Avon 2014 Annual Report Download - page 32

PART II
Specifically, as compared to the prior-year period, foreign currency has impacted our consolidated financial results as a result of foreign
currency transaction losses (within cost of sales, and selling, general and administrative expenses), which had an unfavorable impact to
Adjusted operating profit of an estimated $155, foreign currency translation, which had an unfavorable impact to Adjusted operating profit
of approximately $160, and foreign exchange losses (within other expense, net), which had an unfavorable impact of approximately $41
before tax.
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 have 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 and brochure costs). Since we announced the $400M Cost Savings Initiative, we have reduced our global headcount by
approximately 15% and achieved the cost-savings target of $400 before taxes. While we have achieved the targeted cost savings, we have
not yet achieved our targeted low double-digit operating margin primarily due to the unfavorable impact of foreign exchange, inflationary
pressures and continued revenue decline in North America. We continue to analyze our cost structure and may incur additional restructuring
charges in an effort to achieve additional cost savings. See Note 14, Restructuring Initiatives on pages F-43 through F-47 of our 2014 Annual
Report for more information.
In 2015, we expect to continue to make progress against our strategic objectives. Constant-dollar revenue is expected to be up modestly;
however, assuming January foreign currency spot rates, reported revenue is expected to decline due to an estimated 12 point negative
impact from foreign currency translation. We also expect foreign currency transaction costs and translation adjustments to have a significant
negative impact on Adjusted operating profit. We expect Constant-dollar Adjusted operating margin to be up modestly as we plan to offset
most of the foreign currency transaction impact with price increases and further actions to reduce costs. However, due to foreign currency
translation, we expect that Adjusted operating margin could be down as much as 1 point in reported dollars.
The potential impact from a pending tax law change on cosmetics in Brazil, called Industrial Production Tax (“IPI”), has not been factored
into our outlook at this time. We are presently assessing this pending tax law change and looking for ways to mitigate the potential impact.
In February 2014, the Venezuelan government announced a foreign exchange system (“SICAD II”) which began operating on March 24,
2014. As SICAD II represents the rate which better reflects the economics of Avon Venezuela’s business activity, we concluded that we
should utilize the SICAD II exchange rate to remeasure our Venezuelan operations as of March 31, 2014. 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 represents a
devaluation of approximately 88%. In addition, as a result of using the historical U.S. dollar cost basis of non-monetary assets, such as
inventories, these assets continued to be remeasured, following the change to the SICAD II rate, at the applicable rate at the time of
acquisition. 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 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 addition to the negative impact to operating margin, 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. In February 2015, the Venezuelan government announced that the SICAD II market would no longer be
available, and a new open market foreign exchange system (“SIMADI”) was created. In February 2015, the SIMADI exchange rate was
approximately 170. We believe that significant uncertainty exists regarding the foreign exchange mechanisms in Venezuela, as well as how
any such mechanisms will operate in the future and the availability of U.S. dollars under each mechanism. We are still evaluating our future
access to funds through the SIMADI or other similar markets. See “Segment Review – Latin America” in this MD&A for further discussion of
Venezuela.
In December 2014, the Company settled charges of violations of the books and records and internal control provisions of the Foreign
Corrupt Practices Act (the “FCPA”) with U.S. Department of Justice (the “DOJ”) and the U.S. Securities and Exchange Commission (the
“SEC”). This included the $68 fine related to Avon China paid in December 2014 in connection with the DOJ settlement, and $67 in
disgorgement and prejudgment interest related to Avon Products, Inc. paid to the SEC in January 2015, both of which had been previously
accrued for before December 31, 2014. In the fourth quarter of 2014, the Company also recorded a net tax benefit of approximately $19