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, 2012

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   ¨  (Do not check if a smaller reporting company)    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, 2012, 49,231,798 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, 2012 (Unaudited) and December 31, 2011      1   
  

Unaudited Consolidated Statements of Operations and Comprehensive (Loss) Income for the Three and Nine Months Ended September 30, 2012 and 2011

     2   
  

Unaudited Consolidated Statement of Stockholders’ Deficiency for the Nine Months Ended September 30, 2012

     3   
  

Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011

     4   
   Notes to Unaudited Consolidated Financial Statements      5   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      33   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      50   
Item 4.    Controls and Procedures      51   
PART II – Other Information   
Item 1.    Legal Proceedings      57   
Item 1A.    Risk Factors      60   
Item 6.    Exhibits      60   
   Signatures      61   

 

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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,
2012
    December 31,
2011
 
     (Unaudited)        

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 45.2      $ 101.7   

Trade receivables, less allowance for doubtful accounts of $4.3 and $3.2 as of September 30, 2012 and December 31, 2011, respectively

     195.7        212.0   

Inventories

     143.4        111.0   

Deferred income taxes – current

     49.8        49.8   

Prepaid expenses and other

     56.1        44.2   
  

 

 

   

 

 

 

Total current assets

     490.2        518.7   

Property, plant and equipment, net

     99.9        98.9   

Deferred income taxes – noncurrent

     211.4        232.1   

Goodwill

     217.7        194.7   

Other assets

     164.4        112.7   
  

 

 

   

 

 

 

Total assets

   $ 1,183.6      $ 1,157.1   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY

    

Current liabilities:

    

Short-term borrowings

   $ 8.3      $ 5.9   

Current portion of long-term debt

     8.0        8.0   

Accounts payable

     102.7        89.8   

Accrued expenses and other

     266.5        231.7   
  

 

 

   

 

 

 

Total current liabilities

     385.5        335.4   

Long-term debt

     1,160.8        1,107.0   

Long-term debt – affiliates

     —          58.4   

Redeemable preferred stock

     48.3        48.4   

Long-term pension and other post-retirement plan liabilities

     216.6        245.5   

Other long-term liabilities

     53.1        55.3   

Commitments and contingencies

    

Stockholders’ deficiency:

    

Class A Common Stock, par value $0.01 per share; 900,000,000 shares authorized; 49,986,651 shares issued as of September 30, 2012 and December 31, 2011

     0.5        0.5   

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, 2012 and December 31, 2011

     —          —     

Additional paid-in capital

     1,015.1        1,014.1   

Treasury stock, at cost: 754,853 and 671,271 shares of Class A Common Stock as of September 30, 2012 and December 31, 2011, respectively

     (9.8     (8.6

Accumulated deficit

     (1,493.4     (1,498.0

Accumulated other comprehensive loss

     (193.1     (200.9
  

 

 

   

 

 

 

Total stockholders’ deficiency

     (680.7     (692.9
  

 

 

   

 

 

 

Total liabilities and stockholders’ deficiency

   $ 1,183.6      $ 1,157.1   
  

 

 

   

 

 

 

See Accompanying Notes to Unaudited Consolidated Financial Statements

 

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Table of Contents

REVLON, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE (LOSS) INCOME

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012      2011  

Net sales

   $ 347.0      $ 337.2      $ 1,034.8       $ 1,021.6   

Cost of sales

     127.0        123.1        367.1         358.3   
  

 

 

   

 

 

   

 

 

    

 

 

 

Gross profit

     220.0        214.1        667.7         663.3   

Selling, general and administrative expenses

     179.9        169.3        540.5         526.0   

Restructuring charges

     21.0        —          21.0         —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Operating income

     19.1        44.8        106.2         137.3   
  

 

 

   

 

 

   

 

 

    

 

 

 

Other expenses, net:

         

Interest expense

     19.9        20.4        59.5         64.7   

Interest expense – preferred stock dividends

     1.6        1.6        4.8         4.8   

Amortization of debt issuance costs

     1.3        1.3        3.9         4.1   

Loss on early extinguishment of debt, net

     —          —          —           11.3   

Foreign currency (gains) losses, net

     (0.1     (0.9     2.0         2.4   

Miscellaneous, net

     (0.1     0.2        0.2         1.2   
  

 

 

   

 

 

   

 

 

    

 

 

 

Other expenses, net

     22.6        22.6        70.4         88.5   
  

 

 

   

 

 

   

 

 

    

 

 

 

(Loss) income from continuing operations before income taxes

     (3.5     22.2        35.8         48.8   

Provision for income taxes

     11.5        22.1        31.6         32.4   
  

 

 

   

 

 

   

 

 

    

 

 

 

(Loss) income from continuing operations, net of taxes

     (15.0     0.1        4.2         16.4   

Income from discontinued operations, net of taxes

     —          —          0.4         0.6   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net (loss) income

   $ (15.0   $ 0.1      $ 4.6       $ 17.0   
  

 

 

   

 

 

   

 

 

    

 

 

 

Other comprehensive (loss) income:

         

Currency translation adjustment, net of tax of $(0.7) and nil for the three months ended September 30, 2012 and 2011, respectively, and $0.7 and nil for the nine months ended September 30, 2012 and 2011, respectively

     (1.9     (8.9     0.3         (8.7

Amortization of pension related costs, net of tax of $(0.2) and $(0.5) for the three months ended September 30, 2012 and 2011, respectively, and $(0.7) and $(1.5) for the nine months ended September 30, 2012 and 2011, respectively

     1.8        0.9        7.5         2.7   
  

 

 

   

 

 

   

 

 

    

 

 

 

Other comprehensive (loss) income

     (0.1     (8.0     7.8         (6.0
  

 

 

   

 

 

   

 

 

    

 

 

 

Total comprehensive (loss) income

   $ (15.1   $ (7.9   $ 12.4       $ 11.0   
  

 

 

   

 

 

   

 

 

    

 

 

 

Basic (loss) income per common share:

         

Continuing operations

     (0.29     —          0.08         0.31   

Discontinued operations

     —          —          0.01         0.01   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net (loss) income

   $ (0.29   $ —        $ 0.09       $ 0.32   
  

 

 

   

 

 

   

 

 

    

 

 

 

Diluted (loss) income per common share:

         

Continuing operations

     (0.29     —          0.08         0.31   

Discontinued operations

     —          —          0.01         0.01   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net (loss) income

   $ (0.29   $ —        $ 0.09       $ 0.32   
  

 

 

   

 

 

   

 

 

    

 

 

 

Weighted average number of common shares outstanding:

         

Basic

     52,356,641        52,182,848        52,345,895         52,170,839   
  

 

 

   

 

 

   

 

 

    

 

 

 

Diluted

     52,356,641        52,345,857        52,356,911         52,319,654   
  

 

 

   

 

 

   

 

 

    

 

 

 

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

(dollars in millions)

 

     Common
Stock
     Additional
Paid-In-Capital
     Treasury
Stock
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Loss
    Total
Stockholders’
Deficiency
 

Balance, January 1, 2012

   $ 0.5       $ 1,014.1       $ (8.6   $ (1,498.0   $ (200.9   $ (692.9

Treasury stock acquired, at cost(a)

           (1.2         (1.2

Stock-based compensation amortization

        0.3               0.3   

Excess tax benefits from stock-based compensation

        0.7               0.7   

Net income

             4.6          4.6   

Other comprehensive income(b)

               7.8        7.8   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2012

   $ 0.5       $ 1,015.1       $ (9.8   $ (1,493.4   $ (193.1   $ (680.7
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

Pursuant to the share withholding provisions of the Third Amended and Restated Revlon, Inc. Stock Plan (the “Stock Plan”), certain employees, in lieu of paying withholding taxes on the vesting of certain restricted stock, authorized the withholding of an aggregate of 83,582 shares of Revlon, Inc. Class A Common Stock during the first nine months of 2012 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 $14.20, 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 $1.2 million.

(b)

See Note 9, “Accumulated Other Comprehensive Loss,” in this Form 10-Q regarding the changes in the accumulated balances for each component of accumulated other comprehensive loss during the first nine months of 2012.

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,
 
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 4.6      $ 17.0   

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

    

Income from discontinued operations, net of taxes

     (0.4     (0.6

Depreciation and amortization

     48.4        45.3   

Amortization of debt discount

     1.6        2.0   

Stock compensation amortization

     0.3        1.7   

Provision for deferred income taxes

     22.8        17.1   

Loss on early extinguishment of debt, net

     —          11.3   

Amortization of debt issuance costs

     3.9        4.1   

Loss on sale of certain assets

     0.2        —     

Pension and other post-retirement expense

     4.1        3.9   

Change in assets and liabilities:

    

Decrease in trade receivables

     16.5        8.1   

Increase in inventories

     (32.6     (29.4

Increase in prepaid expenses and other current assets

     (13.2     (4.0

Increase in accounts payable

     2.3        2.0   

Increase in accrued expenses and other current liabilities

     35.3        2.4   

Pension and other post-retirement plan contributions

     (26.8     (28.7

Purchases of permanent displays

     (31.2     (28.2

Other, net

     (17.9     (3.8
  

 

 

   

 

 

 

Net cash provided by operating activities

     17.9        20.2   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Capital expenditures

     (14.8     (9.6

Business acquisition

     (66.2     (39.0

Proceeds from the sale of certain assets

     0.6        0.2   
  

 

 

   

 

 

 

Net cash used in investing activities

     (80.4     (48.4
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net increase in short-term borrowings and overdraft

     12.5        10.0   

Repayments under the 2010 Term Loan Facility

     —          (794.0

Borrowings under the 2011 Term Loan Facility

     —          796.0   

Repayments under the 2011 Term Loan Facility

     (6.0     (2.0

Payment of financing costs

     (0.1     (4.2

Other financing activities

     (0.7     (1.2
  

 

 

   

 

 

 

Net cash provided by financing activities

     5.7        4.6   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     0.3        (3.2
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (56.5     (26.8

Cash and cash equivalents at beginning of period

     101.7        76.7   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 45.2      $ 49.9   
  

 

 

   

 

 

 

Supplemental schedule of cash flow information:

    

Cash paid during the period for:

    

Interest

   $ 57.5      $ 66.4   

Preferred stock dividends

     4.6        4.6   

Income taxes, net of refunds

     13.8        14.0   

Supplemental schedule of non-cash investing and financing activities:

    

Treasury stock received to satisfy minimum tax withholding liabilities

   $ 1.2      $ 1.4   

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, trade support costs, 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, 2011, filed with the Securities and Exchange Commission (the “SEC”) on February 16, 2012 (the “2011 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. For the years ended December 31, 2011 and 2010, the Company’s subsidiary in Venezuela (“Revlon Venezuela”) had net sales of approximately 2% and 3%, respectively, of the Company’s consolidated net sales. At December 31, 2011 and

 

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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)

 

2010, total assets of Revlon Venezuela were approximately 2% and 3%, respectively, of the Company’s total assets. Prior to the fire, approximately 50% of Revlon Venezuela’s net sales were comprised of products imported from the Company’s Oxford, North Carolina facility and approximately 50% were comprised of products locally manufactured at the Revlon Venezuela facility. Revlon Venezuela did not have any net sales from the date of the fire until August 12, 2011. The Company’s net sales in Venezuela since August 12, 2011 have been primarily comprised of products imported from the Company’s Oxford, North Carolina facility. In the first quarter of 2012, Revlon Venezuela also began importing certain products from third party manufacturers outside of Venezuela, which were locally manufactured at the Revlon Venezuela facility prior to the fire.

The Company maintains comprehensive property insurance, as well as business interruption insurance. Business interruption insurance is intended to reimburse for lost profits and other costs incurred, which are attributable to the loss, during the loss period, subject to the terms and conditions of the applicable policies.

For the third quarter and first nine months of 2012, the Company incurred business interruption losses of $1.7 million and $2.8 million, respectively, related to the fire. In the second quarter of 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 the nine months ended September 30, 2012 and 2011 include estimated profits lost as a result of the interruption of Revlon Venezuela’s business and costs incurred directly related to the fire. The business interruption losses incurred through September 30, 2012 are not indicative of future business interruption losses for insurance purposes or future expected profits for Revlon Venezuela. The Company’s insurance coverage provides for business interruption losses to be reimbursed, subject to the terms and conditions of such policy, for a period of time, which period for the coverage related to the Venezuela fire ended on October 2, 2012.

During the third quarter and first nine months of 2012, the Company received interim advances of $1.5 million and $4.5 million, respectively, from its insurance carrier in connection with the fire, for total cumulative receipts of $24.2 million received from the date of the fire through September 30, 2012. During the third quarter and first nine months of 2012, the Company recognized $1.7 million and $2.8 million, respectively, of income from insurance recoveries, which entirely offset the business interruption losses noted above. 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 (“SG&A”) expenses in the Company’s Statements of Operations and Comprehensive (Loss) Income for the three and nine months ended September 30, 2012 and 2011. The Company recorded deferred income related to the insurance proceeds received, but not yet recognized, of $6.8 million and $5.1 million as of September 30, 2012 and December 31, 2011, respectively, which is included in accrued expenses and other in the Company’s Consolidated Balance Sheets.

For insurance purposes, an assessment of the extent of damage resulting from the fire and the impact on Revlon Venezuela’s business is ongoing, and therefore the final amount and timing of the ultimate insurance recovery is currently unknown.

Recently Adopted 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

 

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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)

 

Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”),” which amends Accounting Standards Codification (“ASC”) 820, “Fair Value Measurement.” ASU No. 2011-04 modifies ASC 820 to include disclosure of all transfers between Level 1 and Level 2 asset and liability fair value categories. In addition, ASU No. 2011-04 provides guidance on measuring the fair value of financial instruments managed within a portfolio and the application of premiums and discounts on fair value measurements. ASU No. 2011-04 requires additional disclosure for Level 3 measurements regarding the sensitivity of fair value to changes in unobservable inputs and any interrelationships between those inputs. The Company adopted ASU No. 2011-04 beginning January 1, 2012 and such adoption did not have a material impact on the Company’s results of operations, financial condition or disclosures.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.” ASU No. 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in equity. Under ASU No. 2011-05, an entity can elect to present items of net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. In addition, in December 2011, the FASB issued ASU No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” ASU No. 2011-12 defers the requirement to present components of reclassifications of comprehensive income by income statement line item on the statement of comprehensive income, with all other requirements of ASU No. 2011-05 unaffected. The Company adopted ASU No. 2011-05 and ASU No. 2011-12 beginning January 1, 2012 and has elected to present items of net income and other comprehensive income in one continuous statement.

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 2012 and 2011 are as follows:

 

     Pension Plans     Other
Post-retirement
Benefit Plans
 
     Three Months Ended
September 30,
    Three Months Ended
September 30,
 
         2012             2011             2012              2011      

Net periodic benefit costs:

  

Service cost

   $ 0.4      $ 0.4      $ —         $ —     

Interest cost

     7.5        8.1        0.1         0.2   

Expected return on plan assets

     (8.8     (8.7     —           —     

Amortization of actuarial loss

     2.0        1.3        0.1         —     
  

 

 

   

 

 

   

 

 

    

 

 

 
     1.1        1.1        0.2         0.2   

Portion allocated to Revlon Holdings LLC

     —          (0.1     —           —     
  

 

 

   

 

 

   

 

 

    

 

 

 
   $ 1.1      $ 1.0      $ 0.2       $ 0.2   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

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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)

 

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 2012 and 2011 are as follows:

 

     Pension Plans     Other
Post-retirement
Benefit Plans
 
     Nine Months Ended
September 30,
    Nine Months Ended
September 30,
 
         2012             2011             2012              2011      

Net periodic benefit costs:

  

Service cost

   $ 1.2      $ 1.0      $ —         $ —     

Interest cost

     22.5        24.3        0.5         0.6   

Expected return on plan assets

     (26.4     (26.2     —           —     

Amortization of actuarial loss

     6.1        4.0        0.2         0.2   
  

 

 

   

 

 

   

 

 

    

 

 

 
     3.4        3.1        0.7         0.8   

Portion allocated to Revlon Holdings LLC

     (0.1     (0.1     —           —     
  

 

 

   

 

 

   

 

 

    

 

 

 
   $ 3.3      $ 3.0      $ 0.7       $ 0.8   
  

 

 

   

 

 

   

 

 

    

 

 

 

In the three and nine months ended September 30, 2012, compared to the three and nine months ended September 30, 2011, the Company recognized slightly higher net periodic benefit costs primarily due to the decrease in the weighted-average discount rate, partially offset by the increase in the fair value of pension plan assets at December 31, 2011. 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 2012, comparable to the $5 million cost in 2011.

During the third quarter of 2012, $7.2 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 2012, $26.2 million and $0.6 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 for all of 2012.

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 2011 Form 10-K.

3. BUSINESS ACQUISITION

On July 2, 2012, the Company acquired certain assets of Bari Cosmetics, Ltd., including trademarks and other intellectual property related to Pure Ice nail enamel and Bon Bons cosmetics brands (the “Pure Ice Acquisition”). The Company paid $66.2 million of total consideration for the Pure Ice Acquisition in cash, comprised of $45.0 million cash on hand and $21.2 million drawn under Products Corporation’s 2011 Revolving Credit Facility. The results of operations related to the Pure Ice Acquisition are included in the Company’s consolidated financial statements commencing on the date of acquisition. Pro forma results of operations have not been presented, as the impact on the Company’s consolidated financial results would not have been material. As of September 30, 2012, there were no outstanding borrowings under Products Corporation’s 2011 Revolving Credit Facility (excluding $10.4 million of outstanding undrawn letters of credit).

 

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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)

 

The Company accounted for the Pure Ice Acquisition as a business combination during the third quarter of 2012 and, accordingly, the total consideration of $66.2 million has been recorded on a preliminary basis based on the respective estimated fair values of the net assets acquired at July 2, 2012 as follows:

 

Intangible assets

   $ 43.1   

Goodwill

     23.1   
  

 

 

 

Total consideration

   $ 66.2   
  

 

 

 

Goodwill of $23.1 million represents the excess of cost over the fair value of intangible assets acquired. Factors contributing to the purchase price resulting in the recognition of goodwill include the strength of the Pure Ice brand in key retailers in the U.S. Both the intangible assets acquired and goodwill are expected to be deductible for income tax purposes. The intangible assets acquired by major asset category are as follows:

 

    Fair Values at
July 2, 2012
    Weighted Average
Useful Life

(in years)
 

Customer Relationship

  $ 33.3        19   

Trademarks and Trade Names

    9.8        10   
 

 

 

   

Total

  $ 43.1     
 

 

 

   

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

4. RESTRUCTURING CHARGES

During the third quarter of 2012, the Company recorded charges totaling $24.1 million related to the restructuring that the Company announced in September 2012 (the “September 2012 Program”), which primarily involved the Company exiting its owned manufacturing facility in France and its leased manufacturing facility in Maryland; rightsizing its organizations in France and Italy; and realigning its operations in Latin America, including consolidating Latin America and Canada into a single operating region, which will be effective in the fourth quarter of 2012. Certain of the actions are subject to consultations with employees, works councils or unions, and government authorities. Of the $24.1 million charge: (a) $21.0 million is recorded in restructuring charges; (b) $1.6 million is recorded as a reduction to net sales; (c) $1.1 million is recorded in cost of goods sold; and (d) $0.4 million is recorded in SG&A expenses.

The Company expects to recognize approximately $1.0 million in additional charges for a total of approximately $25 million in charges related to the September 2012 Program. Of the total expected charge of $25 million, approximately $23 million will be cash that is expected to be paid over the next eighteen months.

Details of the activities described above during the first nine months of 2012 are as follows:

 

    Balance
as of
January 1,
2012
    Expenses
(Income),
Net
    Utilized, Net     Balance
as of
September 30,
2012
 
      Cash     Noncash    

Employee severance and other personnel benefits:

         

September 2012 Program

  $ —        $ 19.6      $ (0.1   $ —        $ 19.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other:

         

September 2012 Program

    —          1.4        (0.5     —          0.9   

Other Programs

    1.0        —          (0.5     —          0.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total restructuring charges

  $ 1.0      $ 21.0      $ (1.1   $ —        $ 20.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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)

 

5. INVENTORIES

 

     September 30,
2012
     December 31,
2011
 

Raw materials and supplies

   $ 48.3       $ 37.9   

Work-in-process

     12.0         8.1   

Finished goods

     83.1         65.0   
  

 

 

    

 

 

 
   $ 143.4       $ 111.0   
  

 

 

    

 

 

 

6. ACCRUED EXPENSES AND OTHER

 

     September 30,
2012
     December 31,
2011
 

Sales returns and allowances

   $ 73.3       $ 85.4   

Advertising and promotional costs

     42.6         32.2   

Compensation and related benefits

     51.3         52.0   

Restructuring charges

     20.9         0.6   

Interest

     17.0         16.5   

Taxes

     14.6         15.6   

Other

     46.8         29.4   
  

 

 

    

 

 

 
   $ 266.5       $ 231.7   
  

 

 

    

 

 

 

7. LONG-TERM DEBT AND REDEEMABLE PREFERRED STOCK

 

     September 30,
2012
    December 31,
2011
 

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

   $ 782.6      $ 787.6   

2011 Revolving Credit Facility due 2016 (a

     —          —     

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

     327.8        327.4   

Amended and Restated Senior Subordinated Term Loan due 2014 (c)

     58.4        —     

Senior Subordinated Term Loan due 2014 (c

     —          58.4   
  

 

 

   

 

 

 
     1,168.8        1,173.4   

Less current portion

     (8.0     (8.0
  

 

 

   

 

 

 
     1,160.8        1,165.4   
  

 

 

   

 

 

 

Redeemable Preferred Stock (d

     48.3        48.4   
  

 

 

   

 

 

 
   $ 1,209.1      $ 1,213.8   
  

 

 

   

 

 

 

 

(a) 

During the second quarter of 2011, Products Corporation consummated the refinancing of (i) its 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”), and (ii) its revolving credit facility, which was scheduled to mature on March 11, 2014 and had nil outstanding borrowings at December 31, 2010, 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

 

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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)

 

  agreement dated June 16, 2011 (the “2011 Revolving Credit Agreement” and together with the 2011 Term Loan Agreement, the “2011 Credit Agreements”). See Note 9, “Long-Term Debt and Redeemable Preferred Stock,” to the Consolidated Financial Statements in Revlon, Inc.’s 2011 Form 10-K for certain details regarding Products Corporation’s 2011 Credit Agreements.
(b) 

See Note 9, “Long-Term Debt and Redeemable Preferred Stock,” to the Consolidated Financial Statements in Revlon, Inc.’s 2011 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”).

(c) 

On April 30, 2012, MacAndrews & Forbes exercised its right to assign its interest in the Non-Contributed Loan (as hereinafter defined) to various third parties. In connection with such assignment, Products Corporation entered into an Amended and Restated Senior Subordinated Term Loan Agreement with MacAndrews & Forbes to: (1) modify the interest rate on the Non-Contributed Loan from its prior 12% fixed rate to a floating rate of LIBOR plus 7%, with a 1.5% LIBOR floor, resulting in an interest rate of approximately 8.5% per annum (or a 3.5% reduction per annum) upon the effectiveness of the Amended and Restated Senior Subordinated Term Loan Agreement; (2) insert certain prepayment premiums; and (3) designate Citibank, N.A. as the administrative agent for the Non-Contributed Loan. Refer to “Recent Debt Transactions” below for further discussion.

(d) 

See Note 9, “Long-Term Debt and Redeemable Preferred Stock,” to the Consolidated Financial Statements in Revlon, Inc.’s 2011 Form 10-K for certain details regarding Revlon, Inc.’s redeemable Preferred Stock (as hereinafter defined) and Note 11, “Fair Value Measurements” in this Form 10-Q, regarding the Change of Control Amount (as hereinafter defined) related to Revlon, Inc.’s Preferred Stock.

Recent Debt Transactions

Products Corporation is party to the Senior Subordinated Term Loan Agreement, consisting of (i) the $58.4 million principal amount of the $107.0 million aggregate principal amount of the Senior Subordinated Term Loan (the “Non-Contributed Loan”) which, at December 31, 2011, remained owing from Products Corporation to MacAndrews & Forbes, and which matures on October 8, 2014, and (ii) the $48.6 million of the $107.0 million aggregate principal amount of the Senior Subordinated Term Loan that MacAndrews & Forbes contributed to Revlon, Inc. in connection with the October 2009 consummation of Revlon, Inc.’s exchange offer (the “Contributed Loan”), which remains due from Products Corporation to Revlon, Inc. and which matures on October 8, 2013.

On April 30, 2012, MacAndrews & Forbes exercised its right to assign its interest in the Non-Contributed Loan. In connection with such assignment, Products Corporation entered into an Amended and Restated Senior Subordinated Term Loan Agreement with MacAndrews & Forbes (the “Amended and Restated Senior Subordinated Term Loan Agreement”), and a related Administrative Letter was entered into with Citibank, N.A. and MacAndrews & Forbes, to among other things:

 

   

modify the interest rate on the Non-Contributed Loan from its prior 12% fixed rate to a floating rate of LIBOR plus 7%, with a 1.5% LIBOR floor, resulting in an interest rate of approximately 8.5% per annum (or a 3.5% reduction per annum) upon the effectiveness of the Amended and Restated Senior Subordinated Term Loan Agreement. Interest under the Amended and Restated Senior Subordinated Term Loan Agreement is payable quarterly in arrears in cash;

 

   

insert prepayment premiums such that Products Corporation may optionally prepay the Non-Contributed Loan (i) through October 31, 2013 with a prepayment premium based on a formula designed to provide the assignees of the Non-Contributed Loan with the present value, using a discount rate of 75 basis points over U.S. Treasuries, of the principal, premium and interest that would have accrued on the Non-Contributed Loan from any such prepayment date through October 31, 2013

 

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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)

 

 

(provided that, pursuant to the loan’s terms (both before and after giving effect to these amendments), no portion of the principal amount of the Non-Contributed Loan may be repaid prior to its October 8, 2014 maturity date unless and until all shares of Revlon, Inc.’s Series A Preferred Stock have been or are being concurrently redeemed and all payments due thereon are paid in full or are concurrently being paid in full), (ii) from November 1, 2013 through April 30, 2014 with a 2% prepayment premium on the aggregate principal amount of the Non-Contributed Loan being prepaid, and (iii) from May 1, 2014 through maturity on October 8, 2014 with no prepayment premium; and

 

   

designate Citibank, N.A. as the administrative agent for the Non-Contributed Loan.

Concurrently with the effectiveness of the Amended and Restated Senior Subordinated Term Loan Agreement, MacAndrews & Forbes assigned its entire interest in the Non-Contributed Loan to several third parties.

Covenants

Products Corporation was in compliance with all applicable covenants under the 2011 Term Loan Agreement and 2011 Revolving Credit Agreement as of September 30, 2012. At September 30, 2012, the aggregate principal amount outstanding under the 2011 Term Loan Facility was $790.0 million and availability under the $140.0 million 2011 Revolving Credit Facility, based upon the calculated borrowing base less $10.4 million of outstanding undrawn letters of credit and nil then drawn on the 2011 Revolving Credit Facility, was $126.4 million. (See also Note 3, “Business Acquisition”).

8. BASIC AND DILUTED (LOSS) EARNINGS PER COMMON SHARE

Shares used in basic (loss) earnings per share are computed using the weighted average number of common shares outstanding during each period. Shares used in diluted (loss) 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, 2012 and 2011, 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 (loss) earnings per share in the future were excluded from the calculation of diluted (loss) earnings per common share as their effect would be anti-dilutive, as in each case their exercise price was in excess of the NYSE closing price of the Class A Common Stock at all times during these periods.

For the three months ended September 30, 2012 and 2011, 121 and 97,799 weighted average shares, respectively, of unvested restricted stock that could potentially dilute basic (loss) earnings per share in the future were excluded from the calculation of diluted (loss) earnings per common share as their effect would be anti-dilutive. For the nine months ended September 30, 2012 and 2011, 4,465 and 136,286 weighted average shares, respectively, of unvested restricted stock that could potentially dilute basic (loss) earnings per share in the future were excluded from the calculation of diluted (loss) earnings per common share as their effect would be anti-dilutive.

 

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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)

 

The components of basic and diluted (loss) earnings per share for the three and nine months ended September 30, 2012 and 2011 are as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2012     2011      2012      2011  

Numerator:

  

(Loss) Income from continuing operations

   $ (15.0   $ 0.1       $ 4.2       $ 16.4   

Income from discontinued operations

     —          —           0.4         0.6   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net income

   $ (15.0   $ 0.1       $ 4.6       $ 17.0   
  

 

 

   

 

 

    

 

 

    

 

 

 

Denominator:

          

Weighted average common shares outstanding – Basic

     52,356,641        52,182,848         52,345,895         52,170,839   

Effect of dilutive restricted stock

     —          163,009         11,016         148,815   
  

 

 

   

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding – Diluted

     52,356,641        52,345,857         52,356,911         52,319,654   
  

 

 

   

 

 

    

 

 

    

 

 

 

Basic (loss) earnings per share:

          

Continuing operations

   $ (0.29   $ —         $ 0.08       $ 0.31   

Discontinued operations

     —          —           0.01         0.01   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net (loss) income

   $ (0.29   $ —         $ 0.09       $ 0.32   
  

 

 

   

 

 

    

 

 

    

 

 

 

Diluted (loss) earnings per share:

          

Continuing operations

   $ (0.29   $ —         $ 0.08       $ 0.31   

Discontinued operations

     —          —           0.01         0.01   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net (loss) income

   $ (0.29   $ —         $ 0.09       $ 0.32   
  

 

 

   

 

 

    

 

 

    

 

 

 

9. ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss as of September 30, 2012 are as follows:

 

     Foreign
Currency
Translation
     Actuarial
(Loss) Gain

on Post-
retirement
Benefits
    Prior Service
Cost on Post-
retirement
Benefits
    Accumulated
Other
Comprehensive
Loss
 

Balance January 1, 2012

   $ 24.8       $ (225.6   $ (0.1   $ (200.9

Currency translation adjustment, net of tax of $0.7

     0.3         —          —          0.3   

Amortization of pension related costs, net of tax of $(0.7) (a) 

     —           7.5        —          7.5   
  

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive income

     0.3         7.5        —          7.8   
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance September 30, 2012

   $ 25.1       $ (218.1   $ (0.1   $ $(193.1
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(a) 

The amounts represent the change in accumulated other comprehensive loss as a result of the amortization of actuarial losses during the first nine months of 2012 related to the Company’s pension and other post-retirement benefit plans. Also included in this amount is a $2.0 million reclassification adjustment recorded in the first quarter of 2012 related to deferred taxes on the amortization of actuarial losses.

 

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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)

 

10. GEOGRAPHIC, FINANCIAL AND OTHER INFORMATION

The Company manages its business on the basis of one reportable operating segment. As of September 30, 2012, 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.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

Geographic area:

              

Net sales:

                    

United States

   $ 192.0         55   $ 184.7         55   $ 580.6         56   $ 565.8         55

Outside of the United States

     155.0         45     152.5         45     454.2         44     455.8         45
  

 

 

      

 

 

      

 

 

      

 

 

    
   $ 347.0         $ 337.2         $ 1,034.8         $ 1,021.6      
  

 

 

      

 

 

      

 

 

      

 

 

    

 

     September 30,
2012
    December 31,
2011
 

Long-lived assets, net:

          

United States

   $ 433.1         90   $ 357.8         88

Outside of the United States

     48.9         10 %      48.5         12 % 
  

 

 

      

 

 

    
   $ 482.0         $ 406.3      
  

 

 

      

 

 

    

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

Classes of similar products:

                    

Net sales:

                    

Color cosmetics

   $ 225.0         65   $ 206.8         61   $ 680.0         66   $ 649.1         64

Beauty care and fragrance

     122.0         35     130.4         39     354.8         34     372.5         36
  

 

 

      

 

 

      

 

 

      

 

 

    
   $ 347.0         $ 337.2         $ 1,034.8         $ 1,021.6      
  

 

 

      

 

 

      

 

 

      

 

 

    

11. 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.

 

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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 September 30, 2012, the fair values of the Company’s financial assets and liabilities that are required to be measured at fair value, namely its foreign currency forward exchange contracts (“FX Contracts”) are categorized in the table below:

 

     Total      Level 1      Level 2      Level 3  

Assets:

           

Derivatives:

           

FX Contracts(a)

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivatives:

           

FX Contracts(a)

   $ 0.9       $ —         $ 0.9       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ 0.9       $ —         $ 0.9       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2011, the fair values of the Company’s financial assets and liabilities that are required to be measured at fair value, namely its FX Contracts and the Change of Control Amount (as hereinafter defined) associated with 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)

   $ 0.2       $ —         $ 0.2       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 0.2       $ —         $ 0.2       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Derivatives:

           

FX Contracts(a)

   $ 0.8       $ —         $ 0.8       $ —     

Change of Control Amount (Preferred Stock)(b)

     0.2         —           —           0.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ 1.0       $ —         $ 0.8       $ 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, 2012 and December 31, 2011. (See Note 12, “Financial Instruments,” in this Form 10-Q).

(b) 

In October 2009, Revlon, Inc. consummated its voluntary exchange offer (as amended, the “2009 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 2009 Exchange Offer. Upon consummation of the 2009 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 2009 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 Contributed Loan portion of the Senior Subordinated Term Loan

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

 

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 the Preferred Stock, which was 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 2009 Exchange Offer. As of October 8, 2012, holders of the Preferred Stock are no longer entitled to receive the Change of Control Amount as three years have passed without the occurrence of a change of control transaction. Accordingly, the Company reversed the liability for the Change of Control Amount of $0.2 million which was included as income in miscellaneous, net in the Company’s Statements of Operations and Comprehensive (Loss) Income for the three and nine months ended September 30, 2012.

As of September 30, 2012, the fair values of the Company’s financial liabilities not measured at fair value but for which disclosure of fair value is required, namely its long-term debt, including the current portion of long-term debt, and Preferred Stock, are categorized in the table below:

 

     Total      Level 1      Level 2      Level 3  

Liabilities:

           

Long-term debt, including current portion

   $ 1,194.0       $ —         $ 1,194.0       $ —     

Preferred Stock

     49.3         —           49.3         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ 1,243.3       $ —         $ 1,243.3       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of the Company’s long-term 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, 2012 was approximately $1,243.3 million, which was more than the carrying value of such debt and Preferred Stock at September 30, 2012 of $1,217.1 million. The estimated fair value of such debt and Preferred Stock at December 31, 2011 was approximately $1,240.6 million, which was more than the carrying value of such debt and Preferred Stock at December 31, 2011 of $1,221.8 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.

 

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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)

 

12. FINANCIAL INSTRUMENTS

Products Corporation maintains standby and trade letters of credit for various corporate purposes under which Products Corporation is obligated, of which $10.4 million and $11.1 million (including amounts available under credit agreements in effect at that time) were maintained at September 30, 2012 and December 31, 2011, respectively. Included in these amounts is approximately $8.7 million and $9.1 million at September 30, 2012 and December 31, 2011, respectively, 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 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.

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, 2012 and December 31, 2011 was $47.3 million and $58.4 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.

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:

 

     Assets      Liabilities  
     Balance Sheet
Classification
   September 30,
2012

Fair Value
     December 31,
2011

Fair Value
     Balance Sheet
Classification
   September 30,
2012

Fair Value
     December 31,
2011

Fair Value
 

Derivatives not designated as hedging instruments:

                 

FX Contracts (a)

   Prepaid expenses
and other
   $ —         $ 0.2       Accrued
expenses
   $ 0.9       $ 0.8   

 

(a) 

The fair values of the FX Contracts at September 30, 2012 and December 31, 2011 were determined by using observable market transactions of spot and forward rates at September 30, 2012 and December 31, 2011, respectively.

 

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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)

 

(b) Effects of Derivative Financial Instruments on income for the three and nine months ended September 30, 2012 and 2011:

 

     Amount of Gain (Loss) Recognized in Foreign
Currency (Gains) Losses, Net
 
     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2012     2011      2012     2011  

Derivatives not designated as hedging instruments:

  

FX Contracts

   $ (0.9   $ 2.3       $ (2.0   $ 0.5   

13. 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., nondeductible expenses and 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 2012 and 2011, the Company recorded a provision for income taxes for continuing operations of $11.5 million and $22.1 million, respectively. The $10.6 million decrease in the provision for income taxes was primarily attributable to decreased pre-tax income and the absence of various discrete items that in the aggregate negatively affected the provision for income taxes in the third quarter of 2011 and did not recur in the third quarter of 2012.

For the first nine months of 2012 and 2011, the Company recorded a provision for income taxes for continuing operations of $31.6 million and $32.4 million, respectively. The $0.8 million decrease in the provision for income taxes was primarily attributable to decreased pre-tax income.

The effective tax rate for the three and nine months ended September 30, 2012 is higher than the federal statutory rate of 35% due principally to: (a) the impact of certain expenses for which there is no tax benefit recognized and the impact of certain non-deductible expenses primarily related to the restructuring charges and the litigation loss contingency recorded during the third quarter and first nine months of 2012 (see Note 4, “Restructuring Charges” and Note 14, “Contingencies” in this Form 10-Q); (b) foreign dividends and earnings taxable in the U.S.; and (c) foreign and U.S. tax effects attributable to operations outside the U.S., including pre-tax losses in a number of jurisdictions outside the U.S. for which there is no tax benefit recognized in the third quarter and first nine months of 2012; partially offset by various discrete items, including the favorable resolution of tax matters in certain foreign jurisdictions.

The Company remains subject to examination of its income tax returns in various jurisdictions including, without limitation, South Africa for tax years ended December 31, 2008 through December 31, 2010, Australia for tax years ended December 31, 2008 through December 31, 2011 and the U.S. (federal) for tax years ended December 31, 2009 through December 31, 2011.

14. 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

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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 which MacAndrews & Forbes made 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 “2009 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 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 2009 Settlement Agreement, and on January 8, 2010, defendants filed a motion to enforce the 2009 Settlement Agreement.

In addition to the amended complaints in the Initial Consolidated Action and the Sullivan action, on December 21, 2009, certain of 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 certain of 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 2009 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 2009 Settlement Agreement.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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. On January 10, 2012, plaintiffs’ counsel filed a motion for class certification. Briefing on that motion was not completed. Merits discovery proceeded 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., certain of 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. On January 31, 2012, defendants filed motions to dismiss the amended complaint in the Garofalo action. On March 2, 2012, the plaintiff in the Garofalo action filed a response opposing defendants’ motions to dismiss, and a motion alternatively seeking leave to amend and file a second amended complaint. Briefing is complete on the motions to dismiss and motion to amend and defendants requested oral argument. Defendants previously reached an agreement with the plaintiff in the Garofalo action to permit the plaintiff to participate in merits discovery in the Consolidated Action, and agreed to permit the plaintiff to continue to participate in the merits discovery while the motions to dismiss are pending. An agreement was also reached with the plaintiff in the Sullivan action to stay proceedings in that action, including any response to the amended complaint, until December 21, 2012, so that the plaintiff could participate in the merits discovery in the Consolidated Action.

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 then 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. 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.

Plaintiffs in each of these actions sought, 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.

Although the Company disputes the allegations in the pending actions and believes them to be without merit, on June 21, 2012, without admitting any liability, Revlon, Inc., Revlon, Inc.’s then directors and MacAndrews & Forbes (collectively, “Defendants”) entered into a binding Memorandum of Understanding (“MOU”) with Fidelity Management & Research Company (“FMR Co.”) and its investment advisory affiliates, all of which are direct or indirect subsidiaries of FMR LLC (collectively, “Fidelity”), which through various funds and management agreements controlled the largest block of shares to participate in the Exchange Offer, to settle potential claims Fidelity could have as a potential member of the classes that plaintiffs seek to certify in the pending actions.

Fidelity executed the MOU on behalf of 6,111,879 shares (the “Fidelity Controlled Shares”) out of the 6,933,526 shares (the “Fidelity Shares”) of the Company’s Class A Common Stock that Fidelity exchanged in the Exchange Offer, and pursuant to the terms of the MOU, the remaining 821,647 shares agreed on July 12, 2012, to

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

participate in the settlement. As part of the settlement, Fidelity agreed, among other things, to accept a cash payment from Defendants of $22.5 million (the “Fidelity Settlement Amount”), which amount was subsequently paid from insurance proceeds in July 2012, in exchange for Fidelity’s opting out with respect to the Fidelity Shares of any purported class action related to the Exchange Offer and Fidelity’s release of all related potential claims. On July 20, 2012, Fidelity and the Defendants executed a final Stipulation and Settlement Agreement (the “Stipulation”) the terms of which are substantively identical to the terms of the MOU. The Stipulation supersedes the MOU. In addition, on July 17, 2012, the Defendants entered into a binding MOU with two additional stockholders who collectively exchanged 310,690 shares in the Exchange Offer, the terms of which are substantively identical to the settlement with Fidelity and call for the payment of $1 million, in the aggregate, to the two stockholders. In August 2012, Defendants and the two additional stockholders executed a final Stipulation and Settlement Agreement which supersedes, and is substantively identical to, the MOU. The $1 million payment was subsequently paid from insurance proceeds in August 2012.

In the second quarter of 2012, the Company recorded a charge and corresponding income from insurance proceeds related to the Company’s estimated allocable portion of the Fidelity Settlement Amount and the additional $1 million payment, which resulted in no impact to the Company’s Statement of Operations and Comprehensive (Loss) Income for the second quarter of 2012.

The Defendants also agreed with Fidelity and the two additional stockholders (together, the “settling stockholders”) that, in the event a settlement is reached with the purported class action plaintiffs, or an award of damages is issued following a trial in any of the actions, and that settlement amount or damage award exceeds the settlement amounts on a per share basis received by the settling stockholders, the settling stockholders would each receive additional consideration subject to certain parameters. The agreements with the settling stockholders are not subject to court approval and have no effect on the actions other than to exclude the settling stockholders from any certified class.

Although the Company continues to believe it has meritorious defenses to the asserted claims in the actions, the Defendants and plaintiffs agreed to the terms of a settlement and on October 8, 2012, executed settlement agreements that, if approved by the courts to which they are presented, will resolve all claims in all of the actions (the “Settlement”).

The Settlement provides that the Defendants will make net cash payments totaling approximately $9.2 million to settle all of the actions, and full and complete releases will be provided to Defendants from all plaintiffs. If approved by the courts, the Settlement will also result in additional payments to the settling stockholders totaling approximately $4.2 million, of which approximately $4 million will be paid to Fidelity.

As previously disclosed in the Q2 2012 Form 10-Q, in the second quarter of 2012, the Company recorded a charge of $6.7 million with respect to the Company’s then-estimated costs of resolving the actions, including the Company’s estimate at that time of additional payments to be made to the settling stockholders. In addition to the charge of $6.7 million it recorded in the second quarter of 2012, the Company has recorded an additional charge of $2.2 million in the third quarter of 2012 in connection with payments to be made by the Company as a result of the Settlement and the additional payments to be made to the settling stockholders. This additional charge is included within SG&A expenses in the Company’s Statements of Operations and Comprehensive (Loss) Income for the three and nine months ended September 30, 2012.

There can be no assurance as to the amount, if any, of additional insurance proceeds that the Company may receive in connection with its resolution of the actions. In any event, at least $5 million of future payments to be made by the Defendants relating to these matters, including expenses, will not be covered by insurance.

The Settlement is subject to court approval.

 

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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)

 

15. RELATED PARTY TRANSACTIONS

Senior Subordinated Term Loan

For a description of transactions with MacAndrews & Forbes in 2012 in connection with the Senior Subordinated Term Loan, including MacAndrews & Forbes assigning its interest in the Non-Contributed Loan to various third parties, see Note 7, “Long Term Debt and Redeemable Preferred Stock” in this Form 10-Q.

Reimbursement Agreements

As previously disclosed in the 2011 Form 10-K, Revlon, Inc., Products Corporation and MacAndrews & Forbes Inc. (a wholly-owned subsidiary of MacAndrews & Forbes Holdings) have entered into reimbursement agreements (the “Reimbursement Agreements”) pursuant to which (i) MacAndrews & Forbes Inc. is obligated to provide (directly or through its affiliates) certain professional and administrative services, including, without limitation, employees, to Revlon, Inc. and its subsidiaries, including, without limitation, Products Corporation, and to purchase services from third party providers, such as insurance, legal, accounting and air transportation services, on behalf of Revlon, Inc. and its subsidiaries, including Products Corporation, to the extent requested by Products Corporation, and (ii) Products Corporation is obligated to provide certain professional and administrative services, including, without limitation, employees, to MacAndrews & Forbes and to purchase services from third party providers, such as insurance, legal and accounting services, on behalf of MacAndrews & Forbes to the extent requested by MacAndrews & Forbes, provided that in each case the performance of such services does not cause an unreasonable burden to MacAndrews & Forbes or Products Corporation, as the case may be.

The Company reimburses MacAndrews & Forbes for the allocable costs of the services purchased for or provided by MacAndrews & Forbes to the Company and its subsidiaries and for the reasonable out-of-pocket expenses incurred by MacAndrews & Forbes in connection with the provision of such services. MacAndrews & Forbes reimburses Products Corporation for the allocable costs of the services purchased for or provided by Products Corporation to MacAndrews & Forbes and for the reasonable out-of-pocket expenses incurred in connection with the purchase or provision of such services. Each of the Company, on the one hand, and MacAndrews & Forbes Inc., on the other, has agreed to indemnify the other party for losses arising out of the services provided by it under the Reimbursement Agreements, other than losses resulting from its willful misconduct or gross negligence.

The Reimbursement Agreements may be terminated by either party on 90 days’ notice. The Company does not intend to request services under the Reimbursement Agreements unless their costs would be at least as favorable to the Company as could be obtained from unaffiliated third parties.

The Company participates in MacAndrews & Forbes’ directors and officers liability insurance program (the “D&O Insurance Program”), as well as its other insurance coverages, such as property damage, business interruption, liability and other coverages, which cover the Company, as well as MacAndrews & Forbes and its subsidiaries. The limits of coverage for certain of the policies are available on an aggregate basis for losses to any or all of the participating companies and their respective directors and officers. The Company reimburses MacAndrews & Forbes from time to time for their allocable portion of the premiums for such coverage or the Company pays the insurers directly, which premiums the Company believes are more favorable than the premiums the Company would pay were it to secure stand-alone coverage. Any amounts paid by the Company directly to MacAndrews & Forbes in respect of premiums are included in the amounts paid under the Reimbursement Agreements.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The net activity related to services provided and/or purchased under the Reimbursement Agreements during the nine months ended September 30, 2012 was $3.3 million, which primarily includes $18.0 million of costs incurred by the Company that were reimbursed by MacAndrews & Forbes from proceeds received from the D&O Insurance Program, partially offset by a $14.6 million partial pre-payment made by the Company to MacAndrews & Forbes during the first quarter of 2012 for premiums related to the Company’s allocable portion of the 5-year renewal of the D&O Insurance Program (for the period from January 31, 2012 through January 31, 2017). As of September 30, 2012, a $0.6 million receivable from MacAndrews & Forbes was included within prepaid expenses and other in the Company’s Consolidated Balance Sheets for transactions subject to the Reimbursement Agreements. The net activity related to services provided and/or purchased under the Reimbursement Agreements during the nine months ended September 30, 2011 was $0.3 million.

Fidelity Stockholders Agreement

In connection with the 2004 Revlon Exchange Transactions, Revlon, Inc. and Fidelity Management & Research Co. (“Fidelity”), a wholly-owned subsidiary of FMR LLC (“FMR”), entered into a stockholders agreement (the “Fidelity Stockholders Agreement”) pursuant to which, among other things, Revlon, Inc. (i) agreed to continue to maintain a majority of independent directors (as defined by NYSE listing standards) on its Board of Directors, as it currently does; (ii) established and maintains its Nominating and Corporate Governance Committee of the Board of Directors; and (iii) agreed to certain restrictions with respect to its conducting any business or entering into any transactions or series of related transactions with any of its affiliates, any holders of 10% or more of the outstanding voting stock or any affiliates of such holders (in each case, other than its subsidiaries). The Fidelity Stockholders Agreement terminates, by its terms, when Fidelity ceases to be the beneficial holder of at least 5% of Revlon, Inc.’s outstanding voting stock. In November 2009, affiliates of Fidelity filed a Schedule 13G/A with the SEC disclosing that they ceased to own any shares of Class A Common Stock. In 2010, Fidelity advised the Company that, as of the April 8, 2010 record date for Revlon, Inc.’s 2010 Annual Stockholders’ Meeting, FMR (singly or together with other affiliates of Fidelity) owned 8,233,526 shares of Revlon, Inc.’s outstanding Class A common stock and Revlon, Inc.’s Series A Preferred Stock, in the aggregate, representing approximately 9.2% of Revlon, Inc.’s issued and outstanding shares of voting capital stock at such date. Subsequently, however, Fidelity filed a Schedule 13F with the SEC on August 28, 2012, indicating that it owned 1,013,000 shares of Class A Common Stock as of June 30, 2012. The Company does not know how many shares of Series A Preferred Stock Fidelity currently owns, and there is no public record of such ownership. For a description of transactions with Fidelity in 2012 in connection with certain pending legal proceedings, including a description of Fidelity’s ownership of Series A Preferred Stock upon the consummation of the Exchange Offer, see Note 14, “Contingencies” in this Form 10-Q.

Other

As disclosed in Note 14, “Contingencies” in this Form 10-Q, in the second and third quarters of 2012, the Company and MacAndrews & Forbes entered into settlement agreements in connection with the previously disclosed litigation related to the Company’s 2009 Exchange Offer that would result, if the settlements are approved by the applicable courts, in total cash payments of approximately $36.9 million to settle all actions and related claims by stockholders, of which $23.5 million have been paid from insurance proceeds. There can be no assurance as to the amount, if any, of additional insurance proceeds that the Company and MacAndrews & Forbes may receive in connection with resolution of the actions. In any event, at least $5 million of future payments relating to these matters, including expenses, will not be covered by insurance. Therefore, the Company has recorded a cumulative charge of $8.9 million in the nine months ended September 30, 2012 which represents the Company’s allocable portion of the total settlement payments not currently covered by insurance.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

 

16. 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, 2012 and December 31, 2011, and for the three and nine months ended September 30, 2012 and 2011 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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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)

 

Condensed Consolidating Balance Sheets

As of September 30, 2012

 

     Products
Corporation
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

ASSETS

          

Cash and cash equivalents

   $ 10.3      $ —        $ 34.9      $ —        $ 45.2   

Trade receivables, less allowances for doubtful accounts

     78.2        25.1        92.4        —          195.7   

Inventories

     87.4        12.7        43.3        —          143.4   

Deferred income taxes – current

     39.3        —          10.4        —          49.7   

Prepaid expenses and other

     95.2        6.3        26.2        —          127.7   

Intercompany receivables

     958.4        473.7        390.4        (1,822.5     —     

Investment in subsidiaries

     (123.9     (228.0     —          351.9        —     

Property, plant and equipment, net

     86.9        0.6        12.4        —          99.9   

Deferred income taxes – noncurrent

     185.8        —          13.5        —          199.3   

Goodwill

     150.6        65.2        1.9        —          217.7   

Other assets

     64.1        66.4        31.7        —          162.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 1,632.3      $ 422.0      $ 657.1      $ (1,470.6   $ 1,240.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S DEFICIENCY

          

Short-term borrowings

   $ —        $ 5.8      $ 2.5      $ —        $ 8.3   

Current portion of long-term debt

     8.0        —          —          —          8.0   

Accounts payable

     65.8        7.1        28.9        —          101.8   

Accrued expenses and other

     147.0        15.1        93.8        —          255.9   

Intercompany payables

     596.5        633.6        592.4        (1,822.5     —     

Long-term debt

     1,160.8        —          —          —          1,160.8   

Long-term debt – affiliates

     48.6        —          —          —          48.6   

Other long-term liabilities

     217.9        2.9        48.9        —          269.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     2,244.6        664.5        766.5        (1,822.5     1,853.1   

Stockholder’s deficiency

     (612.3     (242.5     (109.4     351.9        (612.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholder’s deficiency

   $ 1,632.3      $ 422.0      $ 657.1      $ (1,470.6   $ 1,240.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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)

 

Condensed Consolidating Balance Sheets

As of December 31, 2011

 

     Products
Corporation
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

ASSETS

          

Cash and cash equivalents

   $ 57.7      $ 0.1      $ 43.9      $ —        $ 101.7   

Trade receivables, less allowances for doubtful accounts

     107.1        18.2        86.7        —          212.0   

Inventories

     68.3        8.4        34.3        —          111.0   

Deferred income taxes – current

     40.0        —          9.6        —          49.6   

Prepaid expenses and other

     78.3        4.2        25.1        —          107.6   

Intercompany receivables

     907.6        445.5        362.4        (1,715.5     —     

Investment in subsidiaries

     (164.2     (193.0     —          357.2        —     

Property, plant and equipment, net

     85.2        0.9        12.8        —          98.9   

Deferred income taxes – noncurrent

     206.9        —          14.5        —          221.4   

Goodwill

     150.6        42.2        1.9        —          194.7   

Other assets

     53.6        24.5        31.1        —          109.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 1,591.1      $ 351.0      $ 622.3      $ (1,358.3   $ 1,206.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S DEFICIENCY

          

Short-term borrowings

   $ —        $ 3.6      $ 2.3      $ —        $ 5.9   

Current portion of long-term debt

     8.0        —          —          —          8.0   

Accounts payable

     56.0        3.9        29.1        —          89.0   

Accrued expenses and other

     150.8        10.8        68.4        —          230.0   

Intercompany payables

     559.0        609.9        546.6        (1,715.5     —     

Long-term debt

     1,107.0        —          —          —          1,107.0   

Long-term debt – affiliates

     107.0        —          —          —          107.0   

Other long-term liabilities

     244.9        5.3        50.6        —          300.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     2,232.7        633.5        697.0        (1,715.5     1,847.7   

Stockholder’s deficiency

     (641.6     (282.5     (74.7     357.2        (641.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholder’s deficiency

   $ 1,591.1      $ 351.0      $ 622.3      $ (1,358.3   $ 1,206.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


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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)

 

Condensed Consolidating Statement of Operations and Comprehensive (Loss) Income

For the Three Months Ended September 30, 2012

 

     Products
Corporation
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net Sales

   $ 221.1      $ 34.0      $ 141.3      $ (49.4   $ 347.0   

Cost of sales

     101.8        15.6        59.0        (49.4     127.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     119.3        18.4        82.3        —          220.0   

Selling, general and administrative expenses

     100.0        13.0        61.7        —          174.7   

Restructuring charges

     1.2        0.5        19.3        —          21.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     18.1        4.9        1.3        —          24.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses (income):

          

Intercompany interest, net

     0.2        (0.3     1.6        —          1.5   

Interest expense

     19.6        0.2        0.1        —          19.9   

Amortization of debt issuance costs

     0.9        —          —          —          0.9   

Foreign currency (gains) losses, net

     (1.1     0.1        0.9        —          (0.1

Miscellaneous, net

     (27.2     13.7        13.6        —          0.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses (income), net

     (7.6     13.7        16.2        —          22.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     25.7        (8.8     (14.9     —          2.0   

Provision for income taxes

     6.4        2.3        3.3        —          12.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     19.3        (11.1     (18.2     —          (10.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity in loss of subsidiaries

     (29.3     (25.2     —          54.5        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss)

   $ (10.0   $ (36.3   $ (18.2   $ 54.5      $ (10.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss)

     (0.1     (2.8     (3.4     6.2        (0.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive (loss)

   $ (10.1   $ (39.1   $ (21.6   $ 60.7      $ (10.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

27


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)

 

Condensed Consolidating Statement of Operations and Comprehensive (Loss) Income

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, net

     —          —          —          —          —     

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   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss)

     (8.0     (9.0     (13.8     22.8        (8.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive (loss)

   $ (2.7   $ —        $ (8.0   $ 8.0      $ (2.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


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)

 

Condensed Consolidating Statement of Operations and Comprehensive (Loss) Income

For the Nine Months Ended September 30, 2012

 

     Products
Corporation
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net Sales

   $ 680.7      $ 83.0      $ 417.5      $ (146.4   $ 1,034.8   

Cost of sales

     309.4        38.1        166.0        (146.4     367.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     371.3        44.9        251.5        —          667.7   

Selling, general and administrative expenses

     303.1        35.0        186.3        —          524.4   

Restructuring charges

     1.2        0.5        19.3        —          21.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     67.0        9.4        45.9        —          122.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses (income):

          

Intercompany interest, net

     0.7        (0.7     4.6        —          4.6   

Interest expense

     58.9        0.3        0.3        —          59.5   

Amortization of debt issuance costs

     2.6        —          —          —          2.6   

Foreign currency (gains) losses, net

     (1.0     0.3        2.7        —          2.0   

Miscellaneous, net

     (60.3     7.5        53.2        —          0.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses (income), net

     0.9        7.4        60.8        —          69.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     66.1        2.0        (14.9     —          53.2   

Provision for income taxes

     21.9        5.1        6.1        —          33.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     44.2        (3.1     (21.0     —          20.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from discontinued operations, net of taxes

     0.4        —          —          —          0.4   

Equity in loss of subsidiaries

     (24.1     (25.7     —          49.8        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 20.5      $ (28.8   $ (21.0   $ 49.8      $ 20.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     7.8        2.7        1.9        (4.6     7.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

   $ 28.3      $ (26.1   $ (19.1   $ 45.2      $ 28.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

29


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)

 

Condensed Consolidating Statement of Operations and Comprehensive (Loss) Income

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   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss)

     (6.0     (8.8     (14.4     23.2        (6.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

   $ 19.1      $ (6.3   $ (4.8   $ 11.1      $ 19.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

30


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)

 

Condensed Consolidating Statement of Cash Flows

For the Nine Months Ended September 30, 2012

 

     Products
Corporation
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations      Consolidated  

CASH FLOWS FROM OPERATING ACTIVITIES:

           

Net cash (used in) provided by operating activities

   $ (37.9   $ 63.7      $ (7.9   $ —         $ 17.9   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

           

Capital expenditures

     (13.0     (0.3     (1.5     —           (14.8

Business acquisition

     —          (66.2     —          —           (66.2

Proceeds from the sale of certain assets

     0.1        0.4        0.1        —           0.6   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in investing activities

     (12.9     (66.1     (1.4     —           (80.4
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

           

Net increase in short-term borrowings and overdraft

     10.0        2.3        0.2        —           12.5   

Repayments under the 2011 Term Loan Facility

     (6.0     —          —          —           (6.0

Payment of financing costs

     (0.1     —          —          —           (0.1

Other financing activities

     (0.5     —          (0.2     —           (0.7
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash provided by financing activities

     3.4        2.3        —          —           5.7   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     —          —          0.3        —           0.3   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net decrease in cash and cash equivalents

     (47.4     (0.1     (9.0     —           (56.5

Cash and cash equivalents at beginning of period

     57.7        0.1        43.9        —           101.7   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 10.3      $ —        $ 34.9      $ —         $ 45.2   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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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)

 

Condensed Consolidating Statement of Cash Flows

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

Business 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   

Repayment 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

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 PhotoReady, Revlon ColorBurst, Revlon GrowLuscious, Revlon Super Lustrous and Revlon Age Defying franchises; Almay, including the Almay Intense i-Color and Almay Smart Shade franchises; SinfulColors, Pure Ice and Bon Bons 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 80 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 and beauty tools. 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.

 

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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)

 

  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.

 

  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 2012 were $347.0 million, an increase of $9.8 million, or 2.9%, compared to $337.2 million in the third quarter of 2011. Excluding the unfavorable impact of foreign currency fluctuations of $6.4 million, consolidated net sales increased by $16.2 million, or 4.8%, in the third quarter of 2012, driven by higher net sales in the Company’s U.S., Asia Pacific, Latin America and Canada regions, partially offset by lower net sales in the Company’s Europe, Middle East and Africa region.

Consolidated net sales in the first nine months of 2012 were $1,034.8 million, an increase of $13.2 million, or 1.3%, compared to $1,021.6 million in the first nine months of 2011. Excluding the unfavorable impact of foreign currency fluctuations of $19.4 million, consolidated net sales increased by $32.6 million, or 3.2%, in the first nine months of 2012, driven by higher net sales in the Company’s U.S., Asia Pacific, Latin America and Canada regions, partially offset by lower net sales in the Company’s Europe, Middle East and Africa region.

Consolidated net loss in the third quarter of 2012 was $15.0 million, compared to consolidated net income of $0.1 million in the third quarter of 2011. The consolidated net loss in the third quarter of 2012, compared to consolidated net income in the third quarter of 2011, was primarily due to:

 

   

$24.1 million of restructuring and related charges recognized in connection with the September 2012 Program (as hereinafter defined);

with the foregoing partially offset by:

 

   

$10.6 million lower provision for income taxes.

Consolidated net income in the first nine months of 2012 was $4.6 million, compared to $17.0 million in the first nine months of 2011. The decrease in consolidated net income in the first nine months of 2012, compared to the first nine months of 2011, was primarily due to:

 

   

$24.1 million of restructuring and related charges recognized in connection with the September 2012 Program; and

 

   

$14.5 million of higher selling, general and administrative (“SG&A”) expense primarily driven by the impact of the $8.9 million litigation loss contingency recognized in the first nine months of 2012 and higher incentive compensation, partially offset by favorable foreign currency fluctuations and lower advertising expenses;

 

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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)

 

with the foregoing partially offset by:

 

   

a $11.3 million loss on the early extinguishment of debt in the first nine months of 2011 as a result of the 2011 Refinancings; and

 

   

a $5.2 million decrease in interest expense in the first nine months of 2012, primarily driven by lower weighted average borrowing rates as a result of the 2011 Term Loan Facility Refinancing.

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. For the years ended December 31, 2011 and 2010, the Company’s subsidiary in Venezuela (“Revlon Venezuela”) had net sales of approximately 2% and 3%, respectively, of the Company’s consolidated net sales. At December 31, 2011 and 2010, total assets of Revlon Venezuela were approximately 2% and 3%, respectively, of the Company’s total assets. Prior to the fire, approximately 50% of Revlon Venezuela’s net sales were comprised of products imported from the Company’s Oxford, North Carolina facility and approximately 50% were comprised of products locally manufactured at the Revlon Venezuela facility. Revlon Venezuela did not have any net sales from the date of the fire until August 12, 2011. The Company’s net sales in Venezuela since August 12, 2011 have been primarily comprised of products imported from the Company’s Oxford, North Carolina facility. In the first quarter of 2012, Revlon Venezuela also began importing certain products from third party manufacturers outside of Venezuela, which were locally manufactured at the Revlon Venezuela facility prior to the fire.

The Company maintains comprehensive property insurance, as well as business interruption insurance. Business interruption insurance is intended to reimburse for lost profits and other costs incurred, which are attributable to the loss, during the loss period, subject to the terms and conditions of the applicable policies.

For the third quarter and first nine months of 2012, the Company incurred business interruption losses of $1.7 million and $2.8 million, respectively, related to the fire. In the second quarter of 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 the nine months ended September 30, 2012 and 2011 include estimated profits lost as a result of the interruption of Revlon Venezuela’s business and costs incurred directly related to the fire. The business interruption losses incurred through September 30, 2012 are not indicative of future business interruption losses for insurance purposes or future expected profits for Revlon Venezuela. The Company’s insurance coverage provides for business interruption losses to be reimbursed, subject to the terms and conditions of such policy, for a period of time, which period for the coverage related to the Venezuela fire ended on October 2, 2012.

During the third quarter and first nine months of 2012, the Company received interim advances of $1.5 million and $4.5 million, respectively, from its insurance carrier in connection with the fire, for total cumulative receipts of $24.2 million received from the date of the fire through September 30, 2012. During the third quarter and first nine months of 2012, the Company recognized $1.7 million and $2.8 million, respectively, of income from insurance recoveries, which entirely offset the business interruption losses noted above. 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 SG&A expenses in the Company’s Statements of Operations and Comprehensive (Loss) Income for the three and nine months ended September 30,

 

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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)

 

2012 and 2011. The Company recorded deferred income related to the insurance proceeds received, but not yet recognized, of $6.8 million and $5.1 million as of September 30, 2012 and December 31, 2011, respectively, which is included in accrued expenses and other in the Company’s Consolidated Balance Sheets.

For insurance purposes, an assessment of the extent of damage resulting from the fire and the impact on Revlon Venezuela’s business is ongoing, and therefore the final amount and timing of the ultimate insurance recovery is currently unknown.

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 2012 were $347.0 million, an increase of $9.8 million, or 2.9%, compared to $337.2 million in the third quarter of 2011. Excluding the unfavorable impact of foreign currency fluctuations of $6.4 million, consolidated net sales increased by $16.2 million, or 4.8%, in the third quarter of 2012, primarily driven by higher net sales of Revlon color cosmetics, as well as the inclusion of the net sales of Pure Ice beginning in July 2012.

Year-to-date results:

Consolidated net sales in the first nine months of 2012 were $1,034.8 million, an increase of $13.2 million, or 1.3%, compared to $1,021.6 million in the first nine months of 2011. Excluding the unfavorable impact of foreign currency fluctuations of $19.4 million, consolidated net sales increased by $32.6 million, or 3.2%, in the first nine months of 2012, primarily driven by higher net sales of Revlon color cosmetics and Revlon ColorSilk hair color, as well as the inclusion of the net sales of SinfulColors for a full nine months in 2012 and Pure Ice beginning in July 2012, partially offset by lower net sales of fragrances.

 

     Three Months Ended
September 30,
     Change     XFX Change  (a)  
         2012              2011          $     %     $     %  

United States

   $ 192.0       $ 184.7       $ 7.3        4.0   $ 7.3        4.0

Asia Pacific

     60.9         58.0         2.9        5.0        3.2        5.5   

Europe, Middle East and Africa

     43.8         51.1         (7.3     (14.3     (2.8     (5.5

Latin America

     30.6         25.6         5.0        19.5        6.3        24.6   

Canada

     19.7         17.8         1.9        10.7        2.2        12.4   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Net Sales

   $ 347.0       $ 337.2       $ 9.8        2.9   $ 16.2        4.8
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     Nine Months Ended
September 30,
     Change     XFX Change  (a)  
     2012      2011      $     %     $     %  

United States

   $ 580.6       $ 565.8       $ 14.8        2.6   $ 14.8        2.6

Asia Pacific

     172.8         169.6         3.2        1.9        2.7        1.6   

Europe, Middle East and Africa

     134.0         152.8         (18.8     (12.3     (5.4     (3.5

Latin America

     89.2         78.9         10.3        13.1        15.3        19.4   

Canada

     58.2         54.5         3.7        6.8        5.2        9.5   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Net Sales

   $ 1,034.8       $ 1,021.6       $ 13.2        1.3   $ 32.6        3.2
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) 

XFX excludes the impact of foreign currency fluctuations.

 

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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)

 

United States

Third quarter results:

In the U.S., net sales in the third quarter of 2012 increased $7.3 million, or 4.0%, to $192.0 million, compared to $184.7 million in the third quarter of 2011, primarily driven by higher net sales of Revlon color cosmetics, as well as the inclusion of the net sales of Pure Ice beginning in July 2012, partially offset by lower net sales of Revlon ColorSilk hair color, Almay color cosmetics and Mitchum anti-perspirant deodorants. Excluding the results of the recently acquired Pure Ice, net sales in the U.S. increased in the third quarter of 2012.

Year-to-date results:

In the U.S., net sales in the first nine months of 2012 increased $14.8 million, or 2.6%, to $580.6 million, compared to $565.8 million 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 SinfulColors for a full nine months in 2012 and Pure Ice beginning in July 2012, partially offset by lower net sales of Almay color cosmetics and Mitchum anti-perspirant deodorants. Excluding the results of the recently acquired Pure Ice, net sales in the U.S. increased in the first nine months of 2012.

Asia Pacific

Third quarter results:

In Asia Pacific, net sales in the third quarter of 2012 increased 5.0% to $60.9 million, compared to $58.0 million in the third quarter of 2011. Excluding the unfavorable impact of foreign currency fluctuations, net sales increased $3.2 million, or 5.5%, primarily driven by higher net sales of Revlon color cosmetics and Revlon ColorSilk hair color. From a country perspective, net sales increased in certain distributor territories and Japan (which together contributed 8.7 percentage points to the increase in the region’s net sales in the third quarter of 2012, as compared to the third quarter of 2011), partially offset by a decrease in net sales in China (which offset by 3.3 percentage points the increase in the region’s net sales in the third quarter of 2012, as compared to the third quarter of 2011).

Year-to-date results:

In Asia Pacific, net sales in the first nine months of 2012 increased 1.9% to $172.8 million compared to $169.6 million in the first nine months of 2011. Excluding the favorable impact of foreign currency fluctuations, net sales increased $2.7 million, or 1.6%, primarily driven by higher net sales of Revlon ColorSilk hair color. From a country perspective, net sales increased in certain distributor territories and Japan (which together contributed 4.6 percentage points to the increase in the region’s net sales in the first nine months of 2012, as compared to the first nine months of 2011), partially offset by a decrease in net sales in China and Taiwan (which offset by 2.5 percentage points the increase in the region’s net sales in the first nine months of 2012, as compared to the first nine months of 2011).

Europe, Middle East and Africa

Third quarter results:

In Europe, the Middle East and Africa, net sales in the third quarter of 2012 decreased 14.3% to $43.8 million, compared to $51.1 million in the third quarter of 2011. Excluding the unfavorable impact of foreign

 

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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)

 

currency fluctuations, net sales decreased $2.8 million, or 5.5%, primarily driven by a higher returns accrual of $1.6 million recorded in the third quarter of 2012 related to the September 2012 Program and lower net sales of fragrances. From a country perspective, net sales decreased in Italy, France and the U.K., partially driven by the $1.6 million higher returns accrual noted above (which together contributed 6.7 percentage points to the decrease in the region’s net sales in the third quarter of 2012, as compared to the third quarter of 2011). The decrease in the region’s net sales was partially offset by an increase in net sales in South Africa (which offset by 1.7 percentage points the decrease in the region’s net sales in the third quarter of 2012, as compared to the third quarter of 2011).

Year-to-date results:

In Europe, the Middle East and Africa, net sales in the first nine months of 2012 decreased 12.3% to $134.0 million, compared to $152.8 million in the first nine months of 2011. Excluding the unfavorable impact of foreign currency fluctuations, net sales decreased $5.4 million, or 3.5%, primarily driven by lower net sales of fragrances and a higher returns accrual of $1.6 million recorded in the third quarter of 2012 related to the September 2012 Program. From a country perspective, net sales decreased in certain distributor territories, Italy and France, partially driven by the $1.6 million higher returns accrual noted above (which together contributed 4.6 percentage points to the decrease in the region’s net sales in the first nine months of 2012, as compared to the first nine months of 2011). The decrease in the region’s net sales was partially offset by an increase in net sales in South Africa (which offset by 1.2 percentage points the decrease in the region’s net sales in the first nine months of 2012, as compared to the first nine months of 2011).

Latin America

Third quarter results:

In Latin America, net sales in the third quarter of 2012 increased 19.5% to $30.6 million, compared to $25.6 million in the third quarter of 2011. Excluding the unfavorable impact of foreign currency fluctuations, net sales increased $6.3 million, or 24.6%, primarily driven by higher net sales of Revlon ColorSilk hair color, Revlon color cosmetics and other beauty care products. From a country perspective, net sales increased in Venezuela, primarily due to the loss of sales during the third quarter of 2011 as a result of the June 2011 fire which destroyed Revlon Venezuela’s facility. Net sales in Argentina and Venezuela also benefited from higher selling prices given market conditions and inflation, which accounted for approximately 25% of the $6.3 million increase in the region’s net sales.

Year-to-date results:

In Latin America, net sales in the first nine months of 2012 increased 13.1% to $89.2 million, compared to $78.9 million in the first nine months of 2011. Excluding the unfavorable impact of foreign currency fluctuations, net sales increased $15.3 million, or 19.4%, primarily driven by higher net sales of Revlon ColorSilk hair color and Revlon color cosmetics. From a country perspective, net sales increased throughout the region. Venezuela’s increase in net sales in the nine months of 2012 was partially driven by the loss of sales during June through September 2011 as a result of the June 2011 fire which destroyed Revlon Venezuela’s facility. Net sales in Argentina and Venezuela also benefited from higher selling prices given market conditions and inflation, which accounted for approximately 40% of the $15.3 million increase in the region’s net 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)

 

Canada

Third quarter results:

In Canada, net sales in the third quarter of 2012 increased 10.7% to $19.7 million, compared to $17.8 million in the third quarter of 2011. Excluding the unfavorable impact of foreign currency fluctuations, net sales increased $2.2 million, or 12.4%, primarily driven by higher net sales of Revlon color cosmetics.

Year-to-date results:

In Canada, net sales in the first nine months of 2012 increased 6.8% to $58.2 million, compared to $54.5 million in the first nine months of 2011. Excluding the unfavorable impact of foreign currency fluctuations, net sales increased $5.2 million, or 9.5%, primarily driven by higher net sales of Revlon color cosmetics.

Gross profit:

 

     Three Months Ended
September 30,
           Nine Months Ended
September 30,
       
     2012     2011     Change      2012     2011     Change  

Gross profit

   $ 220.0      $ 214.1      $ 5.9       $ 667.7      $ 663.3      $ 4.4   

Percentage of net sales

     63.4     63.5        64.5     64.9  

The 0.1 percentage point decrease in gross profit as a percentage of net sales in the third quarter of 2012, compared to the third quarter of 2011, was primarily due to:

 

   

the impact of product mix, which reduced gross profit as a percentage of net sales by 1.0 percentage point;

 

   

higher costs related to inventory obsolescence, which reduced gross profit as a percentage of net sales by 0.7 percentage points; and

 

   

restructuring related charges recognized in connection with the September 2012 Program, which reduced gross profit as a percentage of net sales by 0.5 percentage points;

with the foregoing partially offset by:

 

   

lower manufacturing and freight costs, as a result of supply chain cost reduction initiatives, which increased gross profit as a percentage of net sales by 1.3 percentage points; and

 

   

lower allowances, which increased gross profit as a percentage of net sales by 0.6 percentage points.

The 0.4 percentage point decrease in gross profit as a percentage of net sales in the first nine months of 2012, compared to the first nine months of 2011, was primarily due to:

 

   

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

 

   

restructuring related charges recognized in connection with the September 2012 Program, which reduced gross profit as a percentage of net sales by 0.2 percentage points;

with the foregoing partially offset by:

 

   

lower manufacturing and freight costs, as a result of supply chain cost reduction initiatives, which increased gross profit as a percentage of net sales by 0.9 percentage points.

 

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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)

 

SG&A expenses:

 

     Three Months Ended
September 30,
           Nine Months Ended
September 30,
        
     2012      2011      Change     2012      2011      Change  

SG&A expenses

   $ 179.9       $ 169.3       $ (10.6   $ 540.5       $ 526.0       $ (14.5

SG&A expenses increased $10.6 million in the third quarter of 2012, as compared to the third quarter of 2011, primarily driven by:

 

   

$4.4 million lower benefit from insurance proceeds related to the Venezuela fire recognized in SG&A expenses in the third quarter of 2012, as compared to the third quarter of 2011;

 

   

$3.0 million of higher general and administrative expenses, principally due to the impact of the $2.2 million litigation loss contingency recognized in the third quarter of 2012 (see Note 14, “Contingencies” to the Consolidated Financial Statements for further discussion); and

 

   

$3.1 million of higher advertising expenses, primarily due to the timing of advertising campaigns in the third quarter of 2012 compared to the third quarter of 2011.

SG&A expenses increased $14.5 million in the first nine months of 2012, as compared to the first nine months of 2011, primarily driven by:

 

   

$19.6 million of higher general and administrative expenses, principally due to the impact of the $8.9 million litigation loss contingency recognized in the first nine months of 2012 (see Note 14, “Contingencies” to the Consolidated Financial Statements for further discussion), higher incentive compensation expense primarily due to the timing, within 2012, of expense recognized in the first nine months of 2012 as compared to the first nine months of 2011 and higher insurance expense; and

 

   

$3.3 million lower benefit from insurance proceeds related to the Venezuela fire recognized in SG&A expenses in the first nine months of 2012, as compared to the first nine months of 2011;

with the foregoing partially offset by: