EDGAR 10-K Filing

Company CIK: 8868
Filing Year: 2023
Filename: 8868_10-K_2023_0000008868-23-000005.json

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ITEM 1. BUSINESS
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, 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, and our strategy is to expand to omnichannel. Since our merger with Natura Cosméticos S.A., we have updated our reportable segments to align with how the business is currently operated and managed. We have identified two reportable segments based on geographic operations: Avon International and Avon Latin America. In prior periods, the Company reported four segments: Europe, Middle East and Africa, Asia Pacific, South Latin America and North Latin America. 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,", and in Note 14, Segment Information, to the Consolidated Financial Statements included herein. We refer to each of the Notes to the Consolidated Financial Statements included herein as a "Note." Information about geographic areas is included in Note 14, Segment Information to the Consolidated Financial Statements included herein. All of our consolidated revenue is derived from operations of subsidiaries outside of the United States ("U.S.").
In May 2019 we and Natura Cosméticos S.A., a Brazilian corporation (sociedade anônima) ("Natura Cosméticos"), entered into an Agreement and Plan of Mergers (the "Merger Agreement"), pursuant to which the Company and Natura Cosméticos were acquired by and became wholly-owned subsidiaries of Natura &Co, Holding S.A., a Brazilian corporation (sociedade anônima) ("Natura &Co") in January 2020. Natura has stock listed on the B3 S.A. - Brasil, Bolsa, Balcão stock exchange in Brazil and American Depositary Shares traded on the New York Stock Exchange ("NYSE"). With the completion of this transaction, our common stock was removed from trading on the NYSE, and we became a privately held company.
Distribution
During 2022, we had sales operations in 51 countries and territories, and distributed our products in 23 other countries and territories. At December 31, 2022, we had sales operations in 49 countries.
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, with a strategy to expand to omnichannel. Our priority in the omnichannel model is to accelerate digital social selling through Representative engagement, activation, training, direct customer delivery service, and e-commerce. 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. On average we had approximately 4 million Active Representatives during the year ended December 31, 2022, 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 globally.
A Representative contacts their customers directly, selling primarily through our brochure (whether paper or online), which highlights new products and special promotions (or incentives) 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 typically generated every three to four weeks. A purchase order is processed and the products are picked at a distribution center and delivered to the Representative usually through a combination of local and national delivery companies. Historically, the Representative then delivers the merchandise and collects payment from the customer for her own account. Several of our larger countries have begun to offer direct to customer delivery of the ordered products. A Representative generally receives a refund of the price the Representative paid for a product if the Representative chooses to return it.
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. We are actively deploying and training the Representatives on additional digital tools and sales methods to help increase its customer reach.
While we continue to grow the penetration of our Representative mobile application, AvonON, we are proud to have increased the usage by 24% in the year ended December 31, 2022, with a 12% increase in engaged users who access the app on a regularly basis in that year, which we believe will eventually lead to an increased number of Hybrid Representatives (who serve customers online & offline). We believe this will be key to our retention & growth of sellers’ segment at Avon since Hybrid Representatives have higher average sales and order more frequently.
In some markets, particularly in Asia Pacific, 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 of the Avon brand, channel with consumers and help reinforce our beauty image. In certain markets, we allow our beauty centers and other retail-oriented and direct-to-consumer opportunities to reach new customers in complementary ways to direct selling. Avon increasingly utilizes e-commerce and markets its products through consumer websites.
The recruiting or appointing and training of Representatives are the primary responsibilities of independent leaders supported by zone managers. 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. As described above, the Representative is the "store" through which we primarily sell our products and, given the high rate of turnover among Representatives, which is 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, demonstration products and training. In order to support the efforts of Representatives to reach new customers, specially designed sales aids, digital content and tools, promotional pieces, customer flyers and various forms of advertising may be used. In addition, we seek to motivate the 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. We believe that the training meetings are an integral part of enabling the Representatives to provide customers with the advice and tools to better service her customer base as well as teach sales techniques and provide recognition for sales performance.
We use a number of merchandising techniques, including promotional pricing for new products, combination offers, trial sizes and samples, and the promotion of products packaged as gift items. In most markets, for each sales campaign, we publish a distinctive brochure (whether paper or online), in which we introduce new products and special promotions on selected items or give particular prominence to a particular category.
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 often compete on a 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 as well as significant competition from other non-direct selling earnings opportunities for which the existing Representatives or potential Representatives could avail themselves. Providing a compelling earnings opportunity for the 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 the Representatives; the Representatives’ earnings opportunity as well as the amount and type of field incentives we offer the 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 2022, our international operations, outside of the U.S., were conducted primarily through subsidiaries in 51 countries and territories. At December 31, 2022, this had reduced to 49 countries and territories. Outside of the U.S., our products were also distributed in 23 other countries and territories. In March 2016, we separated from our North America business, which had consisted of the Company's operations in the U.S., Canada and Puerto Rico; this business has been presented as discontinued operations for all periods presented. As a result, all of our consolidated revenue is derived from operations of subsidiaries outside of the U.S. During 2022, approximately 48% of our consolidated revenue was derived from Avon Latin America, and approximately 52% was derived from Avon International. Further, approximately 21% of our consolidated revenue during 2022 was derived from Brazil, which is our largest market and is included within the Avon Latin America reportable segment.
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, pandemic situations, unfavorable social, economic and political conditions, and other developments such as natural disasters. On February 6, 2023, a magnitude 7.8 earthquake occurred in a region of Turkey where approximately 25% of our Turkey-based Representatives and Sales Leaders are located. We are monitoring the impact of this event, which may adversely affect our revenues and levels of bad debt.
For more information, see "Item 1A. Risk Factors-Risks Related to Our International Operations-Our ability to conduct business in our international markets may be affected by economic, political, legal, tax and regulatory risks" and "-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."
Manufacturing and Sourcing
We manufacture and package the majority of our Beauty products, which are formulated and designed by our staff of chemists, designers and artists. Raw materials, consisting chiefly of essential oils, chemicals, containers and packaging components required for our Beauty products are purchased from a range of third-party suppliers. The remainder of our Beauty products and all of our Fashion & Home products are purchased from various third-party manufacturers.
Our products are affected by the cost and availability of materials such as glass, fragrance and fuel. For the vast majority of items we have more than one source of supply available. We believe that we can continue to obtain sufficient raw materials and supplies to manufacture and produce our Beauty products for the foreseeable future. However, our ability to source the raw materials underlying our product offerings has been adversely affected by events beyond our control in recent years, including the COVID-19 pandemic and the ongoing war between Ukraine and Russia, both events which significantly affected the reliability of global supply chains for a wide range of consumer products.
Additionally, we design the brochures (whether paper or online) that are used by the Representatives to sell our products. The brochures are then produced on our behalf by a range of printing suppliers.
The loss of any one supplier would not have a material impact on our ability to source raw materials for the majority of our Beauty products or source products for the remainder of our Beauty products and all of our Fashion & Home products or paper for the brochures. However, our ability to source raw materials would be adversely affected if we were to lose multiple suppliers at once.
See "Item 2. Properties" for additional information regarding the location of our principal manufacturing facilities.
Product Categories
Both of our product categories individually account for 10% or more of consolidated net sales in 2022. The following is the percentage of net sales by product category for the years ended December 31:
2022 2021 2020
Beauty 78 % 74 % 74 %
Fashion & Home 22 % 26 % 26 %
2022 and 2021 were impacted by certain indirect tax items in Brazil and is excluded from net sales in our calculation above. See Note 5: Revenue for more information.
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 relevant markets, 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 vital to developing new products, including formulating high performing beauty products relevant to women’s needs, and improving existing products. As part of our Open Up & Grow strategy and to improve our brand competitiveness, we are focusing on developing breakthrough new technology and product innovation to deliver accessible Beauty products that provide visible consumer benefits while also delivering the Company’s ambitious sustainability goals. R&D also works extensively with third party companies to bring in new ideas, help accelerate development time and deliver against local market trends.
Our global R&D innovation center is located in Suffern, New York, which, as described in “Item 2. Properties,” will have its current activities transferred to Brazil and Poland by the end of its fiscal quarter ending June 30, 2024. There is a team of expert scientists, researchers and technicians applying the disciplines of science to developing and bringing products to market around the world. Relationships with dermatologists, scientists and other specialists enhance our ability to deliver new formulas and ingredients to market. Additionally, we have R&D centers located in Brazil, China, Mexico, the Philippines, Poland, South Africa and the UK.
The amounts incurred on research activities relating to the development of new products and the improvement of existing products were $40.8 in 2022, $39.3 in 2021 and $36.5 in 2020. 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 laws and regulations impacting our global operations has not had, and currently is not anticipated to have, a material adverse effect on our financial position, capital expenditures or competitive position. As part of the Natura &Co group, we are now in the process of working towards our B Corp accreditation, as set by B Lab, Inc., which we aim to achieve by 2026.
As a B Corp, our board of directors would be required to promote the success of the Company for the benefit of our shareholders as a whole and, through our business and operations, to have a material positive impact on society and the environment, taken as a whole. As a result of the fact that our board of directors would be required to consider other stakeholders and issues in addition to shareholders’ interests, we may take in the future actions that we believe will benefit some or all of our stakeholders, even if those actions do not maximize our financial performance. For example, we may choose to revise our policies in ways that we believe will further promote environmental, social and governance issues, even though such changes may be more costly than other alternatives. Nonetheless, we believe that obtaining B Corp certification, and other environmental, social and governance certifications that we may obtain from time to time, would strengthen our credibility and trust among our customers, employees and business partners as well as within our industry by bolstering our commitment towards our stakeholders.
Human Capital Resources
At December 31, 2022, Avon employed approximately 13,000 employees. Of these, approximately 150 were employed in the United States. In Avon International females constituted approximately 66.5% of our workforce and 68.5% of our managerial employees and in Avon Latin America females constituted approximately 59.6% of our workforce and 56.5% of our managerial employees.
At Avon, we’re the company that strives to put purpose, people and relationships at the heart of everything we do and we’re committed to generating a positive environmental, economic and social impact for our communities across the globe.
We believe beauty is for everyone and that it is beautiful to be you. We celebrate our differences, champion self-expression and are committed to inclusion for all. We embrace diversity and individuality to build a culture that represents our communities and enables everyone to bring their best self to work. Our Avon Expectations for all Associates and Management clearly outline a minimum standard for appropriate behavior. Our employee resource groups enable Associates to have a safe space for learning, honest conversations, coaching and hold the business to account - highlighting areas for improvement and providing feedback on policy and decision-making.
At Avon we are committed to protecting human rights and being humankind. Our aim is to close the gender pay equity gap by 2023 ensuring that associates who perform the same role in the same location with the same responsibilities, experience and performance should be paid equally whatever their gender is, which we have achieved. We also commit to 50% of women in senior management roles, which we are currently meeting. We are also committed to paying living wage or above to all our employees by 2023, which is also true.
We continue with our focus on inclusive hiring to accelerate diverse representation at all levels as well as building an inclusive culture through our employee networks and educational events throughout the year. Building a culture of psychological safety has been at the heart of our culture transformation, with a keynote and recommended learning for all associates as well as the start of our senior leader team effectiveness model to increase psychological safety in teams across the organization.
In 2022, we have also continued to strive for an inclusive and equitable culture through eliminating bias and discrimination in our practices and policies - committing to equally honoring all family structures and relationships through our equity and inclusion position and our global menopause policy, supporting women through perimenopause and menopause through optimizing working conditions, flexible working and additional paid leave.
Avon International
In 2022, we demonstrated our purpose with our support to associates around the Ukrainian War to support people there with creative financial support packages, offers of relocation and help from neighboring countries (especially Poland and Romania). Many of our Polish and Romanian associates took up the opportunity of our new volunteering policy to support Ukrainian refugees as they arrived in the first few weeks of the war. We also ran webinars to support people with their mental well-being through times of crisis - with over 1 000 people joining. Additionally, we also ran separate sessions with an external psychologist and crisis management consultant dedicated to People Managers to support provide them tools so they could support their teams in this stressful situation.
We continued focus on our Employee Value Proposition (EVP) - ‘The Beauty of Doing Good’, tracking progress every 6 months through our employee engagement survey, Glint. We have continued to focus on the growth of our associates, launching LinkedIn Learning in February and were delighted to achieve top quartile activation versus industry peers in the first year of launch. During last year we spent almost 10 000 hours learning and gaining new skills through LinkedIn Learning, 58% of our associates keep using the platform and we continue to engage them in gaining new skills.
We have continued to invest in building leaders at all levels of the organization The “Leading with Heart” program for first -time people managers covers key concepts critical to being an effective and compassionate leader. 274 associates attended this program. Through the “Leading with Purpose” program, participants learn how to leverage their personal strengths while
maximizing impact as senior leaders. 442 associates attended this program. We have invested in executive coaching for leaders stepping up into critical leadership roles and continue to support leadership teams with ongoing team development support.
In July we held a “Simple and Agile” Hackathon - to engage the whole organization to remove some of the pain points and bureaucracy in the organization, The first day was a day of learning with over 4887 hours of learning and on day 2, over 1473 associates joined session to hack 8 problems or opportunities.
One of the Hackathon topics was flexible working and associates worked together to explore different ways we can continue to deliver on our EVP promise to support associates to “work in a way that works for you” and we used the ideas to relaunch our flexible working philosophy - trusting associates to manage their work, to work flexibly between the office and home to enable them to manage their whole lives.
We are really pleased that despite a year of people challenges, we have increased overall Engagement up 2 points and have continued to make progress against our key areas of focus. This has been reflected in our Glint scores, Feedback score up by 1 point, Manager up 2, Career stayed the same, Growth up 2, Equal Opportunity up 3.
Avon Latin America
By 2022, Glint's focus was to evolve the culture of continuous listening and ensure that steps were taken to increase engagement. There was a strong focus on internal movements of talent in managerial positions and above, with 87% of new roles in 2022 being filled by internal hires (administrative public only). We have also invested in executive coaching for leaders stepping up into critical leadership roles and continue to support leadership teams with ongoing team development support. We hold workshops with Avon leadership boards to focus on excellence on execution and to unleash the power of collaboration between areas.
Transformation Plan, Open Up & Grow and Avon Integration
In January 2016, we announced a transformation plan (the "Transformation Plan") which was completed in 2018. In September 2018, we initiated a new strategy to return Avon to growth ("Open Up Avon"). In May 2020, the new leadership of Avon International refreshed our strategy ("Open Up & Grow") which aims to return Avon International to growth over the next three years.
In addition, subsequent to the merger of Natura and Avon in January 2020, an integration plan (the "Avon Integration") was established to create the right global infrastructure to support the future vision of the Natura &Co Group, while also identifying synergies primarily between Avon LATAM and Natura &Co Latin America.
See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Overview" for more information on these items.
Acquisitions and Dispositions
In May 2019 we and Natura Cosméticos, a Brazilian corporation entered into the Merger Agreement, pursuant to which the Company and Natura Cosméticos were acquired by and became wholly-owned subsidiaries of Natura &Co Holding, S.A. ("Natura &Co" or "Natura &Co Holding") in January 2020. With the completion of this transaction, our common stock was removed from trading on the NYSE, and we became a privately held company.
During 2021, 2020 and 2019, we disposed of businesses and assets as part of the Open up Avon strategy and later the Open Up & Grow strategy. In February, May and June 2019, we completed the sale of Avon Manufacturing (Guangzhou), Ltd, Maximin Corporation Sdn Bhd ("Malaysia Maximin") and the Rye office, respectively. In April and August 2020, we completed the sale of the Hungary distribution center and the China Wellness Plant, respectively. In June, September, November and December 2021, we completed the sale of a branch of our Italian business, the Spanish distribution center, the manufacturing business in India and the business in Saudi Arabia, respectively.
On July 1, 2021, the Company sold Avon Luxembourg, including our Mexican business, to a subsidiary of Natura &Co Holding for $150, with the proceeds used to repay maturing loans of $150 borrowed under the $250 Revolving Credit Facility with a subsidiary of Natura &Co Holding.
Refer to Note 3, Discontinued Operations and Assets and Liabilities Held for Sale to the Consolidated Financial Statements included herein, for additional information.
COVID-19 Pandemic
Beginning with the first quarter of 2020, there has been a worldwide impact from the COVID-19 pandemic as during 2020, many markets were subject to lockdown restrictions to varying degrees, which limited our ability to recruit and enroll Representatives, operate manufacturing facilities and distribution centers and to process and deliver orders. In 2021 and 2022,
the continuing economic disruption caused by the COVID-19 pandemic also resulted in inflationary pressures on the cost of certain raw materials used in the production of essential items due to the increased demand for these inputs worldwide.
These inflationary pressures were compounded in 2022 by the ongoing war between Ukraine and Russia which adversely impacted energy prices around the globe and further increased inflationary pressures. As of the date of this report, we are unable to estimate the longer-term economic impact of the ongoing Russia-Ukraine war and of any further impacts of the COVID-19 pandemic on our business. We will continue to review our revenue, investments, expenses and cash outflows, as well as adjusting our relationships with suppliers.
Furthermore, the actions outlined above are continuously being re-evaluated in light of global developments relating to COVID-19. See also “Item 1A. Risk Factors-The COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, manufacturing, supply chains and distribution systems, and we have experienced and expect to continue to experience unpredictable negative effects associated with the pandemic".
Ongoing war between Ukraine and Russia
On February 24, 2022, Russia launched a military invasion of Ukraine. The ongoing war between Ukraine and Russia has provoked strong reactions from the United States, the UK, the European Union (the “EU”) and various other countries around the world, including the imposition of broad financial and economic sanctions against Russia.
As a result of the ongoing war in Ukraine, our Ukraine Distribution center operations are currently suspended for an indeterminate period with orders being shipped to the market from the Polish Distribution center instead. For more information, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Overview-Ongoing war between Ukraine and Russia."
Website Access to Reports
Our filings with the SEC, including reports, proxy and information statements, and other information regarding the Company are 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
ITEM 1A. RISK FACTORS
You should carefully consider each of the following risks and all of the other information in our Consolidated Financial Statements and Notes thereto contained herein. 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.
Summary of Risk Factors
The following is a summary of the risk factors our business faces. The list below is not exhaustive, and investors should read this “Risk Factors” section in full. Some of the risks we face include:
Summary of Risks Related to the Transaction
•The expected benefits from integrating our operations with Natura &Co’s operations may not be achieved. Even if our respective operations are successfully integrated, we may not realize the full benefits of the Transaction, within the expected time frame, if at all.
•Third parties may alter existing contracts or relationships with us as a result of the Transaction. Any loss or distraction of our customers, employees, Representatives, suppliers, vendors, distributors, landlords, lenders, licensors, joint venture partners and other business partners, could have a material adverse effect on our business.
Summary of Risks Related to Our Business Strategy
•Our ability to improve our financial and operational performance and implement our global business strategy is dependent upon a number of factors, and there can be no assurance if and when any of these initiatives will be successfully and fully executed or completed.
•We may experience difficulties, delays or unexpected costs in completing Open Up & Grow and Avon Integration and any other restructuring and cost-saving initiatives, including achieving any anticipated savings and benefits. If we are
unable to realize these savings or benefits, or otherwise fail to invest in the growth initiatives, our business may be adversely affected.
•There can be no assurance that we will be able to improve revenue, margins and net income, or achieve profitable growth in the future, particularly in our largest markets and developing and emerging markets, such as Brazil, Mexico and Russia. 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, competitive pressures or other market pressures in one or more particular regions.
Summary of Risks Related to Our Business Model
•We face intense competition and can make no assurances about our ability to overcome our competitive challenges. 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 the Representatives or end customers perceive competitors’ products as having greater appeal, then our sales, results of operations and cash flows will be adversely affected.
•Third-party suppliers provide, among other things, the raw materials required for our Beauty products. The loss of these suppliers, a supplier’s inability to supply a raw material or a finished product or a disruption or interruption in the supply chain may adversely affect our business. We may be adversely affected by (i) fire, natural disasters, disease outbreaks or pandemics, such as COVID-19, shortages of goods, services or labor, delays in obtaining key supplies, strikes and stoppages, power shortages, failures in the systems, forest fires and deforestation, among others, where we are unable to otherwise service the affected region, (ii) significant disruptions in logistics infrastructure, and (iii) fluctuating fuel prices within our distribution network.
Summary of Risks Related to Our International Operations
•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. There can be no assurance that foreign currency fluctuations and restrictions will not have a material adverse effect on our business, assets, financial condition, liquidity, results of operations or cash flows.
•The ongoing war between Ukraine and Russia has resulted in the interruption of our operations in Ukraine for an indeterminate period and we cannot assure you that our business in Russia will not be interrupted as well. In addition, the ongoing war between Ukraine and Russia has provoked strong reactions from the United States, the UK, the EU and various other countries around the world, including the imposition of severe financial and economic sanctions on Russia which could have a material adverse effect on our business in that country. Furthermore, while the precise effect of the ongoing war and the sanctions on the Russian and global economies remains uncertain, should tensions continue to increase, financial markets may continue to experience significant volatility as well as economic and security consequences including, but not limited to, supply shortages of different kinds, increases in prices of commodities, including piped gas, oil and agricultural goods, significant disruptions in logistics infrastructure, telecommunications services, the risk of unavailability of information technology systems and infrastructure, among others.
•Our ability to conduct business in our international markets may be affected by economic, political, legal, tax and regulatory risks. In the event that any jurisdiction in which we operate or plan to operate imposes any new laws, regulations, restrictions and/or other barriers to entry, our ability to expand may be limited and our growth and development may be adversely affected.
Summary of Risks Related to IT and Cybersecurity Matters
•A failure, disruption, cyberattack, 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. Our and our third-party service providers’ data, IT systems and infrastructure may be vulnerable.
•Unauthorized disclosure of sensitive or confidential Representative or customer information or our failure or the perception by our Representatives or customers that we failed to comply with privacy laws or properly address privacy concerns could materially harm our business and standing with our Representatives and customers. We cannot provide assurance that our security measures will prevent further security breaches.
Summary of Risks Related to Financial Matters
•Our credit ratings are below investment grade, which could limit our access to financing, affect the market price of our financing and increase financing costs. A downgrade in our credit ratings may adversely affect our access to liquidity.
•We may not effectively manage risks associated with the replacement of benchmark indices. Interest rates on our financial instruments tied to benchmark rates, as well as the expenses associated with those financial instruments, may be adversely affected.
Summary of Risks Related to Legal Matters
•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.
•For example, we have been named a defendant in numerous personal injury lawsuits filed in U.S. courts, alleging that certain talc products we sold in the past were contaminated with asbestos. We believe that the claims asserted against us in all of these cases are without merit. We are defending vigorously against these claims and will continue to do so. However, any adverse outcomes of legal proceedings or settlements, either in an individual case or in the aggregate, could be material and in excess to what has been accrued.
•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.
Summary of General Risk Factors
•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.
•Our success depends, in part, on our key personnel. 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.
•The COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, manufacturing, supply chains and distribution systems, and we have experienced and expect to continue to experience unpredictable negative effects associated with the pandemic. If the COVID-19 pandemic continues to adversely affect the global economy and/or adversely affect our business, financial condition, liquidity or results of operations, it may also increase the likelihood and/or magnitude of other risks described in this “Risk Factors” section.
Risks Related to the Transaction
Now that the Transaction has been consummated, the expected benefits from integrating our operations with Natura & Co's operations may not be achieved.
The success of the Transaction depends, in part, on the ability of Natura &Co and its subsidiaries and businesses other than Avon (including Natura Cosméticos, Aesop, The Body Shop and their respective subsidiaries) and Avon to realize the expected benefits from integrating their respective operations. No assurance can be given that Natura &Co and Avon will be able to integrate their respective operations without encountering difficulties, which may include, among other things, the loss of key employees, diversion of management attention, the disruption of our respective ongoing businesses or possible inconsistencies in standards, procedures and policies. Additionally, Natura &Co and Avon may be required to make unanticipated capital expenditures or investments in order to maintain, integrate, improve or sustain our operations. Integrating our respective operations may involve additional unanticipated costs and financial risks, such as the incurrence of unexpected write-offs, the
possible effect of adverse tax and accounting treatments and unanticipated or unknown liabilities relating to Natura &Co or Avon. All of these factors could decrease or delay the expected accretive effect of the Transaction.
Even if our respective operations are successfully integrated, we may not realize the full benefits of the Transaction, including the synergies, cost savings and growth opportunities, within the expected time frame, if at all. Natura &Co and Avon continue to evaluate the estimates of synergies to be realized from the Transaction. However, the actual cost savings, the costs required to realize the cost savings and the source of the cost savings could differ materially from the estimates of Natura &Co and Avon.
Further, Natura &Co and Avon may not achieve the targeted operating or long-term strategic benefits of the Transaction. In addition, Natura &Co and Avon may not accelerate growth by increasing investments in digital, product innovation and brand initiatives. If Natura &Co and Avon are unable to achieve the objectives, or are not able to achieve our objectives on a timely basis, the anticipated benefits of the Transaction may not be realized fully or at all. An inability to realize the full extent of, or any of, the anticipated benefits of the Transaction could have an adverse effect on the financial condition, results of operations and cash flows of Natura &Co and Avon and could limit Natura &Co’s and Avon’s ability to achieve the anticipated benefits of the Transaction.
In addition, the COVID-19 pandemic has created significant volatility, uncertainty and economic disruption, which may adversely affect the Natura &Co and Avon integration plans and may materially and adversely affect our results of operations, cash flows and financial position. For further information regarding the impacts of the COVID-19 pandemic on our operations, please also see "Item 1A. Risk Factors-The COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, manufacturing, supply chains and distribution systems, and we have experienced and expect to continue to experience unpredictable negative effects associated with the pandemic.
Third parties may alter existing contracts or relationships with us as a result of the Transaction.
We have contracts with customers, employees, Representatives, suppliers, vendors, distributors, landlords, lenders, licensors, joint venture partners and other business partners. As a result of the Transaction, parties with which we have business and operational relationships may experience uncertainty as to the future of such relationships and may delay or defer certain business decisions, seek alternative relationships with third parties or seek to alter their present business relationships with us. Further, parties with whom we otherwise may have sought to establish business relationships may seek alternative relationships with third parties.
In addition, current and prospective employees and Representatives may experience uncertainty about their roles now that the Transaction has been consummated and such uncertainty may have an effect on our corporate culture. There can be no assurance we will be able to attract and retain key talent, including senior leaders, to the same extent that we have previously been able to attract and retain employees and sales representatives. Any loss or distraction of our customers, employees, Representatives, suppliers, vendors, distributors, landlords, lenders, licensors, joint venture partners and other business partners, could have a material adverse effect on our business, financial condition, operating results and cash flows and could limit our ability to achieve the anticipated benefits of the Transaction.
The combined company may not realize the cost savings, synergies and other benefits that the parties expect to achieve from the Transaction.
The combination of two independent companies is a complex, costly and time-consuming process. As a result, the combined company will be required to devote significant management attention and resources to integrating the business practices and operations of Natura &Co and Avon. The integration process may disrupt the business of either or both of the companies and, if implemented ineffectively, could preclude realization of the full benefits expected by Natura &Co and Avon from the Transaction. The failure of the combined company to meet the challenges involved in successfully integrating the operations of Natura &Co and Avon or otherwise to realize the anticipated benefits of the Transaction could cause an interruption of the activities of the combined company and could seriously harm its results of operations. In addition, the overall integration of the two companies may result in material unanticipated problems, expenses, liabilities, competitive responses, loss of client relationships and diversion of management’s attention, and may cause the combined company’s share price to decline. The difficulties of combining the operations of the companies include, among others:
• coordinating geographically separate organizations;
• the potential diversion of management focus and resources from other strategic opportunities and from operational matters;
• aligning and executing the strategy of the combined company;
• retaining existing independent beauty consultants and Sales Representatives and attracting new independent beauty consultants and Sales Representatives;
• retaining existing customers and attracting new customers;
• maintaining employee morale and retaining key management and other employees;
• integrating two unique business cultures, which may prove to be incompatible;
• the possibility of faulty assumptions underlying expectations regarding the integration process;
• consolidating corporate and administrative infrastructures and eliminating duplicative operations;
• coordinating distribution and marketing efforts;
• integrating information technology, communications and other systems;
• changes in applicable laws and regulations;
• managing tax costs or inefficiencies associated with integrating the operations of the combined company;
• unforeseen expenses or delays associated with the Transaction; and
• taking actions that may be required in connection with obtaining regulatory approvals.
Many of these factors are out of the combined company’s control and any one of them could result in increased costs, decreased revenues and diversion of management’s time and energy, which could materially affect the combined company’s business, financial condition and results of operations. In addition, even if the operations of Natura &Co and Avon are integrated successfully, the combined company may not realize the full benefits of the Transaction, including the synergies, cost savings or sales or growth opportunities that Natura &Co and Avon expect. These benefits may not be achieved within the anticipated time frame, or at all. As a result, we cannot assure you that the combination of Natura &Co and Avon will result in the realization of the full benefits anticipated from the Transaction.
The financial analyses and projections considered by Natura &Co and Avon prior to the Transaction may not be realized.
The financial analyses and projections considered by Natura &Co and Avon prior to the Transaction reflected numerous estimates and assumptions that were inherently uncertain with respect to industry performance and competition, general business, economic, market and financial conditions and matters specific to Natura &Co’s and Avon’s businesses, including the factors entitled “Forward-Looking Statements” and/or entitled “Item 3. Key Information-D. Risk Factors,” all of which are difficult to predict and many of which are beyond Natura &Co’s and Avon’s control. There can be no assurance that the financial analyses and projections considered by Natura &Co and Avon will be realized or that actual results will not materially vary from such financial analyses and projections. In addition, since the financial projections cover multiple years, such information by its nature becomes less predictive with each successive year.
The consummation of the Transaction limits our ability to utilize existing US tax credits and also could be further reduced pursuant to Sections 382 and 383 of the Code if an additional ownership change occurs in the future.
As of December 31, 2019, we had approximately $660 of foreign tax and other credits available to offset future income for U.S. federal tax purposes. As a result of the ownership change resulting from the Transaction the ability to use these credits has been limited to a range of approximately $108 to $178. Our ability to utilize such credits to offset future income could be further limited, however, if the Company undergoes an additional “ownership change” within the meaning of Section 382 of 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. Prospectively if we were to undergo a further ownership change these remaining credits could be further reduced.
Risks Related to Our Business Strategy
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 Open Up & Grow and Avon Integration stabilization strategies, cost savings initiatives, restructuring and other initiatives, and achieve anticipated savings and benefits from such programs and initiatives;
•reverse declines in our 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 structure, particularly selling, general and administrative (“SG&A”) expenses;
•improve our business in the markets where we operate, including through improving field health;
•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 digital strategies, Internet platform, technology strategies and customer service initiatives, including our ability to offer a more compelling social selling experience and the roll-out of e-commerce in certain markets, especially where innovative platforms and technologies may lead to a disruption of our operations, both online and offline;
•effectively manage our outsourcing activities;
•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 through our recent structural reset of inventory processes, and 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 and enhancing our sales leadership program, the Representative experience, retention and earnings potential, along with 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; and
•estimate and achieve any financial projections concerning, for example, customer demand, 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.
We may experience financial and strategic difficulties and delays or unexpected costs in completing Open Up & Grow and Avon Integration and any other restructuring and cost-saving initiatives, including achieving any anticipated savings and benefits of these initiatives.
Subsequent to the merger of Natura and Avon in January 2020, an integration plan (the "Avon Integration") was established to create the right global infrastructure to support the future ambitions of the Natura &Co Group while also identifying synergies and opportunities to leverage our combined strength, scale and reach. Synergies will be derived mainly from procurement, manufacturing/distribution and administrative, as well as top line synergies, primarily between Avon LATAM and Natura &Co Latin America.
In September 2018, we initiated a new strategy in order to return Avon to growth ("Open Up Avon"). The Open Up Avon strategy is integral to our ability to return Avon to growth, built around the necessity of incorporating new approaches to various elements of our business, including increased utilization of third-party providers in manufacturing and technology, seeking a better fit for purpose asset base, and an increased focus on enabling our Representatives to more easily interact with the company and achieve relevant earnings. These savings have been and are expected to continue to be achieved through restructuring actions (that have resulted, and may continue to result, in charges related to severance, contract terminations and inventory and other asset write-offs), as well as other cost-savings strategies that would not result in restructuring charges. In January 2019, we announced significant advancements in this strategy, including a structural reset of inventory processes and a reduction in global workforce.
In May 2020, the new leadership of Avon International refreshed our strategy ("Open Up & Grow") which aims to return Avon International to growth over the next three years. Open Up & Grow replaces and builds on the success of the 2018 Open Up Avon strategy in order to strengthen competitiveness through enhancing the representative experience, improving brand position and relevance, accelerating digital expansion and improving costs. Over the next three years, savings are expected to continue to be achieved through restructuring actions (that may continue to result in charges related to severance, contract terminations and asset write-offs), as well as other cost-savings strategies that would not result in restructuring charges.
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-saving 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 or in offsetting the financial benefits of reaching those targets. If we are unable to realize these savings or benefits, or otherwise fail to invest in the growth initiatives, 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 improve revenue, margins and net income or achieve profitable growth.
There can be no assurance that we will be able to improve revenue, margins and net income, or achieve profitable growth in the future, particularly in our largest markets and developing and emerging markets, such as Brazil, Philippines and Russia. Our revenue in 2022 was $2,769.2, compared with $3,404.5 in 2021, and $3,625.2 in 2020. Improving revenue, margins and net income and achieving profitable growth will depend on our ability to improve financial and operational performance and execute our global business strategy, and there can be no assurance that we will be able to achieve these goals. Our ability to improve could be hindered by competing business priorities and projects.
To improve revenue, margins and net income and achieve profitable growth, we also need to successfully implement certain initiatives, including Open Up & Grow and Avon Integration, and there can be 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 improve 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, and our inability to retain our Representatives may materially adversely affect us
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, 2022, we had an average of approximately 4 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. 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,
with a strategy to expand to omnichannel successfully execute our digital strategy, including e-commerce, improve our brochure and product offerings and improve our marketing and advertising. If we are unable to constantly update our product portfolio, our ability to retain our representatives could be materially adversely affected. There can be no assurance that we will be able to achieve these objectives.
Our direct-selling model contains an inherent risk of bad debt associated with providing Representatives with credit, which is exacerbated if the financial condition of the Representatives deteriorates. 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 or regulatory body such as Brazil or the European Union, 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 may also be adversely affected by laws or regulations in the countries in which we operate that would characterize representatives as employees or otherwise oblige us to make social security contributions on their behalf.
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 preferences and trends may change due to a variety of factors, such as changes in demographic trends, changes in the characteristics and ingredients of products, new market trends, climate, negative publicity from lawsuits against us or our peers, or a weak economy in one or more of the markets in which we operate. In addition, consumers may switch to the products of competitors, or the demand for products in our segment as a whole could decline. If we are unable to anticipate changes in consumer preferences and trends, our business, financial condition and operating results could be materially adversely affected.
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 the Representatives. Failure to maintain proper inventory levels or increased product returns by the Representatives could result in a material adverse effect on our business, prospects, financial condition, liquidity, results of operations and cash flows.
Risks Related to Our Business Model
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 in which 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 and Russia.
Within the direct-selling channel, we often compete on a 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 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 the 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 as well as significant competition from other non-direct selling earnings opportunities of which our existing Representatives or potential Representatives could avail themselves. Changes to our compensation models are sometimes necessary to be competitive but could have short-term negative impacts on our total number of Representatives. 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 the Representatives or end customers perceive competitors' products as having greater appeal, then our sales, results of operations and cash flows will be adversely affected.
Third-party suppliers provide, among other things, the raw materials required for our Beauty products, and the loss of these suppliers, a supplier's inability to supply a raw material or a finished product or a disruption or interruption in the supply chain may adversely affect our business.
We manufacture and package the majority of our Beauty products, which are formulated and designed by our staff of chemists, designers and artists. Raw materials, consisting chiefly of essential oils, chemicals, containers and packaging components required for our Beauty products are purchased from a range of third-party suppliers. The remainder of our Beauty products and all of our Fashion & Home products are purchased from various third-party manufacturers. Our products are affected by the cost and availability of materials such as glass, fragrance and fuel. For the vast majority of items we have more than one source of supply available. We believe that we can continue to obtain sufficient raw materials and supplies to manufacture and produce our Beauty products for the foreseeable future. Additionally, we design the brochures that are used by the Representatives to sell our products. The brochures are then produced on our behalf by a range of printing suppliers.
The loss of any one supplier would not have a material impact on our ability to source raw materials for the majority of our Beauty products or source products for the remainder of our Beauty products and all of our Fashion & Home products or paper for the 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, restricted supply or, in a worst-case scenario, the impossibility of obtaining raw materials and packaging due to several factors over which we have no control, such as climate, agricultural production, legitimate access to genetic heritage and/or traditional associated knowledge, economic conditions, and transportation and processing costs, among others 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, and may adversely affect our business if we are unable to satisfy demand for certain products or to produce paper brochures that our Representatives can use to sell our products. Moreover, if our suppliers fail to use ethical business practices and comply with applicable laws and regulations, such as any child labor laws and other human rights laws, our reputation could be harmed due to negative publicity and our ability to supply certain products may be disrupted.
In addition, our business depends on a supply chain facing inherent logistics-related risks beyond our control and that of our suppliers, such as ocean freight disruptions, which have negatively impacted us and may continue to adversely affect us in the future. We may be adversely affected in the event of (i) fire, natural disasters, disease outbreaks or pandemics, such as COVID-19, shortages of goods, services or labor, delays in obtaining key supplies, strikes and stoppages, power shortages, failures in the systems, forest fires and deforestation, among others, where we are unable to otherwise service the affected region, (ii) significant disruptions in logistics infrastructure, and (iii) fluctuating fuel prices within our distribution network.
The loss of, or a disruption in, our research and development, production and distribution operations could adversely affect our business, financial condition and results of operations.
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 our 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. We could also experience a negative financial impact if we do not comply with minimum purchase commitments. 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 the Representatives’ or end customers’ standards, then our relationship with the Representatives or end customers could suffer, particularly where the impact of media coverage and new technologies such as social media may exert negative influence over perception of our products. We may 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.
Risks Related to Our International Operations
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 operations outside of the 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, euro, Peruvian new sol, Philippine peso, Polish zloty, Romanian leu, Russian ruble, South African 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 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, and by shifting costs to markets in which we generate revenue, we may not be able to fully offset the impact, if at all. 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 tax or 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. If this should occur, or if the exchange rates devalue, it may have a material adverse effect on our business, assets, financial condition, liquidity, results of operations or cash flows.
Inflation and government measures to curb inflation may adversely affect the economies and capital markets in some of the countries in which we operate, and as a result, harm our business, financial condition and results of operations, as well as the trading price of our ordinary shares.
High levels of inflation have adversely affected the economies and financial markets of some of the countries in which we operate, and the ability of their governments to create conditions that stimulate or maintain economic growth. More recently,
Europe, the United Kingdom, Asia and other areas in which we do business are also experiencing inflation levels that are higher than at any point in the past few decades, and Brazil has also experienced a significant rise in inflation in 2021 and 2022.
In addition, Argentina and Turkey are now considered to be highly inflationary economies. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Segment Review-Avon Latin America” for additional information regarding Argentina and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Segment Review-Avon International” for additional information regarding Turkey. 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.
Inflationary pressures may lead governments to intervene in the economy, including through the implementation of government policies that may have an adverse effect on us and our customers, especially in a context of increased market volatility given the impacts of COVID-19, and any continued increase of such interest rates may negatively affect our profits and results of operations, thereby increasing the costs of financing our operations. Moreover, governmental measures to curb inflation and speculation about possible future governmental measures have contributed to the negative economic impact of inflation and have created general economic uncertainty and heightened volatility in the capital markets. Inflation may adversely affect our sales, revenue and net income as a decrease in consumers’ purchasing power may lead them to switch to lower cost products. Inflation may also result in an increase in costs which we may not be able to pass on to consumers, particularly if consumers are already considering lower cost options as a result of inflationary pressures on their purchasing power. Either of these circumstances could adversely affect our earnings and results of operations. If the countries in which we operate continue to experience high inflation rates, we may not be able to adjust the prices of our products in order to compensate for the effects of inflation in our costs structure, which may have an adverse effect on us.
High interest rates may further impact our cost of obtaining loans and also the cost of any future indebtedness, resulting in an increase in our financial expenses. This increase may adversely affect our ability to pay our financial obligations, as it reduces our cash availability. Mismatches between contracted indexes for assets versus liabilities and/or high volatilities in interest rates may result in financial losses for us.
Our ability to conduct business in our international markets may be affected by economic, political, legal, tax and regulatory risks.
A significant deterioration in economic conditions in any of our important markets, including economic slowdowns or recessions, inflationary pressures and/or disruptions to credit and capital markets, could lead to decreased consumer confidence and consumer spending more generally, thus reducing demand for our products. In addition, our global operations are subject to adverse political, social or other developments, such as political or social unrest, potential health issues, natural disasters, disease outbreaks or pandemics, such as COVID-19, politically motivated violence and terrorist threats and/or act which may also occur in countries where we have operations.
In particular, 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 the ongoing war between Ukraine and Russia) 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;
•changes to tax rules in Brazil, where the tax system is highly complex and the interpretation of the tax laws and regulations is commonly controversial, and the Brazilian government regularly implements changes to tax regimes that may increase our tax burden, including modifications in the rate of assessments and the enactment of new or temporary taxes, the proceeds of which are earmarked for designated governmental purposes;
•macroeconomic pressures in Brazil as a result of the new presidential administration that took office on January 1, 2023;
•the possibility that a government authority might impose legal, tax or other financial burdens on the 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;
•the possibility that a government authority might challenge the status of the Representatives as independent contractors or impose employment or social taxes on the Representatives; and
•those associated with data privacy regulation and the international transfer of personal data.
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-trust 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 those required by 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 the Representative's 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.
At the end of 2021 and into 2022, Russia amassed large numbers of military forces and support personnel on the Ukraine-Russia border, leading to tensions between Ukraine and Russia as well as between the United States, its allies and Russia. On February 24, 2022, Russia launched a military invasion of Ukraine. As a result of these developments, our Ukrainian Distribution center operations are currently suspended for an indeterminate period and we cannot assure you that our Russian operations will not also be reduced or suspended. Furthermore, the ongoing war between Ukraine and Russia has resulted in the imposition of broad financial and economic sanctions against Russia by the United States and its allies, including the UK, the EU and other countries around the world, which could have a lasting impact on regional and global economies. Any further escalation of the war between Ukraine and Russia, or any further increase in tensions between the United States, its allies and Russia could have a material adverse effect on us. See also “-The ongoing war between Ukraine and Russia may have a material adverse effect on our business, financial condition and results of operations.”
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 certainty the outcome or the impact that pending or future legislative and regulatory changes may have on our business in the future. Further, in the event that any jurisdiction in which we operate or plan to operate imposes any new laws, regulations, restrictions and/or other barriers to entry, our ability to expand may be thereby limited and our growth and development may be adversely affected.
The ongoing war between Ukraine and Russia may have a material adverse effect on our business, financial condition and results of operations.
The ongoing war between Ukraine and Russia has provoked strong reactions from the United States, the UK, the EU and various other countries around the world, including from the members of the North Atlantic Treaty Organization, or “NATO.”
Following Russia’s invasion of Ukraine beginning on February 24, 2022, the United States, the UK, the EU and other countries announced broad economic sanctions against Russia, including financial measures such as freezing Russia’s central bank assets and limiting its ability to access its U.S. dollar reserves. The United States, the EU and the UK have also banned people and businesses from dealings with the Russian central bank, its finance ministry and its wealth fund, among others. Selected Russian banks, including Russia’s largest bank Sberbank, have also been removed from the Swift messaging system, which enables the smooth transfer of money across borders. Other sanctions by the UK include major Russian banks being excluded from the UK financial system, stopping them from accessing sterling and clearing payments, major Russian companies and the state being stopped from raising finance or borrowing money on the UK markets, and the establishment of limits on deposits Russians can make at UK banks. The United States, the EU and the UK have also adopted personal measures, such as sanctions on individuals with close ties to Mr. Putin, and placed visa restrictions on several Russian oligarchs, as well as their family members and close associates, as well as asset freezes. In addition, these and other jurisdictions have put in place a vast number of export controls, impacting the export and transfer to Russia of broad categories of goods and materials, as well as bans on a number of professional services, including accounting, legal, IT and management consulting.
We have sales operations in multiple countries including in Ukraine and Russia and we are continuously monitoring the developments to assess any potential further impacts that may arise as a result of the ongoing crisis. We have made substantial changes to our structure, controls and commercial operations in response to the war. Given our operations in Ukraine and Russia, the adverse effects-global or localized-of the ongoing war between Ukraine and Russia, and/or economic sanctions and import and/or export controls being imposed on the Russian government by the United States, the UK, the EU or others, and the above-mentioned adverse effect on the wider global economy and market conditions could, in turn, have a material adverse effect on our business, financial condition and results of operations.
While the precise continuing effect of the ongoing war and these sanctions on the Russian and global economies remains uncertain, they have already resulted in significant volatility in financial markets, depreciation of the Russian ruble and the Ukrainian hryvnia against the U.S. dollar and other major currencies, as well as in an increase in energy and commodity prices globally. As the conflict continues, markets may face continued volatility as well as economic and security consequences including, but not limited to, supply shortages of different kinds, further increases in prices of commodities, including piped gas, oil and agricultural goods, reduced consumer purchasing power, significant disruptions in logistics infrastructure, telecommunications services, the risk of unavailability of information technology systems and infrastructure, among others, given that Ukraine and Russia are significant exporters of commodities. Given that Ukraine and Russia are among the largest commodity exporters in the world, impacts on financial markets, inflation, interest rates, unemployment and other matters could affect the global economy that is still recovering from the effects of the COVID-19 pandemic. Other potential consequences include, but are not limited to, growth in the number of popular uprisings in the region, increased political discontent, especially in the regions most affected by the conflict or economic sanctions, increase in cyber-terrorism activities and attacks, exodus to regions close to the areas of conflict and increase in the number of refugees fleeing across Europe, among other unforeseen social and humanitarian effects.
A further protraction of the conflict between Ukraine and Russia, any escalation of that conflict, and the financial and economic sanctions and import and/or export controls imposed on Russia by the United States, the UK, the EU and others, and the above mentioned adverse effect on the wider global economy and market conditions could, in turn, have a material adverse effect on our business, financial condition and results of operations.
Our business is subject to a number of foreign laws and regulations in various jurisdictions governing data privacy and security.
We collect, use and store personal data of our employees, Representatives, customers and other third parties in the ordinary course of business. We are required to comply with increasingly complex and changing data privacy and security laws and regulations governing the collection, storage, use, transmission and protection of personal information and other data, including the transfer of personal data between countries. In May 2018, the EU adopted robust data privacy regulations under the General Data Protection Regulation (“GDPR”). Further changes are likely to be introduced through a revised Regulation on Privacy and Electronic Communications (the “ePrivacy Regulation”). The GDPR in particular has broad extraterritorial effect and imposes a robust data protection compliance regime with significant penalties for non-compliance. Other countries in which we operate are developing comparable regulations. Brazil enacted the Lei Geral de Proteção de Dados Pessoais (“LGPD”), which is broadly equivalent to GDPR and came into force in September 2020, except for the applicability of the law’s administrative sanctions, which came into force on August 1, 2021. In general, the GDPR and ePrivacy Regulation, and other local privacy laws, could require adaptation of our technologies or practices to satisfy local privacy requirements and standards. We may also face audits or investigations by one or more domestic or foreign government agencies relating to our compliance with these regulations. An adverse outcome under any such investigation or audit could result in the issuance of stop processing orders, and/or subject us to fines and penalties. That or other circumstances related to our collection, use and transfer of personal data could cause a loss of reputation in the market or adversely affect our business.
The scope of data privacy and security regulations continues to evolve, and we believe that the adoption of increasingly restrictive regulations in this area may be likely within the jurisdictions in which we operate. Compliance with data privacy and security requirements could increase the cost of our operations and failure to comply with such requirements could subject us to business disruption, criminal and civil sanctions as well as other penalties.
The uncertainty surrounding the UK's decision to withdraw from the EU may adversely affect our business.
The UK left the EU and subsequent transition periods put in place have now all ended. This means that the UK is no longer part of the EU Single Market and Customs Union and EU law no longer applies in the UK. The Trade and Cooperation Agreement (“TCA”) agreed in December 2020 changed the basis of the relationship between the UK and EU Member States.
Given that we conduct a substantial portion of our business in the EU and the UK, and our corporate headquarters is in the UK, any developments resulting from the implementation of the TCA could have a material adverse effect on our business, financial position, liquidity and results of operations or cash flows. Changes in foreign currency exchange rates may have a material effect on our net sales, financial condition, profitability and/or cash flows and may reduce the reported value of our operating results.
During 2023 we will continue to monitor the implementation of border controls (including any resulting delays), immigration policy (ability to recruit and maintain talent), regulatory changes and requirements to comply with new mandates, which may prove challenging and costly.
Risks Related to IT and Cybersecurity Matters
A failure, disruption, cyberattack, 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, enterprise resource planning (“ERP”) systems, and internal communication and data transfer networks. We increasingly rely on a variety of web-based systems and mobile applications to support Representatives in our markets, including electronic order collection, invoicing systems, shipping and box packing, social media tools, Representative recruitment and online training. We also have e-commerce sites to allow customers to purchase products directly. We use third-party service providers in many instances to provide or support 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. Our IT systems and infrastructure, as well as the systems, infrastructure and services of 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, computer viruses, break-ins, including ransomware, other malware and phishing attacks, 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.
Moreover, as a result of the COVID-19 pandemic, we have increased the number of employees working remotely and expect to continue to allow remote work even after the pandemic comes to an end. This will require us to continue relying on remote-access information technology systems, which increases the risk of unavailability of our systems and infrastructure, disruption of telecommunications services, widespread system failures, and exposes us to increased vulnerability to cyberattacks. Any of these developments could adversely affect our ability to conduct our business may be adversely impacted.
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. An actual or perceived 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 and could be particularly harmful to our brand and reputation.
We continue to invest in industry-standard solutions and protections and monitoring practices of our data and IT systems and infrastructure to reduce these risks and we continue to monitor our IT systems and infrastructure on an ongoing basis for any current or potential threats. We have also deployed additional employee security training and updated security policies for the Company and its third-party service providers. 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 also 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. Our IT databases and systems have been, and will likely continue to be, subject to ransomware, denial of service and phishing attacks. 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 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 doing 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.
See also “-We were the target of a cybersecurity incident which disrupted our systems.”
Unauthorized disclosure of sensitive or confidential Representative or customer information or our failure or the perception by our Representatives or customers that we failed to comply with privacy laws or properly address privacy concerns could materially harm our business and standing with our Representatives and customers.
We collect, store, process, transmit and use certain personal information in the ordinary course of our business. We are required to comply with increasingly complex and changing data privacy and security laws and regulations governing personal information and other data, including the transfer of personal data between countries. We may face audits or investigations by one or more domestic or foreign government agencies relating to our compliance with these regulations. An adverse outcome under any such investigation or audit could result in the issuance of stop processing orders, subject us to fines, penalties or orders to cease, delay or modify collection, use or transfer of personal data. The perception of privacy concerns, whether or not valid, may adversely affect us. We rely on commercially available systems, software, tools and monitoring to provide secure processing, transmission and storage of confidential Representative and customer information.
Our facilities and systems, as well as those of our third-party service providers, may be vulnerable to security breaches, fraud, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors, or other similar events. Any security breach, or any perceived failure involving the misappropriation, loss or other unauthorized disclosure of confidential information, as well as any failure or perceived failure to comply with laws, policies, legal obligations or industry standards regarding data privacy and protection, whether by us or vendors upon whose systems we rely, could damage our reputation, expose us to litigation risk and liability, reduce revenue, increase costs, subject us to negative publicity, disrupt our operations and harm our business. We cannot provide assurance that our security measures will prevent security breaches or that failure to prevent them will not have a material adverse effect on us.
We were the target of a cybersecurity incident which disrupted our systems.
In June 2020, we became aware that we were exposed to a cyber-incident in our Information Technology (IT) environment which interrupted some of our systems and partially affected our operations. We engaged leading external cybersecurity and IT general controls specialists, launched a comprehensive containment and remediation effort and started a forensic investigation. By mid-August 2020, the Company had re-established all of its core business processes and resumed operations in all of its markets, including all of its distribution centers.
The cyber-incident did not have a material impact on our full year 2020 revenue, although it resulted in a shift in revenue from the second quarter to the third quarter of 2020 as the Company fulfilled the order backlog created. The incremental expense incurred as a result of the cyber-incident was not material.
Management concluded that controls related to our IT environment had not been designed and/or operated effectively to prevent access and changes to our IT systems supporting financial information processing. Although we had no indication that the accuracy and completeness of any financial information was impacted as a result of the incident, and we performed extensive procedures immediately after discovering the incident to validate such accuracy and completeness, we believed that, if the incident had gone differently, it could have potentially resulted in a material impact to our financial statements, which led to the conclusion that the magnitude of these control deficiencies represented a material weakness in our IT general controls.
To remediate the material weakness, we strengthened procedures and controls with the support of external cyber security and IT general controls specialists and accelerated our investment in IT infrastructure to strengthen our cyber security controls. Based on testing performed by management, the implemented controls are designed and operating effectively and the material weakness was remediated at December 31, 2020.
As a result of the incident, we may be subject to litigation and investigations by regulators in the jurisdictions in which we operate. We may incur losses associated with potential claims by third parties or individuals, as well as fines, penalties and other sanctions imposed by regulators relating to or arising from the incident. We may also incur contingencies related to the incident. We are not able to reliably forecast all of the losses that may occur as a result of the incident, and such excess losses could have a material adverse effect on our financial condition or results of operations in future periods.
Following the incident, we have taken certain additional preventative measures to reduce cyber risks. However, we cannot provide assurance that our security frameworks and measures will be successful in preventing future cybersecurity incidents. In addition, the costs of such measures and management attention required may be significant. Further, the incident may have a negative impact on our reputation and cause customers, suppliers and other third parties with whom we maintain relationships to lose confidence in us. We are unable to definitively determine the impact to these relationships and whether we will need to engage in any activities to rebuild them.
Risks Related to Financial Matters
Our credit ratings are below investment grade, which could limit our access to financing, affect the market price of our financing and increase financing costs. A downgrade in our credit ratings may adversely affect our access to liquidity.
Our long-term credit ratings are: Moody’s ratings of Ba3 with Stable Outlook for corporate family and senior unsecured debt; S&P ratings of BB- with Stable Outlook for corporate family and senior unsecured debt; and Fitch ratings of BB with Positive Outlook for corporate family and unsecured debt. Our credit ratings remain below investment grade which may impact our ability to access financing transactions on favorable terms. We do not believe these long-term credit ratings will have a material impact on our near-term liquidity. However, any rating agency review could result in a change in outlook or downgrade, which could limit our access to new financing, reduce our flexibility with respect to working capital needs, affect the market price of some or all of our outstanding debt securities and could result in an increase in financing costs. See Note 7, Debt and Other Financing to the Consolidated Financial Statements included herein, for details about the terms of our existing debt and other financing arrangements.
We may not effectively manage risks associated with the replacement of benchmark indices.
Interest rate, equity, foreign exchange rate and other types of indices which are deemed to be “benchmarks” are the subject of increased regulatory scrutiny. In March 2021, the United Kingdom’s Financial Conduct Authority, or the “FCA,” announced that most London interbank offered rate (“LIBOR”) benchmarks would ceased to be available after 2021. Certain other alternative benchmark interest rates have been announced, such as the Federal Reserve Bank of New York’s Secured Overnight Financing Rate based on overnight U.S. Treasury repurchase agreement transactions, which has been recommended as the alternative to U.S. dollar LIBOR by the Alternative Reference Rates Committee convened by the Federal Reserve Board and the Federal Reserve Bank of New York.
These and other reforms may cause benchmarks to perform differently than in the past, or to disappear entirely, or have other consequences that cannot be fully anticipated, which introduces a number of risks for us including legal risks arising from potential changes required to documentation for new and existing transactions. Meaningful time and effort is required to transition to the use of new benchmark rates, including with respect to the negotiation and implementation of any necessary changes to existing contractual arrangements and the implementation of changes to our systems and processes. We are actively evaluating the operational and other impacts of such changes and managing transition efforts accordingly.
Moreover, there is a lack of clarity as to what methods of calculating a replacement benchmark will be established or adopted generally, or whether different industry bodies, such as the loan market and the derivatives market, will adopt the same methodologies. In addition, as part of the transition to a replacement benchmark, parties may seek to adjust the spreads relative to such benchmarks in underlying contractual arrangements. As a result, interest rates on financial instruments tied to benchmark rates, including those pursuant to which we borrow funds, as well as the expenses associated with those financial instruments, may be adversely affected.
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. A change in the discount rate could 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. Please see “Critical Accounting Estimates - Pension and Postretirement Expense” within MD&A and Note 13, Employee Benefit Plans to the Consolidated Financial Statements included herein, for additional information regarding the impact of these factors on our pension plan obligations.
Risks Related to Legal Matters
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 our financial results and the conduct of our business. We are currently vigorously contesting certain of these litigation claims. This includes numerous personal injury lawsuits filed in U.S. courts in which we are named a defendant, alleging that certain talc products we sold in the past were contaminated with asbestos. We believe that the claims asserted against us in all of these cases are without merit. 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. See Note 17, Contingencies to the Consolidated Financial Statements included herein, for a detailed discussion regarding certain legal proceedings in which we are a party.
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 relevant 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 the 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, 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.
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 “-Risks Related to the Separation of North America and the Preferred Stock Investment in the Company-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, our business generally, and our ability to enforce intellectual property rights used in both North America and international jurisdictions” for additional information regarding the risks on our intellectual property rights associated with the separation of North America.
Risks Related to the Separation of North America and the Preferred Stock Investment in the Company
We may be exposed to claims and liabilities as a result of the separation of our North America business.
On March 1, 2016, Cleveland Apple Investor L.P. (“Cerberus Investor”) (an affiliate of Cerberus) contributed $170 of cash into New Avon in exchange for 80.1% of its membership interests, and we contributed (i) assets primarily related to our North America business (including approximately $100 of cash, subject to certain adjustments), (ii) certain assumed liabilities (primarily pension and postretirement liabilities) of our North America business and (iii) the employees of our North America business into New Avon in exchange for a 19.9% ownership interest of New Avon (collectively, the "Separation"). In August 2019, we and Cerberus finalized the sale of our respective interests in New Avon to LG Household & Health Care Ltd. In
connection with the Separation, we entered into a Separation Agreement and various other agreements with New Avon to govern the separation and the relationship of the two companies going forward. These agreements provide for specific indemnity and liability obligations and could lead to disputes between us. The indemnity rights we have against New Avon under the agreements may not be sufficient to protect us. In addition, our indemnity obligations to New Avon may be significant and these risks could negatively affect our financial condition.
We or New Avon may fail to perform under the post-closing arrangements executed in connection with the Separation.
In connection with the Separation, we and New Avon entered into several agreements, including among others, an Intellectual Property License Agreement and a Manufacturing and Supply Agreement. The Intellectual Property License Agreement provides New Avon with rights to use certain intellectual property rights that we used in the conduct of the North America business prior to the Separation. The Manufacturing and Supply Agreement provides that we and New Avon will manufacture, or cause to be manufactured, and supply certain products to each other. These agreements establish a bilateral relationship between New Avon and us. We will rely on New Avon to satisfy its performance and payment obligations under these agreements. If New Avon is unable to satisfy its obligations under these agreements, we could incur operational difficulties or losses that could have a material and adverse effect on our business, financial condition and results of operations.
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, our business generally, and our ability to enforce intellectual property rights used in both North America and international jurisdictions.
In connection with the Separation, we granted New Avon 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 Intellectual Property License Agreement includes quality control provisions obligating New Avon and its sublicensees to remain in compliance with applicable law or, for certain of our brands, quality standards that we have provided to New Avon, when selling products under certain trademarks that we have licensed to New Avon. However, there is a risk that failure by New Avon or its sublicensees to comply with such quality control provisions or other conduct by New Avon or its sublicensees associated with the trademarks licensed to New Avon, could adversely affect our reputation and our business globally. We have also granted New Avon enforcement rights to intellectual property licensed to New Avon in certain circumstances, which could adversely affect our position and options globally relating to enforcement of our intellectual property.
General Risk Factors
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. Economic events, including high unemployment levels and recession, 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, 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, taxation, 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 2022 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.
Moreover, our results of operations and financial condition have been, and will continue to be, affected by the growth rate of the GDP of the countries in which we operate. We cannot ensure that the GDP of the countries in which we operate will increase or remain stable. Developments in the macroeconomic conditions of the countries in which we operate, including Brazil, which has been experiencing an economic slowdown since 2012, may affect such countries’ growth rates and, consequently, us.
In addition, sudden disruptions in business conditions and consumer spending may result from acts of terror, natural disasters, adverse weather conditions, and pandemic situations or large-scale power outages, none of which are under our control.
The COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, manufacturing, supply chains and distribution systems. There is uncertainty around the duration and breadth of the COVID-19 pandemic and the response to it. As a result, we cannot reasonably estimate at this time the continued impact, that COVID-19 may have on our business or operations. The extent to which COVID-19 impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact including on financial markets or otherwise. See also "Item 1A. Risk Factors-The COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, manufacturing, supply chains and distribution systems, and we have experienced and expect to continue to experience unpredictable negative effects associated with the pandemic.
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. Any failure by our management team to perform as expected may have a material adverse effect on our business, prospects, financial condition, results of operations and cash flows, as well as on our ability to address the challenges arising from the COVID-19 pandemic and the response to it. This risk may be exacerbated by the uncertainties associated with the implementation of Open Up & Grow and Avon Integration and any other stabilization strategies and restructuring and cost-saving initiatives we undertake from time to time.
We are not insured against all risks affecting our activities and our insurance coverage may not be sufficient to
cover all losses and/or liabilities that may be incurred by our operations.
We cannot provide assurance that our insurance coverage will always be available or will always be sufficient to cover any damages resulting from any kind of claims. In addition, there are certain types of risks that may not be covered by our policies, such as war, force majeure or certain business interruptions. In addition, we cannot provide assurance that when our current insurance policies expire, we will be able to renew them at sufficient and favorable terms. Claims that are not covered by our policies or the failure to renew our insurance policies may materially adversely affect us.
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 result in an increase in our indebtedness.
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 Separation of North America” for additional information regarding the risks associated with the separation of North America.
The COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, manufacturing, supply chains and distribution systems, and we have experienced and expect to continue to experience unpredictable negative effects associated with the pandemic.
Public health officials worldwide have recommended and mandated precautions to mitigate the spread of COVID-19, including restrictions on manufacturing, distribution, and congregating in heavily populated areas and shelter-in-place orders or similar measures. As a result, manufacturing and distribution of our products have been and may continue to be negatively impacted. Our suppliers have been similarly impacted by disruptions in global supply chains and climate events that hit electricity generation globally, among other events, which further affect our ability to produce and distribute. Distribution has also been impacted by certain restrictions on import and export in various countries and such restrictions may continue in the future. These restrictions have contributed to inflationary pressures in the cost of certain raw materials used in the production of essential items due to the increased demand for these inputs worldwide, which may affect our ability to procure such raw materials at similar prices as we have prior to the COVID-19 pandemic. The pandemic has also led to challenges in recruiting Representatives, and enrollment of Representatives will likely occur at a slower pace. Additionally, there is a general risk that our employees or other workers could be exposed to the virus and that an incident of infection at one of our sites could result in “lock-down” measures for the whole site that could negatively impact our business.
Our results will continue to be adversely impacted by these public health restrictions and other actions taken to contain or mitigate the impact of COVID-19. Although there have been certain improvements in the restrictive measures being adopted to contain the impacts of the COVID-19 pandemic, there is still considerable uncertainty as to whether future restrictions might be required or enforced by the authorities in the future. In particular, new variants of the virus have emerged against which existing vaccines and acquired immunity may not be effective. The extent of the continued impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak and its impact on our Representatives, suppliers and employees, all of which are uncertain and cannot be predicted. COVID-19 also poses risks that our employees, contractors, suppliers, customers and other business partners may be prevented from conducting business activities for an indefinite period of time, including current or future shutdowns that may be requested or mandated by governmental authorities and could have a material adverse effect on our results of operations, financial condition and liquidity going forward. Furthermore, to the extent the COVID-19 pandemic adversely affects our business, results of operations, financial condition and liquidity, it may also have the effect of heightening many of the other risks to which we are exposed, such as those relating to our high level of indebtedness and our need to generate sufficient cash flows to service our indebtedness.
We expect some negative impact on revenue and profits from COVID-19 to continue in 2023, given the emergence of novel strains and variants across the world, which may, in turn, result in lower cash generation from and greater costs in our activities. If the downturn is deeper or for longer than we anticipate, the Company could take certain further actions to ease the pressure of certain cash outflows, such as reducing discretionary expenditure, selling non-core assets, accessing government pandemic initiatives or arranging borrowing facilities with third-party banks and affiliate companies. Our projections indicate that we should have sufficient liquidity to meet our obligations to parties other than Natura &Co and its affiliates for a period of not less than 12 months from the date of issuance of the Consolidated Financial Statements contained herein. The Company has received an irrevocable commitment from Natura &Co Holding that it will provide sufficient financial support if and when needed to enable the Company to meet its obligations as they come due in the normal course of business for a period of not less than 12 months from the date of issuance of the Consolidated Financial Statements contained herein. For further information see Note 1, Accounting Policies, to the Consolidated Financial Statements included herein.
There is uncertainty around the duration and breadth of the COVID-19 pandemic and the response to it. As a result the ultimate impact on our business, financial condition or operating results cannot be reasonably estimated at this time. While we expect the impacts of COVID-19 to continue to have an adverse effect on our business, financial condition and results of operations, we are unable to predict the extent or precise nature of these impacts at this time. If the pandemic or the resulting economic downturn continues to worsen, we could experience loss of business, which could have a material impact on our financial position and cash flows.
In addition, in the future, other regional and / or global outbreaks of communicable diseases may occur. If they occur, the effects that the Company will suffer may be similar or even greater than the effects it is suffering as a result of the COVID-19 pandemic.
If the COVID-19 pandemic continues to adversely affect the global economy and/or adversely affect our business, financial condition, liquidity or results of operations, it may also increase the likelihood and/or magnitude of other risks described in this “Risk Factors” section.
Climate change can create physical risks, transition risks and other risks that could adversely affect us.
Climate risk is a transversal risk that can be an aggravating factor for the types of traditional risks that we manage in the ordinary course of business, including without limitation the risks described in this “Risk Factors” section. Based on the classifications used by Task-Force on Climate-Related Financial Disclosures, we consider that there are two primary sources of climate change related financial risks: physical and transition.
Physical risks resulting from climate change can be event-driven (acute) or long-term shifts (chronic) in climate patterns:
•Acute physical risks include increased severity of extreme weather events, such as drought, hurricanes, or floods.
•Chronic physical risks include changes in precipitation patterns and extreme variability in weather patterns, rising mean temperatures, chronic heat waves or rising sea levels.
Such events could disrupt our operations or those of our customers or third parties on which we rely and with whom we do business, including through direct damage to assets and indirect impacts from supply chain disruption and market volatility. If we fail to adequately embed risks arising from climate change into our risk and operational frameworks to appropriately measure, manage and disclose the various financial and operational risks that may result from climate change, or if we fail to adapt our strategy and business model to a changing regulatory and market environment, we may face significant adverse impacts on our business, financial condition and results of operations.
In turn, transition risks refer to actions brought on to address mitigation and adaptation requirements related to climate change, and they can fall into various categories such as market, technology and market changes:
•Market risk may manifest through shifts in supply and demand for certain commodities, products, and services, as climate-related risks and opportunities are increasingly taken into account.
•Technology risk arises from improvements or innovations to support the transition to a lower-carbon, energy efficient economic system that can have a significant impact on companies to the extent that new technology displaces old systems and disrupts some parts of the existing economic system.
•Operational risks could result if severe weather events directly impacts business continuity and both our customers’ and our operations.
•Policy actions generally fall into two categories-those that attempt to constrain actions that contribute to the adverse effects of climate change and those that seek to promote adaptation to climate change. The risk associated with and the financial impact of policy changes depend on the nature and timing of the policy change.
•Regulatory compliance risks mean that increased regulatory compliance risk may result from the increasing focus, pace, breadth and depth of regulatory expectations requiring implementation in short timeframes across multiple jurisdictions.
•Reputational risks are run to the extent our reputation and client relationships may be damaged as a result of our practices, disclosures and decisions related to climate change and social and environmental matters, or to the practices or involvement of our clients, vendors or suppliers in certain industries or projects associated with causing or exacerbating climate change.
We are already subject to certain regulatory environmental requirements that may increase going forward as a result of the increasing importance of environmental matters. This and other changes in regulations in international markets may expose us to increased compliance costs, limit our ability to pursue certain business opportunities and provide certain products and services, each of which could adversely affect our business, financial condition and results of operations.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
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 fulfilment of their orders, and one principal research and development facility located in Suffern, New York. However, on November 3, 2022, our board of directors approved a plan to relocate its research and development facilities to Brazil and Poland, two of our largest markets, by the end of its fiscal quarter ending June 30, 2024, in order to further deliver its Global Innovation Program and realize cost efficiencies. As a result, Avon will close its research and development facility in Suffern. The closure of the Suffern facility is expected to be completed by the end of Avon’s fiscal quarter ending June 30, 2024.
Since January 2017 our principal executive offices have been located in the UK, and presently are leased in Northampton, UK. All the floors of our previous principal executive office location at 777 Third Avenue, New York, NY continue to be subleased.
During 2022, we sold our Poland freehold administrative office. See Note 3, Discontinued Operations and Assets and Liabilities held for sale, to the Consolidated Financial Statements included herein.
In addition to the facilities noted above, other principal properties measuring 50,000 square feet or more include the following:
•three manufacturing facilities, nine distribution centers and one administrative office in Avon International; and
•two manufacturing facilities, nine distribution centers and one administrative office in Avon Latin America.
We consider all of our principal 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, 17 are owned and the remaining 10 are leased. Many of our properties are used for a combination of manufacturing, distribution and administration. These properties are included based on primary usage.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
Reference is made to Note 17, Contingencies to the Consolidated Financial Statements included herein.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Avon’s Common Stock
At December 31, 2022, all of our common stock was held by Natura &Co Holding S.A. (either directly or through its subsidiaries).

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. [RESERVED]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
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 Notes thereto contained herein. 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" of this MD&A for a description of how constant dollar ("Constant $") growth rates (a Non-GAAP financial measure) are determined and see "Performance Metrics" of this MD&A for definitions of our performance metrics (Change in Active Representatives, Change in units sold, Change in Ending Representatives and Change in Average Order).
Overview
We are a global manufacturer and marketer of beauty and related products. Our business is conducted primarily in the direct-selling channel, with a strategy to expand to omnichannel. During 2022, we had sales operations in 51 countries and territories, and distributed products in 23 more. At December 31, 2022, we had sales operations in 49 countries and territories. All of our consolidated revenue is derived from operations of subsidiaries outside of the United States. Our reportable segments are based on geographic operations in two regions, Avon International and Avon Latin America. Our product categories are Beauty and Fashion & Home. Beauty consists of skincare, 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.
On average we had approximately 4 million Active Representatives during the year ended December 31, 2022, 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.
Total revenue decreased 19% compared to the prior-year period, favorably impacted by the recognition of revenue associated with a settlement agreement to resolve a breach of contract dispute in the current year period and the recognition of certain Brazil indirect taxes in the prior-year period and unfavorably impacted by the recognition of certain Brazil indirect taxes in the current year period.
Excluding these items, Adjusted revenue decreased 19%, unfavorably impacted by foreign exchange variations, primarily driven by the weakening of the U.S. dollar relative to the Brazilian real, offset by the strengthening of the U.S. dollar relative to the Turkish lira, Pound Sterling, Polish zloty, Philippine peso and the Argentinian peso.
On a Constant $ basis, Adjusted revenue decreased 12% year-on-year driven by a 10% decrease in Avon International and a 15% decrease in Avon Latin America, mostly as a result of (i) the sale of Avon Luxembourg on July 1, 2021, (ii) Average Representative Sales increases being more than offset by a 23% decrease in Active Representatives and (iii) the impact of the ongoing war between Ukraine and Russia. During the year ended December 31, 2022, revenues from Ukraine and Russia represented approximately 8% of total revenue compared to approximately 9% for the year ended December 31, 2021.
Constant $ Adjusted revenue excluding the impact of the sale of Avon Luxembourg decreased 6% as increases in Average Representative Sales were more than offset by a 10% decrease in Active Representatives.
Units sold decreased 27% (or 13% excluding the impact of the sale of Avon Luxembourg), driven by decreases in both Avon International and Avon Latin America.
See "-Segment Review" for additional information related to changes in revenue by segment.
Merger with Natura Cosméticos S.A.
On May 22, 2019, we entered into an Agreement and Plan of Mergers with Natura Cosméticos, Natura &Co Holding and Natura &Co pursuant to which, in a series of transactions, Avon and Natura Cosméticos became direct wholly owned subsidiaries of Natura &Co. For additional information see Note 20, Merger with Natura Cosméticos S.A., to the Consolidated Financial Statements included herein. On January 3, 2020, the Company consummated the Transaction and became a fully owned subsidiary of Natura &Co Holding. In connection with the consummation of the Transaction, the Company notified the NYSE that trading of their stock should be suspended, the Company's common stock was subsequently delisted and deregistered.
COVID-19 Pandemic
Beginning with the first quarter of 2020, there has been a worldwide impact from the COVID-19 pandemic as during 2020, many markets were subject to lockdown restrictions to varying degrees, which limited our ability to recruit and enroll Representatives, operate manufacturing facilities and distribution centers and to process and deliver orders. See also “Item 1A. Risk Factors-The COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, manufacturing, supply chains and distribution systems, and we have experienced and expect to continue to experience unpredictable negative effects associated with the pandemic".
Inflation
In 2021 and 2022, the continuing economic disruption caused by the COVID-19 pandemic also resulted in inflationary pressures on the cost of certain raw materials used in the production of essential items due to the increased demand for these inputs worldwide. These inflationary pressures were compounded in 2022 by the ongoing war between Ukraine and Russia which adversely impacted energy prices around the globe and further increased inflationary pressures.
We believe that these recent inflationary pressures, an increase in energy and utility prices globally, the effect of such increased prices on energy-intensive products, increases in transportation costs and the ongoing war between Ukraine and Russia may lead to a significant increase in the rate of inflation. This increase may, in turn, adversely affect demand for our products in that inflation may adversely affect both consumer confidence and the purchasing power of our community of customers, who may already have been considering a switch to lower cost products. We may not be able to pass on these increases in whole or in part to our customers, which may adversely affect our profit margin. High inflation may also lead to an increase in the costs of our operations, including by virtue of increased energy, utility and transportation prices and an increase in the cost of certain raw materials.
Inflationary pressures also may lead governments to intervene in the economy, including through the implementation of government policies that may have an adverse effect on us and our customers, such as increasing interest rates. High interest rates may impact our cost of obtaining loans and also the cost of any future indebtedness, resulting in an increase in our financial expenses. As such, this increase may adversely affect our ability to pay our financial obligations, as it reduces our cash availability. Increased interest rates may also adversely affect our ability to pay our commitments under certain of our operational lease agreements with adjustments directly linked to inflation. As of the date of this report, we are unable to estimate the longer-term economic impact of inflation on our business, results of operations and financial condition. We will continue to review our revenue, investments, expenses and cash outflows, as well as adjusting our relationships with suppliers. Furthermore, the actions outlined above are continuously being re-evaluated in light of global developments relating to inflation and inflationary pressures.
See also “Item 1A. Risk Factors-Risks Related to Our International Operations-Inflation and government measures to curb inflation may adversely affect the economies and capital markets in some of the countries in which we operate, and as a result, harm our business, financial condition and results of operations, as well as the trading price of our ordinary shares.”
Ongoing war between Ukraine and Russia
On February 24, 2022, Russia launched a military invasion of Ukraine. The ongoing war between Ukraine and Russia has provoked strong reactions from the United States, the UK, the European Union (the “EU”) and various other countries around the world, including the imposition of broad financial and economic sanctions against Russia.
As a result of the ongoing war in Ukraine, our Ukraine Distribution center operations are currently suspended for an indeterminate period with orders being shipped to the market from the Polish Distribution center instead.
Along with this, our Russian manufacturing facilities have suspended deliveries of products outside of Russia and we have made substantial changes to our structure, controls and commercial operations in response to the war. Certain suppliers of raw ingredients and components to our Russian manufacturing facilities and of finished products to our Russian business may require us to take additional measures in order to continue supplying our Russian operations. Failure on our part to provide for such additional measures could impair the functioning of our Russian manufacturing facilities and could also result in disruptions in supply or our inability to source certain finished products to sell to customers in Russia. These changes will not impact our Eastern European operations as demand for finished goods is being sourced from manufacturing facilities in other European markets.
Furthermore, the Ukrainian hryvnia and Russian ruble have experienced greater volatility relative to the U.S. dollar since the invasion and may be volatile in the coming months as a result of the conflict. We expect that these currency fluctuations, and in particular that of the Russian ruble given the historical scale of our operations in Russia, may have a material adverse effect on our results of operations and financial condition in these countries as well as a resulting material adverse effect on our consolidated results of operations and financial condition.
While the precise effects of the ongoing war and these sanctions on the Russian and global economies remain uncertain, they have already resulted in significant volatility in financial markets as well as in an increase in energy and commodity prices
globally. Should the conflict continue or escalate, markets may face various economic and security consequences including, but not limited to, supply shortages of different kinds, further increases in prices of commodities, including piped gas, oil and agricultural goods, significant disruptions in logistics infrastructure, telecommunications services, the risk of unavailability of information technology systems and infrastructure, among others, given that Ukraine and Russia are significant exporters of commodities. The resulting impacts on financial markets, inflation, interest rates, unemployment and other matters could disrupt the global economy’s ongoing recovery following the COVID-19 pandemic. Other potential consequences include, but are not limited to, growth in the number of popular uprisings in the region, increased political discontent, especially in the regions most affected by the conflict or economic sanctions, increase in cyberterrorism activities and attacks, displacement of persons to regions close to the areas of conflict and an increase in the number of refugees fleeing across Europe, among other unforeseen social and humanitarian effects.
See also “Item 1A. Risk Factors-Risks Related to Our International Operations- Our ability to conduct business in our international markets may be affected by economic, political, legal, tax and regulatory risks” and “Item 1A. Risk Factors-Risks Related to Our International Operations-The ongoing war between Ukraine and Russia may have a material adverse effect on our business, financial condition and results of operations.”
Going concern
Considering the uncertain nature of any possible future COVID-19 impacts which are beyond the Company’s control and the ongoing war between Ukraine and Russia, we expect these factors to continue to adversely affect our operations, which could in turn result in lower revenues and lower cash generation from activities. If these impacts are deeper or for longer than we anticipate, the Company could take certain further actions to ease the pressure of certain cash outflows, such as reducing discretionary expenditure, selling non-core assets, accessing government pandemic initiatives or arranging borrowing facilities with third-party banks and affiliate companies.
The Company has received an irrevocable commitment from Natura &Co Holding that it will provide sufficient financial support if and when needed to enable the Company to meet its obligations as they come due in the normal course of business. This commitment is effective through to March 31, 2024, a period of more than 12 months from the date of issuance of the Consolidated Financial Statements. See Note 7, Debt and Other Financing, and Note 15, Leases and Commitments, respectively, for information on our debt and contractual financial obligations and commitments, including the loans from Natura &Co and its affiliates maturing within one year.
Cyber-incident
In June 2020, the Company became aware that it was exposed to a cyber-incident in its Information Technology ("IT") environment which interrupted some systems and partially affected the Company's operations. We engaged leading external cyber security and IT general controls specialists, launched a comprehensive containment and remediation effort and started a forensic investigation. By mid-August, the Company had re-established all of its core business processes and resumed operations in all of its markets, including all of its distribution centers.
The cyber-incident did not have a material impact on our full year 2020 revenue, although it resulted in a shift in revenue from the second quarter to the third quarter of 2020 as the Company fulfilled the order backlog created. The incremental expense incurred as a result of the cyber-incident was not material.
Although we had no indication that the accuracy and completeness of any financial information was impacted as a result of the incident, the Company performed extensive procedures immediately after discovering the incident to validate such accuracy and completeness.
Natura &Co - Avon Integration
Subsequent to the merger of Natura and Avon in January 2020, an integration plan (the "Avon Integration") was established to create the right global infrastructure to support the future ambitions of the Natura &Co Group while also identifying synergies and opportunities to leverage our combined strength, scale and reach. Synergies will be derived mainly from procurement, manufacturing/distribution and administrative, as well as top line synergies, primarily between Avon LATAM and Natura &Co Latin America.
Open Up Avon, Open Up & Grow and Transformation Plan
In January 2016, we initiated a transformation plan (the "Transformation Plan"), which was completed in 2018.
In September 2018, we initiated a new strategy in order to return Avon to growth ("Open Up Avon"). The Open Up Avon strategy is integral to our ability to return Avon to growth, built around the necessity of incorporating new approaches to various elements of our business, including increased utilization of third-party providers in manufacturing and technology, a more fit for purpose asset base, and a focus on enabling our Representatives to more easily interact with the company and achieve relevant earnings. These savings have been and are expected to continue to be achieved through restructuring actions
(that have may continue to result in charges related to severance, contract terminations and inventory and other asset write-offs), as well as other cost-savings strategies that would not result in restructuring charges. In January 2019, we announced significant advancements in this strategy, including a structural reset of inventory processes and a reduction in global workforce.
In May 2020, the new leadership of Avon International refreshed our strategy ("Open Up & Grow") which aims to return Avon International to growth over the next three years. Open Up & Grow replaces and builds on the success of the Open Up Avon strategy, launched in 2018 to strengthen competitiveness through enhancing the representative experience, improving brand position and relevance, accelerating digital expansion and improving costs. Over this three-year period, savings are expected to continue to be achieved through restructuring actions (that may continue to result in charges related to severance, contract terminations and asset write-offs), as well as other cost-savings strategies that would not result in restructuring charges.
For additional details on restructuring initiatives, see Note 16, Restructuring Initiatives, to the Consolidated Financial Statements included herein.
Turkish Currency
During the first quarter of 2022, published official exchange rates for Turkey indicated that the three-year cumulative inflation rate has exceeded 100%. As a result, we concluded that Turkey has become a highly inflationary economy. From April 1, 2022, we have applied inflationary accounting for our Turkish subsidiary. As such, the functional currency for Turkey has changed to the U.S. dollar, which is the consolidated group's reporting currency.
As a result of highly inflationary accounting for our Turkish subsidiary, the most significant impacts in our Consolidated Statement of Operations, are in cost of sales, primarily due to inventory being accounted for at its historical dollar cost, and in other (expense) income, net, primarily associated with the net monetary position of Turkey. However, these impacts are not considered material to our Consolidated Income Statements.
Sale of Avon Luxembourg Holdings S.à r.l
On July 1, 2021, the Company sold Avon Luxembourg, including our Mexican business, to a subsidiary of Natura &Co Holding for $150, with the proceeds used to repay maturing loans of $150 borrowed under the $250 Revolving Credit Facility with a subsidiary of Natura &Co Holding.
The sale was accounted for as a transaction under common control in accordance with ASC805 - Business Combinations, with the resulting gain of $148 representing the difference between the proceeds, the net assets of Avon Luxembourg on the date of sale, and the cumulative foreign currency translation adjustment, taken directly to retained earnings. For additional information, see the Consolidated Statements of Changes in Shareholders' Deficit.
Relocation of the subsidiary Avon Products Inc research and development facility
On November 3, 2022, our board of directors approved a plan to relocate the Company's research and development facilities to Brazil and Poland, two of our largest markets, by the end of its fiscal quarter ending June 30, 2024, in order to further deliver the Company's Global Innovation Program and realize cost efficiencies. As a result, Avon will close its research and development facility in Suffern, New York. The closure of the Suffern facility is expected to be completed by the end of Avon’s fiscal quarter ending June 30, 2024.
For additional details on restructuring initiatives, see Note 16, Restructuring Initiatives, to the Consolidated Financial Statements included herein.
Impairment of goodwill
The majority of our goodwill is held in our business in Colombia. During the 2022 annual impairment test, our analysis of the Colombia 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 as it continued to experience challenging trading and economic conditions as a result of the continuing economic disruption caused by the COVID-19 pandemic and subsequent inflationary pressures compounded by the ongoing war between Ukraine and Russia. Accordingly, a non-cash impairment charge of $35.8 was recorded to reduce the carrying amount of goodwill.
See "Critical Accounting Estimates" of this MD&A for further discussion of the impairment of goodwill.
New Accounting Standards
Information relating to new accounting standards is included in Note 2, New Accounting Standards, to the Consolidated Financial Statements included herein.
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.
Change in Average Representative Sales 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 Representative Sales 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 U.S. ("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, Adjusted revenue, operating profit, Adjusted operating profit, operating margin and Adjusted operating margin. We 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 constant exchange rates, which are updated on an annual basis as part of our budgeting process. Foreign currency impact is determined as the difference between actual growth rates and Constant $ growth rates.
We also present revenue, gross margin, SG&A as a percentage of revenue, operating profit, operating margin and income (loss) before taxes 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 financial measures calculated and reported in accordance with GAAP. See "Reconciliation of Non-GAAP Financial Measures" within "Results of Operations - Consolidated" in this MD&A for this quantitative reconciliation.
The Company uses the Non-GAAP financial measures to evaluate its operating performance. 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 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. The Company believes that it is meaningful for investors to be made aware of the impacts of 1) certain Brazil indirect taxes; 2) CTI restructuring initiatives; 3) costs related to the Transaction; 4) costs associated with the early termination of debt and credit facilities, 5) the settlement agreement to resolve a breach of contract dispute and 6) the impairment of goodwill held in our business in Colombia.
(1) 2022 includes the impact of certain Brazil indirect taxes, which were recorded in product sales and selling, general and administrative expenses, net in the amounts of approximately cost of $10 and approximately $3, respectively. The corresponding tax impact was approximately $6. 2021 includes the impact of certain Brazil indirect taxes, which were recorded in product sales and selling, general and administrative expenses, net in the amounts of approximately $21 and approximately $2, respectively. The corresponding tax impact was approximately $7. 2020 includes the impact of certain Brazil indirect taxes, which were recorded in selling, general and administrative expenses, net in the amounts of approximately $11. The corresponding tax impact was approximately $4. See Note 19, Supplemental Balance Sheet Information, to the Consolidated Financial Statements contained herein for further information.
(2) CTI restructuring initiatives includes the impact on the Consolidated Statements of Operations for all periods presented of net charges incurred on approved restructuring initiatives. See Note 16, Restructuring Initiative, to the Consolidated Financial Statements contained herein for further information.
(3) During 2020, the Company recorded approximately $86 of costs related to the Transaction, primarily including professional fees incurred of approximately $46, severance payments of approximately $25 and acceleration of share based compensation of approximately $10 relating to these terminations triggered by change in control provisions. See Note 20, Agreement and Plan of Mergers with Natura Cosméticos S.A., to the Consolidated Financial Statements contained herein and "Agreement and Plan of Mergers with Natura Cosméticos S.A.," in this MD&A for further information.
(4) During 2022, the Company incurred costs of $16 associated with the early repayment of the $462 aggregate principal of the 5% Notes due in March 2023, in May 2022. During 2020, the Company incurred costs of $38 associated with the early termination of debt and credit facilities.
(5) During 2022, an Avon subsidiary concluded the negotiation of a settlement agreement to resolve a breach of contract dispute in Japan. As a result, Avon received cash compensation in the amount of $27 of which approximately $3 related to the settlement of historically recognized revenues and approximately $24 was recognized as revenue.
(6) During the 2022 annual impairment test, our analysis of the Colombia 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 as it continued to experience challenging trading and economic conditions as a result of the continuing economic disruption caused by the COVID-19 pandemic and subsequent inflationary pressures compounded by the ongoing war between Ukraine and Russia. Accordingly, a non-cash impairment charge of $35.8 was recorded to reduce the carrying amount of goodwill.
See Note 17, Contingencies, Note 16, Restructuring Initiatives, Note 14, Segment Information, Note 1, Description of the Business and Summary of Significant Accounting Policies, Note 7, Debt and Other Financing, and Note 9, Income Taxes, to the Consolidated Financial Statements included herein. See also "Effective Tax Rate" in this MD&A, and "Results Of Operations - Consolidated" below, for more information on these items.
Sale of Avon Luxembourg Holdings S.à r.l
On July 1, 2021, the Company sold Avon Luxembourg, including our Mexican business, to a subsidiary of Natura &Co Holding for $150, with the proceeds used to repay maturing loans of $150 borrowed under the $250 Revolving Credit Facility with a subsidiary of Natura &Co Holding. The sale was accounted for as a transaction under common control in accordance with ASC805 - Business Combinations, with the resulting gain of $148 representing the difference between the proceeds, the net assets of Avon Luxembourg on the date of sale, and the cumulative foreign currency translation adjustment, taken directly to Retained Earnings. For additional information, see the Consolidated Statements of Changes in Shareholders' Deficit.
The sale did not qualify for accounting as a discontinued operation in accordance with ASC805 - Business Combinations on the basis that it did not represent a strategic shift having a major effect on the Company's operations and, as a result, the results of operations in prior periods include the results of Avon Luxembourg Holdings S.à r.l. and its subsidiaries. While not a non-GAAP measure, in order to better evaluate the ongoing operating performance of the remaining group, the tables below also identify the prior period impacts of the sale of Avon Luxembourg Holdings S.à r.l. and its subsidiaries, including our Mexican business.
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, to the Consolidated Financial Statements included herein for a detailed discussion of the application of these and other accounting policies.
Revenue Recognition
Revenue is recognized when control of a product or service is transferred to a customer, which is generally the Representative. Revenue is measured based on the consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties, such as Value Added Taxes collected for taxing authorities.
Our contracts with Representatives often include multiple promises to transfer products and/or services to the Representative and determining which of these products and/or services are considered distinct performance obligations that should be accounted for separately. When assessing the recognition of revenue for the identified performance obligations, management has exercised significant judgment in the following areas: estimation of variable consideration and the stand-alone selling prices ("SSP") of promised goods or services delivered under sales incentives to determine and allocate the transaction price.
Typically included within a contract with customers is variable consideration, such as sales returns and late payment fees. Revenue is only recorded to the extent it is probable that it will not be reversed, and therefore revenue is adjusted for variable consideration. Judgment is required to estimate the variable consideration. The Company uses the expected value method, which considers possible outcomes weighted by their probability. Specifically, for sales returns, a refund liability will be recorded for the estimated cash to be refunded for the products expected to be returned, and a returns asset will be recorded for the products which we expect to be returned and re-sold, each of these based on historical experience. The estimate of sales returns as well as the measurement of the returns asset and the refund liability is updated at the end of each month for changes in expectations regarding the amount of salvageable returns, reconditioning costs and any additional decreases in the value of the returned products. Late payment fees are recorded when the uncertainty associated with collecting such fees are resolved (i.e., when collected).
Additionally, management has exercised significant judgment in the estimation of the SSP of promised goods or services delivered under sales incentives such as status programs, loyalty points, prospective discounts, and gift with purchase, among others, to determine and allocate the transaction price. SSP represents the estimated market value, or the estimated amount that could be charged for that material right when the entity sells it separately in similar circumstances to similar customers. Judgment is required to determine the SSP for each distinct performance obligation. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, including for certain sales incentives, we determine the SSP using information that may include market prices and other observable inputs.
Allowances for Doubtful Accounts Receivable
Representatives contact their customers, selling primarily through the use of brochures for each sales campaign, generally on credit if the Representatives meet certain criteria. Sales campaigns are generally 3-4 weeks or a month in 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 past due for prior campaigns 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, as applicable, current conditions and reasonable and supportable forecasts that affect collectability, including seasonality and changing trends and the impact of COVID-19. Over the past three years, annual bad debt expense was $52 in 2022, $62 in 2021 and $78 in 2020, or approximately 2% of total revenue in 2022, 2021 and 2020. 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 the 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. We record a provision for estimated sales returns based on historical experience with product returns. Over the past three years, annual sales returns were $53 for 2022, $76 for 2021 and $101 for 2020, or 2-3% 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, when applicable, equal to the difference between the cost of inventory and the net realizable 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 estimate 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 $23 in 2022, $27 in 2021 and $38 in 2020, or approximately 1% of total revenue in 2022, 2021 and 2020.
Pension and Postretirement Expense
We maintain defined benefit pension plans, the most significant of which are in the UK, Germany and the U.S. However, our U.S. defined benefit pension plan is closed to employees hired on or after January 1, 2015 and the UK defined benefit pension plan was frozen for future accruals as of April 1, 2013 and closed to employees hired on or after September 30, 2006. 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 certain retired employees in the U.S. and certain foreign countries. See Note 13, Employee Benefit Plans, to the Consolidated Financial Statements included herein for more information on our benefit plans.
Pension and postretirement 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 discount rate applied to plan obligations, the expected rate of return on plan assets, the rate of compensation increase of plan participants, interest crediting rates, price inflation, cost-of-living adjustments, mortality rates and certain other demographic assumptions, and other factors. We use a December 31 measurement date for all of our employee benefit plans.
For 2022, the weighted average assumed rate of return on all pension plan assets was 2.35%, as compared with 2.45% for 2021. 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 generally evaluate the expected long-term rates of return annually and adjust as necessary.
In some of our defined benefit pension plans, we have adopted investment strategies which are designed to match the movements in the pension liability through an increased allocation towards debt securities. In addition, we also utilize derivative instruments in our UK defined benefit pension plans 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.
A significant portion of our pension plan assets relate to the UK defined benefit pension plan. The assumed rate of return for determining 2022 net periodic benefit cost for the UK defined benefit pension plan was 1.90%. In addition, the 2022 rate of return assumption for the UK defined benefit pension plan was based on an asset allocation of approximately 94% in liability driven investments, approximately 6% in equity securities, emerging market debt and high yield securities. In addition to the physical assets, the asset portfolio for the UK defined benefit pension plan has derivative instruments which increase our exposure to fixed income (in order to better match liabilities). The rate of return on the plan assets in the UK was approximately (28.7)% in 2022 and approximately 3.4% in 2021.
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 calculating the balance sheet obligations of our more significant plans, including our UK defined benefit pension plan and 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 4.83% at December 31, 2022, and 2.15% at December 31, 2021. For the determination of the expected rates of return on assets and the discount rates, we take external actuarial and investment 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, benefits earned, mortality rates, the number of participants and certain demographics and 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, 2022, we had pretax actuarial losses and prior service credits totaling approximately $17 for the U.S. defined benefit pension and postretirement plans and approximately $117 for the non-U.S. defined benefit pension and postretirement plans that have not yet been charged to expense. These actuarial losses have been charged to 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 2023, our assumption for the expected rate of return on assets is 6.35% for our U.S. defined benefit pension plan and 4.35% for our non-U.S. defined benefit pension plans (which includes 4% for our UK defined benefit pension plan). Our assumptions are generally 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 2022 pension expense and the pension benefit obligation at December 31, 2022:
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 (3.40) 3.40 N/A N/A
Discount rate .1 (.4) (32.2) 34.8
Rate of compensation increase .3 (.3) 2.0 (2.0)
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, inventory write-offs, 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 U.S. 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 deferred tax assets, are taken into consideration. At December 31, 2022, we had recognized deferred tax assets of approximately $52 net of valuation allowances of approximately $941.
We monitor the realizability of our deferred tax assets on a continuous basis. Should macroeconomic and socio-political conditions change or our business operations do not improve, some or all of our remaining deferred tax assets could potentially need to be offset with the recording of a valuation allowance during the next 12 months.
At December 31, 2022, we continue to assert that substantially all of our foreign earnings are indefinitely reinvested. At December 31, 2022 the company’s undistributed foreign earnings is approximately $1.2 billion and would generate an approximate $10 of income tax if repatriated from the local subsidiaries.
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 our Consolidated Financial Statements.
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 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 our 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 pre-tax 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. The fair value of the asset is determined using revenue and cash flow projections, and royalty and discount rates, as appropriate.
Goodwill
We test goodwill for impairment annually, and more frequently if circumstances warrant, using various fair value methods. We completed our annual goodwill impairment assessment for 2022 in December and determined that the estimated fair values were substantially in excess of the carrying values of each of our reporting units.
The impairment analyses performed for goodwill require several estimates in computing the estimated fair value of a reporting unit. 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.
The majority of our goodwill is held in our business in Colombia. During the 2022 annual impairment test, our analysis of the Colombia 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 as it continued to experience challenging trading and economic conditions as a result of the continuing economic disruption caused by the COVID-19 pandemic and subsequent inflationary pressures compounded by the ongoing war between Ukraine and Russia. Accordingly, a non-cash impairment charge of $35.8 was recorded to reduce the carrying amount of goodwill.
The key assumptions supporting the impairment analysis for this business were forecast cash flows based on 2023 budgets, a discount rate of 16% and a long-term growth rate of 3%. The forecast cash flows are driven by assumptions around operating margin and are particularly sensitive to the business’ ability to achieve these over the forecast period. If in isolation, either the forecast operating margin were to decrease by 100 basis points or the discount rate was increased by 200 basis points then fair value would then estimated fair value would be further reduced by approximately $9m and $3m respectively.
Results Of Operations - Consolidated
Years ended December 31 Percentage/Basis Point Change
2022 2021 2020 2022 vs.
2021 2021 vs.
Select Consolidated Financial Information
Total revenue $ 2,769.2 $ 3,404.5 $ 3,625.2 (19) % (6) %
Cost of sales (1,186.2) (1,439.1) (1,588.6) (18) % (9) %
Cost of sales from affiliates of Natura &Co
(20.4) (22.4) (5.9) * *
SG&A expenses (1,705.4) (2,001.4) (2,152.9) (15) % (7) %
Impairment of goodwill (35.8) - - * *
Operating loss (178.6) (58.4) (122.2) 206 % (52) %
Interest expense (40.3) (63.5) (119.6) (37) % (47) %
Interest expense on Loan from affiliates of Natura &Co
(93.8) (50.6) (7.5) * *
Loss on extinguishment of debt (15.7) - (37.7) * *
Interest income 13.0 0.6 2.1 * *
Interest income on Loan to affiliates of Natura &Co
3.9 1.6 - * *
Gain on sale of business / assets - 9.9 1.5 * *
Other income (expense), net (5.8) 1.6 (20.2) * *
Loss from continuing operations, before taxes (317.3) (158.8) (303.6) 100 % (48) %
Loss from continuing operations, net of tax (354.7) (175.0) (337.6) 103 % (48) %
Net loss attributable to Avon $ (428.1) $ (192.1) $ (362.8) 123 % (47) %
Advertising expenses(1)
$ 59.1 $ 67.8 $ 59.9 (13) % 13 %
Reconciliation of Non-GAAP Financial Measures
Total revenue $ 2,769.2 $ 3,404.5 $ 3,625.2 (19) % (6) %
Japan royalty (23.7) - - * *
Certain Brazil indirect taxes 10.0 (21.5) - * *
Adjusted revenue $ 2,755.5 $ 3,383.0 $ 3,625.2 (19) % (7) %
Avon Luxembourg - (249.2) (431.8) * *
Adjusted revenue excluding Avon Luxembourg 2,755.5 $ 3,133.8 $ 3,193.4 (12) % (2) %
Gross margin 56.4 % 57.1 % 56.0 % (70) 110
Japan royalty (.5) - - (50) -
Certain Brazil indirect taxes .4 (.3) - 70 (30)
Adjusted gross margin 56.3 % 56.8 % 56.0 % (50) 80
Avon Luxembourg - % .5 % .8 % (50) (30)
Adjusted gross margin excluding Avon Luxembourg 56.3 % 57.3 % 56.8 % (100) 50
SG&A as a % of total revenue
61.6 % 58.8 % 59.4 % 280 (60)
Japan royalty .8 - - 80 -
Certain Brazil indirect taxes (.7) .3 .3 (100) -
CTI restructuring (2.4) (2.0) (.7) (40) (130)
Costs related to the Transaction - - (2.4) - 240
Adjusted SG&A as a % of total revenue
59.3 % 57.1 % 56.6 % 220 50
Avon Luxembourg - % 1.2 % 1.7 % (120) (50)
Adjusted selling, general and administrative expenses as a % of total revenue excluding Avon Luxembourg
59.3 % 58.3 % 58.3 % 100 -
Years ended December 31 Percentage/Basis Point Change
2022 2021 2020 2022 vs.
2021 2021 vs.
Operating (loss) profit $ (178.6) $ (58.4) $ (122.2) 206 % (52) %
Japan royalty (23.7) - -
Certain Brazil indirect taxes 13.3 (19.8) (10.6)
CTI restructuring 68.6 68.7 23.7
Costs related to the Transaction - - 85.8
Impairment of goodwill 35.8 - -
Adjusted operating (loss) profit $ (84.6) $ (9.5) $ (23.3) * (59) %
Avon Luxembourg - (21.3) (27.6) * (23) %
Adjusted operating (loss) profit excluding Avon Luxembourg $ (84.6) $ (30.8) $ (50.9) 175 % (39) %
Operating margin (6.4) % (1.7) % (3.4) % (470) 170
Japan royalty (.9) - - (90) -
Certain Brazil indirect taxes .5 (.6) (.3) 110 (30)
CTI restructuring 2.5 2.0 .7 50 130
Costs related to the Transaction - - 2.4 - (240)
Impairment of goodwill 1.2 - - 120 -
Adjusted operating margin (3.1) % (.3) % (.6) % (280) 30
Avon Luxembourg - % (.7) % (1.0) % 70 30
Adjusted operating margin excluding Avon Luxembourg (3.1) % (1.0) % (1.6) % (210) 60
Change in Constant $ Adjusted operating margin(2)
(350) 100
(Loss) income before taxes $ (317.3) $ (158.8) $ (303.6) 100 % (48) %
Japan royalty (23.7) - -
Certain Brazil indirect taxes 17.5 (23.6) (10.6)
CTI restructuring 68.6 58.8 22.2
Costs related to the Transaction - - 85.8
Impairment of goodwill 35.8 - -
Loss on extinguishment of debt and credit facilities
15.7 - 37.7
Adjusted (loss) income before taxes $ (203.4) $ (123.6) $ (168.5) 65 % (27) %
Effective tax rate (11.8) % (10.2) % (11.2) %
Adjusted effective tax rate (11.8) % (9.3) % (18.8) %
Performance Metrics
Change in Active Representatives (23) % (15) %
Change in units sold (27) % (16) %
Amounts in the table above may not necessarily sum due to rounding.
* Calculation not meaningful
(1)Advertising expenses are recorded in SG&A.
(2)Change in Constant $ Adjusted operating margin for all years presented is calculated using the current-year Constant $ rates.
2022 Compared to 2021
Revenue
Total revenue decreased 19% compared to the prior-year period, favorably impacted by the recognition of revenue associated with a settlement agreement to resolve a breach of contract dispute in the current year period and the recognition of certain Brazil indirect taxes in the prior-year period and unfavorably impacted by the recognition of certain Brazil indirect taxes in the current year period.
Excluding these items, Adjusted revenue decreased 19% unfavorably impacted by foreign exchange variations, primarily driven by the weakening of the U.S. dollar relative to the Brazilian real, offset by the strengthening of the U.S. dollar relative to the Turkish lira, Pound Sterling, Polish zloty, Philippine peso and the Argentinian peso.
On a Constant $ basis, Adjusted revenue decreased 12% year-on-year driven by a 10% decrease in Avon International and a 15% decrease in Avon Latin America, mostly as a result of (i) the sale of Avon Luxembourg on July 1, 2021, (ii) Average Representative Sales increases being more than offset by a 23% decrease in Active Representatives and (iii) the impact of the ongoing war between Ukraine and Russia. During the year ended December 31, 2022, revenues from Ukraine and Russia represented approximately 8% of total revenue compared to approximately 9% for the year ended December 31, 2021.
Constant $ Adjusted revenue excluding the impact of the sale of Avon Luxembourg decreased 6% as increases in Average Representative Sales were more than offset by a 10% decrease in Active Representatives.
Units sold decreased 27% (or 13%, excluding the impact of the sale of Avon Luxembourg) driven by decreases in both Avon International and Avon Latin America.
See "Segment Review" in this MD&A for additional information related to changes in revenue by segment.
Operating Margin
Operating margin decreased 470 basis points compared to the prior-year period. Operating margin was impacted by lower restructuring expenses in the current year period, the recognition of revenue associated with a settlement agreement to resolve a breach of contract dispute in the current year period, the recognition of certain Brazil indirect taxes in both the current and prior-year periods and the impairment of goodwill held in our business in Colombia.
Excluding these items, Adjusted operating margin decreased by 280 basis points compared to the same period of 2021, due to the decrease in gross margin and higher SG&A as a percentage of total revenue.
The movements in operating margin and Adjusted operating margin are discussed further below in "Gross Margin", "Selling, General and Administrative Expenses" and "Impairment of Goodwill".
Gross Margin
Adjusted gross margin decreased 50 basis points, compared to the same period of 2021, as the favorable impact of price/mix was offset by higher supply chain costs and the unfavorable impact of foreign currency transaction losses.
Selling, General and Administrative Expenses ("SG&A")
SG&A as a percentage of total revenue increased by 280 basis points compared to the prior-year period. SG&A was impacted by lower restructuring expenses in the current year period, the recognition of revenue associated with a settlement agreement to resolve a breach of contract dispute in the current year period and the recognition of certain Brazil indirect taxes in both the current and prior-year periods. Excluding these items, Adjusted SG&A as a percentage of Adjusted revenue increased 220 basis points, compared to the same period of 2021.
The increase in Constant $ Adjusted SG&A as a percentage of Adjusted revenue was largely due to the impact of our lower revenue, which resulted in a deleveraging of our fixed expenses.
Impairment of Goodwill
During the 2022 annual impairment test, our analysis of the Colombia 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 as it continued to experience challenging trading and economic conditions as a result of the continuing economic disruption caused by the COVID-19 pandemic and subsequent inflationary pressures compounded by the ongoing war between Ukraine and Russia. Accordingly, a non-cash impairment charge of $35.8 was recorded to reduce the carrying amount of goodwill.
Other Expenses
Total interest income increased by approximately $15 and total interest expense increased by approximately $20 driven by higher loans from affiliates compared to the prior-year period.
Loss on extinguishment of debt of $15.7 in the year ended December 31, 2022 represents the costs associated with the early repayment of the $461.9 aggregate principal of the 5% Notes due in March 2023, in May 2022.
Other income (expense), net, of approximately $6 represents a favorable impact of $7 compared to the prior-year period ended December 31, 2021 primarily attributable to higher foreign exchange losses and pension and postretirement plan costs in the current year period.
Effective Tax Rate
The Adjusted effective tax rates and the effective tax rates in 2022 and 2021 continue to be impacted by our inability to recognize additional deferred tax assets in various jurisdictions related to our current-year operating results and were also negatively impacted by the country mix of earnings. In addition, the Adjusted effective tax rates and the effective tax rates in 2022 and 2021 continue to be impacted by withholding taxes associated with certain intercompany payments, including royalties, service charges and dividends, which in the aggregate are relatively consistent each year due to the need to mobilize funds to cover certain costs, such as interest on debt and corporate overhead.
The Adjusted effective tax rate and the effective tax rate in 2022 were impacted by an approximate net $7 expense of which approximately $3 was associated with an increase in valuation allowances and approximately $4 of other various taxes associated with changes in tax estimates. The effective tax rate in 2022 was also impacted by CTI restructuring, the Colombia Goodwill impairment and debt extinguishments for which tax benefits cannot currently be claimed as well as additional valuation allowances against deferred tax assets.
The Adjusted effective tax rate and the effective tax rate in 2021 were impacted by an approximate net $6 benefit recognized due to a $11 reduction of uncertain tax positions offset with a net charge of approximately $4 associated with an increase in valuation allowances and approximately $1 of other various taxes associated with changes in tax estimates. The effective tax rate in 2021 was also impacted by CTI restructuring for which tax benefits cannot currently be claimed.
In prior years, we had previously recorded valuation allowances against certain deferred tax assets associated with the U.S. and various foreign jurisdictions. We intend to continue maintaining these valuation allowances on our deferred tax assets until there is sufficient evidence to support the reversal of all or a portion of these allowances. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of any such valuation allowance release is subject to change depending on the level of profitability that we are able to achieve. The Company continuously monitors its operational and capital structure changes, business performance, tax planning actions and tax planning strategies that could potentially allow for the recognition of deferred tax assets which are currently subject to a valuation allowance. There is the possibility that, in the foreseeable future, certain deferred tax assets could be recognized related to improvements in actual and/or expected operating results.
Further, the Company continuously assesses available positive and negative evidence to estimate whether sufficient future taxable income will be generated to utilize our existing deferred tax assets that are not subject to a valuation allowance. The Company continuously monitors the performance of entities and assesses the need for any further valuation allowances based on market performance and executability of tax planning actions and opportunities (including corporate restructuring). Should macroeconomic and sociopolitical conditions change, or our business operations not improve, or tax planning actions and opportunities not be implemented, up to approximately $52 of the Company's recognized deferred tax assets could potentially need to be offset with the recording of a valuation allowance in the future.
Impact of Foreign Currency
As compared to the prior-year period, foreign currency in 2022 impacted our consolidated financial results in the form of:
•foreign currency transaction losses (classified within cost of sales and SG&A in our Consolidated Statements of Operations), which had an unfavorable impact to operating profit and Adjusted operating profit of approximately $40, or approximately 100 basis points to both operating margin and Adjusted operating margin;
•foreign currency translation, which had a favorable impact to operating profit and Adjusted operating profit of approximately $5, or less than 50 basis points on both operating margin and Adjusted operating margin; and
•foreign exchange net gains, on our working capital (classified within other income (expense), net in our Consolidated Statements of Operations) as compared to gains in the prior year, resulting in a favorable impact of less than $5 before tax on both a reported and Adjusted basis.
2021 Compared to 2020
Revenue
Total revenue decreased 6% compared to the prior-year period, impacted by certain indirect taxes recognized in Brazil. Excluding these items, Adjusted revenue was down 7%, with the impact of foreign exchange being broadly neutral as the weakening of the U.S. dollar relative to the South African rand, the British pound and the Mexican peso was offset by the strengthening of the U.S. dollar relative to the Turkish lira and the Brazilian real.
On a Constant $ basis, Adjusted revenue decreased 6% year on year driven by a 4% decrease in Avon International and a 9% decrease in Avon Latin America, mostly driven by changes in the severity of COVID-19 restrictions in many markets and the sale of Avon Luxembourg on July 1, 2021. Revenue and Constant $ Adjusted revenue were impacted by a 10% increase in Average Representative Sales offset by a decrease in Active Representatives of 15% in multiple markets and across both Avon
International and Avon Latin America and also impacted by a reduction in the frequency of campaign cycles as part of our strategy to simplify our business.
Constant $ Adjusted revenue excluding the impact of the sale of Avon Luxembourg decreased by 1% as a 15% increase in Average Representative Sales was offset by an 15% decrease in Active Representatives.
Units sold decreased 16% or decreased 13% excluding the impact of the sale of Avon Luxembourg driven by decreases in both Avon International and Avon Latin America.
See "Segment Review" in this MD&A for additional information related to changes in revenue by segment.
Operating Margin
Operating margin increased 170 basis points, significantly benefiting from costs related to the Natura transaction in the prior-year period and an increase in receipts of certain Brazil indirect taxes in the current year, partially offset by increased restructuring expenses in the current year. Excluding these items, Adjusted operating margin increased 30 basis points compared to the prior-year period. The impact of foreign exchange on Adjusted operating margin was broadly neutral and Constant $ Adjusted Operating Margin improved slightly mostly driven by the increase in gross margin. The movements in operating margin and Adjusted operating margin are discussed further below in "Gross Margin" and "Selling, General and Administrative Expenses".
Gross Margin
Adjusted gross margin increased 80 basis points compared to the same period of 2020 as the positive impact of price/mix more than offset unfavorable impact of foreign currency movements and higher supply chain costs.
Selling, General and Administrative Expenses ("SG&A")
SG&A as a percentage of total revenue decreased 60 basis points, significantly impacted by costs related to the Natura transaction in the prior year period. This benefit was partially offset by increased restructuring expenses in the current year. Excluding these items, Adjusted SG&A as a percentage of Adjusted revenue increased 50 basis points, compared to the same period of 2020, as lower bad debt and sales leader and field investments were offset by higher advertising expenses and the impact of lower revenues, which resulted in a deleveraging of our fixed expenses.
Other Expenses
Interest expense decreased by approximately $13 and interest income remained relatively unchanged compared to 2020.
Other income, net, of $2 increased by approximately $22 compared to other expense, net of $20 in the prior-year period, primarily attributable to lower foreign exchange losses and lower pension and postretirement plan costs in the current year period.
Loss on extinguishment of debt and credit facilities was nil in 2021 compared to approximately $38 in 2020, as we did not redeem, repurchase or terminate debt in 2021 while in 2020 we redeemed the remaining principal amounts of our 2016 Notes due August 15, 2022 and our 2019 Notes due August 15, 2022 in November 2020, repurchased a portion of our 6.95% Notes due March 15, 2043 in September 2020, and terminated our 2019 revolving credit facility in January 2020.
Gain on sale of business/assets in 2021 of $10 related primarily to the sale of our Spanish distribution center in September 2021. Gain on sale of business/assets in 2020 of $2 related primarily to the sale of the China Wellness Plant in August 2020. Refer to Note 3, Discontinued Operations and Assets and Liabilities Held for Sale, to the Consolidated Financial Statements contained herein, for more information relating to these disposals.
Effective Tax Rate
The Adjusted effective tax rates and the effective tax rates in 2021 and 2020 continue to be impacted by our inability to recognize additional deferred tax assets in various jurisdictions related to our current-year operating results and were also negatively impacted by the country mix of earnings. In addition, the Adjusted effective tax rates and the effective tax rates in 2021 and 2020 continue to be impacted by withholding taxes associated with certain intercompany payments, including royalties, service charges and dividends, which in the aggregate are relatively consistent each year due to the need to mobilize funds to cover certain costs, such as interest on debt and corporate overhead.
The Adjusted effective tax rate and the effective tax rate in 2021 were impacted by an approximate net $6 benefit recognized due to a $11 reduction of uncertain tax positions offset with a net charge of approximately $4 associated with an increase in valuation allowances and approximately $1 of other various taxes associated with changes in tax estimates. The effective tax rate in 2021 was also impacted by CTI restructuring for which tax benefits cannot currently be claimed in all affected jurisdictions.
The Adjusted effective tax rate and the effective tax rate in 2020 were impacted by an approximate net $3 benefit recognized due to a $13 reduction of uncertain tax positions offset with a net charge of approximately $4 associated with an increase in valuation allowances and approximately $6 of other various taxes associated with changes in tax estimates. The effective tax rate in 2020 was also impacted by CTI restructuring and debt extinguishments for which tax benefits cannot currently be claimed in all affected jurisdictions.
Impact of Foreign Currency
As compared to the prior-year period, foreign currency in 2021 impacted our consolidated financial results in the form of:
•foreign currency transaction losses (classified within cost of sales and SG&A in our Consolidated Statements of Operations), which had an unfavorable impact to operating profit and Adjusted operating profit of approximately $25, or approximately 50 basis points to both operating margin and Adjusted operating margin;
•foreign currency translation, which had an unfavorable impact to operating profit and Adjusted operating profit of approximately $5, or less than 50 basis points on both operating margin and Adjusted operating margin; and
•foreign exchange net gains, on our working capital (classified within other income (expense), net in our Consolidated Statements of Operations) as compared to losses in the prior year, resulting in a favorable impact of approximately $5 before tax on both a reported and Adjusted basis.
Other Comprehensive (Loss) Income
Other comprehensive income, net of taxes was approximately $33 in 2022 compared with other comprehensive income of approximately $50 in 2021. The year-over-year comparison was favorably impacted by foreign currency translation gains of $60, compared to losses of $1 in the prior year and by unrealized losses on the revaluation of long-term intercompany balances of $17 compared to losses of $21 in the prior year, which relate to certain intercompany loans of a long term nature for which foreign currency transaction gains and losses are accounted for as translation adjustments in equity. These were offset by actuarial losses of approximately $16, compared to gains of approximately $67 in the prior year.
Other comprehensive income, net of taxes was approximately $50 in 2021 compared with other comprehensive loss of approximately $94 in 2020. The year-over-year comparison was favorably impacted by a small foreign currency translation loss, compared to losses of $163 in the prior year. In addition there were actuarial gains of approximately $67, compared to losses of approximately $7 in the prior year. This was partially offset by the unfavorable impact of unrealized losses on the revaluation of long-term intercompany balances of $21 compared to gains of $68 in the prior year. These impacts relate to certain intercompany loans of a long term nature for which foreign currency transaction gains and losses are accounted for as translation adjustments in equity.
Segment Review
The Company has updated its reportable segments to align with how the business is operated and managed since the merger
with Natura, we have identified two reportable segments based on geographic operations: Avon International and Avon Latin
America.
We determine segment profit by deducting the related costs and expenses from segment revenue. Segment profit excludes certain global expenses, CTI restructuring initiatives, certain significant asset impairment charges, and other items, which are not allocated to a particular segment. This is consistent with the manner in which we assess our performance and allocate resources. See Note 14, Segment Information, to the Consolidated Financial Statements included herein for a reconciliation of segment profit to operating profit.
Summarized financial information concerning our reportable segments was as follows:
Years ended December 31 2022 2021 2020
Total revenue Segment profit Total revenue Segment profit Total revenue Segment profit
Avon International $ 1,415.9 $ 60.4 $ 1,724.6 $ 49.9 $ 1,772.6 $ 27.4
Avon Latin America 1,331.6 (111.4) 1,654.7 (10.9) 1,845.9 (39.1)
Total from reportable segments $ 2,747.5 $ (51.0) $ 3,379.3 $ 39.0 $ 3,618.5 $ (11.7)
Below is an analysis of the key factors affecting revenue and segment profit by reportable segment for each of the years in the three-year period ended December 31, 2022. Foreign currency impact is determined as the difference between actual growth rates and Constant $ growth rates. Refer to "Non-GAAP Financial Measures" in this MD&A for more information.
Avon International - 2022 Compared to 2021
%/Point Change
2022 2021 US$ Constant $
Total revenue $ 1,415.9 $ 1,724.6 (18) % (8) %
Settlement agreement (23.7) - * *
Adjusted revenue 1,392.2 1,724.6 (19) % (10) %
Segment profit 60.4 49.9 21 % 25 %
Settlement agreement (23.7) - * *
Adjusted segment profit 36.7 49.9 (26) % (33) %
Segment margin 4.3 % 2.9 % 140 100
Settlement agreement (1.7) % - %
Adjusted segment margin 2.6 % 2.9 % (30) (70)
Change in Active Representatives (19) %
Change in units sold (20) %
Amounts in the table above may not necessarily sum due to rounding.
Total revenue decreased 18% compared to the prior-year period, favorably impacted by the recognition of revenue associated with a settlement agreement to resolve a breach of contract dispute in the current year period. Excluding this item, Adjusted revenue decreased 19% unfavorably impacted by foreign exchange variations, primarily driven by the strengthening of the U.S. dollar relative to the Turkish lira, Pound Sterling, Polish zloty and the Philippine peso.
On a Constant $ basis, Adjusted revenue decreased 10% driven by an increase in Average Representative Sales which was more than offset by a 19% decrease in Active Representatives across most markets in Europe, Middle East and Africa and Asia Pacific. The decrease in Revenue and Constant $ revenue was also due, in part, to the ongoing war between Ukraine and Russia, which affected revenues in this region.
Segment margin increased 140 basis points, or decreased 70 basis points on a Constant $ Adjusted segment margin basis as the decrease in the Constant $ Adjusted gross margin was partially offset by the lower Constant $ Adjusted SG&A as a percentage of total revenue.
Constant $ Adjusted gross margin declined as the favorable impact of price/mix was offset by higher supply chain costs and the unfavorable impact of foreign currency transaction losses.
The decrease in Constant $ Adjusted SG&A as a percentage of Adjusted revenue was due to cost saving programs including Headcount reductions as well as lower sales leader and field investments as investments made during the prior-year period to support our Representatives in response to the COVID-19 pandemic were discontinued in the current year.
Avon International - 2021 Compared to 2020
%/Point Change
2021 2020 US$ Constant $
Total revenue 1,724.6 1,772.6 (3) % (4) %
Segment profit 49.9 27.4 82 % 131 %
Segment margin 2.9 % 1.5 % 140 200
Change in Active Representatives (15) %
Change in units sold (10) %
Amounts in the table above may not necessarily sum due to rounding.
Total revenue decreased 3% compared to the prior-year period, including the favorable impact of foreign exchange which was primarily driven by the weakening of the U.S. dollar relative to the South African rand and the British pound, partially offset by the strengthening of the U.S. dollar relative to the Turkish lira. On a Constant $ basis, revenue decreased 4% driven by an increase in Average Representative Sales which was more than offset by a 15% decrease in Active Representatives.
The decrease in Revenue and Constant $ revenue was mostly driven by changes in COVID-19 restrictions in many markets compared to the same period in the prior year, with some markets remaining materially impacted by COVID-19 restrictions and yet to show signs of recovery.
The contribution of Active Representatives and Average Representative Sales into total revenue was also impacted by a reduction in the frequency of campaign cycles as part of our strategy to simplify our business, with all markets now on a monthly campaign cycle.
Segment margin increased 140 basis points, or 200 on a Constant $ basis, driven by the combination of an increase in the Constant $ Adjusted gross margin and lower SG&A as a percentage of total revenue.
Constant $ Adjusted gross margin increased as the positive impact of price/mix offset the impact of higher supply chain costs.
The decrease in Constant $ Adjusted SG&A as a percentage of Adjusted revenue was largely due to decreases in bad debts.
Avon Latin America - 2022 Compared to 2021
%/Point Change
2022 2021 US$ Constant $
Total revenue $ 1,331.6 $ 1,654.7 (20) % (17) %
Certain Brazil indirect taxes benefit 10.0 (21.5) * *
Adjusted revenue 1,341.6 1,633.2 (18) % (15) %
Avon Luxembourg - (249.2) * *
Adjusted revenue excluding Avon Luxembourg 1,341.6 1,384.0 (3) % - %
Segment profit (111.4) (10.9) * *
Certain Brazil indirect taxes benefit 13.3 (21.5) * *
Adjusted segment profit (98.1) (32.4) 203 % 163 %
Avon Luxembourg - (21.4) * *
Adjusted profit excluding Avon Luxembourg (98.1) (53.8) 82 % 55 %
Segment margin (8.4) % (0.7) % (770) (620)
Certain Brazil indirect taxes benefit (1.1) % 1.3 % * *
Adjusted segment margin (7.3) % (2.0) % (530) (390)
Avon Luxembourg - % (1.9) % * *
Adjusted segment margin excluding Avon Luxembourg (7.3) % (3.9) % (340) (210)
Change in Active Representatives (25) %
Change in units sold (32) %
Amounts in the table above may not necessarily sum due to rounding.
Total revenue decreased 20% compared to the prior-year period, favorably impacted by the recognition of certain Brazil indirect taxes in the prior-year period and unfavorably impacted by the recognition of certain Brazil indirect taxes in the current year period. Excluding these items, Adjusted revenue decreased 18% unfavorably impacted by foreign exchange variations primarily driven by the weakening of the U.S. dollar relative to the Brazilian real, offset by the strengthening of the U.S. dollar relative to the Argentinian peso.
On a Constant $ basis, Adjusted revenue decreased 15% which includes the impact from the sale of Avon Luxembourg, including our Mexican business, on July 1, 2021. Constant $ Adjusted revenue excluding the impact of the sale of Avon Luxembourg was 0%, as increases in Average Representative Sales were offset by a 25% decrease in Active Representatives.
Revenue in Brazil decreased 6% compared to the prior-year period, unfavorably impacted by the recognition of certain Brazil indirect taxes in both the current and prior-year periods. Excluding this item, Adjusted revenue decreased 1% favorably impacted by foreign exchange. On an Adjusted Constant $ basis, revenue decreased 6%, primarily driven by stable in Active Representatives and changes in macro-economic conditions.
Segment margin decreased 770 basis points, or a 390 basis points decrease on a Constant $ Adjusted segment margin basis, driven by the combination of a decrease in the Constant $ Adjusted gross margin and higher SG&A as a percentage of total revenue.
Constant $ Adjusted gross margin declined as the favorable impact of price/mix was offset by higher supply chain costs and the unfavorable impact of foreign currency transaction losses.
The increase in Constant $ Adjusted SG&A as a percentage of Adjusted revenue was largely due to the impact of revenue decline, causing a deleveraging of our fixed expenses.
Avon Latin America - 2021 Compared to 2020
%/Point Change
2021 2020 US$ Constant $
Total revenue $ 1,654.7 $ 1,845.9 (10) % (8) %
Certain Brazil indirect taxes (21.5) - * *
Adjusted revenue 1,633.2 1,845.9 (12) % (9) %
Avon Luxembourg (249.2) (431.8) * *
Adjusted revenue excluding Avon Luxembourg 1,384.0 1,414.1 (2) % 2 %
Segment profit (10.9) (39.1) (72) % (45) %
Certain Brazil indirect taxes (21.5) - * *
Adjusted segment profit (32.4) (39.1) (17) % 3 %
Avon Luxembourg (21.4) (27.7) * *
Adjusted profit excluding Avon Luxembourg (53.8) (66.8) (19) % (13) %
Segment margin (.7) % (2.1) % 140 30
Certain Brazil indirect taxes 1.3 - * *
Adjusted segment margin (2.0) % (2.1) % 10 (20)
Avon Luxembourg (1.9) % (2.6) % * *
Adjusted segment margin excluding Avon Luxembourg (3.9) % (4.7) % 80 60
Change in Active Representatives (16) %
Change in units sold (20) %
Amounts in the table above may not necessarily sum due to rounding.
Total revenue decreased 10% compared to the prior-year period, favorably impacted by the recognition of certain Brazil indirect taxes in the current year. Excluding these items, Adjusted revenue for the region was down 12%, unfavorably impacted by foreign exchange, which was driven by the strengthening of the U.S. dollar relative to multiple currencies, primarily the Brazilian real and the Argentinian peso, partially offset by the weakening of the U.S. dollar relative to the Mexican peso. On a Constant $ basis, Adjusted revenue declined 9% which includes the impact from the sale of Avon Luxembourg, including our Mexican business, on July 1, 2021. Constant $ Adjusted revenue excluding the impact of the sale of Avon Luxembourg increased 2% primarily driven by an increase in Average Representative Sales.
Revenue in Brazil decreased 14% compared to the prior year period, despite the favorable impact of the recognition of certain Brazil indirect taxes in the current year. Excluding these items, Adjusted revenue decreased 17% unfavorably impacted by foreign exchange. On an Adjusted Constant $ basis, revenue decreased 13% primarily driven by decrease in Active Representatives, the COVID-19 second wave and changes in macro-economic conditions.
Segment margin increased 140 basis points, or a 20 basis points decrease on a Constant $ Adjusted segment margin basis, driven by the combination of an increase in the Constant $ Adjusted gross margin and higher SG&A as a percentage of total revenue.
Constant $ Adjusted gross margin increased slightly as the positive impact of price/mix and the favorable impact of foreign currency movements were offset by the impact of higher supply chain costs.
The increase in Constant $ Adjusted SG&A as a percentage of Adjusted revenue was largely due to the impact of revenue decline, causing a deleveraging of our fixed expenses, as well as increases in bad debts and advertising expenses, primarily in Brazil.
Liquidity and Capital Resources
Our principal sources of funds historically have been cash flows from operations, public offerings of notes, bank financings, issuance of commercial paper, borrowings under lines of credit and private placement of notes. Furthermore, since January 3, 2020, we are part of the Natura &Co group of companies which gives us access to intercompany funding. The Company has received an irrevocable commitment from Natura &Co Holding that it will provide sufficient financial support if and when needed to enable the Company to meet its obligations as they come due in the normal course of business for a period of not less than 12 months from the date issuance of the Consolidated Financial Statements contained herein.
Cash and cash equivalents
The Company has cash and cash equivalents of $367.6 at December 31, 2022.
In November 2022, the Company’s subsidiary, Avon Cosmetics Limited entered into a two-year committed intercompany multi-currency revolving credit facility with Natura &Co Luxembourg Holdings S.à r.l, a subsidiary of Natura &Co Holding and an affiliate of the Company (“Natura &Co Luxembourg”), in the amount of $300, of which $226 was drawn down at December 31, 2022. Borrowings under this facility will be used to reduce short-term financing from third-party banks and will bear interest at a rate per annum of 3% plus applicable currency benchmark rate.
Refinancing and the subsequent repurchase of Unsecured Notes
In May 2022, Avon Products, Inc. and Avon Cosmetics Limited entered into promissory notes with Natura &Co UK Holding plc ("Natura UK"), a subsidiary of Natura &Co Holding, in the amount of $405 and $215 respectively. These promissory notes bear interest at a rate per annum of 6.71% and mature on May 17, 2029. In addition, in June 2022, Avon Cosmetics Limited entered into an additional promissory note with Natura &Co Luxembourg in the amount of $115. This promissory note bears interest at a rate per annum of 6.51% and matures on June 28, 2029.
In May 2022, we redeemed in full and repurchased $461.9 of our 5% Notes due March 15, 2023 (the "2023 Notes"). The aggregate repurchase price was equal to the principal amount of the 2023 Notes, plus a premium of $15.0 and accrued interest of $5.4. In connection with the repurchase, we incurred a loss on extinguishment of debt of $15.7 before tax in the quarter ended June 30, 2022 consisting of the $15.0 premium paid for the repurchase and $.7 for the write-off of debt issuance costs and discounts related to the initial issuance of the 2023 Notes that were repurchased.
In June 2022, the $210 outstanding under the Promissory Note with a subsidiary of Natura &Co Holding and an affiliate of the Company, maturing in November 2022, was repaid in full.
Short term commitments
At December 31, 2022, our debt and other financing maturing within one year of include $537 of intercompany loans between affiliates of Natura &Co Holding and Avon Products, Inc. affiliates, including $226 drawn down under a $300 committed intercompany multi-currency revolving credit facility from an affiliate of Natura &Co Holding expiring in November 2024.
In addition, our short term contractual financial obligations and commitments include approximately $102 relating to purchase obligations and approximately $39 relating to operating lease repayments. We also expect to make contributions in the range of $5 to $10 to our defined benefit pension and postretirement plans. These commitments and repayments are expected to be fulfilled through a combination of operating cash flows and where necessary, further financial support from Natura &Co Holding (see going concern below).
Long-term commitments
At December 31, 2022, our long-term debt and other financing include $692 of loans from affiliates of Natura &Co Holding due in 2028, $735 of loans from affiliates of Natura &Co Holding due in 2029 and $216 of Notes due in March 2043. In addition, our long-term contractual financial obligations and commitments include operating lease payments of approximately $87 and purchase obligations of approximately $122. These commitments and repayments are expected to be fulfilled through a combination of operating cash flows and where necessary, further financial support from Natura &Co Holding (see going concern below).
Off balance sheet arrangements
At December 31, 2022, the Company has a issued a number of guarantees totaling $181 that it could be required to make in the event of adverse judgments in a number of lawsuits in Brazil. See Note 17, Contingencies, to the Consolidated Financial Statements included herein for more information. The company has no other material off balance sheet arrangements at December 31, 2022.
Going concern
Considering the uncertain nature of any possible future COVID-19 impacts which are beyond the Company’s control and the ongoing war between Ukraine and Russia, we expect these factors to continue to adversely affect our operations, which could in turn result in lower revenues and lower cash generation from activities. If these impacts are deeper or for longer than we anticipate, the Company could take certain further actions to ease the pressure of certain cash outflows, such as reducing discretionary expenditure, selling non-core assets, accessing government pandemic initiatives or arranging borrowing facilities with third-party banks and affiliate companies.
The Company has received an irrevocable commitment from Natura &Co Holding that it will provide sufficient financial support if and when needed to enable the Company to meet its obligations as they come due in the normal course of business. This commitment is effective through to March 31, 2024, a period of more than 12 months from the date of issuance of the Consolidated Financial Statements. See Note 7, Debt and Other Financing, and Note 15, Leases and Commitments,
respectively, for information on our debt and contractual financial obligations and commitments, including the loans from Natura &Co and its affiliates maturing within one year.
Other liquidity matters
We may seek to retire our outstanding debt in open market purchases, through existing call mechanisms, privately negotiated transactions, through derivative instruments, cash tender offers or otherwise. Repurchases of debt may be funded by cash or the incurrence of additional debt and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors, and the amounts involved may be material. We may also elect to incur additional debt to finance ongoing operations or to meet our other liquidity needs. However, our credit ratings remain below investment grade which may impact our ability to access such transactions on favorable terms, if at all. For more information, see "Risk Factors - Our credit ratings are below investment grade, which could limit our access to financing, affect the market price of our financing and increase financing costs. A downgrade in our credit ratings may adversely affect our access to liquidity," and "Risk Factors - 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" included in Item 1A.
Our liquidity could also be negatively impacted by restructuring initiatives, dividends, capital expenditures, acquisitions, and certain contingencies, including any legal or regulatory settlements, described more fully in Note 17, Contingencies, to the Consolidated Financial Statements included herein. See our Cautionary Statement for purposes of the "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995 on pages 1 through 2.
Balance Sheet Data
2022 2021
Cash and cash equivalents $ 367.6 $ 251.5
Restricted cash 0.3 -
Total debt $ 2,184.9 $ 1,816.6
Working capital 161.1 66.2
Cash Flows
2022 2021 2020
Net cash (used) provided by continuing operating activities $ (163.1) $ (260.4) $ (270.1)
Net cash (used) provided by continuing investing activities (38.8) (48.1) (20.5)
Net cash from continuing financing activities 342.6 222.6 39.1
Effect of exchange rate changes on cash and equivalents 2.4 (22.0) (19.5)
Net Cash from Continuing Operating Activities
Net cash used by continuing operating activities during 2022 was approximately $163 as compared to net cash used by continuing operating activities of approximately $260 during 2021, a decreased cash outflow of approximately $97. The decrease in net cash used by operating activities was primarily driven by a reduction in inventory and increased payables offset by increased losses in 2022.
Net cash used by continuing operating activities during 2021 was approximately $260 as compared to net cash used by continuing operating activities of approximately $270 during 2020, a decreased cash outflow of approximately $10. The decrease in net cash used by operating activities was primarily due to lower cash losses in 2021 impacted by one-time costs linked to the acquisition by Natura &Co Holding in 2020, this was partially offset by a decrease in debt related costs in 2021.
We maintain defined benefit pension plans and unfunded supplemental pension benefit plans (see Note 13, Employee Benefit Plans, to the Consolidated Financial Statements included herein). 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. The amounts necessary to fund future obligations under these plans could vary depending on estimated assumptions (as detailed in "Critical Accounting Estimates - Pension and Postretirement Expense" in this MD&A). The future funding for these plans will depend on economic conditions, employee demographics, mortality rates, the number of associates electing to take lump-sum distributions, investment performance and funding decisions. Based on current assumptions, we expect to make contributions in the range of $5 to $10 to fund our global defined benefit pension and postretirement plans during 2023.
Net Cash from Continuing Investing Activities
Net cash used by continuing investing activities during 2022 was approximately $39, as compared to net cash used by continuing investing activities of approximately $48 during 2021. The approximate $9 decrease to net cash used in investing activities was primarily due to net proceeds of $17 received in 2021 in relation to the sale of our Spanish distribution center, partially offset by reduced capital expenditure in the current year compared to the prior year.
Net cash used by continuing investing activities during 2021 was approximately $48, as compared to net cash used by continuing investing activities of approximately $21 during 2020. The approximate $27 increase to net cash used in investing activities was driven by higher capital expenditures in the current year compared to the prior year. During 2021, net proceeds of $17 were received in relation primarily to the sale of the Spanish distribution center during the third quarter of 2021.
Net Cash from Continuing Financing Activities
Net cash provided by continuing financing activities during 2022 was approximately $343, as compared to net cash provided by financing activities of $223 in 2021. The approximate $120 increase in cash provided by continuing financial activities is primarily due to the favorable increase in proceeds from debt, partially offset by the adverse increase in repayment of debt in the current year compared to the prior year. During 2022, the proceeds from debt issued consisted primarily of loans from affiliates of Natura &Co. Note 7, Debt and Other Financing, to the Consolidated Financial Statements included herein for more information on these items.
Net cash provided by continuing financing activities during 2021 was approximately $223, as compared to net cash provided by financing activities of $39 in 2020. The approximate $184 increase in cash provided by continuing financial activities is primarily due to the favorable decrease in repayment of debt, partially offset by the adverse decrease in proceeds from debt in the current year compared to the prior year. During 2021, the proceeds from debt issued consisted primarily of loans from affiliates of Natura &Co. Note 7, Debt and Other Financing, to the Consolidated Financial Statements included herein for more information on these items.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(U.S. dollars in millions, except per share data)
The overall objective of our financial risk management program is to reduce the potential negative effects from changes in foreign exchange and interest rates arising from our business activities. We may reduce our exposure to fluctuations in fair value or cash flows associated with changes in interest rates and foreign exchange rates by creating offsetting positions through the use of derivative financial instruments and through operational means. Since we may use foreign currency rate-sensitive instruments to hedge a portion of our existing and forecasted transactions, we expect that any loss in value for the hedge instruments generally would be offset by changes in the value of the underlying transactions.
We do not enter into derivative financial instruments for trading or speculative purposes, nor are we a party to leveraged derivatives. The master agreements governing our derivative contracts generally contain standard provisions that could trigger early termination of the contracts in some circumstances.
Interest Rate Risk
Approximately 3% and 5% of our debt portfolio at December 31, 2022 and 2021, respectively, was exposed to floating interest rates.
Our long-term borrowings at year-end were all at fixed rates of interest and are therefore not sensitive to interest rate changes.
Foreign Currency Risk
We conduct business globally, with operations in various locations around the world. Over the past six years, all of our consolidated revenue was derived from operations of subsidiaries outside of the U.S.. The functional currency for most of our foreign operations is their local currency. We are exposed to changes in financial market conditions in the normal course of our operations, primarily due to international businesses and transactions denominated in foreign currencies and the use of various financial instruments. We are not able to project, in any meaningful way, the possible effect of these foreign currency fluctuations on translated amounts or future earnings. At December 31, 2022, the primary foreign currencies for which we had net underlying foreign currency exchange rate exposures were the Argentine peso, Brazilian real, British pound, Chilean peso, Colombian peso, the euro, Peruvian new sol, Philippine peso, Polish zloty, Romanian leu, Russian ruble, South African rand, Turkish lira and Ukrainian hryvnia.
We may reduce our exposure to fluctuations in fair value or cash flows associated with changes in foreign exchange rates by creating offsetting positions, including through the use of derivative financial instruments. Our hedges of our foreign currency exposure are not designed to, and, therefore, cannot entirely eliminate the effect of changes in foreign exchange rates on our consolidated financial position, results of operations and cash flows.
Our foreign-currency financial instruments were analyzed at year-end to determine their sensitivity to foreign exchange rate changes. Based on our foreign exchange contracts at December 31, 2022, all of which were taken out to hedge underlying foreign currency exposures, a hypothetical 10% appreciation of the U.S. dollar against our foreign exchange contracts would reduce earnings by $17 and a hypothetical 10% depreciation of the U.S. dollar against our foreign exchange contracts would increase earnings by $17. This hypothetical analysis does not consider our underlying foreign currency exposures. The hypothetical impact was calculated on the open positions using forward rates at December 31, 2022, adjusted for an assumed 10% appreciation or 10% depreciation of the U.S. dollar against these hedging contracts.
Credit Risk of Financial Instruments
Our foreign currency derivatives are typically comprised of over-the-counter forward contracts, swaps or options with major international financial institutions. Although our theoretical credit risk is the replacement cost at the then estimated fair value of these instruments, we believe that the risk of incurring credit risk losses is remote and that such losses, if any, would not be material.
Non-performance of the counterparties on the balance of all the foreign exchange agreements would not have resulted in any write-off at December 31, 2022. In addition, in the event of non-performance by such counterparties, we would be exposed to market risk on the underlying items being hedged as a result of changes in foreign exchange rates.
See Note 10, Financial Instruments and Risk Management to the Consolidated Financial Statements included herein for more information.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Index on page of our Consolidated Financial Statements and Notes thereto contained herein.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, our principal executive and principal financial officers carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Disclosure controls and procedures are designed to ensure that information relating to Avon (including our consolidated subsidiaries) required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the U.S. and Exchange Commission’s rules and forms and to ensure that information required to be disclosed is accumulated and communicated to management to allow timely decisions regarding disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply its judgment in evaluating and implementing possible controls and procedures.
Based upon their evaluation, the principal executive and principal financial officers concluded that our disclosure controls and procedures were effective as of December 31, 2022, at the reasonable assurance level.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is defined as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
•pertain to the maintenance of records that, in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process, and it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Under the supervision and with the participation of our management, including our principal executive and principal financial officers, we assessed as of December 31, 2022, the effectiveness of our internal control over financial reporting. This assessment was based on criteria established in the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on our assessment using those criteria, our management concluded that our internal control over financial reporting as of December 31, 2022, was effective.
Changes in Internal Control over Financial Reporting
Our management has evaluated, with the participation of our principal executive and principal financial officers, whether any changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2022 have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on the evaluation we conducted, our management has concluded that no such changes have occurred.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
Not applicable.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information called for by this item has been omitted pursuant to General Instruction I(2)(c) of Form 10-K.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item has been omitted pursuant to General Instruction I(2)(c) of Form 10-K.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information called for by this item has been omitted pursuant to General Instruction I(2)(c) of Form 10-K

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information called for by this item has been omitted pursuant to General Instruction I(2)(c) of Form 10-K.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Independent Registered Public Accounting Firm Fees
The Company's principal accountant for 2022 and 2021 was PricewaterhouseCoopers LLP, United Kingdom ("PwC-UK"). The following table sets forth the aggregate fees for professional services rendered for us by PwC, as of and for the years ended December 31, 2022 and December 31, 2021.
2022 2021
Audit Fees $ 6.5 $ 7.2
Audit-Related Fees - -
Tax Fees - -
All Other Fees - -
Total $ 6.5 $ 7.2
Audit Fees. These amounts represent the aggregate fees for professional services rendered by PwC for the audit of our annual financial statements for the years ended December 31, 2022 and 2021, the review of the financial statements included in our Quarterly Reports on Form 10-Q for those years, and services related to statutory and regulatory filings and engagements for such years.
Audit-Related Fees. These amounts represent the aggregate fees for assurance and related services performed by PwC that are reasonably related to the performance of the audit or review of our financial statements. In 2022 and 2021, audit-related fees were de minimis.
Tax Fees. In 2022 and 2021, tax-related fees were de minimis.
All Other Fees. These amounts represent the aggregate fees for other services rendered by PwC not included in any of the foregoing categories. In 2022, all other fees were de minimis.
Audit and Non-Audit Services Pre-Approval Policy
Since the merger of Avon into Natura &Co, in January 2020, Avon no longer maintains an Audit Committee and decisions related to the Company’s independent auditor are taken by Natura &Co in compliance with paragraph (c) (7)(i) of Rule 2-01 of Regulation S-X. Prior to the merger of Avon into Natura &Co, the Company's Audit Committee had historically established a policy for the pre-approval of all audit and non-audit services by PricewaterhouseCoopers LLP and its worldwide affiliates ("PwC"), and the corresponding fees.
The current Natura &Co policy, and the former Avon Audit Committee policy, was established to (i) strictly disallow any service that would be a prohibited service; (ii) allow audit, audit-related, and tax services only if the particular type of service is on the list of types of services that has been pre-approved by the Audit Committee, specific procedures are followed to ensure appropriate management assessment of such service, the proposed fee is within the overall limit set by the Audit Committee for that category of service, and the Audit Committee is informed on a timely basis of each such service; and (iii) allow other services not within any of the foregoing categories only if each such service and the corresponding fee is approved in advance
by the Audit Committee or by one or more members of the Audit Committee with subsequent approval by the Audit Committee. All services provided by PwC during 2022 and 2021 have been reviewed, and the amount of fees paid to PwC for such services and concluded that the provision of services by PwC is compatible with the maintenance of their independence.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) 1. Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm
See Index on page.
(a) 2. Financial Statement Schedule
See Index on page.
All other schedules are omitted because they are not applicable or because the required information is shown in the consolidated financial statements and notes.
(a) 3. Index to Exhibits
Exhibit Number Description
2.1 Agreement and Plan of Mergers, dated as of May 22, 2019, among Avon Products, Inc., Natura Cosméticos S.A., Nectarine Merger Sub I, Inc., Nectarine Merger Sub II, Inc. and Natura Holding S.A (incorporated by reference to Exhibit 2.1 to Avon's Current Report on Form 8-K filed on May 24, 2019).
2.2 Amendment Number One, dated as of October 3, 2019, to the Agreement and Plan of Mergers, dated as of May 22, 2019, among Avon Products, Inc., Natura Cosméticos S.A., Nectarine Merger Sub I, Inc., Nectarine Merger Sub II, Inc. and Natura &Co Holding S.A (incorporated by reference to Exhibit 2.1 to Avon's Current Report on Form 8-K filed on October 4, 2019).
2.3 Amendment Number Two, dated as of November 5, 2019, to the Agreement and Plan of Mergers, dated as of May 22, 2019, among Avon Products, Inc., Natura Cosméticos S.A., Nectarine Merger Sub I, Inc., Nectarine Merger Sub II, Inc. and Natura &Co Holding S.A. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 5, 2019).
2.4 Separation and Investment Agreement, dated as of December 17, 2015, by and among Avon Products, Inc., C-A NA LLC and Cleveland NA Investors LLC (incorporated by reference to Exhibit 2.1 to Avon’s Current Report on Form 8-K filed on December 21, 2015).
3.1 Restated Certificate of Incorporation of Avon Products, Inc. (incorporated by reference to Exhibit 3.1 to Avon's Current Report on Form 8-K filed on January 3, 2020).
3.2 Amended and Restated Bylaws of Avon Products, Inc. (incorporated by reference to Exhibit 3.2 to Avon's Current Report on Form 8-K filed on January 3, 2020).
4.1 Indenture, dated as of February 27, 2008, between Avon Products, Inc. and Deutsche Bank Trust Company Americas, as Trustee (incorporated by reference to Exhibit 4.5 to Avon’s Current Report on Form 8-K filed on March 4, 2008).
4.2 Eighth Supplemental Indenture, dated as of March 12, 2013, between Avon Products, Inc. and Deutsche Bank Trust Company Americas, as Trustee, with respect to the issuance of the 6.950% Notes due 2043 (incorporated by reference to Exhibit 4.5 to Avon’s Current Report on Form 8-K filed on March 13, 2013).
4.3 Tenth Supplemental Indenture, dated October 2, 2019, between Avon Products, Inc., as Issuer, and Deutsche Bank Trust Company Americas, as trustee (incorporated by reference to Exhibit 4.1 to Avon's Current Report on Form 8-K filed on October 2, 2019).
4.4 Promissory Note dated as of May 17, 2022 between Avon Products, Inc. and Natura &Co UK Holdings Plc (incorporated by reference to Exhibit 4.1 to Avon’s Current Report on Form 8-K filed on May 23, 2022).
4.5 Promissory Note dated as of May 17, 2022 between Avon Cosmetics Limited and Natura &Co UK Holdings Plc (incorporated by reference to Exhibit 4.2 to Avon’s Current Report on Form 8-K filed on May 23, 2022).
4.6 Promissory Note dated as of June 29, 2022 between Avon Cosmetics Limited and Natura &Co Luxembourg Holdings S.à.r.l. (incorporated by reference to Exhibit 4.1 to Avon’s Current Report on Form 8-K filed on July 1, 2022).
10.1* Equity Purchase Agreement, dated as of January 8, 2019, by and among TheFaceShop Co., Ltd., Avon Asia Holdings Company and Avon Products (China) Co., Ltd. (incorporated by reference to Exhibit 10.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 2019).
10.2* Avon Products, Inc. 2016 Omnibus Incentive Plan (Amended and Restated as of May 16, 2019) (incorporated by reference to Appendix A to Avon's Proxy Statement as filed on April 2, 2019).
10.3* Form of Performance Contingent Restricted Stock Unit Award Agreement under the Avon Products, Inc. 2016 Omnibus Incentive Plan (Amended and Restated as of May 16, 2019) (incorporated by reference to Exhibit 10.3 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 2019).
10.4* Form of Retention Restricted Stock Unit Award Agreement under the Avon Products, Inc. 2016 Omnibus Incentive Plan (Amended and Restated as of May 16, 2019) (incorporated by reference to Exhibit 10.4 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 2019).
10.5* Form of Restricted Stock Unit Award Agreement under the Avon Products, Inc. 2016 Omnibus Incentive Plan (Amended and Restated as of May 16, 2019) (incorporated by reference to Exhibit 10.5 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 2019).
10.6* Form of Stock Appreciation Right Certificate Agreement under the Avon Products, Inc. 2016 Omnibus Incentive Plan (Amended and Restated as of May 16, 2019) (incorporated by reference to Exhibit 10.6 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 2019).
10.7* Form of Stock Option Award Agreement under the Avon Products, Inc. 2016 Omnibus Incentive Plan (Amended and Restated as of May 16, 2019) (incorporated by reference to Exhibit 10.7 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 2019).
10.8* Avon Products, Inc. 2010 Stock Incentive Plan (incorporated by reference to Appendix E to Avon’s Proxy Statement as filed on March 25, 2010).
10.9* First Amendment to the Avon Products, Inc. 2010 Stock Incentive Plan, dated March 1, 2016 (incorporated by reference to Exhibit 10.6 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 2016).
10.10* Form of Stock Option Award Agreement under the Avon Products, Inc. 2010 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to Avon’s Current Report on Form 8-K filed on May 24, 2010).
10.11* Form of Restricted Stock Unit Award Agreement under the Avon Products, Inc. 2010 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to Avon’s Current Report on Form 8-K filed on May 24, 2010).
10.12* Form of Retention Restricted Stock Unit Award Agreement under the Avon Products, Inc. 2010 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to Avon’s Current Report on Form 8-K filed on May 24, 2010).
10.13* Form of Performance Restricted Stock Unit Award Agreement under the Avon Products, Inc. 2010 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to Avon’s Current Report on Form 8-K filed on March 8, 2011).
10.14* Form of Performance Restricted Stock Unit Award Agreement under the Avon Products, Inc. 2010 Stock Incentive Plan (incorporated by reference to Exhibit 10.21 to Avon's Annual Report on Form 10-K for the year ended December 31, 2011).
10.15* Form of Retention Restricted Stock Unit Award Agreement under the Avon Products, Inc. 2010 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to Avon’s Current Report on Form 8-K filed on March 8, 2011).
10.16* Form of Retention Restricted Stock Unit Award Agreement under the Avon Products, Inc. 2010 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 2012).
10.17* Form of Restricted Stock Unit Award Agreement under the Avon Products, Inc. 2010 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 2012).
10.18* Avon Products, Inc. 2013 Stock Incentive Plan (incorporated by reference to Appendix A to Avon’s Proxy Statement as filed on April 2, 2013).
10.19* Avon Products, Inc. 2013 Stock Incentive Plan, as amended and restated (incorporated by reference to Appendix A to Avon’s Proxy Statement as filed on March 27, 2015).
10.20* First Amendment to the Avon Products, Inc. 2013 Stock Incentive Plan, as amended and restated, dated March 1, 2016 (incorporated by reference to Exhibit 10.5 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 2016).
10.21* Form of Restricted Stock Unit Award Agreement under the Avon Products, Inc. 2013 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to Avon’s Current Report on Form 8-K filed on May 7, 2013).
10.22* Form of Restricted Stock Unit Award Agreement under the Avon Products, Inc. 2013 Stock Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.2 to Avon’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015).
10.23* Form of Retention Restricted Stock Unit Award Agreement under the Avon Products, Inc. 2013 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to Avon’s Current Report on Form 8-K filed on May 7, 2013).
10.24* Form of Retention Restricted Stock Unit Award Agreement under the Avon Products, Inc. 2013 Stock Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.3 to Avon’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015).
10.25* Form of Performance Contingent Restricted Stock Unit Award Agreement under the Avon Products, Inc. 2013 Stock Incentive Plan (incorporated by reference to Exhibit 10.5 to Avon’s Current Report on Form 8-K filed on May 7, 2013).
10.26* Form of Performance Contingent Restricted Stock Unit Award Agreement under the Avon Products, Inc. 2013 Stock Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.4 to Avon’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015).
10.27* Form of Stock Option Award Agreement under the Avon Products, Inc. 2013 Stock Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.11 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 2016).
10.28* Avon Products, Inc. 2016 Omnibus Incentive Plan (incorporated by reference to Appendix B to Avon's Proxy Statement as filed on April 15, 2016).
10.29* Form of Retention Restricted Stock Unit Award Agreement under the Avon Products, Inc. 2016 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.2 to Avon's Current Report on Form 8-K filed on May 26, 2016).
10.30* Form of Restricted Stock Unit Award Agreement under the Avon Products, Inc. 2016 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.3 to Avon's Current Report on Form 8-K filed on May 26, 2016).
10.31* Form of Performance Contingent Restricted Stock Unit Award Agreement under the Avon Products, Inc. 2016 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.4 to Avon's Current Report on Form 8-K filed on May 26, 2016).
10.32* Form of Stock Option Award Agreement under the Avon Products, Inc. 2016 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.5 to Avon's Current Report on Form 8-K filed on May 26, 2016).
10.33* Form of Stock Appreciation Right Certificate Agreement under the Avon Products, Inc. 2016 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.6 to Avon's Current Report on Form 8-K filed on May 26, 2016).
10.34* Avon Products, Inc. Deferred Compensation Plan, as amended and restated as of January 1, 2008 (incorporated by reference to Exhibit 10.20 to Avon’s Annual Report on Form 10-K for the year ended December 31, 2007).
10.35* First Amendment, dated as of December 7, 2010, to the Avon Products, Inc. Deferred Compensation Plan, as amended and restated as of January 1, 2008 (incorporated by reference to Exhibit 10.22 to Avon’s Annual Report on Form 10-K for the year ended December 31, 2010).
10.36* Second Amendment, dated March 2, 2011, to the Avon Products, Inc. Deferred Compensation Plan, as amended and restated as of January 1, 2008 (incorporated by reference to Exhibit 10.4 to Avon’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011).
10.37* Third Amendment, dated November 10, 2014, to the Avon Products, Inc. Deferred Compensation Plan, as amended and restated as of January 1, 2008 (incorporated by reference to Exhibit 10.27 to Avon's Annual Report on Form 10-K for the year ended December 31, 2014).
10.38* Fourth Amendment, dated February 29, 2016, to the Avon Products, Inc. Deferred Compensation Plan, as amended and restated as of January 1, 2008 (incorporated by reference to Exhibit 10.10 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 2016).
10.39* Sixth Amendment to Avon Products, Inc Deferred Compensation Plan (incorporated by reference to Exhibit 10.83 to Avon's Annual Report on Form 10-K for the year ended December 31, 2020)
10.40* Avon Products, Inc. Compensation Plan for Non-Employee Directors, amended and restated as of May 6, 2010 (incorporated by reference to Exhibit 10.5 to Avon’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010).
10.41* Avon Products, Inc. Compensation Plan for Non-Employee Directors, amended and restated as of January 1, 2013 (incorporated by reference to Exhibit 10.28 to Avon's Annual Report on Form 10-K/A for the year ended December 31, 2012).
10.42* Avon Products, Inc. Compensation Plan for Non-Employee Directors, amended and restated as of February 8, 2016 (incorporated by reference to Exhibit 10.29 to Avon's Annual Report on Form 10-K for the year ended December 31, 2015).
10.43* Board of Directors of Avon Products, Inc. Deferred Compensation Plan, amended and restated as of May 6, 2010 (incorporated by reference to Exhibit 10.6 to Avon’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010).
10.44* Avon Products, Inc. 2013-2017 Executive Incentive Plan (incorporated by reference to Appendix B to Avon’s Proxy Statement as filed on April 2, 2013).
10.45* First Amendment, dated March 1, 2016, to Avon Products, Inc. 2013-2017 Executive Incentive Plan (incorporated by reference to Exhibit 10.8 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 2016).
10.46* Benefit Restoration Pension Plan of Avon Products, Inc., as amended and restated as of January 1, 2009 (incorporated by reference to Exhibit 10.26 to Avon’s Annual Report on Form 10-K for the year ended December 31, 2008).
10.47* First Amendment, dated as of December 13, 2010, to the Benefit Restoration Pension Plan of Avon Products, Inc., as amended and restated as of January 1, 2009 (incorporated by reference to Exhibit 10.32 to Avon's Annual report on Form 10-K for the year ended December 31, 2011).
10.48* Second Amendment, dated as of September 19, 2012, to the Benefit Restoration Pension Plan of Avon Products, Inc., as amended and restated as of January 1, 2009 (incorporated by reference to Exhibit 10.3 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 2012).
10.49* Third Amendment, dated as of November 10, 2014, to the Benefit Restoration Pension Plan of Avon Products, Inc., as amended and restated as of January 1, 2009 (incorporated by reference to Exhibit 10.35 to Avon's Annual Report on Form 10-K for the year ended December 31, 2014).
10.50* Fourth Amendment, dated February 29, 2016, to the Benefit Restoration Pension Plan of Avon Products, Inc., as amended and restated as of January 1, 2009 (incorporated by reference to Exhibit 10.9 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 2016).
10.51* Avon Products, Inc. Management Incentive Plan, effective as of January 1, 2009 (incorporated by reference to Exhibit 10.50 to Avon’s Annual Report on Form 10-K for the year ended December 31, 2008).
10.52* Avon Products, Inc. Management Incentive Plan, amended and restated effective as of January 1, 2015 (incorporated by reference to Exhibit 10.50 to Avon's Annual Report on Form 10-K for the year ended December 31, 2017).
10.53* Avon Products, Inc. Long-Term Cash Bonus Plan, effective as of January 1, 2015 (incorporated by reference to Exhibit 10.51 to Avon's Annual Report on Form 10-K for the year ended December 31, 2017).
10.54* Avon Products, Inc. Compensation Recoupment Policy (incorporated by reference to Exhibit 10.1 to Avon’s Current Report on Form 8-K filed on March 17, 2010).
10.55* Avon Products, Inc. Amended and Restated Compensation Recoupment Policy, effective as of January 14, 2013 (incorporated by reference to Exhibit 10.41 to Avon's Annual Report on Form 10-K/A for the year ended December 31, 2012).
10.56* Avon Products, Inc. Change in Control Policy (incorporated by reference to Exhibit 10.2 to Avon’s Current Report on Form 8-K filed on March 17, 2010).
10.57* Avon Products, Inc. Amended and Restated Change in Control Policy, dated as of January 9, 2013 (incorporated by reference to Exhibit 10.43 to Avon's Annual Report on Form 10-K/A for the year ended December 31, 2012).
10.58* Avon Products, Inc. Long Term Incentive Cash Plan, effective as of January 1, 2011 (incorporated by reference to Exhibit 10.5 to Avon’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011).
10.59* Avon Products, Inc. International Retirement Plan, amended and restated effective as of January 1, 2009 (incorporated by reference to Exhibit 10.5 to Avon’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015).
10.60* First Amendment, dated as of December 13, 2010, to the Avon Products, Inc. International Retirement Plan as amended and restated effective as of January 1, 2009 (incorporated by reference to Exhibit 10.6 to Avon’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015).
10.61* Investment Agreement, dated as of December 17, 2015, between Avon Products, Inc. and Cleveland Apple Investor LLC (incorporated by reference to Exhibit 10.1 to Avon’s Current Report on Form 8-K filed on December 21, 2015).
10.62* Investor Rights Agreement, dated as of March 1, 2016, between Avon Products, Inc. and Cleveland Apple Investor L.P. (incorporated by reference to Exhibit 10.1 to Avon’s Current Report on Form 8-K filed on March 7, 2016).
10.63* Intellectual Property License Agreement, dated as of March 1, 2016, among Avon Products, Inc., Avon International Operations, Inc., Avon NA IP LLC and New Avon LLC (incorporated by reference to Exhibit 10.2 to Avon’s Current Report on Form 8-K filed on March 7, 2016).
10.64* Amendment Number One dated as of June 17, 2022, to the Intellectual Property License Agreement, dated as of March 1, 2016, among Avon Products, Inc., Avon International Operations, Inc., Avon NA IP LLC and New Avon LLC.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101 The following materials formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Statements of Operations, (ii) Consolidated Statements of Comprehensive Income (Loss), (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Changes in Shareholders’ Equity (Deficit), (vi) Notes to Consolidated Financial Statements and (vi) Schedule of Valuation and Qualifying Accounts.
104 Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document (included in Exhibit 101).
* The Exhibits identified above with an asterisk (*) are management contracts or compensatory plans or arrangements.
Avon’s Form 10-K for the year ended December 31, 2022, at the time of filing with the United States Securities and Exchange Commission, shall modify and supersede all prior documents filed pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended, for purposes of any offers or sales of any securities after the date of such filing pursuant to any Registration Statement or Prospectus filed pursuant to the Securities Act of 1933, which incorporates by reference such Form 10-K.