avon common stock, respectively, in the calculations of diluted earnings per share because their inclusion would have been anti-dilutive.
We purchased approximately 0.3 million shares of Avon common stock for $7.0 during the first six months of 2011, as compared to approximately 0.4 million shares of Avon common stock for $10.9 during the first six months of 2010 under our previously announced share repurchase program and through acquisition of stock from employees in connection with tax payments upon vesting of restricted stock units.
 





9

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




3. INVENTORIES
 
Components of Inventories
June 30, 2011
 
December 31, 2010
Raw materials
$
419.9

 
$
371.6

Finished goods
921.1

 
781.3

Total
$
1,341.0

 
$
1,152.9


4. EMPLOYEE BENEFIT PLANS
 
 
Three Months Ended June 30, 2011
 
Pension Benefits
 
 
 
 
Net Periodic Benefit Costs
U.S. Plans
 
Non-U.S. Plans
 
Postretirement Benefits
 
2011
 
2010
 
2011
 
2010
 
2011
 
2010
Service cost
$
3.3

 
$
3.1

 
$
4.2

 
$
3.6

 
$
0.3

 
$
0.7

Interest cost
8.1

 
7.9

 
10.3

 
9.6

 
1.1

 
1.9

Expected return on plan assets
(9.1
)
 
(8.3
)
 
(10.5
)
 
(9.2
)
 
(0.3
)
 
(0.6
)
Amortization of prior service credit
(0.1
)
 
(0.1
)
 
(0.3
)
 
(0.3
)
 
(2.5
)
 
(4.3
)
Amortization of actuarial losses
11.9

 
8.7

 
3.6

 
3.3

 
0.6

 
1.0

Net periodic benefit costs
$
14.1

 
$
11.3

 
$
7.3

 
$
7.0

 
$
(0.8
)
 
$
(1.3
)
 
Six Months Ended June 30, 2011
 
Pension Benefits
 
 
 
 
Net Periodic Benefit Costs
U.S. Plans
 
Non-U.S. Plans
 
Postretirement Benefits
 
2011
 
2010
 
2011
 
2010
 
2011
 
2010
Service cost
$
6.6

 
$
6.3

 
$
8.3

 
$
7.3

 
$
0.6

 
$
1.4

Interest cost
16.2

 
15.9

 
20.4

 
19.7

 
2.2

 
3.7

Expected return on plan assets
(18.2
)
 
(16.7
)
 
(20.8
)
 
(18.8
)
 
(0.6
)
 
(1.2
)
Amortization of prior service credit
(0.2
)
 
(0.2
)
 
(0.6
)
 
(0.6
)
 
(4.9
)
 
(8.6
)
Amortization of actuarial losses
23.8

 
17.6

 
7.1

 
6.8

 
1.1

 
2.0

Net periodic benefit costs
$
28.2

 
$
22.9

 
$
14.4

 
$
14.4

 
$
(1.6
)
 
$
(2.7
)
We previously disclosed in our financial statements for the year ended December 31, 2010, that we expected to contribute approximately $90 to $100 and $40 to $45 to our U.S. and non-U.S. pension plans, respectively, in 2011. As of June 30, 2011, we made approximately $85 and $4 of contributions to the U.S. and non-U.S pension plans, respectively. We anticipate contributing approximately $5 to $15 and $36 to $41 to fund our U.S. and non-U.S. pension plans, respectively, during the remainder of 2011. Our funding requirements may be impacted by regulations or interpretations thereof.

5. CONTINGENCIES
In 2002 and 2004, our Brazilian subsidiary received a series of excise tax assessments from the Brazilian tax authorities for alleged tax deficiencies during the years 1997-2001 asserting that the establishment in 1995 of separate manufacturing and distribution companies in that country 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, based on purported market sales data. The structure adopted in 1995 is comparable to that used by other companies in Brazil. We believe that our Brazilian corporate structure is appropriate, both operationally and legally, and that the assessments are unfounded. The 2004 assessment has been officially closed in our favor and the 2002 assessment is being vigorously contested. In the opinion of our outside counsel, the likelihood that the 2002 assessment ultimately will be upheld is remote. Management believes that the likelihood that the assessment will have a material impact on our consolidated financial position, results of operations or cash flows is correspondingly remote.
Our appeal of the 2004 assessment was granted in our favor in May 2010 at the second administrative level. In January 2011, a

10

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


motion was filed by the tax authorities seeking clarification on a certain point in the decision on the 2004 assessment. In May 2011, the second administrative level rejected the motion and, as stated above, the 2004 assessment has been officially closed in our favor as the Brazilian tax authorities did not pursue any further appeals. The 2004 assessment, including penalties and accruing interest, amounted to approximately $419 at the exchange rate on June 30, 2011.
In October 2010, the 2002 assessment was upheld at the first administrative level at an amount reduced to $39 from $93, including penalties and accruing interest, at the exchange rate on June 30, 2011. We have appealed this decision to the second administrative level. In the event that the 2002 assessment is upheld at the third and 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 income. It is not possible to make a reasonable estimate of the amount or range of expense that could result from an unfavorable outcome in respect of this or any additional assessments that may be issued for subsequent periods.
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 is being conducted under the oversight of our Audit Committee, began in June 2008. As we reported in October 2008, we voluntarily contacted the United States Securities and Exchange Commission and the United States Department of Justice to advise both agencies of our internal investigation. We are continuing to cooperate with both agencies and inquiries by them, including but not limited to, signing tolling agreements, translating and producing documents and assisting with interviews.
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 are conducting these compliance reviews in a number of other countries selected to represent each of the Company's international geographic segments. The internal investigation and compliance reviews are 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. In connection with the ongoing internal investigation and compliance reviews, certain personnel actions have been taken and additional personnel actions may be taken in the future. For additional information, see Note 5 to our consolidated financial statements contained in our Form 10-Q for the quarter ended March 31, 2011 and “Risk Factors” contained in our Form 10-K for the year ended December 31, 2010. The internal investigation and compliance reviews of these matters are ongoing, and we continue to cooperate with both agencies with respect to these matters. 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. At this point we are unable to predict the duration, scope, developments in, results of, or consequences of the internal investigation and compliance reviews.

Beginning in July and August 2010, several derivative actions were filed against certain present or former officers and/or directors of the Company that allege breach of fiduciary duty, and, in certain complaints, abuse of control, waste of corporate assets, unjust enrichment and/or proxy disclosure violations, relating to the Company's compliance with the FCPA. The relief sought in one or more of the derivative complaints includes certain declaratory and equitable relief, restitution, unspecified damages, exemplary damages and interest. The Company is named as a nominal defendant. These actions include three consolidated federal court actions (Murray C. White, derivatively on behalf of Avon Products, Inc. v. Andrea Jung, et al. and Avon Products, Inc. as nominal defendant (filed in the United States District Court for the Southern District of New York, 10-CV-5560); County of York Employees Retirement Plan, derivatively on behalf of Avon Products, Inc. v. W. Don Cornwell, et al. and Avon Products, Inc. as nominal defendant (originally filed in the New York Supreme Court, New York County, Index No. 651065/2010 and now refiled in the United States District Court for the Southern District of New York, 10-CIV-5933); and IBEW Local 1919 Pension Fund, derivatively on behalf of Avon Products, Inc. v. W. Don Cornwell, et al. and Avon Products, Inc. as nominal defendant (filed in the United States District Court for the Southern District of New York, 10-CIV-6256)) and two state court actions (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) and 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 May 12, 2011, plaintiffs in the consolidated federal court actions (White v. Jung, et al.) filed a consolidated complaint that alleges breach of fiduciary duty, unjust enrichment and proxy disclosure violations, relating to the Company's compliance with the FCPA, including the adequacy of the Company's internal controls. On June 13, 2011, defendants moved to dismiss the consolidated federal court actions, and also on June 13, 2011, on application of plaintiffs, the Court stayed briefing on defendants' motion to dismiss pending a status conference. We are unable to predict the outcome of these matters.


11

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



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. The complaint is brought on behalf of a purported class consisting of all persons or entities who either (1) were Avon shareholders as of the close of business on March 17, 2011, March 17, 2010, March 18, 2009, March 14, 2008, or March 15, 2007 and therefore were eligible to vote proxies or (2) purchased or otherwise acquired shares of Avon's common stock from July 31, 2006 through and including May 24, 2011. The complaint asserts violations of Sections 10(b), 14(a) and 20(a) of the Securities Exchange Act of 1934 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. In light of, among other things, the early stage of the litigation, we are unable to predict the outcome of this matter and are unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome.
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, 2011, should not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
 
6. COMPREHENSIVE INCOME
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
Components of Comprehensive Income
2011
 
2010
 
2011
 
2010
Net income
$
208.7

 
$
169.2

 
$
352.3

 
$
212.5

Foreign currency translation adjustments
66.1

 
(80.4
)
 
165.6

 
(78.1
)
Change in unrealized gains from available-for-sale securities

 
0.2

 

 
0.1

Change in derivative losses on cash flow hedges
1.0

 
1.0

 
2.0

 
2.0

Adjustments for amortization of net actuarial loss, prior service cost, and transition obligation, net of taxes
7.2

 
5.2

 
15.1

 
11.4

Comprehensive income
283.0

 
95.2

 
535.0

 
147.9

Less: comprehensive income attributable to noncontrolling interest
(2.3
)
 
(2.7
)
 
(2.1
)
 
(3.9
)
Comprehensive income attributable to Avon
$
280.7

 
$
92.5

 
$
532.9

 
$
144.0
























12

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


7. SEGMENT INFORMATION
In conjunction with management changes, beginning in the first quarter of 2011, the results of Asia Pacific and China were managed as a single operating segment. Accordingly, 2011 and 2010 Asia Pacific amounts include the results of China.
Summarized financial information concerning our reportable segments was as follows:
 
 
Three Months Ended June 30,
 
2011
 
2010
 
Revenue
 
Operating
Profit
(Loss)
 
Revenue
 
Operating
Profit
(Loss)
Latin America
$
1,348.2

 
$
194.6

 
$
1,136.4

 
$
140.6

North America
508.4

 
24.8

 
546.4

 
36.2

Central & Eastern Europe
375.1

 
73.4

 
355.9

 
79.6

Western Europe, Middle East & Africa
398.3

 
51.6

 
352.7

 
59.4

Asia Pacific
226.4

 
16.6

 
237.1

 
18.3

Total from operations
$
2,856.4

 
$
361.0

 
$
2,628.5

 
$
334.1

Global and other

 
(44.4
)
 

 
(67.7
)
Total
$
2,856.4

 
$
316.6

 
$
2,628.5

 
$
266.4

 
Six Months Ended June 30,
 
2011
 
2010
 
Revenue
 
Operating
Profit
(Loss)
 
Revenue
 
Operating
Profit
(Loss)
Latin America
$
2,479.6

 
$
334.1

 
$
2,108.1

 
$
228.6

North America
1,020.7

 
52.6

 
1,068.5

 
79.9

Central & Eastern Europe
786.9

 
150.3

 
766.2

 
148.2

Western Europe, Middle East & Africa
744.6

 
85.7

 
652.4

 
81.6

Asia Pacific
453.7

 
36.5

 
479.6

 
33.3

Total from operations
$
5,485.5

 
$
659.2

 
$
5,074.8

 
$
571.6

Global and other

 
(96.1
)
 

 
(113.7
)
Total
$
5,485.5

 
$
563.1

 
$
5,074.8

 
$
457.9

 
Our consolidated net sales by classes of principal products were as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2011
 
2010
 
2011
 
2010
Beauty(1)
$
2,039.2

 
$
1,880.2

 
$
3,914.1

 
$
3,623.4

Fashion(2)
511.1

 
463.1

 
999.1

 
915.9

Home(3)
265.6

 
253.6

 
494.2

 
474.1

Net sales
$
2,815.9

 
$
2,596.9

 
$
5,407.4

 
$
5,013.4

Other revenue(4)
40.5

 
31.6

 
78.1

 
61.4

Total revenue
$
2,856.4

 
$
2,628.5

 
$
5,485.5

 
$
5,074.8

 _____________
(1)
Beauty includes color cosmetics, fragrances, skin care and personal care.
(2)
Fashion includes jewelry, watches, apparel, footwear, accessories and children’s products.
(3)
Home includes gift and decorative products, housewares, entertainment and leisure products and nutritional products.
(4)
Other revenue primarily includes shipping and handling and order processing fees billed to Representatives.
Sales from Health and Wellness products and mark. are included among these categories based on product type.

13

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



8. SUPPLEMENTAL BALANCE SHEET INFORMATION
At June 30, 2011 and December 31, 2010 prepaid expenses and other included the following:
 
Components of Prepaid Expenses and Other
June 30,
2011
 
December 31,
2010
Deferred tax assets
$
348.2

 
$
347.4

Receivables other than trade
156.0

 
145.9

Prepaid taxes and tax refunds receivable
271.7

 
247.1

Prepaid brochure costs, paper and other literature
133.8

 
121.4

Short-term investments
39.5

 
17.1

Property, plant and equipment held for sale
12.8

 
12.8

Other
142.2

 
133.5

Prepaid expenses and other
$
1,104.2

 
$
1,025.2

At June 30, 2011 and December 31, 2010, other assets included the following:
 
Components of Other Assets
June 30,
2011
 
December 31,
2010
Deferred tax assets
$
583.9

 
$
544.3

Investments
47.0

 
47.6

Deferred software
158.6

 
140.6

Interest-rate swap agreements (Note 11 and 12)
132.3

 
124.8

Other
172.5

 
161.3

Other assets
$
1,094.3

 
$
1,018.6


9. RESTRUCTURING INITIATIVES
2005 Restructuring Program
In November 2005, we announced a multi-year turnaround plan to restore sustainable growth. As part of our turnaround plan, we launched a restructuring program in late 2005 (the “2005 Restructuring Program”). Restructuring initiatives under this program include:
enhancement of organizational effectiveness, including efforts to flatten the organization and bring senior management closer to consumers through a substantial organization downsizing;
implementation of a global manufacturing strategy through facilities realignment;
implementation of additional supply chain efficiencies in distribution; and
streamlining of transactional and other services through outsourcing and moves to lower-cost countries.
We have approved and announced all of the initiatives that are part of our 2005 Restructuring Program. We expect to record total restructuring charges and other costs to implement restructuring initiatives of approximately $510 before taxes. We have recorded total costs to implement, net of adjustments, of $515.2 ($1.5 in the first six months of 2011, $3.2 in 2010, $20.1 in 2009, $59.3 in 2008, $157.5 in 2007, $217.1 in 2006, and $56.5 in 2005) for actions associated with our restructuring initiatives. We will incur other costs to implement restructuring initiatives such as other professional services and accelerated depreciation. These future costs are expected to be more than offset by gains on the sales of properties exited due to restructuring initiatives.





14

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


Restructuring Charges – First and Second Quarter 2011
During the three and six months ended June 30, 2011, we recorded total costs to implement of $1.5 associated with previously approved initiatives that are part of our 2005 Restructuring Program, and the costs consisted of the following:
net charge of $0.9 and $0.0, respectively, primarily for employee-related costs offset by adjustments to the reserve
implementation costs of $0.4 and $1.1, respectively, for professional service fees, primarily associated with our initiatives to outsource certain finance processes and realign certain distribution operations; and
accelerated depreciation of $0.2 and $0.4, respectively, associated with our initiatives to realign certain distribution operations.
Total costs to implement were recorded in selling, general and administrative expenses for the three and six months ended June 30, 2011.
Restructuring Charges – First and Second Quarter 2010
During the three and six months ended June 30, 2010, we recorded total costs to implement associated with previously approved initiatives that are part of our 2005 Restructuring Program, of $1.4 and $1.5, respectively, and the costs consisted of the following:
net benefits of $(2.0) and $(3.1), respectively, primarily for adjustments to the reserves for employee-related costs;
implementation costs of $2.9 and $3.3, respectively, for professional service fees, primarily associated with our initiatives to outsource certain finance processes and realign certain distribution operations; and
accelerated depreciation of $0.5 and $1.3, respectively, associated with our initiatives to realign certain distribution operations.
Total costs to implement were recorded in selling, general and administrative expenses for the three and six months ended June 30, 2010.
The liability balances for the initiatives under the 2005 Restructuring Program are shown below:
 
 
Employee-
Related
Costs
 
Inventory
Write-offs
 
Contract
Terminations/
Other
 
Total
Balance December 31, 2010
$
20.6

 
$
(0.2
)
 
$
0.1

 
$
20.5

2011 Charges
1.6

 

 

 
1.6

Adjustments
(1.6
)
 

 

 
(1.6
)
Cash payments
(1.9
)
 

 
(0.1
)
 
(2.0
)
Foreign exchange
0.8

 

 

 
0.8

Balance June 30, 2011
$
19.5

 
$
(0.2
)
 
$

 
$
19.3












15

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


The following table presents the restructuring charges incurred to date, net of adjustments, under our 2005 Restructuring Program, along with the charges expected to be incurred under the plan:
 
 
Employee-
Related
Costs
 
Asset
Write-offs
 
Inventory
Write-offs
 
Currency
Translation
Adjustment
Write-offs
 
Contract
Terminations/
Other
 
Total
Charges incurred to date
$
332.5

 
$
10.8

 
$
7.2

 
$
11.6

 
$
8.6

 
$
370.7

Charges to be incurred on approved initiatives
1.5

 

 

 

 

 
1.5

Total expected charges
$
334.0

 
$
10.8

 
$
7.2

 
$
11.6

 
$
8.6

 
$
372.2

The charges, net of adjustments, of initiatives under the 2005 Restructuring Program by reportable business segment were as follows:
 
 
Latin
America
 
North
America
 
Central
& Eastern
Europe
 
Western
Europe,
Middle East
& Africa
 
Asia
Pacific
 
Corporate
 
Total
2005
$
3.5

 
$
6.9

 
$
1.0

 
$
11.7

 
$
22.4

 
$
6.1

 
$
51.6

2006
34.6

 
61.8

 
6.9

 
45.1

 
14.2

 
29.5

 
192.1

2007
14.9

 
7.0

 
4.7

 
65.1

 
4.9

 
12.7

 
109.3

2008
1.9

 
(1.1
)
 
1.7

 
19.0

 
(0.7
)
 
(3.0
)
 
17.8

2009
1.4

 
(0.1
)
 
(0.7
)
 
(4.4
)
 
11.4

 
(2.9
)
 
4.7

2010
2.1

 
(0.1
)
 
(0.1
)
 
(3.9
)
 
(2.3
)
 
(0.5
)
 
(4.8
)
First Quarter 2011
(0.6
)
 
(0.3
)
 

 

 

 

 
(0.9
)
Second Quarter 2011
0.7

 
0.4

 

 
0.1

 

 
(0.3
)
 
0.9

Charges recorded to date
$
58.5

 
$
74.5

 
$
13.5

 
$
132.7

 
$
49.9

 
$
41.6

 
$
370.7

Charges to be incurred on approved initiatives
1.5

 

 

 

 

 

 
1.5

Total expected charges
$
60.0

 
$
74.5

 
$
13.5

 
$
132.7

 
$
49.9

 
$
41.6

 
$
372.2

As noted previously, we expect to record total costs to implement of approximately $510 before taxes for all restructuring initiatives under the 2005 Restructuring Program, including restructuring charges and other costs to implement. 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 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 will incur other costs to implement restructuring initiatives such as other professional services and accelerated depreciation.
2009 Restructuring Program
In February 2009, we announced a new restructuring program (the “2009 Restructuring Program”) which targets increasing levels of efficiency and organizational effectiveness across the Company’s global operations. We have approved and announced all of the initiatives that are part of our 2009 Restructuring Program. The 2009 Restructuring Program initiatives include:
restructuring the Company’s global supply chain operations;
realigning certain local business support functions to a more regional basis to drive increased efficiencies; and
streamlining transaction related services, including selective outsourcing; and reorganizing certain other functions.
 We expect to record total restructuring charges and other costs to implement restructuring initiatives in the range of $300 to $310 before taxes over the next several years, with implementation to be completed by 2012-2013. We have recorded total costs to implement, net of adjustments, of $253.5 ($25.2 in the first six months of 2011, $77.5 in 2010 and $150.8 in 2009), for actions associated with our restructuring initiatives.


16

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


Restructuring Charges – First and Second Quarter 2011
During the three and six months ended June 30, 2011, we recorded total costs to implement of $10.4 and $25.2, respectively, associated with approved initiatives that are part of our 2009 Restructuring Program, and the costs consisted of the following:
net benefits of $(2.1) related to adjustments to the reserves for employee-related costs, including severance, and a net charge of $8.4 related to contract termination costs, offset by adjustments to the reserves for employee-related costs, including severance;
implementation costs of $8.8 and $17.1, respectively, for professional service fees, primarily associated with our initiatives to realign certain support functions to a more regional basis and realignment of certain manufacturing facilities; and
accelerated depreciation of $3.7 and $5.2, respectively, associated with our initiatives to realign some distribution operations and close some manufacturing operations offset by a gain of $5.5 in the first quarter of 2011 due to the sale of land and a building in Germany.
Of the total costs to implement, $6.9 and $20.5 were recorded in selling, general and administrative expenses for the three and six months ended June 30, 2011, respectively, and $3.5 and $4.7 were recorded in cost of sales for the three and six months ended June 30, 2011, respectively.
Restructuring Charges – First and Second Quarter 2010
During the three and six months ended June 30, 2010, we recorded total costs to implement of $9.0 and $14.1, respectively, associated with approved initiatives that are part of our 2009 Restructuring Program, and the costs consisted of the following:
net benefits of $4.2 and $1.0, respectively, primarily for adjustments to the reserves for employee-related costs, including severance;
implementation costs of $2.2 and $7.8, respectively, for professional service fees, primarily associated with our initiatives to realign certain support functions to a more regional basis and realignment of certain manufacturing facilities; and
accelerated depreciation of $2.6 and $5.3, respectively, associated with our initiatives to realign some distribution operations and close some manufacturing operations.
Of the total costs to implement, $6.8 and $9.4 were recorded in selling, general and administrative expenses for the three and six months ended June 30, 2010, respectively, and $2.2 and $4.7 were recorded in cost of sales for the three and six months ended June 30, 2010, respectively.
The liability balances for the initiatives under the 2009 Restructuring Program are shown below.
 
 
Employee-
Related
Costs
 
Contract
Terminations/
Other
 
Total
Balance December 31, 2010
$
115.3

 
$
0.1

 
$
115.4

2011 Charges
(2.4
)
 
12.6

 
10.2

Adjustments
(1.8
)
 

 
(1.8
)
Cash payments
(19.3
)
 
(12.4
)
 
(31.7
)
Foreign exchange
3.2

 

 
3.2

Balance June 30, 2011
$
95.0

 
$
0.3

 
$
95.3












17

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


The following table presents the restructuring charges incurred to date, net of adjustments, under our 2009 Restructuring Program, along with the charges expected to be incurred under the plan:
 
 
Employee-
Related Costs
 
Contract
Terminations
 
Total
Charges incurred to date
$
165.9

 
$
14.2

 
$
180.1

Charges to be incurred on approved initiatives
2.3

 
1.8

 
4.1

Total expected charges
$
168.2

 
$
16.0

 
$
184.2


 The charges of initiatives approved to date under the 2009 Restructuring Program by reportable business segment were as follows:
 
 
Latin
America
 
North
America
 
Central
& Eastern
Europe
 
Western
Europe,
Middle East
& Africa
 
Asia
Pacific
 
Corporate
 
Total
2009
$
17.8

 
$
26.8

 
$
25.8

 
$
31.8

 
$
8.5

14.9

$
14.9

 
$
125.6

2010
11.5

 
17.9

 
0.4

 
2.8

 
2.0

 
11.5

 
46.1

First Quarter 2011
(2.2
)
 
5.6

 
0.2

 
1.0

 
(0.5
)
 
6.4

 
10.5

Second Quarter 2011
(0.1
)
 
(0.3
)
 
0.2

 
1.2

 
(0.1
)
 
(3.0
)
 
(2.1
)
Charges recorded to date
$
27.0

 
$
50.0

 
$
26.6

 
$
36.8

 
$
9.9

 
$
29.8

 
$
180.1

Charges to be incurred on approved initiatives
0.2

 

 
2.7

 
1.2

 

 

 
4.1

Total expected charges on approved initiatives
$
27.2

 
$
50.0

 
$
29.3

 
$
38.0

 
$
9.9

 
$
29.8

 
$
184.2

As noted previously, we expect to record total costs to implement in the range of $300 to $310 million before taxes for all restructuring initiatives under the 2009 Restructuring Program, including restructuring charges and other costs to implement. The amounts shown in the table 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 table above as total expected charges on approved initiatives represents 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 table above, we will incur other costs to implement restructuring initiatives such as consulting, other professional services, and accelerated depreciation.


10. GOODWILL AND INTANGIBLE ASSETS
Goodwill
 
 
Latin
America
 
North
America
 
Central &
Eastern
Europe
 
Western
Europe, Middle
East & Africa
 
Asia
Pacific
 
Total
Balance at December 31, 2010
$
113.5

 
$
314.7

 
$
8.4

 
$
158.5

 
$
80.0

 
$
675.1

Adjustments

 

 

 
(2.8
)
 

 
(2.8
)
Foreign exchange
8.4

 

 
0.7

 
4.6

 
1.9

 
15.6

Balance at June 30, 2011
$
121.9

 
$
314.7

 
$
9.1

 
$
160.3

 
$
81.9

 
$
687.9


In July 2010, we acquired substantially all the assets and liabilities of Silpada Designs, Inc. (“Silpada”), for approximately $650 in cash, plus a potential additional payment in early 2015 based on the achievement of earnings growth of the Silpada North America business during the periods between 2012 through 2014. Silpada is included within our North America segment. The purchase price allocation resulted in goodwill of $314.7, indefinite-lived trademarks of $150.0 and customer relationships of $172.8. The customer relationships have an average 10-year useful life. At the date of the acquisition, a liability of approximately $26 was recorded associated with this potential additional consideration (“contingent consideration”), based on a

18

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


valuation of the estimated fair value of the liability after probability-weighting and discounting various potential payments. At December 31, 2010, we estimated that the estimated fair value of the contingent consideration liability was $11. At June 30, 2011, we estimated that the potential additional payment associated with the contingent consideration could range from $0 to approximately $15 and that the estimated fair value of the contingent consideration liability was $4.2. The change in the fair value of the contingent consideration was recorded within selling, general and administrative expenses and was primarily due to a decrease in estimates of the ultimate earnout.

Due to the impact of rising silver prices and a decline in revenues relative to our internal forecasts, we completed an interim analysis of the fair value of goodwill and indefinite-lived intangibles impairment assessment related to Silpada. The asset impairment analyses performed for goodwill and indefinite-lived intangibles require several estimates including future cash flows, growth rates and the selection of discount rates. The estimation of fair value utilizing discounted expected future cash flows includes numerous uncertainties which require our significant judgment when making assumptions of expected growth rates and the selection of discount rates as well as assumptions regarding general economic and business conditions, among other factors. Key assumptions used in measuring the fair value of Silpada included the discount rate (based on the weighted-average cost of capital), revenue growth, silver prices, and representative growth and activity rates. The fair value of Silpada for the goodwill impairment assessment was determined using an income approach, which focuses on the income producing capability of a reporting unit based on a prospective analysis of the business that is discounted at a risk adjusted rate. Based upon our interim assessment, Silpada's estimated fair value exceeded its carrying value by 13% as of June 30, 2011. The interim impairment review of our trademarks during the second quarter of 2011 used a risk adjusted discounted cash flow model and the relief-from-royalty method. The royalty rate used was based on a consideration of market rates. Based on the discounted cash flow model, we determined the fair value of our trademarks exceeded their carrying value by a small amount. As a result of the asset impairment analyses performed for goodwill and indefinite-lived trademarks related to Silpada, no adjustments were necessary as of June 30, 2011. A decline in expected future cash flows and growth rates or a change in the risk-adjusted discount rate used to fair value expected future cash flows may result in an impairment charge for the goodwill and/or the indefinite-lived trademark.

Intangible assets
 
June 30, 2011
 
December 31, 2010
 
Gross
Amount
 
Accumulated
Amortization
 
Gross
Amount
 
Accumulated
Amortization
Amortized Intangible Assets
 
 
 
 
 
 
 
Customer relationships
$
225.0

 
$
(59.7
)
 
$
221.9

 
$
(45.6
)
Licensing agreements
62.1

 
(48.9
)
 
58.5

 
(46.1
)
Noncompete agreements
8.5

 
(7.1
)
 
8.2

 
(6.8
)
Trademarks
6.6

 
(2.9
)
 
6.6

 
(1.8
)
Indefinite Lived Trademarks
174.2

 

 
173.4

 

Total
$
476.4

 
$
(118.6
)
 
$
468.6

 
$
(100.3
)

 
Estimated Amortization Expense:
 
2011
$
23.6

2012
23.6

2013
21.4

2014
20.6

2015
20.0

Aggregate amortization expense during the three and six months ended June 30, 2011 was $6.2 and $12.4 respectively, compared to $1.5 and $2.3 for the same periods of 2010.






19

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


11. FAIR VALUE
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, 2011:
 
 
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
Available-for-sale securities
$
1.9

 
$

 
$
1.9

Interest-rate swap agreements

 
132.3

 
132.3

Foreign exchange forward contracts

 
1.0

 
1.0

Total
$
1.9

 
$
133.3

 
$
135.2

Liabilities:
 
 
 
 
 
Interest-rate swap agreements
$

 
$
8.7

 
$
8.7

Foreign exchange forward contracts

 
6.3

 
6.3

Total
$

 
$
15.0

 
$
15.0

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, 2010:
 
 
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
Available-for-sale securities
$
1.8

 
$

 
$
1.8

Interest-rate swap agreements

 
124.8

 
124.8

Foreign exchange forward contracts

 
11.1

 
11.1

Total
$
1.8

 
$
135.9

 
$
137.7

Liabilities:
 
 
 
 
 
Interest-rate swap agreements
$

 
$
9.9

 
$
9.9

Foreign exchange forward contracts

 
4.3

 
4.3

Total
$

 
$
14.2

 
$
14.2

 
Fair Value of Financial Instruments
The net asset (liability) amounts recorded in the balance sheet (carrying amount) and the estimated fair values of financial instruments at June 30, 2011 and December 31, 2010, respectively, consisted of the following:
 
 
2011
 
2010
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Cash and cash equivalents
$
1,011.0

 
$
1,011.0

 
$
1,179.9

 
$
1,179.9

Available-for-sale securities
1.9

 
1.9

 
1.8

 
1.8

Grantor trust cash and cash equivalents

 

 
1.1

 
1.1

Short term investments
39.5

 
39.5

 
17.1

 
17.1

Cash surrender value of supplemental life insurance
45.1

 
45.1

 
44.7

 
44.7

Debt maturing within one year
807.4

 
807.4

 
727.6

 
727.6

Long-term debt, net of related discount or premium
2,417.3

 
2,438.5

 
2,408.6

 
2,502.4

Foreign exchange forward contracts
(5.3
)
 
(5.3
)
 
6.8

 
6.8

Interest-rate swap agreements
123.6

 
123.6

 
114.9

 
114.9




20

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


The methods and assumptions used to estimate fair value are as follows:
Cash and cash equivalents, Grantor trust cash and cash equivalents and Short term investments – Given the short term nature of these financial instruments, the stated cost approximates fair value.
Available-for-sale securities - The fair values of these investments were the quoted market prices for issues listed on securities exchanges.
Cash surrender value of supplemental life insurance - The fair value is equal to the cash surrender value of the life insurance policy.
Debt maturing within one year and long-term debt - The fair values of all debt and other financing were determined based on quoted market prices.
Foreign exchange forward contracts - The fair values of forward contracts were primarily based on quoted forward foreign exchange prices at the reporting date.
Interest-rate swap agreements - The fair values of interest-rate swap agreements were estimated based on LIBOR yield curves at the reporting date.


12. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
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, 2011:
 
 
Asset
 
Liability
 
Balance Sheet
Classification
 
Fair
Value
 
Balance Sheet
Classification
 
Fair
Value
Derivatives designated as hedges:
 
 
 
 
 
 
 
Interest-rate swap agreements
Other assets
 
$
123.5

 
Other Liabilities
 
$

Derivatives not designated as hedges:
 
 
 
 
 
 
 
Interest-rate swap agreements
Other assets
 
$
8.8

 
Other Liabilities
 
$
8.7

Foreign exchange forward contracts
Prepaid expenses and other
 
1.0

 
Accounts Payable
 
6.3

Total derivatives not designated as hedges
 
 
$
9.8

 
 
 
$
15.0

Total derivatives
 
 
$
133.3

 
 
 
$
15.0

 
The following table presents the fair value of derivative instruments outstanding at December 31, 2010:
 
 
Asset
 
 
 
Liability
 
Balance Sheet
Classification
 
Fair
Value
 
Balance Sheet
Classification
 
Fair
Value
Derivatives designated as hedges:
 
 
 
 
 
 
 
Interest-rate swap agreements
Other assets
 
$
114.9

 
Other Liabilities
 
$

Derivatives not designated as hedges:
 
 
 
 
 
 
 
Interest-rate swap agreements
Other assets
 
$
9.9

 
Other Liabilities
 
$
9.9

Foreign exchange forward contracts
Prepaid expenses and other
 
11.1

 
Accounts Payable
 
4.3

Total derivatives not designated as hedges
 
 
$
21.0

 
 
 
$
14.2

Total derivatives
 
 
$
135.9

 
 
 
$
14.2

When we become a party to a derivative instrument, we designate the instrument as a fair value hedge, a cash flow hedge, a net investment hedge, or a non-hedge.



21

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


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. The ineffective portion of a derivative’s gain or loss, if any, is recorded in earnings in other expense, net on the Consolidated Statements of Income. 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.
Interest Rate Risk
We use interest rate swaps to manage our interest rate exposure. The interest rate swaps are used to either convert our fixed rate borrowing to a variable interest rate or to unwind an existing variable interest rate swap on a fixed rate borrowing. At June 30, 2011 and December 31, 2010, we held interest-rate swap agreements that effectively converted approximately 74% , respectively of our outstanding long-term, fixed-rate borrowings to a variable interest rate based on LIBOR. Our total exposure to floating interest rates at June 30, 2011 and December 31, 2010 were approximately 82% and 81%, respectively.
At June 30, 2011, we had interest-rate swap agreements designated as fair value hedges of fixed-rate debt, with notional amounts totaling $1,725. During the three and six months ended June 30, 2011, we recorded a net gain of $26.3 and $10.4 in interest expense for these interest-rate swap agreements designated as fair value hedges. The gain on these interest-rate swap agreements was offset by an equal and offsetting loss in interest expense on our fixed-rate debt. During the three and six months ended June 30, 2010, we recorded a net gain of $65.2 and $82.8 in interest expense for these interest-rate swap agreements designated as fair value hedges. The gain on these interest-rate swap agreements was offset by an equal and offsetting loss 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 designed to offset the gain or loss on the de-designated contract. At June 30, 2011, we had interest-rate swap agreements that are not designated as hedges with notional amounts totaling $250. During the three and six months ended June 30, 2011 we recorded a net loss of $0 in other expense, net associated with these undesignated interest-rate swap agreements. During the three and six months ended June 30, 2010, we recorded a net loss of $0.1 in other expense, net associated with these undesignated interest-rate swap agreements.
Foreign Currency Risk
The primary currencies for which we have net underlying foreign currency exchange rate exposures are the Argentine peso, Brazilian real, British pound, Canadian dollar, Chinese renminbi, Colombian peso, the euro, Mexican peso, Philippine peso, Polish zloty, Russian ruble, Turkish lira, Ukrainian hryvnia and Venezuelan bolivar. We use foreign exchange forward contracts to manage a portion of our foreign currency exchange rate exposures. At June 30, 2011, we had outstanding foreign exchange forward contracts with notional amounts totaling approximately $405.4 for the euro, the Hungarian forint, the Peruvian new sol, the Czech Republic koruna, the Canadian dollar, the British pound, the Romanian leu, the Australian dollar and the New Zealand dollar.
We also 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, 2011, we recorded a gain of $4.8 and $20.5, respectively, in other expense, net related to these undesignated foreign exchange forward contracts. During the three and six months ended June 30, 2011, we recorded a loss of $2.7 and $16.9, respectively, related to the intercompany loans, caused by changes in foreign currency exchange rates. During the three and six months ended June 30, 2010, we recorded a loss of $11.7 and $12.1, respectively, in other expense, net related to these undesignated foreign exchange forward contracts. During the three and six months ended June 30, 2010, we recorded a gain of $12.8 and $13.7, respectively, related to the intercompany loans, caused by changes in foreign currency exchange rates.


22


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

OVERVIEW
We are a global manufacturer and marketer of beauty and related products. Our business is conducted worldwide, primarily in the direct selling channel. We presently have sales operations in 64 countries and territories, including the U.S., and distribute products in 41 more. Our reportable segments are based on geographic operations in five regions: Latin America; North America; Central & Eastern Europe; Western Europe, Middle East & Africa; and Asia Pacific. We have centralized operations for Global Brand Marketing, Global Sales and Global Supply Chain. Our product categories are Beauty, Fashion and Home. Beauty consists of color cosmetics, fragrances, skin care and personal care. Fashion consists of jewelry, watches, apparel, footwear, accessories and children’s products. Home consists of gift and decorative products, housewares, entertainment and leisure products and nutritional products. Sales are made to the ultimate consumer principally through direct selling by approximately 6.5 million active independent Representatives, who are independent contractors and not our employees. The success of our business is highly dependent on recruiting, retaining and servicing our Representatives. During 2010, approximately 83% of our consolidated revenue was derived from operations outside the U.S.
During the first half of 2011, revenues increased 8%, impacted by favorable foreign exchange. Constant $ revenues increased 3%. Sales of products in the Beauty category increased 8%, partially due to favorable foreign exchange. On a Constant $ basis, sales of products in the Beauty category increased 3% due to a 4% increase in net per unit partially offset by 1% decrease in units. Active Representatives were flat. See the “Segment Review” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information related to changes in revenue by segment.
While there were ongoing execution improvements in Brazil and Russia in the second quarter, we saw slower than expected Beauty market growth in those markets as well as weaker macro-economic conditions in our developed markets. We are launching a major global field activation program for the second half of 2011 to help drive revenue growth.
We are implementing restructuring initiatives under our 2005 and 2009 Restructuring Programs. For a description of these restructuring initiatives, please refer to Item 7 of our 2010 Annual Report on Form 10-K (“2010 Form 10-K”). With regards to the 2005 Restructuring Program, we expect to achieve annualized savings of approximately $415 once all initiatives are fully implemented by 2011-2012. With regards to the 2009 Restructuring Program, we remain on track with our expectations included in the 2010 Form 10-K. See Note 9, Restructuring Initiatives, of the Notes to Consolidated Financial Statements for more information on our restructuring programs.
We have increases in labor and commodity costs, including oil, silver and cotton, which our pricing strategies are helping to offset the resulting product cost increases.
Beginning in the first quarter of 2011, the results of Asia Pacific and China were managed as a single operating segment, referred to as Asia Pacific. Accordingly, 2011 and 2010 amounts include the results of China in the Asia Pacific segment. In December 2010, we completed the sale of our subsidiary in Japan, which has been reflected as discontinued operations for all periods.

NEW ACCOUNTING STANDARDS
Information relating to new accounting standards is included in Note 1, Accounting Policies, of the Notes to Consolidated Financial Statements.

RESULTS OF OPERATIONS—THREE AND SIX MONTHS ENDED JUNE 30, 2011 AS COMPARED TO THREE AND SIX MONTHS ENDED JUNE 30, 2010
Non- GAAP Financial Measures
To supplement our financial results presented in accordance with generally accepted accounting principles in the United States (“GAAP”), we disclose operating results that have been adjusted to exclude the impact of changes due to the translation of foreign currencies into U.S. dollars. We refer to these adjusted growth rates as Constant $ growth, which is a non- GAAP financial measure. We believe this measure provides investors an additional perspective on trends. To exclude the impact of changes due to the translation of foreign currencies into U.S. dollars, we calculate current year results and prior year results at a constant exchange rate. Currency impact is determined as the difference between actual growth rates and constant currency growth rates.

23

AVON PRODUCTS, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in millions, except per share data)


We present gross margin, selling, general and administrative expenses as a percentage of revenue, operating profit, operating margin and effective tax rate on a non-GAAP basis. The discussion of our segments presents operating profit and operating margin on a non-GAAP basis. We have provided a quantitative reconciliation of the difference between the non-GAAP financial measure and the financial measure calculated and reported in accordance with GAAP. These non-GAAP measures should not be considered in isolation, or as a substitute for, or superior to, financial measures calculated in accordance with GAAP. The Company uses the non-GAAP financial measures to evaluate its operating performance and believes that it is meaningful for investors to be made aware of, on a period-to-period basis, the impacts of 1) costs to implement (“CTI”) restructuring initiatives and 2) costs and charges related to Venezuela being designated as a highly inflationary economy and the subsequent devaluation of its currency (“Venezuelan special items”). The Company believes investors find the non-GAAP information helpful in understanding the ongoing performance of operations separate from items that may have a disproportionate positive or negative impact on the Company’s financial results in any particular period. The Venezuelan special items include the impact on the Statement of Income caused by the devaluation of the Venezuelan currency on monetary assets and liabilities, such as cash, receivables and payables; deferred tax assets and liabilities; and nonmonetary assets, such as inventory and prepaid expenses. For nonmonetary assets, the Venezuelan special items include the earnings impact caused by the difference between the historical cost of the assets at the previous official exchange rate of 2.15 and the revised official exchange rate of 4.30. See Note 9, Restructuring Initiatives and the Latin America segment review below for more information on these items.









































24

AVON PRODUCTS, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in millions, except per share data)


Consolidated
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2011
 
2010
 
%/Point
Change
 
2011
 
2010
 
%/Point
Change
Total revenue
$
2,856.4

 
$
2,628.5

 
9
 %
 
$
5,485.5

 
$
5,074.8

 
8
 %
Cost of sales
1,018.0

 
962.1

 
6
 %
 
1,967.8

 
1,896.8

 
4
 %
Selling, general and administrative expenses
1,521.8

 
1,400.0

 
9
 %
 
2,954.6

 
2,720.1

 
9
 %
Operating profit
316.6

 
266.4

 
19
 %
 
563.1

 
457.9

 
23
 %
Interest expense
23.9

 
20.3

 
18
 %
 
46.6

 
42.1

 
11
 %
Interest income
(3.9
)
 
(3.4
)
 
15
 %
 
(8.7
)
 
(8.3
)
 
5
 %
Other expense, net
2.9

 
0.4

 
*