REV-2014.3.31-10Q




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 March 31, 2014

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)

Registrant's telephone number, including area code: 212-527-4000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).        Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨
 
 Accelerated filer x
 
Non-accelerated filer ¨
 
Smaller reporting company ¨
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).      Yes ¨ No x
As of March 31, 2014, 52,356,798 shares of Class A Common Stock were outstanding. At such date, 40,669,640 shares of Class A Common Stock were beneficially owned by MacAndrews & Forbes Holdings Inc. and certain of its affiliates.






REVLON, INC. AND SUBSIDIARIES
INDEX

PART I - Financial Information
Item 1.
Financial Statements
 
Consolidated Balance Sheets as of March 31, 2014 (Unaudited) and December 31, 2013
 
Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2014 and 2013
 
Unaudited Consolidated Statement of Stockholders' Deficiency for the Three Months Ended March 31, 2014
 
Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013
 
     Notes to Unaudited Consolidated Financial Statements
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
 
 
 
PART II - Other Information
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 5.
Other Information
Item 6.
Exhibits
 
Signatures

1



PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

REVLON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions, except share and per share amounts)
 
March 31,
2014
 
December 31, 2013(a)
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
196.3

 
$
244.1

Trade receivables, less allowance for doubtful accounts of $5.8 and $4.2 as of March 31, 2014 and December 31, 2013, respectively
265.5

 
253.5

Inventories
188.4

 
175.0

Deferred income taxes – current
61.2

 
65.1

Prepaid expenses and other
72.4

 
61.4

Total current assets
783.8

 
799.1

Property, plant and equipment, net of accumulated depreciation of $251.5 and $243.1 as of March 31, 2014 and December 31, 2013, respectively
195.5

 
195.9

Deferred income taxes – noncurrent
172.6

 
179.6

Goodwill
472.3

 
472.3

Intangible assets, net of accumulated amortization of $24.6 and $19.0 as of March 31, 2014 and December 31, 2013, respectively
355.1

 
360.1

Other assets
125.8

 
123.8

Total assets
$
2,105.1

 
$
2,130.8

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
 
 
 
Current liabilities:
 
 
 
Short-term borrowings
$
11.8

 
$
7.9

Current portion of long-term debt
65.4

 
65.4

Accounts payable
185.6

 
165.7

Accrued expenses and other
272.1

 
313.7

Total current liabilities
534.9

 
552.7

Long-term debt
1,861.3

 
1,862.3

Long-term pension and other post-retirement plan liabilities
109.8

 
118.3

Other long-term liabilities
188.1

 
194.0

Commitments and contingencies


 


Stockholders’ deficiency:
 
 
 
Class A Common Stock, par value $0.01 per share; 900,000,000 shares authorized; 53,231,651 shares issued as of March 31, 2014 and December 31, 2013, respectively
0.5

 
0.5

Additional paid-in capital
1,015.5

 
1,015.3

Treasury stock, at cost: 754,853 shares of Class A Common Stock as of March 31, 2014 and December 31, 2013, respectively
(9.8
)
 
(9.8
)
Accumulated deficit
(1,447.2
)
 
(1,452.7
)
Accumulated other comprehensive loss
(148.0
)
 
(149.8
)
Total stockholders’ deficiency
(589.0
)
 
(596.5
)
Total liabilities and stockholders’ deficiency
$
2,105.1

 
$
2,130.8


(a) During the three months ended March 31, 2014, the Company recorded Measurement Period Adjustments (as hereinafter defined) to certain net assets and intangible assets acquired in the Colomer Acquisition (as hereinafter defined) on October 9, 2013. Accordingly, the prior period has been retrospectively adjusted for such Measurement Period Adjustments. Refer to Note 2, "Business Combination" for additional details.

See Accompanying Notes to Unaudited Consolidated Financial Statements

2



REVLON, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(dollars in millions, except share and per share amounts)
 
Three Months Ended March 31,
 
2014
 
2013
 
 
 
 
Net sales
$
469.8

 
$
325.9

Cost of sales
163.5

 
114.4

   Gross profit
306.3

 
211.5

Selling, general and administrative expenses
246.2

 
161.6

Acquisition and integration costs
3.8

 

Restructuring charges and other, net
13.5

 
0.2

      Operating income
42.8

 
49.7

Other expenses, net:
 
 
 
   Interest expense
22.3

 
18.8

   Interest expense – preferred stock dividends

 
1.6

   Amortization of debt issuance costs
1.4

 
1.3

   Loss on early extinguishment of debt
1.9

 
27.9

   Foreign currency losses, net
1.4

 
3.3

   Miscellaneous, net
0.1

 
0.1

      Other expenses, net
27.1

 
53.0

Income (loss) from continuing operations before income taxes
15.7

 
(3.3
)
Provision for income taxes
7.0

 
1.2

Income (loss) from continuing operations, net of taxes
8.7

 
(4.5
)
Loss from discontinued operations, net of taxes
(3.2
)
 
(2.4
)
Net income (loss)
$
5.5

 
$
(6.9
)
Other comprehensive income:


 


   Currency translation adjustment, net of tax (a)   
1.6

 
(0.8
)
   Amortization of pension related costs, net of tax (b)(d)
1.2

 
1.9

Revaluation of derivative financial instruments, net of tax(c)
(1.0
)
 

Other comprehensive income
1.8

 
1.1

Total comprehensive income (loss)
$
7.3

 
$
(5.8
)
 
 
 
 
Basic earnings (loss) per common share:
 
 
 
Continuing operations
$
0.17

 
$
(0.08
)
Discontinued operations
(0.06
)
 
(0.05
)
Net income (loss)
$
0.11

 
$
(0.13
)
 
 
 


Diluted earnings (loss) per common share:
 
 


Continuing operations
$
0.17

 
$
(0.08
)
Discontinued operations
(0.06
)
 
(0.05
)
Net income (loss)
$
0.11

 
$
(0.13
)
 
 
 


Weighted average number of common shares outstanding:
 
 


      Basic
52,356,798

 
52,356,798

      Diluted
52,367,944

 
52,356,798


(a) 
Net of tax (benefit) expense of $(0.5) million and $0.3 million for the three months ended March 31, 2014 and 2013, respectively.
(b) 
Net of tax benefit of nil and $(0.3) million for the three months ended March 31, 2014 and 2013, respectively.
(c) 
Net of tax expense of $0.6 million for the three months ended March 31, 2014.
(d) 
This other comprehensive income component is included in the computation of net periodic benefit (income) costs. See Note 5, “Pension and Post-Retirement Benefits,” for additional information regarding net periodic benefit (income) costs.

See Accompanying Notes to Unaudited Consolidated Financial Statements

3



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, 2014
$
0.5


$
1,015.3


$
(9.8
)

$
(1,452.7
)

$
(149.8
)

$
(596.5
)
Stock-based compensation amortization


 
0.2

 


 


 


 
0.2

Net income
 
 
 
 
 
 
5.5

 
 
 
5.5

Other comprehensive income, net (a)    
 
 
 
 
 
 
 
 
1.8

 
1.8

Balance, March 31, 2014
$
0.5

 
$
1,015.5

 
$
(9.8
)
 
$
(1,447.2
)
 
$
(148.0
)
 
$
(589.0
)

(a) 
See Note 12, “Accumulated Other Comprehensive Loss,” regarding the changes in the accumulated balances for each component of other comprehensive income during the three months ended March 31, 2014.


See Accompanying Notes to Unaudited Consolidated Financial Statements

4



REVLON, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
 
Three Months Ended March 31,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income (loss)
$
5.5

 
$
(6.9
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
   Depreciation and amortization
24.8

 
17.0

   Amortization of debt discount
0.3

 
0.4

   Stock compensation amortization
0.2

 

   Provision for (benefit from) deferred income taxes
8.2

 
(1.6
)
   Loss on early extinguishment of debt
1.9

 
27.9

   Amortization of debt issuance costs
1.4

 
1.3

Gain on sale of certain assets

 
(0.4
)
   Pension and other post-retirement income
(1.3
)
 
(0.1
)
   Change in assets and liabilities:
 
 


      (Increase) decrease in trade receivables
(12.9
)
 
26.9

      Increase in inventories
(13.7
)
 
(15.4
)
      Increase in prepaid expenses and other current assets
(9.6
)
 
(10.5
)
      Increase in accounts payable
16.1

 
11.1

      Decrease in accrued expenses and other current liabilities
(37.6
)
 
(48.3
)
      Pension and other post-retirement plan contributions
(6.3
)
 
(2.7
)
      Purchases of permanent displays
(13.7
)
 
(11.1
)
      Other, net
(8.8
)
 
(4.5
)
Net cash used in operating activities
(45.5
)
 
(16.9
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(3.7
)
 
(5.5
)
Proceeds from the sale of certain assets
0.1

 
0.4

Net cash used in investing activities
(3.6
)
 
(5.1
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net increase in short-term borrowings and overdraft
6.1

 
0.2

Repayments under the Acquisition Term Loan
(1.8
)
 

Proceeds from the issuance of the 5¾% Senior Notes

 
500.0

Repayment of the 9¾% Senior Secured Notes

 
(330.0
)
Repayments under the 2011 Term Loan

 
(113.0
)
Payment of financing costs
(1.6
)
 
(27.9
)
Other financing activities
(0.5
)
 
(0.6
)
Net cash provided by financing activities
2.2

 
28.7

Effect of exchange rate changes on cash and cash equivalents
(0.9
)
 
(2.2
)
   Net (decrease) increase in cash and cash equivalents
(47.8
)
 
4.5

   Cash and cash equivalents at beginning of period
244.1

 
116.3

   Cash and cash equivalents at end of period
$
196.3

 
$
120.8

Supplemental schedule of cash flow information:
 
 
 
   Cash paid during the period for:
 
 
 
Interest
$
29.5

 
$
24.2

Income taxes, net of refunds
4.9

 
2.7

Preferred stock dividends

 
1.6


See Accompanying Notes to Unaudited Consolidated Financial Statements

5

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 to establish Revlon as the quintessential and most innovative beauty company in the world by offering products that make consumers feel attractive and beautiful. We want to inspire our consumers to express themselves boldly and confidently. The Company operates in two segments, the consumer division (“Consumer”) and the professional division (“Professional”), and manufactures, markets and sells worldwide an extensive array of beauty and personal care products, including cosmetics, hair color, hair care and hair treatments, beauty tools, men's grooming products, anti-perspirant deodorants, fragrances, skincare and other beauty care products. The Company’s principal customers for its products in the Consumer segment include large mass volume retailers and chain drug and food stores (collectively, the “mass retail channel”) in the U.S. and internationally, as well as certain department stores and other specialty stores, such as perfumeries, outside the U.S. The Company's principal customers for its products in the Professional segment include hair and nail salons and distributors in the U.S. and internationally.
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 valuation of acquired intangible and long-lived assets and the recoverability of intangible and long-lived assets, income taxes, including deferred tax valuation allowances and reserves for estimated tax liabilities, restructuring costs, certain estimates and assumptions used in the calculation of the net periodic benefit (income) 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, 2013, filed with the U.S. Securities and Exchange Commission (the "SEC") on March 5, 2014 (the "2013 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.
Discontinued Operations Presentation
As a result of the Company's decision on December 30, 2013 to exit its business operations in China, the Company is reporting the results of its China operations within loss from discontinued operations, net of taxes in the Company's Consolidated Statements of Operations and Comprehensive Income (Loss). Accordingly, prior year amounts have been restated to conform to this presentation. See Note 4, "Discontinued Operations," for further discussion.
Recently Adopted Accounting Pronouncements
In March 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-04, “Accounting for Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date,” requiring an entity to record an obligation resulting from joint and several liability arrangements at the greater of the amount that the entity has agreed to pay or the amount the entity expects to pay. Additional disclosures about joint and several liability arrangements will also be required. This guidance is effective for fiscal periods beginning after December 15, 2013, and is applied retrospectively for obligations that existed at the beginning of the fiscal year for which the entity adopted such guidance, with early adoption permitted. The Company adopted ASU No. 2013-04 beginning January 1, 2014, and such adoption did not have an impact on the Company's results of operations, financial condition or disclosures.


6

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)


Recently Issued Accounting Pronouncements
In April 2014, the FASB issued ASU No. 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity," which changes the requirements for reporting discontinued operations under Accounting Standards Codification Topic 205. Under ASU No. 2014-08, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. The standard states that a strategic shift could include a disposal of (i) a major geographical area of operations, (ii) a major line of business, (iii) a major equity method investment or (iv) other major parts of an entity. ASU No. 2014-08 no longer precludes presentation as a discontinued operation if (i) there are operations and cash flows of the component that have not been eliminated from the reporting entity’s ongoing operations or (ii) there is significant continuing involvement with a component after its disposal. Additional disclosures about discontinued operations will also be required. The guidance is effective for annual periods beginning on or after December 15, 2014, and is to be applied prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. The Company expects to adopt ASU No. 2014-08 on a prospective basis beginning January 1, 2015.

2. BUSINESS COMBINATION
The Colomer Acquisition
On October 9, 2013 (the "Acquisition Date"), Products Corporation completed its acquisition of The Colomer Group Participations, S.L. ("Colomer" and the "Colomer Acquisition"), a Spanish company which primarily manufactures, markets and sells professional products to hair and nail salons and other professional channels under brands such as Revlon Professional, CND, including CND Shellac, and American Crew, as well as retail and multi-cultural product lines. The cash purchase price for the Colomer Acquisition was $664.5 million, which Products Corporation financed with proceeds from the Acquisition Term Loan under the Amended Term Loan Facility (both as hereinafter defined). The Colomer Acquisition provides the Company with broad brand, geographic and channel diversification and substantially expands the Company's business, providing both distribution into new channels and cost synergy opportunities.
The results of operations of the Colomer business are included in the Company’s Consolidated Financial Statements commencing on the Acquisition Date.
For the three months ended March 31, 2014, the Company incurred $3.8 million of acquisition and integration costs in the Consolidated Statements of Operations and Comprehensive Income (Loss), which consist of $0.4 million of acquisition costs and $3.4 million of integration costs related to the Colomer Acquisition. The acquisition costs primarily include legal and consulting fees related to the Colomer Acquisition. The integration costs consist of non-restructuring costs related to the Company's plans to integrate Colomer's operations into the Company's business, and, for 2014, primarily include employee-related costs related to management changes and audit-related fees.
Purchase Price Allocation
The Company accounted for the Colomer Acquisition as a business combination during the fourth quarter of 2013. The table below summarizes the amounts recognized for assets acquired and liabilities assumed as of the Acquisition Date, as well as adjustments made in the period after the Acquisition Date to the amounts initially recorded in 2013 (the "Measurement Period Adjustments"). Accordingly, the Company retrospectively adjusted its balance sheet as of December 31, 2013 to reflect these Measurement Period Adjustments. The Measurement Period Adjustments did not have a material impact on the Company's Consolidated Statements of Operations and Comprehensive Income for the year ended December 31, 2013.
The total consideration of $664.5 million was recorded based on the respective estimated fair values of the net assets acquired on the Acquisition Date with resulting goodwill, as follows:

7

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)


 
Amounts Previously Recognized As of October 9, 2013 (Provisional) (a)
 
Measurement Period Adjustments
 
Amounts Recognized as of Acquisition Date (Adjusted)
Cash and cash equivalents
$
36.9

 
$

 
$
36.9

Trade receivables
83.9

 

 
83.9

Inventories
75.1

 

 
75.1

Prepaid expenses and other
31.3

 

 
31.3

Property, plant and equipment
96.7

 

 
96.7

Intangible assets(b)
292.7

 
5.4

 
298.1

Goodwill(b)(c)
255.7

 
(2.4
)
 
253.3

Deferred tax asset - non-current
53.1

 

 
53.1

Other assets(c)
1.9

 
3.9

 
5.8

         Total assets acquired
927.3

 
6.9

 
934.2

Accounts payable
48.0

 

 
48.0

Accrued expenses and other
65.6

 

 
65.6

Long-term debt
0.9

 

 
0.9

Long-term pension and other benefit plan liabilities
4.5

 

 
4.5

Deferred tax liability(b)
123.3

 
2.1

 
125.4

Other long-term liabilities(c)
20.5

 
4.8

 
25.3

        Total liabilities assumed
262.8

 
6.9

 
269.7

        Total consideration
$
664.5

 
$

 
$
664.5

(a) As previously reported in Revlon, Inc.'s 2013 Form 10-K.
(b) The Measurement Period Adjustments to intangible assets, deferred tax liability and goodwill during the three months ended March 31, 2014 relate to a change in assumptions used to calculate the fair value of an acquired customer relationship intangible asset, which increased the intangible asset by $5.4 million and extended the life of the asset from 10 to 20 years, increased deferred tax liabilities by $2.1 million, and resulted in a net decrease to goodwill of $3.3 million.
(c) The Company also recorded a $3.9 million income tax adjustment to the beginning tax balance within other assets and a $4.8 million adjustment to other long-term liabilities, resulting in a net increase to goodwill of $0.9 million.
The fair values of the net assets acquired in the Colomer Acquisition are based on management’s preliminary estimate of the respective fair values. The estimated fair values of net assets and resulting goodwill are subject to the Company finalizing its analysis of the fair value of Colomer’s assets and liabilities as of the Acquisition Date and may be adjusted upon completion of such analysis. In addition, information unknown at the time of the Colomer Acquisition could result in adjustments to the respective fair values and resulting goodwill within the year following the Colomer Acquisition.
In determining the fair values of net assets acquired and resulting goodwill, the Company considered, among other factors, the analyses of Colomer's historical financial performance and an estimate of the future performance of the acquired business, as well as market participants' intended use of the acquired assets.
The acquired intangible assets, based on the fair values of the identifiable intangible assets, are as follows:
 
Fair Values at October 9, 2013
 
Weighted Average Remaining Useful Life (in years)
Trade names, indefinite-lived
$
108.6

 
Indefinite
Trade names, finite-lived
109.4

 
5 - 20
Customer relationships
62.4

 
15 - 20
License agreement
4.1

 
10
Internally-developed IP
13.6

 
10
Total acquired intangible assets
$
298.1

 


8

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)


Unaudited Pro Forma Results
The following table presents the Company's pro forma consolidated net sales and income from continuing operations, before income taxes for the three months ended March 31, 2013. The unaudited pro forma results include the historical consolidated statements of operations of the Company and Colomer, giving effect to the Colomer Acquisition and related financing transactions as if they had occurred on January 1, 2012.
 
Unaudited Pro Forma Results
 
Three Months Ended  
 March 31, 2013
Net sales
$
450.0

Loss from continuing operations, before income taxes
(4.0
)
The pro forma results, prepared in accordance with U.S. GAAP, include the following pro forma adjustments related to the Colomer Acquisition:
(i) the pro forma increase in depreciation and amortization expense based on the fair value adjustments to property, plant and equipment and acquired finite-lived intangible assets recorded in connection with the Colomer Acquisition of $4.6 million in the three months ended March 31, 2013; and
(ii) the pro forma increase in interest expense and amortization of debt issuance costs, resulting from the issuance of the Acquisition Term Loan used by Products Corporation to finance the Colomer Acquisition, for a total combined increase of $6.1 million in the three months ended March 31, 2013.
The unaudited pro forma results do not include: (1) any revenue or cost reductions that may be achieved through the business combination; or (2) the impact of non-recurring items directly related to the business combination.
The unaudited pro forma results are not necessarily indicative of the operating results that would have occurred if the Colomer Acquisition had been completed as of the date for which the pro forma financial information is presented. In addition, the unaudited pro forma results do not purport to project the future consolidated operating results of the combined company.

3. RESTRUCTURING CHARGES
Integration Program
In January 2014, the Company announced that it was implementing actions to integrate Colomer’s operations into the Company’s business, as well as additional restructuring actions identified to reduce costs across the Company’s businesses (all such actions, together, the “Integration Program”).
The Company expects to recognize total restructuring charges, capital expenditures and related non-restructuring costs under the Integration Program of approximately $45 million to $50 million in the aggregate over the periods described below.
The Integration Program is designed to deliver cost reductions throughout the combined organization by generating synergies and operating efficiencies within the Company’s global supply chain and consolidating offices and back office support, and other actions designed to reduce selling, general and administrative ("SG&A") expenses. Certain actions that are part of the Integration Program are subject to consultations with employees, works councils or unions and governmental authorities. The Company expects to substantially complete the Integration Program by the end of 2015.
The approximately $45 million to $50 million of total expected non-restructuring costs, capital expenditures and restructuring charges under the Integration Program referred to above consist of the following:
1.
$12.5 million and $3.4 million of non-restructuring integration costs recognized in 2013 and for the three months ended March 31, 2014, respectively. Such costs have been reflected within acquisition and integration costs in the Company's Consolidated Statements of Operations and Comprehensive Income (Loss) and are related to combining Colomer’s operations into the Company’s business.
2.
Expected integration-related capital expenditures of approximately $8 million, none of which has been incurred in the first quarter of 2014, of which approximately $7 million is expected to be paid during the remainder of 2014 and the remaining balance in 2015.
3.
$13.6 million of restructuring and related charges recognized for the three months ended March 31, 2014. The Company expects total restructuring and related charges of approximately $26 million, with approximately $7 million expected to be recognized during the remainder of 2014 and any remaining charges to be recognized in 2015. A summary of the

9

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)


restructuring and related charges incurred through March 31, 2014 and expected to be incurred for the Integration Program, are as follows:
 
Restructuring Charges and Other, Net
 
 
 
 
 
 
 
Employee Severance and Other Personnel Benefits
 
Other
 
Total Restructuring Charges
 
Inventory Write-offs and Other Manufacturing-Related Costs
 
Other Charges (a)
 
Total Restructuring and Related Charges
Charges incurred for the three months ended March 31, 2014
$
13.4

 
$
0.1

 
$
13.5

 
$

 
$
0.1

 
$
13.6

Total expected charges
$
18.0

 
$
3.5

 
$
21.5

 
$
3.0

 
$
1.5

 
$
26.0

(a) 
Other charges are recorded within SG&A expenses within the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss).
Of the $13.6 million of restructuring and related charges recognized in the first quarter of 2014, $5.9 million relates to the Consumer segment and $7.7 million relates to the Professional segment.
The Company expects cash payments to total approximately $26 million related to the restructuring and related charges in connection with the Integration Program, of which $1.4 million was paid in the first quarter of 2014, approximately $20 million is expected to be paid in the remainder of 2014 and the balance in 2015.
December 2013 Program
In December 2013, the Company announced restructuring actions that include exiting its business operations in China, as well as implementing other immaterial restructuring actions outside the U.S. that are expected to generate other operating efficiencies (the "December 2013 Program"). Certain of these restructuring actions are subject to consultations with employees, works councils or unions and governmental authorities and will result in the Company eliminating approximately 1,100 positions in 2014, primarily in China, which included eliminating in the first quarter of 2014 approximately 940 beauty advisors retained indirectly through a third-party agency. The charges incurred for the December 2013 Program relate entirely to the Consumer segment.
A summary of the restructuring and related charges incurred through March 31, 2014 and expected to be incurred for the December 2013 Program, are as follows:
 
Restructuring Charges and Other, Net
 
 
 
 
 
 
 
 
 
Employee Severance and Other Personnel Benefits
 
Other
 
Total Restructuring Charges
 
Allowances and Returns
 
Inventory Write-offs
 
Other Charges
 
Total Restructuring and Related Charges
Charges incurred through December 31, 2013
$
9.1

 
$
0.5

 
$
9.6

 
$
7.4

 
$
4.0

 
$
0.4

 
$
21.4

Cumulative charges incurred through March 31, 2014
$
9.1

 
$
0.5

 
$
9.6

 
$
7.4

 
$
4.0

 
$
0.4

 
$
21.4

Total expected charges
$
9.6

 
$
0.5

 
$
10.1

 
$
7.4

 
$
4.0

 
$
0.5

 
$
22.0

The Company expects cash payments related to the December 2013 Program to total approximately $20 million, of which $0.1 million was paid in 2013, $7.4 million was paid in the first quarter of 2014, and the balance is expected to be paid in the remainder of 2014.
September 2012 Program
In September 2012, the Company announced a restructuring (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 and Canada. The charges incurred related to the September 2012 Program relate entirely to the Consumer segment.
During the first quarter of 2013, the Company recorded charges related to the September 2012 Program of $0.3 million. Of the $0.3 million charge, $0.2 million is recorded in restructuring charges and $0.1 million is recorded in SG&A expenses. The Company has recognized cumulative charges of $27.2 million through December 31, 2013 related to the September 2012 Program, all of which relate to the Company's Consumer segment. There were no charges related to such program in the first quarter of 2014.

10

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 expects net cash payments to total approximately $25 million related to the September 2012 Program, of which $21.1 million was paid cumulatively through December 31, 2013, $2.2 million was paid in the three months ended March 31, 2014 and the balance is expected to be paid during the remainder of 2014.
Restructuring Reserve
The related liability balance and activity for the restructuring costs are presented below:
 
 
 
 
 
 
 
Utilized, Net
 
 
Balance
Beginning of Year
 
(Income) Expense, Net
 
Foreign Currency Translation
 

Cash
 

Noncash
 
Balance End of Year
Integration Program:
 
 
 
 
 
 
 
 
 
 
 
Employee severance and other personnel benefits
$

 
$
13.4

 
$

 
$
(1.3
)
 
$

 
$
12.1

Other

 
0.1

 

 
(0.1
)
 

 

December 2013 Program:

 

 

 

 

 

Employee severance and other personnel benefits
9.0

 

 
(0.2
)
 
(6.3
)
 

 
2.5

Other
0.5

 

 

 
(0.5
)
 

 

September 2012 Program:

 

 

 

 

 

Employee severance and other personnel benefits
2.7

 

 

 
(1.4
)
 

 
1.3

Other
1.5

 

 

 
(0.8
)
 

 
0.7

Total restructuring reserve
$
13.7

 
$
13.5

 
$
(0.2
)
 
$
(10.4
)
 
$

 
$
16.6


As of March 31, 2014, $16.2 million of the restructuring reserve balance was included within accrued expenses and other and $0.4 million was included within other long-term liabilities in the Company's Consolidated Balance Sheet. As of December 31, 2013, the entire restructuring reserve balance was included within accrued expenses and other in the Company's Consolidated Balance Sheet.

4. DISCONTINUED OPERATIONS
On December 30, 2013, the Company announced that it was implementing restructuring actions that include exiting its business operations in China (refer to Note 3, "Restructuring Charges"). The Company expects to complete such exit by the end of 2014.
The results of the China discontinued operations are included within loss from discontinued operations, net of taxes, within the Consumer segment. The summary comparative financial results of discontinued operations are as follows:
 
Three Months Ended March 31,
 
2014
 
2013
Net sales
$
0.4

 
$
6.0

Loss from discontinued operations, before taxes
(2.8
)
 
(2.4
)
Provision for income taxes
0.4

 

Loss from discontinued operations, net of taxes
(3.2
)
 
(2.4
)
Assets and liabilities of discontinued operations included in the Consolidated Balance Sheets consist of the following:

11

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)


 
March 31, 2014
 
December 31, 2013
Cash and cash equivalents
$
17.4

 
$
0.9

Trade receivables, net
1.1

 
1.9

Inventories

 

Other current assets
0.1

 

Total current assets
18.6

 
2.8

Total assets
$
18.6

 
$
2.8

 

 

Accounts payable
$
7.5

 
$
4.7

Accrued expenses and other
16.0

 
27.6

Total current liabilities
23.5

 
32.3

Other long-term liabilities

 
2.8

Total liabilities
$
23.5

 
$
35.1


5. PENSION AND POST-RETIREMENT BENEFITS
The components of net periodic benefit (income) costs for the Company’s pension and the other post-retirement benefit plans for the first quarter of 2014 and 2013 are as follows:
 


Pension Plans
 
Other
Post-Retirement
Benefit Plans
 
Three Months Ended March 31,
 
2014
 
2013
 
2014
 
2013
Net periodic benefit (income) costs:
 
Service cost
$
0.2

 
$
0.2

 
$

 
$

Interest cost
7.5

 
6.9

 
0.2

 
0.1

Expected return on plan assets
(10.4
)
 
(9.5
)
 

 

Amortization of actuarial loss
1.2

 
2.1

 

 
0.1

 
$
(1.5
)
 
$
(0.3
)
 
$
0.2

 
$
0.2

In the three months ended March 31, 2014, the Company recognized net periodic benefit income of $(1.3) million, compared to $(0.1) million in the three months ended March 31, 2013, primarily due to an increase in the fair value of pension plan assets at December 31, 2013, as well as lower amortization of actuarial losses. Net periodic benefit (income) costs are reflected in the Company's Unaudited Consolidated Financial Statements as follows:
 
Three Months Ended March 31,
 
2014
 
2013
Net periodic benefit (income) costs:
 
 
 
Cost of sales
$
(0.7
)
 
$
(0.4
)
Selling, general and administrative expense
(0.2
)
 
0.6

Inventories
(0.4
)
 
(0.3
)
 
$
(1.3
)
 
$
(0.1
)
The Company expects that it will have net periodic benefit income of approximately $(5) million for its pension and other post-retirement benefit plans for all of 2014, compared with net periodic benefit income of $(0.4) million in 2013.
During the first quarter of 2014, $6.1 million and $0.2 million were contributed to the Company’s pension plans and other post-retirement benefit plans, respectively. The Company currently expects to contribute approximately $20 million in the aggregate to its pension and other post-retirement benefit plans in 2014.

12

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)


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 Note 16, "Savings Plan, Pension and Post-Retirement Benefits," to the Consolidated Financial Statements in Revlon, Inc.'s 2013 Form 10-K.
        
6. SEGMENT DATA AND RELATED INFORMATION
Reportable operating segments include components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (the “Chief Executive Officer”) in deciding how to allocate resources and in assessing performance. As a result of the similarities in the procurement, marketing and distribution processes for all of the Company’s products, much of the information provided in the consolidated financial statements is similar to, or the same as, that reviewed on a regular basis by the Company's management.
At March 31, 2014, the Company’s operations are organized into the following two operating segments, which also represent the Company’s reportable segments:
Consumer - The Consumer segment is comprised of the Company's consumer brands, which primarily include Revlon, Almay, SinfulColors and Pure Ice in cosmetics; Revlon ColorSilk in women’s hair color; Revlon in beauty tools; and Mitchum in anti-perspirant deodorants. The Company’s principal customers for its consumer products include the mass retail channel, consisting of large mass volume retailers and chain drug and food stores in the U.S. and internationally, as well as certain department stores and other specialty stores, such as perfumeries, outside the U.S. The Consumer segment also includes a skincare and hair color line sold in the mass retail channel, primarily in Spain, which were acquired as part of the Colomer Acquisition.
Professional - The Professional segment is comprised primarily of the brands which the Company acquired in the Colomer Acquisition, which include Revlon Professional in hair color and hair care; CND-branded products in nail polishes and nail enhancements; and American Crew in men’s grooming products, all of which are sold worldwide in the professional salon channel. The Professional segment also includes a multi-cultural line consisting of Crème of Nature hair care products sold in the mass retail channel and in professional salons, primarily in the U.S. The Company’s principal customers for its professional products include hair and nail salons and distributors in the U.S. and internationally.
The Company's management evaluates segment profit, which is defined as income from continuing operations before interest, taxes, depreciation, amortization, gains/losses on foreign currency fluctuations, gains/losses on the early extinguishment of debt and miscellaneous expenses, for each of the Company's Consumer and Professional segments. Segment profit also excludes unallocated corporate expenses and the impact of certain items that are not directly attributable to the segments' underlying operating performance, which for the three months ended March 31, 2014 and 2013 include the impact of: (i) restructuring and related charges; (ii) acquisition and integration costs; (iii) costs of sales resulting from a fair value adjustment to inventory acquired in the Colomer Acquisition; and (iv) insurance proceeds received in 2013 related to the 2011 fire that destroyed the Company's facility in Venezuela. Such items are shown in the table reconciling segment profit to consolidated income before income taxes. Unallocated corporate expenses primarily relate to general and administrative expenses related to the corporate organization. These expenses are recorded in unallocated corporate expenses as these items are centrally directed and controlled and are not included in internal measures of segment operating performance. The Company does not have any material inter-segment sales.
The accounting policies for each of the reportable segments are the same as those described in Note 1, “Description of Business and Summary of Significant Accounting Policies” in Revlon, Inc.'s 2013 Form 10-K. The assets and liabilities of the Company are managed centrally and are reported internally in the same manner as the consolidated financial statements; thus, no additional information regarding assets and liabilities of the Company’s operating segments is produced for the Company's management or included herein.
The following table is a comparative summary of the Company’s net sales and segment profit by operating segment for the three months ended March 31, 2014 and 2013:

13

REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)


 
Three Months Ended March 31,
 
2014 (a)
 
2013
Segment Net Sales:
 
 
 
Consumer
$
339.5

 
$
325.9

Professional
130.3

 

Total
$
469.8

 
$
325.9

 
 
 
 
Segment Profit:
 
 
 
Consumer
$
71.5

 
$
76.3

Professional
31.9

 

Total
$
103.4

 
$
76.3

 
 
 
 
Reconciliation:
 
 
 
Segment Profit
$
103.4

 
$
76.3

Less:
 
 
 
Unallocated corporate expenses
15.6

 
17.6

Depreciation and amortization
25.0

 
17.0

Non-recurring items:
 
 
 
Restructuring and related charges
13.6

 
0.3

Acquisition and integration costs
3.8

 

Inventory purchase accounting adjustment, cost of sales
2.6

 

Gain from insurance proceeds related to Venezuela fire

 
(8.3
)
Operating Income
42.8


49.7

Less:
 
 
 
Interest Expense
22.3

 
18.8

Interest Expense - Preferred Stock

 
1.6

Amortization of debt issuance costs
1.4

 
1.3

Loss on early extinguishment of debt
1.9

 
27.9

Foreign currency losses, net
1.4

 
3.3

Miscellaneous, net
0.1

 
0.1

Income (loss) from continuing operations before income taxes
$
15.7

 
$
(3.3
)
(a) The Consumer segment net sales and segment profit in the first quarter of 2014 include the results of retail brands acquired in the Colomer Acquisition, which had previously been reported in the Professional segment.
As of March 31, 2014, the Company had operations established in 24 countries outside of the U.S. and its products are sold throughout the world. Generally, net sales by geographic area are presented by attributing revenues from external customers on the basis of where the products are sold.
In the tables below, certain prior year amounts have been reclassified to conform to the current period’s presentation.
 
Three Months Ended March 31,
 
2014
 
2013
Geographic area:
 
 
 
 
 
 
 
   Net sales:
 
 
 
 
 
 
 
      United States
$
250.2

 
53%
 
$
192.1

 
59%
  Outside of the United States
219.6

 
47%
 
133.8

 
41%
 
$
469.8

 
 
 
$
325.9

 
 


14

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)


 
March 31,
2014
 
December 31,
2013
Long-lived assets, net:
 
 
 
 
 
 
United States
$
840.4

 
73%
 
$
837.0

 
73%
Outside of the United States
308.3

 
27%
 
315.1

 
27%
 
$
1,148.7

 
 
$
1,152.1

 
 

 
Three Months Ended March 31,
 
2014
 
2013
Classes of similar products:
 
 
 
 
 
 
 
   Net sales:
 
 
 
 
 
 
 
Color cosmetics
$
255.3

 
54%
 
$
219.2

 
67%
Hair care
130.7

 
28%
 
41.6

 
13%
Beauty care and fragrance
83.8

 
18%
 
65.1

 
20%
 
$
469.8

 
 
 
$
325.9

 
 

7. INVENTORIES
 
March 31, 2014
 
December 31,
2013
Raw materials and supplies
$
51.0

 
$
50.8

Work-in-process
20.1

 
12.8

Finished goods
117.3

 
111.4

 
$
188.4

 
$
175.0


8. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill

The following table presents the changes in goodwill by segment during the three months ended March 31, 2014:
 
Consumer
 
Professional
 
Total
Balance at December 31, 2013 before Measurement Period Adjustments(a)
$
217.9

 
$
256.8

 
$
474.7

Measurement Period Adjustments

 
(2.4
)
 
(2.4
)
Balance at December 31, 2013 and March 31, 2014
$
217.9

 
$
254.4

 
$
472.3

(a) As previously reported in Revlon, Inc.'s 2013 Form 10-K.

During the three months ended March 31, 2014, the Company recorded Measurement Period Adjustments to certain net assets and intangible assets acquired in the Colomer Acquisition on October 9, 2013. See Note 2, "Business Combination" for further discussion of the Colomer Acquisition.

Intangible Assets, Net

The following tables present details of the Company's total intangible assets:

15

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)


 
March 31, 2014
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Finite-lived intangible assets:
 
 
 
 
 
Trademarks and Licenses
$
142.5

 
$
(14.3
)
 
$
128.2

Customer relationships
111.5

 
(8.4
)
 
103.1

Patents and Internally-Developed IP
15.8

 
(1.9
)
 
13.9

Total finite-lived intangible assets
$
269.8

 
$
(24.6
)
 
$
245.2

 
 
 
 
 
 
Indefinite-lived intangible assets:
 
 
 
 
 
Trade Names
$
109.9

 
 
 
$
109.9

Total indefinite-lived intangible assets
$
109.9

 
 
 
$
109.9

 
 
 
 
 
 
Total intangible assets
$
379.7

 
$
(24.6
)
 
$
355.1

 
 
 
 
 
 
 
December 31, 2013(a)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Finite-lived intangible assets:
 
 
 
 
 
Trademarks and Licenses
$
142.1

 
$
(11.0
)
 
$
131.1

Customer relationships
111.5

 
(6.7
)
 
104.8

Patents and Internally-Developed IP
15.8

 
(1.3
)
 
14.5

Total finite-lived intangible assets
$
269.4

 
$
(19.0
)
 
$
250.4

 
 
 
 
 
 
Indefinite-lived intangible assets:
 
 
 
 
 
Trade Names
$
109.7

 
 
 
$
109.7

Total indefinite-lived intangible assets
$
109.7

 
 
 
$
109.7

 
 
 
 
 
 
Total intangible assets
$
379.1

 
$
(19.0
)
 
$
360.1


(a) During the three months ended March 31, 2014, the Company recorded Measurement Period Adjustments to customer relationships acquired in the Colomer Acquisition on October 9, 2013. Accordingly, the prior period has been retrospectively adjusted for such Measurement Period Adjustments. Refer to Note 2, "Business Combination" for additional details.


16

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)



9. ACCRUED EXPENSES AND OTHER
 
March 31,
2014
 
December 31,
2013
 
 
Sales returns and allowances
$
70.4

 
$
91.5

Compensation and related benefits
55.9

 
74.5

Advertising and promotional costs
50.3

 
42.9

Taxes
24.0

 
28.5

Interest
6.3

 
13.8

Restructuring reserve
16.2

 
13.7

Other
49.0

 
48.8

 
$
272.1

 
$
313.7


10. LONG-TERM DEBT
 
March 31, 2014
 
December 31, 2013
Amended Term Loan Facility: Acquisition Term Loan due 2019, net of discounts (a)
$
696.6

 
$
698.3

Amended Term Loan Facility: 2011 Term Loan due 2017, net of discounts (a)
670.8

 
670.1

Amended Revolving Credit Facility (b)

 

5¾% Senior Notes due 2021 (c)
500.0

 
500.0

Amended and Restated Senior Subordinated Term Loan due 2014 (d)
58.4

 
58.4

Spanish Government Loan due 2025 (e)
0.9

 
0.9

 
1,926.7

 
1,927.7

Less current portion   
(65.4
)
 
(65.4
)
 
$
1,861.3

 
$
1,862.3

(a) In February 2014, Products Corporation entered into an amendment (the “February 2014 Term Loan Amendment”) to the Company's amended term loan agreement, which is comprised of (i) the $675.0 million term loan due November 19, 2017 (the "2011 Term Loan") and (ii) the $700.0 million term loan due October 8, 2019 (the "Acquisition Term Loan"), which had $698.2 million in aggregate principal balance outstanding as of March 31, 2014 (together, the "Amended Term Loan Agreement"). The February 2014 Term Loan Amendment reduced the interest rates applicable to the 2011 Term Loan. See "Recent Debt Transactions - February 2014 Term Loan Amendment" below for further discussion. Additionally, see Note 11, "Long-Term Debt and Redeemable Preferred Stock," to the Consolidated Financial Statements in Revlon, Inc.'s 2013 Form 10-K for additional details regarding Products Corporation's Amended Term Loan Agreement.
(b) See Note 11, "Long-Term Debt and Redeemable Preferred Stock," to the Consolidated Financial Statements in Revlon, Inc.'s 2013 Form 10-K for certain details regarding Products Corporation's existing $175.0 million asset-based, multi-currency revolving credit facility (the "Amended Revolving Credit Facility").
(c) See Note 11, "Long-Term Debt and Redeemable Preferred Stock," to the Consolidated Financial Statements in Revlon, Inc.'s 2013 Form 10-K for certain details regarding Products Corporation's 5¾% Senior Notes that mature on February 15, 2021.
(d) See Note 11, "Long-Term Debt and Redeemable Preferred Stock," to the Consolidated Financial Statements in Revlon, Inc.'s 2013 Form 10-K for certain details regarding the $58.4 million principal amount outstanding under the Amended and Restated Senior Subordinated Term Loan Agreement, which matures on October 8, 2014 (the "Non-Contributed Loan").
(e) See Note 11, "Long-Term Debt and Redeemable Preferred Stock," to the Consolidated Financial Statements in Revlon, Inc.'s 2013 Form 10-K for certain details regarding the euro-denominated loan payable to the Spanish government which matures on June 30, 2025.

17

REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)


Recent Debt Transactions
February 2014 Term Loan Amendment
In February 2014, Products Corporation entered into the February 2014 Term Loan Amendment to the Company's Amended Term Loan Agreement among Products Corporation, as borrower, a syndicate of lenders and Citicorp USA, Inc., as administrative and collateral agent.
Pursuant to the February 2014 Term Loan Amendment, the interest rates applicable to Eurodollar Loans under the $675.0 million 2011 Term Loan bear interest at the Eurodollar Rate plus 2.5% per annum, with the Eurodollar Rate not to be less than 0.75% (compared to 3.0% and 1.0%, respectively, prior to the February 2014 Term Loan Amendment), while Alternate Base Rate Loans under the 2011 Term Loan bear interest at the Alternate Base Rate plus 1.5%, with the Alternate Base Rate not to be less than 1.75% (compared to 2.0% in each case prior to the February 2014 Term Loan Amendment) (and as each such term is defined in the Amended Term Loan Agreement). The 2011 Term Loan is subject to a 1% premium in connection with any repricing transaction occurring prior to the date that is 12 months after the closing of such amendment (or February 26, 2015).
Products Corporation's Acquisition Term Loan and Amended Revolving Credit Facility were not amended in connection with the February 2014 Term Loan Amendment.
For the three months ended March 31, 2014, the Company incurred approximately $1.1 million of fees and expenses in connection with the February 2014 Term Loan Amendment, which were expensed as incurred, and wrote-off $0.8 million of unamortized debt discount and deferred financing costs as a result of the February 2014 Term Loan Amendment. These amounts, totaling $1.9 million, were recognized within loss on early extinguishment of debt in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended March 31, 2014.
Covenants
Products Corporation was in compliance with all applicable covenants under the Amended Term Loan Agreement and the Amended Revolving Credit Facility as of March 31, 2014. At March 31, 2014, the aggregate principal amounts outstanding under the Acquisition Term Loan and the 2011 Term Loan were $698.2 million and $675.0 million, respectively, and availability under the $175.0 million Amended Revolving Credit Facility, based upon the calculated borrowing base less $9.5 million of outstanding undrawn letters of credit and nil then drawn on the Amended Revolving Credit Facility, was $165.5 million.
Products Corporation was in compliance with all applicable covenants under its 5¾% Senior Notes Indenture as of March 31, 2014.

11. BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE
Shares used in basic earnings (loss) per share are computed using the weighted average number of common shares outstanding during each period. Shares used in diluted earnings (loss) per share include the dilutive effect of unvested restricted shares and outstanding stock options under the Company’s stock plan using the treasury stock method. For the three months ended March 31, 2014 and 2013, all outstanding options to purchase shares of Revlon, Inc. Class A common stock, par value of $0.01 per share (the “Class A Common Stock”), that could potentially dilute basic earnings per common share in the future were excluded from the calculation of diluted earnings per common share as their effect would be anti-dilutive, as in each case their exercise price was in excess of the average NYSE closing price of the Class A Common Stock for these periods.
For the three months ended March 31, 2014, there are 108,854 weighted average shares of unvested restricted stock that could potentially dilute basic earnings per common share in the future that were excluded from the calculation of diluted earnings per common share as their effect would be anti-dilutive. For the three months ended March 31, 2013, there were no shares of unvested restricted stock outstanding.
The components of basic and diluted earnings (loss) per common share for the three months ended March 31, 2014 and 2013 are as follows:

18

REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)


 
Three Months Ended March 31,
 
2014
 
2013
Numerator:
 
 
 
Income (loss) from continuing operations
$
8.7

 
$
(4.5
)
Loss from discontinued operations
(3.2
)
 
(2.4
)
Net income (loss)
$
5.5

 
$
(6.9
)
Denominator:
 
 
 
Weighted average common shares outstanding – Basic
52,356,798

 
52,356,798

Effect of dilutive restricted stock
11,146

 

Weighted average common shares outstanding – Diluted
52,367,944

 
52,356,798

Basic earnings (loss) per common share:
 
 
 
Continuing operations
$
0.17

 
$
(0.08
)
Discontinued operations
(0.06
)
 
(0.05
)
Net income (loss)
$
0.11

 
$
(0.13
)
Diluted earnings (loss) per common share:
 
 


Continuing operations
$
0.17

 
$
(0.08
)
Discontinued operations
(0.06
)
 
(0.05
)
Net income (loss)
$
0.11

 
$
(0.13
)

12. ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss as of March 31, 2014 are as follows:
 
Foreign Currency Translation
 
Actuarial (Loss) Gain on Post-retirement Benefits
 
Deferred Gain - Hedging
 
Accumulated Other Comprehensive Loss
Balance, January 1, 2014
$
19.2

 
$
(170.5
)
 
$
1.5

 
$
(149.8
)
Currency translation adjustment, net of tax benefit of $0.5 million
1.6

 

 

 
1.6

Amortization of pension related costs, net of tax of nil (a)     

 
1.2

 

 
1.2

Revaluation of derivative financial instrument, net of tax of $0.6 million(b)

 

 
(1.0
)
 
(1.0
)
Other comprehensive income (loss)
1.6

 
1.2

 
(1.0
)
 
1.8

Balance, March 31, 2014
$
20.8

 
$
(169.3
)
 
$
0.5

 
$
(148.0
)
(a) 
Amount represents the change in accumulated other comprehensive loss as a result of the amortization of unrecognized prior service costs and actuarial losses (gains) arising during each year related to the Company’s pension and other post-retirement plans. See Note 5, “Pension and Post-retirement Benefits,” for further discussion of the Company’s pension and other post-retirement plans.
(b)  
For the three months ended March 31, 2014, the 2013 Interest Rate Swap (as hereinafter defined) was deemed effective and therefore the changes in fair value related to the 2013 Interest Rate Swap are recorded in other comprehensive income. See Note 14, "Financial Instruments," for further discussion of the 2013 Interest Rate Swap.

13. 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:

19

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)


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

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

Level 3: Fair valuing the asset or liability using unobservable inputs that reflect the Company’s own assumptions regarding the applicable asset or liability.
As of March 31, 2014, the fair values of the Company’s financial assets and liabilities that are required to be measured at fair value are categorized in the table below:
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
FX Contracts(a)     
$
0.6

 
$

 
$
0.6

 
$

2013 Interest Rate Swap(b)
0.9

 

 
0.9

 

Total assets at fair value
$
1.5

 
$

 
$
1.5

 
$

Liabilities:
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
FX Contracts(a)    
$
0.5

 
$

 
$
0.5

 
$

Total liabilities at fair value
$
0.5

 
$

 
$
0.5

 
$


As of December 31, 2013, the fair values of the Company’s financial assets and liabilities that are required to be measured at fair value are categorized in the table below:
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
FX Contracts(a)     
$
1.0

 
$

 
$
1.0

 
$

2013 Interest Rate Swap(b)
2.5

 

 
2.5

 

Total assets at fair value
$
3.5

 
$

 
$
3.5

 
$

Liabilities:
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
FX Contracts(a)    
$
0.2

 
$

 
$
0.2

 
$

Total liabilities at fair value
$
0.2

 
$

 
$
0.2

 
$


(a) 
The fair value of the Company’s foreign currency forward exchange contracts ("FX Contracts") was measured based on observable market transactions of spot and forward rates on the respective dates. See Note 14, “Financial Instruments.”
(b) 
The fair value of the Company's 2013 Interest Rate Swap was measured based on the implied forward rates from the U.S. Dollar three-month LIBOR yield curve on the respective dates. See Note 14, “Financial Instruments.”
As of March 31, 2014, the fair values and carrying values of the Company’s long-term debt, including the current portion of long-term debt, are categorized in the table below:
 
Fair Value
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Carrying Value
Liabilities:
 
 
 
 
 
 
 
 
 
Long-term debt, including current portion
$

 
$
1,933.8

 
$

 
$
1,933.8

 
$
1,926.7


20

REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)



As of December 31, 2013, the fair values and carrying values of the Company’s long-term debt, including the current portion of long-term debt, are categorized in the table below:
 
Fair Value
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Carrying Value
Liabilities:
 
 
 
 
 
 
 
 
 
Long-term debt, including current portion
$

 
$
1,931.9

 
$

 
$
1,931.9

 
$
1,927.7

The fair value of the Company's long-term debt, including the current portion of long-term debt, is based on the quoted market prices for the same issues or on the current rates offered for debt of similar remaining maturities.
The carrying amounts of cash and cash equivalents, trade receivables, notes receivable, accounts payable and short-term borrowings approximate their fair values.

14. FINANCIAL INSTRUMENTS
Products Corporation maintains standby and trade letters of credit for various corporate purposes under which Products Corporation is obligated, of which $9.5 million and $9.9 million (including amounts available under credit agreements in effect at that time) were maintained at March 31, 2014 and December 31, 2013, respectively. Included in these amounts is approximately $7.8 million and $8.1 million at March 31, 2014 and December 31, 2013, 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 (i) FX Contracts, intended for the purpose of managing foreign currency exchange risk by reducing the effects of fluctuations in foreign currency exchange rates on the Company’s net cash flows, and (ii) interest rate hedging transactions, such as the 2013 Interest Rate Swap, intended for the purpose of managing interest rate risk associated with Products Corporation’s variable rate indebtedness.
Foreign Currency Forward Exchange Contracts
The FX Contracts are entered into primarily to hedge the anticipated net cash flows resulting from inventory purchases and intercompany payments denominated in currencies other than the local currencies of the Company’s foreign and domestic operations and generally have maturities of less than one year.
The U.S. Dollar notional amount of the FX Contracts outstanding at March 31, 2014 and December 31, 2013 was $34.0 million and $52.9 million, respectively.
Interest Rate Swap Transaction
In November 2013, Products Corporation executed a forward-starting floating-to-fixed interest rate swap transaction with a 1.00% floor, based on a notional amount of $400 million in respect of indebtedness under the Acquisition Term Loan over a period of three years (the "2013 Interest Rate Swap"). The Company designated the 2013 Interest Rate Swap as a cash flow hedge of the variability of the forecasted three-month LIBOR interest rate payments related to its Acquisition Term Loan with respect to the $400 million notional amount over the three-year term of the 2013 Interest Rate Swap. Under the terms of the 2013 Interest Rate Swap, Products Corporation will receive from the counterparty a floating interest rate based on the higher of three-month USD LIBOR or 1.00% commencing in May 2015, while paying a fixed interest rate payment to the counterparty equal to 2.0709% (which effectively fixes the interest rate on such notional amount at 5.0709% over the three-year term of the 2013 Interest Rate Swap.) For the three months ended March 31, 2014, the 2013 Interest Rate Swap was deemed effective and therefore the changes in fair value related to the 2013 Interest Rate Swap have been recorded in Other Comprehensive Income.
Credit Risk
Exposure to credit risk in the event of nonperformance by any of the counterparties is limited to the gross fair value of the derivative instruments in asset positions, which totaled $1.5 million and $3.5 million as of March 31, 2014 and December 31, 2013, respectively. The Company attempts to minimize exposure to credit risk by generally entering into derivative contracts with counterparties that have investment-grade credit ratings and are major financial institutions. The Company also periodically monitors any changes in the credit ratings of its counterparties. Given the current credit standing of the Company's derivative instrument counterparties, the Company believes the risk of loss under these derivative instruments arising from any non-performance by any of the counterparties is remote.

21

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)


Quantitative Information – Derivative Financial Instruments
The effects of the Company’s derivative instruments on its consolidated financial statements were as follows:
(a)
Fair Values of Derivative Financial Instruments in Consolidated Balance Sheets:
 
Fair Values of Derivative Instruments
 
Assets
 
Liabilities
 
Balance Sheet
 
March 31,
2014
 
December 31,
2013
 
Balance Sheet
 
March 31,
2014
 
December 31,
2013
 
Classification
 
Fair Value
 
Fair Value
 
Classification
 
Fair Value
 
Fair Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
2013 Interest Rate Swap(i)
Other assets
 
$
0.9

 
$
2.5

 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
FX Contracts(ii)   
Prepaid expenses and other
 
0.6

 
1.0

 
Accrued Expenses
 
$
0.5

 
$
0.2


(i) The fair values of the 2013 Interest Rate Swap at March 31, 2014 and December 31, 2013 were measured based on the implied forward rates from the U.S. Dollar three-month LIBOR yield curve at March 31, 2014 and December 31, 2013, respectively.

(ii) The fair values of the FX Contracts at March 31, 2014 and December 31, 2013 were measured based on observable market transactions of spot and forward rates at March 31, 2014 and December 31, 2013, respectively.

(b) Effects of Derivative Financial Instruments on the Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended March 31, 2014 and 2013:
 
Amount of Gain (Loss) Recognized in Other Comprehensive Income
Three Months Ended March 31,
2014
 
2013
Derivatives designated as hedging instruments:
 
 
 
2013 Interest Rate Swap
$
(1.6
)
 
$

 
Income Statement Classification
 
Amount of Gain (Loss) Recognized in Net Income (Loss)
 
Three Months Ended March 31,
 
2014
 
2013
Derivatives not designated as hedging instruments:
 
 
 
 
 
FX Contracts
Foreign currency losses, net
 
$
(0.1
)
 
$
0.5


15. 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 carryforwards, foreign earnings taxable in the U.S., non-deductible 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 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.

22

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)


For the first quarter of 2014 and 2013, the Company recorded a provision for income taxes of $7.0 million and $1.2 million, respectively. The $5.8 million increase in the provision for income taxes was primarily attributable to the loss on early extinguishment of debt recognized in the first quarter of 2013 that favorably impacted the provision for income taxes in the first quarter of 2013, partially offset by certain discrete items that favorably impacted the provision for income taxes in the first quarter of 2014, including the favorable resolution of tax matters in foreign jurisdictions in the first quarter of 2014.
The Company's effective tax rate for the three months ended March 31, 2014 was higher than the federal statutory rate of 35% due principally to foreign dividends and earnings taxable in the U.S., partially offset by foreign and U.S. tax effects attributable to operations outside the U.S.
The Company remains subject to examination of its income tax returns in various jurisdictions including, without limitation, Australia and Spain, for tax years ended December 31, 2009 through December 31, 2012 and the U.S. (federal) and South Africa for tax years ended December 31, 2010 through December 31, 2012.

16. CONTINGENCIES
The Company is involved in various routine legal proceedings incidental to the ordinary course of its business. The Company believes that the outcome of all pending legal proceedings in the aggregate is not reasonably likely to have a material adverse effect on the Company’s business, financial condition and/or its results of operations. However, in light of the uncertainties involved in legal proceedings generally, the ultimate outcome of a particular matter could be material to the Company’s operating results for a particular period depending on, among other things, the size of the loss or the nature of the liability imposed and the level of the Company’s income for that particular period.

17. RELATED PARTY TRANSACTIONS
Reimbursement Agreements
As previously disclosed in Revlon, Inc.'s 2013 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 its 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.

23

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 net activity related to services provided and/or purchased under the Reimbursement Agreements during the three months ended March 31, 2014 and 2013 was $3.8 million and $6.1 million, respectively, which primarily includes the partial payments made by the Company to MacAndrews & Forbes during the first quarter of 2014 and 2013 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 March 31, 2014 and December 31, 2013, a payable balance of $0.1 million and nil, respectively, from MacAndrews & Forbes was included in the Company’s Consolidated Balance Sheets for transactions subject to the Reimbursement Agreements.

18. SUBSEQUENT EVENT
On April 30, 2014, Products Corporation delivered notice to the administrative agent for the Amended and Restated Senior Subordinated Term Loan Agreement, indicating that on May 1, 2014 Products Corporation will use available cash on hand to optionally prepay in full the remaining $58.4 million principal amount outstanding under the Non-Contributed Loan that is owing from Products Corporation to various third parties.  The Non-Contributed Loan would have otherwise matured on October 8, 2014.


24

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 currently operates in two segments, the consumer division (“Consumer”) and the professional division (“Professional”), and manufactures, markets and sells worldwide an extensive array of beauty and personal care products, including cosmetics, hair color, hair care and hair treatments, beauty tools, men's grooming products, anti-perspirant deodorants, fragrances, skincare and other beauty care products. The Company believes that its global brand name recognition, product quality, R&D, new product innovation and marketing experience have enabled it to create leading global consumer and professional brands.
On October 9, 2013 (the "Acquisition Date"), Products Corporation completed its acquisition of The Colomer Group Participations, S.L. ("Colomer" and the "Colomer Acquisition"). The results of operations of the Colomer business are included in the Company’s Consolidated Financial Statements commencing on the Acquisition Date.
The Company's Business Strategy
The Company’s vision is to establish Revlon as the quintessential and most innovative beauty company in the world by offering products that make consumers feel attractive and beautiful. We want to inspire our consumers to express themselves boldly and confidently.
The Company’s strategic goal is to optimize the market and financial performance of its portfolio of brands and assets. The business strategies employed by the Company to achieve this goal are:
1.
Manage financial drivers for value creation. We are focused on gross profit margin expansion, which includes optimizing price, as well as allocating sales allowances to maximize our return on trade spending. We also continue to focus on reducing costs across our global supply chain. In addition, we are focused on eliminating non-value added general and administrative costs in order to fund reinvestment to facilitate growth.
2.
Grow our global brands through exceptional innovation and effective brand support. We are focused on creating fewer, bigger and better innovations across our brands that are relevant, unique, impactful and distinctive. We want to continue to build strong brands by focusing on high-quality, consumer-preferred offerings; effective consumer communication; increased levels of effective advertising and promotion; and superb execution and collaboration with our customers.
3.
Pursue growth opportunities. We are focused on pursuing organic growth opportunities within our existing brand portfolio and existing channels, as well as seeking acquisition opportunities that complement our portfolio. We are also focused on exploring opportunities to expand our geographical presence in key markets, as appropriate.
4.
Improve cash flow. We are focused on improving our cash flows through, among other things, continued effective management of our working capital and by focusing on appropriate return on capital spending.
Discontinued Operations Presentation
As a result of the Company's decision on December 30, 2013 to exit its business operations in China, the Company is reporting the results of its China operations within loss from discontinued operations, net of taxes, in the Company's Consolidated Statements of Operations and Comprehensive Income (Loss). Accordingly, prior year amounts have been restated to conform to this presentation. Unless otherwise stated, financial results discussed within "Overview" and "Results of Operations" refer to continuing operations. See Note 4, "Discontinued Operations," to the Unaudited Consolidated Financial Statements in this Form 10-Q for further discussion.
Overview of Net Sales and Earnings Results
Consolidated net sales in the first quarter of 2014 were $469.8 million, an increase of $143.9 million, or 44.2%, compared to $325.9 million in the first quarter of 2013. Excluding the unfavorable impact of foreign currency fluctuations of $10.0 million,


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)


consolidated net sales increased $153.9 million, or 47.2%, in the first quarter of 2014, primarily driven by the inclusion of $145.8 million of net sales as a result of the Colomer Acquisition in October 2013, of which $130.3 million was included within the Professional segment and $15.5 million was included within the Consumer segment.
Consolidated income from continuing operations, net of taxes, in the first quarter of 2014 was $8.7 million, compared to a loss from continuing operations, net of taxes of $4.5 million in the first quarter of 2013, which was primarily due to:
$94.8 million of higher gross profit due to a $143.9 million increase in consolidated net sales, partially offset by a $49.1 million increase in cost of sales; and
a $27.9 million aggregate loss on early extinguishment of debt recognized in the first quarter of 2013 primarily due to the 2013 Senior Notes Refinancing (as hereinafter defined), compared to an aggregate loss on early extinguishment of debt of $1.9 million in the first quarter of 2014 as a result of the February 2014 Term Loan Amendment (as hereinafter defined);
with the foregoing partially offset by:
$84.6 million of higher selling general and administrative ("SG&A") expenses primarily driven by the inclusion of the SG&A expenses as a result of the Colomer Acquisition; and
$13.3 million of higher restructuring charges related to continuing operations incurred in the first quarter of 2014, as a result of the Integration Program.
These items are discussed in more detail within "Results of Operations" below.

Recent Events
Integration Program
In January 2014, the Company announced that it was implementing actions to integrate Colomer’s operations into the Company’s business, as well as additional restructuring actions identified to reduce costs across the Company’s businesses (all such actions, together, the “Integration Program”).
The Company expects to recognize total restructuring charges, capital expenditures and related non-restructuring costs under the Integration Program of approximately $45 million to $50 million in the aggregate over the periods described below, and to achieve annualized cost reductions of approximately $30 million to $35 million by the end of 2015. Approximately $10 million to $15 million of these cost reductions are expected to benefit 2014 results.
The Integration Program is designed to deliver cost reductions throughout the combined organization by generating synergies and operating efficiencies within the Company’s global supply chain and consolidating offices and back office support, and other actions designed to reduce selling, general and administrative expenses. Certain actions that are part of the Integration Program are subject to consultations with employees, works councils or unions and governmental authorities. The Company expects to substantially complete the Integration Program by the end of 2015.
The approximately $45 million to $50 million of total restructuring charges, related non-restructuring costs and capital expenditures under the Integration Program referred to above consist of the following:
Restructuring and related costs: During the first quarter of 2014, the Company recorded charges totaling $13.6 million related to restructuring and related actions under the Integration Program, of which $13.5 million is recorded in restructuring charges and other, net and $0.1 million is recorded in SG&A expenses. The Company expects total restructuring and related charges of approximately $26 million, with approximately $7 million expected to be recognized for the remainder of 2014 and any remaining charges to be recognized in 2015. The Company expects cash payments related to the restructuring and related charges in connection with the Integration Program to total approximately $26 million, of which $1.4 million was paid in the first quarter of 2014, with $20 million expected to be paid in the remainder of 2014 and with the remaining balance expected to be paid in 2015.
Non-restructuring integration costs: $12.5 million and $3.4 million of non-restructuring integration costs recognized in 2013 and for the three months ended March 31, 2014, respectively. Such costs have been reflected within acquisition and integration costs in the Company's Consolidated Statements of Operations and Comprehensive Income (Loss) related to combining Colomer’s operations into the Company’s business.
Capital Expenditures: Expected integration-related capital expenditures of approximately $8 million, none of which has been incurred in the first quarter of 2014. The Company expects approximately $7 million to be paid during the remainder of 2014, with the remaining balance to be paid in 2015.

26

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)


For further discussion of the Colomer Acquisition and the Integration Program, see Note 2, "Business Combination" and Note 3, "Restructuring Charges - Integration Program" to the Unaudited Consolidated Financial Statements in this Form 10-Q.
2014 Debt Transactions
In February 2014, Products Corporation entered into an amendment (the “February 2014 Term Loan Amendment”) to the Company's amended term loan agreement, which is comprised of (i) the $675.0 million term loan due November 19, 2017 (the "2011 Term Loan") and (ii) the $700.0 million term loan due October 8, 2019 (the "Acquisition Term Loan"), which has $698.2 million in aggregate principal balance outstanding as of March 31, 2014 (together, the "Amended Term Loan Agreement"). The February 2014 Term Loan Amendment reduced the interest rates applicable to Eurodollar Loans under the 2011 Term Loan to the Eurodollar Rate plus 2.5% per annum, with the Eurodollar Rate not to be less than 0.75%, and interest rates applicable to Alternate Base Rate Loans under the 2011 Term Loan to the Alternate Base Rate plus 1.5%, with the Alternate Base Rate not to be less than 1.75%. See “Financial Condition, Liquidity and Capital Resources – Long-Term Debt Instruments” for further discussion.
Operating Segments
Commencing on the Colomer Acquisition Date, the Company began operating in two segments, the Consumer segment and the Professional segment:
The Consumer segment is comprised of the Company's consumer brands, which primarily include Revlon, Almay, SinfulColors and Pure Ice in color cosmetics; Revlon ColorSilk in women’s hair color; Revlon in beauty tools; and Mitchum in anti-perspirant deodorants. The Company’s principal customers for its consumer products include the mass retail channel in the U.S. and internationally, consisting of 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 Consumer segment also includes a skincare line and a hair color line sold in the mass retail channel, primarily in Spain, which was acquired as part of the Colomer Acquisition.
The Professional segment is comprised primarily of the brands which the Company acquired in the Colomer Acquisition, which include Revlon Professional in hair color and hair care; CND-branded products in nail polishes and nail enhancements; and American Crew in men’s grooming products, all of which are sold worldwide in the professional salon channel. The Professional segment also includes a multi-cultural hair care line sold in the mass retail channel and in professional salons, primarily in the U.S. The Company’s principal customers for its professional products include hair and nail salons and distributors in the U.S. and internationally.

Results of Operations
In the tables, all amounts are in millions and numbers in parentheses ( ) denote unfavorable variances.
Consolidated Net Sales:
Consolidated net sales in the first quarter of 2014 were $469.8 million, an increase of $143.9 million, or 44.2%, compared to $325.9 million in the first quarter of 2013. Excluding the unfavorable impact of foreign currency fluctuations of $10.0 million, consolidated net sales increased $153.9 million, or 47.2%, in the first quarter of 2014, primarily driven by the inclusion of the net sales as a result of the Colomer Acquisition, commencing on the Acquisition Date. See "Segment Results" below for further discussion.
Segment Results:
The Company's management evaluates segment profit, which is defined as income from continuing operations before interest, taxes, depreciation, amortization, gains/losses on foreign currency fluctuations, gains/losses on the early extinguishment of debt and miscellaneous expenses, for each of the Company's Consumer and Professional segments. Segment profit also excludes unallocated corporate expenses and the impact of certain items that are not directly attributable to the segments' underlying operating performance, which for the three months ended March 31, 2014 and 2013 includes the impact of: (i) restructuring and related charges; (ii) acquisition and integration costs; (iii) costs of sales resulting from a fair value adjustment to inventory acquired in the Colomer Acquisition; and (iv) insurance proceeds received in 2013 related to the 2011 fire that destroyed the Company's facility in Venezuela. Unallocated corporate expenses primarily relate to general and administrative expenses related to the corporate organization. These expenses are recorded in unallocated corporate expenses as these items are centrally directed and controlled and are not included in internal measures of segment operating performance. The Company does not have any material inter-segment sales. For a reconciliation of segment profit to income from continuing operations before income taxes, see Note 6, "Segment Data and Related Information" to the Unaudited Consolidated Financial Statements in this Form 10-Q.


27

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)


The following table is a comparative summary of the Company's segment results for the three months ended March 31, 2014 and 2013:
 
Net Sales
 
Segment Profit
 
Three Months Ended March 31,
 
Change
 
XFX Change (a)
 
Three Months Ended March 31,
 
Change
 
2014
 
2013
 
$
 
%
 
$
 
%
 
2014
 
2013
 
$
 
%
Consumer
$
339.5

 
$
325.9

 
$
13.6

 
4.2
%
 
$
23.6

 
7.2
%
 
$
71.5

 
$
76.3

 
$
(4.8
)
 
(6.3
)%
Professional
130.3

 

 
130.3

 

 
130.3

 

 
31.9

 

 
31.9

 

Total Net Sales
$
469.8

 
$
325.9

 
$
143.9

 
44.2
%
 
$
153.9

 
47.2
%
 
$
103.4

 
$
76.3

 
$
27.1

 
35.5
 %
(a) XFX excludes the impact of foreign currency fluctuations.
Consumer Segment
Consumer segment net sales in the first quarter of 2014 were $339.5 million, an increase of $13.6 million, or 4.2%, compared to $325.9 million in the first quarter of 2013. Excluding the unfavorable impact of foreign currency fluctuations of $10.0 million, total Consumer net sales increased $23.6 million, or 7.2%, in the first quarter of 2014, compared to the first quarter of 2013, primarily driven by (i) the inclusion of $15.5 million of net sales from consumer brands acquired in the Colomer Acquisition, which effective with the first quarter of 2014 are reported within the Consumer segment; (ii) a $6.3 million favorable returns adjustment in the U.S. during the first quarter of 2014, as a result of lower expected discontinued products related to the Company's strategy to focus on fewer, bigger and better innovations; and (iii) higher net sales of Revlon ColorSilk hair color; partially offset by lower net sales of SinfulColors color cosmetics.
Consumer segment profit in the first quarter of 2014 was $71.5 million, a decrease of $4.8 million, or 6.3%, compared to $76.3 million in the first quarter of 2013, primarily due to $8.4 million of higher advertising expense to support the Company's Consumer brands and unfavorable foreign currency fluctuations of approximately $2 million, partially offset by higher gross profit, primarily due to the returns adjustment discussed above, net of related inventory write-off charges. See "Gross Profit" below for further discussion.
Professional Segment
The Company's Professional segment is comprised primarily of the operations acquired by the Company in the Colomer Acquisition in October 2013 (with the exception of the retail brands acquired in the Colomer Acquisition, which the Company has included within the Consumer segment beginning with the first quarter of 2014, as noted above). As there are no comparable prior years' net sales and segment profit for the Professional segment, an analysis of net sales and segment profit for the Professional segment in the first quarter of 2014, compared to the first quarter of 2013, is not included in this Form 10-Q. Professional net sales were $130.3 million for the first quarter of 2014, consisting primarily of the net sales of CND products worldwide, including CND Shellac; American Crew products; Revlon Professional products, primarily in Europe; and other professional brands world-wide.
Professional segment profit in the first quarter of 2014 was $31.9 million and is comprised primarily of the operating results of the operations acquired in the Colomer Acquisition.
Geographic Results:
In connection with changes that the organization made to its management reporting structure following the Colomer Acquisition, beginning with the first quarter of 2014, the Company has combined its former Latin America and Canada; Asia Pacific; and Europe, Middle East and Africa operating regions into the International region for reporting purposes. The Company has modified its net sales discussion to conform to how management reviews the business, and, accordingly, prior year amounts have been restated to conform to this presentation.
The following table is a comparative summary of the Company's net sales by region for the three months ended March 31, 2014 and 2013:

28

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)


 
Three Months Ended March 31,


Change
 
XFX Change (a)
 
2014
 
2013
 
$
 
%
 
$
 
%
United States
$
250.2

 
$
192.1

 
$
58.1

 
30.2
%
 
$
58.1

 
30.2
%
International
219.6

 
133.8

 
85.8

 
64.1
%
 
95.8

 
71.6
%
    Total Net Sales
$
469.8

 
$
325.9

 
$
143.9

 
44.2
%
 
$
153.9

 
47.2
%
(a) XFX excludes the impact of foreign currency fluctuations.

United States
In the U.S., net sales in the first quarter of 2014 increased 30.2% to $250.2 million, as compared to $192.1 million in the first quarter of 2013, primarily due to the inclusion of $50.9 million of net sales as a result of the Colomer Acquisition. Net sales in the U.S. were also impacted by a $6.3 million favorable returns adjustments during the first quarter 2014 as a result of lower expected discontinued products related to the Company's strategy to focus on fewer, bigger and better innovations, as well as higher net sales of Revlon ColorSilk hair color, partially offset by lower net sales of SinfulColors color cosmetics.
International
International net sales in the first quarter of 2014 increased 64.1% to $219.6 million, as compared to $133.8 million in the first quarter of 2013. Excluding the $10.0 million unfavorable impact of foreign currency fluctuations, International net sales increased $95.8 million, or 71.6%, primarily due to the inclusion of $94.9 million of net sales as a result of the Colomer Acquisition. Additionally, net sales were impacted by higher net sales of Revlon color cosmetics in Japan.

Gross profit:
 
Three Months Ended March 31,
 
Change
 
2014
 
2013

2014 vs 2013
Gross profit
$
306.3

 
$
211.5

 
$
94.8

Percentage of net sales   
65.2
%
 
64.9
%
 
0.3
%
Gross profit increased $94.8 million in the first quarter of 2014, compared to the first quarter of 2013. As a percentage of net sales, gross profit increased 0.3 percentage points in the first quarter of 2014, compared to the first quarter of 2013. The drivers of gross profit in the first quarter of 2014, compared to the first quarter of 2013, primarily included:
the inclusion of gross profit from the October 2013 Colomer Acquisition, which increased gross profit by $98.5 million and increased gross profit as a percentage of net sales by 0.8 percentage points;
the favorable impact of a first quarter 2014 returns accrual adjustment, net of related inventory write-off charges, due to lower expected discontinued products related to the Company's strategy to focus on fewer, bigger and better innovations, which increased gross profit by $4.0 million, with a de minimis impact to gross profit as a percentage of net sales;
favorable product and country sales mix within the Consumer segment, which increased gross profit by $2.9 million and increased gross profit as a percentage of net sales by 0.9 percentage points; and