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Avon's 2013 Results Not So Pretty

February 13, 2014

McCoy says execution and macro-economic factors impacted second half of the year.

The fourth quarter and full year 2013 results are in for Avon Products.

Total revenue was $10.0 billion, a drop of 6%, or 1% in constant dollars, according to the direct-seller, with total units down 5% and price/mix up 4%. Total beauty sales fell 7%, or 2% in constant dollars
"Looking back at 2013, we made progress addressing tough legacy issues, identifying and beginning to resolve operational challenges, and rebuilding our management team.  Although the second half of the year was impacted by both execution and macro-economic factors, I'm pleased that we are making headway toward our financial goals and Avon's return to profitable growth," said Sheri McCoy, CEO. "While much work remains to be done, we continue to make progress toward building a better, simpler and more stable business."

Operating profit was $427 million and operating margin was 4.3%, down 70 basis points from 2012. Adjusted operating profit was $791 million, and adjusted operating margin was 7.9%, up 130 basis points from 2012.

Full-year net loss from continuing operations was $1 million compared with net income from continuing operations of $93 million.  Adjusted net income from continuing operations was $451 million compared with $373 million in 2012.

Cash flow from operations was $540 million for the twelve months ended December 31, 2013, $4 million lower than in the same period in 2012, which the company said was unfavorably impacted by the make-whole premiums of approximately $90 million paid in connection with the prepayment of the company's private notes and 2014 notes, higher contribution to the U.K. pension plan, as well as higher payments for employee incentive compensation. Partially offsetting these unfavorable impacts was improved adjusted operating profit, according to Avon. The overall net cash used in the twelve months ended December 31, 2013 was $102 million, compared with net cash used of $36 million for the same period in 2012. The increase is primarily due to the paydown of the Company's debt, which was partially offset by lower dividends paid.  

Avon's net debt (total debt less cash) as of Dec. 31, 2013 was $1.6 billion, down $376 million from Dec. 31, 2012. For the twelve months ended Dec. 31, 2013, Avon reduced the overall debt balance by $475 million.

During 2013, Avon said the following items had a significant impact on its financial results:

• Avon recorded non-cash impairment charges within operating profit of $159 million pre-tax. This included a charge of $117 million pre-tax related to the Service Model Transformation ("SMT") project, as a result of the Company's decision to halt further roll-out of the SMT project beyond the pilot market of Canada in the fourth quarter. In addition, during the third quarter, the Company recorded a non-cash impairment charge of $42 million pre-tax, and a valuation allowance for deferred tax assets related to the China business of $9 million. These items had a negative impact of $0.28 per diluted share.
• Avon recorded a loss on extinguishment of debt in the first and second quarters of approximately $86 million pre-tax, or $0.12 per diluted share, associated with the prepayment of the $535 million outstanding principal of the Company's private notes and the $500 million outstanding principal of the Company's 2014 notes, including make-whole premiums, and the repayment of $380 million of the outstanding term loan principal.
• Avon recorded an aggregate accrual related to the previously disclosed government Foreign Corrupt Practices Act ("FCPA") investigations of $89 million within operating profit, of which $12 million was recorded in the second quarter. Based on the status of the company's current settlement negotiations with the DOJ and the staff of the SEC, including the level of monetary penalties being discussed, an additional $77 million was recorded in the fourth quarter, and the company estimates the aggregate amount of any potential settlements with the government could exceed this accrual by up to approximately $43 million. There can be no assurance that the company's efforts to reach settlements with the government will be successful or, if they are, what the timing or terms of such settlements will be.
In the final quarter of 2013, total revenue of $2.7 billion decreased 10%, or 4% in constant dollars. Total units decreased 10% and price/mix was up 6% during the quarter. Active representatives were down 5% while average order increased 1%. Beauty sales declined 11%, or 4% in constant dollars.   Fourth-quarter 2013's net loss from continuing operations was $68 million, compared with a net loss from continuing operations of $36 million in the fourth quarter of 2012. Fourth-quarter 2013's adjusted net income from continuing operations was $151 million compared with $154 million in the fourth quarter of 2012.

In the fourth quarter, North America Beauty sales declined 25%, driven primarily by skincare and personal care, on both a reported and constant-dollar basis, according to Avon.

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