Avon 2015 Annual Report Download - page 28

PART I
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.
If we incur additional indebtedness, the related risks that we now face (including those described above), could intensify.
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