Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

(Mark One)

x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

OR

¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from                                                          to                                 

Commission File Number: 1-11178

REVLON, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   13-3662955

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

237 Park Avenue, New York, New York   10017
(Address of principal executive offices)   (Zip Code)

212-527-4000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x        No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x        No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Large accelerated filer  ¨

  

Accelerated filer  x

 

Non-accelerated filer  ¨

  Smaller reporting company  ¨
     (Do not check if a smaller reporting company)  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes ¨        No x

As of September 30, 2011, 49,058,008 shares of Class A Common Stock, 3,125,000 shares of Class B Common Stock and 9,336,905 shares of Series A Preferred Stock were outstanding. At such date, 37,544,640 shares of Class A Common Stock were beneficially owned by MacAndrews & Forbes Holdings Inc. and certain of its affiliates and all of the shares of Class B Common Stock were owned by REV Holdings LLC, a Delaware limited liability company and an indirectly wholly-owned subsidiary of MacAndrews & Forbes Holdings Inc.

 

 

 


Table of Contents

REVLON, INC. AND SUBSIDIARIES

INDEX

 

PART I – Financial Information

  
Item 1.   

Financial Statements

  
  

Consolidated Balance Sheets as of September 30, 2011 (Unaudited) and December 31, 2010

     1   
  

Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2011 and 2010

     2   
  

Unaudited Consolidated Statement of Stockholders' Deficiency and Comprehensive Income for the Nine Months Ended September 30, 2011

     3   
  

Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010

     4   
  

Notes to Unaudited Consolidated Financial Statements

     5   
Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     35   
Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

     53   
Item 4.   

Controls and Procedures

     54   

PART II – Other Information

  
Item 1.   

Legal Proceedings

     61   
Item 1A.   

Risk Factors

     62   
Item 5.   

Exhibits

     63   
  

Signatures

     64   


Table of Contents

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

REVLON, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in millions, except share and per share amounts)

 

     September 30,
2011
    December 31,
2010
 
     (Unaudited)        

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 49.9      $ 76.7   

Trade receivables, less allowance for doubtful accounts of $3.1 as of both September 30, 2011 and December 31, 2010, respectively

     185.5        197.5   

Inventories

     143.6        115.0   

Deferred income taxes — current

     44.4        39.6   

Prepaid expenses and other

     49.1        47.3   
  

 

 

   

 

 

 

Total current assets

     472.5        476.1   

Property, plant and equipment, net

     100.0        106.2   

Deferred income taxes — noncurrent

     205.6        229.4   

Goodwill, net

     193.9        182.7   

Other assets

     109.7        92.3   
  

 

 

   

 

 

 

Total assets

   $ 1,081.7      $ 1,086.7   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY

    

Current liabilities:

    

Short-term borrowings

   $ 9.2      $ 3.7   

Current portion of long-term debt

     8.0        8.0   

Accounts payable

     93.2        88.3   

Accrued expenses and other

     213.5        218.5   
  

 

 

   

 

 

 

Total current liabilities

     323.9        318.5   

Long-term debt

     1,108.6        1,100.9   

Long-term debt — affiliates

     58.4        58.4   

Redeemable preferred stock

     48.3        48.1   

Long-term pension and other post-retirement plan liabilities

     172.2        201.5   

Other long-term liabilities

     55.4        55.7   

Commitments and contingencies

    

Stockholders’ deficiency:

    

Class B Common Stock, par value $0.01 per share: 200,000,000 shares authorized; 3,125,000 shares issued and outstanding as of September 30, 2011 and December 31, 2010, respectively

              

Class A Common Stock, par value $0.01 per share: 900,000,000 shares authorized; 49,987,510 and 50,000,497 shares issued as of September 30, 2011 and December 31, 2010, respectively

     0.5        0.5   

Additional paid-in capital

     1,013.7        1,012.0   

Treasury stock, at cost: 671,271 and 532,838 shares of Class A Common Stock as of September 30, 2011 and December 31, 2010, respectively

     (8.6     (7.2

Accumulated deficit

     (1,534.4     (1,551.4

Accumulated other comprehensive loss

     (156.3     (150.3
  

 

 

   

 

 

 

Total stockholders’ deficiency

     (685.1     (696.4
  

 

 

   

 

 

 

Total liabilities and stockholders’ deficiency

   $ 1,081.7      $ 1,086.7   
  

 

 

   

 

 

 

See Accompanying Notes to Unaudited Consolidated Financial Statements

 

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Table of Contents

REVLON, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in millions, except share and per share amounts)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011      2010  

Net sales

   $ 337.2      $ 319.0      $ 1,021.6       $ 952.2   

Cost of sales

     123.1        110.4        358.3         326.1   
  

 

 

   

 

 

   

 

 

    

 

 

 

Gross profit

     214.1        208.6        663.3         626.1   

Selling, general and administrative expenses

     169.3        169.3        526.0         494.1   
  

 

 

   

 

 

   

 

 

    

 

 

 

Operating income

     44.8        39.3        137.3         132.0   
  

 

 

   

 

 

   

 

 

    

 

 

 

Other expenses, net:

         

Interest expense

     20.4        23.1        64.7         67.4   

Interest expense — preferred stock dividends

     1.6        1.6        4.8         4.8   

Amortization of debt issuance costs

     1.3        1.5        4.1         4.5   

Loss on early extinguishment of debt, net

                   11.3         9.7   

Foreign currency (gains) losses, net

     (0.9     0.8        2.4         4.7   

Miscellaneous, net

     0.2        0.3        1.2         0.9   
  

 

 

   

 

 

   

 

 

    

 

 

 

Other expenses, net

     22.6        27.3        88.5         92.0   
  

 

 

   

 

 

   

 

 

    

 

 

 

Income from continuing operations before income taxes

     22.2        12.0        48.8         40.0   

Provision for (benefit from) income taxes

     22.1        (0.6     32.4         9.2   
  

 

 

   

 

 

   

 

 

    

 

 

 

Income from continuing operations, net of taxes

     0.1        12.6        16.4         30.8   

(Loss) income from discontinued operations, net of taxes

            (0.1     0.6         0.3   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net income

   $ 0.1      $ 12.5      $ 17.0       $ 31.1   
  

 

 

   

 

 

   

 

 

    

 

 

 

Basic income per common share:

         

Continuing operations

            0.24        0.31         0.59   

Discontinued operations

                   0.01         0.01   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net income

   $      $ 0.24      $ 0.32       $ 0.60   
  

 

 

   

 

 

   

 

 

    

 

 

 

Diluted income per common share:

         

Continuing operations

            0.24        0.31         0.59   

Discontinued operations

                   0.01         0.01   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net income

   $      $ 0.24      $ 0.32       $ 0.60   
  

 

 

   

 

 

   

 

 

    

 

 

 

Weighted average number of common shares outstanding:

         

Basic

     52,182,848        51,901,810        52,170,839         51,889,742   
  

 

 

   

 

 

   

 

 

    

 

 

 

Diluted

     52,345,857        52,311,906        52,319,654         52,304,500   
  

 

 

   

 

 

   

 

 

    

 

 

 

See Accompanying Notes to Unaudited Consolidated Financial Statements

 

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Table of Contents

REVLON, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

AND COMPREHENSIVE INCOME

(dollars in millions)

 

     Common
Stock
     Additional
Paid-In-

Capital
     Treasury
Stock
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Loss
    Total
Stockholders’
Deficiency
 

Balance, January 1, 2011

   $ 0.5       $ 1,012.0       $ (7.2   $ (1,551.4   $ (150.3   $ (696.4

Treasury stock acquired, at cost(a)

           (1.4         (1.4

Stock-based compensation amortization

        1.7               1.7   

Comprehensive income:

              

Net income

             17.0          17.0   

Currency translation adjustment

               (8.7     (8.7

Amortization of pension related costs, net of tax(b)

               2.7        2.7   
              

 

 

 

Total comprehensive income

                 11.0   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2011

   $ 0.5       $ 1,013.7       $ (8.6   $ (1,534.4   $ (156.3   $ (685.1
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

Pursuant to the share withholding provisions of the Third Amended and Restated Revlon, Inc. Stock Plan (the “Stock Plan”), certain employees and executives, in lieu of paying withholding taxes on the vesting of certain restricted stock, authorized the withholding of an aggregate of 138,433 shares of Revlon, Inc. Class A Common Stock during the first nine months of 2011 to satisfy the minimum statutory tax withholding requirements related to such vesting. These shares were recorded as treasury stock using the cost method, at a weighted average price per share of $10.07, based on the closing price of Revlon, Inc. Class A Common Stock as reported on the NYSE consolidated tape on the respective vesting dates, for a total of $1.4 million.

 

(b)

See Note 2, “Pension and Post-retirement Benefits,” and Note 7, “Comprehensive Income,” in this Form 10-Q for details on the change in Accumulated Other Comprehensive Loss as a result of the amortization of unrecognized prior service costs and actuarial losses arising during the first nine months of 2011.

See Accompanying Notes to Unaudited Consolidated Financial Statements

 

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Table of Contents

REVLON, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in millions)

 

     Nine Months Ended
September 30,
 
     2011     2010  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 17.0      $ 31.1   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Income from discontinued operations, net of taxes

     (0.6     (0.3

Depreciation and amortization

     45.3        42.3   

Amortization of debt discount

     2.0        1.9   

Stock compensation amortization

     1.7        2.8   

Provision for deferred income taxes

     17.1        0.9   

Loss on early extinguishment of debt, net

     11.3        9.7   

Amortization of debt issuance costs

     4.1        4.5   

Pension and other post-retirement expense

     3.9        7.1   

Change in assets and liabilities:

    

Decrease in trade receivables

     8.1        3.6   

Increase in inventories

     (29.4     (12.0

Increase in prepaid expenses and other current assets

     (4.0     (13.6

Increase in accounts payable

     2.0        18.1   

Increase in accrued expenses and other current liabilities

     2.4        9.1   

Pension and other post-retirement plan contributions

     (28.7     (20.1

Purchases of permanent displays

     (28.2     (25.8

Other, net

     (3.8     (9.3
  

 

 

   

 

 

 

Net cash provided by operating activities

     20.2        50.0   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Capital expenditures

     (9.6     (11.4

Acquisition

     (39.0       

Proceeds from the sale of certain assets

     0.2        0.2   
  

 

 

   

 

 

 

Net cash used in investing activities

     (48.4     (11.2
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net increase (decrease) in short-term borrowings and overdraft

     10.0        (2.9

Repayments under the 2006 Term Loan Facility

            (815.0

Borrowings under the 2010 Term Loan Facility

            786.0   

Repayments under the 2010 Term Loan Facility

     (794.0     (4.0

Borrowings under the 2011 Term Loan Facility

     796.0          

Repayments under the 2011 Term Loan Facility

     (2.0       

Payment of financing costs

     (4.2     (17.5

Other financing activities

     (1.2     (0.6
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     4.6        (54.0
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (3.2     1.2   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (26.8     (14.0

Cash and cash equivalents at beginning of period

     76.7        54.5   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 49.9      $ 40.5   
  

 

 

   

 

 

 

Supplemental schedule of cash flow information:

    

Cash paid during the period for:

    

Interest

   $ 66.4      $ 59.0   

Preferred stock dividends

   $ 4.6      $ 4.6   

Income taxes, net of refunds

   $ 14.0      $ 11.2   

Supplemental schedule of non-cash investing and financing activities:

    

Treasury stock received to satisfy minimum tax withholding liabilities

   $ 1.4      $ 2.5   

See Accompanying Notes to Unaudited Consolidated Financial Statements

 

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Table of Contents

REVLON, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)

 

(1)

Description of Business and Basis of Presentation

Revlon, Inc. (and together with its subsidiaries, the “Company”) conducts its business exclusively through its direct, wholly-owned operating subsidiary, Revlon Consumer Products Corporation (“Products Corporation”), and its subsidiaries. Revlon, Inc. is a direct and indirect majority-owned subsidiary of MacAndrews & Forbes Holdings Inc. (“MacAndrews & Forbes Holdings” and, together with certain of its affiliates other than the Company, “MacAndrews & Forbes”), a corporation wholly-owned by Ronald 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’s principal customers include large mass volume retailers and chain drug and food stores in the U.S., as well as certain department stores and other specialty stores, such as perfumeries, outside the U.S. The Company also sells beauty products to U.S. military exchanges and commissaries and has a licensing business pursuant to which the Company licenses certain of its key brand names to third parties for the manufacture and sale of complementary beauty-related products and accessories in exchange for royalties.

The accompanying Consolidated Financial Statements are unaudited. In management’s opinion, all adjustments necessary for a fair presentation have been made. The Unaudited Consolidated Financial Statements include the accounts of the Company after the elimination of all material intercompany balances and transactions.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Actual results could differ from these estimates. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Significant estimates made in the accompanying Unaudited Consolidated Financial Statements include, but are not limited to, allowances for doubtful accounts, inventory valuation reserves, expected sales returns and allowances, certain assumptions related to the recoverability of intangible and long-lived assets, deferred tax valuation allowances, reserves for estimated tax liabilities, restructuring costs, certain estimates and assumptions used in the calculation of the net periodic benefit costs and the projected benefit obligations for the Company’s pension and other post-retirement plans, including the expected long-term return on pension plan assets and the discount rate used to value the Company’s pension benefit obligations. The Unaudited Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and related notes contained in Revlon, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission (the “SEC”) on February 17, 2011 (the “2010 Form 10-K”).

The Company’s results of operations and financial position for interim periods are not necessarily indicative of those to be expected for a full year.

Certain prior year amounts in the Unaudited Consolidated Financial Statements have been reclassified to conform to the current period’s presentation.

Fire at Revlon Venezuela Facility

On June 5, 2011, the Company’s facility in Venezuela was destroyed by fire. As of and for the year ended December 31, 2010, the Company’s subsidiary in Venezuela (“Revlon Venezuela”) had net sales of approximately 3% of the Company’s consolidated net sales and Revlon Venezuela’s total assets were approximately 3% of the Company’s total assets. Historically, approximately 50% of Revlon Venezuela’s net sales were comprised of products imported from Revlon’s Oxford, North Carolina facility and approximately 50% were comprised of locally manufactured products. Revlon Venezuela did not have any net sales from the

 

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Table of Contents

REVLON, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)

 

date of the fire until August 12, 2011. The Company’s net sales in Venezuela since August 12, 2011 have been solely comprised of products imported from the Company’s Oxford, North Carolina facility. The Company is currently evaluating options to minimize the extent and duration of the disruption to Revlon Venezuela’s business as a result of 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.

In June 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 and in the period from June through September 30, 2011, the Company incurred business interruption losses of $6.1 million related to the fire, for total losses of $11.0 million incurred in the first nine months of 2011. The business interruption losses incurred in 2011 include estimated profits lost as a result of the interruption of the business and costs incurred directly related to the fire. The business interruption losses incurred through September 30, 2011 are not indicative of future business interruption losses for insurance purposes or future expected profits for Revlon Venezuela.

In the third quarter of 2011, the Company received a $15 million interim advance from its insurance carrier in connection with the fire. During the third quarter and first nine months of 2011, the Company recognized $6.1 million and $11.0 million, respectively, of income from insurance recoveries, which entirely offset the impairment loss and business interruption losses noted above. The income from insurance recoveries is included within selling, general and administrative expenses in the Company’s Statements of Operations for the three and nine months ended September 30, 2011. The deferred balance of $4.0 million was recorded as deferred income, which is included in accrued expenses and other in the Company’s Consolidated Balance Sheet as of September 30, 2011.

An assessment of the extent of damage and the impact on the Company’s business in Venezuela is ongoing, and therefore the final amount and timing of the ultimate insurance recovery is currently unknown. See Note 14, “Subsequent Event,” in regards to additional advance insurance proceeds received subsequent to September 30, 2011.

Impact of Foreign Currency Translation — Venezuela

Highly-Inflationary Economy:    Effective January 1, 2010, Venezuela was designated as a highly inflationary economy under U.S. GAAP. As a result, beginning January 1, 2010, the U.S. dollar is the functional currency for Revlon Venezuela. Through December 31, 2009, prior to Venezuela being designated as highly inflationary, currency translation adjustments of Revlon Venezuela’s balance sheet were reflected in shareholders’ equity as part of Other Comprehensive Income; however, subsequent to January 1, 2010, such adjustments are reflected in earnings.

Currency Restrictions:    Currency restrictions enacted by the Venezuelan government in 2003 have become more restrictive and have impacted the ability of Revlon Venezuela to obtain U.S. dollars in exchange for Venezuelan Bolivars (“Bolivars”) at the official foreign exchange rates from the Venezuelan government and its foreign exchange commission, the Comisión de Administracion de Divisas (“CADIVI”). In May 2010, the Venezuelan government took control over the previously freely-traded foreign currency exchange market and in June 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, SITME can only be used for product purchases and related services, such as freight, and is 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 of 5.5 Bolivars per U.S. dollar to translate Revlon

 

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REVLON, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)

 

Venezuela’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 utilized Venezuela’s official exchange rate of 4.3 Bolivars per U.S. dollar to translate Revlon Venezuela’s financial statements from January 1, 2010 through March 31, 2011. In the third quarter of 2011, the Company continued using the SITME Rate, which did not materially change from the second quarter of 2011, to translate Revlon Venezuela’s financial statements.

To reflect the impact of the change in exchange rates from Venezuela’s official exchange rate to the SITME Rate, a foreign currency loss of $1.7 million was recorded in the second quarter of 2011. As Venezuela was designated as a highly inflationary economy effective January 1, 2010, this foreign currency loss was reflected in earnings during the nine months ended September 30, 2011. For the three and nine months ended September 30, 2011, the change in the exchange rates in Venezuela unfavorably impacted the Company’s consolidated net sales by $0.8 million and $2.4 million, respectively. The impact on the Company’s consolidated operating income for both the three and nine months ended September 30, 2011 was de minimis.

Recent Accounting Pronouncements

In May 2011, the Financial 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 the existing standard 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. ASU No. 2011-04 is effective for interim and annual reporting periods beginning after December 15, 2011, with early adoption prohibited. The Company does not expect such adoption will have a material impact on the Company’s results of operations, financial condition or its disclosures.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income”. ASU No. 2011-05 eliminates the current 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. ASU No. 2011-05 is effective for publicly traded companies as of the beginning of a fiscal year that begins after December 15, 2011 and interim and annual periods thereafter. Early adoption of ASU No. 2011-05 is permitted, but full retrospective application is required. As the Company reports comprehensive income within its Statement of Stockholders’ Deficiency and Comprehensive Income, the adoption of ASU No. 2011-05 will impact the presentation of the Company’s consolidated financial statements beginning in the first quarter of 2012.

In September 2011, the FASB issued ASU No. 2011-08, “Intangibles-Goodwill and Other: Testing Goodwill for Impairment”, which amends ASC 350, “Intangible Assets-Goodwill and Other”. Under ASU No. 2011-08, an entity may elect the option to assess qualitative factors to determine whether it is necessary to perform the first step in the two-step impairment testing process. ASU No. 2011-08 is effective for annual reporting periods beginning after December 15, 2011, with early adoption permitted. The Company has chosen to early adopt ASU No. 2011-08, and therefore, the new guidance will be effective for the year ended December 31, 2011. The Company does not expect such adoption will have a material impact on the Company’s results of operations, financial condition or its disclosures.

 

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REVLON, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)

 

(2)

Pension and Post-retirement Benefits

The components of net periodic benefit costs for the Company’s pension and the other post-retirement benefit plans for the third quarter of 2011 and 2010 are as follows:

 

     Pension Plans     Other
Post-retirement
Benefit Plans
 
     Three Months  Ended
September 30,
    Three Months  Ended
September 30,
 
         2011             2010             2011              2010      

Net periodic benefit costs:

         

Service cost

   $ 0.4      $ 0.4      $       $   

Interest cost

     8.1        8.5        0.2         0.2   

Expected return on plan assets

     (8.7     (8.0               

Amortization of actuarial loss

     1.3        1.2                0.1   
  

 

 

   

 

 

   

 

 

    

 

 

 
     1.1        2.1        0.2         0.3   

Portion allocated to Revlon Holdings LLC

     (0.1                      
  

 

 

   

 

 

   

 

 

    

 

 

 
   $ 1.0      $ 2.1      $ 0.2       $ 0.3   
  

 

 

   

 

 

   

 

 

    

 

 

 

The components of net periodic benefit costs for the Company’s pension and the other post-retirement benefit plans for the first nine months of 2011 and 2010 are as follows:

 

     Pension Plans     Other
Post-retirement
Benefit Plans
 
     Nine Months Ended
September 30,
    Nine Months Ended
September 30,
 
         2011             2010             2011              2010      

Net periodic benefit costs:

  

Service cost

   $ 1.0      $ 1.2      $       $   

Interest cost

     24.3        25.4        0.6         0.6   

Expected return on plan assets

     (26.2     (24.1               

Amortization of actuarial loss

     4.0        3.8        0.2         0.2   
  

 

 

   

 

 

   

 

 

    

 

 

 
     3.1        6.3        0.8         0.8   

Portion allocated to Revlon Holdings LLC

     (0.1     (0.1               
  

 

 

   

 

 

   

 

 

    

 

 

 
   $ 3.0      $ 6.2      $ 0.8       $ 0.8   
  

 

 

   

 

 

   

 

 

    

 

 

 

In the three and nine months ended September 30, 2011, compared to the prior year periods, the Company recognized lower net periodic benefit costs primarily due to the increase in the fair value of pension plan assets at December 31, 2010, partially offset by a decrease in the weighted-average discount rate. The Company expects that its net periodic benefit costs for its pension and the other post-retirement benefit plans will be approximately $5 million for all of 2011, compared with $9.3 million in 2010.

During the third quarter of 2011, $13.5 million and $0.2 million were contributed to the Company’s pension plans and other post-retirement benefit plans, respectively. During the first nine months of 2011, $28 million and $0.7 million were contributed to the Company’s pension plans and other post-retirement benefit plans, respectively. The Company currently expects to contribute approximately $30 million in the aggregate to its pension plans and other post-retirement benefit plans in 2011.

Relevant aspects of the qualified defined benefit pension plans, nonqualified pension plans and other post-retirement benefit plans sponsored by Products Corporation are disclosed in Revlon, Inc.’s 2010 Form 10-K.

 

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REVLON, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)

 

(3)

Business Acquisition

On March 17, 2011, the Company acquired certain assets, including trademarks and other intellectual property, inventory, certain receivables and manufacturing equipment, related to Sinful Colors cosmetics, Wild and Crazy cosmetics, freshMinerals cosmetics and freshcover cosmetics, which products are sold principally in the U.S. mass retail channel (the “Sinful Colors Acquisition”). The Company also assumed certain liabilities of the acquired business. The Company paid $39.0 million of total consideration for the Sinful Colors Acquisition in cash, which included the $38.0 million purchase price and a $1.0 million adjustment based on working capital at closing. The results of operations related to the Sinful Colors Acquisition are included in the Company’s consolidated financial statements commencing on the date of acquisition. Pro forma results of operations have not been presented, as the impact on the Company’s consolidated financial results would not have been material.

The Company accounted for the Sinful Colors Acquisition as a business combination during the first quarter of 2011 and, accordingly, the total consideration of $39.0 million has been allocated on a preliminary basis to the net assets acquired based on their respective estimated fair values at March 17, 2011 as follows:

 

Recognized amounts of assets acquired and liabilities assumed:

  

Trade receivables

   $ 2.9   

Inventories

     3.3   

Property, plant and equipment, net

     0.4   

Intangible assets

     22.8   

Accounts payable

     (0.9

Accrued expenses and other

     (0.9
  

 

 

 

Fair value of net assets acquired

     27.6   

Goodwill

     11.4   
  

 

 

 

Total consideration

   $ 39.0   
  

 

 

 

The allocation of the total consideration of $39.0 million includes intangible assets of $22.8 million and goodwill of $11.4 million, all of which is expected to be deductible for income tax purposes. The intangible assets acquired by major asset category are as follows:

 

     Fair Values at
March 17, 2011
     Weighted Average
Useful Life

(in years)

Trademarks and Trade Names

   $ 7.3       10

Customer Relationships

     15.5       14
  

 

 

    

Total

   $ 22.8       13
  

 

 

    

The Company is in the process of completing its assessment of the fair value of assets acquired and liabilities assumed in the Sinful Colors Acquisition. As a result, the fair value of the net assets acquired is provisional pending completion of the final valuation of such net assets.

 

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REVLON, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)

 

(4)

Inventories

 

     September  30,
2011
     December  31,
2010
 
     

Raw materials and supplies

   $ 49.3       $ 39.7   

Work-in-process

     9.8         9.9   

Finished goods

     84.5         65.4   
  

 

 

    

 

 

 
   $ 143.6       $ 115.0   
  

 

 

    

 

 

 

 

(5)

Long-Term Debt and Redeemable Preferred Stock

 

     September  30,
2011
    December  31,
2010
 
    

2011 Term Loan Facility due 2017, net of discounts(a)

   $ 789.3      $   

2010 Term Loan Facility due 2015, net of discounts(a)(b)

            782.0   

2011 Revolving Credit Facility due 2016(a)

              

2010 Revolving Credit Facility due 2014(a)(b)

              

9 3/4% Senior Secured Notes due 2015, net of discounts(c)

     327.3        326.9   

Senior Subordinated Term Loan due 2014(d)

     58.4        58.4   
  

 

 

   

 

 

 
     1,175.0        1,167.3   

Less current portion

     (8.0     (8.0
  

 

 

   

 

 

 
     1,167.0        1,159.3   
  

 

 

   

 

 

 

Redeemable Preferred Stock(e)

     48.3        48.1   
  

 

 

   

 

 

 
   $ 1,215.3      $ 1,207.4   
  

 

 

   

 

 

 

 

(a) 

During the second quarter of 2011, Products Corporation consummated the refinancing of the 2010 Term Loan Facility and the 2010 Revolving Credit Facility (together referred to as the “2011 Refinancings”). The 2011 Refinancings, among other things, (i) reduced interest rates and extended the maturity of Products Corporation’s 2010 Term Loan Facility, due March 2015, by entering into the 2011 Term Loan Facility due November 2017, and (ii) reduced interest rates and extended the maturity of Products Corporation’s 2010 Revolving Credit Facility, due March 2014, by entering into the 2011 Revolving Credit Facility due June 2016. See “Recent Debt Reduction Transactions” below in this Note 5 for further discussion of the 2011 Refinancings.

 

(b) 

During March 2010, Products Corporation consummated the refinancing of the 2006 Term Loan Facility and the 2006 Revolving Credit Facility (together referred to as the “2010 Refinancing”). See Note 9, “Long-Term Debt and Redeemable Preferred Stock,” to the Consolidated Financial Statements in Revlon, Inc.’s 2010 Form 10-K for certain details regarding Products Corporation’s 2010 Credit Agreements.

 

(c) 

See Note 9, “Long-Term Debt and Redeemable Preferred Stock,” to the Consolidated Financial Statements in Revlon, Inc.’s 2010 Form 10-K for certain details regarding Products Corporation’s 9 3/4% Senior Secured Notes which mature on November 15, 2015 (the “9 3/4% Senior Secured Notes”).

 

(d) 

See Note 9, “Long-Term Debt and Redeemable Preferred Stock,” to the Consolidated Financial Statements in Revlon, Inc.’s 2010 Form 10-K for certain details regarding the $58.4 million principal amount of the Senior Subordinated Term Loan which remains owing from Products Corporation to MacAndrews & Forbes (the “Non-Contributed Loan”), which matures on October 8, 2014.

 

(e) 

See Note 9, “Long-Term Debt and Redeemable Preferred Stock,” to the Consolidated Financial Statements in Revlon, Inc.’s 2010 Form 10-K for certain details regarding Revlon, Inc.’s redeemable Preferred Stock (as hereinafter defined).

 

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REVLON, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)

 

Recent Debt Reduction Transactions

Refinancing of the 2010 Term Loan and 2010 Revolving Credit Facilities:    During the second quarter of 2011, Products Corporation consummated the 2011 Refinancings, reducing interest rates and extending maturities, consisting of the following transactions:

 

   

In May 2011, Products Corporation consummated a refinancing of the 2010 Term Loan Facility (the “2011 Term Loan Facility Refinancing”), which included replacing Products Corporation’s 2010 bank term loan facility, which was scheduled to mature on March 11, 2015 and had $794.0 million aggregate principal amount outstanding at December 31, 2010 (the “2010 Term Loan Facility”), with a 6.5-year, $800.0 million term loan facility due November 19, 2017 (the “2011 Term Loan Facility”) under a third amended and restated term loan agreement dated May 19, 2011 (the “2011 Term Loan Agreement”), among Products Corporation, as borrower, Citigroup Global Markets Inc. (“CGMI”), J.P. Morgan Securities LLC (“JPM Securities”), Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch”), Credit Suisse Securities (USA) LLC (“Credit Suisse”) and Wells Fargo Securities, LLC (“WFS”) as the joint lead arrangers; CGMI, JPM Securities, Merrill Lynch, Credit Suisse, WFS and Natixis, New York Branch (“Natixis”), as joint bookrunners; JPMorgan Chase Bank, N.A. and Bank of America, N.A. as co-syndication agents; Credit Suisse, Wells Fargo Bank, N.A. and Natixis as co-documentation agents; and Citicorp USA, Inc. (“CUSA”) as administrative agent and collateral agent.

Products Corporation used $796 million of proceeds from the 2011 Term Loan Facility, which was drawn in full on the May 19, 2011 closing date and issued to lenders at 99.5% of par, to refinance in full the $792.0 million of outstanding indebtedness under its 2010 Term Loan Facility and to pay approximately $2 million of accrued interest. The Company incurred approximately $3.9 million of fees in connection with consummating the 2011 Term Loan Facility Refinancing in the first nine months of 2011, of which approximately $2 million was capitalized.

 

   

In June 2011, Products Corporation consummated a refinancing of the 2010 Revolving Credit Facility (the “2011 Revolving Credit Facility Refinancing”), which included refinancing Products Corporation’s 2010 revolving credit facility, which was scheduled to mature on March 11, 2014 and had nil outstanding borrowings at December 31, 2010 (the “2010 Revolving Credit Facility”), with a 5-year, $140.0 million asset-based, multi-currency revolving credit facility due June 16, 2016 (the “2011 Revolving Credit Facility”) under a third amended and restated revolving credit agreement dated June 16, 2011 (the “2011 Revolving Credit Agreement” and together with the 2011 Term Loan Agreement, the “2011 Credit Agreements”), among Products Corporation and certain of its foreign subsidiaries, as borrowers, and CGMI and Wells Fargo Capital Finance, LLC (“WFCF”) as the joint lead arrangers; CGMI, WFCF, Merrill Lynch, JPMorgan Securities and Credit Suisse as joint bookrunners; and CUSA as administrative agent and collateral agent.

Products Corporation incurred approximately $0.7 million of fees in connection with consummating the 2011 Revolving Credit Facility Refinancing in the first nine months of 2011, all of which were capitalized.

As a result of the 2011 Refinancings, the Company recognized a loss on the early extinguishment of debt of $11.3 million during the first nine months of 2011, due to $1.9 million of fees which were expensed as incurred in connection with the 2011 Refinancings, as well as the write-off of $9.4 million of unamortized debt discount and deferred financing fees as a result of such refinancings.

2011 Revolving Credit Facility

The following is a summary description of the 2011 Revolving Credit Facility. Unless otherwise indicated, capitalized terms have the meanings given to them in the 2011 Revolving Credit Agreement. This description is subject to a number of qualifications and exceptions which are specified in the 2011 Revolving Credit Agreement.

 

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REVLON, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)

 

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 the U.K. and eligible real property and equipment in the U.S. from time to time.

In each case subject to borrowing base availability, the 2011 Revolving Credit Facility is available to:

(i) Products Corporation in revolving credit loans denominated in U.S. dollars;

(ii) Products Corporation in swing line loans denominated in U.S. dollars up to $30.0 million;

(iii) Products Corporation in standby and commercial letters of credit denominated in U.S. dollars and other currencies up to $60.0 million; and

(iv) Products Corporation and certain of its international subsidiaries designated from time to time in revolving credit loans and bankers’ acceptances denominated in U.S. dollars and other currencies.

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 make borrowings under the 2011 Revolving Credit Facility is also conditioned upon the satisfaction of certain conditions precedent and Products 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:

 

Excess Availability

   Alternate Base
Rate Loans
   Eurodollar
Loans,
Eurocurrency
Loans or Local
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 (as defined in the 2011 Revolving Credit Agreement) bear interest, if mutually acceptable to Products 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.

Prior to the termination date of the 2011 Revolving Credit Facility, revolving loans are required to be prepaid (without any permanent reduction in commitment) with:

(i) the net cash proceeds from sales of Revolving Credit First Lien Collateral (as defined below) by Products Corporation or any of its subsidiary guarantors (other than dispositions in the ordinary course of business and certain other exceptions); and

(ii) the net proceeds from the issuance by Products Corporation or any of its subsidiaries of certain additional debt, to the extent there remains any such proceeds after satisfying Products Corporation’s repayment obligations under the 2011 Term Loan Facility.

Products Corporation pays to the lenders under the 2011 Revolving Credit Facility a commitment fee of 0.375% of the average daily unused portion of the 2011 Revolving Credit Facility, which fee is payable quarterly in arrears. Under the 2011 Revolving Credit Facility, Products Corporation also pays:

(i) to foreign lenders, a fronting fee of 0.25% per annum on the aggregate principal amount of specified Local Loans (which fee is retained by foreign lenders out of the portion of the Applicable Margin payable to such foreign lender);

 

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REVLON, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)

 

(ii) to foreign lenders, an administrative fee of 0.25% per annum on the aggregate principal amount of specified Local Loans;

(iii) to the multi-currency lenders, a letter of credit commission equal to the product of (a) the Applicable Margin (as defined in the 2011 Revolving Credit Agreement) for revolving credit loans that are Eurodollar Rate (as defined in the 2011 Revolving Credit Agreement) loans (adjusted for the term that the letter of credit is outstanding) and (b) the aggregate undrawn face amount of letters of credit; and

(iv) to the issuing lender, a letter of credit fronting fee of 0.25% per annum of the aggregate undrawn face amount of letters of credit, which fee is a portion of the Applicable Margin.

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.

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 requires Products Corporation to maintain a consolidated fixed charge coverage ratio (the ratio of EBITDA minus Capital Expenditures to Cash Interest Expense for such period, as each such term is defined in the 2011 Revolving Credit Facility) of a minimum of 1.0 to 1.0.

The 2011 Revolving Credit Facility matures on June 16, 2016; provided, however, it will mature on August 15, 2015, if Products Corporation’s 9 3/4% Senior Secured Notes have not been refinanced, redeemed, repurchased, defeased or repaid in full on or before such date.

2011 Term Loan Facility

The following is a summary description of the 2011 Term Loan Facility. Unless otherwise indicated, capitalized terms have the meanings given to them in the 2011 Term Loan Agreement. This description is subject to a number of qualifications and exceptions which are specified in the 2011 Term Loan Agreement.

Under the 2011 Term Loan Facility, Eurodollar Loans (as defined in the 2011 Term Loan Agreement) 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 the November 2017 termination date of the 2011 Term Loan Facility, on September 30, December 31, March 31 and June 30 of each year (commencing September 30, 2011), 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. In addition, the term loans under the 2011 Term Loan Facility are required to be prepaid with:

(i) the net cash proceeds in excess of $10 million for each 12-month period ending on March 31 received during such period from sales of Term Loan First Lien Collateral (as defined below) by Products Corporation or any of its subsidiary guarantors with carryover of unused annual basket amounts up to a maximum of $25 million and with respect to certain specified dispositions, up to an additional $25 million in the aggregate (subject to a reinvestment right for 365 days, or 545 days if Products Corporation has within such 365-day period entered into a legally binding commitment to invest such funds);

(ii) the net proceeds from the issuance by Products Corporation or any of its subsidiaries of certain additional debt; and

 

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REVLON, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)

 

(iii) 50% of Products Corporation’s “excess cash flow” (as defined under the 2011 Term Loan Agreement), commencing with excess cash flow for the 2012 fiscal year payable in the first 100 days of 2013, which prepayments are applied to reduce Products Corporation’s future regularly scheduled term loan amortization payments in the direct order of maturities.

The 2011 Term Loan Facility contains a financial covenant limiting Products Corporation’s first lien senior secured leverage ratio (the ratio of Products 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 Existing 2010 Revolving Credit Facility)) to EBITDA, as each such term is defined in the 2011 Term Loan Facility), to no more than 4.0 to 1.0 for each period of four consecutive fiscal quarters ending during the period from June 30, 2011 to the November 2017 maturity date of the 2011 Term Loan Facility.

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 on November 19, 2017; provided, however, it will mature on August 15, 2015, if Products Corporation’s 9 3/4% Senior Secured Notes have not been refinanced, redeemed, repurchased, defeased or repaid in full on or before such date.

Provisions Applicable to the 2011 Revolving Credit Facility and the 2011 Term Loan Facility

The 2011 Revolving Credit Facility and 2011 Term Loan Facility (herein referred to as the “2011 Credit Facilities”) are supported by, among other things, guarantees from Revlon, Inc. and, subject to certain limited exceptions, Products Corporation’s domestic subsidiaries. The obligations of Products Corporation under the 2011 Credit Facilities and the obligations under such guarantees are secured by, subject to certain limited exceptions, substantially all of the assets of Products Corporation and the guarantors, including:

(i) a mortgage on owned real property, including Products Corporation’s facility in Oxford, North Carolina;

(ii) the capital stock of Products Corporation and the subsidiary guarantors and 66% of the voting capital stock and 100% of the non-voting capital stock of Products Corporation’s and the subsidiary guarantors’ first-tier, non-U.S. subsidiaries;

(iii) intellectual property and other intangible property of Products Corporation and the subsidiary guarantors; and

(iv) inventory, accounts receivable, equipment, investment property and deposit accounts of Products Corporation and the subsidiary guarantors.

The liens on, among other things, inventory, accounts receivable, deposit accounts, investment property (other than the capital stock of Products Corporation and its subsidiaries), real property, equipment, fixtures and certain intangible property (the ‘‘Revolving Credit First Lien Collateral’’) secure the 2011 Revolving Credit Facility on a first priority basis, the 2011 Term Loan Facility on a second priority basis and Products Corporation’s 9 3/4% Senior Secured Notes and the related guarantees on a third priority basis. The liens on the capital stock of Products Corporation and its subsidiaries and intellectual property and certain other intangible property (the ‘‘Term Loan First Lien Collateral’’) secure the 2011 Term Loan Facility on a first priority basis and the 2011 Revolving Credit Facility and the 9 3/4% Senior Secured Notes and the related guarantees on a second priority basis. Such arrangements are set forth in the Third Amended and Restated Intercreditor and Collateral Agency Agreement, dated as of March 11, 2010, by and among Products Corporation and CUSA, as administrative agent and as collateral agent for the benefit of the secured parties for the 2011 Term Loan Facility, 2011 Revolving Credit Facility and the 9 3/4% Senior Secured Notes (the ‘‘2010 Intercreditor Agreement’’). The

 

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REVLON, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)

 

2010 Intercreditor Agreement also provides that the liens referred to above may be shared from time to time, subject to certain limitations, with specified types of other obligations incurred or guaranteed by Products Corporation, such as foreign exchange and interest rate hedging obligations and foreign working capital lines.

The 2011 Credit Facilities contain various restrictive covenants prohibiting Products Corporation and its subsidiaries from:

(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 permitting Products 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 as SEC filing fees and NYSE 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 the Third 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 of Products 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 Products Corporation’s or its subsidiaries’ assets or revenues, granting negative pledges or selling or transferring any of Products Corporation’s or its subsidiaries’ assets, all subject to certain limited exceptions;

(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 of Products 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 to Products 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 of Products Corporation, subject to certain exceptions.

The events of default under the 2011 Credit Facilities include customary events of default for such types of agreements, including, among others:

(i) nonpayment of any principal, interest or other fees when due, subject in the case of interest and fees to a grace period;

 

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REVLON, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)

 

(ii) non-compliance with the covenants in such 2011 Credit Facilities or the ancillary security documents, subject in certain instances to grace periods;

(iii) the institution of any bankruptcy, insolvency or similar proceedings by or against Products Corporation, any of Products Corporation’s subsidiaries or Revlon, Inc., subject in certain instances to grace periods;

(iv) default by Revlon, Inc. or any of its subsidiaries (A) in the payment of certain indebtedness when due (whether at maturity or by acceleration) in excess of $25.0 million in aggregate principal amount or (B) in the observance or performance of any other agreement or condition relating to such debt, provided that the amount of debt involved is in excess of $25.0 million in aggregate principal amount, or the occurrence of any other event, the effect of which default referred to in this subclause (iv) is to cause or permit the holders of such debt to cause the acceleration of payment of such debt;

(v) in the case of the 2011 Term Loan Facility, a cross default under the 2011 Revolving Credit Facility, and in the case of the 2011 Revolving Credit Facility, a cross default under the 2011 Term Loan Facility;

(vi) the failure by Products Corporation, certain of Products Corporation’s subsidiaries or Revlon, Inc. to pay certain material judgments;

(vii) a change of control such that (A) Revlon, Inc. shall cease to be the beneficial and record owner of 100% of Products Corporation’s capital stock, (B) Ronald O. Perelman (or his estate, heirs, executors, administrator or other personal representative) and his or their controlled affiliates shall cease to “control” Products Corporation, and any other person or group of persons owns, directly or indirectly, more than 35% of the total voting power of Products Corporation, (C) any person or group of persons other than Ronald O. Perelman (or his estate, heirs, executors, administrator or other personal representative) and his or their controlled affiliates shall “control” Products Corporation or (D) during any period of two consecutive years, the directors serving on Products Corporation’s Board of Directors at the beginning of such period (or other directors nominated by at least a majority of such continuing directors) shall cease to be a majority of the directors;

(viii) Revlon, Inc. shall have any meaningful assets or indebtedness or shall conduct any meaningful business other than its ownership of Products Corporation and such activities as are customary for a publicly-traded holding company which is not itself an operating company, in each case subject to limited exceptions; and

(ix) the failure of certain of Products Corporation’s affiliates which hold Products Corporation’s or its subsidiaries’ indebtedness to be party to a valid and enforceable agreement prohibiting such affiliate from demanding or retaining payments in respect of such indebtedness, subject to certain exceptions, including as to Products Corporation’s Senior Subordinated Term Loan.

If Products 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 of September 30, 2011. At September 30, 2011, the aggregate principal amount outstanding under the 2011 Term Loan Facility was $798 million and availability under the $140.0 million 2011 Revolving Credit Facility, based upon the calculated borrowing base less $21.1 million of outstanding undrawn letters of credit and nil then drawn on the 2011 Revolving Credit Facility, was $114.6 million.

 

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REVLON, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)

 

(6)

Basic and Diluted Earnings Per Common Share

Shares used in basic earnings per share are computed using the weighted average number of common shares outstanding during each period. Shares used in diluted earnings per share include the dilutive effect of unvested restricted shares and outstanding stock options under the Stock Plan using the treasury stock method. For the three and nine months ended September 30, 2011 and 2010, all outstanding options to purchase shares of Revlon, Inc. Class A common stock, par value of $0.01 per share (the “Class A Common Stock”), that could potentially dilute basic earnings per share in the future were excluded from the calculation of diluted earnings per common share as their effect would have been anti-dilutive since their exercise price was in excess of the NYSE closing price of the Class A Common Stock during the periods.

For the three and nine months ended September 30, 2011, 95,222 and 109,417 shares, respectively, of unvested restricted stock that could potentially dilute basic earnings per share in the future were excluded from the calculation of diluted earnings per common share as their effect would be anti-dilutive. For the three and nine months ended September 30, 2010, 287,824 and 283,162 shares, respectively, of unvested restricted stock that could potentially dilute basic earnings per share in the future were excluded from the calculation of diluted earnings per common share as their effect would be anti-dilutive.

The components of basic and diluted earnings per share for the three months ended September 30, 2011 and 2010 and the nine months ended September 30, 2011 and 2010 are as follows:

 

     Three Months  Ended
September 30,
    Nine Months  Ended
September 30,
 
         2011              2010             2011              2010      

Numerator:

          

Income from continuing operations

   $ 0.1       $ 12.6      $ 16.4       $ 30.8   

Income (loss) from discontinued operations

             (0.1     0.6         0.3   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income

   $ 0.1       $ 12.5      $ 17.0       $ 31.1   
  

 

 

    

 

 

   

 

 

    

 

 

 

Denominator:

          

Weighted average common shares outstanding — Basic

     52.18         51.90        52.17         51.89   

Effect of dilutive restricted stock

     0.16         0.41        0.15         0.41   
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted average common shares outstanding — Diluted

     52.34         52.31        52.32         52.30   
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic earnings per share:

          

Continuing operations

   $       $ 0.24      $ 0.31       $ 0.59   

Discontinued operations

                    0.01         0.01   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income

   $       $ 0.24      $ 0.32       $ 0.60   
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted earnings per share:

          

Continuing operations

   $       $ 0.24      $ 0.31       $ 0.59   

Discontinued operations

                    0.01         0.01   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income

   $       $ 0.24      $ 0.32       $ 0.60   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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REVLON, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)

 

(7)

Comprehensive Income (Loss)

The components of comprehensive income (loss) for the three months ended September 30, 2011 and 2010 and the nine months ended September 30, 2011 and 2010 are as follows:

 

     Three Months  Ended
September 30,
     Nine Months  Ended
September 30,
 
         2011             2010              2011             2010      

Net income

   $ 0.1      $ 12.5       $ 17.0      $ 31.1   

Other comprehensive income (loss):

         

Revaluation of financial derivative instruments(a)

                           1.7   

Currency translation adjustment

     (8.9     5.5         (8.7     4.7   

Amortization of pension related costs, net of tax(b)

     0.9        1.3         2.7        4.0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total other comprehensive income (loss)

     (8.0     6.8         (6.0     10.4   
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income (loss)

   $ (7.9   $ 19.3       $ 11.0      $ 41.5   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(a)

The amount for the nine months ended September 30, 2010 relates to (1) the reclassification of an unrecognized loss of $0.8 million on the 2008 Interest Rate Swap (as hereinafter defined) prior to its expiration in April 2010 from Accumulated Other Comprehensive Loss into earnings due to the discontinuance of hedge accounting as a result of the 2010 Refinancing (See Note 10, “Financial Instruments,” in this Form 10-Q) and (2) the reversal of amounts recorded in Accumulated Other Comprehensive Loss pertaining to a net settlement payment of $0.9 million on the 2008 Interest Rate Swap.

 

(b)

The amounts represent the change in Accumulated Other Comprehensive Loss as a result of the amortization of actuarial losses arising during the third quarter of 2011 and 2010 and the first nine months of 2011 and 2010 related to the Company’s pension and other post-retirement benefit plans.

 

(8)

Geographic, Financial and Other Information

The Company manages its business on the basis of one reportable operating segment. As of September 30, 2011, the Company had operations established in 14 countries outside of the U.S. and its products are sold throughout the world. Generally, net sales by geographic area are presented by attributing revenues from external customers on the basis of where the products are sold.

In the tables below, certain prior year amounts have been reclassified to conform to the current period’s presentation.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Geographic area:

                    

Net sales:

                    

United States

   $ 184.7         55   $ 166.7         52   $ 565.8         55   $ 528.1         55

Outside of the United States

     152.5         45     152.3         48     455.8         45     424.1         45
  

 

 

      

 

 

      

 

 

      

 

 

    
   $ 337.2         $ 319.0         $ 1,021.6         $ 952.2      
  

 

 

      

 

 

      

 

 

      

 

 

    

 

     September 30,
2011
    December 31,
2010
 

Long-lived assets, net:

          

United States

   $ 355.1         88   $ 331.5         87

Outside of the United States

     48.5         12     49.7         13
  

 

 

      

 

 

    
   $ 403.6         $ 381.2      
  

 

 

      

 

 

    

 

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REVLON, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Classes of similar products:

  

                 

Net sales:

                    

Color cosmetics

   $ 197.6         59   $ 183.1         57   $ 630.7         62   $ 583.0         61

Beauty care and fragrance

     139.6         41     135.9         43     390.9         38     369.2         39
  

 

 

      

 

 

      

 

 

      

 

 

    
   $ 337.2         $ 319.0         $ 1,021.6         $ 952.2      
  

 

 

      

 

 

      

 

 

      

 

 

    

 

(9)

Fair Value Measurements

Assets and liabilities are required to be categorized into three levels of fair value based upon the assumptions used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3, if applicable, generally would require significant management judgment. The three levels for categorizing the fair value measurement of assets and liabilities are as follows:

 

   

Level 1:    Fair valuing the asset or liability using observable inputs, such as quoted prices in active markets for identical assets or liabilities;

 

   

Level 2:    Fair valuing the asset or liability using inputs other than quoted prices that are observable for the applicable asset or liability, either directly or indirectly, such as quoted prices for similar (as opposed to identical) assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; and

 

   

Level 3:    Fair valuing the asset or liability using unobservable inputs that reflect the Company’s own assumptions regarding the applicable asset or liability.

As of September 30, 2011, the fair values of the Company’s financial assets and liabilities, namely its FX Contracts (as hereinafter defined) and Revlon, Inc.’s Series A Preferred Stock, par value $0.01 per share (“Preferred Stock”), are categorized in the table below:

 

     Total      Level 1      Level 2      Level 3  

Assets:

           

Derivatives:

           

FX Contracts(a)

   $ 1.5       $       $ 1.5       $   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 1.5       $       $ 1.5       $   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivatives:

           

FX Contracts(a)

   $ 0.2       $       $ 0.2       $   

Redeemable Preferred Stock (Change of Control Amount)(b)

     0.2                         0.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ 0.4       $       $ 0.2       $ 0.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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REVLON, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)

 

As of December 31, 2010, the fair values of the Company’s financial assets and liabilities, namely its FX Contracts and Preferred Stock, are categorized in the table below:

 

     Total      Level 1      Level 2      Level 3  

Assets

           

Derivatives:

           

FX Contracts(a)

   $ 0.2       $       $ 0.2       $   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 0.2       $       $ 0.2       $   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Derivatives:

           

FX Contracts(a)

   $ 2.1       $       $ 2.1       $   

Redeemable Preferred Stock (Change of Control Amount)(b)

     0.2                         0.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ 2.3       $       $ 2.1       $ 0.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) 

The fair value of the Company’s FX Contracts was measured based on observable market transactions of spot and forward rates at September 30, 2011 and December 31, 2010. (See Note 10, “Financial Instruments,” in this Form 10-Q.)

 

(b) 

In October 2009, Revlon, Inc. consummated its voluntary exchange offer (as amended, the “Exchange Offer”) in which, among other things, Revlon, Inc. issued to stockholders (other than MacAndrews & Forbes) 9,336,905 shares of its Preferred Stock in exchange for the same number of shares of Class A Common Stock tendered in the Exchange Offer. Upon consummation of the Exchange Offer, Revlon, Inc. initially recorded the Preferred Stock as a long-term liability at a fair value of $47.9 million, which was comprised of two components:

 

   

Liquidation Preference:    Upon initial valuation of the Preferred Stock, the total amount to be paid by Revlon, Inc. at maturity is approximately $48.6 million, which represents the $5.21 liquidation preference for each of the 9,336,905 shares of Preferred Stock issued in the Exchange Offer (the “Liquidation Preference”). The Liquidation Preference was initially measured at fair value based on the yield to maturity of the $48.6 million portion of the Senior Subordinated Term Loan (as hereinafter defined) that was contributed to Revlon, Inc. by MacAndrews & Forbes (the “Contributed Loan”), adjusted for an estimated average subordination premium for subordinated note issues. The Liquidation Preference is subsequently measured at the present value of the amount to be paid at maturity, accruing interest cost using the rate implicit at the issuance date since both the amount to be paid and the maturity date are fixed.

 

   

Change of Control Amount:    Holders of the Preferred Stock are entitled to receive upon a change of control transaction (as defined in the certificate of designation of the Preferred Stock) through October 8, 2012, a pro rata portion of the equity value received in such transaction, capped at an amount that would provide aggregate cash payments of $12.00 per share over the term of the Preferred Stock. If the equity value received in the change of control transaction is greater than or equal to $12.00 per share, then each holder of Preferred Stock will be entitled to receive an amount equal to $12.00 minus the Liquidation Preference minus any paid and/or accrued and unpaid dividends on the Preferred Stock. If the per share equity value received in the change of control transaction is less than $12.00, then each holder of Preferred Stock is entitled to receive an amount equal to such per share equity value minus the Liquidation Preference minus any paid and/or accrued and unpaid dividends on the Preferred Stock. If the per share equity value received in the change of control transaction does not exceed the Liquidation Preference plus any paid and/or accrued and unpaid dividends, then each holder of the Preferred Stock is not entitled to an additional payment upon any such change of control transaction (the foregoing payments being the “Change of Control Amount”). The fair value of the Change of Control Amount of

 

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REVLON, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)

 

 

the Preferred Stock, which is deemed to be a Level 3 liability, is based on the Company’s assessment of the likelihood of the occurrence of specified change of control transactions within three years of the consummation of the Exchange Offer. There was no change in the fair value of the Change in Control Amount from the initial valuation performed upon the October 2009 consummation of the Exchange Offer through September 30, 2011.

 

(10)

Financial Instruments

The fair value of the Company’s debt, including the current portion of long-term debt and Preferred Stock, is based on the quoted market prices for the same issues or on the current rates offered for debt of similar remaining maturities. The estimated fair value of such debt and Preferred Stock at September 30, 2011 was approximately $1,215.9 million, which was less than the carrying value of such debt and Preferred Stock at September 30, 2011 of $1,223.3 million. The estimated fair value of such debt and Preferred Stock at December 31, 2010 was approximately $1,259.6 million, which was more than the carrying value of such debt and Preferred Stock at December 31, 2010 of $1,215.4 million.

The carrying amounts of cash and cash equivalents, marketable securities, trade receivables, notes receivable, accounts payable and short-term borrowings approximate their fair values.

Products Corporation also maintains standby and trade letters of credit for various corporate purposes under which Products Corporation is obligated, of which approximately $21.1 million and $21.2 million (including amounts available under credit agreements in effect at that time) were maintained at September 30, 2011 and December 31, 2010, respectively. Included in these amounts is approximately $9.1 million at both September 30, 2011 and December 31, 2010 in standby letters of credit which support Products Corporation’s self-insurance programs. The estimated liability under such programs is accrued by Products Corporation.

Derivative Financial Instruments

The Company uses derivative financial instruments, primarily (1) foreign currency forward exchange contracts (“FX Contracts”) intended for the purpose of managing foreign currency exchange risk by reducing the effects of fluctuations in foreign currency exchange rates on the Company’s net cash flows and (2) interest rate hedging transactions intended for the purpose of managing interest rate risk associated with Products Corporation’s variable rate indebtedness.

Foreign Currency Forward Exchange Contracts

The FX Contracts are entered into primarily to hedge the anticipated net cash flows resulting from inventory purchases and 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. The U.S. dollar notional amount of the FX Contracts outstanding at September 30, 2011 and December 31, 2010 was $53.9 million and $46.0 million, respectively.

While the Company may be exposed to credit loss in the event of the counterparty’s non-performance, the Company’s exposure is limited to the net amount that Products Corporation would have received, if any, from the counterparty over the remaining balance of the terms of the FX Contracts. The Company does not anticipate any non-performance and, furthermore, even in the case of any non-performance by the counterparty, the Company expects that any such loss would not be material.

Interest Rate Swap Transactions

Prior to its expiration in April 2010, the Company’s floating-to-fixed interest rate swap had a notional amount of $150.0 million initially relating to indebtedness under Products Corporation’s former 2006 Term Loan

 

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REVLON, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)

 

Facility (prior to its complete refinancing in March 2010) and which also related, through its expiration in April 2010, to a notional amount of $150.0 million relating to indebtedness under Products Corporation’s 2010 Term Loan Facility (the “2008 Interest Rate Swap”). Under the terms of the 2008 Interest Rate Swap, Products Corporation was required to pay to the counterparty a quarterly fixed interest rate of 2.66% on the $150.0 million notional amount under the 2008 Interest Rate Swap (which, based upon the 4.0% applicable margin, effectively fixed the interest rate on such notional amounts at 6.66% for the 2-year term of such swap), commencing in July 2008, while receiving a variable interest rate payment from the counterparty equal to three-month U.S. dollar LIBOR.

The 2008 Interest Rate Swap was initially designated as a cash flow hedge of the variable interest rate payments on Products Corporation’s former 2006 Term Loan Facility (prior to its complete refinancing in March 2010). However, as a result of the 2010 Refinancing, effective March 11, 2010 (the closing date of the 2010 Refinancing), the 2008 Interest Rate Swap no longer met the criteria to allow for the deferral of the effective portion of unrecognized hedging gains or losses in other comprehensive income, as the scheduled variable interest payment specified on the date originally documented at the inception of the hedge will not occur. As a result, as of March 11, 2010, the Company reclassified an unrecognized loss of $0.8 million from Accumulated Other Comprehensive Loss into earnings.

Quantitative Information — Derivative Financial Instruments

The effects of the Company’s derivative instruments on its consolidated financial statements were as follows:

(a) Fair Value of Derivative Financial Instruments in Consolidated Balance Sheet:

 

    Fair Values of Derivative Instruments  
    Assets     Liabilities  

Derivatives:

  Balance Sheet
Classification
  September 30,
2011
Fair Value
    December 31,
2010
Fair Value
    Balance Sheet
Classification
  September 30,
2011
Fair Value
    December 31,
2010
Fair Value
 

Derivatives not designated as hedging instruments:

  

     

FX Contracts(a)

 

Prepaid expenses
and other

  $ 1.5      $ 0.2     

Accrued expenses

  $ 0.2      $ 2.1   

 

(a) 

The fair values of the FX Contracts at September 30, 2011 and December 31, 2010 were determined by using observable market transactions of spot and forward rates at September 30, 2011 and December 31, 2010.

(b) Effects of Derivative Financial Instruments on Income for the three months ended September 30, 2011 and 2010:

 

(September 30,) (September 30,)
    

Amount of Gain (Loss)

Recognized in Foreign
Currency (Gains) Losses, Net

     Three months  ended,
September 30,
     2011    2010

Derivatives not designated as hedging instruments:

     

FX Contracts

   $2.3    $(2.1)

 

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REVLON, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)

 

Effects of Derivative Financial Instruments on Income and Other Comprehensive Income (Loss) (“OCI”) for the nine months ended September 30, 2011 and 2010:

 

$(0.8) $(0.8) $(0.8) $(0.8) $(0.8)
     Derivative Instruments Gain (Loss) Effect on  Consolidated
Statement of Operations and
OCI for the nine months ended September 30,
 
     Amount of
Gain (Loss)
Recognized in OCI
(Effective

Portion)
     Income Statement
Classification

of Gain (Loss)
Reclassified from

OCI to Income
     Amount of
Gain (Loss)
Reclassified

from OCI
to Income
(Effective Portion)
 
         2011              2010                 2011              2010      

Derivatives designated as hedging instruments:

              

2008 Interest Rate Swap(a)

   $       $         Interest expense       $       $ (0.9

 

$(0.8) $(0.8) $(0.8) $(0.8) $(0.8)
     Amount of
Gain (Loss)
Recognized

in Foreign
Currency (Gains)
Losses, Net
    Income Statement
Classification of
Gain (Loss)
Reclassified from

OCI to Income
   Amount of
Gain (Loss)
Recognized

in Interest
Expense
(Ineffective Portion)
 
         2011              2010                2011              2010      

Derivatives not designated as hedging instruments:

  

       

FX Contracts

   $ 0.5       $ (1.5        

2008 Interest Rate Swap(a)

                 

Interest expense

             (0.8
  

 

 

    

 

 

      

 

 

    

 

 

 
   $ 0.5       $ (1.5      $       $ (0.8
  

 

 

    

 

 

      

 

 

    

 

 

 

 

(a)

Effective March 11, 2010 (the closing date of the 2010 Refinancing), the 2008 Interest Rate Swap, which expired in April 2010, was no longer designated as a cash flow hedge. (See “Interest Rate Swap Transactions” in this Note 10.)

 

(11)

Income Taxes

The provision for income taxes represents federal, foreign, state and local income taxes. The effective tax rate differs from the applicable federal statutory rate due to the effect of state and local income taxes, tax rates and income in foreign jurisdictions, utilization of tax loss carry-forwards, foreign earnings taxable in the U.S., certain nondeductible expenses and certain other items. The Company’s tax provision changes quarterly based on various factors including, but not limited to, the geographical mix of earnings, enacted tax legislation, foreign, state and local income taxes, tax audit settlements, the ultimate disposition of deferred tax assets relating to stock-based compensation and the interaction of various global tax strategies. In addition, changes in judgment from the evaluation of new information resulting in the recognition, derecognition and/or re-measurement of a tax position taken in a prior period are recognized in the quarter in which any such change occurs.

For the third quarter of 2011 and 2010, the Company recorded a provision for (benefit from) income taxes of $22.1 million and $(0.6) million, respectively. The $22.1 million provision for income taxes for the third quarter of 2011, as compared to the $0.6 million benefit from income taxes for the third quarter of 2010, was primarily attributable to higher pre-tax income in the U.S. and certain foreign jurisdictions in 2011 and higher deferred tax expense for the U.S. in 2011 due to the reduction of the valuation allowance in the U.S. on December 31, 2010. In addition, the provision for income taxes in the third quarter of 2011 included various discrete items, including income tax provision to tax return adjustments, which in the aggregate negatively impacted the quarter, while the benefit from income taxes in the third quarter of 2010 included the favorable resolution of tax matters in the U.S. and in certain foreign jurisdictions that did not recur in 2011.

 

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REVLON, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)

 

The effective tax rate for the three months ended September 30, 2011 is higher than the federal statutory rate of 35% due principally to: (i) various discrete items, including income tax provision to tax return adjustments, which in the aggregate negatively impacted the Company’s effective tax rate in the quarter; (ii) foreign earnings taxable in the U.S.; (iii) pre-tax losses in a number of markets outside the U.S. for which there is no tax benefit recognized in the period; and (iv) state and local taxes.

For the first nine months of 2011 and 2010, the Company recorded a provision for income taxes for continuing operations of $32.4 million and $9.2 million, respectively. The $32.4 million provision for income taxes for the first nine months of 2011, as compared to the $9.2 million provision for income taxes for the first nine months of 2010, was primarily attributable to higher deferred tax expense for the U.S. in 2011 due to the reduction of the valuation allowance in the U.S. on December 31, 2010 and higher pre-tax income in the U.S. and certain foreign jurisdictions in 2011. In addition, the provision for income taxes in the first nine months of 2010 included the favorable resolution of tax matters in the U.S. and in certain foreign jurisdictions that did not recur in 2011.

The effective tax rate for the nine months ended September 30, 2011 is higher than the federal statutory rate of 35% due principally to: (i) foreign earnings taxable in the U.S.; (ii) pre-tax losses in a number of markets outside the U.S. for which there is no tax benefit recognized in the period; and (iii) state and local taxes.

The Company remains subject to examination of its income tax returns in various jurisdictions including, without limitation, the U.S. (federal) for tax years ended December 31, 2008 through December 31, 2010, and Australia and South Africa for tax years ended December 31, 2007 through December 31, 2010.

 

(12)

Contingencies

The Company is involved in various routine legal proceedings incident to the ordinary course of its business. The Company believes that the outcome of all pending legal proceedings in the aggregate is unlikely to have a material adverse effect on the Company’s business, financial condition and/or its results of operations. However, in light of the uncertainties involved in legal proceedings generally, the ultimate outcome of a particular matter could be material to the Company’s operating results for a particular period depending on, among other things, the size of the loss or the nature of the liability imposed and the level of the Company’s income for that particular period.

As previously announced, on October 8, 2009, the Company consummated its voluntary exchange offer in which, among other things, Revlon, Inc. issued to stockholders who elected to exchange shares (other than MacAndrews & Forbes) 9,336,905 shares of its Preferred Stock in exchange for the same number of shares of Revlon, Inc. Class A Common Stock tendered in the Exchange Offer (the “Exchange Offer”). On April 24, 2009, May 1, 2009, May 5, 2009 and May 12, 2009, respectively, four purported class actions were filed by each of Vern Mercier, Arthur Jurkowitz, Suri Lefkowitz and T. Walter Heiser in the Court of Chancery of the State of Delaware (the “Chancery Court”). On May 4, 2009, a purported class action was filed by Stanley E. Sullivan in the Supreme Court of New York, New York County. Each such lawsuit was brought against Revlon, Inc., Revlon, Inc.’s then directors and MacAndrews & Forbes, and challenged a merger proposal made by MacAndrews & Forbes on April 13, 2009, which would have resulted in MacAndrews & Forbes and certain of its affiliates owning 100% of Revlon, Inc.’s outstanding Common Stock (in lieu of consummating such merger proposal, the Company consummated the aforementioned Exchange Offer). Each action sought, among other things, to enjoin the proposed merger transaction. On June 24, 2009, the Chancery Court consolidated the four Delaware actions (the “Initial Consolidated Action”), and appointed lead counsel for plaintiffs. As announced on August 10, 2009, an agreement in principle was reached to settle the Initial Consolidated Action, as set forth in a Memorandum of Understanding (as amended in September 2009, the “Settlement Agreement”).

On December 24, 2009, an amended complaint was filed in the Sullivan action alleging, among other things, that defendants should have disclosed in the Company’s Offer to Exchange for the Exchange Offer information

 

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REVLON, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)

 

regarding the Company’s financial results for the fiscal quarter ended September 30, 2009. On January 6, 2010, an amended complaint was filed by plaintiffs in the Initial Consolidated Action making allegations similar to those in the amended Sullivan complaint. Revlon initially believed that by filing the amended complaint, plaintiffs in the Initial Consolidated Action had formally repudiated the Settlement Agreement, and on January 8, 2010, defendants filed a motion to enforce the Settlement Agreement.

In addition to the amended complaints in the Initial Consolidated Action and the Sullivan action, on December 21, 2009, Revlon, Inc.’s current directors, a former director and MacAndrews & Forbes were named as defendants in a purported class action filed in the Chancery Court by Edward Gutman. Also on December 21, 2009, a second purported class action was filed in the Chancery Court against Revlon, Inc.’s current directors and a former director by Lawrence Corneck. The Gutman and Corneck actions make allegations similar to those in the amended complaints in the Sullivan action and the Initial Consolidated Action. On January 15, 2010, the Chancery Court consolidated the Gutman and Corneck actions with the Initial Consolidated Action (the Initial Consolidated Action, as consolidated with the Gutman and Corneck actions, is hereafter referred to as the “Consolidated Action”). A briefing schedule was then set to determine the leadership structure for plaintiffs in the Consolidated Action.

On March 16, 2010, after hearing oral argument on the leadership issue, the Chancery Court changed the leadership structure for plaintiffs in the Consolidated Action. Thereafter, newly appointed counsel for the plaintiffs in the Consolidated Action and the defendants agreed that the defendants would withdraw their motion to enforce the Settlement Agreement and that merits discovery would proceed. Defendants agreed not to withdraw any of the concessions that had been provided to the plaintiffs as part of the Settlement Agreement.

On May 25, 2010, plaintiffs’ counsel in the Consolidated Action filed an amended complaint alleging breaches of fiduciary duties arising out of the Exchange Offer and that defendants should have disclosed in the Company’s Offer to Exchange information regarding the Company’s financial results for the fiscal quarter ended September 30, 2009. Merits discovery is proceeding in the Consolidated Action.

On December 31, 2009, a purported class action was filed in the U.S. District Court for the District of Delaware by John Garofalo against Revlon, Inc., Revlon, Inc.’s current directors, a former director and MacAndrews & Forbes alleging federal and state law claims stemming from the alleged failure to disclose in the Offer to Exchange certain information relating to the Company’s financial results for the fiscal quarter ended September 30, 2009. On July 29, 2011, the plaintiff in this action filed an amended complaint. Otherwise, defendants and plaintiff have agreed to stay proceedings in this action, including any response to the amended complaint, until January 31, 2012, to permit plaintiff to participate in the merits discovery in the Consolidated Action. A similar agreement has been reached with the plaintiff in the Sullivan action to stay that action until January 31, 2012.

On May 11, 2010, a purported derivative action was filed in the U.S. District Court for the District of Delaware by Richard Smutek, derivatively and on behalf of Revlon, Inc. against Revlon, Inc.’s current directors and MacAndrews & Forbes alleging breach of fiduciary duty in allowing the Exchange Offer to proceed and failing to disclose in the Offer to Exchange certain information related to the Company’s financial results for the fiscal quarter ended September 30, 2009. On August 16, 2010, defendants moved to dismiss the complaint. Briefing on defendants’ motions to dismiss was completed on December 10, 2010. Thereafter, the parties requested oral argument on the motions to dismiss. The motions to dismiss are currently pending. On September 27, 2010, plaintiff filed a motion to compel discovery. In response, defendants moved to strike plaintiff’s motion to compel discovery or, in the alternative, for an extension of time for defendants to respond to plaintiff’s motion. On October 17, 2011, the U.S. District Court for the District of Delaware denied plaintiff’s motion to compel and granted defendants’ motion to strike.

 

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REVLON, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)

 

Plaintiffs in each of these actions are seeking, among other things, an award of damages and the costs and disbursements of such actions, including a reasonable allowance for the fees and expenses of each such plaintiff’s attorneys and experts. Because the Smutek action is styled as a derivative action on behalf of the Company, any award of damages, costs and disbursements would be made to and for the benefit of the Company.

The Company believes the allegations contained in the amended Sullivan complaint, the amended complaint in the Consolidated Action, the amended Garofalo complaint and the Smutek complaint are without merit and intends to vigorously defend against them. The Company believes it has substantial factual and legal defenses to the claims at issue and believes that it would prevail at trial. However, in an effort to mitigate the utilization of time and resources on these matters, the Company has had discussions regarding settlement of these matters. Based on the current state of discussions, it appears that the likelihood of a settlement is remote at this time.

 

(13)

Guarantor Financial Information

Products Corporation’s 9 3/4% Senior Secured Notes are fully and unconditionally guaranteed on a senior secured basis by Revlon, Inc. and Products Corporation’s domestic subsidiaries (other than certain immaterial subsidiaries) that guarantee Products Corporation’s obligations under its 2011 Credit Agreements (the “Guarantor Subsidiaries”).

The following Condensed Consolidating Financial Statements present the financial information as of September 30, 2011 and December 31, 2010, and for the three and nine months ended September 30, 2011 and 2010 for (i) Products Corporation on a stand-alone basis; (ii) the Guarantor Subsidiaries on a stand-alone basis; (iii) the subsidiaries of Products Corporation that do not guarantee Products Corporation’s 9 3/4% Senior Secured Notes (the “Non-Guarantor Subsidiaries”) on a stand-alone basis; and (iv) Products Corporation, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries on a consolidated basis. The Condensed Consolidating Financial Statements are presented on the equity method, under which the investments in subsidiaries are recorded at cost and adjusted for the applicable share of the subsidiary’s cumulative results of operations, capital contributions, distributions and other equity changes. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions.

 

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REVLON, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)

 

Consolidating Condensed Balance Sheets

As of September 30, 2011

 

    Products
Corporation
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

ASSETS

         

Cash and cash equivalents

  $ 17.9      $ 0.1      $ 31.9      $      $ 49.9   

Trade receivables, less allowances for doubtful accounts

    73.5        22.7        89.3               185.5   

Inventories

    87.4        10.8        45.4               143.6   

Deferred income taxes — current

    38.4               5.6               44.0   

Prepaid expenses and other

    78.9        5.3        25.4               109.6   

Intercompany receivables

    911.1        439.6        347.6        (1,698.3       

Investment in subsidiaries

    (201.0     (200.6            401.6          

Property, plant and equipment, net

    86.3        0.8        12.9               100.0   

Deferred income taxes — noncurrent

    192.6               2.4               195.0   

Goodwill, net

    150.6        41.4        1.9               193.9   

Other assets

    49.8        25.6        30.4               105.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 1,485.5      $ 345.7      $ 592.8      $ (1,296.7   $ 1,127.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S DEFICIENCY

  

       

Short-term borrowings

  $      $ 6.0      $ 3.2      $      $ 9.2   

Current portion of long-term debt

    8.0                             8.0   

Accounts payable

    57.8        4.7        29.4               91.9   

Accrued expenses and other

    127.2        14.1        69.8               211.1   

Intercompany payables

    539.1        615.4        543.8        (1,698.3       

Long-term debt

    1,108.6                             1,108.6   

Long-term debt — affiliates

    107.0                             107.0   

Other long-term liabilities

    174.1        6.9        46.8               227.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    2,121.8        647.1        693.0        (1,698.3     1,763.6   

Stockholder’s deficiency

    (636.3     (301.4     (100.2     401.6        (636.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholder’s deficiency

  $ 1,485.5      $ 345.7      $ 592.8      $ (1,296.7   $ 1,127.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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REVLON, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)

 

Consolidating Condensed Balance Sheets

As of December 31, 2010

 

    Products
Corporation
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

ASSETS

         

Cash and cash equivalents

  $ 20.5      $ 0.1      $ 56.1      $      $ 76.7   

Trade receivables, less allowances for doubtful accounts

    91.0        14.9        91.6               197.5   

Inventories

    76.6        2.4        36.0               115.0   

Deferred income taxes — current

    34.4               5.9               40.3   

Prepaid expenses and other

    72.5        3.2        22.4               98.1   

Intercompany receivables

    895.1        432.0        331.1        (1,658.2       

Investment in subsidiaries

    (229.8     (184.7            414.5          

Property, plant and equipment, net

    89.4        0.6        16.2               106.2   

Deferred income taxes — noncurrent

    214.0               2.6               216.6   

Goodwill, net

    150.6        30.0        2.1               182.7   

Other assets

    55.8        4.2        27.3               87.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 1,470.1      $ 302.7      $ 591.3      $ (1,243.7   $ 1,120.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S DEFICIENCY

  

       

Short-term borrowings

  $      $ 1.8      $ 1.9      $      $ 3.7   

Current portion of long-term debt

    8.0                             8.0   

Accounts payable

    54.3        4.4        25.8               84.5   

Accrued expenses and other

    140.1        9.0        67.1               216.2   

Intercompany payables

    516.4        613.4        528.4        (1,658.2       

Long-term debt

    1,100.9                             1,100.9   

Long-term debt — affiliates

    107.0                             107.0   

Other long-term liabilities

    200.5        9.1        47.6               257.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    2,127.2        637.7        670.8        (1,658.2     1,777.5   

Stockholder’s deficiency

    (657.1     (335.0     (79.5     414.5        (657.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholder’s deficiency

  $ 1,470.1      $ 302.7      $ 591.3      $ (1,243.7   $ 1,120.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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REVLON, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)

 

Consolidating Condensed Statement of Operations

For the Three Months Ended September 30, 2011

 

     Products
Corporation
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net Sales

   $ 212.2      $ 28.1      $ 139.7      $ (42.8   $ 337.2   

Cost of Sales

     98.9        13.3        53.7        (42.8     123.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     113.3        14.8        86.0               214.1   

Selling, general and administrative expenses

     96.5        11.8        59.4               167.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     16.8        3.0        26.6               46.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses (income):

          

Intercompany interest, net

            (0.3     1.8               1.5   

Interest expense

     20.2        0.1        0.1               20.4   

Amortization of debt issuance costs

     0.8                             0.8   

Loss on early extinguishment of debt

                                   

Foreign currency gains, net

     (0.2            (0.7            (0.9

Miscellaneous, net

     (8.5     (3.8     12.5               0.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses (income), net

     12.3        (4.0     13.7               22.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     4.5        7.0        12.9               24.4   

Provision for (benefit from) income taxes

     12.5        (0.5     7.1               19.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

     (8.0     7.5        5.8               5.3   

Equity in income of subsidiaries

     13.3        1.5               (14.8       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 5.3      $ 9.0      $ 5.8      $ (14.8   $ 5.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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REVLON, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)

 

Consolidating Condensed Statement of Operations

For the Three Months Ended September 30, 2010

 

     Products
Corporation
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

Net Sales

   $ 196.7      $ 20.5      $ 137.9       $ (36.1   $ 319.0   

Cost of Sales

     85.4        9.2        51.9         (36.1     110.4   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     111.3        11.3        86.0                208.6   

Selling, general and administrative expenses

     101.2        8.4        58.3                167.9   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Operating income

     10.1        2.9        27.7                40.7   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other expenses (income):

           

Intercompany interest, net

     0.7        (0.4     1.3                1.6   

Interest expense

     22.9        0.1        0.1                23.1   

Amortization of debt issuance costs

     1.1                              1.1   

Foreign currency (gains) losses, net

     (0.3            1.1                0.8   

Miscellaneous, net

     (7.0     (3.8     11.1                0.3   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other expenses (income), net

     17.4        (4.1     13.6                26.9   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

(Loss) income from continuing operations before income taxes

     (7.3     7.0        14.1                13.8   

(Benefit from) provision for income taxes

     (1.5     0.3        0.7                (0.5
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

(Loss) income from continuing operations

     (5.8     6.7        13.4                14.3   

Loss from discontinued operations, net of taxes

     (0.1                           (0.1

Equity in income of subsidiaries

     20.1        10.0                (30.1       
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 14.2      $ 16.7      $ 13.4       $ (30.1   $ 14.2   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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REVLON, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)

 

Consolidating Condensed Statement of Operations

For the Nine Months Ended September 30, 2011

 

     Products
Corporation
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

Net Sales

   $ 659.2      $ 71.8      $ 420.4       $ (129.8   $ 1,021.6   

Cost of Sales

     295.6        33.2        159.3         (129.8     358.3   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     363.6        38.6        261.1                663.3   

Selling, general and administrative expenses

     300.4        31.4        188.3                520.1   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Operating income

     63.2        7.2        72.8                143.2   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other expenses (income):

           

Intercompany interest, net

     (0.1     (0.8     5.5                4.6   

Interest expense

     64.2        0.2        0.3                64.7   

Amortization of debt issuance costs

     2.9                              2.9   

Loss on early extinguishment of debt, net

     11.3                              11.3   

Foreign currency (gains) losses, net

     (1.4     0.4        3.4                2.4   

Miscellaneous, net

     (43.1     3.4        40.9                1.2   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other expenses, net

     33.8        3.2        50.1                87.1   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income from continuing operations before income taxes

     29.4        4.0        22.7                56.1   

Provision for income taxes

     16.6        1.9        13.1                31.6   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income from continuing operations

     12.8        2.1        9.6                24.5   

Income from discontinued operations, net of taxes

     0.6                              0.6   

Equity in income of subsidiaries

     11.7        0.4                (12.1       
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 25.1      $ 2.5      $ 9.6       $ (12.1   $ 25.1   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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REVLON, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)

 

Consolidating Condensed Statement of Operations

For the Nine Months Ended September 30, 2010

 

     Products
Corporation
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

Net Sales

   $ 620.0      $ 50.7      $ 389.4       $ (107.9   $ 952.2   

Cost of Sales

     265.0        22.3        146.7         (107.9     326.1   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     355.0        28.4        242.7                626.1   

Selling, general and administrative expenses

     297.1        24.8        167.1                489.0   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Operating income

     57.9        3.6        75.6                137.1   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other expenses (income):

           

Intercompany interest, net

     2.2        (1.0     3.5                4.7   

Interest expense

     67.0        0.2        0.2                67.4   

Amortization of debt issuance costs

     3.5                              3.5   

Loss on early extinguishment of debt, net

     9.7                              9.7   

Foreign currency (gains) losses, net

     (4.6     (0.2     9.5                4.7   

Miscellaneous, net

     (35.9     3.6        33.2                0.9   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other expenses, net

     41.9        2.6        46.4                90.9   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income from continuing operations before income taxes

     16.0        1.0        29.2                46.2   

(Benefit from) provision for income taxes

     (2.8     3.0        9.1                9.3   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) from continuing operations

     18.8        (2.0     20.1                36.9   

Income from discontinued operations, net of taxes

     0.3                              0.3   

Equity in income of subsidiaries

     18.1        8.6                (26.7       
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 37.2      $ 6.6      $ 20.1       $ (26.7   $ 37.2   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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REVLON, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)

 

Consolidating Condensed Statement of Cash Flow

For the Nine Months Ended September 30, 2011

 

    Products
Corporation
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

CASH FLOWS FROM OPERATING ACTIVITIES:

         

Net cash provided by (used in) operating activities

  $ 6.1      $ 34.9      $ (20.8   $      $ 20.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

         

Capital expenditures

    (8.2     (0.2     (1.2            (9.6

Acquisition

           (39.0                   (39.0

Proceeds from sales of certain assets

    0.1               0.1               0.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    (8.1     (39.2     (1.1            (48.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

         

Net increase in short-term borrowings and overdraft

    4.1        4.3        1.6               10.0   

Repayments under the 2010 Term Loan Facility

    (794.0                          (794.0

Borrowings under the 2011 Term Loan Facility

    796.0                             796.0   

Repayments under the 2011 Term Loan Facility

    (2.0                          (2.0

Payment of financing costs

    (4.2                          (4.2

Other financing activities

    (0.5            (0.7            (1.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

    (0.6     4.3        0.9               4.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

                  (3.2            (3.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

    (2.6            (24.2            (26.8

Cash and cash equivalents at beginning of period

    20.5        0.1        56.1               76.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ 17.9      $ 0.1      $ 31.9      $      $ 49.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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REVLON, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)

 

Consolidating Condensed Statement of Cash Flow

For the Nine Months Ended September 30, 2010

 

    Products
Corporation
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

CASH FLOWS FROM OPERATING ACTIVITIES:

         

Net cash provided by (used in) operating activities

  $ 45.4      $ (2.4   $ 6.5      $      $ 49.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

         

Capital expenditures

    (10.2     (0.1     (1.1            (11.4

Proceeds from sales of certain assets

                  0.2               0.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    (10.2     (0.1     (0.9            (11.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

         

Net (decrease) increase in short-term borrowings and overdraft

    (7.9     2.6        2.4               (2.9

Repayments under the 2006 Term Loan Facility

    (815.0                          (815.0

Borrowings under the 2010 Term Loan Facility

    786.0                             786.0   

Repayments under the 2010 Term Loan Facility

    (4.0                          (4.0

Payment of financing costs

    (17.0                          (17.0

Other financing activities

    (0.3            (0.3            (0.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

    (58.2     2.6        2.1               (53.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

                  1.2               1.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

    (23.0     0.1        8.9               (14.0

Cash and cash equivalents at beginning of period

    27.4        0.4        26.7               54.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ 4.4      $ 0.5      $ 35.6      $      $ 40.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(14)

Subsequent Event

On October 12, 2011, the Company received an additional advance payment of $4.7 million from its insurers in connection with the June 5, 2011 fire at the Company’s facility in Venezuela, for total insurance proceeds of $19.7 million received to date.

The final amount and timing of the ultimate insurance recovery is still currently unknown. As of September 30, 2011, the Company has not recognized any income from insurance recoveries beyond the business interruption and impairment losses incurred through such date. For further discussion, see Note 1, “Description of Business and Basis of Presentation — Fire at Revlon Venezuela Facility.”

 

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Table of Contents

REVLON, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

(all tabular amounts in millions, except share and per share amounts)

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Overview of the Business

The Company (as defined below) is providing this overview in accordance with the SEC’s December 2003 interpretive guidance regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Revlon, Inc. (and together with its subsidiaries, the “Company”) conducts its business exclusively through its direct wholly-owned operating subsidiary, Revlon Consumer Products Corporation (“Products Corporation”), and its subsidiaries. Revlon, Inc. is a direct and indirect majority-owned subsidiary of MacAndrews & Forbes Holdings Inc. (“MacAndrews & Forbes Holdings” and together with certain of its affiliates other than the Company, “MacAndrews & Forbes”), a corporation wholly-owned by Ronald 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 (as hereinafter defined). 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.

The Company’s products are sold worldwide and marketed under such brand names as Revlon, including the Revlon ColorStay, Revlon Super Lustrous and Revlon Age Defying franchises, as well as the Almay brand, including the Almay Intense i-Color and Almay Smart Shade franchises, in cosmetics; Revlon ColorSilk in women’s hair color; Revlon in beauty tools; Mitchum in anti-perspirant deodorants; Charlie and Jean Naté in fragrances; and Ultima II and Gatineau in skincare.

The Company’s principal customers include large mass volume retailers and chain drug and food stores (collectively, the “mass retail channel”) in the U.S., as well as certain department stores and other specialty stores, such as perfumeries, outside the U.S. The Company also sells beauty products to U.S. military exchanges and commissaries and has a licensing business pursuant to which the Company licenses certain of its key brand names to third parties for complementary beauty-related products and accessories in exchange for royalties.

The Company was founded by Charles Revson, who revolutionized the cosmetics industry by introducing nail enamels matched to lipsticks in fashion colors over 75 years ago. Today, the Company has leading market positions in a number of its principal product categories in the U.S. mass retail channel, including color cosmetics (face, lip, eye and nail categories), women’s hair color, beauty tools and anti-perspirant deodorants. The Company also has leading market positions in several product categories in certain foreign countries, including Australia, Canada and South Africa.

Overview of the Company’s Business Strategy

The Company’s strategic goal is to profitably grow our business. The business strategies employed by the Company to achieve this goal are:

1. Building our strong brands.    We continue to build our strong brands by focusing on innovative, high-quality, consumer-preferred brand offering; effective consumer brand communication; appropriate levels of advertising and promotion; and superb execution with our retail partners.

2. Developing our organizational capability.    We continue to develop our organizational capability through attracting, retaining and rewarding highly capable people and through performance management, development planning, succession planning and training.

 

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REVLON, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

(all tabular amounts in millions, except share and per share amounts)

 

3. Driving our company to act globally.    We continue to drive common global processes which are designed to provide the most efficient and effective allocation of our resources.

4. Increasing our operating profit and cash flow.    We continue to focus on increasing our operating profit and cash flow.

5. Improving our capital structure.    We continue to improve our capital structure by focusing on strengthening our balance sheet and reducing debt.

Overview of Net Sales and Earnings Results

Consolidated net sales in the third quarter of 2011 were $337.2 million, an increase of $18.2 million, or 5.7%, compared to $319.0 million in the third quarter of 2010. Excluding the favorable impact of foreign currency fluctuations of $6.8 million, consolidated net sales increased by $11.4 million, or 3.6%, in the third quarter of 2011, driven by higher net sales in the Company’s U.S. region, partially offset by lower net sales in the Company’s regions outside the U.S.

Consolidated net sales for the first nine months of 2011 were $1,021.6 million, an increase of $69.4 million, or 7.3%, compared to $952.2 million for the first nine months of 2010. Excluding the favorable impact of foreign currency fluctuations of $23.5 million, consolidated net sales increased by $45.9 million, or 4.8%, in the first nine months of 2011, driven by higher net sales in the Company’s U.S., Asia Pacific and Latin America regions, partially offset by lower net sales in the Company’s Canada region. Net sales in the Europe, Middle East and Africa region remained essentially flat during the period.

Consolidated net income for the third quarter of 2011 was $0.1 million, compared to $12.5 million in the third quarter of 2010. The decrease in consolidated net income in the third quarter of 2011, compared to the third quarter of 2010, was primarily due to:

 

   

$22.7 million of higher provision for income taxes primarily attributable to higher pre-tax income in the U.S. and certain foreign jurisdictions in 2011 and higher deferred tax expense in the U.S. in 2011 due to the reduction of the valuation allowance in the U.S. on December 31, 2010;

with the foregoing partially offset by:

 

   

$5.5 million of higher gross profit primarily due to an $18.2 million improvement in consolidated net sales, partially offset by a $12.7 million increase in cost of sales; and

 

   

a $2.7 million decrease in interest expense, primarily driven by lower weighted average borrowing rates as a result of the 2011 Refinancings (as hereinafter defined).

Consolidated net income for the first nine months of 2011 was $17 million, compared to $31.1 million in the first nine months of 2010. The decrease in consolidated net income in the first nine months of 2011 compared to the first nine months of 2010 was primarily due to:

 

   

$31.9 million of higher SG&A expense, primarily driven by $15.6 million of higher general and administrative expenses, a $12.9 million unfavorable impact of foreign currency fluctuations and $7.3 million of higher advertising expenses to support the Company’s brands; and

 

   

$23.2 million of higher provision for income taxes primarily attributable to higher deferred tax expense for the U.S. in 2011 due to the reduction of the valuation allowance in the U.S. and higher pre-tax income in the U.S. and certain foreign jurisdictions in 2011;

with the foregoing partially offset by:

 

   

$37.2 million of higher gross profit due to a $69.4 million improvement in consolidated net sales, partially offset by a $32.2 million increase in cost of sales.

 

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REVLON, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

(all tabular amounts in millions, except share and per share amounts)

 

These current and prior period items are discussed in more detail below.

Fire at Revlon Venezuela Facility

On June 5, 2011, the Company’s facility in Venezuela was destroyed by fire. As of and for the year ended December 31, 2010, the Company’s subsidiary in Venezuela (“Revlon Venezuela”) had net sales of approximately 3% of the Company’s consolidated net sales and Revlon Venezuela’s total assets were approximately 3% of the Company’s total assets. Historically, approximately 50% of Revlon Venezuela’s net sales were comprised of products imported from Revlon’s Oxford, North Carolina facility and approximately 50% were comprised of locally manufactured products. Revlon Venezuela did not have any net sales from the date of the fire until August 12, 2011. The Company’s net sales in Venezuela since August 12, 2011 have been solely comprised of products imported from the Company’s Oxford, North Carolina facility. The Company is currently evaluating options to minimize the extent and duration of the disruption to Revlon Venezuela’s business as a result of the fire and estimates the lost net sales to be between $15 million and $20 million for 2011.

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.

In June 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 and in the period from June through September 30, 2011, the Company incurred business interruption losses of $6.1 million related to the fire, for total losses of $11.0 million incurred in the first nine months of 2011. The business interruption losses incurred in 2011 include estimated profits lost as a result of the interruption of the business and costs incurred directly related to the fire. The business interruption losses incurred through September 30, 2011 are not indicative of future business interruption losses for insurance purposes or future expected profits for Revlon Venezuela.

In the third quarter of 2011, the Company received a $15 million interim advance from its insurance carrier in connection with the fire. During the third quarter and first nine months of 2011, the Company recognized $6.1 million and $11.0 million, respectively, of income from insurance recoveries, which entirely offset the impairment loss and business interruption losses noted above. The income from insurance recoveries is included within selling, general and administrative expenses in the Company’s Statements of Operations for the three and nine months ended September 30, 2011. The deferred balance of $4.0 million was recorded as deferred income, which is included in accrued expenses and other in the Company’s Consolidated Balance Sheet as of September 30, 2011.

An assessment of the extent of damage and the impact on the Company’s business in Venezuela is ongoing, and therefore the final amount and timing of the ultimate insurance recovery is currently unknown. See Note 14, “Subsequent Event,” to the Unaudited Consolidated Financial Statements in this Form 10-Q in regards to additional advance insurance proceeds received subsequent to September 30, 2011.

Impact of the March 2011 Disaster in Japan

The March 2011 disaster in Japan and its aftermath on the Company’s global supply chain and its operations in Japan did not have a material impact on the Company’s net sales, operating profit or global supply chain in the third quarter or first nine months of 2011. (See Item IA. “Risk Factors”). However, the Company continues to monitor any potential disruption to the business.

 

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REVLON, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

(all tabular amounts in millions, except share and per share amounts)

 

Overview of Financing Activities

Refinancing of the 2010 Term Loan and 2010 Revolving Credit Facilities: During the second quarter of 2011, Products Corporation consummated the refinancing of the 2010 Term Loan Facility and the 2010 Revolving Credit Facility (together referred to as the “2011 Refinancings”), reducing interest rates and extending maturities, consisting of the following transactions:

In May 2011, Products Corporation consummated a refinancing of the 2010 Term Loan Facility (the “2011 Term Loan Facility Refinancing”), which included replacing Products Corporation's 2010 bank term loan facility, which was scheduled to mature on March 11, 2015 and had $794.0 million aggregate principal amount outstanding at December 31, 2010 (the “2010 Term Loan Facility”), with a 6.5-year, $800.0 million term loan facility due November 19, 2017 (the “2011 Term Loan Facility”) under a third amended and restated term loan agreement dated May 19, 2011 (the “2011 Term Loan Agreement”), among Products Corporation, as borrower, Citigroup Global Markets Inc. (“CGMI”), J.P. Morgan Securities LLC (“JPM Securities”), Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch”), Credit Suisse Securities (USA) LLC (“Credit Suisse”) and Wells Fargo Securities, LLC (“WFS”) as the joint lead arrangers; CGMI, JPM Securities, Merrill Lynch, Credit Suisse, WFS and Natixis, New York Branch (“Natixis”), as joint bookrunners; JPMorgan Chase Bank, N.A. and Bank of America, N.A. as co-syndication agents; Credit Suisse, Wells Fargo Bank, N.A. and Natixis as co-documentation agents; and Citicorp USA, Inc. (“CUSA”) as administrative agent and collateral agent.

Products Corporation used $796 million of proceeds from the 2011 Term Loan Facility, which was drawn in full on the May 19, 2011 closing date and issued to lenders at 99.5% of par, to refinance in full the $792.0 million of outstanding indebtedness under its 2010 Term Loan Facility and to pay approximately $2 million of accrued interest. The Company incurred approximately $3.9 million of fees in connection with consummating the 2011 Term Loan Facility Refinancing in the first nine months of 2011, of which approximately $2 million was capitalized.

In June 2011, Products Corporation consummated a refinancing of the 2010 Revolving Credit Facility (the “2011 Revolving Credit Facility Refinancing”), which included refinancing Products Corporation’s 2010 revolving credit facility, which was scheduled to mature on March 11, 2014 and had nil outstanding borrowings at December 31, 2010 (the “2010 Revolving Credit Facility”), with a 5-year, $140.0 million asset-based, multi-currency revolving credit facility due June 16, 2016 (the “2011 Revolving Credit Facility”) under a third amended and restated revolving credit agreement dated June 16, 2011 (the “2011 Revolving Credit Agreement” and together with the 2011 Term Loan Agreement, the “2011 Credit Agreements”), among Products Corporation and certain of its foreign subsidiaries, as borrowers, and CGMI and Wells Fargo Capital Finance, LLC (“WFCF”) as the joint lead arrangers; CGMI, WFCF, Merrill Lynch, JPMorgan Securities and Credit Suisse as joint bookrunners; and CUSA as administrative agent and collateral agent.

Products Corporation incurred approximately $0.7 million of fees in connection with consummating the 2011 Revolving Credit Facility Refinancing in the first nine months of 2011, all of which were capitalized.

For further detail regarding the 2011 Refinancings, see Note 5, “Long-Term Debt and Redeemable Preferred Stock,” to the Unaudited Consolidated Financial Statements in this Form 10-Q.

Results of Operations

In the tables, all amounts are in millions and numbers in parentheses ( ) denote unfavorable variances.

Net sales:

Third quarter results

Consolidated net sales in the third quarter of 2011 were $337.2 million, an increase of $18.2 million, or 5.7%, compared to $319.0 million in the third quarter of 2010. Excluding the favorable impact of foreign

 

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Table of Contents

REVLON, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

(all tabular amounts in millions, except share and per share amounts)

 

currency fluctuations of $6.8 million, consolidated net sales increased by $11.4 million, or 3.6%, in the third quarter of 2011, primarily driven by the inclusion of the net sales of Sinful Colors in 2011, as well as higher net sales of Revlon color cosmetics and Revlon ColorSilk hair color, partially offset by lower net sales in Venezuela due to the June 2011 fire.

Year-to-date results

Consolidated net sales for the first nine months of 2011 were $1,021.6 million, an increase of $69.4 million, or 7.3%, compared to $952.2 million for the first nine months of 2010. Excluding the favorable impact of foreign currency fluctuations of $23.5 million, consolidated net sales increased by $45.9 million, or 4.8%, in the first nine months of 2011, primarily driven by higher net sales of Revlon color cosmetics, as well as the inclusion of the net sales of Sinful Colors beginning in March 2011, partially offset by lower net sales of other beauty care products.

 

$1,021.6 $1,021.6 $1,021.6 $1,021.6 $1,021.6 $1,021.6
     Three Months Ended      Change     XFX  Change(a)  
     September 30,               
         2011              2010          $     %     $     %  

United States

   $ 184.7       $ 166.7       $ 18.0        10.8   $ 18.0        10.8

Asia Pacific

     58.0         54.5         3.5        6.4        (1.3     (2.4

Europe, Middle East and Africa

     51.1         50.6         0.5        1.0        (1.4     (2.8

Latin America

     25.6         29.3         (3.7     (12.6     (2.8     (9.6

Canada

     17.8         17.9         (0.1     (0.6     (1.1     (6.1
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Net Sales

   $ 337.2       $ 319.0       $ 18.2        5.7   $ 11.4        3.6
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

$1,021.6 $1,021.6 $1,021.6 $1,021.6 $1,021.6 $1,021.6
     Nine Months Ended      Change     XFX  Change(a)  
     September 30,               
         2011              2010          $      %     $     %  

United States

   $ 565.8       $ 528.1       $ 37.7         7.1   $ 37.7        7.1

Asia Pacific

     169.6         149.1         20.5         13.7        7.0        4.7   

Europe, Middle East and Africa

     152.8         143.7         9.1         6.3                 

Latin America

     78.9         78.0         0.9         1.2        3.1        4.0   

Canada

     54.5         53.3         1.2         2.3        (1.9     (3.6
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total Net Sales

   $ 1,021.6       $ 952.2       $ 69.4         7.3   $ 45.9        4.8
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

(a) 

XFX excludes the impact of foreign currency fluctuations.

United States

Third quarter results

In the U.S., net sales in the third quarter of 2011 increased 10.8% to $184.7 million, compared to $166.7 million in the third quarter of 2010, primarily driven by the inclusion of the net sales of Sinful Colors in 2011, as well as higher net sales of Revlon color cosmetics and Revlon ColorSilk hair color. Excluding the results of the recently acquired Sinful Colors, net sales in the U.S. increased in the third quarter of 2011.

Year-to-date results

In the U.S, net sales in the first nine months of 2011 increased 7.1% to $565.8 million, compared to $528.1 million in the first nine months of 2010, primarily driven by the inclusion of the net sales of Sinful Colors

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

(all tabular amounts in millions, except share and per share amounts)

 

beginning in March 2011, as well as higher net sales of Revlon color cosmetics and Revlon ColorSilk hair color. Excluding the results of the recently acquired Sinful Colors, net sales in the U.S. increased in the first nine months of 2011.

Asia Pacific

Third quarter results

In Asia Pacific, net sales in the third quarter of 2011 increased 6.4% to $58.0 million, compared to $54.5 million in the third quarter of 2010. Excluding the favorable impact of foreign currency fluctuations, net sales decreased $1.3 million, or 2.4%, primarily driven by lower net sales of Revlon color cosmetics and other beauty care products. From a country perspective, net sales decreased in Japan and Australia (which together contributed 3.9 percentage points to the decrease in the region’s net sales in the third quarter of 2011, as compared to the third quarter of 2010), partially offset by an increase in net sales in China (which offset by 1.9 percentage points the decrease in the region’s net sales in the third quarter of 2011, as compared to the third quarter of 2010).

Year-to-date results

In Asia Pacific, net sales in the first nine months of 2011 increased 13.7% to $169.6 million, compared to $149.1 million in the first nine months of 2010. Excluding the favorable impact of foreign currency fluctuations, net sales increased $7.0 million, or 4.7%, primarily driven by higher net sales of Revlon color cosmetics and other beauty care products. From a country perspective, net sales increased in China and certain distributor markets (which together contributed 6.1 percentage points to the increase in the region’s net sales in the first nine months of 2011, as compared to the first nine months of 2010), partially offset by a decrease in net sales in Japan (which offset by 1.6 percentage points the increase in the region’s net sales in the first nine months of 2011, as compared to the first nine months of 2010).

Europe, Middle East and Africa

Third quarter results

In Europe, the Middle East and Africa, net sales in the third quarter of 2011 increased 1.0% to $51.1 million, compared to $50.6 million in the third quarter of 2010. Excluding the favorable impact of foreign currency fluctuations, net sales decreased $1.4 million, or 2.8%, primarily driven by lower net sales of fragrances. From a country perspective, net sales decreased in the U.K., France and certain distributor markets (which together contributed 3.8 percentage points to the decrease in the region’s net sales in the third quarter of 2011, as compared to the third quarter of 2010), partially offset by an increase in net sales in South Africa (which offset by 1.5 percentage points the decrease in the region’s net sales in the third quarter of 2011, as compared to the third quarter of 2010).

Year-to-date results

In Europe, the Middle East and Africa, net sales in the first nine months of 2011 increased 6.3% to $152.8 million, compared to $143.7 million in the first nine months of 2010. Excluding the favorable impact of foreign currency fluctuations, net sales remained essentially flat, primarily driven by higher net sales of Revlon color cosmetics, offset by lower net sales of other beauty care products. From a country perspective, net sales increased in South Africa (which contributed 1.6 percentage points to the increase in the region’s net sales in the first nine months of 2011, as compared to the first nine months of 2010), offset by a decrease in net sales in Italy, France and certain distributor markets (which together offset by 1.6 percentage points the increase in the region’s net sales in the first nine months of 2011, as compared to the first nine months of 2010).

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

(all tabular amounts in millions, except share and per share amounts)

 

Latin America

Third quarter results

In Latin America, net sales in the third quarter of 2011 decreased 12.6% to $25.6 million, compared to $29.3 million in the third quarter of 2010. Excluding the unfavorable impact of foreign currency fluctuations, net sales decreased $2.8 million, or 9.6%, primarily driven by lower net sales of other beauty care products and Revlon ColorSilk hair color, partially offset by higher net sales of Revlon color cosmetics. From a country perspective, net sales decreased in Venezuela (which contributed 16.8 percentage points to the decrease in the region’s net sales in the third quarter of 2011, as compared to the third quarter of 2010), partially offset by an increase in net sales in Argentina and Mexico (which together offset by 8.6 percentage points the decrease in the region’s net sales in the third quarter of 2011, as compared to the third quarter of 2010). Venezuela’s decline in net sales was primarily due to the loss of sales during the third quarter of 2011 as a result of the June 2011 fire at Revlon Venezuela’s facility. Revlon Venezuela resumed sales of imported goods on August 12, 2011; however the Company has not recorded any sales of locally manufactured goods in Venezuela since the fire in June 2011.

Year-to-date results

In Latin America, net sales in the first nine months of 2011 increased 1.2% to $78.9 million, compared to $78.0 million in the first nine months of 2010. Excluding the unfavorable impact of foreign currency fluctuations, net sales increased $3.1 million, or 4.0%, primarily driven by higher net sales of Revlon color cosmetics, partially offset by lower net sales of Revlon ColorSilk hair color. From a country perspective, net sales increased in Argentina, Mexico and Latin America Export (which together contributed 6.4 percentage points to the increase in the region’s net sales in the first nine months of 2011, as compared to the first nine months of 2010), partially offset by a decrease in net sales in Venezuela (which offset by 2.4 percentage points the increase in the region’s net sales in the first nine months of 2011, as compared to the first nine months of 2010). Venezuela’s decline in net sales was primarily due to the loss of sales in June through September 2011 as a result of the June 2011 fire at Revlon Venezuela’s facility referred to above.

Canada

Third quarter results

In Canada, net sales in the third quarter of 2011 decreased 0.6% to $17.8 million, compared to $17.9 million in the third quarter of 2010. Excluding the favorable impact of foreign currency fluctuations, net sales decreased $1.1 million, or 6.1%, primarily driven by lower net sales of Almay color cosmetics.

Year-to-date results

In Canada, net sales in the first nine months of 2011 increased 2.3% to $54.5 million, compared to $53.3 million in the first nine months of 2010. Excluding the favorable impact of foreign currency fluctuations, net sales decreased $1.9 million, or 3.6%, primarily driven by lower net sales of Almay color cosmetics.

Gross profit:

 

       Three Months  Ended
September 30,
             Nine Months  Ended
September 30,
       
       2011     2010     Change        2011     2010     Change  

Gross profit

     $ 214.1      $ 208.6      $ 5.5         $ 663.3      $ 626.1      $ 37.2   

Percentage of net sales

       63.5     65.4          64.9     65.8  

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

(all tabular amounts in millions, except share and per share amounts)

 

The 1.9 percentage point decrease in gross profit as a percentage of net sales for the third quarter of 2011, compared to the third quarter of 2010, was primarily due to:

 

   

higher allowances, which reduced gross profit as a percentage of net sales by 2.0 percentage points; and

 

   

the impact of product mix, which reduced gross profit as a percentage of net sales by 1.1 percentage points;

with the foregoing partially offset by:

 

   

lower costs related to inventory obsolescence and sales returns, which increased gross profit as a percentage of net sales by 0.8 percentage points; and

 

   

favorable foreign currency fluctuations, which increased gross profit as a percentage of net sales by 0.6 percentage points.

The 0.9 percentage point decrease in gross profit as a percentage of net sales for the first nine months of 2011, compared to the first nine months of 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 1.0 percentage points;

with the foregoing partially offset by:

 

   

favorable foreign currency fluctuations, which increased gross profit as a percentage of net sales by 0.7 percentage points;

 

   

lower costs related to inventory obsolescence and sales returns, which increased gross profit as a percentage of net sales by 0.3 percentage points; and

 

   

lower pension expenses within cost of goods, which increased gross profit as a percentage of net sales by 0.3 percentage points.

SG&A expenses:

 

       Three Months  Ended
September 30,
                Nine Months  Ended
September 30,
          
       2011        2010        Change        2011        2010        Change  

SG&A expenses

     $ 169.3         $ 169.3         $         $ 526.0         $ 494.1         $ (31.9

SG&A expenses remained flat for the third quarter of 2011, as compared to the third quarter of 2010, primarily driven by:

 

   

$10.5 million of higher general and administrative expenses primarily due to (i) an increase in the accrual for incentive compensation, (ii) the inclusion of operating expenses of Sinful Colors in 2011, (iii) higher severance and lease termination costs and (iv) higher professional fees; and

 

   

$3.4 million of unfavorable impact of foreign currency fluctuations;

with the foregoing partially offset by:

 

   

$8.6 million of lower advertising expenses primarily due to the timing of advertising campaigns in 2011 compared to 2010; and

 

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REVLON, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

(all tabular amounts in millions, except share and per share amounts)

 

   

$6.1 million of income from insurance recoveries related to the fire at Revlon Venezuela’s facility, which entirely offset the business interr