Avon 2015 Annual Report Download - page 38

PART II
Review – Global and Other Expenses” within MD&A on pages 54 through 56, Note 11, Employee Benefit Plans on pages F-34 through F-42 of our 2015
Annual Report, Note 16, Goodwill and Intangibles on pages F-51 through F-53 of our 2015 Annual Report, Note 3, Discontinued Operations and Divestitures
on pages F-15 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 59 through 60) 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-15 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 38 through 46, 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 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
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