10-K 1 avp10k2015.htm FORM 10-K 10-K


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-K
x
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2015
OR
o
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)
(212) 282-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common stock (par value $.25)
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
_________________________ 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  o    No  x
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  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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  x    No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
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
 
x
  
Accelerated filer
 
o
 
 
 
 
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  o    No  x
The aggregate market value of voting and non-voting Common Stock (par value $.25) held by non-affiliates at June 30, 2015 (the last business day of our most recently completed second quarter) was $2.7 billion.
The number of shares of Common Stock (par value $.25) outstanding at January 31, 2016, was 435,472,459
 _________________________
Documents Incorporated by Reference
Part III - Portions of the registrant’s Proxy Statement relating to the 2016 Annual Meeting of Shareholders.
 





Table of Contents
 
 
 
Item
 
Page

Part I
 
 
 
Item 1

Item 1A

Item 1B

Item 2

Item 3

Item 4

 
 
 
Part II
 
 
 
Item 5

Item 6

Item 7

Item 7A
59 - 60

Item 8
60 

Item 9

Item 9A

Item 9B

 
 
 
Part III
 
 
 
Item 10

Item 11

Item 12

Item 13

Item 14

 
 
 
Part IV
 
 
 
Item 15

 

 

 

 
 
 
 
67







CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements in this report (or in the documents it incorporates by reference) that are not historical facts or information may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "estimate," "project," "forecast," "plan," "believe," "may," "expect," "anticipate," "intend," "planned," "potential," "can," "expectation," "could," "will," "would" and similar expressions, or the negative of those expressions, may identify forward-looking statements. They include, among other things, statements regarding our anticipated or expected results, future financial performance, various strategies and initiatives (including our transformation plan, stabilization strategies, cost savings initiatives, restructuring and other initiatives and related actions), costs and cost savings, competitive advantages, impairments, the impact of foreign currency, including devaluations, and other laws and regulations, government investigations, internal investigations and compliance reviews, results of litigation, contingencies, taxes and tax rates, potential alliances or divestitures, liquidity, cash flow, uses of cash and financing, hedging and risk management strategies, pension, postretirement and incentive compensation plans, supply chain and the legal status of our Representatives. Such forward-looking statements are based on management's reasonable current assumptions, expectations, plans and forecasts regarding the Company's current or future results and future business and economic conditions more generally. Such forward-looking statements involve risks, uncertainties and other factors, which may cause the actual results, levels of activity, performance or achievement of Avon to be materially different from any future results expressed or implied by such forward-looking statements, and there can be no assurance that actual results will not differ materially from management's expectations. Such factors include, among others, the following:
our ability to improve our financial and operational performance and execute fully our global business strategy, including our ability to implement the key initiatives of, and/or realize the projected benefits (in the amounts and time schedules we expect) from, our transformation plan, stabilization strategies, cost savings initiatives, restructuring and other initiatives, product mix and pricing strategies, enterprise resource planning, customer service initiatives, sales and operation planning process, outsourcing strategies, Internet platform and technology strategies including e-commerce, marketing and advertising strategies, information technology and related system enhancements and cash management, tax, foreign currency hedging and risk management strategies, and any plans to invest these projected benefits ahead of future growth;
our broad-based geographic portfolio, which is heavily weighted towards emerging markets, a general economic downturn, a recession globally or in one or more of our geographic regions or markets, such as Brazil, Mexico or Russia, or sudden disruption in business conditions, and the ability to withstand an economic downturn, recession, cost inflation, commodity cost pressures, economic or political instability (including fluctuations in foreign exchange rates), competitive or other market pressures or conditions;
the effect of economic factors, including inflation and fluctuations in interest rates and foreign currency exchange rates;
the possibility of business disruption in connection with our transformation plan, stabilization strategies, cost savings initiatives, or restructuring and other initiatives;
our ability to reverse declining revenue, margins and net income, and to achieve profitable growth, particularly in our largest markets, such as Brazil, and developing and emerging markets, such as Mexico and Russia;
our ability to improve working capital and effectively manage doubtful accounts and inventory and implement initiatives to reduce inventory levels, including the potential impact on cash flows and obsolescence;
our ability to reverse declines in Active Representatives, to enhance our sales Leadership programs, to generate Representative activity, to increase the number of consumers served per Representative and their engagement online, to enhance branding and the Representative and consumer experience and increase Representative productivity through field activation and segmentation programs and technology tools and enablers, to invest in the direct-selling channel, to offer a more social selling experience, and to compete with other direct-selling organizations to recruit, retain and service Representatives and to continue to innovate the direct-selling model;
general economic and business conditions in our markets, including social, economic and political uncertainties, such as in Russia and Ukraine, and any potential sanctions, restrictions or responses to such conditions imposed by other markets in which we operate;
our ability to successfully complete (i) the planned separation of our North America business into a privately-held company that will be majority-owned and managed by Cleveland NA Investor LLC (an affiliate of Cerberus Capital Management L.P. ("Cerberus")) (the "Separation") and (ii) the preferred stock investment by Cleveland Apple Investor LLC (an affiliate of Cerberus) in the Company and the resulting interest Cerberus will have in our Company, as described herein in each case;
developments in or consequences of any investigations and compliance reviews, and any litigation related thereto, including the investigations and compliance reviews of Foreign Corrupt Practices Act ("FCPA") and related United States ("U.S.") and foreign law matters in China and additional countries, as well as any disruption or adverse consequences

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resulting from such investigations, reviews, related actions or litigation, including the retention of a compliance monitor as required by the deferred prosecution agreement with the U.S. Department of Justice and a consent to settlement with the Securities and Exchange Commission ("SEC"), any changes in Company policy or procedure suggested by the compliance monitor or undertaken by the Company, the duration of the compliance monitor and whether and when the Company will be permitted to undertake self-reporting, the Company’s compliance with the deferred prosecution agreement and whether and when the charges against the Company are dismissed with prejudice;
the effect of political, legal, tax, including changes in tax rates, and other regulatory risks imposed on us abroad and in the U.S., our operations or our Representatives, including foreign exchange, pricing, data privacy or other restrictions, the adoption, interpretation and enforcement of foreign laws, including in jurisdictions such as Brazil, Russia, Venezuela and Argentina, and any changes thereto, as well as reviews and investigations by government regulators that have occurred or may occur from time to time, including, for example, local regulatory scrutiny in Venezuela;
competitive uncertainties in our markets, including competition from companies in the consumer packaged goods industry, some of which are larger than we are and have greater resources;
the impact of the adverse effect of volatile energy, commodity and raw material prices, changes in market trends, purchasing habits of our consumers and changes in consumer preferences, particularly given the global nature of our business and the conduct of our business in primarily one channel;
our ability to attract and retain key personnel;
other sudden disruption in business operations beyond our control as a result of events such as acts of terrorism or war, natural disasters, pandemic situations, large-scale power outages and similar events;
key information technology systems, process or site outages and disruptions, and any cyber security breaches, including any security breach of our systems or those of a third-party provider that results in the theft, transfer or unauthorized disclosure of Representative, customer, employee or Company information or compliance with information security and privacy laws and regulations in the event of such an incident which could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputation and results of operations, and related costs to address such malicious intentional acts and to implement adequate preventative measures against cyber security breaches;
the risk of product or ingredient shortages resulting from our concentration of sourcing in fewer suppliers;
any changes to our credit ratings and the impact of such changes on our financing costs, rates, terms, debt service obligations, access to lending sources and working capital needs;
the impact of our indebtedness, our access to cash and financing, and our ability to secure financing or financing at attractive rates and terms and conditions;
the impact of a continued decline in our business results, which includes the impact of any adverse foreign exchange movements, significant restructuring charges and significant legal settlements or judgments, on our ability to comply with certain covenants in our revolving credit facility;
the impact of the transfer of certain pension obligations in connection with the Separation and the impact of possible pension funding obligations, increased pension expense and any changes in pension standards and regulations or interpretations thereof on our cash flow and results of operations;
our ability to successfully identify new business opportunities, strategic alliances and strategic alternatives and identify and analyze alliance candidates, secure financing on favorable terms and negotiate and consummate alliances;
disruption in our supply chain or manufacturing and distribution operations;
the quality, safety and efficacy of our products;
the success of our research and development activities;
our ability to protect our intellectual property rights, including in connection with the Separation;
our ability to pay dividends on or mandatorily redeem the Series C Preferred Stock (as defined herein) issued in connection with the Separation; and
the risk of an adverse outcome in any material pending and future litigation or with respect to the legal status of Representatives.
Additional information identifying such factors is contained in Item 1A of our 2015 Form 10-K for the year ended December 31, 2015, and other reports and documents we file with the SEC. We undertake no obligation to update any such forward-looking statements.


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PART I
ITEM 1. BUSINESS
(U.S. dollars in millions, except per share data)
When used in this report, the terms "Avon," "Company," "we," "our" or "us" mean, unless the context otherwise indicates, Avon Products, Inc. and its majority and wholly owned subsidiaries.
General
We are a global manufacturer and marketer of beauty and related products. We commenced operations in 1886 and were incorporated in the State of New York on January 27, 1916. We conduct our business in the highly competitive beauty industry and compete against other consumer packaged goods ("CPG") and direct-selling companies to create, manufacture and market beauty and non-beauty-related products. Our product categories are Beauty and Fashion & Home. Beauty consists of skincare (which includes personal care), fragrance and color (cosmetics). Fashion & Home consists of fashion jewelry, watches, apparel, footwear, accessories, gift and decorative products, housewares, entertainment and leisure products, children’s products and nutritional products.
Our business is conducted primarily in one channel, direct selling. Our reportable segments are based on geographic operations and include commercial business units in Latin America; Europe, Middle East & Africa; and Asia Pacific. In addition, we operate our business in North America, which has been presented as discontinued operations for all periods presented and is discussed further below. Financial information relating to our reportable segments is included in "Segment Review" within Management’s Discussion and Analysis of Financial Condition and Results of Operations, which we refer to in this report as "MD&A," on pages 27 through 59 of this 2015 Annual Report on Form 10-K, which we refer to in this report as our "2015 Annual Report," and in Note 12, Segment Information, to the Consolidated Financial Statements on pages F-42 through F-44 of our 2015 Annual Report. We refer to each of the Notes to the Consolidated Financial Statements in this 2015 Annual Report as a "Note." Information about geographic areas is included in Note 12, Segment Information on pages F-42 through F-44 of our 2015 Annual Report.
In December 2015, we entered into definitive agreements with affiliates of Cerberus Capital Management ("Cerberus"), which include a $435 investment in Avon by an affiliate of Cerberus through the purchase of our convertible preferred stock and the separation of the North America business from Avon into a privately-held company, which will include a $100 contribution by Avon, that will be majority-owned and managed by an affiliate of Cerberus. Avon will retain approximately 20% ownership in this new privately-held company. These transactions are expected to close concurrently in the first half of 2016. The North America business, which represents the Company's operations in the United States, Canada and Puerto Rico, was previously its own reportable segment and has been presented as discontinued operations for all periods presented. Refer to Note 3, Discontinued Operations and Divestitures, on pages F-16 through F-18 of our 2015 Annual Report, for additional information regarding the investment by an affiliate of Cerberus and the separation of the North America business.
Distribution
During 2015, we had sales operations in 57 countries and territories, and distributed our products in 15 other countries and territories. In addition, our North America business (which has been presented as discontinued operations) had sales operations in 3 countries and territories, and distributed our products in 27 other countries and territories. Unlike most of our CPG competitors, which sell their products through third-party retail establishments (e.g., drug stores and department stores), we primarily sell our products to the ultimate consumer through the direct-selling channel. In our case, sales of our products are made to the ultimate consumer principally through direct selling by Representatives, who are independent contractors and not our employees. As of December 31, 2015, we had nearly 6 million active Representatives which represents the number of Representatives submitting an order in a sales campaign, totaled for all campaigns during the year and then divided by the number of campaigns. Representatives earn by purchasing products directly from us at a discount from a published brochure price and selling them to their customers, the ultimate consumer of our products. Representatives can start their Avon businesses for a nominal fee, or in some markets, for no fee at all. We generally have no arrangements with end users of our products beyond the Representative, except as described below. No single Representative accounts for more than 10% of our net sales.
A Representative contacts their customers directly, selling primarily through our brochure, which highlights new products and special promotions for each sales campaign. In this sense, the Representative, together with the brochure, are the "store" through which our products are sold. A brochure introducing a new sales campaign is usually generated every three to four weeks for most markets. Generally, the Representative forwards an order for a campaign to us using the Internet, mail, telephone, or fax. This order is processed and the products are assembled at a distribution center and delivered to the Representative usually through a combination of local and national delivery companies. Generally, the Representative then delivers the merchandise and collects payment from the customer for her or his own account. A Representative generally receives a refund of the price the Representative paid for a product if the Representative chooses to return it.

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We employ certain web-enabled systems to increase Representative support, which allow a Representative to run her or his business more efficiently and also allow us to improve our order-processing accuracy. For example, in many countries, Representatives can utilize the Internet to manage their business electronically, including order submission, order tracking, payment and communications with us. In addition, in many markets, Representatives can further build their own business through personalized web pages provided by us, enabling them to sell a complete line of our products online. Self-paced online training also is available in certain markets.
In some markets, we use decentralized branches, satellite stores and independent retail operations (e.g., beauty boutiques) to serve Representatives and other customers. Representatives come to a branch to place and pick up product orders for their customers. The branches also create visibility for us with consumers and help reinforce our beauty image. In certain markets, we provide opportunities to license our beauty centers and other retail-oriented and direct-to-consumer opportunities to reach new customers in complementary ways to direct selling. In the U.K. and certain other markets, we also utilize e-commerce and market our products through consumer websites.
The recruiting or appointing and training of Representatives are the primary responsibilities of district sales managers, zone managers and independent leaders. Depending on the market and the responsibilities of the role, some of these individuals are our employees and some are independent contractors. Those who are employees are paid a salary and an incentive based primarily on the achievement of a sales objective in their district. Those who are independent contractors are rewarded primarily based on total sales achieved in their zones or downline team of recruited, trained and managed Representatives. Personal contacts, including recommendations from current Representatives (including the sales Leadership program), and local market advertising constitute the primary means of obtaining new Representatives. The sales Leadership program is a multi-level compensation program which gives Representatives, known as independent leaders, the opportunity to earn discounts on their own sales of our products, as well as commissions based on the net sales made by Representatives they have recruited and trained. This program generally limits the number of levels on which commissions can be earned to three. The primary responsibilities of independent leaders are the prospecting, appointing, training and development of their downline Representatives while maintaining a certain level of their own sales. Development of the sales Leadership program throughout the world is one part of our long-term growth strategy. As described above, the Representative is the "store" through which we primarily sell our products and, given the high rate of turnover among Representatives (a common characteristic of direct selling), it is critical that we recruit, retain and service Representatives on a continuing basis in order to maintain and grow our business.
From time to time, local governments and others question the legal status of Representatives or impose burdens inconsistent with their status as independent contractors, often in regard to possible coverage under social benefit laws that would require us (and, in most instances, the Representatives) to make regular contributions to government social benefit funds. Although we have generally been able to address these questions in a satisfactory manner, these questions can be raised again following regulatory changes in a jurisdiction or can be raised in other jurisdictions. If there should be a final determination adverse to us in a country, the cost for future, and possibly past, contributions could be so substantial in the context of the volume and profitability of our business in that country that we would consider discontinuing operations in that country.
Promotion and Marketing
Sales promotion and sales development activities are directed at assisting Representatives, through sales aids such as brochures, product samples and demonstration products. In order to support the efforts of Representatives to reach new customers, specially designed sales aids, promotional pieces, customer flyers, television advertising and print advertising may be used. In addition, we seek to motivate our Representatives through the use of special incentive programs that reward superior sales performance. Periodic sales meetings with Representatives are conducted by the district sales or zone managers. The meetings are designed to keep Representatives abreast of product line changes, explain sales techniques and provide recognition for sales performance.
A number of merchandising techniques are used, including the introduction of new products, the use of combination offers, the use of trial sizes and samples, and the promotion of products packaged as gift items. In general, for each sales campaign, a distinctive brochure is published, in which new products are introduced and selected items are offered as special promotions or are given particular prominence in the brochure. A key priority for our merchandising is to continue the use of pricing and promotional models and tools to enable a deeper, fact-based understanding of the role and impact of pricing within our product portfolio.
From time to time, various regulations or laws have been proposed or adopted that would, in general, restrict the frequency, duration or volume of sales resulting from new product introductions, special promotions or other special price offers. We expect our broad product lines and pricing flexibility to mitigate the effect of these regulations.

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Competitive Conditions
We face competition from various products and product lines. The beauty and beauty-related products industry is highly competitive and the number of competitors and degree of competition that we face in this industry varies widely from country to country. We compete against products sold to consumers in a number of distribution methods, including direct selling, through the Internet, and through the mass market retail and prestige retail channels.
Specifically, due to the nature of the direct-selling channel, we compete on a regional, often country-by-country basis, with our direct-selling competitors. Unlike a typical CPG company which operates within a broad-based consumer pool, direct sellers compete for representative or entrepreneurial talent by providing a more competitive earnings opportunity or "better deal" than that offered by the competition. Providing a compelling earnings opportunity for our Representatives is as critical as developing and marketing new and innovative products. As a result, in contrast to a typical CPG company, we must first compete for a limited pool of Representatives before we reach the ultimate consumer.
Within the broader CPG industry, we principally compete against large and well-known cosmetics (color), fragrance and skincare companies that manufacture and sell broad product lines through various types of retail establishments and other channels, including through the Internet. In addition, we compete against many other companies that manufacture and sell more narrow beauty product lines sold through retail establishments and other channels, including through the Internet.
We also have many global branded and private label competitors in the accessories, apparel, housewares, and gift and decorative products industries, including retail establishments, principally department stores, mass merchandisers, gift shops and specialty retailers. Our principal competition in the fashion jewelry industry consists of a few large companies and many small companies that sell fashion jewelry through department stores, mass merchandisers, specialty retailers and e-commerce.
We believe that the personalized customer service offered by our Representatives; the amount and type of field incentives we offer our Representatives on a market-by-market basis; the high quality, attractive designs and prices of our products; the high level of new and innovative products; our easily recognized brand name and our guarantee of product satisfaction are significant factors in helping to establish and maintain our competitive position.
International Operations
During 2015, our international operations were conducted primarily through subsidiaries in 57 countries and territories outside of the U.S. Our products were also distributed in 15 other countries and territories. In addition, our North America business (which has been presented as discontinued operations) had sales operations in 2 countries and territories outside of the U.S., and distributed our products in 27 other countries and territories.
Our international operations are subject to risks inherent in conducting business abroad, including, but not limited to, the risk of adverse foreign currency fluctuations, foreign currency remittance restrictions, the ability to procure products and unfavorable social, economic and political conditions.
See the sections "Risk Factors - Our ability to conduct business in our international markets may be affected by political, legal, tax and regulatory risks" and "Risk Factors - We are subject to financial risks as a result of our international operations, including exposure to foreign currency fluctuations and the impact of foreign currency restrictions" in Item 1A on pages 8 through 20 of our 2015 Annual Report for more information.
Manufacturing
We manufacture and package the majority of our Beauty products. Raw materials, consisting chiefly of essential oils, chemicals, containers and packaging components, are purchased for our Beauty products from various suppliers. Most of our Fashion & Home products are purchased from various third-party suppliers. Additionally, we design the brochures that are used by the Representatives to sell our products. The loss of any one supplier would not have a material impact on our ability to source raw materials for our Beauty products or source products for our Fashion & Home categories or paper for the brochures.
Packages, consisting of containers and packaging components, are designed by our staff of artists and designers. The design and development of new Beauty products are affected by the cost and availability of materials such as glass, plastics and chemicals. We believe that we can continue to obtain sufficient raw materials and supplies to manufacture and produce our Beauty products for the foreseeable future.
See Item 2, Properties, on page 21 of our 2015 Annual Report for additional information regarding the location of our principal manufacturing facilities.

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Product Categories
Both of our product categories individually account for 10% or more of consolidated net sales in 2015. The following is the percentage of net sales by product category for the years ended December 31:
 
 
2015
 
2014
 
2013
Beauty
 
74
%
 
75
%
 
75
%
Fashion & Home
 
26
%
 
25
%
 
25
%
Trademarks and Patents
Our business is not materially dependent on the existence of third-party patent, trademark or other third-party intellectual property rights, and we are not a party to any ongoing material licenses, franchises or concessions. We do seek to protect our key proprietary technologies by aggressively pursuing comprehensive patent coverage in major markets. We protect our Avon name and other major proprietary trademarks through registration of these trademarks in the markets where we sell our products, monitoring the markets for infringement of such trademarks by others, and by taking appropriate steps to stop any infringing activities.
Seasonal Nature of Business
Our sales and earnings are typically affected by seasonal variations, a characteristic of many companies selling beauty, gift and decorative products, apparel and fashion jewelry. For instance, our sales are generally highest during the fourth quarter due to seasonal and holiday-related patterns. However, the sales volume of holiday gift items is, by its nature, difficult to forecast, and taken as a whole, seasonality does not have a material impact on our financial results.
Research and Product Development Activities
New products are essential to growth in the highly competitive cosmetics industry. Our research and development ("R&D") department’s efforts are important to developing new products, including formulating effective beauty treatments relevant to women’s needs, and redesigning or reformulating existing products. To increase our brand competitiveness, we have sustained our focus on new technology and product innovation to deliver first-to-market products that provide visible consumer benefits.
Our global R&D facility is located in Suffern, NY. A team of researchers and technicians apply the disciplines of science to the practical aspects of bringing products to market around the world. Relationships with dermatologists and other specialists enhance our ability to deliver new formulas and ingredients to market. Additionally, we have an R&D facility located in Shanghai, China and satellite R&D operations located in Argentina, Brazil, China, Mexico, Poland and South Africa.
In 2015, our most significant product launches included: Anew Clinical Overnight Hydration Mask, Anew Power Serum, Ultra Color Indulgence Lip Color, SuperExtend Winged Out Mascara, Big & False Lash Volume Mascara, Outspoken Party! by Fergie Fragrance and Avon Attraction for Him and for Her Fragrances.
The amounts incurred on research activities relating to the development of new products and the improvement of existing products were $61.9 in 2015, $64.7 in 2014 and $66.9 in 2013. This research included the activities of product research and development and package design and development. Most of these activities were related to the design and development of Beauty products.
Environmental Matters
Compliance with environmental regulations impacting our global operations has not had, and is not anticipated to have, any material adverse effect on our financial position, capital expenditures or competitive position.
Employees
At December 31, 2015, we employed approximately 28,300 employees, excluding North America. Of these, approximately 800 were employed in the U.S. and approximately 27,500 were employed in other countries. In addition, we employed approximately 2,600 in our North America business (which has been presented as discontinued operations), and of these, approximately 2,100 were employed in the U.S. and approximately 500 were employed in other countries.
Transformation Plan
In January 2016, we announced a transformation plan (the "Transformation Plan"), which includes investing in growth, reducing costs in an effort to continue to improve our cost structure and improving our financial resilience. As a result of this plan, we expect to invest $350 into the business over the next three years with an estimated $150 in media and social selling and $200 related to the service model evolution and information technology, which will be aimed at improving the overall Representative experience. With respect to cost reductions, we have targeted pre-tax annualized cost savings of approximately

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$350 after three years, with an estimated $200 from supply chain reductions and an estimated $150 from other cost reductions. These cost savings are expected to be achieved through restructuring actions as well as other cost-savings strategies that will not result in restructuring charges. We are targeting the realization of $70 of these pre-tax cost savings in 2016. We have initiated this Transformation Plan in order to enable us to achieve our long-term goals of double-digit operating margin and mid single-digit constant-dollar revenue growth. While we expect to evaluate options to improve our financial resilience, we have already implemented actions in this area, including refinancing our revolving credit facility, divesting Liz Earle Beauty Co. Limited (“Liz Earle”), prepaying our 2.375% Notes (as defined in "Capital Resources" within MD&A on pages 58 through 59) and suspending our dividend.
See Note 14, Restructuring Initiatives on pages F-44 through F-48 of our 2015 Annual Report, Note 3, Discontinued Operations and Divestitures on pages F-16 through F-18 of our 2015 Annual Report and Note 5, Debt and Other Financing on pages F-19 through F-21 of our Annual Report for more information on these items.
$400M Cost Savings Initiative
In 2012, we outlined initial steps toward achieving a cost-savings target of $400 before taxes by the end of 2015. In connection with this cost-savings target, 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. As part of the $400M Cost Savings Initiative, we identified areas for cost efficiency that required restructuring charges for reductions in our global workforce and related actions across many of our businesses and functions, as well as the closure of certain smaller, under-performing markets, including South Korea, Vietnam, Republic of Ireland, Bolivia and France. We also expected to achieve savings through other cost-savings strategies that would not result in restructuring charges (including reductions in legal costs). While we achieved the targeted cost savings, we did not achieve our targeted low double-digit operating margin primarily due to the unfavorable impact of foreign exchange, inflationary pressures and the continued revenue decline in North America (which has since been presented as discontinued operations for all periods presented). Additional information regarding the $400M Cost Savings Initiative is included in Note 14, Restructuring Initiatives on pages F-44 through F-48 of our 2015 Annual Report.
Acquisitions and Dispositions
In December 2015, we entered into definitive agreements with affiliates of Cerberus, which included the separation of the North America business from Avon into a privately-held company that will be majority-owned and managed by an affiliate of Cerberus. Avon will retain approximately 20% ownership in this new privately-held company. In July 2015, we completed the sale of Liz Earle. In July 2013, we completed the sale of Silpada Designs, Inc. ("Silpada"). Refer to Note 3, Discontinued Operations and Divestitures, on pages F-16 through F-18 of our 2015 Annual Report, for additional information regarding the sales of the North America business, Liz Earle and Silpada.
Website Access to Reports
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, are, and have been throughout 2015, available without charge on our investor website (www.avoninvestor.com) as soon as reasonably practicable after they are filed with or furnished to the U.S. Securities and Exchange Commission (the "SEC"). We also make available on our website the charters of our Board Committees, our Corporate Governance Guidelines and our Code of Conduct. Copies of these SEC reports and other documents are also available, without charge, by sending a letter to Investor Relations, Avon Products, Inc., 777 Third Avenue, New York, N.Y. 10017-1307, by sending an email to investor.relations@avon.com or by calling (212) 282-5320. Information on our website does not constitute part of this report. Additionally, our filings with the SEC may be read and copied at the SEC Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. These filings, including reports, proxy and information statements, and other information regarding the Company are also available on the SEC’s website at www.sec.gov free of charge as soon as reasonably practicable after we have filed or furnished the above-referenced reports.

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ITEM 1A. RISK FACTORS
You should carefully consider each of the following risks associated with an investment in our publicly traded securities and all of the other information in our 2015 Annual Report. Our business may also be adversely affected by risks and uncertainties not presently known to us or that we currently believe to be immaterial. If any of the events contemplated by the following discussion of risks should occur, our business, prospects, financial condition, liquidity, results of operations and cash flows may be materially adversely affected.
Risks Related to Us and Our Business
Our success depends on our ability to improve our financial and operational performance and execute fully our global business strategy.
Our ability to improve our financial and operational performance and implement the key initiatives of our global business strategy is dependent upon a number of factors, including our ability to:
implement our transformation plan, stabilization strategies, cost savings initiatives, restructuring and other initiatives, and achieve anticipated savings and benefits from such programs and initiatives;
reverse declines in our revenue performance and market share, and strengthen our brand image;
implement appropriate pricing strategies and product mix that are more aligned with the preferences of local markets and achieve anticipated benefits from these strategies;
reduce costs and effectively manage our cost base, particularly selling, general and administrative ("SG&A") expenses;
improve our business in the markets where we operate, including through improving field health, improving our brochure and creating a sustainable cost base;
execute investments in information technology ("IT") infrastructure and realize efficiencies across our supply chain, marketing processes, sales model and organizational structure;
implement and continue to innovate our Internet platform, technology strategies and customer service initiatives;
effectively manage our outsourcing activities;
offer a more compelling social selling experience, including the roll-out of e-commerce in certain markets;
improve our marketing and advertising, including our brochures and our social media presence;
improve working capital, effectively manage inventory and implement initiatives to reduce inventory levels, including the potential impact on cash flows and obsolescence;
secure financing at attractive rates, maintain appropriate capital investment, capital structure and cash flow levels and implement cash management, tax, foreign currency hedging and risk management strategies;
reverse declines in Active Representatives and Representative satisfaction by successfully reducing campaign complexity, enhancing our sales Leadership program, the Representative experience and earnings potential and improving our brand image;
increase the productivity of Representatives through successful implementation of segmentation, field activation programs and technology tools and enablers and other investments in the direct-selling channel;
improve management of our businesses in developing markets, including improving local IT resources and management of local supply chains;
increase the number of consumers served per Representative and their engagement online, as well as to reach new consumers through a combination of new brands, new businesses, new channels and pursuit of strategic opportunities such as joint ventures and alliances with other companies;
comply with certain covenants in our revolving credit facility as a result of a continued decline in our business results, which includes the impact of any adverse foreign exchange movements, significant restructuring charges and significant legal or regulatory settlements, obtain necessary waivers from compliance with, or necessary amendments to, such covenants, and address the impact any non-compliance with such covenants may have on our ability to secure financing with favorable terms; and
estimate and achieve any financial projections concerning, for example, future revenue, profit, cash flow, and operating margin increases and maintain an effective internal control environment as a result of any challenges associated with the implementation of our various plans, strategies and initiatives.
There can be no assurance if and when any of these initiatives will be successfully and fully executed or completed.

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We may experience financial and strategic difficulties and delays or unexpected costs in completing our transformation plan and any other restructuring and cost-savings initiatives, including achieving any anticipated savings and benefits of these initiatives.
In 2012, we outlined initial steps toward achieving a cost-savings target of $400 million before taxes by the end of 2015. In connection with this cost-savings target, 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. While we achieved the targeted cost savings, we did not achieve our targeted low double-digit operating margin primarily due to the unfavorable impact of foreign exchange, inflationary pressures and the continued revenue decline in North America (which has since been presented as discontinued operations for all periods presented). We continue to analyze our cost structure and expect to incur additional restructuring charges as a result. For example, in January 2016, we announced a transformation plan (the "Transformation Plan"), which includes cost reduction efforts to continue to improve our cost structure and to enable us to reinvest in growth. As a result of this plan, we have targeted pre-tax annualized cost savings of approximately $350 million after three years, with an estimated $200 million from supply chain reductions and an estimated $150 million from other cost reductions, which are expected to be achieved through restructuring actions as well as other cost-savings strategies that will not result in restructuring charges. We plan to reinvest a portion of these cost savings in growth initiatives, including media, social selling and information technology systems that will help us modernize our business. We initiated the Transformation Plan in order to enable us to achieve our long-term goals of double-digit operating margin and mid single-digit constant-dollar revenue growth.
As we work to right-size our cost structure, we may not realize anticipated savings or benefits from one or more of the various restructuring and cost-savings initiatives we may undertake as part of these efforts in full or in part or within the time periods we expect. Other events and circumstances, such as financial and strategic difficulties and delays or unexpected costs, including the impact of foreign currency and inflationary pressures, may occur which could result in our not realizing our targets. If we are unable to realize these savings or benefits, our ability to continue to fund other initiatives and aspects of our business may be adversely affected. In addition, any plans to invest these savings and benefits ahead of future growth means that such costs will be incurred whether or not we realize these savings and benefits. We are also subject to the risks of labor unrest, negative publicity and business disruption in connection with these initiatives, and the failure to realize anticipated savings or benefits from such initiatives could have a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows.
There can be no assurance that we will be able to reverse declining revenue, margins and net income and achieve profitable growth.
There can be no assurance that we will be able to reverse declining revenue, margins and net income, and to achieve profitable growth in the future, particularly in our largest markets, such as Brazil and in developing and emerging markets, such as Mexico and Russia. Our revenue in 2015 was $6,160.5 million, compared with $7,648.0 million in 2014 and $8,496.8 million in 2013. Our gross margin in 2015 was 60.3%, compared with 60.7% in 2014 and 62.7% in 2013. Our operating margin in 2015 was 2.7%, compared with 5.7% in 2014 and 6.4% in 2013. In 2015, we had a loss from continuing operations, net of tax, of $796.5 million, compared with a loss from continuing operations, net of tax, of $344.5 million in 2014, and income from continuing operations, net of tax, of $67.5 million in 2013. Reversing these trends will depend on our ability to improve financial and operational performance and execution of our global business strategy. There can be no assurance that we will be able to reverse these trends.
To reverse these trends in revenue, margins and net income and to achieve profitable growth, we also need to successfully implement certain initiatives including our Transformation Plan, and there can no assurance that we will be able to do so. Our achievement of profitable growth is also subject to the strengths and weaknesses of our individual international markets, which are or may be impacted by global economic conditions. We cannot assure that our broad-based geographic portfolio will be able to withstand an economic downturn, recession, cost or wage inflation, commodity cost pressures, economic or political instability (including fluctuations in foreign exchange rates), competitive pressures or other market pressures in one or more particular regions.
Failure to reverse declining revenue, margins and net income and to achieve profitable growth could have a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows.
Our business is conducted primarily in one channel, direct selling.
Our business is conducted primarily in the direct-selling channel. Sales are made to the ultimate consumer principally through direct selling by Representatives, who are independent contractors and not our employees. As of December 31, 2015, we had nearly 6 million active Representatives. There is a high rate of turnover among Representatives, which is a common characteristic of the direct selling business. In order to reverse losses of Representatives and grow our business in the future, we need to recruit, retain and service Representatives on a continuing basis. Among other things, we need to create attractive Representative earning opportunities and transform the value chain, restore field health and sales force effectiveness, successfully implement other initiatives in the direct-selling channel, successfully execute our digital strategy, including e-

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commerce, improve our brochure and product offerings and improve our marketing and advertising. There can be no assurance that we will be able to achieve these objectives. Additionally, consumer purchasing habits, including reducing purchases of beauty and related products generally, or reducing purchases from Representatives through direct selling by buying beauty and related products in other channels such as retail, could reduce our sales, impact our ability to execute our global business strategy or have a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows. Additionally, if we lose market share in the direct-selling channel, our business, prospects, financial condition, liquidity, results of operations and cash flows may be adversely affected. Furthermore, if any government such as Brazil, bans or severely restricts our business methods or operational/commercial model of direct selling, our business, prospects, financial condition, liquidity, results of operations and cash flows may be materially adversely affected.
We are subject to financial risks as a result of our international operations, including exposure to foreign currency fluctuations and the impact of foreign currency restrictions.
We operate globally, through operations in various locations around the world, and derive all of our consolidated revenue from our operations outside of the United States ("U.S.").
One risk associated with our international operations is that the functional currency for most of our international operations is their local currency. The primary foreign currencies for which we have significant exposures include the Argentine peso, Brazilian real, British pound, Chilean peso, Colombian peso, the euro, Mexican peso, Peruvian new sol, Philippine peso, Polish zloty, Romanian leu, Russian ruble, South Africa rand, Turkish lira and Ukrainian hryvnia. As the U.S. dollar strengthens relative to our foreign currencies, our revenues and profits are reduced when translated into U.S. dollars and our margins may be negatively impacted by country mix if our higher margin markets, such as Russia, experience significant devaluation. In addition, our costs are more weighted to U.S. dollars while our sales are denominated in local currencies. Although we typically work to mitigate this negative foreign currency transaction impact through price increases and further actions to reduce costs, we may not be able to fully offset the impact, if at all. For example, in 2015, our revenues declined 19% compared with 2014 due to unfavorable foreign exchange, and grew 2% on a Constant $ basis (as defined in "Non-GAAP Financial Measures" within MD&A on page 29). Our success depends, in part, on our ability to manage these various foreign currency impacts and there can be no assurance that foreign currency fluctuations will not have a material adverse effect on our business, assets, financial condition, liquidity, results of operations or cash flows.
Another risk associated with our international operations is the possibility that a foreign government may impose foreign currency remittance restrictions. Due to the possibility of government restrictions on transfers of cash out of the country and control of exchange rates, we may not be able to immediately repatriate cash at the official exchange rate. If this should occur, or if the official exchange rate devalues, it may have a material adverse effect on our business, assets, financial condition, liquidity, results of operations or cash flows. For example, currency restrictions enacted by the Venezuelan government in 2003 have become more restrictive and have impacted the ability of our subsidiary in Venezuela (Avon Venezuela) to obtain foreign currency to pay for imported products, which in turn has reduced our product offerings in Venezuela and negatively impacted our sales. Unless foreign exchange is made more readily available, Avon Venezuela's operations will continue to be negatively impacted as it will need to obtain more of its foreign currency needs from non-government sources where the exchange rate is less favorable than the official rate. In 2011, the Argentine government introduced restrictive foreign currency exchange controls. In December 2015, the Argentine government began the process of removing foreign currency exchange controls; however, some uncertainty exists regarding the foreign currency exchange controls in the future. Unless foreign exchange is made more readily available, Avon Argentina's operations may be negatively impacted.
Inflation is another risk associated with our international operations. Gains and losses resulting from the remeasurement of the financial statements of subsidiaries operating in highly inflationary economies are recorded in earnings. High rates of inflation or the related devaluation of foreign currency may have a material adverse effect on our business, assets, financial condition, liquidity and results of operations or cash flows. For example, Venezuela has been designated as a highly inflationary economy. See "Segment Review - Latin America" within MD&A on pages 46 through 50 of our 2015 Annual Report for additional information regarding Venezuela. In addition, there can be no assurance that other countries in which we operate, such as Argentina, will not also become highly inflationary and that our revenue, operating profit and net income will not be adversely impacted as a result.
We are subject to a deferred prosecution agreement with the U.S. Department of Justice (the "DOJ") and a consent to settlement with the U.S. Securities and Exchange Commission (the "SEC") pursuant to which we engaged, at our own expense, an independent compliance monitor. With the approval of the DOJ and the SEC, the monitor can be replaced by the Company after 18 months, if the Company agrees to undertake self-reporting obligations for the remainder of the monitoring period. The monitoring period is scheduled to expire in July 2018. We have been incurring costs in connection with these obligations, and compliance with these obligations could divert members of management’s time from the operation of our business. Ongoing costs and burdens could be significant.
In December 2014, the U.S. District Court for the Southern District of New York (the "USDC") approved a deferred prosecution agreement between the Company and the DOJ (the "DPA") and in January 2015, the USDC approved a consent to

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settlement with the SEC (the "Consent") in connection with the previously disclosed Foreign Corrupt Practices Act (the "FCPA") investigations.
Under the DPA and the Consent, among other things, the Company agreed to have a compliance monitor (the "monitor"). During July 2015, the Company engaged a monitor, who had been approved by the DOJ and SEC. With the approval of the DOJ and the SEC, the monitor can be replaced by the Company after 18 months, if the Company agrees to undertake self-reporting obligations for the remainder of the monitoring period. The monitoring period is scheduled to expire in July 2018. There can be no assurance as to whether or when the DOJ and the SEC will approve replacing the monitor with the Company’s self-reporting.
Under the DPA, the Company also represented that it has implemented and agreed that it will continue to implement a compliance and ethics program designed to prevent and detect violations of the FCPA and other applicable anti-corruption laws throughout its operations.
The monitor is assessing and monitoring the Company's compliance with the terms of the DPA. The monitor may recommend changes to our policies and procedures that we must adopt unless they are unduly burdensome or otherwise inadvisable, in which case we may propose alternatives, which the DOJ and the SEC may or may not accept. In addition, operating under the oversight of the monitor may result in additional time and attention on these matters by members of our management, which may divert their time from the operation of our business. Assuming the monitor is replaced by a self-reporting period, the Company’s self-reporting obligations may be costly or time-consuming.
We currently cannot estimate the costs that we are likely to incur in connection with ongoing compliance with the DPA and the Consent, including the monitorship, the costs, if applicable, of self-reporting, and the costs of implementing the changes, if any, to our policies and procedures required by the monitor. However, these costs could be significant.
If we commit a breach of the DPA, we may be subject to criminal prosecution. Such criminal prosecution could have a material adverse effect on our business, financial condition, results of operations or cash flows.
Under the DPA, the DOJ will defer criminal prosecution of the Company for a term of three years in connection with the charged violations of the FCPA. If the DOJ determines that the Company has knowingly violated the DPA (including the monitoring provisions described in the preceding risk factor), the DOJ may commence prosecution or extend the term of the DPA for up to one year. If the Company remains in compliance with the DPA through its term, the charges against the Company will be dismissed with prejudice.
Failure to comply with the terms of the DPA could result in criminal prosecution by the DOJ, including for the charged violations of the books and records and internal controls provisions of the FCPA that were included in the information that was filed in connection with the DPA. Under such circumstance, the DOJ would be permitted to rely upon the admissions we made in the DPA and would benefit from our waiver of certain procedural and evidentiary defenses. Such a criminal prosecution could subject us to penalties that could have a material adverse effect on our business, financial condition, results of operations or cash flows.
A general economic downturn, a recession globally or in one or more of our geographic regions or markets or sudden disruption in business conditions or other challenges may adversely affect our business, our access to liquidity and capital, and our credit ratings.
Current global macro-economic instability or a further downturn in the economies in which we sell our products, including any recession in one or more of our geographic regions or markets could adversely affect our business, our access to liquidity and capital, and our credit ratings. Global economic events over the past few years, including high unemployment levels, the tightening of credit markets and failures of financial institutions and other entities, have resulted in challenges to our business and a heightened concern regarding further deterioration globally. In addition, as mentioned above, our business is conducted primarily in the direct-selling channel. We could experience declines in revenues, profitability and cash flow due to reduced orders, payment delays, supply chain disruptions or other factors caused by such economic, operational or business challenges. Any or all of these factors could potentially have a material adverse effect on our liquidity and capital resources and credit ratings, including our ability to access short-term financing, raise additional capital, reduce flexibility with respect to working capital, and maintain credit lines and offshore cash balances.
Consumer spending is also generally affected by a number of factors, including general economic conditions, inflation, interest rates, energy costs, gasoline prices and consumer confidence generally, all of which are beyond our control. Consumer purchases of discretionary items, such as beauty and related products, tend to decline during recessionary periods, when disposable income is lower, and may impact sales of our products. We may face continued economic challenges in fiscal 2016 because customers may continue to have less money for discretionary purchases as a result of job losses, bankruptcies, and reduced access to credit, among other things.

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In addition, sudden disruptions in business conditions and consumer spending may result from acts of terror, natural disasters, adverse weather conditions, such as the significant typhoon which impacted the Philippines in 2013, and pandemic situations or large scale power outages, none of which are under our control.
Our credit ratings were downgraded in 2015, which could limit our access to financing, affect the market price of our financing, and increase financing costs. A further downgrade in our credit ratings may adversely affect our access to liquidity.
Nationally recognized credit rating organizations have issued credit ratings relating to our long-term debt. In 2015, our credit ratings were downgraded. Our long-term credit ratings are Ba2 (Negative Outlook) for corporate family debt, and Ba3 (Negative Outlook) for senior unsecured debt, with Moody's; B+ (Stable Outlook) with S&P; and B+ (Negative Outlook) with Fitch, which are below investment grade. Additional rating agency reviews could result in a further change in outlook or downgrade. Our credit ratings could limit our access to new financing, particularly short-term financing; reduce our flexibility with respect to working capital needs; adversely affect the market price of some or all of our outstanding debt securities; result in an increase in financing costs, including interest expense under certain of our debt instruments; and result in less favorable covenants and financial terms of our financing arrangements. For example, as of December 31, 2015, we have approximately $50 million outstanding in short-term borrowings of our international subsidiaries. A further change in outlook or downgrade of our credit ratings may increase some of these risks and limit our access to such short-term financing in the future on favorable terms, if at all. See Note 5, Debt and Other Financing, on pages F-19 through F-21 of our 2015 Annual Report for details about the terms of our existing debt and other financing arrangements.
Our ability to conduct business in our international markets, may be affected by political, legal, tax and regulatory risks.
Our ability to achieve growth in our international markets, and to improve operations in our existing international markets, is exposed to various risks, including:
the possibility that a foreign government might ban, halt or severely restrict our business, including our primary method of direct-selling;
the possibility that local civil unrest, economic or political instability, bureaucratic delays, changes in macro-economic conditions, changes in diplomatic or trade relationships (including any sanctions, restrictions and other responses such as those related to Russia and Ukraine) or other uncertainties might disrupt our operations in an international market;
the lack of well-established or reliable legal systems in certain areas where we operate;
the adoption of new U.S. or Foreign tax legislation or exposure to additional tax liabilities, including exposure to tax assessments without prior notice or the opportunity to review the basis for any such assessments in certain jurisdictions;
the possibility that a government authority might impose legal, tax or other financial burdens on our Representatives, as direct sellers, or on Avon, due, for example, to the structure of our operations in various markets, or additional taxes on our products, including in Brazil; and
the possibility that a government authority might challenge the status of our Representatives as independent contractors or impose employment or social taxes on our Representatives.
We are also subject to the adoption, interpretation and enforcement by governmental agencies abroad and in the U.S. (including on federal, state and local levels) of other laws, rules, regulations or policies, including any changes thereto, such as restrictions on trade, competition, manufacturing, license and permit requirements, import and export license requirements, privacy and data protection laws, anti-corruption laws, environmental laws, records and information management, tariffs and taxes, laws relating to the sourcing of "conflict minerals," health care reform requirements such as the Patient Protection and Affordable Healthcare Act, and regulation of our brochures, product claims or ingredients, which may require us to adjust our operations and systems in certain markets where we do business.
For example, from time to time, local governments and others question the legal status of Representatives or impose burdens inconsistent with their status as independent contractors, often in regard to possible coverage under social benefit laws that would require us (and, in most instances, the Representatives) to make regular contributions to government social benefit funds. Another example is privacy and data protection laws which are subject to frequently changing rules and regulations, and which may vary among the various jurisdictions where we operate. For instance, in 2015, the Court of Justice of the European Union (“E.U.”) invalidated the Safe Harbor framework for the transfer of personal data from the E.U. to the U.S. In 2016, the E.U. and the U.S. reached an agreement on a new framework, the details of which are not yet publicly available.
If we are unable to address these matters in a satisfactory manner, or adhere to or successfully implement processes in response to changing regulatory requirements, our business, costs and/or reputation may be adversely affected. We cannot predict with

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certainty the outcome or the impact that pending or future legislative and regulatory changes may have on our business in the future.
We face intense competition and can make no assurances about our ability to overcome our competitive challenges.
We face intense competition from competing products in each of our lines of business, in the markets we operate. We compete against products sold to consumers in a number of distribution methods, including direct selling, through the Internet, and through mass market retail and prestige retail channels. We also face increasing direct-selling and retail competition in our developing and emerging markets, particularly Brazil.
Within the direct-selling channel, we compete on a regional, and often country-by-country, basis with our direct-selling competitors. There are a number of direct-selling companies that sell product lines similar to ours, some of which have worldwide operations and compete with us globally. Unlike a typical consumer packaged goods ("CPG") company which operates within a broad-based consumer pool, direct sellers compete for representative or entrepreneurial talent by providing a more competitive earnings opportunity or "better deal" than that offered by the competition. Providing a compelling earnings opportunity for our Representatives is as critical as developing and marketing new and innovative products. Therefore, in contrast to typical CPG companies, we must first compete for a limited pool of Representatives before we reach the ultimate consumer.
Representatives are attracted to a direct seller by competitive earnings opportunities, often through what are commonly known as "field incentives" in the direct-selling industry. Competitors devote substantial effort to finding out the effectiveness of such incentives so that they can invest in incentives that are the most cost-effective or produce the better payback. As one of the largest and oldest beauty direct sellers globally, Avon's business model and strategies are often highly sought after, particularly by smaller and more nimble competitors who seek to capitalize on our investment and experience. As a result, we are subject to significant competition for the recruitment of Representatives from other direct-selling or network marketing organizations. It is therefore continually necessary to innovate and enhance our direct-selling and service model as well as to recruit and retain new Representatives. If we are unable to do so, our business will be adversely affected.
Within the broader CPG industry, we principally compete against large and well-known cosmetics (color), fragrance and skincare companies that manufacture and sell broad product lines through various types of retail establishments and other channels, including through the Internet. In addition, we compete against many other companies that manufacture and sell more narrow beauty product lines sold through retail establishments and other channels, including through the Internet. This industry is highly competitive, and some of our principal competitors in the CPG industry are larger than we are and have greater resources than we do. Competitive activities on their part could cause our sales to suffer. We also have many highly competitive global branded and private label competitors in the accessories, apparel, housewares, and gift and decorative products industries, including retail establishments, principally department stores, mass merchandisers, gift shops and specialty retailers. Our principal competition in the highly competitive fashion jewelry industry consists of a few large companies and many small companies that sell fashion jewelry through department stores, mass merchandisers, specialty retailers and e-commerce.
The number of competitors and degree of competition that we face in the beauty and related products industry varies widely from country to country. If our advertising, promotional, merchandising or other marketing strategies are not successful, if we are unable to improve our product mix and offer new products that represent technological breakthroughs and are aligned with local preferences, if we do not successfully manage the timing of new product introductions or the profitability of these efforts, if we are unable to improve the Representative experience, or if for other reasons our Representatives or end customers perceive competitors' products as having greater appeal, then our sales and results of operations will be adversely affected.
Our ability to improve our financial performance depends on our ability to anticipate and respond to market trends and changes in consumer preferences.
Our ability to improve our financial performance depends on our ability to anticipate, gauge and react in a timely and effective manner to changes in consumer spending patterns and preferences for beauty and related products. We must continually work to develop, produce and market new products, maintain and enhance the recognition of our brands, achieve a favorable mix of products, and refine our approach as to how and where we market and sell our products. Consumer spending patterns and preferences cannot be predicted with certainty and can change rapidly. In addition, certain market trends may be short-lived. There can be no assurance that we will be able to anticipate and respond to trends timely and effectively in the market for beauty and related products and changing consumer demands and improve our financial results.
Furthermore, material shifts or decreases in market demand for our products, including as a result of changes in consumer spending patterns and preferences or incorrect forecasting of market demand, could result in us carrying inventory that cannot be sold at anticipated prices or increased product returns by our Representatives. Failure to maintain proper inventory levels or increased product returns by our Representatives could result in a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows.

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Our success depends, in part, on our key personnel.
Our success depends, in part, on our ability to retain our key personnel. The unexpected loss of or failure to retain one or more of our key employees could adversely affect our business. Our success also depends, in part, on our continuing ability to identify, hire, attract, train, develop and retain other highly qualified personnel. Competition for these employees can be intense and our ability to hire, attract and retain them depends on our ability to provide competitive compensation. We may not be able to attract, assimilate, develop or retain qualified personnel in the future, and our failure to do so could adversely affect our business, including the execution of our global business strategy. For example, there have been many changes to the Company's senior management, including a new chief executive officer in 2012 and a new chief financial officer in 2015. Any failure by our management team to perform as expected may have a material adverse effect on our business, prospects, financial condition and results of operations. This risk may be exacerbated by the uncertainties associated with the implementation of our transformation plan and any other stabilization strategies and restructuring and cost-savings initiatives we undertake from time to time.
A failure, disruption, cyberattack or other breach in the security of an IT system or infrastructure that we utilize could adversely affect our business and reputation and increase our costs.
We employ IT systems to support our business, including systems to support financial reporting, web-based tools, an enterprise resource planning ("ERP") system, and internal communication and data transfer networks. We also employ IT systems to support Representatives in many of our markets, including electronic order collection, invoicing systems, shipping and box packing, social media tools, mobile applications and on-line training. We have e-commerce and Internet sites, including business-to-business websites to support Representatives. We use third-party service providers in many instances to provide these IT systems. Over the last several years, we have undertaken initiatives to increase our reliance on IT systems which has resulted in the outsourcing of certain services and functions, such as global human resources IT systems, call center support, Representative support services and other IT processes. For example, we recently announced that we intend to outsource four areas of the Company's IT infrastructure. Our IT systems and infrastructure, as well as those of third parties, are integral to our performance.
Any of our IT systems and infrastructure, or those of our third-party service providers, may be susceptible to outages, disruptions, destruction or corruption due to the complex landscape of localized applications and architectures as well as incidents related to legacy or unintegrated systems. These IT systems and infrastructure also may be susceptible to cybersecurity breaches, attacks, break-ins, data corruption, fire, floods, power loss, telecommunications failures, terrorist attacks and similar events beyond our control. We rely on our employees, Representatives and third parties in our day-to-day and ongoing operations, who may, as a result of human error or malfeasance or failure, disruption, cyberattack or other security breach of third party systems or infrastructure, expose us to risk. Furthermore, our ability to protect and monitor the practices of our third-party service providers is more limited than our ability to protect and monitor our own IT systems and infrastructure.
Our IT systems, or those of our third-party service providers may be accessed by unauthorized users such as cyber criminals as a result of a failure, disruption, cyberattack or other security breach, exposing us to risk. As techniques used by cyber criminals change frequently, a failure, disruption, cyberattack or other security breach may go undetected for a long period of time. A failure, disruption, cyberattack or other security breach of our IT systems or infrastructure, or those of our third-party service providers, could result in the theft, transfer, unauthorized access to, disclosure, modification, misuse, loss, or destruction of Company, employee, Representative, customer, vendor, or other third-party data, including sensitive or confidential data, personal information and intellectual property. For example, the Company uses a newswire service that has been subject to the hacking of not-yet-issued press releases by hackers in order to trade on securities using the information contained in such press releases.
We are investing in industry standard solutions and protections and monitoring practices of our data and IT systems and infrastructure to reduce these risks and continue to monitor our IT systems and infrastructure on an ongoing basis for any current or potential threats. Such efforts and investments are costly, and as cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities. As a company that operates globally, we could be impacted by commercial agreements between us and processing organizations, existing and proposed laws and regulations, and government policies and practices related to cybersecurity, privacy and data protection.
Despite our efforts, our and our third-party service providers’ data, IT systems and infrastructure may be vulnerable. There can be no assurance that our efforts will prevent a failure, disruption, cyberattack or other security breach of our or our third-party service providers’ IT systems or infrastructure, or that we will detect and appropriately respond if there is such a failure, disruption, cyberattack or other security breach. Any such failure, disruption, cyberattack or other security breach could adversely affect our business including our ability to expand our business, cause damage to our reputation, result in increased costs to address internal data, security, and personnel issues, and result in violations of applicable privacy laws and other laws and external financial obligations such as governmental fines, penalties, or regulatory proceedings, remediation efforts such as

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breach notification and identity theft monitoring, and third-party private litigation with potentially significant costs. In addition, it could result in deterioration in our employees', Representatives', customers', or vendors’ confidence in us, which could cause them to discontinue business with us or result in other competitive disadvantages.
In addition, there may be other challenges and risks as we upgrade, modernize, and standardize our IT systems globally. For example, in the past in Brazil, we experienced challenges in implementing an ERP system which impacted service levels, which in turn negatively impacted average order and Active Representative and revenue growth during 2011.
Third-party suppliers provide, among other things, the raw materials used to manufacture our Beauty products, and the loss of these suppliers or a disruption or interruption in the supply chain may adversely affect our business.
We manufacture and package the majority of our Beauty products. Raw materials, consisting chiefly of essential oils, chemicals, containers and packaging components, are purchased from various third-party suppliers for our Beauty products. All of our Fashion & Home products are purchased from various suppliers. Additionally, we produce the brochures that are used by Representatives to sell Avon products. The loss of multiple suppliers or a significant disruption or interruption in the supply chain could have a material adverse effect on the manufacturing and packaging of our Beauty products, the purchasing of our Fashion & Home products or the production of our brochures. This risk may be exacerbated by our globally-coordinated purchasing strategy, which leverages volumes. Regulatory action, such as restrictions on importation, may also disrupt or interrupt our supply chain. Furthermore, increases in the costs of raw materials or other commodities may adversely affect our profit margins if we are unable to pass along any higher costs in the form of price increases or otherwise achieve cost efficiencies in manufacturing and distribution. In addition, if our suppliers fail to use ethical business practices and comply with applicable laws and regulations, such as any child labor laws, our reputation could be harmed due to negative publicity.
Our indebtedness and any future inability to meet any of our obligations under our indebtedness, could adversely affect us by reducing our flexibility to respond to changing business and economic conditions.
As of December 31, 2015, we had approximately $2.2 billion of indebtedness outstanding. We may also incur additional long-term indebtedness and working capital lines of credit to meet future financing needs, subject to certain restrictions under our indebtedness, including our revolving credit facility (as described below), which would increase our total indebtedness. We may be unable to generate sufficient cash flow from operations and future borrowings and other financing may be unavailable in an amount sufficient to enable us to fund our current and future financial obligations or our other liquidity needs. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or our inability to refinance our debt obligations on commercially reasonable terms or at all, would have a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows. Our indebtedness could have material negative consequences on our business, prospects, financial condition, liquidity, results of operations and cash flows, including the following:
limitations on our ability to obtain additional debt or equity financing sufficient to fund growth, such as working capital and capital expenditures requirements or to meet other cash requirements, in particular during periods in which credit markets are weak;
a further downgrade in our credit ratings, as discussed above;
a limitation on our flexibility to plan for, or react to, competitive challenges in our business and the beauty industry;
the possibility that we are put at a competitive disadvantage relative to competitors that do not have as much debt as us, and competitors that may be in a more favorable position to access additional capital resources and withstand economic downturns;
limitations on our ability to execute business development activities to support our strategies or ability to execute restructuring as necessary; and
limitations on our ability to invest in recruiting, retaining and servicing our Representatives.
Our revolving credit facility is secured by first priority liens on and security interests in substantially all of the assets of Avon International Operations, Inc. (“AIO,” a wholly-owned domestic subsidiary) and the subsidiary guarantors and by certain assets of the Company, in each case, subject to certain exceptions. The facility includes affirmative, negative and financial covenants, including, among other things, limits on the ability of the Company, AIO or any restricted subsidiary to, subject to certain exceptions, incur liens, incur debt, make restricted payments, make investments or merge, consolidate or dispose of all or substantially all of its assets, as well as a minimum interest coverage ratio and a maximum total leverage ratio. If we are unable to comply with these covenants as a result of a continued decline in our business results, which includes the impact of any adverse foreign exchange movements, significant restructuring charges and significant legal or regulatory settlements, we would be limited in our ability to borrow under our revolving credit facility which could, as a result, restrict our operational flexibility. In addition, we could have difficulty obtaining necessary waivers from compliance with, or necessary amendments to, these covenants, and we could have difficulty addressing the impact any non-compliance with these covenants may have on our ability to secure financing with favorable terms.

15



If we incur additional indebtedness, the related risks that we now face (including those described above), could intensify.
Our ability to utilize our foreign tax and other U.S. credits to offset our future taxable income may be limited under Sections 382 and 383 of the Internal Revenue Code.
As of December 31, 2015, we had approximately $746.1 million of foreign tax and other credits available to offset future income for U.S. federal tax liability purposes. Our ability to utilize such credits to offset future income could be limited, however, if the Company undergoes an “ownership change” within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). In general, an ownership change will occur if there is a cumulative increase in ownership of our stock by 5% shareholders (as defined in the Code) that exceeds 50 percentage points over a rolling three-year period. If the 50 percentage points are exceeded, Section 382 establishes an annual limitation on the amount of deferred tax assets attributable to previously incurred credits that may be used to offset taxable income in future years. A number of complex rules apply in calculating this limitation, and any such limitation would depend in part on the market value of the Company at the time of the ownership change and prevailing interest rates at the time of calculation. As a result, the magnitude of any potential limitation on the use of our deferred tax assets and the effect of such limitation on the Company if an ownership change were to occur is difficult to assess. However, if all or a portion of our deferred tax assets were to become subject to this limitation, our tax liability could increase significantly and our future results of operations and cash flows could be adversely impacted.
We currently believe an ownership change has not occurred. However, in recent periods, we have experienced fluctuations in the market price of our stock and changes in ownership by our 5% shareholders. In addition, the Investment Transaction (as defined below) will result in an increase in our cumulative ownership change by our 5% shareholders.
Significant changes in pension fund investment performance, assumptions relating to pension costs or required legal changes in pension funding rules may have a material effect on the valuation of pension obligations, the funded status of pension plans and our pension cost.
Our funding policy for pension plans is to meet the minimum required contributions under applicable law and accumulate plan assets that, over the long run, are expected to approximate the present value of projected benefit obligations. Our pension cost is materially affected by the discount rate used to measure pension obligations, the level of plan assets available to fund those obligations at the measurement date and the expected long-term rate of return on plan assets. Significant changes in investment performance or a change in the portfolio mix of invested assets can result in corresponding increases and decreases in the valuation of plan assets, including equity and debt securities and derivative instruments, or in a change of the expected rate of return on plan assets. Also, while our U.S. defined benefit pension plan has been closed to employees hired on or after January 1, 2015, significant changes in the number and demographics of participants in our pension plans generally may result in changes to our funding obligations. A change in the discount rate would result in a significant increase or decrease in the valuation of pension obligations, affecting the reported funded status of our pension plans as well as the net periodic pension cost in the following fiscal years. Similarly, changes in the expected rate of return on plan assets can result in significant changes in the net periodic pension cost of the following fiscal years. Please see "Transfer of certain U.S. pension obligations and related assets in connection with the Separation may have a material adverse effect on the funded status of our U.S. defined benefit pension plan and our pension funding obligations in respect of our retained pension liabilities" below for additional information regarding the risks on the U.S. defined benefit pension plan associated with the planned separation of the North America business. Please see "Critical Accounting Estimates - Pension and Postretirement Expense" within MD&A on pages 32 through 33 and Note 11, Employee Benefit Plans on pages F-33 through F-42 of our 2015 Annual Report, for additional information regarding the impact of these factors on our pension plan obligations.
Any strategic alliances or divestitures may expose us to additional risks.
We evaluate potential strategic alliances that would complement our current product offerings, increase the size and geographic scope of our operations or otherwise offer growth and/or operating efficiency opportunities. Strategic alliances may entail numerous risks, including:
substantial costs, delays or other operational or financial difficulties, including difficulties in leveraging synergies among the businesses to increase sales and obtain cost savings or achieve expected results;
difficulties in assimilating acquired operations or products, including the loss of key employees from any acquired businesses and disruption to our direct-selling channel;
diversion of management’s attention from our core business;
adverse effects on existing business relationships with suppliers and customers;
risks of entering markets in which we have limited or no prior experience; and
reputational and other risks regarding our ability to successfully implement such strategic alliances, including obtaining financing which could dilute the interests of our shareholders, result in an increase in our indebtedness or both.

16



Our failure to successfully complete the integration of any new or acquired businesses could have a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows. In addition, there can be no assurance that we will be able to identify suitable candidates or consummate such transactions on favorable terms.
For divestitures, success is also dependent on effectively and efficiently separating the divested unit or business from the Company and reducing or eliminating associated overhead costs. In cases where a divestiture is not successfully implemented or completed, the Company's business, prospects, financial condition, liquidity, results of operations and cash flows could be adversely affected. Please see "Risks Related to the Planned Separation of North America and the Preferred Stock Investment in the Company" below for additional information regarding the risks associated with the planned separation of North America.
The loss of, or a disruption in, our manufacturing and distribution operations could adversely affect our business.
Our principal properties consist of worldwide manufacturing facilities for the production of Beauty products, distribution centers where offices are located and where finished merchandise is packed and shipped to Representatives in fulfillment of their orders, and one principal research and development facility. Additionally, we use third-party manufacturers to manufacture certain of our products. Therefore, as a company engaged in manufacturing, distribution and research and development on a global scale, we are subject to the risks inherent in such activities, including industrial accidents, environmental events, fires, strikes and other labor or industrial disputes, disruptions in logistics or information systems (such as the ERP system), loss or impairment of key manufacturing or distribution sites, product quality control issues, safety concerns, licensing requirements and other regulatory or government issues, as well as natural disasters, pandemics, border disputes, acts of terrorism and other external factors over which we have no control. These risks may be exacerbated by our efforts to increase facility consolidation covering our manufacturing, distribution and supply footprints, particularly if we are unable to successfully increase our resiliency to potential operational disruptions or enhance our disaster recovery planning. The loss of, or damage to, any of our facilities or centers, or those of our third-party manufacturers, could have a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows.
Our success depends, in part, on the quality, safety and efficacy of our products.
Our success depends, in part, on the quality, safety and efficacy of our products. If our products are found to be, or perceived to be, defective or unsafe, or if they otherwise fail to meet our Representatives' or end customers' standards, our relationship with our Representatives or end customers could suffer, we could need to recall some of our products and/or become subject to regulatory action, our reputation or the appeal of our brand could be diminished, we could lose market share, and we could become subject to liability claims, any of which could result in a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows.
If we are unable to protect our intellectual property rights, specifically patents and trademarks, our ability to compete could be adversely affected.
The market for our products depends to a significant extent upon the value associated with our product innovations and our brand equity. We own the material patents and trademarks used in connection with the marketing and distribution of our major products where such products are principally sold. Although most of our material intellectual property is registered in certain countries in which we operate, there can be no assurance with respect to the rights associated with such intellectual property in those countries. In addition, the laws of certain foreign countries, including many emerging markets, may not completely protect our intellectual property rights. The costs required to protect our patents and trademarks, especially in emerging markets, may be substantial. Please see "The licensing of our North America intellectual property rights, including trademarks that are fundamental to our brand, in connection with the Separation could adversely impact our reputation and our ability to enforce intellectual property rights used in both North America and international jurisdictions, without appropriate controls and monitoring" below for additional information regarding the risks on our intellectual property rights associated with the planned separation of North America.
We are involved, and may become involved in the future, in legal proceedings that, if adversely adjudicated or settled, could adversely affect our financial results.
We are and may, in the future, become party to litigation, including, for example, claims alleging violation of the federal securities laws or claims relating to employee or employment matters, our products or advertising. In general, litigation claims can be expensive and time consuming to bring or defend against and could result in settlements or damages that could significantly affect financial results and the conduct of our business. We are currently vigorously contesting certain of these litigation claims. However, it is not possible to predict the final resolution of the litigation to which we currently are or may in the future become party, or to predict the impact of certain of these matters on our business, prospects, financial condition, liquidity, results of operations and cash flows.

17



Government reviews, inquiries, investigations, and actions could harm our business or reputation. In addition, from time to time we may conduct other investigations and reviews, the consequences of which could negatively impact our business or reputation.
As we operate in various locations around the world, our operations in certain countries are subject to significant governmental scrutiny and may be harmed by the results of such scrutiny. The regulatory environment with regard to direct selling in emerging and developing markets where we do business is evolving, and government officials in such locations often exercise broad discretion in deciding how to interpret and apply applicable regulations. From time to time, we may receive formal and informal inquiries from various government regulatory authorities about our business and compliance with local laws and regulations. In addition, from time to time, we may conduct investigations and reviews. The consequences of such government reviews, inquiries, investigations, and actions or such investigations and reviews may adversely impact our business, prospects, reputation, financial condition, liquidity, results of operations or cash flows.
Additionally, any determination that our operations or activities, or, where local law mandates, the activities of our Representatives, including our licenses or permits, importing or exporting, or product testing or approvals are not, or were not, in compliance with existing laws or regulations could result in the imposition of substantial fines, civil and criminal penalties, interruptions of business, loss of supplier, vendor or other third party relationship, termination of necessary licenses and permits, modification of business practices and compliance programs, equitable remedies, including disgorgement, injunctive relief and other sanctions that we may take against our personnel or that may be taken against us or our personnel. Other legal or regulatory proceedings, as well as government investigations, which often involve complex legal issues and are subject to uncertainties, may also follow as a consequence. Further, other countries in which we do business may initiate their own investigations and impose similar sanctions. These proceedings or investigations could be costly and burdensome to our management, and could adversely impact our business, prospects, reputation, financial condition, liquidity, results of operations or cash flows. Even if an inquiry or investigation does not result in any adverse determinations, it potentially could create negative publicity and give rise to third-party litigation or action.
The market price of our common stock could be subject to fluctuations as a result of many factors.
Factors that could affect the trading price of our common stock include the following:
variations in operating results;
developments in connection with any investigations or litigations;
a change in our credit ratings;
economic conditions and volatility in the financial markets;
announcements or significant developments in connection with our business and with respect to beauty and related products or the beauty industry in general;
actual or anticipated variations in our quarterly or annual financial results;
unsolicited takeover proposals, proxy contests or other shareholder activism;
governmental policies and regulations;
estimates of our future performance or that of our competitors or our industries;
general economic, political, and market conditions;
market rumors; and
factors relating to competitors.
The trading price of our common stock has been, and could in the future continue to be, subject to significant fluctuations.
Risks Related to the Planned Separation of North America and the Preferred Stock Investment in the Company
The planned separation of our North America business and the issuance of our Series C Preferred Stock to an affiliate of Cerberus may not be successfully completed or may be delayed, either of which could adversely affect our business, prospects, financial condition, liquidity, results of operations and cash flows.
On December 17, 2015, we entered into a separation agreement (the “Separation Agreement”) pursuant to which we will transfer our North America business into a new company (“NewCo” and such transfer, the "Separation") of which we will control 19.9% of the voting and economic rights, and Cleveland NA Investor LLC (“Cleveland NA”) (an affiliate of Cerberus Capital Management (“Cerberus”)) will control 80.1% of the voting and economic rights. Concurrently with our entry into the Separation Agreement, we entered into an investment agreement (the “Investment Agreement”) pursuant to which we will issue and sell to Cleveland Apple Investor LLC (“Cleveland Investor”) (an affiliate of Cerberus) 435,000 shares of newly issued Series C Preferred Stock, par value $1.00 per share (the “Series C Preferred Stock”), for an aggregate purchase price of $435 million (the "Investment Transaction" and together with the Separation, the "Cerberus Transactions").

18



The closing of the Separation and the Investment Transactions are each conditioned upon certain customary closing conditions, including receipt of required regulatory approvals, compliance by the parties with their respective obligations under each agreement and accuracy of the parties’ representations and warranties. Additionally, the closing of the Cerberus Transactions are conditioned on the substantially concurrent closing of the Investment Transactions and the Separation, respectively. The Separation Agreement and the Investment Agreement each contain certain customary termination rights, including that the transactions may be terminated if they have not been completed on or prior to May 3, 2016. We currently expect the Cerberus Transactions to close concurrently prior to May 3, 2016; however, there can be no assurances that the Cerberus Transactions will close within the anticipated timetable or at all.
Additionally, the process of closing the Cerberus Transactions may be disruptive to our business operations, may distract our management team from their day-to-day responsibilities, may make it more difficult to retain employees and may impair our ability to recognize and take advantage of new opportunities for our remaining business. Any of these risks or uncertainties, including the failure of the Cerberus Transactions either to close or to close within the expected timeframe, could adversely affect our business, prospects, financial condition, liquidity, results of operations and cash flows.
Transfer of certain U.S. pension obligations and related assets in connection with the Separation may have a material adverse effect on the funded status of our U.S. defined benefit pension plan and our pension funding obligations in respect of our retained pension liabilities.
In connection with the Separation, we will transfer certain liabilities under our U.S. defined benefit pension plan to a defined benefit pension plan sponsored by NewCo. The liabilities transferred are in respect of current and former employees of our North America business, as well as in respect of individuals who were previously employees outside of the North America business and who have an accrued benefit under our U.S. defined benefit pension plan. Our U.S. defined benefit pension plan will continue to retain liabilities in respect of employees who are actively employed outside of the North America business and certain employees of the North America business who are on disability leave at the time of the Separation.
In connection with the transfer of liabilities from our U.S. defined benefit pension plan to the defined benefit pension plan maintained by NewCo, we will be required to transfer a portion of the assets held in our U.S. defined benefit pension plan to the NewCo defined benefit pension plan. The amount of assets transferred will be determined under Section 4044 of the Employee Retirement Income Security Act of 1974, as amended, and Section 414(l) of the Internal Revenue Code of 1986, as amended, which contain comprehensive rules on allocation of pension plan assets to categories of benefit liabilities under a defined benefit pension plan. Depending on the amount of liabilities transferred to the NewCo defined benefit pension plan, the amount of liabilities retained by our U.S. defined benefit pension plan, and the assets allocated to benefits under both plans, the transfer of assets to the NewCo defined benefit pension plan could result in a significant increase in the percentage of the underfunded position of our U.S. defined benefit pension plan.
The licensing of our North America intellectual property rights, including trademarks that are fundamental to our brand, in connection with the Separation could adversely impact our reputation and our ability to enforce intellectual property rights used in both North America and international jurisdictions, without appropriate controls and monitoring.
In connection with the Separation, we will grant NewCo a perpetual, irrevocable, royalty-free license, with the ability to sublicense, to certain intellectual property rights that we used in the conduct of our North America business prior to the Separation. The license agreement includes quality control provisions obligating NewCo and its sublicensees to remain in compliance with applicable law or, for certain of our brands, quality standards that we have provided to NewCo, when marketing products under certain trademarks we have licensed to NewCo. However, there is a risk that failure by NewCo or its sublicensees to comply with such quality control provisions or other conduct by NewCo or its sublicensees associated with the trademarks licensed to NewCo, could adversely affect our reputation globally. We have also granted NewCo enforcement rights to intellectual property licensed to NewCo in certain circumstances, which could adversely affect our position and options globally relating to enforcement of our intellectual property.
The issuance and subsequent conversion of 435,000 shares of our Series C Preferred Stock to Cleveland Investor would dilute the ownership of holders of our common stock and may adversely affect the market price of our common stock.
Conversion of the Series C Preferred Stock would dilute the ownership interest of existing holders of our common stock, and any sales in the public market of the common stock issuable upon conversion of the Series C Preferred Stock could adversely affect the market price of our common stock. We have granted Cleveland Investor registration rights in respect of the shares of Series C Preferred Stock and shares of common stock issued upon conversion of the Series C Preferred Stock, which would facilitate the resale of such securities into the public market. Sales by Cleveland Investor of a substantial number of shares of our common stock in the public market, or the perception that such sales might occur, could have a material adverse effect on the price of our common stock.

19



The Series C Preferred Stock to be issued to Cleveland Investor will have rights, preferences and privileges that are not held by, and are preferential to, the rights of holders of our common stock. Such preferential rights could adversely affect our liquidity, cash flows and financial condition, and may result in the interests of Cleveland Investor differing from those of our common shareholders.
The Series C Preferred Stock will rank senior to the shares of our common stock with respect to dividend rights and rights on the distribution of assets on any liquidation, dissolution or winding up of our affairs. The Series C Preferred Stock will have a liquidation preference of $1,000 per share, representing an aggregate liquidation preference of $435 million upon issuance. Holders of Series C Preferred Stock will be entitled to participate on an as-converted basis in any cash dividends paid to the holders of shares of our common stock. In addition, cumulative preferred dividends will accrue daily on the Series C Preferred Stock and will be payable at the rate of 1.25% per quarter (net of any dividends on our common stock and subject to increase up to 5.00% per quarter if we breach certain obligations). Except to the extent not otherwise previously paid by us, preferred dividends will be payable on the seventh anniversary of the issuance date of the Series C Preferred Stock as and when declared by the Board of Directors and at the end of each quarter thereafter. Accrued and unpaid preferred dividends may be paid, at our option, in (i) cash, (ii) subject to certain conditions, in shares of our common stock or (iii) upon conversion of shares of Series C Preferred Stock, in shares of our non-voting, non-convertible Series D Preferred Stock, par value $1.00 per share (the “Series D Preferred Stock”). Any such shares of Series D Preferred Stock issued would have similar preferential rights.
Upon certain change of control events involving us, holders of Series C Preferred Stock can require us to repurchase the Series C Preferred Stock for an amount equal to the greater of (i) cash equal to 100% of the liquidation preference thereof plus all accrued but unpaid dividends or (ii) the consideration the holders would have received if they had converted their shares of Series C Preferred Stock into common stock immediately prior to the change of control event.
Our obligations to pay dividends to the holders of Series C Preferred Stock, and to repurchase the outstanding shares of Series C Preferred Stock under certain circumstances, could impact our liquidity and reduce the amount of cash flows. Our obligations to the holders of Series C Preferred Stock could also limit our ability to obtain additional financing or increase our borrowing costs, which could have an adverse effect on our financial condition. The preferential rights of holders of our Series C Preferred Stock could also result in divergent interests between Cleveland Investor and those of our common shareholders.
Cleveland Investor will be able to exercise significant influence over us, including through its ability to elect up to three members of our Board of Directors, including the Chairman.
Holders of Series C Preferred Stock will be entitled to vote generally with holders of our common stock on an as-converted basis (subject to an agreement to vote in favor of the slate of directors nominated by the Board of Directors, so long as the 25% Ownership Requirement is met and subject to certain exceptions). Therefore, the issuance of the Series C Preferred Stock to Cleveland Investor will effectively reduce the relative voting power of the holders of our common stock. Upon closing of the Investment Transactions, the shares of Series C Preferred Stock owned by Cleveland Investor will represent approximately 16.6% of the voting rights of our common stock on an as-converted basis (an estimate based on the amount of our common stock outstanding at the time we entered into the Investment Agreement). As a result, Cleveland Investor will have the ability to significantly influence the outcome of any matter submitted for the vote of our shareholders. In addition, provided Cleveland Investor has maintained certain levels of beneficial ownership of Series C Preferred Stock and/or common stock, Cleveland Investor will have consent rights over certain actions taken by us, including increasing the size of the Board of Directors, reinstating our quarterly common stock dividend and incurring indebtedness in excess of certain thresholds.
In addition, we will grant Cleveland Investor certain rights to designate directors to serve on our Board of Directors (one of whom will act as the Chairman so long as the 50% Ownership Requirement (as defined below) is met). Cleveland Investor will continue to be entitled to elect: (i) three directors to the Board of Directors, so long as Cleveland Investor continues to beneficially own shares of Series C Preferred Stock and/or shares of common stock that represent, on an as-converted basis, at least 75% of Cleveland Investor’s initial shares of Series C Preferred Stock on an as-converted basis, (ii) two directors to the Board of Directors, so long as Cleveland Investor continues to beneficially own shares of Series C Preferred Stock and/or common stock that represent, on an as-converted basis, at least 50% but less than 75% of Cleveland Investor’s initial shares of Series C Preferred Stock on an as-converted basis (the “50% Ownership Requirement”) and (iii) one director to the Board of Directors, so long as Cleveland Investor continues to beneficially own shares of Series C Preferred Stock and/or common stock that represent, on an as-converted basis, at least 25% but less than 50% of Cleveland Investor’s initial shares of Series C Preferred Stock on an as-converted basis (the “25% Ownership Requirement”). Until Cleveland Investor no longer meets the 25% Ownership Requirement, subject to certain exceptions and to satisfaction by such director designees of independence and other customary qualifications, Cleveland Investor will have the right to have one of its director designees serve on each committee of the Board of Directors. Notwithstanding the fact that all directors will be subject to fiduciary duties and applicable law, the interests of the directors appointed by Cleveland Investor may differ from the interests of holders of our common stock as a whole or of our other directors.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our principal properties worldwide consist of manufacturing facilities for the production of Beauty products, distribution centers where administrative offices are located and where finished merchandise is packed and shipped to Representatives in fulfillment of their orders, and one principal research and development facility located in Suffern, NY.
We also lease an office space in New York City for our executive and administrative offices, and we own property in Rye, NY that is predominantly for Global IT. In October 2012, we consolidated our New York City offices into one location at 777 Third Avenue. Our previous executive office location at 1345 Avenue of the Americas has been vacated and subleased. We also have a distribution center in the U.S. which is inactive and currently listed for sale.
In addition to the facilities noted above, other principal properties measuring 50,000 square feet or more include the following:
four manufacturing facilities, eleven distribution centers and two administrative offices in Latin America;
two manufacturing facilities in Europe, primarily servicing Europe, Middle East & Africa;
thirteen distribution centers and five administrative offices in Europe, Middle East & Africa; and
four manufacturing facilities, six distribution centers and one administrative office in Asia Pacific, of which one manufacturing facility is inactive.
We consider all of these properties to be in good repair, to adequately meet our needs and to operate at reasonable levels of productive capacity.
Of all the properties listed above, 26 are owned and the remaining 22 are leased. Many of our properties are used for a combination of manufacturing, distribution and administration. These properties are included in the above listing based on primary usage.
In addition, in our North America business (which has been presented as discontinued operations) we have one manufacturing facility and five distribution centers measuring 50,000 square feet or more, of which five are owned and one is leased.
ITEM 3. LEGAL PROCEEDINGS
Reference is made to Note 15, Contingencies, on pages F-48 through F-50 of our 2015 Annual Report.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Avon’s Common Stock
Our common stock is listed on The New York Stock Exchange and trades under the AVP ticker symbol. At December 31, 2015, there were 13,383 holders of record of our common stock. We believe that there are many additional shareholders who are not "shareholders of record" but who beneficially own and vote shares through nominee holders such as brokers and benefit plan trustees. High and low market prices and dividends per share of our common stock, in dollars, for 2015 and 2014 are listed below. For information regarding the suspension of the dividend on our common stock effective in the first quarter of 2016, see "Liquidity and Capital Resources" within MD&A on pages 55 through 59.
 
 
2015
 
2014
Quarter
 
High
 
Low
 
Dividends
Declared
and Paid
 
High
 
Low
 
Dividends
Declared
and Paid
First
 
$
9.31

 
$
7.28

 
$
.06

 
$
17.09

 
$
14.28

 
$
.06

Second
 
9.15

 
6.26

 
.06

 
15.28

 
13.30

 
.06

Third
 
6.64

 
3.22

 
.06

 
14.72

 
12.59

 
.06

Fourth
 
4.50

 
2.50

 
.06

 
12.00

 
9.11

 
.06

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN(1)
Among Avon Products, Inc., The S&P 500 Index and
2015 Peer Group (2)
The Stock Performance Graph above assumes a $100 investment on December 31, 2010, in Avon’s common stock, the S&P 500 Index and the Peer Group. The dollar amounts indicated in the graph above and in the chart below are as of December 31 or the last trading day in the year indicated.
 
 
2010

 
2011

 
2012

 
2013

 
2014

 
2015

Avon
 
100.0

 
62.5

 
53.6

 
65.1

 
36.2

 
16.4

S&P 500
 
100.0

 
102.1

 
118.5

 
156.8

 
178.3

 
180.8

Peer Group(2)
 
100.0

 
111.5

 
121.2

 
151.9

 
173.2

 
167.1

(1)
Total return assumes reinvestment of dividends at the closing price at the end of each quarter.

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(2)
The Peer Group includes The Clorox Company, Colgate–Palmolive Company, Estée Lauder Companies, Inc., Kimberly Clark Corp., The Procter & Gamble Company and Revlon, Inc.
The Stock Performance Graph above shall not be deemed to be "soliciting material" or to be "filed" with the United States Securities and Exchange Commission or subject to the liabilities of Section 18 under the Securities Exchange Act of 1934 as amended (the "Exchange Act"). In addition, it shall not be deemed incorporated by reference by any statement that incorporates this annual report on Form 10-K by reference into any filing under the Securities Act of 1933 (the "Securities Act") or the Exchange Act, except to the extent that we specifically incorporate this information by reference.
Issuer Purchases of Equity Securities
The following table provides information about our purchases of our common stock during the quarterly period ended December 31, 2015:
 
 
Total Number
of Shares
Purchased
 
Average Price
Paid per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Programs
 
Approximate Dollar
Value of Shares that
May Yet Be Purchased
Under the Program
10/1/15 – 10/31/15
 
10,944

(1) 
$
3.38

 
*
 
*
11/1/15 – 11/30/15
 
24,796

(1) 
3.99

 
*
 
*
12/1/15 – 12/31/15
 
8,640

(1) 
3.24

 
*
 
*
Total
 
44,380

 
$
3.70

 
*
 
*
*
These amounts are not applicable as the Company does not have a share repurchase program in effect.
(1)
All shares were repurchased by the Company in connection with employee elections to use shares to pay withholding taxes upon the vesting of their restricted stock units.
Some of these share repurchases may reflect a brief delay from the actual transaction date.
ITEM 6. SELECTED FINANCIAL DATA
(U.S. dollars in millions, except per share data)
We derived the following selected financial data from our audited Consolidated Financial Statements. The following data should be read in conjunction with our MD&A and our Consolidated Financial Statements and related Notes contained in our 2015 Annual Report.
 
 
2015
 
2014
 
2013
 
2012
 
2011
Statement of Operations Data
 
 
 
 
 
 
 
 
 
 
Total revenue
 
$
6,160.5

 
$
7,648.0

 
$
8,496.8

 
$
8,810.2

 
$
9,227.0

Operating profit(1)
 
165.0

 
434.3

 
539.8

 
448.2

 
952.2

(Loss) income from continuing operations, net of tax(1)
 
(796.5
)
 
(344.5
)
 
67.5

 
39.8

 
600.5

Diluted (loss) earnings per share from continuing operations
 
$
(1.81
)
 
$
(.79
)
 
$
.14

 
$
.09

 
$
1.38

Cash dividends per share
 
$
.24

 
$
.24

 
$
.24

 
$
.75

 
$
.92

Balance Sheet Data
 
 
 
 
 
 
 
 
 
 
Total assets*
 
$
3,779.5

 
$
5,496.8

 
$
6,492.3

 
$
7,382.5

 
$
7,735.0

Debt maturing within one year
 
55.2

 
121.7

 
171.2

 
564.3

 
838.8

Long-term debt
 
2,159.6

 
2,428.7

 
2,488.1

 
2,572.3

 
2,410.7

Total debt
 
2,214.8

 
2,550.4

 
2,659.3

 
3,136.6

 
3,249.5

Total shareholders’ (deficit) equity
 
(1,056.4
)
 
305.3

 
1,127.5

 
1,233.3

 
1,585.2

*
Total assets at December 31, 2015 and 2014 in the table above exclude the $100.0 receivable from continuing operations that was presented within current assets of discontinued operations.
(1)
A number of items, shown below, impact the comparability of our operating profit and (loss) income from continuing operations, net of tax. See Note 14, Restructuring Initiatives on pages F-44 through F-48 of our 2015 Annual Report, Note 1, Description of the Business and Summary of Significant Accounting Policies on pages F-9 through F-15 of our 2015 Annual Report, "Results Of Operations - Consolidated" within MD&A on pages 37 through 45, "Segment Review - Latin America" within MD&A on pages 46 through 50, Note 15, Contingencies on pages F-48 through F-50 of our 2015 Annual Report, "Segment Review - Global and Other Expenses" within MD&A on pages 53 through 55, Note 11, Employee

23



Benefit Plans on pages F-33 through F-42 of our 2015 Annual Report, Note 16, Goodwill and Intangibles on pages F-50 through F-52 of our 2015 Annual Report, Note 3, Discontinued Operations and Divestitures on pages F-16 through F-18 of our 2015 Annual Report, Note 5, Debt and Other Financing on pages F-19 through F-21 of our 2015 Annual Report and Note 7, Income Taxes on pages F-22 through F-26 of our 2015 Annual Report for more information on these items.
 
 
Impact on Operating Profit
 
 
2015
 
2014
 
2013
 
2012
 
2011
Costs to implement restructuring initiatives
 
$
49.1

 
$
86.6

 
$
53.4

 
$
94.2

 
$
15.3

Venezuelan special items(2)
 
120.2

 
137.1

 
49.6

 

 

FCPA accrual(3)
 

 
46.0

 
89.0

 

 

Pension settlement charge(4)
 
7.3

 
9.5

 

 

 

Other items(5)
 
3.1

 

 

 

 

Asset impairment and other charges(6)
 
6.9

 

 
42.1

 
44.0

 

In addition to the items impacting operating profit identified above, loss from continuing operations, net of tax during 2015 was impacted by the gain on sale of Liz Earle of $44.9 before tax ($51.6 after tax). In addition, loss from continuing operations, before taxes during 2015 was impacted by a loss on extinguishment of debt of $5.5 before tax caused by the make-whole premium and the write-off of debt issuance costs and discounts, associated with the prepayment of the 2.375% Notes (as defined in "Capital Resources" within MD&A on pages 58 through 59) and a charge of $2.5 before tax associated with the write-off of issuance costs related to our previous $1 billion revolving credit facility. Loss from continuing operations, net of tax during 2015 was also negatively impacted by an aggregate non-cash income tax charge of $685.1. This was primarily due to additional valuation allowances for U.S. deferred tax assets of $669.7 which were due to the continued strengthening of the U.S. dollar against currencies of some of our key markets and the impact on the benefits from our tax planning strategies associated with the realization of our deferred tax assets. In addition, the non-cash income tax charge was due to additional valuation allowances for deferred tax assets outside of the U.S. of $15.4, primarily in Russia, which was largely due to lower earnings, which were significantly impacted by foreign exchange losses on working capital balances. In addition, loss from continuing operations, before taxes during 2015 was impacted by an income tax benefit of $18.7, which was recorded in the fourth quarter of 2015, recognized as a result of the implementation of foreign tax planning strategies. See Note 3, Discontinued Operations and Divestitures on pages F-16 through F-18 of our 2015 Annual Report, Note 5, Debt and Other Financing on pages F-19 through F-21 of our 2015 Annual Report, and Note 7, Income Taxes on pages F-22 through F-26 of our 2015 Annual Report for more information.
In addition to the items impacting operating profit identified above, loss from continuing operations, net of tax during 2014 was negatively impacted by a non-cash income tax charge of $404.9. This was primarily due to a valuation allowance of $383.5 to reduce our deferred tax assets to an amount that is "more likely than not" to be realized, which was recorded in the fourth quarter of 2014. In addition, loss from continuing operations, net of tax during 2014 was favorably impacted by the $18.5 net tax benefit recorded in the fourth quarter of 2014 related to the finalization of the Foreign Corrupt Practices Act ("FCPA") settlements. See Note 7, Income Taxes on pages F-22 through F-26 of our 2015 Annual Report for more information.
In addition to the items impacting operating profit identified above, income from continuing operations, net of tax during 2013 was impacted by a loss on extinguishment of debt of $73.0 before tax ($46.2 after tax) caused by the make-whole premium and the write-off of debt issuance costs associated with the prepayment of our private notes, as well as the write-off of debt issuance costs associated with the early repayment of $380 of the outstanding principal amount of a term loan agreement. Income from continuing operations, net of tax during 2013 was also impacted by a loss on extinguishment of debt of $13.0 before tax ($8.2 after tax) caused by the make-whole premium and the write-off of debt issuance costs and discounts, partially offset by a deferred gain associated with the January 2013 interest-rate swap agreement termination, associated with the prepayment of notes due in 2014. In addition, income from continuing operations, net of tax during 2013 was impacted by valuation allowances for deferred tax assets of $41.8 related to Venezuela and $9.2 related to China. See Note 5, Debt and Other Financing on pages F-19 through F-21 of our 2015 Annual Report, "Results Of Operations - Consolidated" within MD&A on pages 37 through 45, and Note 7, Income Taxes on pages F-22 through F-26 of our 2015 Annual Report for more information.
In addition to the items impacting operating profit identified above, income from continuing operations, net of tax during 2012 was impacted by a benefit recorded to other expense, net of $23.8 before tax ($15.7 after tax) due to the release of a provision in the fourth quarter associated with the excess cost of acquiring U.S. dollars in Venezuela at the regulated market rate as compared with the official exchange rate. This provision was released as the Company capitalized the associated intercompany liabilities. Also, during the fourth quarter of 2012, we determined that the Company may repatriate offshore cash to meet certain domestic funding needs. Accordingly, we are no longer asserting that the

24



undistributed earnings of foreign subsidiaries are indefinitely reinvested, and therefore, we recorded an additional provision for income taxes of $168.3. See Note 7, Income Taxes on pages F-22 through F-26 of our 2015 Annual Report, for more information.
(2)
During 2015, 2014 and 2013, our operating profit and operating margin were negatively impacted by devaluations of the Venezuelan currency, combined with being designated as a highly inflationary economy,
In February 2015, the Venezuelan government announced that a new foreign exchange system was created, referred to as the SIMADI exchange ("SIMADI"). SIMADI began operating on February 12, 2015 and we concluded that we should utilize the SIMADI exchange rate to remeasure our Venezuelan operations effective February 12, 2015. At February 12, 2015, the SIMADI exchange rate was approximately 170, as compared to the SICAD II exchange rate of approximately 50 that we used previously, which caused the recognition of a devaluation of approximately 70%. As a result of using the historical United States ("U.S.") dollar cost basis of non-monetary assets, such as inventories, these assets continued to be remeasured, following the change to the SIMADI rate, at the applicable rate at the time of their acquisition. As a result, we determined that an adjustment of $11.4 to cost of sales was needed to reflect certain non-monetary assets, primarily inventories, at their net realizable value. In 2015, we recognized an additional negative impact of $18.5 to operating profit and net income relating to these non-monetary assets. In addition to the negative impact to operating profit, as a result of the devaluation of Venezuelan currency, during 2015, we recorded an after-tax benefit of $3.4 (benefit of $4.2 in other expense, net, and a loss of $.8 in income taxes), primarily reflecting the write-down of monetary assets and liabilities. In addition, we reviewed Avon Venezuela's long-lived assets to determine whether the carrying amount of the assets was recoverable. Based on our expected cash flows associated with the asset group, we determined that the carrying amount of the assets, carried at their historical U.S. dollar cost basis, was not recoverable. As such, an impairment charge of $90.3 to selling, general and administrative expenses was recorded to reflect the write-down of the long-lived assets to their estimated fair value of $15.7.
In February 2014, the Venezuelan government announced a foreign exchange system which began operating on March 24, 2014, referred to as the SICAD II exchange ("SICAD II") and we concluded that we should utilize the SICAD II exchange rate to remeasure our Venezuelan operations effective March 31, 2014. At March 31, 2014, the SICAD II exchange rate was approximately 50, as compared to the official exchange rate of 6.30 that we used previously, which caused the recognition of a devaluation of approximately 88%. As a result of using the historical United States ("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 their acquisition. As a result, we determined that an adjustment of $115.7 to cost of sales was needed to reflect certain non-monetary assets, primarily inventories, at their net realizable value. In 2014, we recognized an additional negative impact of $21.4 to operating profit and net income relating to these non-monetary assets. In addition to the negative impact to operating profit, as a result of the devaluation of Venezuelan currency, during 2014, we recorded an after-tax loss of $41.8 ($53.7 in other expense, net, and a benefit of $11.9 in income taxes), primarily reflecting the write-down of monetary assets and liabilities.
In 2013, as a result of using the historical U.S. dollar cost basis of non-monetary assets, such as inventories, acquired prior to the devaluation, 2013 operating profit was negatively impacted by $49.6, due to the difference between the historical U.S. dollar cost at the previous official exchange rate of 4.30 and the official exchange rate of 6.30. In addition to the negative impact to operating profit and net income, as a result of the devaluation of Venezuelan currency, during 2013, we recorded an after-tax loss of $50.7 ($34.1 in other expense, net, and $16.6 in income taxes), primarily reflecting the write-down of monetary assets and liabilities and deferred tax benefits.
See discussion of our Venezuela operations in "Segment Review - Latin America" within MD&A on pages 46 through 50 and Note 1, Description of the Business and Summary of Significant Accounting Policies on pages F-9 through F-15 of our 2015 Annual Report for more information.
(3)
During 2014, our operating profit and operating margin were negatively impacted by the additional $46 accrual, and during 2013, our operating profit and operating margin were negatively impacted by the $89 accrual, both recorded for the settlements related to the FCPA investigations. See Note 15, Contingencies on pages F-48 through F-50 of our 2015 Annual Report for more information.
(4)
During 2015, our operating profit and operating margin were negatively impacted by settlement charges associated with the U.S. defined benefit pension plan. As a result of the lump-sum payments made to former employees who were vested and participated in the U.S. defined benefit pension plan, in the third quarter of 2015, we recorded a settlement charge of $23.8. As the settlement threshold was exceeded in the third quarter of 2015, a settlement charge of $4.1 was also recorded in the fourth quarter of 2015, as a result of additional payments from our U.S. defined benefit pension plan. These settlement charges were allocated between Global Expenses and Discontinued Operations.
During 2014, our operating profit and operating margin were negatively impacted by settlement charges associated with the U.S. defined benefit pension plan. As a result of the payments made to former employees who were vested and

25



participated in the U.S. defined benefit pension plan, in the second quarter of 2014, we recorded a settlement charge of $23.5. As the settlement threshold was exceeded in the second quarter of 2014, settlement charges of $5.4 and $7.5 were also recorded in the third and fourth quarters of 2014, respectively, as a result of additional payments from our U.S. defined benefit pension plan. These settlement charges were allocated between Global Expenses and Discontinued Operations.
See "Segment Review - Global and Other Expenses" within MD&A on pages 53 through 55, and Note 11, Employee Benefit Plans on pages F-33 through F-42 of our 2015 Annual Report for a further discussion of the settlement charges.
(5)
During 2015, our operating profit and operating margin were negatively impacted by transaction-related costs of $3.1 associated with the planned separation of North America that were included in continuing operations.
(6)
During 2015, our operating profit and operating margin were negatively impacted by a non-cash impairment charge of $6.9 associated with goodwill of our Egypt business. During 2013 and 2012, our operating profit and operating margin were negatively impacted by non-cash impairment charges of $42.1 and $44.0, respectively, associated with goodwill and intangible assets of our China business. See Note 16, Goodwill and Intangible Assets on pages F-50 through F-52 of our 2015 Annual Report for more information on Egypt and China.

26




ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ("MD&A")
(U.S. dollars in millions, except per share and share data)
You should read the following discussion of the results of operations and financial condition of Avon Products, Inc. and its majority and wholly owned subsidiaries in conjunction with the information contained in the Consolidated Financial Statements and related Notes contained in our 2015 Annual Report. When used in this discussion, the terms "Avon," "Company," "we," "our" or "us" mean, unless the context otherwise indicates, Avon Products, Inc. and its majority and wholly owned subsidiaries.
See "Non-GAAP Financial Measures" on pages 29 through 31 of this MD&A for a description of how Constant dollar ("Constant $") growth rates (a Non-GAAP financial measure) are determined.
Overview
We are a global manufacturer and marketer of beauty and related products. Our business is conducted primarily in the direct-selling channel. During 2015, we had sales operations in 57 countries and territories, and distributed products in 15 more. In addition, in our North America business (which has been presented as discontinued operations) we had sales operations in 3 countries and territories, and distributed our products in 27 other countries and territories. Our reportable segments are based on geographic operations and include commercial business units in Latin America; Europe, Middle East & Africa; and Asia Pacific. In addition, we operate our business in North America, which has been presented as discontinued operations for all periods presented and is discussed further below. Our product categories are Beauty and Fashion & Home. Beauty consists of skincare (which includes personal care), fragrance and color (cosmetics). Fashion & Home consists of fashion jewelry, watches, apparel, footwear, accessories, gift and decorative products, housewares, entertainment and leisure products, children’s products and nutritional products. Sales are made to the ultimate consumer principally through direct selling by Representatives, who are independent contractors and not our employees. As of December 31, 2015, we had nearly 6 million active Representatives which represents the number of Representatives submitting an order in a sales campaign, totaled for all campaigns during the year and then divided by the number of campaigns. The success of our business is highly dependent on recruiting, retaining and servicing our Representatives. During 2015, all of our consolidated revenue was derived from operations outside of the U.S.
In December 2015, we entered into definitive agreements with affiliates of Cerberus Capital Management ("Cerberus"), which include a $435 investment in Avon by an affiliate of Cerberus through the purchase of our convertible preferred stock and the separation of the North America business from Avon into a privately-held company, which will include a $100 contribution by Avon, that will be majority-owned and managed by an affiliate of Cerberus. Avon will retain approximately 20% ownership in this new privately-held company. These transactions are expected to close concurrently in the first half of 2016. The North America business, which represents the Company's operations in the United States, Canada and Puerto Rico, was previously its own reportable segment and has been presented as discontinued operations for all periods presented. Refer to Note 3, Discontinued Operations and Divestitures, on pages F-16 through F-18 of our 2015 Annual Report, for additional information regarding the investment by an affiliate of Cerberus and the separation of the North America business.
Total revenue in 2015 compared to 2014 declined 19% compared to the prior-year period, due to unfavorable foreign exchange. Constant $ revenue increased 2%. Constant $ revenue was negatively impacted by approximately 2 points due to taxes in Brazil from the combined impact of the recognition of Value Added Tax ("VAT") credits in 2014 which did not recur in 2015 along with a new Industrial Productions Tax ("IPI") on cosmetics which went into effect in May 2015. Constant $ revenue was also negatively impacted by approximately 1 point as a result of the sale of Liz Earle which was completed in July 2015. Sales from the Beauty category decreased 20%, or increased 3% on a Constant $ basis. Sales from the Fashion & Home category decreased 15%, or increased 5% on a Constant $ basis.
Our Constant $ revenue benefited from growth in markets experiencing relatively high inflation (Venezuela and Argentina), which contributed approximately 2 points to our Constant $ revenue growth. Our Constant $ revenue also benefited from growth in Europe, Middle East & Africa, most significantly Eastern Europe (Russia and Ukraine), and to a lesser extent, South Africa and underlying growth in Brazil. Constant $ revenue benefited from higher average order and a 1% increase in Active Representatives. The increase in Active Representatives was primarily due to growth in Europe, Middle East & Africa, most significantly Russia, which was primarily due to sustained momentum in recruitment and retention, partially offset by markets experiencing relatively high inflation (Venezuela and Argentina). The net impact of price and mix increased 4%, driven by increases in all regions. The net impact of price and mix was primarily positively impacted by markets experiencing relatively high inflation (Venezuela and Argentina), as these markets benefited from the inflationary impact on pricing. Units sold decreased 2%, primarily due to declines in units sold in Brazil and Venezuela, partially offset by an increase in units sold in Russia. See "Segment Review" of this MD&A for additional information related to changes in revenue by segment.

27



Over the last two years, our profitability has suffered significantly given our geographic footprint and the strength of the U.S. dollar relative to currencies of key Avon markets. As a result, our revenue and profits have been reduced when translated into U.S. dollars and our margins have been negatively impacted by country mix, as certain of our markets which have historically had higher operating margins experienced significant devaluation of their local currency. In addition, as our sales and costs are often denominated in different currencies, this has created a negative foreign currency transaction impact. Specifically, as compared to the prior-year period, foreign currency has impacted our consolidated financial results as a result of foreign currency transaction losses (classified within cost of sales, and selling, general and administrative expenses), which had an unfavorable impact to Adjusted operating profit of an estimated $210, foreign currency translation, which had an unfavorable impact to Adjusted operating profit of approximately $265 (of which approximately $90 related to Venezuela, as discussed further below), and lower foreign exchange losses on our working capital (classified within other expense, net), which had a favorable impact of approximately $10 before tax.
In November 2015, we announced an internal reorganization of our management structure, including the combined management of Latin America and Europe, Middle East & Africa, effective January 1, 2016. As a result of the internal reorganization, we will report results for the following four reportable segments beginning in the first quarter of 2016: Europe, Middle East & Africa; Northern Latin America; South America; and Asia Pacific.
In January 2016, we announced a transformation plan (the "Transformation Plan"), which includes investing in growth, reducing costs in an effort to continue to improve our cost structure and improving our financial resilience. As a result of this plan, we expect to invest $350 into the business over the next three years with an estimated $150 in media and social selling and $200 related to the service model evolution and information technology, which will be aimed at improving the overall Representative experience. With respect to cost reductions, we have targeted pre-tax annualized cost savings of approximately $350 after three years, with an estimated $200 from supply chain reductions and an estimated $150 from other cost reductions. These cost savings are expected to be achieved through restructuring actions as well as other cost-savings strategies that will not result in restructuring charges. We are targeting the realization of $70 of these pre-tax cost savings in 2016. We have initiated this Transformation Plan in order to enable us to achieve our long-term goals of double-digit operating margin and mid single-digit constant-dollar revenue growth. While we expect to evaluate options to improve our financial resilience, we have already implemented actions in this area, including refinancing our revolving credit facility, divesting Liz Earle Beauty Co. Limited ("Liz Earle"), prepaying our 2.375% Notes (as defined below in "Capital Resources" on pages 58 through 59) and suspending our dividend.
See Note 14, Restructuring Initiatives on pages F-44 through F-48 of our 2015 Annual Report, Note 3, Discontinued Operations and Divestitures on pages F-16 through F-18 of our 2015 Annual Report and Note 5, Debt and Other Financing on pages F-19 through F-21 of our Annual Report for more information on these items.
In July 2015, we sold Liz Earle, and as a result, we expect Avon's Constant $ and reported revenue in 2016 to be negatively impacted by approximately 1 point. See Note 3, Discontinued Operations and Divestitures on pages F-16 through F-18 of our 2015 Annual Report for more information.
In February 2015, the Venezuelan government announced that the SICAD II market would no longer be available, and a new foreign exchange system was created, referred to as the SIMADI exchange ("SIMADI"). SIMADI began operating on February 12, 2015. Use of the SIMADI exchange rate caused the recognition of a devaluation of approximately 70%. In addition, we recognized impairment charges of approximately $11 to cost of sales and approximately $90 to selling, general and administrative expenses in order to reflect the write-down of inventory and long-lived assets, respectively, which was recorded in the first quarter of 2015. We recognized an additional negative impact of approximately $19 to operating profit and net income relating to these non-monetary assets in the first, second, third and fourth quarters of 2015 due to the recognition of the cost basis at a higher exchange rate than the rate at which revenue was reported in U.S. dollars. In addition to the negative impact to operating margin, we recorded an after-tax benefit of approximately $3 (a benefit of approximately $4 in other expense, net, and a loss of approximately $1 in income taxes) in the first quarter of 2015, primarily reflecting the write-down of monetary assets and liabilities. See "Segment Review - Latin America" of this MD&A for further discussion of our Venezuela operations.
New Accounting Standards
Information relating to new accounting standards is included in Note 2, New Accounting Standards, to our consolidated financial statements contained in this 2015 Annual Report.

28



Performance Metrics
Within this MD&A, in addition to our key financial metrics of revenue, operating profit and operating margin, we utilize the performance metrics defined below to assist in the evaluation of our business.
Performance Metrics
  
Definition
 
 
Change in Active Representatives
  
This metric is a measure of Representative activity based on the number of unique Representatives submitting at least one order in a sales campaign, totaled for all campaigns in the related period. To determine the change in Active Representatives, this calculation is compared to the same calculation in the corresponding period of the prior year. Orders in China are excluded from this metric as our business in China is predominantly retail. Liz Earle was also excluded from this calculation as it did not distribute through the direct-selling channel.

 
 
Change in units sold
  
This metric is based on the gross number of pieces of merchandise sold during a period, as compared to the same number in the same period of the prior year. Units sold include samples sold and products contingent upon the purchase of another product (for example, gift with purchase or discount purchase with purchase), but exclude free samples.
 
 
 
Change in Average Order
 
This metric is a measure of Representative productivity. The calculation is the difference of the year-over-year change in revenue on a Constant $ basis and the Change in Active Representatives. Change in Average Order may be impacted by a combination of factors such as inflation, units, product mix, and/or pricing.
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, including changes in: revenue, operating profit, Adjusted operating profit, operating margin and Adjusted operating margin. We also refer to these adjusted financial measures as Constant $ items, which are Non-GAAP financial measures. We believe these measures provide investors an additional perspective on trends and underlying business results. To exclude the impact of changes due to the translation of foreign currencies into U.S. dollars, we calculate current-year results and prior-year results at a constant exchange rate. Foreign currency impact is determined as the difference between actual growth rates and constant-currency growth rates.
We also present gross margin, selling, general and administrative expenses as a percentage of revenue, total and net global expenses, 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 refer to these Non-GAAP financial measures as "Adjusted." We have provided a quantitative reconciliation of the difference between the Non-GAAP financial measures and the most directly comparable financial measures calculated and reported 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, 2) costs and charges related to the devaluations of Venezuelan currency in February 2015, March 2014 and February 2013, combined with being designated as a highly inflationary economy, and a valuation allowance for deferred tax assets related to Venezuela ("Venezuelan special items"), 3) the $89 accrual recorded in 2013 for the settlements related to the Foreign Corrupt Practices Act ("FCPA") investigations, the additional $46 accrual in 2014 for the settlements related to the FCPA investigations and, in the fourth quarter of 2014, the associated approximate $19 net tax benefit ("FCPA accrual"), 4) the settlement charges associated with the U.S. pension plan ("Pension settlement charge"), 5) the goodwill impairment charge related to the Egypt business, and the goodwill and intangible asset impairment charges and a valuation allowance for deferred tax assets related to the China business ("Asset impairment and other charges"), 6) various other items associated with the sale of Liz Earle, the separation of the North America business and debt-related charges ("Other items") and, as it relates to our effective tax rate discussion, 7) the non-cash income tax adjustments associated with our deferred tax assets recorded in 2015 and 2014, and an income tax benefit realized as a result of tax planning strategies ("Special tax 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. 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 Venezuelan special items include the impact on the Consolidated Statements of Operations in 2015, 2014 and 2013 caused by the devaluations of Venezuelan currency on monetary assets and liabilities, such as cash, receivables and payables; deferred tax assets and liabilities; and non-monetary assets, such as inventories. For non-monetary assets, the Venezuelan special items include the earnings impact caused by the difference between the historical U.S. dollar cost of the assets at the previous

29



exchange rate and the revised exchange rate. In 2015 and 2014, the Venezuelan special items also include adjustments of approximately $11 and approximately $116, respectively, to reflect certain non-monetary assets at their net realizable value. In 2015, the Venezuelan special items also include an impairment charge of approximately $90 to reflect the write-down of the long-lived assets to their estimated fair value. In 2013, the devaluation was as a result of the change in the official exchange rate, which moved from 4.30 to 6.30. In 2014, the devaluation was caused as a result of moving from the official exchange rate of 6.30 to the SICAD II exchange rate of approximately 50. In 2015, the devaluation was caused as a result of moving from the SICAD II exchange rate of approximately 50 to the SIMADI exchange rate of approximately 170. The Venezuelan special items also include the impact on the Consolidated Statements of Operations caused by a valuation allowance for deferred tax assets related to Venezuela recorded in the fourth quarter of 2013.
The Pension settlement charge includes the impact on the Consolidated Statements of Operations in the third and fourth quarters of 2015 and the second, third and fourth quarters of 2014 associated with the payments made to former employees who were vested and participated in the U.S. defined benefit pension plan. Such payments fully settle our pension plan obligation to those participants who elected to receive such payment.
The Asset impairment and other charges include the impact on the Consolidated Statements of Operations caused by the goodwill impairment charge related to the Egypt business in the fourth quarter of 2015. The Asset impairment and other charges also include the impact on the Consolidated Statements of Operations caused by the goodwill and intangible asset impairment charges and a valuation allowance for deferred tax assets related to the China business in 2013.
The Other items include the impact during 2015 on the Consolidated Statements of Operations due to the gain on the sale of Liz Earle. The Other items also includes the impact on the Consolidated Statements of Operations in the fourth quarter of 2015 caused by transaction-related costs of $3.1 associated with the planned separation of the North America business that were included in continuing operations. In addition, Other items includes the impact on the Consolidated Statements of Operations of the loss on extinguishment of debt caused by the make-whole premium and the write-off of debt issuance costs and discounts associated with the prepayment of our 2.375% Notes (as defined below in "Liquidity and Capital Resources"). The Other items also include the impact on other expense, net in the Consolidated Statements of Operations of $2.5 associated with the write-off of issuance costs related to our previous $1 billion revolving credit facility. The Other items, in 2013, also include the impact on the Consolidated Statements of Operations caused by the make-whole premium and the write-off of debt issuance costs associated with the prepayment of our private notes issued in 2010, as well as the write-off of debt issuance costs associated with the early repayment of $380 of the outstanding principal amount of a term loan agreement. The Other items also include the impact on the Consolidated Statements of Operations in 2013 caused by the make-whole premium and the write-off of debt issuance costs and discounts, partially offset by a deferred gain associated with the January 2013 interest-rate swap agreement termination, associated with the prepayment of the notes due in 2014.
In addition, the effective tax rate discussion includes Special tax items which include the impact during 2015 on income taxes in the Consolidated Statements of Operations due to a non-cash income tax charge in the first quarter of 2015 and a non-cash income tax benefit in the second quarter of 2015, each associated with valuation allowances, to adjust our U.S. deferred tax assets to an amount that was "more likely than not" to be realized. These adjustments were primarily caused by fluctuations of the U.S. dollar against currencies of some of our key markets. The Special tax items also include the impact during the third quarter of 2015 on income taxes in the Consolidated Statements of Operations due to a non-cash income tax charge as a result of establishing a valuation allowance for the full amount of our U.S. deferred tax assets due to the impact of the continued strengthening of the U.S. dollar against currencies of some of our key markets and its associated effect on our tax planning strategies. Additionally, the Special tax items includes the impact on income taxes in the Consolidated Statements of Operations due to a non-cash income tax charge associated with valuation allowances, to adjust certain non-U.S. deferred tax assets to an amount that is "more likely than not" to be realized. The non-U.S. valuation allowance included an adjustment associated with Russia, which was primarily the result of lower earnings, which were significantly impacted by foreign exchange losses on working capital balances. The Special tax items also include the impact during the fourth quarter of 2014 on the income taxes in the Consolidated Statements of Operations due to a non-cash income tax charge primarily associated with a valuation allowance to reduce our U.S. deferred tax assets to an amount that is "more likely than not" to be realized, and was primarily due to the strengthening of the U.S. dollar against currencies of some of our key markets and, to a lesser extent, the finalization of the FCPA settlements. The Special tax items also include the impact during the fourth quarter of 2015 on the income taxes in the Consolidated Statements of Operations due to an income tax benefit recognized as a result of the implementation of foreign tax planning strategies.
See Note 14, Restructuring Initiatives on pages F-44 through F-48 of our 2015 Annual Report, "Results Of Operations - Consolidated" below, "Segment Review - Latin America" below, Note 1, Description of the Business and Summary of Significant Accounting Policies on pages F-9 through F-15 of our 2015 Annual Report, Note 15, Contingencies on pages F-48 through F-50 of our 2015 Annual Report, "Segment Review - Global and Other Expense" below, Note 11, Employee Benefit Plans on pages F-33 through F-42 of our 2015 Annual Report, Note 16, Goodwill and Intangible Assets on pages F-50 through F-52 of our 2015 Annual Report, Note 3, Discontinued Operations and Divestitures on pages F-16 through F-18 of our 2015

30



Annual Report, "Liquidity and Capital Resources" below, Note 5, Debt and Other Financing on pages F-19 through F-21 of our 2015 Annual Report, and Note 7, Income Taxes on pages F-22 through F-26 of our 2015 Annual Report for more information on these items.

Critical Accounting Estimates
We believe the accounting policies described below represent our critical accounting policies due to the estimation processes involved in each. See Note 1, Description of the Business and Summary of Significant Accounting Policies, on pages F-9 through F-15 of our 2015 Annual Report for a detailed discussion of the application of these and other accounting policies.
Allowances for Doubtful Accounts Receivable
Representatives contact their customers, selling primarily through the use of brochures for each sales campaign. Sales campaigns are generally for a three- to four-week duration. The Representative purchases products directly from us and may or may not sell them to an end user. In general, the Representative, an independent contractor, remits a payment to us during each sales campaign, which relates to the prior campaign cycle. The Representative is generally precluded from submitting an order for the current sales campaign until the accounts receivable balance for the prior campaign is paid; however, there are circumstances where the Representative fails to make the required payment. We record an estimate of an allowance for doubtful accounts on receivable balances based on an analysis of historical data and current circumstances, including seasonality and changing trends. Over the past three years, annual bad debt expense was $144 in 2015, $171 in 2014 and $209 in 2013, or approximately 2% of total revenue in each year. The allowance for doubtful accounts is reviewed for adequacy, at a minimum, on a quarterly basis. We generally have no detailed information concerning, or any communication with, any end user of our products beyond the Representative. We have no legal recourse against the end user for the collection of any accounts receivable balances due from the Representative to us. If the financial condition of our Representatives were to deteriorate, resulting in their inability to make payments, additional allowances may be required.
Allowances for Sales Returns
Policies and practices for product returns vary by jurisdiction, but within many jurisdictions, we generally allow an unlimited right of return. We record a provision for estimated sales returns based on historical experience with product returns. Over the past three years, annual sales returns were $191 for 2015, $241 for 2014 and $274 for 2013, or approximately 3% of total revenue in each year, which has been generally in line with our expectations. If the historical data we use to calculate these estimates does not approximate future returns, due to changes in marketing or promotional strategies, or for other reasons, additional allowances may be required.
Provisions for Inventory Obsolescence
We record an allowance for estimated obsolescence equal to the difference between the cost of inventory and the estimated market value. In determining the allowance for estimated obsolescence, we classify inventory into various categories based upon its stage in the product life cycle, future marketing sales plans and the disposition process. We assign a degree of obsolescence risk to products based on this classification to determine the level of obsolescence provision. If actual sales are less favorable than those projected, additional inventory allowances may need to be recorded for such additional obsolescence. Annual obsolescence expense was $45 in 2015, $78 in 2014 and $82 in 2013.

31



Pension and Postretirement Expense
We maintain defined benefit pension plans, which cover substantially all employees in the U.S. and a portion of employees in international locations. However, our U.S. defined benefit pension plan is closed to employees hired on or after January 1, 2015. Additionally, we have unfunded supplemental pension benefit plans for some current and retired executives and provide retiree health care benefits subject to certain limitations to many retired employees in the U.S. and certain foreign countries. See Note 11, Employee Benefit Plans on pages F-33 through F-42 of our 2015 Annual Report for more information on our benefit plans.
Pension plan expense and the requirements for funding our major pension plans are determined based on a number of actuarial assumptions, which are generally reviewed and determined on an annual basis. These assumptions include the expected rate of return on pension plan assets, the interest crediting rate for hybrid plans and the discount rate applied to pension plan obligations, the rate of compensation increase of plan participants and mortality rates. We use a December 31 measurement date for all of our employee benefit plans.
For 2015, the weighted average assumed rate of return on all pension plan assets, including the U.S. and non-U.S. defined benefit pension plans was 6.87%, as compared with 6.86% for 2014. In determining the long-term rates of return, we consider the nature of the plans’ investments, an expectation for the plans’ investment strategies, historical rates of return and current economic forecasts. We evaluate the expected long-term rate of return annually and adjust as necessary.
As part of the separation of the North America business, we will transfer certain pension liabilities under the U.S. defined benefit pension plan associated with current and former employees of the North America business and certain other former Avon employees, along with a portion of the assets held by the U.S. defined benefit pension plan, to a defined benefit pension plan sponsored by the new privately-held company. We will also transfer certain other postretirement liabilities (namely, retiree medical and supplemental pension liabilities) in respect of such employees and former employees. We will continue to retain certain U.S. pension and other postretirement liabilities primarily associated with employees who are actively employed by Avon outside of the North America business. Prior to this separation, our net periodic benefit costs for the U.S. pension and postretirement benefit plans were allocated between Discontinued Operations and Global and Other Expenses as the plan includes both North America and U.S. Corporate Avon associates. In line with this allocation, our ongoing net periodic benefit costs within Global and Other Expenses are not expected to be materially impacted by the separation of the North America business.
Beginning in 2014, we adopted an investment strategy for the U.S. defined benefit pension plan which is designed to match the movements in the pension liability through an increased allocation towards debt securities. In addition, we also have begun to utilize derivative instruments to achieve the desired market exposures or to hedge certain risks. Derivative instruments may include, but are not limited to, futures, options, swaps or swaptions. Investment types, including the use of derivatives are based on written guidelines established for each investment manager and monitored by the plan's investment committee. In 2015, similar investment strategies were implemented in some of our non-U.S. defined benefit pension plans.
A significant portion of our pension plan assets relate to the U.S. defined benefit pension plan. The assumed rate of return for 2015 for the U.S. defined benefit pension plan was 7.25%, which was based on an asset allocation of approximately 70% in corporate and government bonds and mortgage-backed securities (which are expected to earn approximately 3% to 5% in the long-term) and approximately 30% in equity securities and high yield securities (which are expected to earn approximately 5% to 7% in the long term). In addition to the physical assets, the asset portfolio has derivative instruments which increase our exposure to higher yielding securities. Historical rates of return on the assets of the U.S. defined benefit pension plan were approximately 8% for the most recent 10-year period and approximately 8% for the 20-year period. In the U.S. defined benefit pension plan, our asset allocation policy has historically favored U.S. equity securities, which have returned approximately 7% over the 10-year period and approximately 8% over the 20-year period. The rate of return on the plan assets in the U.S. was approximately negative 3% in 2015 and approximately 11% in 2014.
The discount rate used for determining the present value of future pension obligations for each individual plan is based on a review of bonds that receive a high-quality rating from a recognized rating agency. The discount rates for our more significant plans, including our U.S. defined benefit pension plan, were based on the internal rates of return for a portfolio of high-quality bonds with maturities that are consistent with the projected future benefit payment obligations of each plan. The weighted-average discount rate for U.S. and non-U.S. defined benefit pension plans determined on this basis was 3.92% at December 31, 2015, and 3.54% at December 31, 2014. For the determination of the expected rate of return on assets and the discount rate, we take external actuarial advice into consideration.
Our funding requirements may be impacted by standards and regulations or interpretations thereof. Our calculations of pension and postretirement costs are dependent on the use of assumptions, including discount rates, hybrid plan maximum interest crediting rates and expected return on plan assets discussed above, rate of compensation increase of plan participants, interest cost, health care cost trend rates, benefits earned, mortality rates, the number of participants and certain demographics and

32



other factors. Actual results that differ from assumptions are accumulated and amortized to expense over future periods and, therefore, generally affect recognized expense in future periods. At December 31, 2015, we had pretax actuarial losses and prior service credits totaling approximately $296 for the U.S. defined benefit pension and postretirement plans and approximately $238 for the non-U.S. defined benefit pension and postretirement plans that have not yet been charged to expense, of which approximately $247 of the U.S. defined benefit pension and postretirement plans are associated with discontinued operations. These actuarial losses have been charged to accumulated other comprehensive loss ("AOCI") within shareholders’ equity. While we believe that the assumptions used are reasonable, differences in actual experience or changes in assumptions may materially affect our pension and postretirement obligations and future expense. For 2016, our assumption for the expected rate of return on assets is 7.00% for our U.S. defined benefit pension plan and 6.40% for our non-U.S. defined benefit pension plans. Our assumptions are reviewed and determined on an annual basis.
A 50 basis point change (in either direction) in the expected rate of return on plan assets, the discount rate or the rate of compensation increases, would have had approximately the following effect on 2015 pension expense and the pension benefit obligation at December 31, 2015:
 
 
Increase/(Decrease) in
Pension Expense
 
Increase/(Decrease) in
Pension Obligation
 
 
50 Basis Point
 
50 Basis Point
 
 
Increase
 
Decrease
 
Increase
 
Decrease
Rate of return on assets
 
$
(5.0
)
 
$
5.0

 
N/A

 
N/A

Discount rate
 
(6.5
)
 
6.4

 
$
(91.0
)
 
$
98.1

Rate of compensation increase
 
1.0

 
(1.0
)
 
6.9

 
(6.7
)
The above table reflects the entire U.S. pension and postretirement plans, a portion of which are associated with discontinued operations.
Restructuring Reserves
We record the estimated expense for our restructuring initiatives when such costs are deemed probable and estimable, when approved by the appropriate corporate authority and by accumulating detailed estimates of costs for such plans. These expenses include the estimated costs of employee severance and related benefits, impairment or accelerated depreciation of property, plant and equipment and capitalized software, and any other qualifying exit costs. These estimated costs are grouped by specific projects within the overall plan and are then monitored on a quarterly basis by finance personnel. Such costs represent our best estimate, but require assumptions about the programs that may change over time, including attrition rates. Estimates are evaluated periodically to determine whether an adjustment is required.
Taxes
We record a valuation allowance to reduce our deferred tax assets to an amount that is "more likely than not" to be realized. Evaluating the need for and quantifying the valuation allowance often requires significant judgment and extensive analysis of all the weighted positive and negative evidence available to the Company in order to determine whether all or some portion of the deferred tax assets will not be realized. In performing this analysis, the Company’s forecasted domestic and foreign taxable income, and the existence of potential prudent and feasible tax planning strategies that would enable the Company to utilize some or all of its excess foreign tax credits, were taken into consideration. At December 31, 2015, we had net deferred tax assets of $151 (net of valuation allowances of $1,972).
With respect to our deferred tax assets, at December 31, 2015, we had recognized deferred tax assets relating to tax loss carryforwards of $657, primarily from foreign and U.S. state jurisdictions, for which a valuation allowance of $652 has been provided. Prior to December 31, 2015, we had recognized deferred tax assets of $746 relating to excess U.S. foreign tax and other U.S. general business credit carryforwards for which a valuation allowance of $746 has been provided. We have a history of domestic source losses, and our excess U.S. foreign tax and general business credits have primarily resulted from having a greater domestic source loss in recent years which reduces our ability to credit foreign taxes or utilize the general business credits which we generate.
Our ability to realize our U.S. deferred tax assets, such as our foreign tax and general business credit carryforwards, is dependent on future U.S. taxable income within the carryforward period. At December 31, 2015, we would need to generate approximately $2.1 billion of excess net foreign source income in order to realize the U.S. foreign tax and general business credits before they expire.
During the fourth quarter of 2014, the Company’s expected net foreign source income was reduced significantly, primarily due to the strengthening of the U.S. dollar against currencies for some of our key markets and, to a lesser extent, the finalization of the FCPA settlements. This strengthening of the U.S. dollar reduced the expected dividends and royalties that could be remitted

33



to the U.S. by our foreign subsidiaries, particularly Russia, Brazil, Mexico and Colombia. The effectiveness of our tax planning strategies, including the repatriation of foreign earnings and the acceleration of royalties from our foreign subsidiaries, was also negatively impacted by the strengthening of the U.S. dollar. In addition, the finalization of the FCPA settlements, which included a $68 fine related to Avon China in connection with the DOJ settlement and $67 in disgorgement and prejudgment interest related to Avon Products, Inc. in connection with the SEC settlement, negatively impacted expected future repatriation of foreign earnings and reduced current U.S. taxable income, respectively. As a result of these developments, we determined that we may not generate sufficient taxable income to realize all of our U.S. deferred tax assets. As such, we recorded a valuation allowance of $441 to reduce our U.S. deferred tax assets to an amount that is "more likely than not" to be realized, of which $367 was recorded to income taxes in the Consolidated Statements of Operations and the remainder was recorded to various components of other comprehensive (loss) income.
During the first and second quarters of 2015, the Company recorded a $31 charge and a $3 benefit, respectively, associated with valuation allowances, to adjust our U.S. deferred tax assets to an amount that was “more likely than not” to be realized. These adjustments were primarily caused by fluctuations of the U.S. dollar against currencies of some of our key markets.
During the third quarter of 2015, we recorded an additional valuation allowance for the remaining U.S. deferred tax assets of $642. The increase in the valuation allowance resulted from reduced tax benefits expected to be obtained from tax planning strategies associated with an anticipated accelerated receipt in the U.S. of foreign source income. As the U.S. dollar had further strengthened against currencies of some of our key markets during the third quarter of 2015, the benefits associated with the Company’s tax planning strategies were no longer sufficient for the Company to continue to conclude that its tax planning strategies were prudent. In the absence of any alternative prudent tax planning strategies and other sources of future taxable income, it was determined that a full valuation allowance should be recorded. Although the Company continues to expect that it will generate taxable income and tax liability in the U.S., the Company is expected to offset its current and future tax liability with foreign tax credits, and as a result, the expected level of future taxable income and tax liability is not adequate to realize the benefit of previously recorded deferred tax assets. Although the Company may not be able to recognize a financial statement benefit associated with its deferred tax assets, the Company will continue to manage and plan for the utilization of its deferred tax assets to avoid the expiration of deferred tax assets that may have limited lives.
At December 31, 2015, we continue to assert that our foreign earnings are not indefinitely reinvested, as a result of our domestic liquidity profile. Accordingly, we adjusted our deferred tax liability to account for our 2015 undistributed earnings of foreign subsidiaries and for the tax effect of earnings that were actually repatriated to the U.S. during the year. The net impact on the deferred tax liability associated with the Company’s undistributed earnings is an increase of $75, resulting in a deferred tax liability balance of $89 related to the incremental tax cost on $1.4 billion of undistributed foreign earnings at December 31, 2015. This deferred income tax liability amount is net of the estimated foreign tax credits that would be generated upon the repatriation of such earnings. The repatriation of foreign earnings may result in the utilization of a portion of our foreign tax credits in the year of repatriation; therefore, the utilization of foreign tax credits is dependent on the amount and timing of repatriations, as well as the jurisdictions involved. We have not included the undistributed earnings of our subsidiary in Venezuela in the calculation of this deferred income tax liability as local regulations restrict cash distributions denominated in U.S. dollars.
In addition, in the fourth quarter of 2015, we recognized a benefit of approximately $19 associated with the implementation of foreign tax planning strategies. We completed the implementation of these tax planning strategies and expect to recognize an additional benefit of approximately $30 in the first quarter of 2016.
With respect to our uncertain tax positions, we recognize the benefit of a tax position, if that position is more likely than not of being sustained on examination by the taxing authorities, based on the technical merits of the position. We believe that our assessment of more likely than not is reasonable, but because of the subjectivity involved and the unpredictable nature of the subject matter at issue, our assessment may prove ultimately to be incorrect, which could materially impact the Consolidated Financial Statements.
We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. In 2016, a number of open tax years are scheduled to close due to the expiration of the statute of limitations and it is possible that a number of tax examinations may be completed. If our tax positions are ultimately upheld or denied, it is possible that the 2016 provision for income taxes, as well as tax related cash receipts or payments, may be impacted.
Loss Contingencies
We determine whether to disclose and/or accrue for loss contingencies based on an assessment of whether the risk of loss is remote, reasonably possible or probable. We record loss contingencies when it is probable that a liability has been incurred and the amount of loss is reasonably estimable. Our assessment is developed in consultation with our outside counsel and other advisors and is based on an analysis of possible outcomes under various strategies. Loss contingency assumptions involve judgments that are inherently subjective and can involve matters that are in litigation, which, by its nature is unpredictable. We

34



believe that our assessment of the probability of loss contingencies is reasonable, but because of the subjectivity involved and the unpredictable nature of the subject matter at issue, our assessment may prove ultimately to be incorrect, which could materially impact the Consolidated Financial Statements.
Impairment of Assets
Plant, Property and Equipment and Capitalized Software
We evaluate our plant, property and equipment and capitalized software for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.
In February 2015, we reviewed Avon Venezuela's long-lived assets to determine whether the carrying amount of the assets was recoverable. Based on our expected cash flows associated with the asset group, we determined that the carrying amount of the assets, carried at their historical U.S. dollar cost basis, was not recoverable. As such, an impairment charge of $90.3 to selling, general and administrative expenses was recorded to reflect the write-down of the long-lived assets to their estimated fair value of $15.7, which was recorded in the first quarter of 2015. The fair value of Avon Venezuela's long-lived assets was determined using both market and cost valuation approaches. The valuation analysis performed required several estimates, including market conditions and inflation rates. See Note 1, Description of the Business and Summary of Significant Accounting Policies on pages F-9 through F-15 of our 2015 Annual Report for more information on Avon Venezuela.
Goodwill and Intangible Assets
We test goodwill and intangible assets with indefinite lives for impairment annually, and more frequently if circumstances warrant, using various fair value methods. We review finite-lived intangible assets, which are subject to amortization, for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable.
We completed our annual goodwill impairment assessment for 2015 and determined that the estimated fair values were considered substantially in excess of the carrying values of each of our reporting units, with the exception of our Egypt reporting unit (discussed below).
The impairment analyses performed for goodwill and intangible assets require several estimates in computing the estimated fair value of a reporting unit, an indefinite-lived intangible asset, and a finite-lived intangible asset. As part of our goodwill impairment analysis, we typically use a discounted cash flow ("DCF") approach to estimate the fair value of a reporting unit, which we believe is the most reliable indicator of fair value of a business, and is most consistent with the approach that we would generally expect a market participant would use. In estimating the fair value of our reporting units utilizing a DCF approach, we typically forecast revenue and the resulting cash flows for periods of five to ten years and include an estimated terminal value at the end of the forecasted period. When determining the appropriate forecast period for the DCF approach, we consider the amount of time required before the reporting unit achieves what we consider a normalized, sustainable level of cash flows. The estimation of fair value utilizing a DCF approach includes numerous uncertainties which require 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, and the structure that would yield the highest economic value, among other factors.
Egypt
During the 2015 year-end close process, our analysis of the Egypt business indicated an impairment as the carrying value of the business exceeded the estimated fair value. This was primarily the result of reducing our long-term projections of the business. During 2015, Egypt performed generally in line with our revenue and earnings projections, which assumed growth as compared to 2014. However, as a result of currency restrictions for the payment of goods in Egypt, we lowered our long-term revenue and earnings projections for the business. Accordingly, a non-cash impairment charge of $6.9 was recorded to reduce the carrying amount of goodwill. There is no amount remaining associated with goodwill for our Egypt reporting unit as a result of this impairment charge.
China
During the first half of 2013, China performed generally in line with our revenue and earnings projections. As assumed in our projections, China's revenue in the first half of 2013 continued to deteriorate versus the prior-year period; however, beginning in the third quarter of 2013, this revenue decline was significantly in excess of our assumptions. As a result, in the third quarter of 2013, it became apparent that we would not achieve our 2013 and long-term forecasted revenue and earnings, and we completed an interim impairment assessment of the fair value of goodwill related to our operations in China. The revenue decline in China during the third quarter of 2013 resulted in the recognition of an operating loss while we had expected

35



operating profit in our projections. In the third quarter of 2013, we significantly lowered our long-term revenue and earnings projections for China that was included in our DCF model utilized in our interim impairment assessment. As a result of our impairment testing, we recorded a non-cash impairment charge of $42.1 in the third quarter of 2013 to reduce the carrying amounts of goodwill and finite-lived intangible assets. There are no amounts remaining associated with goodwill or intangible assets for our China reporting unit as a result of this impairment charge.
Key Assumptions - Egypt and China
Key assumptions used in measuring the fair value of Egypt and China during these impairment assessments included projections of revenue and the resulting cash flows, as well as the discount rate (based on the estimated weighted-average cost of capital). To estimate the fair value of Egypt and China, we forecasted revenue and the resulting cash flows over five years and ten years, respectively, using a DCF model which included a terminal value at the end of the projection period. We believed that a five-year period and a ten-year period was a reasonable amount of time in order to return cash flows of Egypt and China, respectively, to normalized, sustainable levels.
See Note 16, Goodwill and Intangible Assets on pages F-50 through F-52 of our 2015 Annual Report for more information on Egypt and China.


36



Results Of Operations - Consolidated
 
 
Years ended December 31
 
%/Point Change
 
 
2015
 
2014
 
2013
 
2015 vs.
2014
 
2014 vs.
2013
Total revenue
 
$
6,160.5

 
$
7,648.0

 
$
8,496.8

 
(19
)%
 
(10
)%
Cost of sales
 
2,445.4

 
3,006.9

 
3,172.8

 
(19
)%
 
(5
)%
Selling, general and administrative expenses
 
3,543.2

 
4,206.8

 
4,742.1

 
(16
)%
 
(11
)%
Impairment of goodwill and intangible assets
 
6.9

 

 
42.1

 
*

 
*

Operating profit
 
165.0

 
434.3

 
539.8

 
(62
)%
 
(20
)%
Interest expense
 
120.5

 
108.8

 
117.9

 
11
 %
 
(8
)%
Loss on extinguishment of debt
 
5.5

 

 
86.0

 
*

 
*

Interest income
 
(12.5
)
 
(14.8
)
 
(25.9
)
 
(16
)%
 
(43
)%
Other expense, net
 
73.7

 
139.5

 
83.9

 
(47
)%
 
66
 %
Gain on sale of business
 
(44.9
)
 

 

 
*

 
*

(Loss) income from continuing operations, net of tax
 
(796.5
)
 
(344.5
)
 
67.5

 
*

 
*

Net loss attributable to Avon
 
$
(1,148.9
)
 
$
(388.6
)
 
$
(56.4
)
 
*

 
*

Diluted (loss) income per share from continuing operations
 
$
(1.81
)
 
$
(.79
)
 
$
.14

 
*

 
*

Diluted loss per share attributable to Avon
 
$
(2.60
)
 
$
(.88
)
 
$
(.13
)
 
*

 
*

 
 
 
 
 
 
 
 
 
 
 
Advertising expenses(1)
 
$
128.0

 
$
166.4

 
$
174.3

 
(23
)%
 
(5
)%
 
 
 
 
 
 
 
 
 
 
 
Gross margin
 
60.3
 %
 
60.7
 %
 
62.7
 %
 
(.4
)
 
(2.0
)
CTI restructuring
 

 

 

 

 

Venezuelan special items
 
.5

 
1.6

 
.5

 
(1.1
)
 
1.1

Adjusted gross margin
 
60.8
 %
 
62.3
 %
 
63.2
 %
 
(1.5
)
 
(.9
)
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses as a % of total revenue(2)
 
57.5
 %
 
55.0
 %
 
55.8
 %
 
2.5

 
(.8
)
CTI restructuring
 
(.8
)
 
(1.1
)
 
(.6
)
 
.3

 
(.5
)
Venezuelan special items
 
(1.5
)
 
(.2
)
 
(.1
)
 
(1.3
)
 
(.1
)
FCPA accrual
 

 
(.6
)
 
(1.0
)
 
.6

 
.4

Pension settlement charge
 
(.1
)
 
(.1
)
 

 

 
(.1
)
Other items
 
(.1
)
 

 

 
(.1
)
 

Adjusted selling, general and administrative expenses as a % of total revenue(2)
 
55.1
 %
 
52.9
 %
 
54.1
 %
 
2.2

 
(1.2
)
 
 
 
 
 
 
 
 
 
 
 
Operating profit
 
$
165.0

 
$
434.3

 
$
539.8

 
(62
)%
 
(20
)%
CTI restructuring
 
49.1

 
86.6

 
53.4

 
 
 
 
Venezuelan special items
 
120.2

 
137.1

 
49.6

 
 
 
 
FCPA accrual
 

 
46.0

 
89.0

 
 
 
 
Pension settlement charge
 
7.3

 
9.5

 

 
 
 
 
Other items
 
3.1

 

 

 
 
 
 
Asset impairment and other charges
 
6.9

 

 
42.1

 
 
 
 
Adjusted operating profit
 
$
351.6

 
$
713.5

 
$
773.9

 
(51
)%
 
(8
)%
 
 
 
 
 
 
 
 
 
 
 
Operating margin(2)
 
2.7
 %
 
5.7
 %
 
6.4
 %
 
(3.0
)
 
(.7
)
CTI restructuring
 
.8

 
1.1

 
.6

 
(.3
)
 
.5

Venezuelan special items
 
2.0

 
1.8

 
.6

 
.2

 
1.2

FCPA accrual
 

 
.6

 
1.0

 
(.6
)
 
(.4
)
Pension settlement charge
 
.1

 
.1

 

 

 
.1

Other items
 
.1

 

 

 
.1

 

Asset impairment and other charges
 
.1

 

 
.5

 
.1

 
(.5
)
Adjusted operating margin(2)
 
5.7
 %
 
9.3
 %
 
9.1
 %
 
(3.6
)
 
.2


37



 
 
Years ended December 31
 
%/Point Change
 
 
2015
 
2014
 
2013
 
2015 vs.
2014
 
2014 vs.
2013
 
 
 
 
 
 
 
 
 
 
 
Change in Constant $ Adjusted operating margin(3)
 
 
 
 
 
 
 
(1.8
)
 
1.0

 
 
 
 
 
 
 
 
 
 
 
Change in Active Representatives
 
 
 
 
 
 
 
1
 %
 
(4
)%
Change in units sold
 
 
 
 
 
 
 
(2
)%
 
(2
)%
Amounts in the table above may not necessarily sum due to rounding.
*     Calculation not meaningful
(1)
Advertising expenses are included within selling, general and administrative expenses.
(2)
Selling, general and administrative expenses and Adjusted selling, general, and administrative expenses as a percentage of revenue, as well as operating margin and Adjusted operating margin, have been impacted as compared to amounts previously reported due to classifying North America within discontinued operations for all periods presented. Global expenses previously allocated to North America will remain in continuing operations, as these represent costs associated with functions of the Company's continuing operations.
(3)
Change in Constant $ Adjusted operating margin for all years presented is calculated using the current-year Constant $ rates.
2015 Compared to 2014
Revenue
Total revenue in 2015 compared to 2014 declined 19% compared to the prior-year period, due to unfavorable foreign exchange. Constant $ revenue increased 2%. Constant $ revenue was negatively impacted by approximately 2 points due to taxes in Brazil from the combined impact of the recognition of VAT credits in 2014 which did not recur in 2015 along with a new IPI tax on cosmetics which went into effect in May 2015. Constant $ revenue was also negatively impacted by approximately 1 point as a result of the sale of Liz Earle which was completed in July 2015. Our Constant $ revenue benefited from growth in markets experiencing relatively high inflation (Venezuela and Argentina), which contributed approximately 2 points to our Constant $ revenue growth. Our Constant $ revenue also benefited from growth in Europe, Middle East & Africa, most significantly Eastern Europe (Russia and Ukraine), and to a lesser extent, South Africa and underlying growth in Brazil. Constant $ revenue benefited from higher average order and a 1% increase in Active Representatives. The increase in Active Representatives was primarily due to growth in Europe, Middle East & Africa, most significantly Russia, which was primarily due to sustained momentum in recruitment and retention, partially offset by markets experiencing relatively high inflation (Venezuela and Argentina). The net impact of price and mix increased 4%, driven by increases in all regions. The net impact of price and mix was primarily positively impacted by markets experiencing relatively high inflation (Venezuela and Argentina), as these markets benefited from the inflationary impact on pricing. Units sold decreased 2%, primarily due to declines in units sold in Brazil and Venezuela, partially offset by an increase in units sold in Russia. See "Segment Review" in this MD&A for additional information related to changes in revenue by segment and "Segment Review - Latin America" in this MD&A for a further discussion of the tax benefits in Brazil.
On a category basis, our net sales and associated growth rates were as follows:
 
Years ended December 31
 
%/Point Change
 
2015
 
2014
 
US$
 
Constant $
Beauty:
 
 
 
 
 
 
 
Skincare
$
1,791.2

 
$
2,281.0

 
(21
)%
 
%
Fragrance
1,632.8

 
1,966.3

 
(17
)
 
7

Color
1,078.1

 
1,365.1

 
(21
)
 
1

Total Beauty
4,502.1

 
5,612.4

 
(20
)
 
3

Fashion & Home:
 
 
 
 
 
 
 
Fashion
907.8

 
1,040.4

 
(13
)
 
6

Home
666.6

 
819.7

 
(19
)
 
4

Total Fashion & Home
1,574.4

 
1,860.1

 
(15
)
 
5

Net sales
$
6,076.5

 
$
7,472.5

 
(19
)
 
3



38



Operating Margin
Operating margin and Adjusted operating margin decreased 300 basis points and 360 basis points, respectively, compared to 2014. The decrease in Adjusted operating margin includes the benefits associated with the restructuring actions taken during 2015 and the $400M Cost Savings Initiative, primarily reductions in headcount, as well as other cost reductions. The decrease in operating margin and Adjusted operating margin are discussed further below in "Gross Margin," "Selling, General and Administrative Expenses" and "Impairment of Goodwill and Intangible Assets."
Gross Margin
Gross margin and Adjusted gross margin decreased 40 basis points and 150 basis points, respectively, compared to 2014. The gross margin comparison was impacted by a lower negative impact of the devaluation of the Venezuelan currency in conjunction with highly inflationary accounting, as approximately $29 was recognized in the current-year period as compared to approximately $121 in the prior-year period, primarily associated with adjustments to reflect certain non-monetary assets at their net realizable value. See "Segment Review - Latin America" in this MD&A for a further discussion of our Venezuela operations.
The decrease of 150 basis points in Adjusted gross margin was primarily due to the following:
a decrease of approximately 270 basis points due to the unfavorable impact of foreign currency transaction losses and foreign currency translation;
a decrease of 40 basis points associated with the net impact of VAT credits in Brazil recognized in revenue in 2014 that did not recur in 2015; and
a decrease of 20 basis points as a result of the IPI tax law on cosmetics in Brazil that went into effect in May 2015.
These items were partially offset by the following:
an increase of 130 basis points due to the favorable net impact of mix and pricing, primarily in Latin America, which includes the realization of price increases in markets experiencing relatively high inflation (Venezuela and Argentina); and
an increase of approximately 60 basis points due to lower supply chain costs, primarily in Europe, Middle East & Africa which was largely due to lower overhead costs.
The negative impact of foreign currency transaction losses was partially mitigated by the benefits of pricing as we realized the impact of inflation in certain of our markets. 
See "Segment Review - Latin America" in this MD&A for a further discussion of the VAT credits and IPI tax law in Brazil.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 2015 decreased approximately $664 compared to 2014. This decrease is primarily due to the favorable impact of foreign currency translation, as the strengthening of the U.S. dollar against many of our foreign currencies resulted in lower reported selling, general and administrative expenses. The decrease in selling, general and administrative expenses is also due to the additional $46 accrual recorded in the first quarter of 2014 for the settlements related to the FCPA investigations and a lower amount of CTI restructuring. Partially offsetting the decrease in selling, general and administrative expenses was an approximate $90 impairment charge recorded in 2015 to reflect the write-down of the long-lived assets to their estimated fair value associated with the devaluation of the Venezuelan currency in conjunction with highly inflationary accounting, higher Representative, sales leader and field expense, higher foreign currency transaction costs and higher expenses associated with long-term employee incentive compensation plans as the prior-year period includes the benefit from the reversal of such accruals that did not recur in the current-year period.
Selling, general and administrative expenses and Adjusted selling, general, and administrative expenses as a percentage of revenue increased 250 basis points and 220 basis points, respectively, compared to 2014. In the current-year period, selling, general and administrative expenses as a percentage of revenue was impacted by an approximate $90 impairment charge recorded in 2015 to reflect the write-down of the long-lived assets to their estimated fair value associated with the devaluation of the Venezuelan currency in conjunction with highly inflationary accounting, the approximate $7 aggregate settlement charges associated with the payments made to former employees who were vested and participated in the U.S. defined benefit pension plan, approximately $3 of transaction-related costs associated with the separation of North America that were included in continuing operations, and approximately $1 associated with our Venezuela operations for certain non-monetary assets carried at the historical U.S. dollar cost following the devaluation of the Venezuelan currency in conjunction with highly inflationary accounting. In the prior-year period, selling, general and administrative expenses as a percentage of revenue was impacted by the additional $46 accrual recorded in 2014 for the settlements related to the FCPA investigations that did not recur

39



in 2015, approximately $16 associated with our Venezuela operations for certain non-monetary assets carried at the historical U.S. dollar cost following the devaluation of the Venezuelan currency in conjunction with highly inflationary accounting, and the approximate $10 aggregate settlement charges associated with the payments made to former employees who were vested and participated in the U.S. defined benefit pension plan. Additionally, the selling, general and administrative expenses as a percentage of revenue comparison was impacted by lower CTI restructuring as compared to the prior-year period.
See "Segment Review - Latin America" in this MD&A and Note 1, Description of the Business and Summary of Significant Accounting Policies on pages F-9 through F-15 of our 2015 Annual Report for a further discussion of our Venezuela operations, Note 15, Contingencies on pages F-48 through F-50 of our 2015 Annual Report for more information on the FCPA investigations, "Segment Review - Global and Other Expenses" in this MD&A and Note 11, Employee Benefit Plans on pages F-33 through F-42 of our 2015 Annual Report for a further discussion of the pension settlement charges, and Note 14, Restructuring Initiatives on pages F-44 through F-48 of our 2015 Annual Report for more information on CTI restructuring.
The increase of 220 basis points in Adjusted selling, general and administrative expenses as a percentage of revenue was primarily due to the following:
an increase of approximately 210 basis points due to the unfavorable impact of foreign currency translation and foreign currency transaction losses;
an increase of 60 basis points associated with the net impact of VAT credits in Brazil recognized in revenue in 2014 that did not recur in 2015;
an increase of 60 basis points as a result of the IPI tax law on cosmetics in Brazil, which reduced revenue as we did not raise the prices paid by Representatives to the same extent as the IPI tax; and
an increase of 40 basis points due to higher expenses associated with long-term employee incentive compensation plans as the prior-year period includes the benefit from the reversal of such accruals that did not recur in the current-year period.
These items were partially offset by the following:
a decrease of 160 basis points primarily due to the impact of Constant $ revenue growth with respect to our fixed expenses. In addition, lower fixed expenses, primarily resulting from our cost savings initiatives, mainly reductions in headcount, were largely offset by the inflationary impact on our expenses.
See "Segment Review - Latin America" in this MD&A for a further discussion of the VAT credits and IPI tax law in Brazil.
Impairment of Goodwill and Intangible Assets
During the fourth quarter of 2015, we recorded a non-cash impairment charge of approximately $7 for goodwill associated with our Egypt business. See Note 16, Goodwill and Intangible Assets on pages F-50 through F-52 of our 2015 Annual Report for more information on Egypt.
See “Segment Review” in this MD&A for additional information related to changes in operating margin by segment.

40



Other Expense
Interest expense increased by approximately $12 compared to the prior-year period, primarily due to the increase in the interest rates on the 2013 Notes (defined below) as a result of the long-term credit rating downgrades.
Interest income decreased by approximately $2 compared to the prior-year period.
Loss on extinguishment of debt in 2015 was comprised of approximately $5 for the make-whole premium and approximately $1 for the write-off of debt issuance costs and discounts associated with the prepayment of our 2.375% Notes (as defined below in "Liquidity and Capital Resources"). Refer to Note 5, Debt and Other Financing on pages F-19 through F-21 of our 2015 Annual Report and "Liquidity and Capital Resources" in this MD&A for additional information.
Other expense, net, decreased by approximately $66 compared to the prior-year period, primarily due to a less significant impact from the devaluation of the Venezuelan currency on monetary assets and liabilities in conjunction with highly inflationary accounting, as we recorded a benefit of approximately $4 in the first quarter of 2015 as compared to a loss of approximately $54 in the first quarter of 2014. In addition, the decrease in other expense, net was partially due to lower foreign exchange losses, which decreased by approximately $10 compared to the prior-year period. See "Segment Review - Latin America" in this MD&A for a further discussion of our Venezuela operations.
Gain on sale of business in 2015 was the result of the sale of Liz Earle in July 2015. Refer to Note 3, Discontinued Operations and Divestitures on pages F-16 through F-18 of our 2015 Annual Report, for additional information regarding the sale of Liz Earle.
Effective Tax Rate
The effective tax rate in 2015 was negatively impacted by additional valuation allowances for U.S. deferred tax assets of approximately $670. The additional valuation allowances in 2015 were due to the continued strengthening of the U.S. dollar against currencies of some of our key markets and the impact on the benefits from our tax planning strategies associated with the realization of our deferred tax assets. In addition, the effective tax rate in 2015 was negatively impacted by additional valuation allowances for deferred tax assets outside of the U.S. of approximately $15, primarily in Russia, which was largely due to lower earnings, which were significantly impacted by foreign exchange losses on working capital balances. In addition, in the fourth quarter of 2015, we recognized a benefit of approximately $19 as a result of the implementation of foreign tax planning strategies. The additional valuation allowances for deferred tax assets in 2015 caused income taxes to be significantly in excess of income before taxes.
The effective tax rate in 2014 was negatively impacted by a non-cash income tax charge of approximately $396. This was largely due to a valuation allowance, recorded in the fourth quarter of 2014, against deferred tax assets of approximately $375 which is primarily due to the strengthening of the U.S. dollar against currencies of some of our key markets. The approximate $375 includes the valuation allowance recorded for U.S. deferred tax assets of approximately $367, as well as approximately $8 associated with other foreign subsidiaries.
In addition, the effective tax rates in 2015 and 2014 were negatively impacted by the devaluations of the Venezuelan currency in conjunction with highly inflationary accounting discussed further within "Segment Review - Latin America" in this MD&A.
See Note 7, Income Taxes on pages F-22 through F-26 of our 2015 Annual Report, for more information.
The Adjusted effective tax rate in 2015 was negatively impacted by the country mix of earnings and the inability to recognize additional deferred tax assets in various jurisdictions related to our current-year operating results. The Adjusted effective tax rate in 2014 was negatively impacted by an adjustment to the carrying value of our state deferred tax balances due to changes in the expected tax rate, valuation allowances for deferred taxes, including the impact of legislative changes, and out-of-period adjustments of approximately $6 recorded in the fourth quarter of 2014.
Discontinued Operations
Loss from discontinued operations, net of tax was $349 compared to a loss of $40 for 2014. During 2015, we recorded a charge of approximately $340 before tax ($340 after tax) associated with the estimated loss on the sale of the North America business that is expected to be completed in 2016. In addition, the North America operations achieved higher operating income in 2015 as compared with 2014 despite lower revenues as a result of significant cost savings, as well as lower costs to implement restructuring initiatives.


41



The estimated loss on sale was comprised of the following:
Pension and postretirement benefit plan liabilities
$
236

Cash to be contributed to the North America business at closing
(100
)
Gain on net liability reduction
136

Acceleration of pension and postretirement items in AOCI
(278
)
Total pension and postretirement related items
(142
)
Net assets to be contributed at closing (excluding pension items above)
(206
)
Costs to sell
(35
)
Implied value of ownership interest in North America business
43

Estimated loss on sale
$
(340
)

See Note 3, Discontinued Operations and Divestitures on pages F-16 through F-18 of our 2015 Annual Report for a further discussion of the pension settlement charges.

Impact of Foreign Currency
During 2015, foreign currency had a significant impact on our financial results. Specifically, as compared to the prior-year period, foreign currency has impacted our consolidated financial results as a result of:
foreign currency transaction losses (classified within cost of sales, and selling, general and administrative expenses), which had an unfavorable impact to Adjusted operating profit of an estimated $210, or approximately 280 points to Adjusted operating margin;
foreign currency translation, which had an unfavorable impact to Adjusted operating profit of approximately $265 (of which approximately $90 related to Venezuela), or approximately 200 points to Adjusted operating margin; and
lower foreign exchange losses (classified within other expense, net), which had a favorable impact of approximately $10 before tax.

2014 Compared to 2013
Revenue
Total revenue in 2014 declined 10% compared to the prior-year period, due to unfavorable foreign exchange. Constant $ revenue increased 3%, and benefited by approximately 1 point due to the net impact of certain tax benefits in Brazil. In 2014 and 2013, we recognized tax credits in Brazil of approximately $85 and approximately $29, respectively, primarily associated with a change in estimate of expected recoveries of VAT. See "Segment Review - Latin America" in this MD&A for a further discussion of the tax benefits in Brazil. Constant $ revenue benefited from higher average order, which was partially offset by a 4% decrease in Active Representatives. The net impact of price and mix increased 5%, as pricing benefited from inflationary impacts in Latin America, primarily in Argentina and Venezuela, while units sold decreased 2%. During 2014, our Constant $ revenue benefited from net growth in Latin America and Europe, Middle East & Africa, which was partially offset by a net decline in Asia Pacific. Constant $ revenue growth in Latin America was primarily driven by Venezuela largely due to inflationary pricing, which was partially offset by declines in Mexico. Constant $ revenue growth in Europe, Middle East & Africa was driven by South Africa and the United Kingdom, which was partially offset by revenue declines in Russia and Turkey. Constant $ revenue in Russia was negatively impacted by a difficult economy, including the impact of geopolitical uncertainties, and its decline in the first half of 2014 was partially offset by Constant $ revenue growth in the second half of 2014 driven by actions to improve unit sales. In Asia Pacific, Constant $ revenue declined as compared to 2013 as growth in the Philippines was more than offset by declines in the other Asia Pacific markets. See "Segment Review" in this MD&A for additional information related to changes in revenue by segment.

42



On a category basis, our net sales and associated growth rates were as follows:
 
Years ended December 31
 
%/Point Change
 
2014
 
2013
 
US$
 
Constant $
Beauty:
 
 
 
 
 
 
 
Skincare
$
2,281.0

 
$
2,556.7

 
(11
)%
 
1
 %
Fragrance
1,966.3

 
2,202.4

 
(11
)
 
5

Color
1,365.1

 
1,548.3

 
(12
)
 

Total Beauty
5,612.4

 
6,307.4

 
(11
)
 
2

Fashion & Home:
 
 
 
 
 
 
 
Fashion
1,040.4

 
1,169.7

 
(11
)
 
(1
)
Home
819.7

 
902.3

 
(9
)
 
6

Total Fashion & Home
1,860.1

 
2,072.0

 
(10
)
 
2

Net sales
$
7,472.5

 
$
8,379.4

 
(11
)
 
2

Operating Margin
Operating margin and Adjusted operating margin decreased 70 basis points and increased 20 basis points, respectively, compared to 2013. The increase in Adjusted operating margin includes the benefits associated with the $400M Cost Savings Initiative, primarily reductions in headcount, as well as other cost reductions. The decrease in operating margin and increase in Adjusted operating margin are discussed further below in "Gross Margin," "Selling, General and Administrative Expenses" and "Impairment of Goodwill and Intangible Assets."
Gross Margin
Gross margin and Adjusted gross margin decreased 200 basis points and 90 basis points, respectively, compared to 2013. The gross margin comparison was largely impacted by an adjustment of approximately $116 associated with our Venezuela operations to reflect certain non-monetary assets at their net realizable value, which was recorded in the first quarter of 2014. Partially offsetting the decrease in gross margin was a lower negative impact of the devaluation of the Venezuelan currency in conjunction with highly inflationary accounting, as approximately $5 was recognized in the current-year period as compared to approximately $45 in the prior-year period associated with carrying certain non-monetary assets at the historical U.S. dollar cost following a devaluation. See "Segment Review - Latin America" in this MD&A for a further discussion of our Venezuela operations.
The decrease of 90 basis points in Adjusted gross margin was primarily due to the following:
a decrease of approximately 140 basis points due to the unfavorable impact of foreign currency transaction losses and foreign currency translation, driven by Europe, Middle East & Africa and Latin America; and
an increase of 80 basis points due to the favorable net impact of mix and pricing, primarily in Latin America, which includes the realization of price increases in markets experiencing relatively high inflation (Venezuela and Argentina).
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 2014 decreased approximately $535 compared to 2013. This decrease is primarily due to the favorable impact of foreign currency translation, as the strengthening of the U.S. dollar against many of our foreign currencies resulted in lower reported selling, general and administrative expenses. The decrease in selling, general and administrative expenses is also due to the $89 accrual for the settlements relating to the FCPA investigations recorded in 2013, lower expenses related to our Service Model Transformation ("SMT") project as a result of our decision to halt the further roll-out beyond the pilot market of Canada in the fourth quarter of 2013, lower professional and related fees associated with the FCPA investigation and compliance reviews and lower bad debt expense. Partially offsetting the decrease in selling, general and administrative expenses was the additional $46 accrual recorded in the first quarter of 2014 for the settlements related to the FCPA investigations and a higher amount of CTI restructuring primarily associated with the $400M Cost Savings Initiative.
Selling, general and administrative expenses and Adjusted selling, general and administrative expenses as a percentage of revenue decreased 80 basis points and 120 basis points, respectively, compared to 2013. The selling, general and administrative expenses as a percentage of revenue comparison was impacted by a higher amount of CTI restructuring as compared to the prior-year period. Additionally, in the current-year period, selling, general and administrative expenses as a percentage of revenue was impacted by the additional $46 accrual recorded in the first quarter of 2014 for the settlements related to the FCPA

43



investigations, approximately $16 associated with our Venezuela operations for certain non-monetary assets carried at the historical U.S. dollar cost following a devaluation, and the approximate $10 aggregate settlement charges recorded in 2014 associated with the payments made to former employees who were vested and participated in the U.S. defined benefit pension plan. In the prior-year period, selling, general and administrative expenses as a percentage of revenue was impacted by the $89 accrual for the settlements relating to the FCPA investigations and $5 associated with our Venezuela operations for certain non-monetary assets carried at the historical U.S. dollar cost following a devaluation.
See Note 14, Restructuring Initiatives on pages F-44 through F-48 of our 2015 Annual Report for more information on CTI restructuring, Note 1, Description of the Business and Summary of Significant Accounting Policies on pages F-9 through F-15 of our 2015 Annual Report for more information on SMT, Note 15, Contingencies on pages F-48 through F-50 of our 2015 Annual Report for more information on the FCPA investigations, "Segment Review - Global and Other Expenses" in this MD&A and Note 11, Employee Benefit Plans on pages F-33 through F-42 of our 2015 Annual Report for a further discussion of the pension settlement charges and "Segment Review - Latin America" in this MD&A for a further discussion of our Venezuela operations.
The decrease of 120 basis points in Adjusted selling, general and administrative expenses as a percentage of revenue was primarily due to the following:
a decrease of 80 basis points from lower expenses related to our SMT project as a result of our decision to halt the further roll-out beyond the pilot market of Canada in the fourth quarter of 2013;
a decrease of 50 basis points primarily due to the impact of Constant $ revenue growth with respect to our fixed expenses. In addition, lower fixed expenses, primarily resulting from our cost savings initiatives, mainly reductions in headcount, were largely offset by the inflationary impact on our expenses;
a decrease of 30 basis points as a result of the net impact of the incremental tax credits in Brazil recognized as revenue in 2014 and 2013;
a decrease of 30 basis points from lower Representative and sales leader expense, primarily in Latin America;
a decrease of 30 basis points from lower bad debt expense; and
a decrease of 30 basis points from lower professional and related fees associated with the FCPA investigation and compliance reviews.
These items were partially offset by the following:
an increase of approximately 100 basis points due to the unfavorable impact of foreign currency translation and foreign currency transaction losses.
See "Segment Review - Latin America" in this MD&A for a further discussion of the tax credits in Brazil.
Impairment of Goodwill and Intangible Assets
During the third quarter of 2013, we recorded a non-cash impairment charge of approximately $42 for goodwill and intangible assets associated with our China business. See Note 16, Goodwill and Intangible Assets on pages F-50 through F-52 of our 2015 Annual Report for more information on China.
See “Segment Review” in this MD&A for additional information related to changes in operating margin by segment.
Other Expense
Interest expense decreased by approximately $9 compared to the prior-year period, primarily due to lower outstanding debt balances partially offset by higher average interest rates.
Loss on extinguishment of debt in 2013 is comprised of approximately $71 for the make-whole premium and the write-off of debt issuance costs associated with the prepayment of our private notes issued in 2010 and approximately $2 for the write-off of debt issuance costs associated with the early repayment of the $380 of outstanding principal amount of a term loan agreement, which occurred in the first quarter of 2013. In addition, in the second quarter of 2013, we recorded a loss on extinguishment of debt of approximately $13 for the make-whole premium and the write-off of debt issuance costs, partially offset by a deferred gain associated with the January 2013 interest-rate swap agreement termination, associated with the prepayment of notes due in 2014. See Note 5, Debt and Other Financing on pages F-19 through F-21 of our 2015 Annual Report, and "Liquidity and Capital Resources" in this MD&A for more information.
Interest income decreased by approximately $11 compared to the prior-year period, primarily impacted by $12 for interest income that benefited the fourth quarter of 2013, due to an out-of-period adjustment related to judicial deposits in Brazil.

44



Other expense, net, increased by approximately $56 compared to the prior-year period, primarily due to higher foreign exchange losses. Foreign exchange losses increased by approximately $41 compared to the prior-year period, with the most significant impact due to the weakening of the Russian ruble. In addition, the increase in other expense, net was also due to a more significant impact, approximately $54 in 2014 as compared to approximately $34 in 2013, from the devaluations of the Venezuelan currency on monetary assets and liabilities in conjunction with highly inflationary accounting. See "Segment Review - Latin America" in this MD&A for a further discussion of our Venezuela operations.
Effective Tax Rate
The effective tax rate in 2014 was negatively impacted by a non-cash income tax charge of approximately $396. This was largely due to a valuation allowance, recorded in the fourth quarter of 2014, for deferred tax assets of approximately $375 which is primarily due to the strengthening of the U.S. dollar against currencies of some of our key markets. The approximate $375 includes the valuation allowance recorded for U.S. deferred tax assets of approximately $367, as well as approximately $8 associated with other foreign subsidiaries. The effective tax rates in 2014 and 2013 were impacted by the devaluation of the Venezuelan currency in conjunction with highly inflationary accounting discussed further within "Segment Review - Latin America" in this MD&A. The effective tax rate in 2013 was also negatively impacted by the $89 accrual for the settlements related to the FCPA investigations, the non-cash impairment charges for goodwill and intangible assets associated with our China business of approximately $42, a valuation allowance for deferred tax assets related to China of approximately $9, and a valuation allowance for deferred tax assets related to Venezuela in the fourth quarter of approximately $42. See Note 7, Income Taxes on pages F-22 through F-26 of our 2015 Annual Report, for more information.
The Adjusted effective tax rate for 2014 negatively impacted by an adjustment to the carrying value of our state deferred tax balances due to changes in the expected tax rate, valuation allowances for deferred taxes, including the impact of legislative changes, and an out-of-period adjustment of approximately $6 recorded in the fourth quarter of 2014.
Discontinued Operations
Loss from discontinued operations, net of tax was $40 compared to a loss of $119 for 2013. During 2013, we recorded a non-cash impairment charge of approximately $117 ($74 after tax) for capitalized software related to SMT and a charge of approximately $79 ($50 after tax) associated with our Silpada jewelry business which was sold in July 2013. The North America Avon operations achieved lower operating income in 2014 as compared with 2013 due to lower revenues, higher costs to implement restructuring initiatives and settlement charges associated with the U.S. pension plan. These were partially offset by significant cost savings from our North America Avon business as compared to 2013.

See Note 3, Discontinued Operations and Divestitures on pages F-16 through F-18 and "Segment Review - Global and Other Expenses" in this MD&A and Note 11, Employee Benefit Plans on pages F-33 through F-42 of our 2015 Annual Report for a further discussion of the pension settlement charges.
Other Comprehensive Income (Loss)
Other comprehensive income (loss), net of taxes was approximately ($151) in 2015 compared with approximately ($348) in 2014, primarily due to net actuarial gains of approximately $41 in 2015 as compared with net actuarial losses of approximately $187 in 2014. In 2015, net actuarial gains benefited from higher discount rates for the non-U.S. and U.S. pension plans, partially offset by lower asset returns in the non-U.S. and U.S. pension plans in 2015 as compared to 2014. The other comprehensive income (loss) year-over-year comparison was also unfavorably impacted by foreign currency translation adjustments, which increased by approximately $27 as compared to 2014 primarily due to unfavorable movements of the Brazilian real, partially offset by the year-over-year comparison of movements of the Polish zloty and Russian ruble.
Other comprehensive income (loss), net of taxes was approximately ($348) in 2014 compared with approximately $5 in 2013, primarily due to net actuarial losses of approximately $187 in 2014 as compared with net actuarial gains of approximately $81 in 2013. In 2014, net actuarial losses were negatively impacted by lower discount rates for the non-U.S. and U.S. pension plans and updated mortality rates for the U.S. pension plan, partially offset by higher asset returns in the non-U.S. and U.S. pension plans in 2014 as compared to 2013. The other comprehensive income (loss) year-over-year comparison was also unfavorably impacted by foreign currency translation adjustments, as well as higher amortization of net actuarial loss which was driven by the settlement charges associated with the U.S. pension plan. In 2014, foreign currency translation adjustments were negatively impacted by approximately $136 as compared to 2013 primarily due to unfavorable movements of the Polish zloty, the British pound, the Colombian peso and the Mexican peso.
See Note 11, Employee Benefit Plans on pages F-33 through F-42 of our 2015 Annual Report for more information.


45



Segment Review
Below is an analysis of the key factors affecting revenue and operating profit (loss) by reportable segment for each of the years in the three-year period ended December 31, 2015:
Years ended December 31
 
2015
 
2014
 
2013
 
 
Total
Revenue
 
Operating
Profit (Loss)
 
Total
Revenue
 
Operating
Profit (Loss)
 
Total
Revenue
 
Operating
Profit (Loss)
Latin America
 
$
3,260.4

 
$
103.1

 
$
4,239.5

 
$
279.8

 
$
4,840.5

 
$
478.6

Europe, Middle East & Africa
 
2,272.3

 
217.1

 
2,705.8

 
300.9

 
2,898.4

 
406.7

Asia Pacific
 
627.8

 
35.3

 
702.7

 
20.9

 
757.9

 
(12.1
)
Total from operations
 
6,160.5

 
355.5

 
7,648.0

 
601.6

 
8,496.8

 
873.2

Global and other expenses
 

 
(190.5
)
 

 
(167.3
)
 

 
(333.4
)
Total
 
$
6,160.5

 
$
165.0

 
$
7,648.0

 
$
434.3

 
$
8,496.8

 
$
539.8

Latin America – 2015 Compared to 2014
 
 
 
 
 
 
%/Point Change
 
 
2015
 
2014
 
US$
 
Constant $
Total revenue
 
$
3,260.4

 
$
4,239.5

 
(23
)%
 
1
 %
Operating profit
 
103.1

 
279.8

 
(63
)%
 
(12
)%
CTI restructuring
 
1.6

 
26.7

 
 
 
 
Venezuelan special items
 
120.2

 
137.1

 
 
 
 
Adjusted operating profit
 
$
224.9

 
$
443.6

 
(49
)%
 
(17
)%
 
 
 
 
 
 
 
 
 
Operating margin
 
3.2
%
 
6.6
%
 
(3.4
)
 
(1.2
)
CTI restructuring
 

 
.6

 
 
 
 
Venezuelan special items
 
3.7

 
3.2

 
 
 
 
Adjusted operating margin
 
6.9
%
 
10.5
%
 
(3.6
)
 
(1.8
)
 
 
 
 
 
 
 
 
 
Change in Active Representatives
 
 
 
 
 
 
 
(2
)%
Change in units sold
 
 
 
 
 
 
 
(5
)%
Amounts in the table above may not necessarily sum due to rounding.
Total revenue decreased 23% compared to the prior-year period, due to the unfavorable impact from foreign exchange which was primarily driven by the strengthening of the U.S. dollar relative to the Brazilian real and the Venezuelan currency devaluation. See below for further discussion regarding the impact of the Venezuelan currency devaluation. On a Constant $ basis, revenue increased 1%, despite the growth rate being negatively impacted by approximately 5 points due to taxes in Brazil from the combined impact of the recognition of VAT credits in 2014 along with a new IPI tax on cosmetics in 2015. Specifically, during 2014, we recognized $85 in Brazil for expected VAT recoveries which did not recur in 2015, and as such, there was an approximate 2 point negative impact on the region’s Constant $ growth rate. In addition, an IPI tax law on cosmetics in Brazil went into effect in May 2015 and has caused an estimated 3 point negative impact on the region's Constant $ revenue growth. Further, the markets experiencing relatively high inflation (Venezuela and Argentina) contributed approximately 5 points to the region's Constant $ revenue growth. The region's Constant $ revenue growth benefited from higher average order, which was partially offset by a decrease in Active Representatives. The region's higher average order was positively impacted by markets experiencing relatively high inflation (Venezuela and Argentina), as these markets benefited from the inflationary impact on pricing, while Active Representatives was negatively impacted by these markets. Average order was negatively impacted by the taxes in Brazil. Revenue in Brazil decreased 34%, unfavorably impacted by foreign exchange, or decreased 8% on a Constant $ basis. Revenue in Mexico declined 15%, unfavorably impacted by foreign exchange, or increased 2% on a Constant $ basis, primarily due to higher average order.
Brazil’s Constant $ revenue decline of 8% was negatively impacted by approximately 10 points due to the combined impact of the VAT credits in 2014 and the IPI tax in 2015 discussed above. The negative impact of these tax items were partially offset by an increase in Active Representatives. On a Constant $ basis, Brazil’s sales from Beauty products decreased 5%, negatively impacted by the IPI tax. This negative impact on Beauty sales was partially offset by increased sales of fragrance, which benefited from our alliance with Coty, as well as from new product launches during the first quarter of 2015. The IPI tax also negatively impacted Brazil's Beauty units, as we increased prices to partially offset the new tax. On a Constant $ basis, Brazil's

46



sales from Fashion & Home products increased 1%. Brazil continues to be impacted by a difficult economic environment as well as high levels of competition.
Operating margin was negatively impacted by .5 points as compared to the prior-year period due to the Venezuelan special items in conjunction with highly inflationary accounting as discussed further below. Operating margin also benefited by .6 points as compared to the prior-year period from lower CTI restructuring. Adjusted operating margin decreased 3.6 points, or 1.8 points on a Constant $ basis, primarily as a result of:
a decline of 1.9 points associated with the net impact of VAT credits in Brazil recognized in revenue in 2014, discussed above;
a decline of 1.4 points as a result of the IPI tax law on cosmetics in Brazil, which reduced revenue as we did not raise the prices paid by Representatives to the same extent as the IPI tax;
a net benefit of 1.2 points primarily due to the impact of Constant $ revenue growth with respect to our fixed expenses. This includes a reduction of corporate expenses, which are allocated from Global, partially offset by the inflationary impact on our expenses; and
gross margin benefited only slightly compared to the prior year period, as 2.1 points from the favorable net impact of mix and pricing, which includes the realization of price increases in markets experiencing relatively high inflation (Venezuela and Argentina) was largely offset by 2.0 points from the unfavorable impact of foreign currency transaction losses.
Venezuela Discussion
Currency restrictions enacted by the Venezuelan government since 2003 have impacted the ability of Avon Venezuela to obtain foreign currency to pay for imported products. Since 2010, we have been accounting for our operations in Venezuela under accounting guidance associated with highly inflationary economies. Under U.S. GAAP, the financial statements of a foreign entity operating in a highly inflationary economy are required to be remeasured as if the functional currency is the company’s reporting currency, the U.S. dollar. This generally results in translation adjustments, caused by changes in the exchange rate, being reported in earnings currently for monetary assets (e.g., cash, accounts receivable) and liabilities (e.g., accounts payable, accrued expenses) and requires that different procedures be used to translate non-monetary assets (e.g., inventories, fixed assets). Non-monetary assets and liabilities are remeasured at the historical U.S. dollar cost basis. This diverges significantly from the application of accounting rules prior to designation as highly inflationary accounting, where such gains and losses would have been recognized only in accumulated other comprehensive income (loss) (shareholders' equity).
With respect to our 2013 results, effective February 13, 2013, the official exchange rate moved from 4.30 to 6.30, a devaluation of approximately 32%. As a result of the change in the official rate to 6.30, we recorded an after-tax loss of approximately $51 (approximately $34 in other expense, net, and approximately $17 in income taxes) in the first quarter of 2013, primarily reflecting the write-down of monetary assets and liabilities and deferred tax benefits. Additionally, certain non-monetary assets are carried at their historical U.S. dollar cost subsequent to the devaluation. Therefore, these costs will impact the income statement during 2015 at a disproportionate rate as they were not devalued based on the new exchange rates, but were expensed at their historical U.S. dollar value. 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 devaluation, at the applicable rate at the time of their acquisition. As a result, we recognized an additional negative impact of approximately $45 to operating profit and net income relating to these non-monetary assets in the first, second, third and fourth quarters of 2013.
In March 2013, the Venezuelan government announced a foreign exchange system that increased government control over the allocation of U.S. dollars in the country, referred to as the SICAD I exchange ("SICAD I"). In February 2014, the Venezuelan government announced a foreign exchange system which began operating on March 24, 2014, referred to as the SICAD II exchange ("SICAD II"). While liquidity was limited through the SICAD II market, in comparison to the other available exchange rates (the official rate and SICAD I rate), it represented the rate which better reflected the economics of Avon Venezuela's business activity. Accordingly, we concluded that we should utilize the SICAD II exchange rate to remeasure our Venezuelan operations effective March 31, 2014.
With respect to our 2014 results, at March 31, 2014, the SICAD II exchange rate was approximately 50, as compared to the official exchange rate of 6.30 that we used previously, which caused the recognition of a devaluation of approximately 88%. As a result of our change to the SICAD II rate, we recorded an after-tax loss of approximately $42 (approximately $54 in other expense, net, and a benefit of approximately $12 in income taxes) in the first quarter of 2014, primarily reflecting the write-down of monetary assets and liabilities. 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. As a result, we determined that an adjustment of approximately $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. We recognized an

47



additional negative impact of approximately $21 to operating profit and net income relating to these non-monetary assets in the second, third and fourth quarters of 2014.
In February 2015, the Venezuelan government announced that the SICAD II market would no longer be available, and a new foreign exchange system was created, referred to as the SIMADI exchange ("SIMADI"). SIMADI began operating on February 12, 2015. The SICAD I and SICAD II markets merged to create a single foreign exchange system, referred to as the SICAD exchange ("SICAD"). At December 31, 2015, the SICAD exchange rate was approximately 13. The exchange rates established through the SIMADI market fluctuate and have been significantly higher than both the official rate and SICAD rate. In March 2015, we began to access the SIMADI market and have been able to obtain only limited U.S. dollars. While liquidity is limited through the SIMADI market, in comparison to the other available exchange rates (the official rate and SICAD rate), it represents the rate which better reflects the economics of Avon Venezuela's business activity. Accordingly, we concluded that we should utilize the SIMADI exchange rate to remeasure our Venezuelan operations effective February 12, 2015.
At February 12, 2015, the SIMADI exchange rate was approximately 170, as compared to the SICAD II exchange rate of approximately 50 that we used previously, which caused the recognition of a devaluation of approximately 70%. As a result of our change to the SIMADI rate, we recorded an after-tax benefit of approximately $3 (a benefit of approximately $4 in other expense, net, and a loss of approximately $1 in income taxes) in the first quarter of 2015, primarily reflecting the write-down of monetary assets and liabilities.
Additionally, certain non-monetary assets are carried at their historical U.S. dollar cost subsequent to the devaluation. Therefore, these costs will impact the income statement during 2015 at a disproportionate rate as they were not devalued based on the new exchange rates, but were expensed at their historical U.S. dollar value. 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 SIMADI rate, at the applicable rate at the time of their acquisition. As a result, we determined that an adjustment of approximately $11 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 2015. We recognized an additional negative impact of approximately $19 to operating profit and net income relating to these non-monetary assets in the first, second, third and fourth quarters of 2015.
In addition, in February 2015, we reviewed Avon Venezuela's long-lived assets to determine whether the carrying amount of the assets was recoverable. Based on our expected cash flows associated with the asset group, we determined that the carrying amount of the assets, carried at their historical U.S. dollar cost basis, was not recoverable. As such, an impairment charge of approximately $90 to selling, general and administrative expenses was recorded to reflect the write-down of the long-lived assets to estimated fair value of approximately $16, which was recorded in the first quarter of 2015. Further devaluations or regulatory actions may further impair the carrying value of Avon Venezuela's long-lived assets.
At December 31, 2015, the SIMADI exchange rate was approximately 200. During 2015, Avon Venezuela (using an average exchange rate which included SICAD II exchange rates in the first part of the first quarter and SIMADI exchange rates in the latter part of the first quarter and the entire second, third and fourth quarters) represented less than 1% of Avon’s consolidated revenue and less than 3% of Avon’s consolidated Adjusted operating profit. While the rate in the SIMADI market will vary, the ongoing impacts primarily related to the remeasurement of Avon Venezuela's financial statements are not expected to have a material impact on Avon's consolidated results.
The Company continuously monitors factors such as our ability to access and transact in the various exchange mechanisms currently in place, the political and economic environment in Venezuela and our ability to effectively make key operational decisions in regard to its Venezuela operations. If the Company is unable to make key operational decisions regarding its business in Venezuela, on an ongoing basis, the Company may conclude that it should deconsolidate its operations in Venezuela. At December 31, 2015, we had a net asset position in Avon Venezuela of approximately $33 and accumulated foreign currency translation adjustments within accumulated other comprehensive income (loss) (shareholders' equity) associated with foreign currency movements before Venezuela was accounted for as a highly inflationary economy of approximately $81.
Argentina Discussion
In 2011, the Argentine government introduced restrictive foreign currency exchange controls. In December 2015, the Argentine government began the process of removing foreign currency exchange controls; however, some uncertainty exists regarding the foreign currency exchange controls in the future. Unless foreign exchange is made more readily available, Avon Argentina's operations may be negatively impacted. At December 31, 2015, we had a net asset position of approximately $92 associated with our operations in Argentina, including cash of approximately $48. During 2015, Avon Argentina represented approximately 7% of Avon’s consolidated revenue and approximately 18% of Avon’s consolidated Adjusted operating profit.
Also in late December 2015, the exchange rate in Argentina was devalued by approximately 25%, from approximately 10 to approximately 13 at December 31, 2015. Avon Argentina's 2015 results were not materially impacted by this devaluation as it

48



occurred late in the year. As of December 31, 2015, we did not account for Argentina as a highly inflationary economy, and as a result, this devaluation did not negatively impact earnings with respect to Argentina's monetary and non-monetary assets.
Latin America – 2014 Compared to 2013
 
 
 
 
 
 
%/Point Change
 
 
2014
 
2013
 
US$
 
Constant $
Total revenue
 
$
4,239.5

 
$
4,840.5

 
(12
)%
 
5
 %
Operating profit
 
279.8

 
478.6

 
(42
)%
 
 %
CTI restructuring
 
26.7

 
8.4

 
 
 
 
Venezuelan special items
 
137.1

 
49.6

 
 
 
 
Adjusted operating profit
 
$
443.6

 
$
536.6

 
(17
)%
 
6
 %
 
 
 
 
 
 
 
 
 
Operating margin
 
6.6
%
 
9.9
%
 
(3.3
)
 
(.5
)
CTI restructuring
 
.6

 
.1

 
 
 
 
Venezuelan special items
 
3.2

 

 
 
 
 
Adjusted operating margin
 
10.5
%
 
11.1
%
 
(.6
)
 
.1

 
 
 
 
 
 
 
 
 
Change in Active Representatives
 
 
 
 
 
 
 
(4
)%
Change in units sold
 
 
 
 
 
 
 
(4
)%
Amounts in the table above may not necessarily sum due to rounding.
Total revenue decreased 12% compared to the prior-year period due to the unfavorable impact from foreign exchange. On a Constant $ basis, revenue grew 5%. The region's revenue growth benefited by approximately 1 point due to the net impact of certain tax benefits in Brazil. In addition, higher average order was partially offset by a decrease in Active Representatives. Average order benefited from pricing, including inflationary impacts, primarily in Venezuela. Revenue in Venezuela and Mexico declined 55% and 9%, respectively, which were unfavorably impacted by foreign exchange, and Constant $ revenue in Venezuela and Mexico increased 45% and declined 6%, respectively. Revenue in Brazil declined 5%, which was unfavorably impacted by foreign exchange, and Constant $ revenue in Brazil increased 3%. Brazil's revenue benefited by approximately 3 points as a result of the net impact of certain tax benefits.
In 2014, our Constant $ revenue growth and Constant $ operating profit growth were not impacted by the use of the SICAD II exchange rate as we applied the exchange rate of 6.30 to current and prior periods for our Venezuela operations in order to determine Constant $ growth. If we had used an exchange rate of 50 (which is a rate more reflective of the SICAD II rate) for our Venezuela operations for the year ended December 31, 2014, the region's Constant $ revenue would have been an increase of 1% from the prior-year period, the region's Constant $ Adjusted operating margin would have been a decrease of .8 points from the prior-year period, and Avon's consolidated Constant $ revenue decline would have been a decrease of 2% from the prior-year period. As we update our Constant $ rates on an annual basis, we utilized a rate of approximately 50 in our Constant $ financial performance beginning with our 2015 results. See below for further discussion regarding the impact of the Venezuelan currency devaluation.
Brazil's Constant $ revenue benefited by approximately 3 points due to the net benefit of larger tax credits recognized in 2014 as compared to the benefit and tax credits recognized in 2013. In 2014 and 2013, we recognized tax credits in Brazil of approximately $85 and approximately $29, respectively, primarily associated with a change in estimate of expected recoveries of VAT. Of the VAT credits recognized in 2014, approximately $13 were out-of-period adjustments. As the tax credits are associated with VAT, which is recorded as a reduction to revenue, the benefit from these VAT credits is recognized as revenue. Brazil's Active Representatives and average order were relatively unchanged from the prior-year period. On a Constant $ basis, Brazil’s sales from both Beauty and Fashion & Home products were relatively unchanged.
Mexico's Constant $ revenue decline was primarily due to a decrease in Active Representatives, partially offset by higher average order. Constant $ revenue growth in Venezuela was primarily due to higher average order, partially offset by a decrease in Active Representatives. Venezuela's average order benefited from the inflationary impact on pricing that was partially offset by a decrease in units sold. Venezuela's Active Representatives and units sold were negatively impacted by the reduced size of our product offering, primarily the result of our increased difficulty to import products and raw materials. Additional information on our Venezuela operations is discussed in more detail above.
Operating margin was negatively impacted by 2.2 points as compared to the prior-year period due to the Venezuelan special items in conjunction with highly inflationary accounting as discussed further above. Operating margin was also negatively

49



impacted by .4 points as compared to the prior-year period from higher CTI restructuring. Adjusted operating margin decreased .6 points, or increased .1 points on a Constant $ basis, primarily as a result of:
a benefit of 1.1 points from lower Representative, sales leader and field expense, which was primarily attributable to a shift towards more cost-effective incentives;
a benefit of 1.0 point associated with the net impact of the incremental tax credits in Brazil recognized as revenue in 2014 and 2013, discussed above;
a benefit of .3 points from lower net brochure costs, driven by Venezuela as a result of cost savings initiatives;
a decline of .8 points due to lower gross margin caused primarily by 1.4 points from the unfavorable impact of foreign currency transaction losses, primarily in Venezuela, and .9 points from higher supply chain costs, which was driven by higher obsolescence primarily in Venezuela and Brazil. These items were partially offset by 1.8 points from the favorable net impact of mix and pricing. Benefits from pricing include the realization of price increases in markets experiencing relatively high inflation (Venezuela and Argentina) on inventory acquired in advance of such inflation;
a decline of .8 points from higher distribution expenses, driven by inflation in Venezuela and Argentina and other cost pressures in the region; and
a decline of .7 points from higher administrative expenses, partially driven by inflationary costs, and increased legal expenses associated with labor and civil related matters in Brazil.
Europe, Middle East & Africa – 2015 Compared to 2014
 
 
 
 
 
 
%/Point Change
 
 
2015
 
2014
 
US$
 
Constant $
Total revenue
 
$
2,272.3

 
$
2,705.8

 
(16
)%
 
6
 %
Operating profit
 
217.1

 
300.9

 
(28
)%
 
4
 %
CTI restructuring
 
3.5

 
23.2

 
 
 
 
Asset impairment and other charges
 
6.9

 

 
 
 
 
Adjusted operating profit
 
$
227.5

 
$
324.1

 
(30
)%
 
(1
)%
 
 
 
 
 
 
 
 
 
Operating margin
 
9.6
%
 
11.1
%
 
(1.5
)
 
(.2
)
CTI restructuring
 
.2

 
.9

 
 
 
 
Asset impairment and other charges
 
.3

 

 
 
 
 
Adjusted operating margin
 
10.0
%
 
12.0
%
 
(2.0
)
 
(.7
)
 
 
 
 
 
 
 
 
 
Change in Active Representatives
 
 
 
 
 
 
 
7
 %
Change in units sold
 
 
 
 
 
 
 
5
 %
Amounts in the table above may not necessarily sum due to rounding.
Total revenue decreased 16% compared to the prior-year period, due to the unfavorable impact from foreign exchange including the strengthening of the U.S. dollar relative to the Russian ruble, and to a lesser extent, due to the sale of Liz Earle. On a Constant $ basis, revenue grew 6%, primarily driven by Eastern Europe. The region's Constant $ revenue was negatively impacted by approximately 2 points as a result of the sale of Liz Earle. An increase in Active Representatives drove the region's Constant $ revenue growth.
In Russia, revenue declined 23%, which was unfavorably impacted by foreign exchange. On a Constant $ basis, Russia's revenue grew 23%, primarily due to an increase in Active Representatives which benefited from sustained momentum in recruiting and retention, and higher average order. In the United Kingdom, revenue declined 12%, which was unfavorably impacted by foreign exchange. On a Constant $ basis, the United Kingdom's revenue declined 5%, primarily due to a decrease in Active Representatives. In Turkey, revenue declined 15%, which was unfavorably impacted by foreign exchange. On a Constant $ basis, Turkey's revenue grew 5%. In South Africa, revenue grew 1%, which was unfavorably impacted by foreign exchange. On a Constant $ basis, South Africa’s revenue grew 19%, primarily due to an increase in Active Representatives and higher average order.
Operating margin was negatively impacted by .3 points as compared to the prior-year period due to the impact of a non-cash goodwill impairment charge associated with our Egypt business during 2015. The non-cash goodwill impairment charge in the fourth quarter of 2015 was recorded based on our annual impairment analysis. See Note 16, Goodwill and Intangible Assets on pages F-50 through F-52 of our 2015 Annual Report for more information on Egypt. Operating margin benefited by .7 points as

50



compared to the prior-year period from lower CTI restructuring. Adjusted operating margin decreased 2.0 points, or .7 points on a Constant $ basis, primarily as a result of:
a decline of 2.4 points due to lower gross margin caused primarily by an estimated 4 points from the unfavorable impact of foreign currency transaction losses, partially offset by approximately 1.2 points from lower supply chain costs and .8 points from the favorable net impact of mix and pricing. Supply chain costs benefited primarily as a result of lower overhead costs which were attributable to increased productivity. The favorable net impact of mix and pricing was primarily driven by Eastern Europe;
a decline of .6 points from higher Representative, sales leader and field expense; and
a net benefit of 2.0 points primarily due to the Constant $ revenue growth with respect to our fixed expenses and a reduction of corporate expenses, which are allocated from Global.
Europe, Middle East & Africa – 2014 Compared to 2013
 
 
 
 
 
 
%/Point Change
 
 
2014
 
2013
 
US$
 
Constant $
Total revenue
 
$
2,705.8

 
$
2,898.4

 
(7
)%
 
1
 %
Operating profit
 
300.9

 
406.7

 
(26
)%
 
(18
)%
CTI restructuring
 
23.2

 
17.7