REVLON CONSUMER PRODUCTS CORP – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented as follows: • Overview; • Results of Operations; • Financial Condition, Liquidity and Capital Resources;
• Disclosures about Contractual Obligations and Commercial Commitments;
• Off-Balance Sheet Transactions (there are none); • Discussion of Critical Accounting Policies; • Recent Accounting Pronouncements; and • Inflation.
The Company (as defined below) is providing this overview in accordance with the
Overview
Overview of the Business
Revlon Consumer Products Corporation ("Products Corporation " and together with its subsidiaries, the "Company") is a wholly-owned operating subsidiary of Revlon, Inc., which is a direct and indirect majority-owned subsidiary ofMacAndrews & Forbes Holdings Inc. ("MacAndrews & Forbes Holdings " and together with certain of its affiliates other than Revlon, Inc. and the Company, "MacAndrews & Forbes"), a corporation wholly-owned byRonald O. Perelman . The Company's vision is glamour, excitement and innovation through high-quality products at affordable prices. The Company operates in a single segment and manufactures, markets and sells an extensive array of cosmetics, women's hair color, beauty tools, anti-perspirant deodorants, fragrances, skincare and other beauty care products. The Company is one of the world's leading cosmetics companies in the mass retail channel. The Company believes that its global brand name recognition, product quality and marketing experience have enabled it to create one of the strongest consumer brand franchises in the world. Effective beginningOctober 1, 2012 , the Company is consolidating and reportingLatin America andCanada (previously reported separately) as the combinedLatin America andCanada region. As a result, 2012 and all corresponding prior year amounts have been reclassified to conform to this presentation.
For additional information regarding our business, see "Part 1, Item 1 - Business" of this Annual Report on Form 10-K.
Overview of Net Sales and Earnings Results
Consolidated net sales in 2012 were$1,426.1 million , an increase of$44.7 million , or 3.2%, compared to$1,381.4 million in 2011. Excluding the unfavorable impact of foreign currency fluctuations of$21.2 million , consolidated net sales increased by$65.9 million , or 4.8% in 2012 compared to 2011, driven by higher net sales in the Company's U.S.,Latin America andCanada , andAsia Pacific regions, partially offset by lower net sales in the Company'sEurope ,Middle East andAfrica region. Consolidated net income in 2012 was$71.2 million , compared to$64.0 million in 2011. The increase in consolidated net income in 2012, compared to 2011, was primarily due to:
•
consolidated net sales, partially offset by a
cost of sales in 2012; • an$11.2 million loss on the early extinguishment of debt in 2011 as a
result of the 2011 Refinancings (as hereinafter defined) that did not recur in 2012; and 25
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• a
lower weighted average borrowing rates as a result of the 2011 Term Loan
Facility Refinancing (as hereinafter defined);
with the foregoing partially offset by:
•
connection with the
•
expense primarily driven by higher insurance expense.
Recent EventsSeptember 2012 Program During 2012, the Company recorded charges totaling$24.1 million related to the restructuring that the Company announced inSeptember 2012 (the "September 2012 Program"), which primarily involved the Company exiting its owned manufacturing facility inFrance and its leased manufacturing facility inMaryland ; rightsizing its organizations inFrance andItaly ; and realigning its operations inLatin America , including consolidatingLatin America andCanada into a single operating region, which became effective in the fourth quarter of 2012. Certain of the actions were subject to consultations with employees, works councils or unions, and government authorities, which have substantially been concluded as ofDecember 31, 2012 . Of the$24.1 million charge: (a)$20.7 million is recorded in restructuring charges; (b)$1.6 million is recorded as a reduction to net sales; (c)$1.2 million is recorded in cost of goods sold; and (d)$0.6 million is recorded in SG&A expenses. Included within the$20.7 million restructuring charges is a net non-cash pension curtailment gain of$1.5 million . The Company expects to recognize approximately$1 million of additional charges in 2013 for a total of approximately$25 million in charges related to theSeptember 2012 Program. The Company expects to pay cash of approximately$24 million related to theSeptember 2012 Program, of which$3.8 million was paid in 2012 and the remainder is expected to be paid in 2013. The Company expects approximately$7.5 million of cost reductions to benefit 2013 and annualized cost reductions thereafter are expected to be approximately$10 million .
See Note 3, "Restructuring Charges," to the Consolidated Financial Statements in this Form 10-K.
Pure Ice Acquisition OnJuly 2, 2012 , the Company acquired certain assets ofBari Cosmetics, Ltd. , including trademarks and other intellectual property related to Pure Ice nail enamel and Bon Bons cosmetics brands (the "Pure Ice Acquisition"). The Company paid$66.2 million of total consideration for the Pure Ice Acquisition in cash, comprised of$45.0 million cash on hand and$21.2 million drawn underProducts Corporation's 2011 Revolving Credit Facility. The results of operations related to the Pure Ice Acquisition are included in the Company's consolidated financial statements commencing on the date of acquisition. As ofDecember 31, 2012 , there were no outstanding borrowings underProducts Corporation's 2011 Revolving Credit Facility (excluding$10.4 million of outstanding undrawn letters of credit).
Other Events
Fire at Revlon Venezuela Facility
OnJune 5, 2011 , the Company's facility inVenezuela was destroyed by fire. For the years endedDecember 31, 2012 , 2011 and 2010, the Company's subsidiary inVenezuela ("Revlon Venezuela") had net sales of approximately 2%, 2% and 3%, respectively, of the Company's consolidated net sales. AtDecember 31, 2012 , 2011 and 2010, total assets of Revlon Venezuela were approximately 2%, 2% and 3%, respectively, of the Company's total assets. Prior to the fire, approximately 50% of Revlon Venezuela's net sales were comprised of products imported from the Company'sOxford, North Carolina facility and approximately 50% were comprised of products locally manufactured at the Revlon Venezuela facility. Revlon Venezuela did not have any net sales from the date of the fire untilAugust 12, 2011 . The Company's net sales inVenezuela sinceAugust 12, 2011 have been primarily comprised of: (i) products imported from the Company'sOxford, North Carolina facility; 26
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and (ii) commencing in the first quarter of 2012, certain products imported from third party manufacturers outside ofVenezuela , which were locally manufactured at the Revlon Venezuela facility prior to the fire. The Company maintains comprehensive property insurance, as well as business interruption insurance. Business interruption insurance is intended to reimburse for lost profits and other costs incurred, which are attributable to the loss, during the loss period, subject to the terms and conditions of the applicable policies. For the years endedDecember 31, 2012 and 2011, the Company incurred business interruption losses of$2.8 million and$9.7 million , respectively, related to the fire. Additionally, inJune 2011 , the Company recorded a$4.9 million impairment loss related to Revlon Venezuela's net book value of inventory, property, plant and equipment destroyed by the fire, for total losses of$14.6 million incurred for the year endedDecember 31, 2011 . The business interruption losses incurred in the years endedDecember 31, 2012 and 2011 include estimated profits lost as a result of the interruption of Revlon Venezuela's business and costs incurred directly related to the fire. The Company's insurance coverage provides for business interruption losses to be reimbursed, subject to the terms and conditions of such policy, for a period of time, which period for the coverage related to theVenezuela fire ended onOctober 2, 2012 . The business interruption losses incurred throughDecember 31, 2012 are not indicative of future expected profits for Revlon Venezuela. For the years endedDecember 31, 2012 and 2011, the Company received interim advances of$6.6 million and$19.7 million , respectively, from its insurance carrier in connection with the fire, for total cumulative receipts of$26.3 million received from the date of the fire throughDecember 31, 2012 . During the years endedDecember 31, 2012 and 2011, the Company recognized$2.8 million and$14.6 million , respectively, of income from insurance recoveries, which entirely offset the business interruption losses and 2011 impairment loss noted above. The income from insurance recoveries is included within SG&A expenses in the Company's Consolidated Statements of Income and Comprehensive Income for the years endedDecember 31, 2012 and 2011. The Company recorded deferred income related to the insurance proceeds received, but not yet recognized, of$8.9 million and$5.1 million as ofDecember 31, 2012 and 2011, respectively, which is included in accrued expenses and other in the Company's Consolidated Balance Sheet.
The final amount and timing of the ultimate insurance recovery is currently unknown. See Note 22, "Subsequent Events - Insurance Settlement on Loss of Inventory," to the Consolidated Financial Statements in this Form 10-K for discussion related to the final settlement of the inventory portion of the total insurance claim.
Results of Operations
Year ended
In the tables, all dollar amounts are in millions and numbers in parenthesis ( ) denote unfavorable variances.
Net sales:
Consolidated net sales in 2012 were$1,426.1 million , an increase of$44.7 million , or 3.2%, compared to$1,381.4 million in 2011. Excluding the unfavorable impact of foreign currency fluctuations of$21.2 million , consolidated net sales increased by$65.9 million , or 4.8% in 2012, primarily driven by higher net sales of Revlon color cosmetics, Revlon ColorSilkhair color and SinfulColors color cosmetics, as well as the inclusion of the net sales of Pure Ice color cosmetics beginning inJuly 2012 . These increases were partially offset by lower net sales of fragrances and other beauty care products. Year Ended December 31, Change XFX Change (a) 2012 2011 $ % $ % United States $ 799.8 $ 757.4 $ 42.4 5.6 % $ 42.4 5.6 % Asia Pacific 238.9 233.4 5.5 2.4 4.4 1.9 Europe, Middle East and Africa 184.4 208.7 (24.3 ) (11.6 ) (8.9 ) (4.3 ) Latin America and Canada 203.0 181.9 21.1 11.6 28.0 15.4 Consolidated Net Sales $ 1,426.1 $ 1,381.4 $ 44.7 3.2 % $ 65.9 4.8 % (a) XFX excludes the impact of foreign currency fluctuations.United States 27
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In the U.S., net sales in 2012 increased 5.6% to$799.8 million , compared to$757.4 million in 2011, primarily driven by the higher net sales of Revlon color cosmetics and SinfulColors color cosmetics, as well as the inclusion of the net sales of Pure Ice color cosmetics beginning inJuly 2012 , partially offset by lower net sales of Almay color cosmetics. Excluding the results of the recently acquired Pure Ice color cosmetics, net sales in the U.S. increased in 2012.
InAsia Pacific , net sales in 2012 increased 2.4% to$238.9 million , compared to$233.4 million in 2011. Excluding the favorable impact of foreign currency fluctuations, net sales increased$4.4 million , or 1.9%, in 2012, primarily driven by higher net sales of Revlon color cosmetics. From a country perspective, net sales increased inJapan and certain distributor territories (which together contributed 4.1 percentage points to the increase in the region's net sales in 2012, as compared to 2011), partially offset by a decrease in net sales inChina (which offset by 2.1 percentage points the increase in the region's net sales in 2012, as compared to 2011).
InEurope , theMiddle East andAfrica , net sales in 2012 decreased 11.6% to$184.4 million , compared to$208.7 million in 2011. Excluding the unfavorable impact of foreign currency fluctuations, net sales decreased$8.9 million , or 4.3%, in 2012, primarily driven by lower net sales of fragrances and a higher returns accrual of$1.6 million recorded in 2012 related to theSeptember 2012 Program. From a country perspective, net sales decreased inItaly ,France and certain distributor territories (which together contributed 5.9 percentage points to the decrease in the region's net sales in 2012, as compared to 2011), partially offset by an increase in net sales inSouth Africa (which offset by 1.2 percentage points the decrease in the region's net sales in 2012, as compared to 2011). The decrease in the net sales inFrance andItaly was partially driven by the$1.6 million higher returns accrual noted above.
InLatin America andCanada , net sales in 2012 increased 11.6% to$203.0 million , compared to$181.9 million in 2011. Excluding the unfavorable impact of foreign currency fluctuations, net sales increased$28.0 million , or 15.4%, in 2012, primarily driven by higher net sales of Revlon color cosmetics, Revlon ColorSilk hair color and Almay color cosmetics. From a country perspective, net sales increased throughout the region.Venezuela's increase in net sales in 2012 was partially driven by the loss of sales during June throughDecember 2011 as a result of theJune 2011 fire which destroyed Revlon Venezuela's facility. Net sales inArgentina andVenezuela also benefited from higher selling prices given market conditions and inflation, which accounted for approximately one-third of the$28.0 million increase in the region's net sales. Gross profit: Year Ended December 31, 2012 2011 Change Gross profit $ 919.6 $ 888.8 $ 30.8 Percentage of net sales 64.5 % 64.3 % 0.2 %
The 0.2 percentage point increase in gross profit as a percentage of net sales for 2012, compared 2011, was primarily due to:
• lower manufacturing costs, including materials and freight costs, as a
result of supply chain cost reduction initiatives, which increased gross
profit as a percentage of net sales by 0.6 percentage points; and • lower sales returns and allowances which increased gross profit as a
percentage of net sales by 0.4 percentage points;
with the foregoing partially offset by:
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• the impact of product mix, which reduced gross profit as a percentage of
net sales by 0.5 percentage points;
• higher costs related to inventory obsolescence, which reduced gross profit
as a percentage of net sales by 0.3 percentage points; and • restructuring related charges recognized in connection with the September
2012 Program, which reduced gross profit as a percentage of net sales by
0.1 percentage points.
SG&A expenses: Year Ended December 31, 2012 2011 Change SG&A expenses $ 690.9 $ 678.1 $ (12.8 )
The
•
due to higher insurance expense and higher compensation expense; and •$6.9 million lower benefit from insurance proceeds related to theVenezuela fire recognized in SG&A expenses in 2012, as compared to 2011;
with the foregoing partially offset by:
•$8.7 million of favorable impact of foreign currency fluctuations. Restructuring charges: Year Ended December 31, 2012 2011 Change Restructuring charges $ 20.7 $ - $ (20.7 ) During 2012, the Company recorded charges totaling <money>$24.1 million related to theSeptember 2012 Program, which primarily involved the Company exiting its owned manufacturing facility inFrance and its leased manufacturing facility inMaryland ; rightsizing its organizations inFrance andItaly ; and realigning its operations inLatin America , including consolidatingLatin America andCanada into a single operating region. Of the$24.1 million charge: (a)$20.7 million is recorded in restructuring charges; (b)$1.6 million is recorded as a reduction to net sales; (c)$1.2 million is recorded in cost of goods sold; and (d)$0.6 million is recorded in SG&A expenses. See Note 3, "Restructuring Charges," to the Consolidated Financial Statements in this Form 10-K for further discussion of the above. Interest expense: Year Ended December 31, 2012 2011 Change Interest expense $ 85.3 $ 91.1 $ 5.8 29
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The$5.8 million decrease in interest expense for 2012, as compared to 2011, was primarily due to lower weighted average borrowing rates as a result of the 2011 Term Loan Facility Refinancing. (See "Financial Condition, Liquidity and Capital Resources - Long Term Debt Instruments" and Note 10, "Long-Term Debt" to the Consolidated Financial Statements in this Form 10-K).
Loss on early extinguishment of debt, net:
Year Ended December 31, 2012 2011 Change
Loss on early extinguishment of debt, net $ - $ 11.2
As a result of the 2011 Refinancings, the Company recognized a loss on the early extinguishment of debt of$11.2 million during 2011, due to$1.7 million of fees which were expensed as incurred in connection with the 2011 Refinancings, as well as the write-off of$9.5 million of unamortized debt discount and deferred financing fees as a result of such refinancings.
Foreign currency losses, net:
Year Ended December 31, 2012 2011 Change
Foreign currency losses, net $ 2.7 $ 4.4 $
1.7
The decrease in foreign currency losses, net of
• lower losses as a result of the revaluation of certain U.S. Dollar denominated intercompany payables and foreign currency denominated intercompany receivables from the Company's foreign subsidiaries during 2012 as compared to 2011; and
• a foreign currency loss of
re-measurement of Revlon Venezuela's balance sheet that did not recur in
2012. See "Financial Condition, Liquidity and Capital Resources - Impact
of Foreign Currency Translation -
with the foregoing partially offset by:
•
foreign currency forward exchange contracts ("FX Contracts") during 2012 compared to 2011. Provision for income taxes: Year Ended December 31, 2012 2011 Change Provision for income taxes $ 44.8 $ 35.4 $ (9.4 ) The provision for income taxes in 2012 included a non-cash benefit of$15.8 million related to the reduction of the Company's deferred tax valuation allowance on certain of its net deferred tax assets for certain jurisdictions within the U.S. atDecember 31, 2012 as a result of the Company's improved earnings trends and cumulative taxable income in those jurisdictions. The provision for income taxes in 2011 included a non-cash benefit of$16.9 million recorded in 2011 related to the reduction of the Company's deferred tax valuation allowance on its net deferred tax assets for certain jurisdictions outside the U.S. atDecember 31, 2011 as a result 30
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of the Company's improved earnings trends and cumulative taxable income in those jurisdictions. Excluding these non-cash benefits, the provision for income taxes in 2012 was higher than 2011 primarily due to increased pre-tax income, partially offset by various discrete items, including the favorable resolution of tax matters in certain foreign jurisdictions. The effective tax rate for 2012 is higher than the federal statutory rate of 35% due principally to: (a) foreign dividends and earnings taxable in the U.S.; and (b) the impact of certain expenses for which there is no tax benefit recognized, primarily related to theSeptember 2012 Program (see Note 3, "Restructuring Charges" to the Consolidated Financial Statements in this Form 10-K), partially offset by the effect of the$15.8 million reduction of the deferred tax valuation allowance described above. In assessing the recoverability of its deferred tax assets, management regularly considers whether some portion or all of the deferred tax assets will not be realized based on the recognition threshold and measurement of a tax position. The ultimate realization of deferred tax assets is generally dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the level of historical losses for certain jurisdictions within the U.S., the Company had maintained a deferred tax valuation allowance against certain of its deferred tax assets. As ofDecember 31, 2012 , the Company had experienced improved earnings trends and had cumulative taxable income in such jurisdictions. As a result of such earnings trends and the Company's tax position, and based upon the Company's projections for future taxable income over the periods in which the deferred tax assets are recoverable, management concluded that it was more likely than not that the Company would realize the benefits of certain of its net deferred tax assets existing atDecember 31, 2012 in those jurisdictions. Therefore, atDecember 31, 2012 , the Company realized a non-cash benefit of$15.8 million related to a reduction of the Company's deferred tax valuation allowance on certain of its net deferred tax assets for certain jurisdictions within the U.S.The Company reflected this benefit in the tax provision and this non-cash benefit increased net income atDecember 31, 2012 . Based upon the level of historical taxable losses for certain jurisdictions outside the U.S., the Company had maintained a deferred tax valuation allowance against its deferred tax assets. As ofDecember 31, 2011 , the Company experienced improved earnings trends and had cumulative taxable income in such jurisdictions. As a result of such earnings trends and the Company's tax position, and based upon the Company's projections for future taxable income over the periods in which the deferred tax assets are recoverable, management concluded that it was more likely than not that the Company would realize the benefits of the net deferred tax assets existing atDecember 31, 2011 in those jurisdictions. Therefore, atDecember 31, 2011 , the Company realized a non-cash benefit of$16.9 million related to a reduction of the Company's deferred tax valuation allowance on its net deferred tax assets for certain jurisdictions outside the U.S.The Company has reflected this benefit in the tax provision and this non-cash benefit increased the Company's net income atDecember 31, 2011 . As a result of the reduction of the Company's deferred tax valuation allowance in the U.S. during 2010, as discussed below in the "Year endedDecember 31, 2011 compared with the year endedDecember 31, 2010 - Provision for (benefit from) income taxes", the Company's tax provision has reflected a higher effective tax rate beginning with the first quarter of 2011. However, the increase in the effective tax rate did not affect the Company's cash taxes paid in 2011 and 2012 and will not affect the Company's cash taxes paid thereafter until the Company has fully used its tax loss carryforwards and other tax attributes in the U.S.
See Note 13, "Income Taxes," to the Consolidated Financial Statements in this Form 10-K for further discussion of the above.
Year ended
In the tables, all dollar amounts are in millions and numbers in parenthesis ( ) denote unfavorable variances.
Net sales:
Consolidated net sales in 2011 were$1,381.4 million , an increase of$60.0 million , or 4.5%, compared to$1,321.4 million in 2010. Excluding the favorable impact of foreign currency fluctuations of$17.0 million , consolidated net sales increased by$43.0 million , or 3.3% in 2011, primarily driven by the inclusion of the net sales of SinfulColors color cosmetics beginning inMarch 2011 , as well as higher net sales of Revlon and 31
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Almay color cosmetics and Revlon ColorSilk hair color. These increases were partially offset by lower net sales of Revlon beauty tools and lower net sales of other beauty care products inVenezuela as a result of theJune 2011 fire at Revlon Venezuela's facility. Year Ended December 31, Change XFX Change (a) 2011 2010 $ % $ % United States $ 757.4 $ 729.1 $ 28.3 3.9 % $ 28.3 3.9 % Asia Pacific 233.4 209.9 23.5 11.2 8.4 4.0 Europe, Middle East and Africa 208.7 200.4 8.3 4.1 4.0 2.0 Latin America and Canada 181.9 182.0 (0.1 ) (0.1 ) 2.3 1.3 Consolidated Net Sales $ 1,381.4 $ 1,321.4 $ 60.0 4.5 % $ 43.0 3.3 % (a) XFX excludes the impact of foreign currency fluctuations.
In the U.S., net sales in 2011 increased 3.9% to$757.4 million , compared to$729.1 million in 2010, primarily driven by the inclusion of the net sales of SinfulColors color cosmetics beginning inMarch 2011 , as well as higher net sales of Almay color cosmetics and Revlon ColorSilk hair color, partially offset by lower net sales of Revlon beauty tools and Revlon color cosmetics. Excluding the results of SinfulColors color cosmetics, net sales in the U.S. increased in 2011.Asia Pacific InAsia Pacific , net sales in 2011 increased 11.2% to$233.4 million , compared to$209.9 million in 2010. Excluding the favorable impact of foreign currency fluctuations, net sales increased$8.4 million , or 4.0%, in 2011, primarily driven by higher net sales of Revlon color cosmetics. From a country perspective, net sales increased inChina and certain distributor markets (which together contributed 6.2 percentage points to the increase in the region's net sales in 2011, as compared to 2010), partially offset by a decrease in net sales inJapan andAustralia (which together offset by 2.1 percentage points the increase in the region's net sales in 2011, as compared to 2010).
InEurope , theMiddle East andAfrica , net sales in 2011 increased 4.1% to$208.7 million , compared to$200.4 million in 2010. Excluding the favorable impact of foreign currency fluctuations, net sales increased$4.0 million , or 2.0%, in 2011, primarily driven by higher net sales of Revlon color cosmetics. From a country perspective, net sales increased inSouth Africa (which contributed 2.5 percentage points to the increase in the region's net sales in 2011, as compared to 2010), partially offset by a decrease in net sales inItaly (which offset by 0.8 percentage points the increase in the region's net sales in 2011, as compared to 2010).Latin America andCanada InLatin America andCanada , net sales in 2011 decreased 0.1% to$181.9 million , compared to$182.0 million in 2010. Excluding the unfavorable impact of foreign currency fluctuations, net sales increased$2.3 million , or 1.3%, in 2011, primarily driven by higher net sales of Revlon color cosmetics, partially offset by lower net sales of other beauty care products. From a country perspective, net sales increased inArgentina and Latin America Export (which together contributed 3.9 percentage points to the increase in the region's net sales in 2011, as compared to 2010), partially offset by a decrease in net sales inVenezuela andCanada (which together offset by 3.1 percentage points the increase in the region's net sales in 2011, as compared to 2010).Venezuela's decline in net sales was due to the loss of a significant portion of sales from June throughDecember 2011 as a result of theJune 2011 fire which destroyed Revlon Venezuela's facility. Revlon Venezuela resumed sales of imported goods onAugust 12, 2011 ; however, the Company had not recorded any sales of locally manufactured goods inVenezuela since the fire inJune 2011 . Gross profit: 32
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Table of Contents Year Ended December 31, 2011 2010 Change Gross profit $ 888.8 $ 866.1 $ 22.7 Percentage of net sales 64.3 % 65.5 % (1.2 )%
The 1.2 percentage point decrease in gross profit as a percentage of net sales for 2011, compared to 2010, was primarily due to:
• the impact of product mix, which reduced gross profit as a percentage of
net sales by 1.3 percentage points; and • higher allowances, which reduced gross profit as a percentage of net sales
by 0.9 percentage points;
with the foregoing partially offset by:
• favorable foreign currency fluctuations, which increased gross profit as a
percentage of net sales by 0.6 percentage points;
• lower pension expenses within cost of goods, which increased gross profit
as a percentage of net sales by 0.2 percentage points.
SG&A expenses: Year Ended December 31, 2011 2010 Change SG&A expenses $ 678.1 $ 659.3 $ (18.8 )
The
•
to (i) the inclusion of operating expenses of SinfulColors from the date
of acquisition inMarch 2011 , (ii) higher compensation expenses, (iii) higher professional fees and (iv) higher depreciation costs; and
•
with the foregoing partially offset by:
•
million of income from insurance recoveries related to the fire that destroyed Revlon Venezuela's facility, partially offset by the $4.9
million impairment loss related to Revlon Venezuela's net book value of
inventory, property, plant and equipment destroyed by the fire. The $9.7
million, net, from insurance recoveries entirely offset the business
interruption losses incurred from
(See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Fire at Revlon Venezuela's Facility" for further discussion). Interest expense: Year Ended December 31, 2011 2010 Change Interest expense $ 91.1 $ 96.7 $ 5.6 33
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The$5.6 million decrease in interest expense for 2011, as compared to 2010, was primarily due to lower weighted average borrowing rates as a result of the 2011 Refinancings. (See "Financial Condition, Liquidity and Capital Resources - 2011 Refinancings" and Note 10, "Long-Term Debt," to the Consolidated Financial Statements in this Form 10-K).
Loss on early extinguishment of debt, net:
Year Ended December 31, 2011 2010 Change Loss on early extinguishment of debt, net $ 11.2 $ 9.7 $ (1.5 ) As a result of the 2011 Refinancings, the Company recognized a loss on the early extinguishment of debt of$11.2 million during 2011, due to$1.7 million of fees which were expensed as incurred in connection with the 2011 Refinancings, as well as the write-off of$9.5 million of unamortized debt discount and deferred financing fees as a result of such refinancings. DuringMarch 2010 ,Products Corporation consummated the refinancing of its 2006 bank term loan facility and its 2006 revolving credit facility (together referred to as the "2010 Refinancing"). As a result of the 2010 Refinancing, the Company recognized a loss on the early extinguishment of debt of$9.7 million during 2010, primarily due to$5.9 million of fees and expenses which were expensed as incurred in connection with the 2010 Refinancing, as well as the write-off of$3.8 million of unamortized deferred financing fees as a result of such refinancing. Foreign currency losses: Year Ended December 31, 2011 2010 Change
Foreign currency losses $ 4.4 $ 6.3 $
1.9
The
• a
related to the re-measurements of Revlon Venezuela's balance sheet (see
"Financial Condition, Liquidity and Capital Resources - Impact of Foreign
Currency Translation -Venezuela "); and
•
Contracts during 2011 compared to 2010;
with the foregoing partially offset by:
• the unfavorable impact of the revaluation of certain U.S.
dollar-denominated intercompany payables from the Company's foreign
subsidiaries compared to 2010.
Provision for (benefit from) income taxes:
Year Ended December 31, 2011 2010 Change
Provision for (benefit from) income taxes
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The provision for income taxes in 2011 included a non-cash benefit of$16.9 million related to the reduction of the Company's deferred tax valuation allowance on its net deferred tax assets for certain jurisdictions outside the U.S. atDecember 31, 2011 as discussed above in "Results of Operations - Provision for Income Taxes". The benefit for income taxes in 2010 included a non-cash benefit of$248.5 million related to a reduction of the Company's deferred tax valuation allowance on its net U.S. deferred tax assets atDecember 31, 2010 . Excluding these non-cash benefits, the provision for income taxes in 2011 was higher than 2010 primarily due to higher deferred tax expense for the U.S. in 2011 due to the reduction of the valuation allowance in the U.S. onDecember 31, 2010 and higher pre-tax income in the U.S. in 2011. In addition, the provision for income taxes in 2010 benefited from various discrete items, including the favorable resolution of tax matters in the U.S. and certain foreign jurisdictions, that did not recur in 2011. The effective tax rate for 2011 is higher than the federal statutory rate of 35% due principally to: (i) foreign dividends and earnings taxable in the U.S.; and (ii) foreign and U.S. tax effects attributable to operations outside the U.S., including pre-tax losses in a number of jurisdictions outside the U.S. for which there is no tax benefit recognized in the period, partially offset by the effect of the reduction of the deferred tax valuation allowance described above. Based upon the level of historical taxable losses for the U.S., the Company had maintained a deferred tax valuation allowance against its deferred tax assets in the U.S. As ofDecember 31, 2010 , the Company had experienced improved earnings trends and had cumulative taxable income. As a result of such earnings trends and the Company's tax position, and based upon the Company's projections for future taxable income over the periods in which the deferred tax assets were recoverable, management concluded that it was more likely than not that the Company would realize the benefits of the net deferred tax assets existing atDecember 31, 2010 . Therefore, atDecember 31, 2010 , the Company realized a non-cash benefit of$248.5 million related to a reduction of the Company's deferred tax valuation allowance on its net U.S. deferred tax assets atDecember 31, 2010 . The Company reflected this benefit in the tax provision and this non-cash benefit increased net income atDecember 31, 2010 .
See Note 13, "Income Taxes," to the Consolidated Financial Statements in this Form 10-K for further discussion of the above.
Financial Condition, Liquidity and Capital Resources
AtDecember 31, 2012 , the Company had liquidity of$237.6 million , consisting of cash and cash equivalents (net of any outstanding checks) of$108.0 million , as well as$129.6 million in available borrowings under the 2011 Revolving Credit Facility (based upon the borrowing base less$10.4 million of undrawn outstanding letters of credit and nil then drawn under the 2011 Revolving Credit Facility at such date). Cash Flows
At
Year Ended December 31, 2012 2011 2010 Net cash provided by operating activities $ 104.1 $ 88.0 $ 96.7 Net cash used in investing activities (86.3 ) (52.6 ) (14.9 ) Net cash used in financing activities (3.4 ) (7.5 ) (62.3 ) Effect of exchange rate changes on cash and cash equivalents 0.2
(2.9 ) 2.7
Net cash provided by operating activities was$104.1 million ,$88.0 million and$96.7 million for 2012, 2011 and 2010, respectively. As compared to 2011, cash provided by operating activities in 2012 was impacted by favorable changes in working capital and lower cash interest paid, partially offset by the renewal and partial pre-payment of certain of the Company's multi-year insurance programs. As compared to 2010, cash provided 35
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by operating activities in 2011 was impacted by higher interest payments, increased permanent display spending and increased pension contributions.
Net cash used in investing activities was
Net cash used in investing activities for 2012 included:
•$66.2 million for the Pure Ice Acquisition; and •$20.9 million used for capital expenditures.
Net cash used in investing activities for 2011 included:
•
On
trademarks and other intellectual property, inventory, certain receivables
and manufacturing equipment, related to SinfulColors cosmetics, Wild and
Crazy cosmetics, freshMinerals cosmetics and freshcover cosmetics, which products are sold principally in the U.S. mass retail channel (the "SinfulColors Acquisition"); and •$13.9 million used for capital expenditures.
Net cash used in investing activities in 2010 included
Net cash used in financing activities was
Net cash used in financing activities for 2012 included:
• an aggregate
Term Loan Facility in 2012;
with the foregoing partially offset by:
• a$6.3 million increase in short term borrowings and overdraft.
Net cash used in financing activities for 2011 included:
• payment of the
Refinancings; and • an aggregate$4.0 million of scheduled amortization payments on the 2011
Term Loan Facility in 2011;
with the foregoing partially offset by:
• cash provided by
aggregate principal amount of the 2011 Term Loan Facility, or $796.0
million, net of discounts, partially offset by cash used for the repayment
of
Corporation's 2010 Term Loan Facility.
Net cash used in financing activities for 2010 included:
• cash used for repayment of
amount of
offset by cash provided byProducts Corporation's issuance of the$800.0 million aggregate principal amount of the 2010 Term Loan Facility, or$786.0 million , net of discounts;
• an aggregate
Term Loan Facility in 2010; and • payment of financing costs of$17.0 million , which was comprised of
(i) the payment of
2010 refinancing of
and revolving credit facility and (ii) the payment of the remaining
balance of
connection with the refinancing of
Notes in
2015. 2012 Debt Transaction
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Products Corporation toMacAndrews & Forbes, and which matures onOctober 8, 2014 , and (ii) the$48.6 million Contributed Loan (as hereinafter defined), which remains due fromProducts Corporation to Revlon, Inc. and which matures onOctober 8, 2013 . OnApril 30, 2012 ,MacAndrews & Forbes exercised its right to assign its interest in the Non-Contributed Loan to various third parties. In connection with such assignment,Products Corporation entered into an Amended and Restated Senior Subordinated Term Loan Agreement withMacAndrews & Forbes (the "Amended and Restated Senior Subordinated Term Loan Agreement") to: (1) modify the interest rate on the Non-Contributed Loan from its prior 12% fixed rate to a floating rate of LIBOR plus 7%, with a 1.5% LIBOR floor, resulting in an interest rate of approximately 8.5% per annum (or a 3.5% reduction per annum) upon the effectiveness of the Amended and Restated Senior Subordinated Term Loan Agreement; (2) insert certain prepayment premiums; and (3) designateCitibank, N.A . as the administrative agent for the Non-Contributed Loan. Refer to "Amended and Restated Senior Subordinated Term Loan Agreement" below for further discussion of the above.
2011 Refinancings
In the second quarter of 2011,Products Corporation consummated refinancing of its 2010 Term Loan Facility with the 2011Term Loan Facility and Products Corporation's 2010 Revolving Credit Facility with the 2011 Revolving Credit Facility (together referred to as the "2011 Refinancings"), reducing interest rates and extending maturities. InMay 2011 ,Products Corporation consummated a refinancing of the 2010 Term Loan Facility (the "2011 Term Loan Facility Refinancing"), which included replacingProducts Corporation's 2010 bank term loan facility, which was scheduled to mature onMarch 11, 2015 and had$794.0 million aggregate principal amount outstanding atDecember 31, 2010 (the "2010 Term Loan Facility"), with a 6.5-year,$800.0 million term loan facility dueNovember 19, 2017 (the "2011 Term Loan Facility").Products Corporation used$796 million of proceeds from the 2011 Term Loan Facility, which was drawn in full on theMay 19, 2011 closing date and issued to lenders at 99.5% of par, to refinance in full the$792.0 million of then outstanding indebtedness under its 2010 Term Loan Facility and to pay approximately$2 million of accrued interest.Products Corporation incurred$3.6 million of fees in connection with consummating the 2011 Term Loan Facility Refinancing, of which$1.9 million was capitalized. InJune 2011 ,Products Corporation consummated a refinancing of the 2010 Revolving Credit Facility, which included refinancingProducts Corporation's 2010 revolving credit facility, which was scheduled to mature onMarch 11, 2014 and had nil outstanding borrowings atDecember 31, 2010 , with a 5-year,$140.0 million asset-based, multi-currency revolving credit facility dueJune 16, 2016 .Products Corporation incurred$0.7 million of fees in connection with consummating the 2011 Revolving Credit Facility Refinancing, all of which were capitalized. The following is a summary description of the 2011 Term Loan Facility and 2011 Revolving Credit Facility. Investors should refer to the principal refinancing agreements (copies of which are included as exhibits to the Company's Form 10-Q for the period endedJune 30, 2011 , filed with theSEC onJuly 28, 2011 ) for complete terms and conditions. Unless otherwise indicated, capitalized terms have the meanings given to them in the 2011 Term Loan Agreement and/or the 2011 Revolving Credit Agreement, as applicable.
2011 Term Loan Facility
Under the 2011 Term Loan Facility, Eurodollar Loans bear interest at the Eurodollar Rate plus 3.50% per annum (with the Eurodollar Rate not to be less than 1.25%) and Alternate Base Rate loans bear interest at the Alternate Base Rate plus 2.50% (with the Alternate Base Rate not to be less than 2.25%). Prior to theNovember 2017 termination date of the 2011 Term Loan Facility, onSeptember 30 ,December 31 ,March 31 andJune 30 of each year,Products Corporation is required to repay$2 million of the principal amount of the term loans outstanding under the 2011 Term Loan Facility on each respective date. For other prepayment terms (including, without limitation, the requirement to pre-pay the 2011 Term Loan Facility with 50% ofProducts Corporation's "excess cash flow", commencing with excess cash flow for the 2012 fiscal year payable in the first 100 days of 2013, which prepayments are applied to reduceProducts Corporation's future regularly scheduled term loan amortization payments in the direct order of maturities), see Note 10, "Long-Term Debt," to the Consolidated Financial Statements in this Form 10-K. In addition to its regularly scheduled$2.0 million principal repayment due onMarch 31, 2013 , prior toApril 10, 2013 ,Products Corporation will also be required to repay approximately$19.5 million of indebtedness under the 2011 Term Loan Facility, representing 50% of its 2012 "excess cash flow" (as defined under the 2011 Term Loan Agreement), which repayment would satisfy Products 37
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Corporation's future regularly scheduled term loan amortization payments in the direct order of maturities beginning in
The 2011 Term Loan Facility contains a financial covenant limitingProducts Corporation's first lien senior secured leverage ratio (the ratio ofProducts Corporation's Senior Secured Debt that has a lien on the collateral which secures the 2011 Term Loan Facility that is not junior or subordinated to the liens securing the 2011 Term Loan Facility (excluding debt outstanding under the 2011 Revolving Credit Facility) to EBITDA), to no more than 4.0 to 1.0 for each period of four consecutive fiscal quarters during the period fromJune 30, 2011 to such facility'sNovember 2017 maturity date. Under certain circumstances,Products Corporation has the right to request the 2011 Term Loan Facility to be increased by up to$300 million , provided that the lenders are not committed to provide any such increase. The 2011 Term Loan Facility matures onNovember 19, 2017 ; provided, however, it will mature onAugust 15, 2015 ifProducts Corporation's 9 3/4% Senior Secured Notes have not been refinanced, redeemed, repurchased, defeased or repaid in full on or before such date. See "2013 Senior Notes Refinancing" below for a discussion of the 2013 refinancing of the 9 3/4% Senior Secured Notes.
2011 Revolving Credit Facility
Availability under the 2011 Revolving Credit Facility varies based on a borrowing base that is determined by the value of eligible accounts receivable and eligible inventory in the U.S. and theU.K. and eligible real property and equipment in the U.S. from time to time. If the value of the eligible assets is not sufficient to support the$140.0 million borrowing base under the 2011 Revolving Credit Facility,Products Corporation will not have full access to the 2011 Revolving Credit Facility.Products Corporation's ability to borrow under the 2011 Revolving Credit Facility is also conditioned upon the satisfaction of certain conditions precedent andProducts Corporation's compliance with other covenants in the 2011 Revolving Credit Agreement.
Under the 2011 Revolving Credit Facility, borrowings (other than loans in foreign currencies) bear interest, if made as Eurodollar Loans, at the Eurodollar Rate, plus the applicable margin set forth in the grid below and, if made as Alternate Base Rate loans, at the Alternate Base Rate, plus the applicable margin set forth in the grid below:
Eurodollar Loans, Eurocurrency Loans or Alternate Base Local Excess Availability Rate Loans Rate Loans Greater than or equal to $92,000,000 1.00 % 2.00 % Less than$92,000,000 but greater than or equal to $46,000,000 1.25 % 2.25 % Less than $46,000,000 1.50 % 2.50 % Local Loans bear interest, if mutually acceptable toProducts Corporation and the relevant foreign lenders, at the Local Rate, and otherwise (i) if in foreign currencies or in U.S. dollars at the Eurodollar Rate or the Eurocurrency Rate plus the applicable margin set forth in the grid above or (ii) if in U.S. dollars at the Alternate Base Rate plus the applicable margin set forth in the grid above. For other fees payable to the lenders under the 2011 Revolving Credit Facility (including, without limitation, a commitment fee of 0.375% of the average daily unused portion of the 2011 Revolving Credit Facility), see Note 10, "Long-Term Debt and," to the Consolidated Financial Statements in this Form 10-K.
For prepayment terms under the 2011 Revolving Credit Facility, see Note 10, "Long-Term Debt," to the Consolidated Financial Statements in this Form 10-K.
Under certain circumstances,Products Corporation has the right to request that the 2011 Revolving Credit Facility be increased by up to$60.0 million , provided that the lenders are not committed to provide any such increase. 38
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Under certain circumstances if and when the difference between (i) the borrowing base under the 2011 Revolving Credit Facility and (ii) the amounts outstanding under the 2011 Revolving Credit Facility is less than$20.0 million for a period of two consecutive days or more, and until such difference is equal to or greater than$20.0 million for a period of 30 consecutive business days, the 2011 Revolving Credit Facility requiresProducts Corporation to maintain a consolidated fixed charge coverage ratio (the ratio of EBITDA minus Capital Expenditures to Cash Interest Expense for such period) of a minimum of 1.0 to 1.0. The 2011 Revolving Credit Facility matures onJune 16, 2016 ; provided, however, it will mature onAugust 15, 2015 ifProducts Corporation's 9 3/4% Senior Secured Notes have not been refinanced, redeemed, repurchased, defeased or repaid in full on or before such date. See "2013 Senior Notes Refinancing" below for a discussion of the 2013 refinancing of the 9 3/4% Senior Secured Notes.
Covenants and Defaults Applicable to the 2011 Credit Facilities
The 2011 Credit Facilities contain various restrictive covenants prohibiting
(i) incurring additional indebtedness or guarantees, with certain exceptions;
(ii) making dividend and other payments or loans to Revlon, Inc. or other affiliates, with certain exceptions, including among others:
(a) exceptions permittingProducts Corporation to pay dividends or make other payments to Revlon, Inc. to enable it to, among other things, pay expenses incidental to being a public holding company, including, among other things, professional fees such as legal, accounting and insurance fees, regulatory fees, such asSEC filing fees andNYSE listing fees, and other expenses related to being a public holding company; (b) subject to certain circumstances, to finance the purchase by Revlon, Inc. of its Class A Common Stock in connection with the delivery of such Class A Common Stock to grantees under theThird Amended and Restated Revlon, Inc. Stock Plan and/or the payment of withholding taxes in connection with the vesting of restricted stock awards under such plan; (c) subject to certain limitations, to pay dividends or make other payments to finance the purchase, redemption or other retirement for value by Revlon, Inc. of stock or other equity interests or equivalents in Revlon, Inc. held by any current or former director, employee or consultant in his or her capacity as such; and (d) subject to certain limitations, to make other restricted payments to affiliates ofProducts Corporation in an amount up to$10 million per year (plus$10 million for each calendar year commencing with 2011), other restricted payments in an aggregate amount not to exceed$35 million and other restricted payments based upon certain financial tests.
(iii) creating liens or other encumbrances on
(iv) with certain exceptions, engaging in merger or acquisition transactions;
(v) prepaying indebtedness and modifying the terms of certain indebtedness and specified material contractual obligations, subject to certain exceptions;
(vi) making investments, subject to certain exceptions; and
(vii) entering into transactions with affiliates ofProducts Corporation involving aggregate payments or consideration in excess of$10 million other than upon terms that are not materially less favorable when taken as a whole toProducts Corporation or its subsidiaries as terms that would be obtainable at the time for a comparable transaction or series of similar transactions in arm's length dealings with an unrelated third person and where such payments or consideration exceed$20 million , unless such transaction has been approved by all of the independent directors ofProducts Corporation , subject to certain exceptions. 39
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The events of default under the 2011 Credit Facilities include customary events of default for such types of agreements. For a description of the events of defaults, see Note 10, "Long-Term Debt," to the Consolidated Financial Statements in this Form 10-K. IfProducts Corporation is in default under the senior secured leverage ratio under the 2011 Term Loan Facility or the consolidated fixed charge coverage ratio under the 2011 Revolving Credit Agreement,Products Corporation may cure such default by issuing certain equity securities to, or receiving capital contributions from, Revlon, Inc. and applying such cash which is deemed to increase EBITDA for the purpose of calculating the applicable ratio.Products Corporation may exercise this cure right two times in any four-quarter period.Products Corporation was in compliance with all applicable covenants under the 2011 Term Loan Agreement and 2011 Revolving Credit Agreement upon closing the respective 2011 Refinancings and as ofDecember 31, 2012 . AtDecember 31, 2012 , the aggregate principal amount outstanding under the 2011 Term Loan Facility was$788.0 million and availability under the$140.0 million 2011 Revolving Credit Facility, based upon the calculated borrowing base less$10.4 million of outstanding undrawn letters of credit and nil then drawn on the 2011 Revolving Credit Facility, was$129.6 million . During 2012 and 2011, the average borrowings outstanding under the 2011 Revolving Credit Facility were$4.1 million and$5.8 million , respectively.
For further detail regarding the 2011 Refinancings, see Note 10, "Long-Term Debt," to the Consolidated Financial Statements in this Form 10-K.
9 3/4% Senior Secured Notes due 2015
InNovember 2009 ,Products Corporation issued and sold$330.0 million in aggregate principal amount of the 9 3/4% Senior Secured Notes dueNovember 15, 2015 (the "9 3/4% Senior Secured Notes") in a private placement which was priced at 98.9% of par, receiving net proceeds (net of original issue discount and underwriters fees) of$319.8 million . Including the amortization of the original issue discount, the effective interest rate on the 9 3/4% Senior Secured Notes is 10%. Pursuant to a registration rights agreement, inJuly 2010 ,Products Corporation completed an offer to exchange the original 9 3/4% Senior Secured Notes for up to$330 million in aggregate principal amount of its 9 3/4% Senior Secured Notes due 2015 that have been registered under the Securities Act of 1933, as amended (the "Securities Act"), in which all of the old notes were exchanged for new notes which have substantially identical terms as the old notes, except that the new notes are registered with theSEC under the Securities Act and the transfer restrictions and registration rights applicable to the old notes do not apply to the new notes. The 9 3/4% Senior Secured Notes bear interest at an annual rate of 9 3/4%, which is payable onMay 15 andNovember 15 of each year, requiring bi-annual interest payments of$16.1 million on each interest payment date, based on the$330.0 million aggregate principal face amount of the 9 3/4% Senior Secured Notes outstanding as ofDecember 31, 2012 . Upon a Change in Control (as defined in the 9 3/4% Senior Secured Notes Indenture), subject to certain conditions, each holder of the 9 3/4% Senior Secured Notes will have the right to requireProducts Corporation to repurchase all or a portion of such holder's 9 3/4% Senior Secured Notes at a price equal to 101% of the principal amount, plus accrued and unpaid interest, if any, to the date of repurchase. The 9 3/4% Senior Secured Notes Indenture contains covenants that, among other things, limit (i) the issuance of additional debt and redeemable stock byProducts Corporation ; (ii) the incurrence of liens; (iii) the issuance of debt and preferred stock byProducts Corporation's subsidiaries; (iv) the payment of dividends on capital stock ofProducts Corporation and its subsidiaries and the redemption of capital stock ofProducts Corporation and certain subordinated obligations; (v) the sale of assets and subsidiary stock byProducts Corporation ; (vi) transactions with affiliates ofProducts Corporation ; (vii) consolidations, mergers and transfers of all or substantially all ofProducts Corporation's assets; and (viii) certain restrictions on transfers of assets by or distributions from subsidiaries ofProducts Corporation . All of these limitations and prohibitions, however, are subject to a number of qualifications and exceptions, which are specified in the 9 3/4% Senior Secured Notes Indenture.Products Corporation was in compliance with all applicable covenants under its 9 3/4% Senior Secured Notes Indenture as ofDecember 31, 2012 . For further discussion regarding the 9 3/4% Senior Secured Notes, dueNovember 2015 , see Note 10, "Long-Term Debt," to the Consolidated Financial Statements in this Form 10-K.
See "2013 Senior Notes Refinancing" below for a discussion of the 2013 refinancing of the 9 3/4% Senior Secured Notes.
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Amended and Restated Senior Subordinated Term Loan
InOctober 2009 , Revlon, Inc. consummated a voluntary exchange offer transaction (the "2009 Exchange Offer"), in whichMacAndrews & Forbes contributed to Revlon, Inc.$48.6 million of the$107.0 million aggregate outstanding principal amount of the Senior Subordinated Term Loan (the "Contributed Loan"), representing$5.21 of outstanding principal amount for each of the 9,336,905 shares of Revlon, Inc.'s Class A Common Stock exchanged in the 2009 Exchange Offer, and Revlon, Inc. issued toMacAndrews & Forbes 9,336,905 shares of Class A Common Stock at a ratio of one share of Class A Common Stock for each$5.21 of outstanding principal amount of the Senior Subordinated Term Loan contributed to Revlon. Also upon consummation of the 2009 Exchange Offer, the terms of the Senior Subordinated Term Loan Agreement were amended to extend the maturity date of the Contributed Loan which remains owing fromProducts Corporation to Revlon, Inc. fromAugust 2010 toOctober 8, 2013 , to change the annual interest rate on the Contributed Loan from 11% to 12.75%, to extend the maturity date of the$58.4 million principal amount of the Senior Subordinated Term Loan which, atDecember 31, 2011 , remained owing fromProducts Corporation toMacAndrews & Forbes (the "Non-Contributed Loan") fromAugust 2010 toOctober 8, 2014 and to change the annual interest rate on the Non-Contributed Loan from 11% to 12%. OnApril 30, 2012 ,MacAndrews & Forbes exercised its right to assign its interest in the Non-Contributed Loan. In connection with such assignment,Products Corporation entered into the Amended and Restated Senior Subordinated Term Loan Agreement withMacAndrews & Forbes and a related Administrative Letter was entered into withCitibank, N.A . andMacAndrews & Forbes, to among other things: • modify the interest rate on the Non-Contributed Loan from its prior 12%
fixed rate to a floating rate of LIBOR plus 7%, with a 1.5% LIBOR floor, resulting in an interest rate of approximately 8.5% per annum (or a 3.5%
reduction per annum) upon the effectiveness of the Amended and Restated
Senior Subordinated Term Loan Agreement. Interest under the Amended and
Restated Senior Subordinated Term Loan Agreement is payable quarterly in
arrears in cash;
• insert prepayment premiums such that
prepay the Non-Contributed Loan (i) through
prepayment premium based on a formula designed to provide the assignees of
the Non-Contributed Loan with the present value, using a discount rate of
75 basis points over U.S. Treasuries, of the principal, premium and
interest that would have accrued on the Non-Contributed Loan from any such
prepayment date through
loan's terms (both before and after giving effect to these amendments), no
portion of the principal amount of the Non-Contributed Loan may be repaid
prior to its
Revlon, Inc.'s Preferred Stock have been or are being concurrently
redeemed and all payments due thereon are paid in full or are concurrently
being paid in full), (ii) fromNovember 1, 2013 throughApril 30, 2014 with a 2% prepayment premium on the aggregate principal amount of the
Non-Contributed Loan being prepaid, and (iii) from
maturity onOctober 8, 2014 with no prepayment premium; and • designateCitibank, N.A . as the administrative agent for the Non-Contributed Loan.
Concurrently with the effectiveness of the Amended and Restated Senior Subordinated Term Loan Agreement,
For further discussion regarding the Amended and Restated Senior Subordinated Term Loan, see Note 10, "Long-Term Debt," to the Consolidated Financial Statements in this Form 10-K.
Impact of Foreign Currency Translation -
For the years endedDecember 31, 2012 , 2011 and 2010, Revlon Venezuela had net sales of approximately 2%, 2% and 3%, respectively, of the Company's consolidated net sales. AtDecember 31, 2012 and 2011, total assets of RevlonVenezuela were approximately 2% and 2%, respectively, of the Company's total assets. Highly-Inflationary Economy: EffectiveJanuary 1, 2010 ,Venezuela was designated as a highly inflationary economy under U.S. GAAP. As a result, beginningJanuary 1, 2010 , the U.S. dollar is the functional currency for RevlonVenezuela . ThroughDecember 31, 2009 , prior toVenezuela being designated as highly inflationary, currency translation adjustments of Revlon Venezuela's balance sheet were reflected in stockholder's deficiency 41
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as part of other comprehensive income; however, subsequent to
Currency Devaluation: OnJanuary 8, 2010 , the Venezuelan government announced the devaluation of its local currency, Venezuelan Bolivars ("Bolivars"), relative to the U.S. dollar and the official exchange rate for non-essential goods changed from 2.15 to 4.30. Throughout 2010, the Company usedVenezuela's official rate to translate Revlon Venezuela's financial statements. In 2010, the devaluation had the impact of reducing the Company's reported net sales and operating income by$33.4 million and$8.4 million , respectively. Additionally, to reflect the impact of the currency devaluation, the Company recorded a one-time foreign currency loss of$2.8 million inJanuary 2010 as a result of the required re-measurement of Revlon Venezuela's balance sheet. AsVenezuela was designated as a highly inflationary economy effectiveJanuary 1, 2010 , this foreign currency loss was reflected in earnings in the first quarter of 2010. Currency Restrictions: Currency restrictions enacted by the Venezuelan government in 2003 have become more restrictive and have impacted RevlonVenezuela's ability to obtain U.S. dollars in exchange for Bolivars at the official foreign exchange rates from the Venezuelan government and its foreign exchange commission, the Comisión de Administracion de Divisas ("CADIVI"). InMay 2010 , the Venezuelan government took control over the previously freely-traded foreign currency exchange market and inJune 2010 , replaced it with a new foreign currency exchange system, the Sistema de Transacciones en Moneda Extranjera ("SITME"). SITME provides a mechanism to exchange Bolivars into U.S. dollars. However, U.S. dollars accessed through SITME can only be used for product purchases and related services, such as freight, and are not available for other transactions, such as the payment of dividends. Also, SITME can only be used for amounts of up to$50,000 per day, subject to a monthly maximum of$350,000 per legal entity, and is generally only available to the extent the applicant has not exchanged and received U.S. dollars from CADIVI within the previous 90 days. In the second quarter of 2011, the Company began using a SITME rate of5.5 Bolivars per U.S. dollar to translate RevlonVenezuela's financial statements, as this was the rate at which the Company accessed U.S. dollars in the SITME market during the second quarter of 2011 (the "SITME Rate"). The Company had previously utilizedVenezuela's official exchange rate of4.3 Bolivars per U.S. dollar to translate Revlon Venezuela's financial statements fromJanuary 1, 2010 throughMarch 31, 2011 . ThroughDecember 31, 2012 , the Company continued using the SITME Rate to translate Revlon Venezuela's financial statements. To reflect the impact of the change in exchange rates fromVenezuela's official exchange rate to the SITME Rate, a foreign currency loss of$1.7 million was recorded in the second quarter of 2011. AsVenezuela was designated as a highly inflationary economy effectiveJanuary 1, 2010 , the Company reflected this foreign currency loss in earnings for the year endedDecember 31, 2011 . For the year endedDecember 31, 2011 , the change in the exchange rates inVenezuela unfavorably impacted the Company's consolidated net sales by$4.6 million .
Sources and Uses
The Company's principal sources of funds are expected to be operating revenues, cash on hand and funds available for borrowing under the 2011 Revolving Credit Facility and other permitted lines of credit. The 2011 Credit Agreements, the 9 3/4% Senior Secured Notes Indenture and the Amended and Restated Senior Subordinated Term Loan Agreement contain certain provisions that by their terms limitProducts Corporation and its subsidiaries' ability to, among other things, incur additional debt. The Company's principal uses of funds are expected to be the payment of operating expenses, including expenses in connection with the continued execution of the Company's business strategy, purchases of permanent wall displays, capital expenditure requirements, debt service payments and costs, tax payments, pension and post-retirement benefit plan contributions, payments in connection with the Company's restructuring programs, severance not otherwise included in the Company's restructuring programs and debt repurchases. The Company's cash contributions to its pension and post-retirement benefit plans in 2012 were$29.8 million . The Company expects cash contributions to its pension and post-retirement benefit plans to be approximately$20 million in the aggregate for 2013. The Company's cash taxes paid in 2012 were$17.8 million . The Company expects to pay cash taxes of approximately$20 million in the aggregate for 2013. The Company's purchases of permanent wall displays and capital expenditures in 2012 were$43.2 million and$20.9 million , respectively. The Company expects purchases of permanent wall displays and capital expenditures in the aggregate for 2013 to be approximately$50 million and$25 million , respectively. The Company has undertaken, and continues to assess, refine and implement steps to efficiently manage its working capital, including, among other things, 42
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initiatives intended to optimize inventory levels over time; centralized procurement to secure discounts and efficiencies; prudent management of accounts receivable and accounts payable; and controls on general and administrative spending. In the ordinary course of business, the Company's source or use of cash from operating activities may vary on a quarterly basis as a result of a number of factors, including the timing of working capital flows. Continuing to execute the Company's business strategy could include taking advantage of additional opportunities to reposition, repackage or reformulate one or more brands or product lines, launching additional new products, acquiring businesses or brands, further refining the Company's approach to retail merchandising and/or taking further actions to optimize its manufacturing, sourcing and organizational size and structure. Any of these actions, the intended purpose of which would be to create value through profitable growth, could result in the Company making investments and/or recognizing charges related to executing against such opportunities. Any such activities may be funded with cash on hand, funds available under the 2011 Revolving Credit Facility and/or other permitted additional sources of capital, which actions could increase the Company's total debt. The Company may also, from time to time, seek to retire or purchase its outstanding debt obligations in open market purchases, in privately negotiated transactions or otherwise and may seek to refinance some or all of its indebtedness based upon market conditions. Any retirement or purchase of debt may be funded with operating cash flows of the business or other sources and will depend upon prevailing market conditions, liquidity requirements, contractual restrictions and other factors, and the amounts involved may be material. The Company expects that operating revenues, cash on hand and funds available for borrowing under the 2011 Revolving Credit Facility and other permitted lines of credit will be sufficient to enable the Company to cover its operating expenses for 2013, including cash requirements in connection with the payment of operating expenses, including expenses in connection with the execution of the Company's business strategy, purchases of permanent wall displays, capital expenditure requirements, debt service payments and costs, tax payments, pension and post-retirement plan contributions, payments in connection with the Company's restructuring programs, severance not otherwise included in the Company's restructuring programs and debt repurchases. There can be no assurance that available funds will be sufficient to meet the Company's cash requirements on a consolidated basis. If the Company's anticipated level of revenues is not achieved because of, among other things, decreased consumer spending in response to weak economic conditions or weakness in the cosmetics category in the mass retail channel; adverse changes in currency exchange rates and/or currency controls; decreased sales of the Company's products as a result of increased competitive activities by the Company's competitors; changes in consumer purchasing habits, including with respect to shopping channels; retailer inventory management, retailer space reconfigurations or reductions in retailer display space; changes in retailer pricing or promotional strategies; or less than anticipated results from the Company's existing or new products or from its advertising, promotional and/or marketing plans; or if the Company's expenses, including, without limitation, for pension expense under its benefit plans, advertising, promotional and marketing activities or for sales returns related to any reduction of retail space, product discontinuances or otherwise, exceed the anticipated level of expenses, the Company's current sources of funds may be insufficient to meet the Company's cash requirements. Any such developments, if significant, could reduce the Company's revenues and could adversely affectProducts Corporation's ability to comply with certain financial covenants under the 2011 Credit Agreements and in such event, the Company could be required to take measures, including, among other things, reducing discretionary spending. (See Item 1A. "Risk Factors-The Company's ability to service its debt and meet its cash requirements depends on many factors, including achieving anticipated levels of revenue and expenses. If such revenue or expense levels prove to be other than as anticipated, the Company may be unable to meet its cash requirements orProducts Corporation may be unable to meet the requirements of the financial covenants under the 2011 Credit Agreements, which could have a material adverse effect on the Company's business, financial condition and/or results of operations" and certain other risk factors discussing certain risks associated with the Company's business and indebtedness).Products Corporation enters into FX Contracts and foreign currency option contracts from time to time to hedge certain net cash flows denominated in currencies other than the local currencies of the Company's foreign and domestic operations. The FX Contracts are entered into primarily for the purpose of hedging anticipated inventory purchases and certain intercompany payments denominated in currencies other than the local currencies of the Company's foreign and domestic operations and generally have maturities of less than one year. 43
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At
2013 Senior Notes Refinancing
OnFebruary 8, 2013 ,Products Corporation successfully completed its previously-announced offering, pursuant to an exemption from registration under the Securities Act, of$500 million aggregate principal amount of 5 3/4% Senior Notes due 2021 (the "5 3/4% Senior Notes"). The 5 3/4% Senior Notes are unsecured and were issued to investors at par. The 5 3/4% Senior Notes will mature onFebruary 15, 2021 . Interest on the 5 3/4% Senior Notes will accrue at 5 3/4% per annum, paid every six months onFebruary 15th andAugust 15th , with the first interest payment due onAugust 15, 2013 . The 5 3/4% Senior Notes were issued pursuant to an Indenture (the "Indenture"), dated as ofFebruary 8, 2013 (the "Closing Date"), by and amongProducts Corporation ,Products Corporation's domestic subsidiaries (the "Guarantors"), which also currently guaranteeProducts Corporation's 2011 Term Loan Facility and 2011 Revolving Credit Facility, andU.S. Bank National Association , as trustee. The Guarantors have issued guarantees (the "Guarantees") ofProducts Corporation's obligations under the 5 3/4% Senior Notes and the Indenture on a senior unsecured basis. The holders of the 5 3/4% Senior Notes and the Guarantees will have certain registration rights pursuant to a Registration Rights Agreement (the "Registration Rights Agreement"), dated as of the Closing Date, by and amongProducts Corporation , the Guarantors and the representatives of the several initial purchasers of the 5 3/4% Senior Notes.Products Corporation used the net proceeds from the issuance of the 5 3/4% Senior Notes to: (i) pay the tender offer consideration, including applicable consent payments, in connection withProducts Corporation's cash tender offer to purchase any and all of the$330 million outstanding aggregate principal amount of its 9 3/4% Senior Secured Notes dueNovember 2015 (discussed in more detail below); (ii) pay the applicable premium and accrued interest, along with related fees and expenses, on the 9 3/4% Senior Secured Notes that are subsequently redeemed byProducts Corporation following the tender offer; and (iii) pay applicable fees and expenses incurred in connection with the issuance of the 5 3/4% Senior Notes, the tender offer and any redemption.Products Corporation expects to use the remaining balance available from the issuance of the 5 3/4% Senior Notes for general corporate purposes, including debt reduction transactions such as repaying a portion of its 2011 Term Loan Facility dueNovember 2017 and repaying the Contributed Loan portion of its Amended and Restated Senior Subordinated Term Loan at maturity inOctober 2013 .
Tender Offer
OnFebruary 8, 2013 , Revlon, Inc. also announced the early tender results forProducts Corporation's previously-announced cash tender offer and consent solicitation (the "Tender Offer") to purchase any and all of its 9 3/4% Senior Secured Notes due 2015 (CUSIP No. 761519 BB2). As of11:59 p.m. ,New York City time, onFebruary 7, 2013 (the "Consent Date"), holders of the 9 3/4% Senior Secured Notes had validly tendered and not withdrawn$192.4 million aggregate principal amount of such 9 3/4% Senior Secured Notes (the "Consent Notes"), which represent approximately 58% of the$330.0 million aggregate principal amount of the 9 3/4% Senior Secured Notes outstanding. In addition, on the Closing Date,Products Corporation effected a covenant defeasance on the balance of the 9 3/4% Senior Secured Notes by entering into a supplemental indenture to the indenture governing the 9 3/4% Senior Secured Notes, which pursuant to the Tender Offer, eliminated substantially all of the covenants and certain events of default under such indenture.Products Corporation will redeem onMarch 11, 2013 the aggregate principal amount of 9 3/4% Senior Secured Notes that may be outstanding on such date. Ranking The 5 3/4% Senior Notes areProducts Corporation's unsubordinated, unsecured obligations and rank senior in right of payment to any future subordinated obligations ofProducts Corporation and rank pari passu in right of payment with all existing and future senior debt ofProducts Corporation . Similarly, each Guarantee is the relevant Guarantor's unsubordinated, unsecured obligation and ranks senior in right of payment to any future subordinated obligations of such Guarantor and ranks pari passu in right of payment with all existing and future senior debt of such Guarantor.
The 5 3/4% Senior Notes and the Guarantees will rank effectively junior to
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stock of
Optional Redemption On and afterFebruary 15, 2016 , the 5 3/4% Senior Notes may be redeemed at the option ofProducts Corporation , at any time as a whole, or from time to time in part, at the following redemption prices (expressed as percentages of principal amount), plus accrued interest to the date of redemption, if redeemed during the 12-month period beginning onFebruary 15th of the years indicated below: Year Percentage 2016 104.313 % 2017 102.875 % 2018 101.438 % 2019 and thereafter 100.000 %Products Corporation may redeem the 5 3/4% Senior Notes at its option at any time or from time to time prior toFebruary 15, 2016 , as a whole or in part, at a redemption price per 5 3/4% Senior Note equal to the sum of (1) the then outstanding principal amount thereof, plus (2) accrued and unpaid interest (if any) to the date of redemption, plus (3) the applicable premium based on the applicable treasury rate plus 75 basis points. Prior toFebruary 15, 2016 ,Products Corporation may, from time to time, redeem up to 35% of the aggregate principal amount of the 5 3/4% Senior Notes and any additional notes with, and to the extentProducts Corporation actually receives, the net proceeds of one or more equity offerings from time to time, at 105.75% of the principal amount thereof, plus accrued interest to the date of redemption.
Change of Control
Upon the occurrence of specified change of control events,Products Corporation will be required to make an offer to purchase all of the 5 3/4% Senior Notes. The purchase price will be 101% of the outstanding principal amount of the 5 3/4% Senior Notes as of the date of any such repurchase plus accrued and unpaid interest to the date of repurchase.
Certain Covenants
The Indenture limits
• incur or guarantee additional indebtedness ("Limitation on Debt");
• pay dividends, make repayments on indebtedness that is subordinated in
right of payment to the 5 3/4% Senior Notes and make other "restricted
payments" ("Limitation on Restricted Payments"); • make certain investments; • create liens on their assets to secure debt; • enter into transactions with affiliates;
• merge, consolidate or amalgamate with another company ("
• transfer and sell assets ("Limitation on Asset Sales"); and
• permit restrictions on the payment of dividends by
subsidiaries ("Limitation on Dividends from Subsidiaries").
These covenants are subject to important qualifications and exceptions. The Indenture also contains customary affirmative covenants and events of default.
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In addition, if during any period of time the 5 3/4% Senior Notes receive investment grade ratings from both Standard & Poor's andMoody's Investors Services, Inc. and no default or event of default has occurred and is continuing under the Indenture,Products Corporation and its subsidiaries will not be subject to the covenants on Limitation on Debt, Limitation on Restricted Payments, Limitation on Asset Sales, Limitation on Dividends from Subsidiaries and certain provisions of theSuccessor Company covenant.
Registration Rights
On the Closing Date,Products Corporation , the Guarantors and the representatives of the initial purchasers of the 5 3/4% Senior Notes entered into the Registration Rights Agreement. Pursuant to the Registration Rights Agreement,Products Corporation and the Guarantors agreed with the representatives of the initial purchasers, for the benefit of the holders of the 5 3/4% Senior Notes, thatProducts Corporation will, at its cost, among other things: (i) file a registration statement with respect to the 5 3/4% Senior Notes within 150 days after the Closing Date to be used in connection with the exchange of the 5 3/4% Senior Notes and related guarantees for publicly registered notes and related guarantees with substantially identical terms in all material respects (except for the transfer restrictions relating to the 5 3/4% Senior Notes and interest rate increases as described below); (ii) use its reasonable best efforts to cause the applicable registration statement to become effective under the Securities Act within 210 days after the Closing Date; and (iii) use its reasonable best efforts to effect an exchange offer of the 5 3/4% Senior Notes and the related guarantees for registered notes and related guarantees within 270 days after the Closing Date. In addition, under certain circumstances,Products Corporation may be required to file a shelf registration statement to cover resales of the 5 3/4% Senior Notes. IfProducts Corporation fails to satisfy such obligations, it will be obligated to pay additional interest to each holder of the 5 3/4% Senior Notes that are subject to transfer restrictions, with respect to the first 90-day period immediately following any such failure, at a rate of 0.25% per annum on the principal amount of the 5 3/4% Senior Notes that are subject to transfer restrictions held by such holder. The amount of additional interest will increase by an additional 0.25% per annum with respect to each subsequent 90-day period until all registration requirements have been satisfied, up to a maximum amount of additional interest of 0.50% per annum on the principal amount of the 5 3/4% Senior Notes that are subject to transfer restrictions.
Disclosures about Contractual Obligations and Commercial Commitments
The following table aggregates all contractual obligations and commercial commitments that affect the Company's financial condition and liquidity position as ofDecember 31, 2012 : Payments Due by Period (dollars in millions) Less than 1 After 5 Contractual Obligations Total year 1-3 years 3-5 years years Current portion of long-term debt - affiliates(a) $ 48.6 $ 48.6 - - - Long-term debt, including current portion (b) 1,176.4 21.5 $ 390.9 $ 764.0 - Interest on long-term debt (c) 294.0 83.0 142.4 68.6 - Interest on current portion of long-term debt - affiliates (d) 6.2 6.2 - - - Capital lease obligations 5.6 2.5 2.8 0.3 - Operating leases 62.8 18.1 20.1 9.3 15.3 Purchase obligations (e ) 73.1 73.1 - - - Other long-term obligations (f) 67.7 48.2 13.4 6.1 - Total contractual obligations $ 1,734.4 $ 301.2 $ 569.6 $ 848.3 $ 15.3 46
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Table of Contents (a) Represents the$48.6 million aggregate principal amount outstanding of the Contributed Loan (the portion of the Amended and Restated Senior Subordinated Term Loan that remains owing fromProducts Corporation to Revlon, Inc.) and which matures onOctober 8, 2013 .
(b) Amount includes the
the Non-Contributed Loan (the portion of the Amended and Restated Senior
Subordinated Term Loan that remains owing fromProducts Corporation to various third parties) as ofDecember 31, 2012 , which loan matures onOctober 8, 2014 and bears interest at at a floating rate of LIBOR plus 7%, with a 1.5% LIBOR floor.
(c) Consists of interest through the respective maturity dates on (i) the $788.0
million in aggregate principal amount outstanding under the 2011 Term Loan
Facility based upon assumptions regarding the amount of debt outstanding
under the 2011 Term Loan Agreement; (ii) the
principal amount of the 9 3/4% Senior Secured Notes; and (iii) the $58.4
million aggregate principal amount outstanding of the Non-Contributed Loan;
based on interest rates under such debt agreements as of
(d) Consists of the 12.75% interest on the aggregate principal amount outstanding under the Contributed Loan, which has a maturity date onOctober 8, 2013 . (e) Consists of purchase commitments for finished goods, raw materials, components and services pursuant to enforceable and legally binding
obligations which include all significant terms, including fixed or minimum
quantities to be purchased; fixed, minimum or variable price provisions; and
the approximate timing of the transactions. (f) Consists primarily of media and advertising contracts, pension funding
obligations (amount due within one year only, as subsequent pension funding
obligation amounts cannot be reasonably estimated since the return on
pension assets in future periods, as well as future pension assumptions, are
not known), software licensing agreements and obligations related to
third-party warehousing services. Such amounts exclude employment
agreements, severance and other immaterial contractual commitments, which
severance and other contractual commitments related to restructuring
activities are discussed under "Recent Events -
Off-Balance Sheet Transactions
The Company does not maintain any off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Discussion of Critical Accounting Policies
In the ordinary course of its business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of its financial statements in conformity with U.S. generally accepted accounting principles ("U.S. GAAP"). Actual results could differ significantly from those estimates and assumptions. The Company believes that the following discussion addresses the Company's most critical accounting policies, which are those that are most important to the portrayal of the Company's financial condition and results of operations and require management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. 47
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Allowance for Doubtful Accounts:
The allowance for doubtful accounts is determined based on historical experience and ongoing evaluations of the Company's receivables and evaluations of the risks of payment. The allowance for doubtful accounts is recorded against accounts receivable balances when they are deemed uncollectible. Recoveries of accounts receivable previously reserved are recorded in the consolidated statements of income and comprehensive income when received.
Sales Returns:
The Company allows customers to return their unsold products when they meet certain company-established criteria as outlined in the Company's trade terms. The Company regularly reviews and revises, when deemed necessary, the Company's estimates of sales returns based primarily upon historical returns experience, planned product discontinuances and promotional sales, which would permit customers to return items based upon the Company's trade terms. The Company records estimated sales returns as a reduction to sales and cost of sales, and an increase in accrued liabilities and inventories. Returned products, which are recorded as inventories, are valued based upon the amount that the Company expects to realize upon their subsequent disposition. The physical condition and marketability of the returned products are the major factors the Company considers in estimating realizable value. Cost of sales includes the cost of refurbishment of returned products. Actual returns, as well as realized values on returned products, may differ significantly, either favorably or unfavorably, from the Company's estimates if factors such as product discontinuances, customer inventory levels or competitive conditions differ from the Company's estimates and expectations and, in the case of actual returns, if economic conditions differ significantly from the Company's estimates and expectations.
Trade Support Costs:
In order to support the retail trade, the Company has various performance-based arrangements with retailers to reimburse them for all or a portion of their promotional activities related to the Company's products. The Company regularly reviews and revises, when deemed necessary, estimates of costs to the Company for these promotions based on estimates of what has been incurred by the retailers. Actual costs incurred by the Company may differ significantly if factors such as the level and success of the retailers' programs, as well as retailer participation levels, differ from the Company's estimates and expectations.
Inventories:
Inventories are stated at the lower of cost or market value. Cost is principally determined by the first-in, first-out method. The Company records adjustments to the value of inventory based upon its forecasted plans to sell its inventories, as well as planned discontinuances. The physical condition (e.g., age and quality) of the inventories is also considered in establishing its valuation. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from the amounts that the Company may ultimately realize upon the disposition of inventories if future economic conditions, customer inventory levels, product discontinuances, return levels or competitive conditions differ from the Company's estimates and expectations.
Pension Benefits:
The Company sponsors both funded and unfunded pension and other retirement plans in various forms covering employees who meet the applicable eligibility requirements. The Company uses several statistical and other factors in an attempt to estimate future events in calculating the liability and net periodic benefit cost related to these plans. These factors include assumptions about the discount rate, expected long-term return on plan assets and rate of future compensation increases as determined annually by the Company, within certain guidelines, which assumptions would be subject to revisions if significant events occur during the year. The Company usesDecember 31st as its measurement date for defined benefit pension plan obligations and assets. The Company selected a weighted-average discount rate of 3.78% in 2012, representing a decrease from the 4.38% weighted-average discount rate selected in 2011 for the Company's U.S. defined benefit pension plans. The Company selected a weighted-average discount rate for the Company's international defined benefit pension plans of 4.33% in 2012, representing a decrease from the 4.77% weighted-average discount rate selected in 2011. The discount rates are used to measure the benefit obligations at the measurement date and the net periodic benefit cost for the subsequent calendar year and are reset annually using data available at the measurement date. The changes in the discount rates used for 2012 were primarily due to decreasing long-term interest yields on high-quality corporate bonds during 2012. AtDecember 31, 2012 , the decrease in the discount rates from 48
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December 31, 2011 had the effect of increasing the Company's projected pension benefit obligation by approximately$51 million . For 2013, the Company expects that the aforementioned decrease in the discount rate will have the effect of decreasing the net periodic benefit cost for its U.S. and international defined benefit pension plans by approximately$2.0 million , as compared to the net periodic benefit cost for 2012. Each year during the first quarter, the Company selects an expected long-term rate of return on its pension plan assets. For the Company's U.S. defined benefit pension plans, the expected long-term rate of return on the pension plan assets used was 7.75% and 8.00% for 2012 and 2011, respectively. The weighted average expected long-term rate of return used for the Company's international plans was 6.22% and 6.25% for 2012 and 2011, respectively. The table below reflects the Company's estimates of the possible effects of changes in the discount rates and expected long-term rates of return on its 2012 net periodic benefit costs and its projected benefit obligation atDecember 31, 2012 for the Company's principal defined benefit pension plans, with all other assumptions remaining constant: Effect of Effect of 25 basis points increase 25 basis points decrease Projected Projected pension pension Net periodic benefit Net periodic benefit benefit costs obligation benefit costs obligation Discount rate $ (0.1 ) $ (21.3 ) $ 0.1 $ 22.1 Expected long-term rate of return (1.1 ) - 1.1 - The rate of future compensation increases is another assumption used by the Company's third party actuarial consultants for pension accounting. The rate of future compensation increases used for the Company's projected pension benefit obligation in both 2012 and 2011 was 3.0% and 3.5%, respectively, for the U.S. defined benefit pension plans, excluding the Revlon Employees' Retirement Plan and the Revlon Pension Equalization Plan, as the rate of future compensation increases is no longer relevant to such plans due to the plan amendments made inMay 2009 . In addition, the Company's actuarial consultants also use other factors such as withdrawal and mortality rates. The actuarial assumptions used by the Company may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants, among other things. Differences from these assumptions could significantly impact the actual amount of net periodic benefit cost and liability recorded by the Company.
Goodwill:
Goodwill totaled$217.8 million and$194.7 million as ofDecember 31, 2012 and 2011, respectively. The Company operates in one operating segment and one reportable segment, which is also the only reporting unit for purposes of accounting for goodwill. Since the Company currently only has one reporting unit, all of its goodwill has been assigned to the enterprise as a whole. The determination of the fair value of goodwill requires management to make estimates and assumptions. Goodwill is reviewed for impairment annually, usingSeptember 30th carrying values. As the Company has a negative carrying value, managment performed an assessment of qualitative factors and concluded that it is more likely than not that a goodwill impairment does not exist. The Company did not record any impairment of goodwill during the years endedDecember 31, 2012 , 2011 or 2010. In addition, the Company assesses potential impairments to goodwill when there is evidence that events or changes in circumstances indicate that the carrying amount may not be recovered. As ofDecember 31, 2012 , there have been no significant events since the timing of the Company's annual impairment test that would have triggered additional impairment testing.
Income Taxes:
The Company records income taxes based on amounts payable with respect to the current year and includes the effect of deferred taxes. The effective tax rate reflects statutory tax rates, tax-planning opportunities available in various jurisdictions in which the Company operates, and the Company's estimate of the ultimate outcome of various tax audits and issues. Determining the Company's effective tax rate and evaluating tax positions requires significant judgment. 49
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The Company recognizes deferred tax assets and liabilities for the future impact of differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases, as well as for operating loss and tax credit carryforwards. The Company measures deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which management expects that the Company will recover or settle those differences. The Company has established valuation allowances for deferred tax assets when management has determined that it is not more likely than not that the Company will realize a tax benefit. In 2010, the Company recognized a non-cash benefit of$248.5 million related to a reduction of the Company's deferred tax valuation allowance on its net deferred tax assets in the U.S. atDecember 31, 2010 . In 2011, the Company recognized a non-cash benefit of$16.9 million related to a reduction of the Company's deferred tax valuation allowance on its net deferred tax assets in certain jurisdictions outside the U.S. atDecember 31, 2011 . In 2012, the Company recognized a non-cash benefit of$15.8 million related to a reduction of the Company's deferred tax valuation allowance on certain of its net deferred tax assets for certain jurisdictions within the U.S. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Provision for (benefit from) income taxes," for further discussion. The Company recognizes a tax position in its financial statements when it is more likely than not that the position will be sustained upon examination, based on the merits of such position.
Recently Adopted Accounting Pronouncements:
InMay 2011 , theFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards ("IFRS")," which amends Accounting Standards Codification ("ASC") 820, "Fair Value Measurement." ASU No. 2011-04 modifies ASC 820 to include disclosure of all transfers between Level 1 and Level 2 asset and liability fair value categories. In addition, ASU No. 2011-04 provides guidance on measuring the fair value of financial instruments managed within a portfolio and the application of premiums and discounts on fair value measurements. ASU No. 2011-04 requires additional disclosure for Level 3 measurements regarding the sensitivity of fair value to changes in unobservable inputs and any interrelationships between those inputs. The Company adopted ASU No. 2011-04 beginningJanuary 1, 2012 and such adoption did not have a material impact on the Company's results of operations, financial condition or disclosures. InJune 2011 , the FASB issued ASU No. 2011-05, "Presentation of Comprehensive Income." ASU No. 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in equity. Under ASU No. 2011-05, an entity can elect to present items of net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. In addition, inDecember 2011 , the FASB issued ASU No. 2011-12, "Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05." ASU No. 2011-12 defers the requirement to present components of reclassifications of comprehensive income by income statement line item on the statement of comprehensive income, with all other requirements of ASU No. 2011-05 unaffected. The Company adopted ASU No. 2011-05 and ASU No. 2011-12 beginningJanuary 1, 2012 and has elected to present items of net income and other comprehensive income in one continuous statement.
Inflation
The Company's costs are affected by inflation and the effects of inflation may be experienced by the Company in future periods. Management believes, however, that such effects have not been material to the Company during the past three years in the U.S. and in foreign non-hyperinflationary countries. The Company operates in certain countries around the world, such asArgentina andVenezuela , which have experienced hyperinflation. In hyperinflationary foreign countries, the Company attempts to mitigate the effects of inflation by increasing prices in line with inflation, where possible, and efficiently managing its costs and working capital levels. EffectiveJanuary 1, 2010 , the Company determined that the Venezuelan economy should be considered a highly inflationary economy under U.S. GAAP based upon a blended inflation index of the Venezuelan National Consumer Price Index ("NCPI") and the Venezuelan Consumer Price Index ("CPI"). (See "Financial Condition, Liquidity and Capital Resources - Impact of Foreign Currency Translation-Venezuela" for details regarding the designation ofVenezuela as a highly inflationary economy effectiveJanuary 1, 2010 and the Venezuelan government's announcement of the devaluation of its local currency onJanuary 8, 2010 ). 50
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