e10vq
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
(Mark One)
 
     
x
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2010
 
OR
o
  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
(State or other jurisdiction of
incorporation or organization)
  13-3662955
(I.R.S. Employer
Identification No.)
     
237 Park Avenue, New York, New York
(Address of principal executive offices)
  10017
(Zip Code)
 
212-527-4000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                                                    Yes x     No o
 
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 o     No o
 
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
Large accelerated filer o   Accelerated filer x   Non-accelerated filer o   Smaller reporting company o
(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 o     No x
 
As of June 30, 2010, 48,769,593 shares of Class A Common Stock, 3,125,000 shares of Class B Common Stock and 9,336,905 shares of Preferred Stock were outstanding. At such date 37,544,640 shares of Class A Common Stock were beneficially owned by MacAndrews & Forbes Holdings Inc. and certain of its affiliates and all of the shares of Class B Common Stock were owned by REV Holdings LLC, a Delaware limited liability company and an indirectly wholly-owned subsidiary of MacAndrews & Forbes Holdings Inc.
 


 

 
REVLON, INC. AND SUBSIDIARIES
 
INDEX
 
             
 
         
        2  
        3  
        4  
        5  
        6  
      34  
      55  
      56  
      62  
      63  
      63  
        64  
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2


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PART I — FINANCIAL INFORMATION
 
Item 1.   Financial Statements
 
REVLON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions, except share and per share amounts)
 
                 
    June 30,
    December 31,
 
    2010     2009  
    (Unaudited)        
 
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 38.6     $ 54.5  
Trade receivables, less allowance for doubtful accounts of $3.2 and $3.8 as of June 30, 2010 and December 31, 2009, respectively
    172.1       181.7  
Inventories
    122.4       119.2  
Prepaid expenses and other
    52.7       48.2  
                 
Total current assets
    385.8       403.6  
Property, plant and equipment, net
    108.6       111.7  
Other assets
    99.4       96.3  
Goodwill, net
    182.5       182.6  
                 
Total assets
  $ 776.3     $ 794.2  
                 
 
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
Current liabilities:
               
Short-term borrowings
  $ 5.7     $ 0.3  
Current portion of long-term debt
    8.0       13.6  
Accounts payable
    88.7       82.4  
Accrued expenses and other
    206.5       213.0  
                 
Total current liabilities
    308.9       309.3  
Long-term debt
    1,103.3       1,127.8  
Long-term debt — affiliates
    58.4       58.4  
Redeemable preferred stock
    48.1       48.0  
Long-term pension and other post-retirement plan liabilities
    205.3       216.3  
Other long-term liabilities
    64.1       68.0  
Stockholders’ deficiency:
               
Class B Common Stock, par value $.01 per share: 200,000,000 shares authorized; 3,125,000 shares issued and outstanding as of June 30, 2010 and December 31, 2009, respectively
           
Class A Common Stock, par value $.01 per share: 900,000,000 shares authorized; 50,009,498 and 50,021,063 shares issued as of June 30, 2010 and December 31, 2009, respectively
    0.5       0.5  
Additional paid-in capital
    1,009.2       1,007.2  
Treasury stock, at cost: 528,717 and 385,677 shares of Class A Common Stock as of June 30, 2010 and December 31, 2009, respectively
    (7.1 )     (4.7 )
Accumulated deficit
    (1,860.1 )     (1,878.7 )
Accumulated other comprehensive loss
    (154.3 )     (157.9 )
                 
Total stockholders’ deficiency
    (1,011.8 )     (1,033.6 )
                 
Total liabilities and stockholders’ deficiency
  $ 776.3     $ 794.2  
                 
 
See Accompanying Notes to Unaudited Consolidated Financial Statements


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REVLON, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in millions, except share and per share amounts)
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2010     2009     2010     2009  
 
Net sales
  $ 327.7     $ 321.8     $ 633.2     $ 625.1  
Cost of sales
    107.0       120.6       215.7       231.6  
                                 
Gross profit
    220.7       201.2       417.5       393.5  
Selling, general and administrative expenses
    173.6       156.3       325.0       316.5  
Restructuring costs and other, net
    (0.2 )     18.3       (0.2 )     18.8  
                                 
Operating income
    47.3       26.6       92.7       58.2  
                                 
Other expenses (income):
                               
Interest expense
    23.0       24.0       44.3       48.1  
Interest expense — preferred stock dividends
    1.6             3.2        
Interest income
          (0.2 )     (0.2 )     (0.4 )
Amortization of debt issuance costs
    1.3       1.4       3.0       2.8  
(Gain) loss on early extinguishment of debt, net
          (0.5 )     9.7       (7.5 )
Foreign currency losses, net
    0.1       2.1       3.9       4.5  
Miscellaneous, net
    0.5       0.1       0.8       0.3  
                                 
Other expenses, net
    26.5       26.9       64.7       47.8  
                                 
Income (loss) from continuing operations before income taxes
    20.8       (0.3 )     28.0       10.4  
Provision for (benefit from) income taxes
    4.8       (0.2 )     9.8       (2.2 )
                                 
Income (loss) from continuing operations, net of taxes
    16.0       (0.1 )     18.2       12.6  
Income from discontinued operations, net of taxes
    0.4       0.3       0.4       0.3  
                                 
Net income
  $ 16.4     $ 0.2     $ 18.6     $ 12.9  
                                 
Basic income (loss) per common share:
                               
Continuing operations
    0.31       (0.00 )     0.35       0.24  
Discontinued operations
    0.01       0.01       0.01       0.01  
                                 
Net income
  $ 0.32     $ 0.00     $ 0.36     $ 0.25  
                                 
Diluted income (loss) per common share:
                               
Continuing operations
    0.31       (0.00 )     0.35       0.24  
Discontinued operations
    0.01       0.01       0.01       0.01  
                                 
Net income
  $ 0.31     $ 0.00     $ 0.36     $ 0.25  
                                 
Weighted average number of common shares outstanding:
                               
Basic
    51,894,593       51,526,101       51,883,608       51,524,278  
                                 
Diluted
    52,314,596       51,526,101       52,300,736       51,533,896  
                                 
 
See Accompanying Notes to Unaudited Consolidated Financial Statements


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REVLON, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
AND COMPREHENSIVE INCOME (LOSS)
(dollars in millions)
 
                                                 
                            Accumulated
       
          Additional
                Other
    Total
 
    Common
    Paid-In-
    Treasury
    Accumulated
    Comprehensive
    Stockholders’
 
    Stock     Capital     Stock     Deficit     Loss     Deficiency  
 
Balance, January 1, 2010
  $ 0.5     $ 1,007.2     $ (4.7 )   $ (1,878.7 )   $ (157.9 )   $ (1,033.6 )
Treasury stock acquired, at cost(a)
                    (2.4 )                     (2.4 )
Amortization of deferred compensation for restricted stock
            2.0                               2.0  
Comprehensive income:
                                               
Net income
                            18.6               18.6  
Revaluation of financial derivative instruments(b)
                                    1.7       1.7  
Currency translation adjustment
                                    (0.8 )     (0.8 )
Amortization of pension related costs(c)
                                    2.7       2.7  
                                                 
Total comprehensive income
                                            22.2  
                                                 
Balance, June 30, 2010
  $ 0.5     $ 1,009.2     $ (7.1 )   $ (1,860.1 )   $ (154.3 )   $ (1,011.8 )
                                                 
 
(a) Pursuant to the share withholding provisions of the Third Amended and Restated Revlon, Inc. Stock Plan (the “Stock Plan”), certain employees and executives, in lieu of paying withholding taxes on the vesting of certain restricted stock, authorized the withholding of an aggregate 143,040 and nil shares of Revlon, Inc. Class A Common Stock (as hereinafter defined) during the first and second quarters of 2010, respectively, to satisfy the minimum statutory tax withholding requirements related to such vesting. These shares were recorded as treasury stock using the cost method, at a weighted average price per share of $17.01 and $17.02, based on the closing price of Revlon, Inc. Class A Common Stock as reported on the NYSE consolidated tape on the respective vesting dates, for a total of $2.4 million.
 
(b) See Note 5, “Comprehensive Income,” and Note 9, “Financial Instruments,” in this Form 10-Q for details regarding the net amount of hedge accounting derivative losses recognized due to the Company’s use of derivative financial instruments and a reversal of net amounts accumulated in Accumulated Other Comprehensive Loss due to the discontinuance of hedge accounting on the 2008 Interest Rate Swap (as hereinafter defined) prior to its expiration in April 2010 as a result of the 2010 Refinancing (as hereinafter defined).
 
(c) See Note 2, “Pension and Post-retirement Benefits,” and Note 5, “Comprehensive Income,” in this Form 10-Q for details on the change in Accumulated Other Comprehensive Loss as a result of the amortization of unrecognized prior service costs and actuarial losses arising during the first half of 2010.
 
See Accompanying Notes to Unaudited Consolidated Financial Statements


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REVLON, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
 
                 
    Six Months
 
    Ended
 
    June 30,  
    2010     2009  
 
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net income
  $ 18.6     $ 12.9  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Income from discontinued operations, net of taxes
    (0.4 )     (0.3 )
Depreciation and amortization
    28.1       30.5  
Amortization of debt discount
    1.0       0.4  
Stock compensation amortization
    2.0       3.4  
Loss (gain) on early extinguishment of debt, net
    9.7       (7.5 )
Amortization of debt issuance costs
    3.0       2.8  
Gain on sale of certain assets
          (1.6 )
Pension and other post-retirement expense
    4.7       13.9  
Change in assets and liabilities:
               
Increase in trade receivables
    (1.1 )     (8.8 )
(Increase) decrease in inventories
    (5.2 )     12.3  
Increase in prepaid expenses and other current assets
    (10.4 )     (3.6 )
Increase in accounts payable
    16.1       5.8  
Increase (decrease) in accrued expenses and other current liabilities
    8.0       (8.2 )
Pension and other post-retirement plan contributions
    (11.8 )     (10.4 )
Purchases of permanent displays
    (17.7 )     (20.2 )
Other, net
    (4.1 )     (3.4 )
                 
Net cash provided by operating activities
    40.5       18.0  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Capital expenditures
    (7.6 )     (5.8 )
Proceeds from the sale of certain assets
    0.2       2.3  
                 
Net cash used in investing activities
    (7.4 )     (3.5 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net decrease in short-term borrowings and overdraft
    (0.3 )     (0.3 )
Borrowings under the 2006 Revolving Credit Facility, net
          1.5  
Repayments under the 2006 Term Loan Facility
    (815.0 )     (18.7 )
Borrowings under the 2010 Term Loan Facility, net
    784.0        
Repayment of long-term debt
          (22.9 )
Payment of financing costs
    (17.1 )     (0.4 )
                 
Net cash used in financing activities
    (48.4 )     (40.8 )
                 
CASH FLOWS FROM DISCONTINUED OPERATIONS ACTIVITIES:
               
Net cash used in discontinued operating activities
          (0.2 )
                 
Net cash used in discontinued operations
          (0.2 )
                 
Effect of exchange rate changes on cash and cash equivalents
    (0.6 )     0.9  
                 
Net decrease in cash and cash equivalents
    (15.9 )     (25.6 )
Cash and cash equivalents at beginning of period
    54.5       52.8  
                 
Cash and cash equivalents at end of period
  $ 38.6     $ 27.2  
                 
                 
Supplemental schedule of cash flow information:
               
Cash paid during the period for:
               
Interest
  $ 35.4     $ 51.1  
Preferred stock dividends
  $ 3.1     $  
Income taxes, net of refunds
  $ 9.6     $ 7.8  
                 
Supplemental schedule of non-cash investing and financing activities:
               
Treasury stock received to satisfy minimum tax withholding liabilities
  $ 2.4     $ 0.6  
 
See Accompanying Notes to Unaudited Consolidated Financial Statements


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REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
 
(1)   Description of Business and Basis of Presentation
 
Revlon, Inc. (and together with its subsidiaries, the “Company”) conducts its business exclusively through its direct wholly-owned operating subsidiary, Revlon Consumer Products Corporation (“Products Corporation”) and its subsidiaries. Revlon, Inc. is a direct and indirect majority-owned subsidiary of MacAndrews & Forbes Holdings Inc. (“MacAndrews & Forbes Holdings” and, together with certain of its affiliates other than the Company, “MacAndrews & Forbes”), a corporation wholly owned by Ronald O. Perelman.
 
The Company’s vision is glamour, excitement and innovation through high-quality products at affordable prices. The Company operates in a single segment and manufactures, markets and sells an extensive array of cosmetics, women’s hair color, beauty tools, anti-perspirant deodorants, fragrances, skincare and other beauty care products. The Company’s principal customers include large mass volume retailers and chain drug and food stores in the U.S., as well as certain department stores and other specialty stores, such as perfumeries, outside the U.S. The Company also sells beauty products to U.S. military exchanges and commissaries and has a licensing business pursuant to which the Company licenses certain of its key brand names to third parties for the manufacture and sale of complementary beauty-related products and accessories in exchange for royalties.
 
The accompanying Consolidated Financial Statements are unaudited. In management’s opinion, all adjustments necessary for a fair presentation have been made. The Unaudited Consolidated Financial Statements include the accounts of the Company after the elimination of all material intercompany balances and transactions.
 
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Actual results could differ from these estimates. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Significant estimates made in the accompanying Unaudited Consolidated Financial Statements include, but are not limited to, allowances for doubtful accounts, inventory valuation reserves, expected sales returns and allowances, certain assumptions related to the recoverability of intangible and long-lived assets, deferred tax valuation allowances, reserves for estimated tax liabilities, restructuring costs, certain estimates and assumptions used in the calculation of the net periodic benefit costs and the projected benefit obligation 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, 2009, filed with the Securities and Exchange Commission (the “SEC”) on February 25, 2010 (the “2009 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.
 
Effective for periods beginning January 1, 2010, the Company is reporting Canada separately (previously Canada was included in the Europe region) and is reporting South Africa as part of the Europe, Middle East and Africa region (previously South Africa was included in the Asia Pacific region). As a result, prior year amounts have been reclassified to conform to this presentation.


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REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
 
(2)   Pension and Post-retirement Benefits
 
In May 2009, and effective December 31, 2009, Products Corporation amended its U.S. qualified defined benefit pension plan (the Revlon Employees’ Retirement Plan), covering a substantial portion of the Company’s employees in the U.S., to cease future benefit accruals under such plan after December 31, 2009. Products Corporation also amended its non-qualified pension plan (the Revlon Pension Equalization Plan) to similarly cease future benefit accruals under such plan after December 31, 2009. In connection with such amendments, all benefits accrued under such plans through December 31, 2009 will remain in effect and no additional benefits will accrue after December 31, 2009, other than interest credits on participant account balances under the cash balance program of the Company’s U.S. pension plans. Also, service credits for vesting and early retirement eligibility will continue to accrue in accordance with the terms of the respective plans. (The plan amendments described above in this Note 2 are hereinafter referred to as the “May 2009 Pension Plan Amendments.”)
 
In May 2009, Products Corporation also amended, effective December 31, 2009, its qualified and non-qualified defined contribution savings plans for its U.S.-based employees, creating a new discretionary profit sharing component under such plans that will enable the Company, should it elect to do so, to make discretionary profit sharing contributions. The Company will determine in the fourth quarter of each year whether and, if so, to what extent, profit sharing contributions would be made for the following year. In December 2009, the Company determined that the discretionary profit sharing contribution during 2010 will be 5% of eligible compensation, to be credited on a quarterly basis. (The savings plan amendments described above are hereinafter referred to as the “May 2009 Savings Plan Amendments” and, together with the May 2009 Pension Plan Amendments, as the “May 2009 Plan Amendments.”)
 
In the second quarter and first half of 2010, the Company recognized lower net periodic benefit cost primarily due to the impact of the May 2009 Plan Amendments which ceased future benefit accruals under the Revlon Employees’ Retirement Plan and the Revlon Pension Equalization Plan after December 31, 2009, and resulted in a change in the amortization period of actuarial gains (losses) from the remaining service period to the remaining life expectancy of plan participants.
 
During the second quarter of 2009, the Company recorded an $8.6 million decrease in its pension liabilities which was offset against accumulated other comprehensive income (loss) as a result of the pension curtailment and the re-measurement of the pension liabilities performed in the second quarter of 2009 in connection with the May 2009 Pension Plan Amendments and the May 2009 Program (as defined in Note 6, “Restructuring Costs and Other, Net”). The net decrease in pension liabilities was comprised of a non-cash curtailment gain of approximately $9.2 million which was recorded as an offset against the net actuarial losses previously reported within accumulated other comprehensive income (loss), partially offset by a net increase in pension liabilities of $0.6 million as a result of the re-measurements noted above. In addition, the Company recognized a decrease in its estimated pension expense of $1.1 million in the second quarter of 2009, which included a non-cash curtailment gain of $0.8 million related to the recognition of previously unrecognized prior service costs that had been reported in accumulated other comprehensive loss.


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REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
 
The components of net periodic benefit cost for the pension and the other post-retirement benefit plans for the second quarter of 2010 and 2009, respectively, are as follows:
 
                                 
          Other
 
          Post-retirement
 
    Pension Plans     Benefit Plans  
    Three Months Ended
    Three Months Ended
 
    June 30,     June 30,  
    2010     2009     2010     2009  
 
Net periodic benefit costs:
                               
Service cost
  $   0.4     $   1.9     $     $  
Interest cost
    8.4       8.8       0.2       0.2  
Expected return on plan assets
    (8.0 )     (6.9 )            
Amortization of actuarial (gain) loss
    (0.1 )     3.3              
Curtailment gain
          (0.8 )            
                                 
      0.7       6.3       0.2       0.2  
Portion allocated to Revlon Holdings LLC
    (0.1 )     (0.1 )            
                                 
    $ 0.6     $ 6.2     $ 0.2     $ 0.2  
                                 
 
The components of net periodic benefit cost for the pension and the other post-retirement benefit plans for the first half of 2010 and 2009, respectively, are as follows:
 
                                 
          Other
 
          Post-retirement
 
    Pension Plans     Benefit Plans  
    Six Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2010     2009     2010     2009  
 
Net periodic benefit costs:
                               
Service cost
  $ 0.8     $ 4.0     $     $  
Interest cost
    16.9       17.4       0.4       0.4  
Expected return on plan assets
    (16.1 )     (13.6 )            
Amortization of prior service cost
          (0.1 )            
Amortization of actuarial loss
    2.6       6.6       0.1        
Curtailment gain
          (0.8 )            
                                 
      4.2       13.5       0.5       0.4  
Portion allocated to Revlon Holdings LLC
    (0.1 )     (0.1 )            
                                 
    $ 4.1     $ 13.4     $ 0.5     $ 0.4  
                                 
 
The Company expects net periodic benefit costs for the pension and the other post-retirement benefit plans to be approximately $10 million for all of 2010, compared with $27.3 million in 2009. The Company currently expects to contribute approximately $25 million in the aggregate to its pension plans and other post-retirement benefits plans in 2010. During the second quarter of 2010, $5.8 million and $0.2 million were contributed to the Company’s pension plans and other post-retirement benefit plans, respectively. During the first half of 2010, $11.4 million and $0.4 million were contributed to the Company’s pension plans and other post-retirement benefit plans, respectively.
 
Relevant aspects of the qualified defined benefit pension plans, nonqualified pension plans and other post-retirement benefit plans sponsored by Products Corporation are disclosed in Revlon, Inc.’s 2009 Form 10-K.


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Table of Contents

REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
 
(3)   Inventories
 
                 
    June 30,
    December 31,
 
    2010     2009  
 
Raw materials and supplies
  $ 37.8     $ 42.7  
Work-in-process
    10.9       12.0  
Finished goods
    73.7       64.5  
               
    $ 122.4     $ 119.2  
               
 
(4)   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 Stock Plan using the treasury stock method. For both the three and six months ended June 30, 2010 and 2009, options to purchase 1,132,216 and 1,330,242 shares, respectively, of Revlon, Inc. Class A common stock, par value of $0.01 per share (the “Class A Common Stock”), that could potentially dilute basic earnings per share in the future were excluded from the calculation of diluted earnings (loss) per common share as their effect would have been anti-dilutive since their exercise price was in excess of the NYSE closing price of the Class A Common Stock during the period.
 
For the three and six months ended June 30, 2010, 291,185 and 294,061 shares, respectively, of unvested restricted stock that could potentially dilute basic earnings per share in the future were excluded from the calculation of diluted earnings per common share as their effect would be anti-dilutive.
 
For the three and six months ended June 30, 2009, 1,315,454 and 1,305,836 shares, respectively, of unvested restricted stock that could potentially dilute basic earnings per share in the future were excluded from the calculation of diluted earnings (loss) per common share as their effect would be anti-dilutive.


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Table of Contents

REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
 
The components of basic and diluted earnings (loss) per share for the second quarter and first half of 2010 and 2009, respectively, are as follows:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2010     2009     2010     2009  
    (shares in millions)  
 
Numerator:
                               
Income (loss) from continuing operations
  $ 16.0     $ (0.1 )   $ 18.2     $ 12.6  
Income from discontinued operations
    0.4       0.3       0.4       0.3  
                                 
Net income
  $ 16.4     $ 0.2     $ 18.6     $ 12.9  
                                 
Denominator:
                               
Weighted average common shares outstanding — Basic
    51.89       51.53       51.88       51.52  
Effect of dilutive restricted stock
    0.42             0.42       0.01  
                                 
Weighted average common shares outstanding — Diluted
    52.31       51.53       52.30       51.53  
                                 
Basic earnings (loss) per share:
                               
Continuing operations
  $ 0.31     $ (0.00 )   $ 0.35     $ 0.24  
Discontinued operations
    0.01       0.01       0.01       0.01  
                                 
Net income
  $ 0.32     $ 0.00     $ 0.36     $ 0.25  
                                 
Diluted earnings (loss) per share:
                               
Continuing operations
  $ 0.31     $ (0.00 )   $ 0.35     $ 0.24  
Discontinued operations
    0.01       0.01       0.01       0.01  
                                 
Net income
  $ 0.31     $ 0.00     $ 0.36     $ 0.25  
                                 
 
(5)   Comprehensive Income
 
The components of comprehensive income for the second quarter and first half of 2010 and 2009, respectively, are as follows:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2010     2009     2010     2009  
 
Net income
  $ 16.4     $ 0.2     $ 18.6     $ 12.9  
Other comprehensive (loss) income:
                               
Revaluation of financial derivative instruments(a)
          1.2       1.7       1.3  
Currency translation adjustment
    (1.6 )     7.1       (0.8 )     7.4  
Amortization of pension related costs(b)
    (0.1 )     2.5       2.7       5.7  
Pension re-measurement(c)
          (0.6 )           (0.6 )
Pension curtailment gain(c)
          9.2             9.2  
                                 
Total other comprehensive (loss) income
    (1.7 )     19.4       3.6       23.0  
                                 
Comprehensive income
  $  14.7     $  19.6     $  22.2     $  35.9  
                                 


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Table of Contents

REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
 
 
(a) The amount for the six months ended June 30, 2010 relates to (1) the reclassification of an unrecognized loss of $0.8 million on the 2008 Interest Rate Swap prior to its expiration in April 2010 from Accumulated Other Comprehensive Loss into earnings due to the discontinuance of hedge accounting as a result of the 2010 Refinancing (See Note 9, “Financial Instruments,” in this Form 10-Q) and (2) the reversal of amounts recorded in Accumulated Other Comprehensive Loss pertaining to a net settlement payment of $0.9 million on the 2008 Interest Rate Swap. The amount for the six months ended June 30, 2009 relates to (1) net unrealized losses of $0.9 million on the 2008 Interest Rate Swap and the interest rate swap which expired in September 2009 (together, the “Interest Rate Swaps” as defined in Note 11, “Financial Instruments,” of Revlon, Inc.’s 2009 Form 10-K) and (2) the reversal of amounts recorded in Accumulated Other Comprehensive Loss pertaining to net settlement receipts of $0.8 million and net settlement payments of $3.0 million on the Interest Rate Swaps.
 
(b) The amounts represent the change in Accumulated Other Comprehensive Loss as a result of the amortization of actuarial losses arising during the second quarter of 2010 and 2009, respectively, and the first half of 2010 and 2009, respectively, related to the Company’s pension and other post-retirement benefit plans.
 
(c) The $0.6 million increase in pension liabilities recorded within Accumulated Other Comprehensive Loss is the result of the re-measurement of the pension liabilities performed in the second quarter of 2009 in connection with the May 2009 Pension Plan Amendments, as well as the May 2009 Program. In connection with the May 2009 Pension Plan Amendments, the Company also recognized a curtailment gain of $9.2 million, which reduced its pension liability and was recorded as an offset against the net actuarial losses previously reported within Accumulated Other Comprehensive Loss. (See Note 2, “Pension and Post-retirement Benefits,” in this Form 10-Q.)
 
(6)   Restructuring Costs and Other, Net
 
In May 2009, the Company announced a worldwide restructuring (the “May 2009 Program”), which involved consolidating certain functions; reducing layers of management, where appropriate, to increase accountability and effectiveness; streamlining support functions to reflect the new organizational structure; and further consolidating the Company’s office facilities in New Jersey.
 
The $20.6 million of charges related to the May 2009 Program has been or is expected to be paid out as follows: $11.0 million paid in 2009, $7.0 million expected to be paid in 2010 and the balance of $2.6 million expected to be paid thereafter.
 
During the second quarter of 2010 a $0.2 million favorable adjustment was recorded to restructuring costs associated with the May 2009 Program.
 
During the second quarter of 2009, the Company recorded charges of $18.3 million in restructuring costs and other, which are comprised of (1) an $18.2 million charge related to the May 2009 Program and (2) a $0.1 million charge related to the 2008 Programs (as hereinafter defined).
 
During the first half of 2009, the Company recorded charges of $18.8 million in restructuring costs and other, net, which are comprised of:
 
  •  an $18.2 million charge related to the May 2009 Program;
 
  •  $1.2 million of charges related to employee severance and other employee-related termination costs related to restructuring actions in the U.K., Mexico and Argentina announced in the first quarter of 2009 (together with the May 2009 Program, the “2009 Programs”); and
 
  •  a $1.0 million charge related to the 2008 Programs (as hereinafter defined);
 
with the foregoing partially offset by
 
  •  income of $1.6 million related to the sale of a facility in Argentina in the first quarter of 2009.


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REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
 
 
The Company recorded restructuring costs related to various other restructuring plans during 2008 (the “2008 Programs”). (See Note 3, “Restructuring Costs and Other, Net,” to the Consolidated Financial Statements in Revlon, Inc.’s 2009 Form 10-K.)
 
Details of the movements in the restructuring accrual for the 2008 Programs and 2009 Programs during the first half of 2010 are as follows:
 
                                         
    Balance
                      Balance
 
    as of
    (Income)
                as of
 
    January 1,
    Expenses,
    Utilized, Net     June 30,
 
    2010     Net     Cash     Noncash     2010  
 
Employee severance and other personnel benefits:
                                       
2008 Programs
  $ 0.3     $     $ (0.2 )   $     $ 0.1  
2009 Programs
    7.6       (0.1 )     (4.8 )           2.7  
                                         
      7.9       (0.1 )     (5.0 )           2.8  
Lease exit
    2.3       (0.1 )     (0.3 )           1.9  
                                         
Total restructuring costs and other, net
  $ 10.2     $ (0.2 )   $ (5.3 )   $     $ 4.7  
                                         
 
(7)   Geographic, Financial and Other Information
 
The Company manages its business on the basis of one reportable operating segment. As of June 30, 2010, the Company had operations established in 14 countries outside of the U.S. and its products are sold throughout the world. Generally, net sales by geographic area are presented by attributing revenues from external customers on the basis of where the products are sold.
 
In the tables below, certain prior year amounts have been reclassified to conform to the current period’s presentation.
 
                                                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2010     2009     2010     2009  
 
Geographic area:
                                                               
Net sales:
                                                               
United States
  $ 179.3       55 %   $ 186.2       58 %   $ 361.4       57 %   $ 377.2       60 %
Outside of the United States
    148.4       45 %     135.6       42 %     271.8       43 %     247.9       40 %
                                                                 
    $ 327.7             $ 321.8             $ 633.2             $ 625.1          
                                                                 
 
                                 
    June 30,
    December 31,
 
    2010     2009  
 
Long-lived assets:
                               
United States
  $ 310.6       80%     $ 308.6       79%  
Outside of the United States
    79.9       20%       82.0       21%  
                                 
    $ 390.5             $ 390.6          
                                 
 


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REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
 
                                                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2010     2009     2010     2009  
 
Classes of similar products:
                                                               
Net sales:
                                                               
Color cosmetics
  $ 206.2       63 %   $ 197.5       61 %   $ 399.9       63 %   $ 390.8       63 %
Beauty care and fragrance
    121.5       37 %     124.3       39 %     233.3       37 %     234.3       37 %
                                                                 
    $ 327.7             $ 321.8             $ 633.2             $ 625.1          
                                                                 
 
(8)   Fair Value Measurements
 
The Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification (the “Fair Value Measurements and Disclosures Topic”) clarifies the definition of fair value of assets and liabilities, establishes a framework for measuring the fair value of assets and liabilities and expands the disclosures on fair value measurements. The Company adopted the provisions of the Fair Value Measurements and Disclosures Topic with respect to financial assets and liabilities effective January 1, 2008 and with respect to non-financial assets and liabilities effective as of January 1, 2009, neither of which had a material impact on the Company’s results of operations and/or financial condition.
 
The fair value framework under the Fair Value Measurements and Disclosures Topic requires the categorization of assets and liabilities into three levels 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 assets and liabilities fair value measurement requirements are as follows:
 
  •  Level 1: Fair valuing the asset or liability using observable inputs, such as quoted prices in active markets for identical assets or liabilities;
 
  •  Level 2: Fair valuing the asset or liability using inputs other than quoted prices that are observable for the applicable asset or liability, either directly or indirectly, such as quoted prices for similar (as opposed to identical) assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; and
 
  •  Level 3: Fair valuing the asset or liability using unobservable inputs that reflect the Company’s own assumptions regarding the applicable asset or liability.
 
As of June 30, 2010, the fair values of the Company’s financial assets and liabilities, namely its FX Contracts (as hereinafter defined), and Revlon, Inc.’s Series A Preferred Stock, par value $0.01 per share (the “Preferred Stock”), are categorized as presented in the table below:
 
                                 
    Total     Level 1     Level 2     Level 3  
 
Assets:
                               
Derivatives:
                               
FX Contracts(a)
  $ 0.8     $     $ 0.8     $  
                                 
Total assets at fair value
  $ 0.8     $     $ 0.8     $  
                                 
Liabilities:
                               
Derivatives:
                               
FX Contracts(a)
  $ 0.2     $     $ 0.2     $  
Redeemable Preferred Stock(b)
    0.2                   0.2  
                                 
Total liabilities at fair value
  $ 0.4     $     $ 0.2     $ 0.2  
                                 

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REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
 
 
(a) The fair value of the Company’s FX Contracts was measured based on observable market transactions of spot and forward rates at June 30, 2010. (See Note 9, “Financial Instruments,” in this Form 10-Q.)
 
(b) In October 2009, Revlon, Inc. consummated its voluntary exchange offer (as amended, the “Exchange Offer”) in which, among other things, Revlon, Inc. issued to stockholders (other than MacAndrews & Forbes) 9,336,905 shares of its Preferred Stock in exchange for the same number of shares of Class A Common Stock tendered in the Exchange Offer. Upon consummation of the Exchange Offer, Revlon, Inc. initially recorded the Preferred Stock as a long-term liability at a fair value of $47.9 million, which was comprised of two components:
 
  •  Liquidation Preference:  Upon initial valuation of the Preferred Stock, the total amount to be paid by Revlon, Inc. at maturity is approximately $48.6 million, which represents the $5.21 liquidation preference for each of the 9,336,905 shares of Preferred Stock issued in the Exchange Offer (the “Liquidation Preference”). The Liquidation Preference was initially measured at fair value based on the yield to maturity of the $48.6 million portion of the Senior Subordinated Term Loan (as hereinafter defined) that was contributed to Revlon, Inc. by MacAndrews & Forbes (the “Contributed Loan”), adjusted for an estimated average subordination premium for subordinated note issues. The Liquidation Preference is subsequently measured at the present value of the amount to be paid at maturity, accruing interest cost using the rate implicit at the issuance date since both the amount to be paid and the maturity date are fixed.
 
  •  Change of Control Amount:  Holders of the Preferred Stock are entitled to receive upon a change of control transaction (as defined in the certificate of designation of the Preferred Stock) through October 8, 2012, a pro rata portion of the equity value received in such transaction, capped at an amount that would provide aggregate cash payments of $12.00 per share over the term of the Preferred Stock. If the equity value received in the change of control transaction is greater than or equal to $12.00 per share, then each holder of Preferred Stock will be entitled to receive an amount equal to $12.00 minus the Liquidation Preference minus any paid and/or accrued and unpaid dividends on the Preferred Stock. If the per share equity value received in the change of control transaction is less than $12.00, then each holder of Preferred Stock is entitled to receive an amount equal to such per share equity value minus the Liquidation Preference minus any paid and/or accrued and unpaid dividends on the Preferred Stock. If the per share equity value received in the change of control transaction does not exceed the Liquidation Preference plus any paid and/or accrued and unpaid dividends, then each holder of the Preferred Stock is not entitled to an additional payment upon any such change of control transaction (the foregoing payments being the “Change of Control Amount”). The fair value of the Change of Control Amount of the Preferred Stock, which is deemed to be a Level 3 liability, is based on the Company’s assessment of the likelihood of the occurrence of specified change of control transactions within three years of the consummation of the Exchange Offer. There was no change in the fair value of the Change in Control Amount from the initial valuation performed upon the October 2009 consummation of the Exchange Offer through June 30, 2010.
 
(9)   Financial Instruments
 
The fair value of the Company’s debt, including the current portion of long-term debt and Preferred Stock, is based on the quoted market prices for the same issues or on the current rates offered for debt of similar remaining maturities. The estimated fair value of such debt and Preferred Stock at June 30, 2010 was approximately $1,213.6 million, which was less than the carrying value of such debt and Preferred Stock at June 30, 2010 of $1,217.8 million. The estimated fair value of such debt and Preferred Stock at December 31, 2009 was approximately $1,241.4 million, which was less than the carrying value of such debt and Preferred Stock at December 31, 2009 of $1,247.8 million.


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Table of Contents

REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
 
The carrying amounts of cash and cash equivalents, marketable securities, trade receivables, notes receivable, accounts payable and short-term borrowings approximate their fair-values.
 
Products Corporation also maintains standby and trade letters of credit for various corporate purposes under which Products Corporation is obligated, of which approximately $21.8 million and $12.2 million (including amounts available under credit agreements in effect at that time) were maintained at June 30, 2010 and December 31, 2009, respectively. Included in these amounts is approximately $9.3 million at both June 30, 2010 and December 31, 2009 in standby letters of credit which support Products Corporation’s self-insurance programs. The estimated liability under such programs is accrued by Products Corporation.
 
Derivative Financial Instruments
 
The Company uses derivative financial instruments, primarily (1) foreign currency forward exchange contracts (“FX Contracts”) intended for the purpose of managing foreign currency exchange risk by reducing the effects of fluctuations in foreign currency exchange rates on the Company’s net cash flows and (2) interest rate hedging transactions intended for the purpose of managing interest rate risk associated with Products Corporation’s variable rate indebtedness.
 
While the Company may be exposed to credit loss in the event of the counterparty’s non-performance, the Company’s exposure is limited to the net amount that Products Corporation would have received, if any, from the counterparty over the remaining balance of the terms of the FX Contracts. The Company does not anticipate any non-performance and, furthermore, even in the case of any non-performance by the counterparty, the Company expects that any such loss would not be material.
 
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 June 30, 2010 and December 31, 2009 was $43.5 million and $54.3 million, respectively.
 
Interest Rate Swap Transactions
 
Prior to its expiration in April 2010, the Company’s floating-to-fixed interest rate swap had a notional amount of $150.0 million initially relating to indebtedness under Products Corporation’s former 2006 Term Loan Facility (as hereinafter defined) (prior to its complete refinancing in March 2010) and which also related, through its expiration in April 2010, to a notional amount of $150.0 million relating to indebtedness under Products Corporation’s 2010 Term Loan Facility (as hereinafter defined in Note 10, “Long-Term Debt and Redeemable Preferred Stock,” in this Form 10-Q) (the “2008 Interest Rate Swap”). Under the terms of the 2008 Interest Rate Swap, Products Corporation was required to pay to the counterparty a quarterly fixed interest rate of 2.66% on the $150.0 million notional amount under the 2008 Interest Rate Swap (which, based upon the 4.0% applicable margin, effectively fixed the interest rate on such notional amounts at 6.66% for the 2-year term of such swap), commencing in July 2008, while receiving a variable interest rate payment from the counterparty equal to three-month U.S. dollar LIBOR.
 
The 2008 Interest Rate Swap was initially designated as a cash flow hedge of the variable interest rate payments on Products Corporation’s former 2006 Term Loan Facility (prior to its complete refinancing in March 2010) under the Derivatives and Hedging Topic of the FASB Accounting Standards Codification (the “Derivatives and Hedging Topic”). However, as a result of the 2010 Refinancing (as hereinafter defined in Note 10, “Long-Term Debt and Redeemable Preferred Stock,” in this Form 10-Q), effective


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REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
 
March 11, 2010 (the closing date of the 2010 Refinancing), the 2008 Interest Rate Swap no longer met the criteria specified under the Derivatives and Hedging Topic to allow for the deferral of the effective portion of unrecognized hedging gains or losses in other comprehensive income since the scheduled variable interest payment specified on the date originally documented at the inception of the hedge will not occur. As a result, as of March 11, 2010, the Company reclassified an unrecognized loss of $0.8 million from Accumulated Other Comprehensive Loss into earnings.
 
Quantitative Information — Derivative Financial Instruments
 
The effects of the Company’s derivative instruments on its consolidated financial statements were as follows:
 
(a) Fair Value of Derivative Financial Instruments in Consolidated Balance Sheet at June 30, 2010 and December 31, 2009, respectively:
 
                                         
    Fair Values of Derivative Instruments  
    Assets     Liabilities  
        June 30,
    December 31,
        June 30,
    December 31,
 
    Balance Sheet
  2010
    2009
    Balance Sheet
  2010
    2009
 
Derivatives:
  Classification   Fair Value     Fair Value     Classification   Fair Value     Fair Value  
 
Derivatives designated as hedging instruments:
                                       
2008 Interest Rate Swap(a)(b)
  Prepaid expenses   $     $     Accrued expenses   $     $ 1.8  
Derivatives not designated as hedging instruments:
                                   
FX Contracts(c)
  Prepaid expenses     0.8       0.1     Accrued expenses     0.2       1.7  
                                         
        $ 0.8     $ 0.1         $ 0.2     $ 3.5  
                                         
 
(a) Effective March 11, 2010 (the closing date of the 2010 Refinancing), the 2008 Interest Rate Swap, which expired in April 2010, was no longer designated as a cash flow hedge. (See “Interest Rate Swap Transactions” in this Note 9.) In April 2010, the 2008 Interest Rate Swap expired.
 
(b) At December 31, 2009, the fair value of the 2008 Interest Rate Swap, which expired in April 2010, was determined by using the three-month U.S. Dollar LIBOR index at the latest receipt date, or October 16, 2009.
 
(c) The fair values of the FX Contracts at June 30, 2010 and December 31, 2009 were determined by using observable market transactions of spot and forward rates at June 30, 2010 and December 31, 2009, respectively.


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REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
 
 
(b) Effects of Derivative Financial Instruments on Income and Other Comprehensive Income (Loss) (“OCI”) for the second quarter of 2010 and 2009, respectively:
 
                                     
    Derivative Instruments Gain (Loss) Effect on Consolidated
    Statement of Operations for the Three Months Ended June 30,
    Amount of
      Amount of
    Gain (Loss)
      Gain (Loss)
    Recognized
      Reclassified
    in
  Income Statement
  from OCI
    OCI
  Classification
  to Income
    (Effective
  of Gain (Loss)
  (Effective
    Portion)   Reclassified from
  Portion)
    2010   2009   OCI to Income   2010   2009
 
Derivatives designated as hedging instruments:
                                   
2008 Interest Rate Swap(a)
  $     $ 1.2     Interest expense   $     $ (1.9 )
                                     
                                     
    Amount of
      Amount of
    Gain (Loss)
      Gain (Loss)
    Recognized
      Recognized
    in Foreign
  Income Statement
  in Interest
    Currency
  Classification
  Expense
    Gains
  of Gain (Loss)
  (Ineffective
    (Losses), Net   Reclassified from
  Portion)
    2010   2009   OCI to Income   2010   2009
 
Derivatives not designated as hedging instruments:
FX Contracts
  $ 1.1     $ (4.3 )   Interest expense   $     $  
2008 Interest Rate Swap(a)
              Interest expense            
                                     
    $ 1.1     $ (4.3 )       $     $  
                                     
 
(a) Effective March 11, 2010 (the closing date of the 2010 Refinancing), the 2008 Interest Rate Swap, which expired in April 2010, was no longer designated as a cash flow hedge. (See “Interest Rate Swap Transactions” in this Note 9.)


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REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
 
 
Effects of Derivative Financial Instruments on Income and Other Comprehensive Income (Loss) (“OCI”) for the first half of 2010 and 2009, respectively:
 
                                     
    Derivative Instruments Gain (Loss) Effect on Consolidated
 
    Statement of Operations for the Six Months Ended June 30,  
    Amount of
        Amount of
 
    Gain (Loss)
        Gain (Loss)
 
    Recognized
        Reclassified
 
    in
    Income Statement
  from OCI
 
    OCI
    Classification
  to Income
 
    (Effective
    of Gain (Loss)
  (Effective
 
    Portion)     Reclassified from
  Portion)  
    2010     2009     OCI to Income   2010     2009  
 
Derivatives designated as hedging instruments:
                                   
2008 Interest Rate Swap(a)
  $     $ (4.1 )   Interest expense   $ (0.9 )   $ (2.2 )
                                     
 
 
    Amount of
        Amount of
 
    Gain (Loss)
        Gain (Loss)
 
    Recognized
        Recognized
 
    in Foreign
    Income Statement
  in Interest
 
    Currency
    Classification
  Expense
 
    Gains
    of Gain (Loss)
  (Ineffective
 
    (Losses), Net     Reclassified from
  Portion)  
    2010     2009     OCI to Income   2010     2009  
 
Derivatives not designated as hedging instruments:
                                   
FX Contracts
  $ 0.6     $ (3.4 )   Interest expense   $     $  
2008 Interest Rate Swap(a)
              Interest expense     (0.8 )      
                                     
    $ 0.6     $ (3.4 )       $ (0.8 )   $  
                                     
 
(a) Effective March 11, 2010 (the closing date of the 2010 Refinancing), the 2008 Interest Rate Swap, which expired in April 2010, was no longer designated as a cash flow hedge. (See “Interest Rate Swap Transactions” in this Note 9.)
 
(10)   Long-Term Debt and Redeemable Preferred Stock
 
                 
    June 30,
    December 31,
 
    2010     2009  
 
2010 Term Loan Facility due 2015, net of discounts(a)
  $ 784.7     $  
2006 Term Loan Facility due 2012(a)
          815.0  
2010 Revolving Credit Facility due 2014(a)
           
93/4% Senior Secured Notes due 2015, net of discounts(b)
    326.6       326.4  
Senior Subordinated Term Loan due 2014(c)
    58.4       58.4  
                 
      1,169.7       1,199.8  
Less current portion
    (8.0 )     (13.6 )
                 
      1,161.7       1,186.2  
                 
Redeemable Preferred Stock(d)
    48.1       48.0  
                 
    $ 1,209.8     $ 1,234.2  
                 
 
(a) On March 11, 2010 the Company consummated the 2010 Refinancing. The 2010 Refinancing, among other things, extended the maturity of Products Corporation’s 2006 Term Loan Facility and 2006 Revolving Credit Facility, each due January 2012, by entering into the 2010 Term Loan Facility due


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REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
 
March 2015 and the 2010 Revolving Credit Facility due March 2014, respectively (each as hereinafter defined).
 
(b) See Note 9, “Long-Term Debt and Redeemable Preferred Stock,” to the Consolidated Financial Statements in Revlon, Inc.’s 2009 Form 10-K for certain details regarding Products Corporation’s 93/4% Senior Secured Notes which mature on November 15, 2015 (the “93/4% Senior Secured Notes”).
 
(c) See Note 9, “Long-Term Debt and Redeemable Preferred Stock,” to the Consolidated Financial Statements in Revlon, Inc.’s 2009 Form 10-K for certain details regarding the $58.4 million principal amount of the Senior Subordinated Term Loan which remains owing from Products Corporation to MacAndrews & Forbes (the “Non-Contributed Loan”), which matures on October 8, 2014.
 
(d) See Note 9, “Long-Term Debt and Redeemable Preferred Stock,” to the Consolidated Financial Statements in Revlon, Inc.’s 2009 Form 10-K for certain details regarding Revlon, Inc.’s redeemable Preferred Stock. The Liquidation Preference of the Preferred Stock was initially measured at fair value of $47.7 million, based on the yield to maturity of the $48.6 million Contributed Loan, adjusted for an estimated average subordination premium for subordinated note issues. The Liquidation Preference is subsequently measured at the present value of the amount to be paid at maturity, accruing interest cost using the rate implicit at the issuance date since both the amount to be paid and the maturity date are fixed.
 
Recent Debt Reduction Transactions
 
Refinancing of the 2006 Term Loan and Revolving Credit Facilities:  In March 2010, Products Corporation consummated a credit agreement refinancing (the “2010 Refinancing”) consisting of the following transactions:
 
  •  The 2010 Refinancing included refinancing Products Corporation’s term loan facility, which was scheduled to mature on January 15, 2012 and had $815.0 million aggregate principal amount outstanding at December 31, 2009 (the “2006 Term Loan Facility”), with a 5-year, $800.0 million term loan facility due March 11, 2015 (the “2010 Term Loan Facility”) under a second amended and restated term loan agreement dated March 11, 2010 (the “2010 Term Loan Agreement”), among Products Corporation, as borrower, the lenders party thereto, Citigroup Global Markets Inc. (“CGMI”), J.P. Morgan Securities Inc. (“JPM Securities”), Banc of America Securities LLC (“BAS”) and Credit Suisse Securities (USA) LLC (“Credit Suisse”), as joint lead arrangers, CGMI, JPM Securities, BAS, Credit Suisse and Natixis, New York Branch (“Natixis”), as joint bookrunners, JPMorgan Chase Bank, N.A. and Bank of America, N.A. as co-syndication agents, Credit Suisse and Natixis as co-documentation agents, and Citicorp USA, Inc. (“CUSA”), as administrative agent and collateral agent.
 
  •  The 2010 Refinancing also included refinancing Products Corporation’s 2006 revolving credit facility, which was scheduled to mature on January 15, 2012 and had nil outstanding borrowings at December 31, 2009, with a 4-year, $140.0 million asset-based, multi-currency revolving credit facility due March 11, 2014 (the “2010 Revolving Credit Facility” and, together with the 2010 Term Loan Facility, the “2010 Credit Facilities”) under a second amended and restated revolving credit agreement dated March 11, 2010 (the “2010 Revolving Credit Agreement” and, together with the 2010 Term Loan Agreement, the “2010 Credit Agreements”), among Products Corporation, as borrower, the lenders party thereto, CGMI and Wells Fargo Capital Finance, LLC (“WFS”), as joint lead arrangers, CGMI, WFS, BAS, JPM Securities and Credit Suisse, as joint bookrunners, and CUSA, as administrative agent and collateral agent.
 
  •  Products Corporation used the approximately $786 million of proceeds from the 2010 Term Loan Facility, which was drawn in full on the March 11, 2010 closing date and issued to lenders at 98.25%


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REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
 
  of par, plus approximately $31 million of available cash and approximately $20 million then drawn on the 2010 Revolving Credit Facility to refinance in full the $815.0 million of outstanding indebtedness under its 2006 Term Loan Facility and to pay approximately $7 million of accrued interest and approximately $15 million of fees and expenses incurred in connection with consummating the 2010 Refinancing, of which approximately $9 million was capitalized.
 
2010 Revolving Credit Facility
 
Availability under the 2010 Revolving Credit Facility varies based on a borrowing base that is determined by the value of eligible accounts receivable and eligible inventory in the U.S. and the U.K. and eligible real property and equipment in the U.S. from time to time.
 
In each case subject to borrowing base availability, the 2010 Revolving Credit Facility is available to:
 
(i) Products Corporation in revolving credit loans denominated in U.S. dollars;
 
(ii) Products Corporation in swing line loans denominated in U.S. dollars up to $30.0 million;
 
(iii) Products Corporation in standby and commercial letters of credit denominated in U.S. dollars and other currencies up to $60.0 million; and
 
(iv) Products Corporation and certain of its international subsidiaries designated from time to time in revolving credit loans and bankers’ acceptances denominated in U.S. dollars and other currencies.
 
If the value of the eligible assets is not sufficient to support the $140.0 million borrowing base under the 2010 Revolving Credit Facility, Products Corporation will not have full access to the 2010 Revolving Credit Facility. Products Corporation’s ability to make borrowings under the 2010 Revolving Credit Facility is also conditioned upon the satisfaction of certain conditions precedent and Products Corporation’s compliance with other covenants in the 2010 Revolving Credit Agreement.
 
Borrowings under the 2010 Revolving Credit Facility bear interest at a rate equal to, at Products Corporation’s option, either (i) the Eurodollar Rate plus 3.00% per annum or (ii) the Alternate Base Rate plus 2.00% per annum.
 
Prior to the termination date of the 2010 Revolving Credit Facility, revolving loans are required to be prepaid (without any permanent reduction in commitment) with:
 
(i) the net cash proceeds from sales of Revolving Credit First Lien Collateral (as defined below) by Products Corporation or any of its subsidiary guarantors (other than dispositions in the ordinary course of business and certain other exceptions); and
 
(ii) the net proceeds from the issuance by Products Corporation or any of its subsidiaries of certain additional debt, to the extent there remains any such proceeds after satisfying Products Corporation’s repayment obligations under the 2010 Term Loan Facility.
 
Products Corporation pays to the lenders under the 2010 Revolving Credit Facility a commitment fee of 0.75% of the average daily unused portion of the 2010 Revolving Credit Facility, which fee is payable quarterly in arrears. Under the 2010 Revolving Credit Facility, Products Corporation also pays:
 
(i) to foreign lenders a fronting fee of 0.25% per annum on the aggregate principal amount of specified Local Loans (as defined in the 2010 Revolving Credit Agreement) (which fee is retained by foreign lenders out of the portion of the Applicable Margin payable to such foreign lender);
 
(ii) to foreign lenders an administrative fee of 0.25% per annum on the aggregate principal amount of specified Local Loans;


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REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
 
(iii) to the multi-currency lenders a letter of credit commission equal to the product of (a) the Applicable Margin (as defined in the 2010 Revolving Credit Agreement) for revolving credit loans that are Eurodollar Rate (as defined in the 2010 Revolving Credit Agreement) loans (adjusted for the term that the letter of credit is outstanding) and (b) the aggregate undrawn face amount of letters of credit; and
 
(iv) to the issuing lender, a letter of credit fronting fee of 0.25% per annum of the aggregate undrawn face amount of letters of credit, which fee is a portion of the Applicable Margin.
 
Under certain circumstances, Products Corporation will have the right to request that the 2010 Revolving Credit Facility be increased by up to $60.0 million, provided that the lenders are not committed to provide any such increase.
 
Under certain circumstances if and when the difference between (i) the borrowing base under the 2010 Revolving Credit Facility and (ii) the amounts outstanding under the 2010 Revolving Credit Facility is less than $20.0 million for a period of two consecutive days or more, and until such difference is equal to or greater than $20.0 million for a period of 30 consecutive business days, the 2010 Revolving Credit Facility requires Products Corporation to maintain a consolidated fixed charge coverage ratio (the ratio of EBITDA minus Capital Expenditures to Cash Interest Expense for such period, as each such term is defined in the 2010 Revolving Credit Facility) of 1.0 to 1.0.
 
The 2010 Revolving Credit Facility matures on March 11, 2014.
 
2010 Term Loan Facility
 
Under the 2010 Term Loan Facility, Eurodollar Loans (as defined in the 2010 Term Loan Agreement) bear interest at the Eurodollar Rate (as defined in the 2010 Term Loan Agreement) plus 4.00% per annum (provided that in no event shall the Eurodollar Rate be less than 2.00% per annum) and Alternate Base Rate (as defined in the 2010 Term Loan Agreement) loans bear interest at the Alternate Base Rate plus 3.00% per annum (provided that in no event shall the Alternate Base Rate be less than 3.00% per annum).
 
Prior to the termination date of the 2010 Term Loan Facility, on June 30, September 30, December 31 and March 31 of each year (commencing June 30, 2010), Products Corporation is required to repay $2.0 million of the principal amount of the term loans outstanding under the 2010 Term Loan Facility on each respective date. In addition, the term loans under the 2010 Term Loan Facility are required to be prepaid with:
 
(i) the net cash proceeds in excess of $10.0 million for each 12-month period ending on March 31 received during such period from sales of Term Loan First Lien Collateral (as defined below) by Products Corporation or any of its subsidiary guarantors (subject to a reinvestment right for 365 days and carryover of unused annual basket amounts up to a maximum of $25.0 million and subject to certain specified dispositions of up to an additional $25.0 million in the aggregate);
 
(ii) the net proceeds from the issuance by Products Corporation or any of its subsidiaries of certain additional debt; and
 
(iii) 50% of Products Corporation’s “excess cash flow” (as defined under the 2010 Term Loan Agreement), commencing with excess cash flow for the 2011 fiscal year payable in the first quarter of 2012.
 
Any such prepayments are applied to reduce Products Corporation’s future regularly scheduled term loan amortization payments, to be applied in the direct order of maturity to the remaining installments thereof or as otherwise directed by Products Corporation.


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REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
 
The 2010 Term Loan Facility contains a financial covenant limiting Products Corporation’s first lien senior secured leverage ratio (the ratio of Products Corporation’s Senior Secured Debt that has a lien on the collateral which secures the 2010 Term Loan Facility that is not junior or subordinated to the liens securing the 2010 Term Loan Facility (excluding debt outstanding under the 2010 Revolving Credit Facility) to EBITDA, as each such term is defined in the 2010 Term Loan Facility), to 4.0 to 1.0 for each period of four consecutive fiscal quarters ending during the period from March 31, 2010 to the March 2015 maturity date of the 2010 Term Loan Facility.
 
Under certain circumstances, Products Corporation will have the right to request the 2010 Term Loan Facility to be increased by up to $300.0 million, provided that the lenders are not committed to provide any such increase.
 
The 2010 Term Loan Facility matures on March 11, 2015.
 
Provisions Applicable to the 2010 Revolving Credit Facility and the 2010 Term Loan Facility
 
The 2010 Credit Facilities are supported by, among other things, guarantees from Revlon, Inc. and, subject to certain limited exceptions, Products Corporation’s domestic subsidiaries. The obligations of Products Corporation under the 2010 Credit Facilities and the obligations under such guarantees are secured by, subject to certain limited exceptions, substantially all of the assets of Products Corporation and the guarantors, including:
 
(i) mortgages on owned real property, including Products Corporation’s facility in Oxford, North Carolina;
 
(ii) the capital stock of Products Corporation and the subsidiary guarantors and 66% of the voting capital stock and 100% of the non-voting capital stock of Products Corporation’s and the subsidiary guarantors’ first-tier, non-U.S. subsidiaries;
 
(iii) intellectual property and other intangible property of Products Corporation and the subsidiary guarantors; and
 
(iv) inventory, accounts receivable, equipment, investment property and deposit accounts of Products Corporation and the subsidiary guarantors.
 
The liens on inventory, accounts receivable, deposit accounts, investment property (other than the capital stock of Products Corporation and its subsidiaries), real property, equipment, fixtures and certain intangible property related to the foregoing (the “Revolving Credit First Lien Collateral”) secure the 2010 Revolving Credit Facility on a first priority basis, the 2010 Term Loan Facility on a second priority basis and Products Corporation’s 93/4% Senior Secured Notes due November 2015 (the “93/4% Senior Secured Notes”) and the related guarantees on a third priority basis. The liens on the capital stock of Products Corporation and its subsidiaries, intellectual property and intangible property (other than intangible property included in the Revolving Credit First Lien Collateral) (the “Term Loan First Lien Collateral”) secure the 2010 Term Loan Facility on a first priority basis and the 2010 Revolving Credit Facility and the 93/4% Senior Secured Notes and the related guarantees on a second priority basis. Such arrangements are set forth in the Third Amended and Restated Intercreditor and Collateral Agency Agreement, dated March 11, 2010, by and among Products Corporation and CUSA, as administrative agent and as collateral agent for the benefit of the secured parties for the 2010 Term Loan Facility, 2010 Revolving Credit Facility and the 93/4% Senior Secured Notes (the “2010 Intercreditor Agreement”). The 2010 Intercreditor Agreement also provides that the liens referred to above may be shared from time to time, subject to certain limitations, with specified types of other obligations incurred or guaranteed by Products Corporation, such as foreign exchange and interest rate hedging obligations and foreign working capital lines.


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REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
 
Each of the 2010 Credit Facilities contains various restrictive covenants prohibiting Products Corporation and its subsidiaries from:
 
(i) incurring additional indebtedness or guarantees, with certain exceptions;
 
(ii) making dividend and other payments or loans to Revlon, Inc. or other affiliates, with certain exceptions, including among others:
 
(a) exceptions permitting Products Corporation to pay dividends or make other payments to Revlon, Inc. to enable it to, among other things, pay expenses incidental to being a public holding company, including, among other things, professional fees such as legal, accounting and insurance fees, regulatory fees, such as SEC filing fees and NYSE listing fees, and other expenses related to being a public holding company;
 
(b) subject to certain circumstances, to finance the purchase by Revlon, Inc. of its Class A Common Stock in connection with the delivery of such Class A Common Stock to grantees under the Third Amended and Restated Revlon, Inc. Stock Plan and/or the payment of withholding taxes in connection with the vesting of restricted stock awards under such plan;
 
(c) subject to certain limitations, to pay dividends or make other payments to finance the purchase, redemption or other retirement for value by Revlon, Inc. of stock or other equity interests or equivalents in Revlon, Inc. held by any current or former director, employee or consultant in his or her capacity as such; and
 
(d) subject to certain limitations, to make other restricted payments to affiliates of Products Corporation in amounts up to $5.0 million per year ($10.0 million in 2010), other restricted payments in an aggregate amount not to exceed $20.0 million and other restricted payments based upon certain financial tests;
 
(iii) creating liens or other encumbrances on Products Corporation’s or its subsidiaries’ assets or revenues, granting negative pledges or selling or transferring any of Products Corporation’s or its subsidiaries’ assets, all subject to certain limited exceptions;
 
(iv) with certain exceptions, engaging in merger or acquisition transactions;
 
(v) prepaying indebtedness and modifying the terms of certain indebtedness and specified material contractual obligations, subject to certain exceptions;
 
(vi) making investments, subject to certain exceptions; and
 
(vii) entering into transactions with affiliates of Products Corporation involving aggregate payments or consideration in excess of $10.0 million other than upon terms that are not materially less favorable when taken as a whole to Products Corporation or its subsidiaries as terms that would be obtainable at the time for a comparable transaction or series of similar transactions in arm’s length dealings with an unrelated third person and where such payments or consideration exceed $20.0 million, unless such transaction has been approved by all of the independent directors of Products Corporation, subject to certain exceptions.
 
The events of default under each of the 2010 Credit Facilities include customary events of default for such types of agreements, including, among others:
 
(i) nonpayment of any principal, interest or other fees when due, subject in the case of interest and fees to a grace period;
 
(ii) non-compliance with the covenants in such 2010 Credit Facilities or the ancillary security documents, subject in certain instances to grace periods;


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REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
 
(iii) the institution of any bankruptcy, insolvency or similar proceedings by or against Products Corporation, any of Products Corporation’s subsidiaries or Revlon, Inc., subject in certain instances to grace periods;
 
(iv) default by Revlon, Inc. or any of its subsidiaries (A) in the payment of certain indebtedness when due (whether at maturity or by acceleration) in excess of $25.0 million in aggregate principal amount or (B) in the observance or performance of any other agreement or condition relating to such debt, provided that the amount of debt involved is in excess of $25.0 million in aggregate principal amount, or the occurrence of any other event, the effect of which default referred to in this subclause (iv) is to cause or permit the holders of such debt to cause the acceleration of payment of such debt;
 
(v) in the case of the 2010 Term Loan Facility, a cross default under the 2010 Revolving Credit Facility, and in the case of the 2010 Revolving Credit Facility, a cross default under the 2010 Term Loan Facility;
 
(vi) the failure by Products Corporation, certain of Products Corporation’s subsidiaries or Revlon, Inc. to pay certain material judgments;
 
(vii) a change of control such that (A) Revlon, Inc. shall cease to be the beneficial and record owner of 100% of Products Corporation’s capital stock, (B) Ronald O. Perelman (or his estate, heirs, executors, administrator or other personal representative) and his or their controlled affiliates shall cease to “control” Products Corporation, and any other person or group of persons owns, directly or indirectly, more than 35% of the total voting power of Products Corporation, (C) any person or group of persons other than Ronald O. Perelman (or his estate, heirs, executors, administrator or other personal representative) and his or their controlled affiliates shall “control” Products Corporation or (D) during any period of two consecutive years, the directors serving on Products Corporation’s Board of Directors at the beginning of such period (or other directors nominated by at least a majority of such continuing directors) shall cease to be a majority of the directors;
 
(viii) Revlon, Inc. shall have any meaningful assets or indebtedness or shall conduct any meaningful business other than its ownership of Products Corporation and such activities as are customary for a publicly traded holding company which is not itself an operating company, in each case subject to limited exceptions; and
 
(ix) the failure of certain of Products Corporation’s affiliates which hold Products Corporation’s or its subsidiaries’ indebtedness to be party to a valid and enforceable agreement prohibiting such affiliate from demanding or retaining payments in respect of such indebtedness, subject to certain exceptions, including exceptions as to Products Corporation’s Senior Subordinated Term Loan.
 
If Products Corporation is in default under the senior secured leverage ratio under the 2010 Term Loan Facility or the consolidated fixed charge coverage ratio under the 2010 Revolving Credit Facility, Products Corporation may cure such default by issuing certain equity securities to, or receiving capital contributions from, Revlon, Inc. and applying such cash which is deemed to increase EBITDA for the purpose of calculating the applicable ratio. This cure right may be exercised by Products Corporation two times in any four-quarter period.
 
Products Corporation was in compliance with all applicable covenants under the 2010 Credit Agreements upon closing the 2010 Refinancing and as of June 30, 2010. At June 30, 2010, the aggregate principal amount outstanding under the 2010 Term Loan Facility was $798.0 million and availability under the $140.0 million 2010 Revolving Credit Facility, based upon the calculated borrowing base less $21.8 million of outstanding undrawn letters of credit and nil then drawn on the 2010 Revolving Credit Facility, was $106.6 million.


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REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
 
(11)   Income Taxes
 
The provision for income taxes represents federal, foreign, state and local income taxes. The effective rate differs from statutory rates due to the effect of state and local income taxes, tax rates in foreign jurisdictions, utilization of tax loss carry-forwards and certain nondeductible expenses. The Company’s tax provision (benefit) changes quarterly based on recurring and non-recurring factors including, but not limited to, the geographical mix of earnings, enacted tax legislation, foreign and state and local income taxes, tax audit settlements, the ultimate disposition of deferred tax assets relating to stock-based compensation and the interaction of various global tax strategies. In addition, changes in judgment from the evaluation of new information resulting in the recognition, derecognition and/or re-measurement of a tax position taken in a prior annual period are recognized in the quarter in which any such change occurs.
 
For the second quarter of 2010 and 2009, the Company recorded a provision for (benefit from) income taxes for continuing operations of $4.8 million and $(0.2) million, respectively. The $4.8 million provision for income taxes for the second quarter of 2010, as compared to the $0.2 million benefit from income taxes for the second quarter of 2009, was primarily attributable to the favorable resolution of a tax contingency in the U.S in the second quarter of 2009 and higher taxable income for taxable subsidiaries in certain foreign jurisdictions in the second quarter of 2010, as compared to the second quarter of 2009.
 
For the first half of 2010 and 2009, the Company recorded a provision for (benefit from) income taxes for continuing operations of $9.8 million and $(2.2) million, respectively. The $9.8 million provision for income taxes in the first half of 2010, as compared to the $2.2 million benefit from income taxes for the first half of 2009, was primarily attributable to the favorable resolution of tax contingencies and other tax matters in the U.S. and certain foreign jurisdictions in the first half of 2009 and higher taxable income for taxable subsidiaries in certain foreign jurisdictions in the first half of 2010, as compared to the first half of 2009.
 
The Company remains subject to examination of its income tax returns in various jurisdictions including, without limitation, the U.S. (federal) and South Africa, for tax years ended December 31, 2006 through December 31, 2009, and Australia, for tax years ended December 31, 2005 through December 31, 2009.
 
(12)   Guarantor Financial Information
 
Products Corporation’s 93/4% Senior Secured Notes are fully and unconditionally guaranteed on a senior secured basis by Revlon, Inc. and Products Corporation’s domestic subsidiaries (other than certain immaterial subsidiaries) that guarantee Products Corporation’s obligations under its 2010 Credit Agreements (the “Guarantor Subsidiaries”). (See Note 13, “Subsequent Event,” in this Form 10-Q.)
 
The following Condensed Consolidating Financial Statements present the financial information as of June 30, 2010 and December 31, 2009, and for the three and six months ended June 30, 2010 and 2009 for (i) Products Corporation on a stand-alone basis; (ii) the Guarantor Subsidiaries on a stand-alone basis; (iii) the subsidiaries of Products Corporation that do not guarantee Products Corporation’s 93/4% Senior Secured Notes (the “Non-Guarantor Subsidiaries”) on a stand-alone basis; and (iv) Products Corporation, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries on a consolidated basis. The Condensed Consolidating Financial Statements are presented on the equity method, under which the investments in subsidiaries are recorded at cost and adjusted for the applicable share of the subsidiary’s cumulative results of operations, capital contributions, distributions and other equity changes. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions.


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REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
 
Consolidating Condensed Balance Sheets
As of June 30, 2010
 
                                         
                Non-
             
    Products
    Guarantor
    Guarantor
             
    Corporation     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
ASSETS
                                       
Cash and cash equivalents
  $ 5.4     $ 0.1     $ 33.1     $     $ 38.6  
Trade receivables, less allowances for doubtful accounts
    78.0       15.3       78.8             172.1  
Inventories
    76.5       4.0       41.9             122.4  
Prepaid expenses and other
    72.6       4.4       24.6             101.6  
Intercompany receivables
    879.5       445.7       308.6       (1,633.8 )      
Investment in subsidiaries
    (258.9 )     (215.2 )           474.1        
Property, plant and equipment, net
    93.1       0.8       14.7             108.6  
Other assets
    60.8       3.5       29.3             93.6  
Goodwill, net
    150.6       30.0       1.9             182.5  
                                         
Total assets
  $ 1,157.6     $ 288.6     $ 532.9     $ (1,159.7 )   $ 819.4  
                                         
                         
LIABILITIES AND STOCKHOLDER’S DEFICIENCY
                       
Short-term borrowings
  $     $ 4.5     $ 1.2     $     $ 5.7  
Current portion of long-term debt
    8.0                         8.0  
Accounts payable
    58.2       5.2       25.3             88.7  
Accrued expenses and other
    134.3       8.7       59.5             202.5  
Intercompany payables
    505.8       615.2       512.8       (1,633.8 )      
Long-term debt
    1,103.3                         1,103.3  
Long-term debt — affiliates
    107.0                         107.0  
Other long-term liabilities
    206.2       13.5       49.7             269.4  
                                         
Total liabilities
    2,122.8       647.1       648.5       (1,633.8 )     1,784.6  
Stockholder’s deficiency
    (965.2 )     (358.5 )     (115.6 )     474.1       (965.2 )
                                         
Total liabilities and stockholder’s deficiency
  $ 1,157.6     $ 288.6     $ 532.9     $ (1,159.7 )   $ 819.4  
                                         


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REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
 
Consolidating Condensed Balance Sheets
As of December 31, 2009
 
                                         
                Non-
             
    Products
    Guarantor
    Guarantor
             
    Corporation     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
ASSETS
                                       
Cash and cash equivalents
  $ 27.4     $ 0.4     $ 26.7     $     $ 54.5  
Trade receivables, less allowances for doubtful accounts
    81.1       15.5       85.1             181.7  
Inventories
    76.2       3.5       39.5             119.2  
Prepaid expenses and other
    60.1       4.3       26.5             90.9  
Intercompany receivables
    855.1       443.7       299.8       (1,598.6 )      
Investment in subsidiaries
    (248.1 )     (215.1 )           463.2        
Property, plant and equipment, net
    94.3       1.1       16.3             111.7  
Other assets
    56.8       2.7       30.4             89.9  
Goodwill, net
    150.6       30.0       2.0             182.6  
                                         
Total assets
  $ 1,153.5     $ 286.1     $ 526.3     $ (1,135.4 )   $ 830.5  
                                         
                         
LIABILITIES AND STOCKHOLDER’S DEFICIENCY
                       
Short-term borrowings
  $     $     $ 0.3     $     $ 0.3  
Current portion of long-term debt
    13.6                         13.6  
Accounts payable
    55.8       5.0       21.6             82.4  
Accrued expenses and other
    133.2       9.5       66.2             208.9  
Intercompany payables
    495.1       604.6       498.9       (1,598.6 )      
Long-term debt
    1,127.8                         1,127.8  
Long-term debt — affiliates
    107.0                         107.0  
Other long-term liabilities
    214.8       15.7       53.8             284.3  
                                         
Total liabilities
    2,147.3       634.8       640.8       (1,598.6 )     1,824.3  
Stockholder’s deficiency
    (993.8 )     (348.7 )     (114.5 )     463.2       (993.8 )
                                         
Total liabilities and stockholder’s deficiency
  $ 1,153.5     $ 286.1     $ 526.3     $ (1,135.4 )   $ 830.5  
                                         


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REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
 
Consolidating Condensed Statement of Operations
For the Three Months Ended June 30, 2010
 
                                         
                Non-
             
    Products
    Guarantor
    Guarantor
             
    Corporation     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net Sales
  $ 214.8     $ 16.9     $ 135.7     $ (39.7 )   $ 327.7  
Cost of Sales
    89.0       7.1       50.6       (39.7 )     107.0  
                                         
Gross profit
    125.8       9.8       85.1             220.7  
Selling, general and administrative expenses
    105.0       7.2       59.4             171.6  
Restructuring costs and other, net
    (0.1 )           (0.1 )           (0.2 )
                                         
Operating income
    20.9       2.6       25.8             49.3  
                                         
Other expenses (income):
                                       
Intercompany interest, net
    0.7       (0.2 )     1.1             1.6  
Interest expense
    22.8             0.1             22.9  
Amortization of debt issuance costs
    1.0                         1.0  
Foreign currency losses(gains), net
    0.2       0.2       (0.3 )           0.1  
Miscellaneous, net
    (21.9 )     10.9       11.5             0.5  
                                         
Other expenses, net
    2.8       10.9       12.4             26.1  
                                         
Income (loss) from continuing operations before income taxes
    18.1       (8.3 )     13.4             23.2  
(Benefit from) provision for income taxes
    (1.3 )     2.0       4.1             4.8  
                                         
Income (loss) from continuing operations
    19.4       (10.3 )     9.3             18.4  
Income from discontinued operations, net of taxes
    0.4                         0.4  
Equity in (loss) income of subsidiaries
    (1.0 )     2.6             (1.6 )      
                                         
Net income (loss)
  $ 18.8     $ (7.7 )   $ 9.3     $ (1.6 )   $ 18.8  
                                         


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REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
 
Consolidating Condensed Statement of Operations
For the Three Months Ended June 30, 2009
 
                                         
                Non-
             
    Products
    Guarantor
    Guarantor
             
    Corporation     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net Sales
  $ 216.7     $ 19.7     $ 121.0     $ (35.6 )   $ 321.8  
Cost of Sales
    97.5       8.9       49.8       (35.6 )     120.6  
                                         
Gross profit
    119.2       10.8       71.2             201.2  
Selling, general and administrative expenses
    93.6       8.6       52.1             154.3  
Restructuring costs and other, net
    13.8       0.5       4.0             18.3  
                                         
Operating income
    11.8       1.7       15.1             28.6  
                                         
Other expenses (income):
                                       
Intercompany interest, net
    (0.7 )     (0.4 )     1.1              
Interest expense
    23.9             0.1             24.0  
Interest income
                (0.2 )           (0.2 )
Amortization of debt issuance costs
    1.4                         1.4  
Gain on early extinguishment of debt, net
    (0.5 )                       (0.5 )
Foreign currency (gains) losses, net
    (1.4 )     1.0       2.5             2.1  
Miscellaneous, net
    (6.8 )     (4.3 )     11.2             0.1  
                                         
Other expenses (income), net
    15.9       (3.7 )     14.7             26.9  
                                         
(Loss) income from continuing operations before income taxes
    (4.1 )     5.4       0.4             1.7  
(Benefit from) provision for income taxes
    (4.2 )     1.8       2.6             0.2  
                                         
Income (loss) from continuing operations
    0.1       3.6       (2.2 )           1.5  
Income from discontinued operations, net of taxes
    0.3                         0.3  
Equity in income (loss) of subsidiaries
    1.4       (2.2 )           0.8        
                                         
Net income (loss)
  $ 1.8     $ 1.4     $ (2.2 )   $ 0.8     $ 1.8  
                                         


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REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
 
Consolidating Condensed Statement of Operations
For the Six Months Ended June 30, 2010
 
                                         
                Non-
             
    Products
    Guarantor
    Guarantor
             
    Corporation     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net Sales
  $ 423.3     $ 30.2     $ 251.5     $ (71.8 )   $ 633.2  
Cost of Sales
    179.6       13.1       94.8       (71.8 )     215.7  
                                         
Gross profit
    243.7       17.1       156.7             417.5  
Selling, general and administrative expenses
    196.0       16.4       108.9             321.3  
Restructuring costs and other, net
    (0.1 )           (0.1 )           (0.2 )
                                         
Operating income
    47.8       0.7       47.9             96.4  
                                         
Other expenses (income):
                                       
Intercompany interest, net
    1.5       (0.6 )     2.2             3.1  
Interest expense
    44.1       0.1       0.1             44.3  
Interest income
                (0.2 )           (0.2 )
Amortization of debt issuance costs
    2.4                         2.4  
Loss on early extinguishment of debt, net
    9.7                         9.7  
Foreign currency (gains) losses, net
    (4.3 )     (0.2 )     8.4             3.9  
Miscellaneous, net
    (28.9 )     7.4       22.3             0.8  
                                         
Other expenses, net
    24.5       6.7       32.8             64.0  
                                         
Income (loss) from continuing operations before income taxes
    23.3       (6.0 )     15.1             32.4  
(Benefit from) provision for income taxes
    (1.3 )     2.7       8.4             9.8  
                                         
Income (loss) from continuing operations
    24.6       (8.7 )     6.7             22.6  
Income from discontinued operations, net of taxes
    0.4                         0.4  
Equity in (loss) income of subsidiaries
    (2.0 )     (1.4 )           3.4        
                                         
Net income (loss)
  $ 23.0     $ (10.1 )   $ 6.7     $ 3.4     $ 23.0  
                                         


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REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
 
Consolidating Condensed Statement of Operations
For the Six Months Ended June 30, 2009
 
                                         
                Non-
             
    Products
    Guarantor
    Guarantor
             
    Corporation     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net Sales
  $ 431.9     $ 34.2     $ 225.3     $ (66.3 )   $ 625.1  
Cost of Sales
    190.8       15.1       92.0       (66.3 )     231.6  
                                         
Gross profit
    241.1       19.1       133.3             393.5  
Selling, general and administrative expenses
    196.8       16.7       99.3             312.8  
Restructuring costs and other, net
    14.6       0.9       3.3             18.8  
                                         
Operating income
    29.7       1.5       30.7             61.9  
                                         
Other expenses (income):
                                       
Intercompany interest, net
    (1.8 )     (0.9 )     2.7              
Interest expense
    48.0             0.1             48.1  
Interest income
                (0.4 )           (0.4 )
Amortization of debt issuance costs
    2.8                         2.8  
Gain on early extinguishment of debt, net
    (7.5 )                       (7.5 )
Foreign currency (gains) losses, net
    (0.8 )     0.9       4.4             4.5  
Miscellaneous, net
    (28.0 )     7.1       21.2             0.3  
                                         
Other expenses, net
    12.7       7.1       28.0             47.8  
                                         
Income (loss) from continuing operations before income taxes
    17.0       (5.6 )     2.7             14.1  
(Benefit from) provision for income taxes
    (25.7 )     23.8                   (1.9 )
                                         
Income (loss) from continuing operations
    42.7       (29.4 )     2.7             16.0  
Income from discontinued operations, net of taxes
    0.3                         0.3  
Equity in (loss) income of subsidiaries
    (26.7 )     3.2             23.5        
                                         
Net income (loss)
  $ 16.3     $ (26.2 )   $ 2.7     $ 23.5     $ 16.3  
                                         


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REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
 
Consolidating Condensed Statement of Cash Flow
For the Six Months Ended June 30, 2010
 
                                         
                Non-
             
    Products
    Guarantor
    Guarantor
             
    Corporation     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                                       
Net cash provided by (used in) operating activities
  $ 37.2     $ (3.9 )   $ 6.7     $     $ 40.0  
                                         
CASH FLOWS FROM INVESTING ACTIVITIES:
                                       
Capital expenditures
    (6.7 )           (0.9 )           (7.6 )
Proceeds from sales of certain assets
    0.1             0.1             0.2  
                                         
Net cash used in investing activities
    (6.6 )           (0.8 )           (7.4 )
                                         
CASH FLOWS FROM FINANCING ACTIVITIES:
                                       
Net (decrease) increase in short-term borrowings and overdraft
    (5.0 )     3.6       1.1             (0.3 )
Repayments under the 2006 Term Loan Facility
    (815.0 )                       (815.0 )
Borrowings under the 2010 Term Loan Facility, net
    784.0                         784.0  
Payment of financing costs
    (16.6 )                       (16.6 )
                                         
Net cash (used in) provided by financing activities
    (52.6 )     3.6       1.1             (47.9 )
                                         
Effect of exchange rate changes on cash and cash equivalents
                (0.6 )           (0.6 )
                                         
Net (decrease) increase in cash and cash equivalents
    (22.0 )     (0.3 )     6.4             (15.9 )
Cash and cash equivalents at beginning of period
    27.4       0.4       26.7             54.5  
                                         
Cash and cash equivalents at end of period
  $ 5.4     $ 0.1     $ 33.1     $     $ 38.6  
                                         


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REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
 
Consolidating Condensed Statement of Cash Flow
For the Six Months Ended June 30, 2009
 
                                         
                Non-
             
    Products
    Guarantor
    Guarantor
             
    Corporation     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                                       
Net cash provided by (used in) operating activities
  $ 27.8     $ (0.8 )   $ (9.4 )   $     $ 17.6  
                                         
CASH FLOWS FROM INVESTING ACTIVITIES:
                                       
Capital expenditures
    (4.9 )           (0.9 )           (5.8 )
Proceeds from sales of certain assets
                2.3             2.3  
                                         
Net cash (used in) provided by investing activities
    (4.9 )           1.4             (3.5 )
                                         
CASH FLOWS FROM FINANCING ACTIVITIES:
                                       
Net (decrease) increase in short-term borrowings and overdraft
    (0.5 )     (0.1 )     0.3             (0.3 )
Borrowings under the 2006 Revolving Credit Facility, net
    1.5                         1.5  
Repayment of long-term debt
    (41.5 )           (0.1 )           (41.6 )
                                         
Net cash (used in) provided by financing activities
    (40.5 )     (0.1 )     0.2             (40.4 )
                                         
Net cash used in discontinued operations
    (0.2 )                       (0.2 )
                                         
Effect of exchange rate changes on cash and cash equivalents
          0.2       0.7             0.9  
                                         
Net decrease in cash and cash equivalents
    (17.8 )     (0.7 )     (7.1 )           (25.6 )
Cash and cash equivalents at beginning of period
    18.7       0.9       33.2             52.8  
                                         
Cash and cash equivalents at end of period
  $ 0.9     $ 0.2     $ 26.1     $     $ 27.2  
                                         
 
(13)   Subsequent Event
 
Pursuant to a registration rights agreement, on June 1, 2010, Products Corporation commenced an offer to exchange the original 93/4% Senior Secured Notes (“Old Notes”) for up to $330 million in aggregate principal amount of its 93/4% Senior Secured Notes due 2015 (“New Notes”) that have been registered under the Securities Act of 1933, as amended (the “Securities Act”). On July 16, 2010, all of the Old Notes were exchanged for New Notes which have substantially identical terms as the Old Notes, except that the New Notes are registered with the SEC under the Securities Act and the transfer restrictions and registration rights applicable to the Old Notes do not apply to the New Notes.


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REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
 
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Overview
 
Overview of the Business
 
The Company is providing this overview in accordance with the SEC’s December 2003 interpretive guidance regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Revlon, Inc. (and together with its subsidiaries, the “Company”) conducts its business exclusively through its direct wholly-owned operating subsidiary, Revlon Consumer Products Corporation (“Products Corporation”) and its subsidiaries. Revlon, Inc. is a direct and indirect majority-owned subsidiary of MacAndrews & Forbes Holdings Inc. (“MacAndrews & Forbes Holdings” and together with certain of its affiliates other than the Company, “MacAndrews & Forbes”), a corporation wholly-owned by Ronald O. Perelman.
 
The Company’s vision is glamour, excitement and innovation through high-quality products at affordable prices. The Company operates in a single segment and manufactures, markets and sells an extensive array of cosmetics, women’s hair color, beauty tools, anti-perspirant deodorants, fragrances, skincare and other beauty care products. The Company is one of the world’s leading cosmetics companies in the mass retail channel (as hereinafter defined). The Company believes that its global brand name recognition, product quality and marketing experience have enabled it to create one of the strongest consumer brand franchises in the world.
 
The Company’s products are sold worldwide and marketed under such brand names as Revlon, including the Revlon ColorStay, Revlon Super Lustrous and Revlon Age Defying franchises, as well as the Almay brand, including the Almay Intense i-Color and Almay Smart Shade franchises, in cosmetics; Revlon ColorSilk women’s hair color; Revlon in beauty tools; Mitchum anti-perspirant deodorants; Charlie and Jean Naté in fragrances; and Ultima II and Gatineau in skincare.
 
The Company’s principal customers include large mass volume retailers and chain drug and food stores (collectively, the “mass retail channel”) in the U.S., as well as certain department stores and other specialty stores, such as perfumeries, outside the U.S. The Company also sells beauty products to U.S. military exchanges and commissaries and has a licensing business pursuant to which the Company licenses certain of its key brand names to third parties for complementary beauty-related products and accessories in exchange for royalties.
 
The Company was founded by Charles Revson, who revolutionized the cosmetics industry by introducing nail enamels matched to lipsticks in fashion colors over 75 years ago. Today, the Company has leading market positions in a number of its principal product categories in the U.S. mass retail channel, including color cosmetics (face, lip, eye and nail categories), women’s hair color, beauty tools and anti-perspirant deodorants. The Company also has leading market positions in several product categories in certain foreign countries, including Australia, Canada and South Africa.
 
Effective for periods beginning January 1, 2010, the Company is reporting Canada separately (previously Canada was included in the Europe region) and is reporting South Africa as part of the Europe, Middle East and Africa region (previously South Africa was included in the Asia Pacific region). As a result, prior year amounts have been reclassified to conform to this presentation.


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REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
 
Overview of the Company’s Strategy
 
The Company’s strategic goal is to profitably grow our business. The business strategies employed by the Company to achieve this goal are:
 
1. Building our strong brands.  We continue to build our strong brands by focusing on innovative, high-quality, consumer-preferred brand offering; effective consumer brand communication; appropriate levels of advertising and promotion; and superb execution with our retail partners.
 
2. Developing our organizational capability.  We continue to develop our organizational capability through attracting, retaining and rewarding highly capable people and through performance management, development planning, succession planning and training.
 
3. Driving our company to act globally.  We continue to drive common global processes which are designed to provide the most efficient allocation of our resources.
 
4. Increasing our operating profit and cash flow.  We continue to focus on increasing our operating profit and cash flow.
 
5. Improving our capital structure.  We continue to improve our capital structure by focusing on strengthening our balance sheet and reducing debt.
 
Overview of Net Sales and Earnings Results
 
Consolidated net sales in the second quarter of 2010 were $327.7 million, an increase of $5.9 million, or 1.8%, compared to $321.8 million in the second quarter of 2009. Consolidated net sales for the first half of 2010 were $633.2 million, an increase of $8.1 million, or 1.3%, compared to $625.1 million for the first half of 2009. Excluding the unfavorable impact of foreign currency fluctuations of $0.5 million, consolidated net sales increased by 2.0% in the second quarter of 2010, driven by higher net sales in the Company’s Latin America, Europe, Middle East and Africa and Canada regions, partially offset by lower net sales in the U.S. and the Company’s Asia Pacific region. Excluding the favorable impact of foreign currency fluctuations of $8.5 million, consolidated net sales decreased by 0.1% in the first half of 2010, driven by lower net sales in the U.S. and the Company’s Asia Pacific region, partially offset by higher net sales in the Company’s Latin America, Europe, Middle East and Africa and Canada regions.
 
Consolidated net income for the second quarter of 2010 was $16.4 million, compared to $0.2 million in the second quarter of 2009. In the first half of 2010, consolidated net income was $18.6 million, compared to $12.9 million in the first half of 2009. The improvement in consolidated net income in the second quarter of 2010, compared to the second quarter of 2009, was primarily due to:
 
  •   $19.5 million of higher gross profit primarily due to a $13.6 million improvement in cost of sales and a $5.9 million improvement in consolidated net sales; and
 
  •   $18.5 million of lower restructuring costs and other, net;
 
with the foregoing partially offset by:
 
  •   $17.3 million of higher SG&A expenses, driven primarily by $20.2 million of higher advertising expenses to support the Company’s brands; and
 
  •   a $4.8 million provision for income taxes in the second quarter of 2010, as compared to a $0.2 million benefit from income taxes in the second quarter of 2009.


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REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
 
 
The improvement in consolidated net income in the first half of 2010 compared to the first half of 2009 was primarily due to:
 
  •   $24.0 million of higher gross profit primarily due to a $15.9 million improvement in cost of sales and an $8.1 million improvement in consolidated net sales; and
 
  •   $19.0 million of lower restructuring costs and other, net;
 
with the foregoing partially offset by:
 
  •   a $9.7 million loss on the early extinguishment of debt in the first half of 2010, as compared to the $7.5 million gain related to the early extinguishment of debt in the first half of 2009;
 
  •   $8.5 million of higher SG&A expenses, driven primarily by $13.2 million of higher advertising expenses to support the Company’s brands; and
 
  •   a $9.8 million provision for income taxes in the first half of 2010, as compared to a $2.2 million benefit from income taxes in the first half of 2009.
 
Overview of Financing Activities
 
Refinancing of the 2006 Term Loan and Revolving Credit Facilities:  In March 2010, Products Corporation consummated a credit agreement refinancing (the “2010 Refinancing”) consisting of the following transactions:
 
The 2010 Refinancing included refinancing Products Corporation’s term loan facility, which was scheduled to mature on January 15, 2012 and had $815.0 million aggregate principal amount outstanding at December 31, 2009 (the “2006 Term Loan Facility”), with a 5-year, $800.0 million term loan facility due March 11, 2015 (the “2010 Term Loan Facility”) under a second amended and restated term loan agreement dated March 11, 2010 (the “2010 Term Loan Agreement”), among Products Corporation, as borrower, the lenders party thereto, Citigroup Global Markets Inc. (“CGMI”), J.P. Morgan Securities Inc. (“JPM Securities”), Banc of America Securities LLC (“BAS”) and Credit Suisse Securities (USA) LLC (“Credit Suisse”), as joint lead arrangers, CGMI, JPM Securities, BAS, Credit Suisse and Natixis, New York Branch (“Natixis”), as joint bookrunners, JPMorgan Chase Bank, N.A. and Bank of America, N.A. as co-syndication agents, Credit Suisse and Natixis as co-documentation agents, and Citicorp USA, Inc. (“CUSA”), as administrative agent and collateral agent.
 
The 2010 Refinancing also included refinancing Products Corporation’s 2006 revolving credit facility, which was scheduled to mature on January 15, 2012 and had nil outstanding borrowings at December 31, 2009, with a 4-year, $140.0 million asset-based, multi-currency revolving credit facility due March 11, 2014 (the “2010 Revolving Credit Facility” and, together with the 2010 Term Loan Facility, the “2010 Credit Facilities”) under a second amended and restated revolving credit agreement dated March 11, 2010 (the “2010 Revolving Credit Agreement” and, together with the 2010 Term Loan Agreement, the “2010 Credit Agreements”), among Products Corporation, as borrower, the lenders party thereto, CGMI and Wells Fargo Capital Finance, LLC (“WFS”), as joint lead arrangers, CGMI, WFS, BAS, JPM Securities and Credit Suisse, as joint bookrunners, and CUSA, as administrative agent and collateral agent.
 
Products Corporation used the approximately $786 million of proceeds from the 2010 Term Loan Facility, which was drawn in full on the March 11, 2010 closing date and issued to lenders at 98.25% of par, plus approximately $31 million of available cash and approximately $20 million then drawn on the 2010 Revolving Credit Facility to refinance in full the $815.0 million of outstanding indebtedness under the 2006 Term Loan Facility and to pay approximately $7 million of accrued interest and approximately $15 million


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REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
 
of fees and expenses incurred in connection with consummating the 2010 Refinancing, of which approximately $9 million was capitalized.
 
Results of Operations
 
In the tables, all amounts are in millions and numbers in parentheses ( ) denote unfavorable variances.
 
Net sales:
 
Second quarter results
 
Consolidated net sales in the second quarter of 2010 were $327.7 million, an increase of $5.9 million, or 1.8%, compared to $321.8 million in the second quarter of 2009. Excluding the unfavorable impact of foreign currency fluctuations of $0.5 million, consolidated net sales increased by 2.0% in the second quarter of 2010, primarily driven by higher net sales of Revlon color cosmetics and Revlon ColorSilk hair color, partially offset by lower net sales of Mitchum anti-perspirant deodorant and Almay color cosmetics.
 
Year-to-date results
 
Consolidated net sales in the first half of 2010 were $633.2 million, an increase of $8.1 million, or 1.3%, compared to $625.1 million in the first half of 2009. Excluding the favorable impact of foreign currency fluctuations of $8.5 million, consolidated net sales decreased by 0.1% in the first half of 2010, primarily driven by lower net sales of Almay color cosmetics and Revlon beauty tools, due to the cycling of the 2009 launches of Almay Pure Blends and Revlon Pedi-Expert, respectively, and lower net sales of Mitchum anti- perspirant deodorant, partially offset by higher net sales of Revlon color cosmetics and Revlon ColorSilk hair color.
 
                                                 
    Three Months Ended
             
    June 30,     Change     XFX Change(a)  
    2010     2009     $     %     $     %  
 
United States
  $ 179.3     $ 186.2     $ (6.9 )     (3.7 )%   $ (6.9 )     (3.7 )%
Asia Pacific
    48.7       45.5       3.2       7.0       (0.4 )     (0.9 )
Europe, Middle East and Africa
    50.2       45.6       4.6       10.1       3.3       7.2  
Latin America
    28.7       27.2       1.5       5.5       9.1       33.5  
Canada
    20.8       17.3       3.5       20.2       1.3       7.5  
                                                 
Total Net Sales
  $ 327.7     $ 321.8     $ 5.9       1.8 %   $ 6.4       2.0 %
                                                 
 
                                                 
    Six Months Ended
             
    June 30,     Change     XFX Change(a)  
    2010     2009     $     %     $     %  
 
United States
  $ 361.4     $ 377.2     $ (15.8 )     (4.2 )%   $ (15.8 )     (4.2 )%
Asia Pacific
    94.6       87.1       7.5       8.6       (1.6 )     (1.8 )
Europe, Middle East and Africa
    93.1       83.9       9.2       11.0       1.5       1.8  
Latin America
    48.7       46.7       2.0       4.3       14.9       31.9  
Canada
    35.4       30.2       5.2       17.2       0.6       2.0  
                                                 
Total Net Sales
  $ 633.2     $ 625.1     $ 8.1       1.3 %   $ (0.4 )     (0.1 )%
                                                 
 
(a) XFX excludes the impact of foreign currency fluctuations.


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REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
 
 
United States
 
Second quarter results
 
In the U.S., net sales in the second quarter of 2010 were $179.3 million, a decrease of $6.9 million, or 3.7%, compared to $186.2 million in the second quarter of 2009, primarily driven by lower net sales of Almay color cosmetics, due to the cycling of the 2009 launch of Almay Pure Blends, and lower net sales of Revlon beauty tools and Mitchum anti-perspirant deodorant, partially offset by higher net sales of Revlon color cosmetics.
 
Year-to-date results
 
In the U.S, net sales in the first half of 2010 were $361.4 million, a decrease of $15.8 million, or 4.2%, compared to $377.2 million in the first half of 2009, primarily driven by lower net sales of Almay color cosmetics and Revlon beauty tools, due to the cycling of the 2009 launches of Almay Pure Blends and Revlon Pedi-Expert, respectively, and lower net sales of Mitchum anti-perspirant deodorant, partially offset by higher net sales of Revlon color cosmetics.
 
Asia Pacific
 
Second quarter results
 
In Asia Pacific, net sales in the second quarter of 2010 increased 7.0% to $48.7 million, compared to $45.5 million in the second quarter of 2009. Excluding the favorable impact of foreign currency fluctuations, net sales decreased $0.4 million, or 0.9%, primarily driven by lower net sales of Revlon color cosmetics. From a country perspective, lower net sales in Australia (which contributed approximately 4.1 percentage points to the decrease in the region’s net sales in the second quarter of 2010, as compared with the second quarter of 2009) were partially offset by higher net sales in certain distributor markets, Japan and China (which together offset by approximately 3.0 percentage points the decrease in the region’s net sales in the second quarter of 2010, as compared with the second quarter of 2009).
 
Year-to-date results
 
In Asia Pacific, net sales in the first half of 2010 increased 8.6% to $94.6 million, compared to $87.1 million in the first half of 2009. Excluding the favorable impact of foreign currency fluctuations, net sales decreased $1.6 million, or 1.8%, primarily driven by lower net sales of Revlon color cosmetics. From a country perspective, lower net sales in Australia and Japan (which together contributed approximately 5.0 percentage points to the decrease in the region’s net sales in the first half of 2010, as compared with the first half of 2009) were partially offset by higher net sales in China and certain distributor markets (which together offset by approximately 2.5 percentage points the decrease in the region’s net sales in the first half of 2010, as compared with the first half of 2009).
 
Europe, Middle East and Africa
 
Second quarter results
 
In Europe, the Middle East and Africa, net sales in the second quarter of 2010 increased 10.1% to $50.2 million, compared to $45.6 million in the second quarter of 2009. Excluding the favorable impact of foreign currency fluctuations, net sales increased $3.3 million, or 7.2%, primarily driven by higher net sales of Revlon color cosmetics and fragrances. From a country perspective, higher net sales in South Africa and certain distributor markets contributed approximately 7.3 percentage points to the increase in the region’s net sales in the second quarter of 2010, as compared to the second quarter of 2009.


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REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
 
Year-to-date results
 
In Europe, the Middle East and Africa, net sales in the first half of 2010 increased 11.0% to $93.1 million, compared to $83.9 million in the first half of 2009. Excluding the favorable impact of foreign currency fluctuations, net sales increased $1.5 million, or 1.8%, primarily driven by higher net sales of fragrances. From a country perspective, higher net sales in South Africa (which contributed approximately 3.2 percentage points to the increase in the region’s net sales in the first half of 2010, as compared to the first half of 2009) were partially offset by lower net sales in the U.K. (which offset by approximately 2.2 percentage points the increase in the region’s net sales in the first half of 2010, as compared with the first half of 2009).
 
Latin America
 
Second quarter results
 
In Latin America, net sales in the second quarter of 2010 increased 5.5% to $28.7 million, compared to $27.2 million in the second quarter of 2009. Excluding the unfavorable impact of foreign currency fluctuations (including the unfavorable impact of the January 2010 devaluation of Venezuela’s local currency relative to the U.S. dollar), net sales increased $9.1 million, or 33.5%, primarily driven by higher net sales of Revlon ColorSilk hair color, Revlon color cosmetics and other beauty care products. From a country perspective, higher net sales in certain distributor markets and Venezuela contributed approximately 28.8 percentage points to the increase in the region’s net sales in the second quarter of 2010, as compared to the second quarter of 2009. Higher selling prices in Venezuela, given market conditions and inflation, accounted for approximately half of the $9.1 million increase in net sales in the region.
 
Year-to-date results
 
In Latin America, net sales in the first half of 2010 increased 4.3% to $48.7 million, compared to $46.7 million in the first half of 2009. Excluding the unfavorable impact of foreign currency fluctuations (including the unfavorable impact of the January 2010 devaluation of Venezuela’s local currency relative to the U.S. dollar), net sales increased $14.9 million, or 31.9%, primarily driven by higher net sales of Revlon ColorSilk hair color, other beauty care products and Revlon color cosmetics. From a country perspective, higher net sales in certain distributor markets and Venezuela contributed approximately 25.7 percentage points to the increase in the region’s net sales in the first half of 2010, as compared to the first half of 2009. Higher selling prices in Venezuela, given market conditions and inflation, accounted for approximately half of the $14.9 million increase in net sales in the region.
 
Canada
 
Second quarter results
 
In Canada, net sales in the second quarter of 2010 were $20.8 million, an increase of $3.5 million, or 20.2%, compared to $17.3 million in the second quarter of 2009. Excluding the favorable impact of foreign currency fluctuations, net sales increased $1.3 million, or 7.5%, primarily driven by higher net sales of Revlon color cosmetics.
 
Year-to-date results
 
In Canada, net sales in the first half of 2010 were $35.4 million, an increase of $5.2 million, or 17.2%, compared to $30.2 million in the first half of 2009. Excluding the favorable impact of foreign currency fluctuations, net sales increased $0.6 million, or 2.0%, primarily driven by higher net sales of Revlon color


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REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
 
cosmetics, partially offset by lower net sales of Revlon beauty tools, due to the cycling of the 2009 launch of Revlon Pedi-Expert.
 
Gross profit:
 
                                                 
    Three Months Ended
          Six Months Ended
       
    June 30,           June 30,        
    2010     2009     Change     2010     2009     Change  
 
Gross profit
  $ 220.7     $ 201.2     $ 19.5     $ 417.5     $ 393.5     $ 24.0  
Percentage of net sales
    67.3 %     62.5 %     4.8 %     65.9 %     62.9 %     3.0 %
 
The 4.8 percentage point increase in gross profit as a percentage of net sales for the second quarter of 2010, compared to the second quarter of 2009, was primarily due to:
 
  •   lower costs related to sales returns and inventory obsolescence, which increased gross profit as a percentage of net sales by 2.4 percentage points;
 
  •   lower material costs as a result of purchasing initiatives and savings as a result of the May 2009 Program (as hereinafter defined), which increased gross profit as a percentage of net sales by 1.5 percentage points; and
 
  •   favorable foreign currency fluctuations which resulted in lower cost of goods in most international markets on goods purchased from the Company’s facility in Oxford, North Carolina, which increased gross profit as a percentage of net sales by 1.1 percentage points.
 
The 3.0 percentage point increase in gross profit as a percentage of net sales for the first half of 2010, compared to the first half of 2009, was primarily due to:
 
  •   lower material costs as a result of purchasing initiatives and savings as a result of the May 2009 Program, which increased gross profit as a percentage of net sales by 1.6 percentage points;
 
  •   lower costs related to sales returns and inventory obsolescence, which increased gross profit as a percentage of net sales by 1.4 percentage points; and
 
  •   favorable foreign currency fluctuations which resulted in lower cost of goods in most international markets on goods purchased from the Company’s facility in Oxford, North Carolina, which increased gross profit as a percentage of net sales by 1.1 percentage points;
 
with the foregoing partially offset by:
 
  •   the unfavorable impact of cost of goods as a result of the devaluation of Venezuela’s local currency relative to the U.S. dollar, as inventory is carried at historical dollar cost resulting in higher inventory value based on the exchange rate prior to such devaluation, which reduced gross profit as a percentage of net sales by 0.5 percentage points.
 
SG&A expenses:
 
                                                 
    Three Months Ended
          Six Months Ended
       
    June 30,           June 30,        
    2010     2009     Change     2010     2009     Change  
 
SG&A expenses
  $ 173.6      $ 156.3      $ (17.3   $ 325.0      $ 316.5      $ (8.5 )    
 
The $17.3 million increase in SG&A expenses for the second quarter of 2010, as compared to the second quarter of 2009, was driven primarily by $20.2 million of higher advertising expenses to support the Company’s brands, which is consistent with the Company’s business strategy to build its strong brands, as


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
 
well as higher compensation expenses, including the accrual for incentive compensation, partially offset by savings as a result of the May 2009 Program.
 
The $8.5 million increase in SG&A expenses for the first half of 2010, as compared to the first half of 2009, was driven primarily by $13.2 million of higher advertising expenses to support the Company’s brands, which is consistent with the Company’s business strategy to build its strong brands, as well as higher compensation expenses, including the accrual for incentive compensation, partially offset by savings as a result of the May 2009 Program.
 
Consistent with the Company’s business strategy to build its strong brands, in the third quarter of 2010, as compared to the third quarter of 2009, the Company currently intends to support its brands with increased advertising spending (as defined in Note 1, “Summary of Significant Accounting Policies — Advertising,” to the Consolidated Financial Statements in Revlon, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC on February 25, 2010 (the “2009 Form 10-K”)).
 
Restructuring costs and other, net:
 
                                                 
    Three Months Ended
          Six Months Ended
       
    June 30,           June 30,        
    2010     2009     Change     2010     2009     Change  
 
Restructuring costs and other, net
  $ (0.2 )   $ 18.3     $ 18.5     $ (0.2 )   $ 18.8     $ 19.0  
 
In May 2009 the Company announced a worldwide restructuring (the “May 2009 Program”), which involved consolidating certain functions; reducing layers of management, where appropriate, to increase accountability and effectiveness; streamlining support functions to reflect the new organizational structure; and further consolidating the Company’s office facilities in New Jersey.
 
The $20.6 million of charges related to the May 2009 Program have been or will be paid out as follows: $11.0 million paid in 2009, $7.0 million expected to be paid in 2010 (of which $5.1 million was paid during the first half of 2010) and the balance of $2.6 million is expected to be paid thereafter. The May 2009 Program delivered savings of approximately $15 million in 2009 and the Company expects annualized savings of approximately $30 million in 2010 and thereafter (inclusive of the approximately $15 million in 2009).
 
During the second quarter of 2010 a $0.2 million favorable adjustment was recorded to restructuring costs associated with the May 2009 Program.
 
During the second quarter of 2009, the Company recorded charges of $18.3 million in restructuring costs and other, which are comprised of (1) an $18.2 million charge related to the May 2009 Program and (2) a $0.1 million charge related to the 2008 Programs.
 
During the first half of 2009, the Company recorded charges of $18.8 million in restructuring costs and other, net, which are comprised of:
 
  •   an $18.2 million charge related to the May 2009 Program;
 
  •   $1.2 million of charges related to employee severance and other employee-related termination costs related to restructuring actions in the U.K., Mexico and Argentina announced in the first quarter of 2009; and
 
  •   a $1.0 million charge related to the 2008 Programs;
 
with the foregoing partially offset by
 
  •   income of $1.6 million related to the sale of a facility in Argentina in the first quarter of 2009.


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REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
 
 
Interest expense:
 
                                                 
    Three Months Ended
          Six Months Ended
       
    June 30,           June 30,        
    2010     2009     Change     2010     2009     Change  
 
Interest expense
  $ 23.0     $ 24.0     $ 1.0     $ 44.3     $ 48.1     $ 3.8  
Interest expense — preferred stock dividends
    1.6             (1.6 )     3.2             (3.2 )
 
The $1.0 million decrease in interest expense for the second quarter of 2010, as compared to the second quarter of 2009, was due to lower debt levels, partially offset by higher weighted average borrowing rates.
 
The $3.8 million decrease in interest expense for the first half of 2010, as compared to the first half of 2009, was primarily due to lower debt levels. Interest expense throughout the remainder of 2010 will continue to be impacted by higher weighted average borrowing rates as a result of the 2010 Refinancing.
 
In accordance with the terms of the certificate of designation of the Preferred Stock, on April 8, 2010, Revlon, Inc. paid to holders of record of the Preferred Stock at the close of business on March 26, 2010 the Regular Dividend in the amount of $0.163794 per share for the period from January 8, 2009 through and including April 8, 2010. In addition, on July 8, 2010, Revlon, Inc. paid to holders of record of the Preferred Stock at the close of business on June 25, 2010 the Regular Dividend in the amount of $0.165614 per share for the period from April 8, 2010 through and including July 8, 2010. As of June 30, 2010, the Company accrued $1.4 million in interest expense related to the quarterly Regular Dividend on the Preferred Stock which was paid in July 2010.
 
(Gain) loss on early extinguishment of debt, net:
 
                                                 
    Three Months Ended
          Six Months Ended
       
    June 30,           June 30,        
    2010     2009     Change     2010     2009     Change  
 
(Gain) loss on early extinguishment of debt, net
  $     $ (0.5 )   $ (0.5 )   $ 9.7     $ (7.5 )   $ (17.2 )
 
As a result of the 2010 Refinancing, the Company recognized a loss on the extinguishment of debt of $9.7 million during the first half of 2010, primarily due to $5.9 million of fees and expenses which were expensed as incurred in connection with the 2010 Refinancing, as well as the write-off of $3.8 million of unamortized deferred financing fees in connection with such refinancing.
 
In the first quarter of 2009, Products Corporation used $16.5 million to repurchase an aggregate principal amount of $23.9 million of its 91/2% Senior Notes (prior to their complete refinancing in November 2009 with the 93/4% Senior Secured Notes), and paid an additional $1.2 million of accrued and unpaid interest and fees through the respective dates of the repurchases. In the second quarter of 2009, Products Corporation used $6.3 million to repurchase an aggregate principal amount of $7.0 million of its 91/2% Senior Notes (prior to their complete refinancing in November 2009 with the 93/4% Senior Secured Notes) and paid an additional $0.2 million of accrued and unpaid interest and fees through the respective dates of the repurchases. As a result of these 2009 repurchases, the Company recorded a gain of $7.0 million during the first quarter of 2009 and a gain of $0.5 million during the second quarter of 2009, which are net of the write-off of the ratable portion of unamortized debt discounts and deferred financing fees.


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REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
 
Foreign currency losses:
 
                                                 
    Three Months Ended
          Six Months Ended
       
    June 30,           June 30,        
    2010     2009     Change     2010     2009     Change  
 
Foreign currency losses
  $ 0.1     $ 2.1     $ 2.0     $ 3.9     $ 4.5     $ 0.6  
 
The $2.0 million decrease in foreign currency losses during the second quarter of 2010, as compared to the second quarter of 2009, was primarily driven by:
 
  •   foreign currency gains related to the Company’s outstanding foreign currency forward exchange contracts (“FX Contracts”) for the second quarter of 2010, as compared to foreign currency losses related to the Company’s FX Contracts for the second quarter of 2009;
 
with the foregoing partially offset by:
 
  •   the unfavorable impact of the revaluation of certain U.S. dollar-denominated intercompany payables from the Company’s foreign subsidiaries during the second quarter of 2010.
 
The $0.6 million decrease in foreign currency losses during the first half of 2010, as compared to the first half of 2009, was primarily driven by:
 
  •   foreign currency gains related to the Company’s outstanding FX Contracts for the first half of 2010, as compared to foreign currency losses related to the Company’s FX Contracts for the first half of 2009;
 
with the foregoing partially offset by:
 
  •   a $2.8 million one-time foreign currency loss related to the required re-measurement of the balance sheet of the Company’s subsidiary in Venezuela (“Revlon Venezuela”) during the first quarter of 2010 to reflect the impact of the devaluation of Venezuela’s local currency relative to the U.S. dollar, as Venezuela has been designated as a highly inflationary economy effective January 1, 2010 (See “Financial Condition, Liquidity and Capital Resources — Impact of Foreign Currency Translation — Venezuela” in this Form 10-Q).
 
Provision for (benefit from) income taxes:
 
                                                 
    Three Months Ended
          Six Months Ended
       
    June 30,           June 30,        
    2010     2009     Change     2010     2009     Change  
 
Provision for (benefit from) income taxes
  $ 4.8     $ (0.2 )   $ (5.0 )   $ 9.8     $ (2.2 )   $ (12.0 )
 
The $4.8 million provision for income taxes for the second quarter of 2010, as compared to the $0.2 million benefit from income taxes for the second quarter of 2009, was primarily attributable to the favorable resolution of a tax contingency in the U.S. in the second quarter of 2009 and higher taxable income for taxable subsidiaries in certain foreign jurisdictions in the second quarter of 2010, as compared to the second quarter of 2009.
 
The $9.8 million provision for income taxes in the first half of 2010, as compared to the $2.2 million benefit from income taxes for the first half of 2009, was primarily attributable to the favorable resolution of tax contingencies and other tax matters in the U.S. and certain foreign jurisdictions in the first half of 2009 and higher taxable income for taxable subsidiaries in certain foreign jurisdictions in the first half of 2010, as compared to the first half of 2009.


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REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
 
The Company has previously disclosed the details of its deferred tax assets, including the amount of its domestic tax loss carryforwards, the expiration dates thereof and the valuation allowance related to its deferred tax assets. (See Note 12, “Income Taxes,” to the Consolidated Financial Statements in Revlon, Inc.’s 2009 Form 10-K for further details regarding the Company’s deferred tax assets). In assessing the recoverability of its deferred tax assets, management regularly considers whether some portion or all of the deferred tax assets will not be realized based on the recognition threshold and measurement of a tax position in accordance with the Income Taxes Topic of the FASB Accounting Standards Codification (the “Income Taxes Topic”). The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. In accordance with the Income Taxes Topic, based upon the level of historical taxable losses for the U.S., the Company has maintained a deferred tax valuation allowance against its deferred tax assets in the U.S. through June 30, 2010. For 2008 and 2009, however, the Company has experienced continued improved earnings trends and has had cumulative taxable income in the U.S. The first half of 2010 has continued with positive earnings and if such earnings trends and our tax position continue, the Company may realize the benefits of all or a significant portion of its net U.S. deferred tax assets in the near term through a reduction in its deferred tax valuation allowance, based upon current expectations for future taxable income in the U.S. over the periods in which the deferred tax assets are recoverable. This would result in an income tax benefit that would be primarily reflected in net income.
 
Financial Condition, Liquidity and Capital Resources
 
At June 30, 2010, the Company had a liquidity position (excluding cash in compensating balance accounts), of $134.0 million, consisting of cash and cash equivalents (net of any outstanding checks) of $27.4 million, as well as $106.6 million in available borrowings under the 2010 Revolving Credit Facility.
 
Cash Flows
 
At June 30, 2010, the Company had cash and cash equivalents of $38.6 million, compared with $27.2 million at June 30, 2009. The following table summarizes the Company’s cash flows from operating, investing and financing activities for the six months ended June 30, 2010 and June 30, 2009, respectively:
 
                 
    Six Months Ended
    June 30,
    2010   2009
 
Net cash provided by operating activities
  $ 40.5     $ 18.0  
Net cash used in investing activities
    7.4       3.5  
Net cash used in financing activities
    48.4       40.8  
 
Operating Activities
 
Net cash provided by operating activities in the first half of 2010 was $40.5 million, as compared to $18.0 million in the first half of 2009. This improvement in cash provided by operating activities in the first half of 2010, compared to the first half of 2009, was due to improved operating income, lower interest payments and lower incentive compensation payments.
 
Investing Activities
 
Net cash used in investing activities was $7.4 million and $3.5 million for the first half of 2010 and 2009, respectively. Net cash used in investing activities for the first half of 2010 included $7.6 million of cash used


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
 
for capital expenditures. Net cash used in investing activities for the first half of 2009 included cash used for capital expenditures of $5.8 million, partially offset by cash provided by investing activities of $2.3 million from the net proceeds from the sale of certain assets.
 
Financing Activities
 
Net cash used in financing activities was $48.4 million and $40.8 million for the first half of 2010 and 2009, respectively. Net cash used in financing activities for the first half of 2010 included the 2010 Refinancing of the $815.0 million remaining aggregate principal amount of Products Corporation’s 2006 Term Loan Facility, partially offset by Products Corporation’s issuance of the $800.0 million aggregate principal amount of the 2010 Term Loan Facility, or $784.0 million, net of discounts and after giving effect to the $2.0 million scheduled amortization payment on the 2010 Term Loan Facility in the second quarter of 2010. Net cash used in financing activities for the first half of 2010 also included payment of financing costs of $17.1 million, which is comprised of (i) the payment of $15.0 million of the $15.3 million of fees incurred in connection with the 2010 Refinancing; (ii) the payment of $1.6 million of the $25.1 million of fees incurred in connection with the refinancing of Product Corporation’s 91/2% Senior Notes in November 2009 with the 93/4% Senior Secured Notes due November 2015; and (iii) the payment of the remaining balance of $0.5 million of the $6.7 million of fees incurred in connection with Revlon, Inc.’s consummation of the voluntary exchange offer in October 2009.
 
Net cash used in financing activities for the first half of 2009 includes debt reduction payments of $41.6 million, which is primarily comprised of the repayment of $18.7 million in principal amount of Products Corporation’s former 2006 Term Loan Facility (prior to its complete refinancing in March 2010 with the 2010 Term Loan Facility) and repurchases of $30.9 million in aggregate principal amount of Products Corporation’s 91/2% Senior Notes (prior to their complete refinancing in November 2009 with the 93/4% Senior Secured Notes) at an aggregate purchase price of $22.9 million.
 
Long-Term Debt Instruments
 
For further detail regarding Products Corporation’s long-term debt instruments, see Note 9, “Long-Term Debt and Redeemable Preferred Stock,” to the Consolidated Financial Statements in Revlon, Inc.’s 2009 Form 10-K.
 
2010 Bank Credit Agreements
 
In March 2010, Products Corporation consummated the 2010 Refinancing, which included refinancing its 2006 Term Loan Facility with the 2010 Term Loan Facility and Products Corporation’s 2006 Revolving Credit Facility with the 2010 Revolving Credit Facility.
 
2010 Revolving Credit Facility
 
Availability under the 2010 Revolving Credit Facility varies based on a borrowing base that is determined by the value of eligible accounts receivable and eligible inventory in the U.S. and the U.K. and eligible real property and equipment in the U.S. from time to time.
 
In each case subject to borrowing base availability, the 2010 Revolving Credit Facility is available to:
 
(i) Products Corporation in revolving credit loans denominated in U.S. dollars;
 
(ii) Products Corporation in swing line loans denominated in U.S. dollars up to $30.0 million;


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
 
(iii) Products Corporation in standby and commercial letters of credit denominated in U.S. dollars and other currencies up to $60.0 million; and
 
(iv) Products Corporation and certain of its international subsidiaries designated from time to time in revolving credit loans and bankers’ acceptances denominated in U.S. dollars and other currencies.
 
If the value of the eligible assets is not sufficient to support the $140.0 million borrowing base under the 2010 Revolving Credit Facility, Products Corporation will not have full access to the 2010 Revolving Credit Facility. Products Corporation’s ability to make borrowings under the 2010 Revolving Credit Facility is also conditioned upon the satisfaction of certain conditions precedent and Products Corporation’s compliance with other covenants in the 2010 Revolving Credit Agreement.
 
Borrowings under the 2010 Revolving Credit Facility bear interest at a rate equal to, at Products Corporation’s option, either (i) the Eurodollar Rate plus 3.00% per annum or (ii) the Alternate Base Rate plus 2.00% per annum.
 
Prior to the termination date of the 2010 Revolving Credit Facility, revolving loans are required to be prepaid (without any permanent reduction in commitment) with:
 
(i) the net cash proceeds from sales of Revolving Credit First Lien Collateral (as defined below) by Products Corporation or any of its subsidiary guarantors (other than dispositions in the ordinary course of business and certain other exceptions); and
 
(ii) the net proceeds from the issuance by Products Corporation or any of its subsidiaries of certain additional debt, to the extent there remains any such proceeds after satisfying Products Corporation’s repayment obligations under the 2010 Term Loan Facility.
 
Products Corporation pays to the lenders under the 2010 Revolving Credit Facility a commitment fee of 0.75% of the average daily unused portion of the 2010 Revolving Credit Facility, which fee is payable quarterly in arrears. Under the 2010 Revolving Credit Facility, Products Corporation also pays:
 
(i) to foreign lenders a fronting fee of 0.25% per annum on the aggregate principal amount of specified Local Loans (as defined in the 2010 Revolving Credit Agreement) (which fee is retained by foreign lenders out of the portion of the Applicable Margin payable to such foreign lender);
 
(ii) to foreign lenders an administrative fee of 0.25% per annum on the aggregate principal amount of specified Local Loans;
 
(iii) to the multi-currency lenders a letter of credit commission equal to the product of (a) the Applicable Margin (as defined in the 2010 Revolving Credit Agreement) for revolving credit loans that are Eurodollar Rate (as defined in the 2010 Revolving Credit Agreement) loans (adjusted for the term that the letter of credit is outstanding) and (b) the aggregate undrawn face amount of letters of credit; and
 
(iv) to the issuing lender, a letter of credit fronting fee of 0.25% per annum of the aggregate undrawn face amount of letters of credit, which fee is a portion of the Applicable Margin.
 
Under certain circumstances, Products Corporation will have the right to request that the 2010 Revolving Credit Facility be increased by up to $60.0 million, provided that the lenders are not committed to provide any such increase.
 
Under certain circumstances if and when the difference between (i) the borrowing base under the 2010 Revolving Credit Facility and (ii) the amounts outstanding under the 2010 Revolving Credit Facility is less


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
 
than $20.0 million for a period of two consecutive days or more, and until such difference is equal to or greater than $20.0 million for a period of 30 consecutive business days, the 2010 Revolving Credit Facility requires Products Corporation to maintain a consolidated fixed charge coverage ratio (the ratio of EBITDA minus Capital Expenditures to Cash Interest Expense for such period, as each such term is defined in the 2010 Revolving Credit Facility) of 1.0 to 1.0.
 
The 2010 Revolving Credit Facility matures on March 11, 2014.
 
2010 Term Loan Facility
 
Under the 2010 Term Loan Facility, Eurodollar Loans (as defined in the 2010 Term Loan Agreement) bear interest at the Eurodollar Rate (as defined in the 2010 Term Loan Agreement) plus 4.00% per annum (provided that in no event shall the Eurodollar Rate be less than 2.00% per annum) and Alternate Base Rate (as defined in the 2010 Term Loan Agreement) loans bear interest at the Alternate Base Rate plus 3.00% per annum (provided that in no event shall the Alternate Base Rate be less than 3.00% per annum).
 
Prior to the termination date of the 2010 Term Loan Facility, on June 30, September 30, December 31 and March 31 of each year (commencing June 30, 2010), Products Corporation is required to repay $2.0 million of the principal amount of the term loans outstanding under the 2010 Term Loan Facility on each respective date. In addition, the term loans under the 2010 Term Loan Facility are required to be prepaid with:
 
(i) the net cash proceeds in excess of $10.0 million for each 12-month period ending on March 31 received during such period from sales of Term Loan First Lien Collateral (as defined below) by Products Corporation or any of its subsidiary guarantors (subject to a reinvestment right for 365 days and carryover of unused annual basket amounts up to a maximum of $25.0 million and subject to certain specified dispositions of up to an additional $25.0 million in the aggregate);
 
(ii) the net proceeds from the issuance by Products Corporation or any of its subsidiaries of certain additional debt; and
 
(iii) 50% of Products Corporation’s “excess cash flow” (as defined under the 2010 Term Loan Agreement), commencing with excess cash flow for the 2011 fiscal year payable in the first quarter of 2012.
 
Any such prepayments are applied to reduce Products Corporation’s future regularly scheduled term loan amortization payments, to be applied in the direct order of maturity to the remaining installments thereof or as otherwise directed by Products Corporation.
 
The 2010 Term Loan Facility contains a financial covenant limiting Products Corporation’s first lien senior secured leverage ratio (the ratio of Products Corporation’s Senior Secured Debt that has a lien on the collateral which secures the 2010 Term Loan Facility that is not junior or subordinated to the liens securing the 2010 Term Loan Facility (excluding debt outstanding under the 2010 Revolving Credit Facility) to EBITDA, as each such term is defined in the 2010 Term Loan Facility), to 4.0 to 1.0 for each period of four consecutive fiscal quarters ending during the period from March 31, 2010 to the March 2015 maturity date of the 2010 Term Loan Facility.
 
Under certain circumstances, Products Corporation will have the right to request the 2010 Term Loan Facility to be increased by up to $300.0 million, provided that the lenders are not committed to provide any such increase.
 
The 2010 Term Loan Facility matures on March 11, 2015.


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REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
 
Provisions Applicable to the 2010 Revolving Credit Facility and the 2010 Term Loan Facility
 
The 2010 Credit Facilities are supported by, among other things, guarantees from Revlon, Inc. and, subject to certain limited exceptions, Products Corporation’s domestic subsidiaries. The obligations of Products Corporation under the 2010 Credit Facilities and the obligations under such guarantees are secured by, subject to certain limited exceptions, substantially all of the assets of Products Corporation and the guarantors. (See Note 10, “Long-Term Debt and Redeemable Preferred Stock,” to the Consolidated Financial Statements in this Form 10-Q).
 
Each of the 2010 Credit Facilities contains various restrictive covenants prohibiting Products Corporation and its subsidiaries from:
 
(i) incurring additional indebtedness or guarantees, with certain exceptions;
 
(ii) making dividend and other payments or loans to Revlon, Inc. or other affiliates, with certain exceptions, including among others:
 
(a) exceptions permitting Products Corporation to pay dividends or make other payments to Revlon, Inc. to enable it to, among other things, pay expenses incidental to being a public holding company, including, among other things, professional fees such as legal, accounting and insurance fees, regulatory fees, such as SEC filing fees and NYSE listing fees, and other expenses related to being a public holding company;
 
(b) subject to certain circumstances, to finance the purchase by Revlon, Inc. of its Class A Common Stock in connection with the delivery of such Class A Common Stock to grantees under the Third Amended and Restated Revlon, Inc. Stock Plan and/or the payment of withholding taxes in connection with the vesting of restricted stock awards under such plan;
 
(c) subject to certain limitations, to pay dividends or make other payments to finance the purchase, redemption or other retirement for value by Revlon, Inc. of stock or other equity interests or equivalents in Revlon, Inc. held by any current or former director, employee or consultant in his or her capacity as such; and
 
(d) subject to certain limitations, to make other restricted payments to affiliates of Products Corporation in amounts up to $5.0 million per year ($10.0 million in 2010), other restricted payments in an aggregate amount not to exceed $20.0 million and other restricted payments based upon certain financial tests;
 
(iii) creating liens or other encumbrances on Products Corporation’s or its subsidiaries’ assets or revenues, granting negative pledges or selling or transferring any of Products Corporation’s or its subsidiaries’ assets, all subject to certain limited exceptions;
 
(iv) with certain exceptions, engaging in merger or acquisition transactions;
 
(v) prepaying indebtedness and modifying the terms of certain indebtedness and specified material contractual obligations, subject to certain exceptions;
 
(vi) making investments, subject to certain exceptions; and
 
(vii) entering into transactions with affiliates of Products Corporation involving aggregate payments or consideration in excess of $10.0 million other than upon terms that are not materially less favorable when taken as a whole to Products Corporation or its subsidiaries as terms that would be obtainable at the time for a comparable transaction or series of similar transactions in arm’s length dealings with an unrelated third person and where such payments or consideration exceed


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
 
$20.0 million, unless such transaction has been approved by all of the independent directors of Products Corporation, subject to certain exceptions.
 
The events of default under each of the 2010 Credit Facilities include customary events of default for such types of agreements, including, among others:
 
(i) nonpayment of any principal, interest or other fees when due, subject in the case of interest and fees to a grace period;
 
(ii) non-compliance with the covenants in such 2010 Credit Facilities or the ancillary security documents, subject in certain instances to grace periods;
 
(iii) the institution of any bankruptcy, insolvency or similar proceedings by or against Products Corporation, any of Products Corporation’s subsidiaries or Revlon, Inc., subject in certain instances to grace periods;
 
(iv) default by Revlon, Inc. or any of its subsidiaries (A) in the payment of certain indebtedness when due (whether at maturity or by acceleration) in excess of $25.0 million in aggregate principal amount or (B) in the observance or performance of any other agreement or condition relating to such debt, provided that the amount of debt involved is in excess of $25.0 million in aggregate principal amount, or the occurrence of any other event, the effect of which default referred to in this subclause (iv) is to cause or permit the holders of such debt to cause the acceleration of payment of such debt;
 
(v) in the case of the 2010 Term Loan Facility, a cross default under the 2010 Revolving Credit Facility, and in the case of the 2010 Revolving Credit Facility, a cross default under the 2010 Term Loan Facility;
 
(vi) the failure by Products Corporation, certain of Products Corporation’s subsidiaries or Revlon, Inc. to pay certain material judgments;
 
(vii) a change of control such that (A) Revlon, Inc. shall cease to be the beneficial and record owner of 100% of Products Corporation’s capital stock, (B) Ronald O. Perelman (or his estate, heirs, executors, administrator or other personal representative) and his or their controlled affiliates shall cease to “control” Products Corporation, and any other person or group of persons owns, directly or indirectly, more than 35% of the total voting power of Products Corporation, (C) any person or group of persons other than Ronald O. Perelman (or his estate, heirs, executors, administrator or other personal representative) and his or their controlled affiliates shall “control” Products Corporation or (D) during any period of two consecutive years, the directors serving on Products Corporation’s Board of Directors at the beginning of such period (or other directors nominated by at least a majority of such continuing directors) shall cease to be a majority of the directors;
 
(viii) Revlon, Inc. shall have any meaningful assets or indebtedness or shall conduct any meaningful business other than its ownership of Products Corporation and such activities as are customary for a publicly traded holding company which is not itself an operating company, in each case subject to limited exceptions; and
 
(ix) the failure of certain of Products Corporation’s affiliates which hold Products Corporation’s or its subsidiaries’ indebtedness to be party to a valid and enforceable agreement prohibiting such affiliate from demanding or retaining payments in respect of such indebtedness, subject to certain exceptions, including exceptions as to Products Corporation’s Senior Subordinated Term Loan.


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REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
 
If Products Corporation is in default under the senior secured leverage ratio under the 2010 Term Loan Facility or the consolidated fixed charge coverage ratio under the 2010 Revolving Credit Facility, Products Corporation may cure such default by issuing certain equity securities to, or receiving capital contributions from, Revlon, Inc. and applying such cash which is deemed to increase EBITDA for the purpose of calculating the applicable ratio. This cure right may be exercised by Products Corporation two times in any four-quarter period.
 
Products Corporation was in compliance with all applicable covenants under the 2010 Credit Agreements upon closing the 2010 Refinancing and as of June 30, 2010. At June 30, 2010, the aggregate principal amount outstanding under the 2010 Term Loan Facility was $798.0 million and availability under the $140.0 million 2010 Revolving Credit Facility, based upon the calculated borrowing base less $21.8 million of outstanding undrawn letters of credit and nil then drawn on the 2010 Revolving Credit Facility, was $106.6 million.
 
93/4% Senior Secured Notes due 2015
 
For detail regarding the 93/4% Senior Secured Notes, due November 2015, see Note 9, “Long-Term Debt and Redeemable Preferred Stock,” to the Consolidated Financial Statements in Revlon, Inc.’s 2009 Form 10-K. (See Note 13, “Subsequent Event,” in this Form 10-Q.)
 
Products Corporation was in compliance with all applicable covenants under its 93/4% Senior Secured Notes as of June 30, 2010.
 
Senior Subordinated Term Loan
 
For detail regarding Products Corporation’s Senior Subordinated Term Loan from MacAndrews & Forbes (the “Senior Subordinated Term Loan”), consisting of (i) the $48.6 million of the $107.0 million aggregate outstanding principal amount of the Senior Subordinated Term Loan that was contributed to Revlon, Inc. by MacAndrews & Forbes (the “Contributed Loan”), which matures on October 8, 2013 and (ii) the $58.4 million principal amount of the Senior Subordinated Term Loan which remains owing from Products Corporation to MacAndrews & Forbes (the “Non-Contributed Loan”), which matures on October 8, 2014, see Note 9, “Long-Term Debt and Redeemable Preferred Stock,” to the Consolidated Financial Statements in Revlon, Inc.’s 2009 Form 10-K.
 
Interest Rate Swap Transaction
 
Prior to its expiration in April 2010, the Company’s floating-to-fixed interest rate swap had a notional amount of $150.0 million initially relating to indebtedness under Products Corporation’s former 2006 Term Loan Facility (prior to its complete refinancing in March 2010) and which also related, through its expiration in April 2010, to a notional amount of $150.0 million relating to indebtedness under Products Corporation’s 2010 Term Loan Facility (the “2008 Interest Rate Swap”). Under the terms of the 2008 Interest Rate Swap, Products Corporation was required to pay to the counterparty a quarterly fixed interest rate of 2.66% on the $150.0 million notional amount under the 2008 Interest Rate Swap (which, based upon the 4.0% applicable margin, effectively fixed the interest rate on such notional amounts at 6.66% for the 2-year term of such swap), commencing in July 2008, while receiving a variable interest rate payment from the counterparty equal to three-month U.S. dollar LIBOR.
 
The 2008 Interest Rate Swap was initially designated as a cash flow hedge of the variable interest rate payments on Products Corporation’s former 2006 Term Loan Facility (prior to its complete refinancing in March 2010) under the Derivatives and Hedging Topic of the FASB Accounting Standards Codification (the “Derivatives and Hedging Topic”). However, as a result of the 2010 Refinancing, effective March 11,


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REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
 
2010 (the closing date of the 2010 Refinancing), the 2008 Interest Rate Swap no longer met the criteria specified under the Derivatives and Hedging Topic to allow for the deferral of the effective portion of unrecognized hedging gains or losses in other comprehensive income since the scheduled variable interest payment specified on the date originally documented at the inception of the hedge will not occur. As a result, as of March 11, 2010, the Company reclassified an unrecognized loss of $0.8 million from Accumulated Other Comprehensive Loss into earnings.
 
Impact of Foreign Currency Translation — Venezuela
 
Highly-Inflationary Economy:  Effective January 1, 2010, Venezuela has been designated as a highly inflationary economy under U.S. GAAP. As a result, beginning January 1, 2010, the U.S. dollar is the functional currency for the Company’s subsidiary in Venezuela. Through December 31, 2009, prior to Venezuela being designated as highly inflationary, currency translation adjustments of Revlon Venezuela’s balance sheet were reflected in shareholders’ equity as part of Other Comprehensive Income; however, subsequent to January 1, 2010, such adjustments are reflected in earnings.
 
Currency Devaluation:  On January 8, 2010, the Venezuelan government announced the devaluation of its local currency (“Bolivars”) relative to the U.S. dollar. The official exchange rate for non-essential goods has changed from 2.15 to 4.30. The Company uses Venezuela’s official rate to translate the financial statements of Revlon Venezuela. In the second quarter of 2010 the devaluation had the impact of reducing reported net sales and operating income by $7.8 million and $2.0 million, respectively. In the first half of 2010 the devaluation had the impact of reducing reported net sales and operating income by $13.2 million and $3.9 million, respectively. Additionally, to reflect the impact of the currency devaluation, a one-time foreign currency loss of $2.8 million was recorded in January 2010 as a result of the required re-measurement of Revlon Venezuela’s balance sheet. As Venezuela has been designated as a highly inflationary economy effective January 1, 2010, this foreign currency loss was reflected in earnings in the first quarter of 2010.
 
Sources and Uses
 
The Company’s principal sources of funds are expected to be operating revenues, cash on hand and funds available for borrowing under the 2010 Revolving Credit Facility and other permitted lines of credit. The 2010 Credit Agreements, the indenture governing Products Corporation’s 93/4% Senior Secured Notes and the Senior Subordinated Term Loan Agreement contain certain provisions that by their terms limit Products Corporation and its subsidiaries’ ability to, among other things, incur additional debt.
 
The Company’s principal uses of funds are expected to be the payment of operating expenses, including expenses in connection with the continued execution of the Company’s business strategy, purchases of permanent wall displays, capital expenditure requirements, payments in connection with the Company’s restructuring programs, severance not otherwise included in the Company’s restructuring programs, debt service payments and costs, debt repurchases and regularly scheduled pension and post-retirement benefit plan contributions and benefit payments. The Company’s cash contributions to its pension and post-retirement benefit plans in the first half of 2010 were $11.8 million. In accordance with the minimum pension contributions required under the Employee Retirement Income Security Act of 1974, as amended by the Pension Protection Act of 2006 and as amended by the Worker, Retiree and Employer Recovery Act of 2008, the Company expects cash contributions to its pension and post-retirement benefit plans to be approximately $25 million in the aggregate for full year 2010. The Company’s purchases of permanent wall displays and capital expenditures in the first half of 2010 were $17.7 million and $7.6 million, respectively. The Company expects purchases of permanent wall displays and capital expenditures in the aggregate for full year 2010 to be approximately $40 million and $20 million, respectively, inclusive of


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REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
 
amounts expended in the first half of 2010. (See “Restructuring Costs and Other, Net” above in this Form 10-Q for discussion of the Company’s expected uses of funds in connection with its various restructuring programs.)
 
The Company has undertaken, and continues to assess, refine and implement, a number of programs to efficiently manage its cash and working capital, including, among other things, programs intended to reduce inventory levels over time; centralized purchasing to secure discounts and efficiencies in procurement; providing discounts to U.S. customers for more timely payment of receivables; prudent management of accounts payable; and targeted controls on general and administrative spending.
 
Continuing to execute the Company’s business strategy could include taking advantage of additional opportunities to reposition, repackage or reformulate one or more brands or product lines, launching additional new products, acquiring businesses or brands, further refining the Company’s approach to retail merchandising and/or taking further actions to optimize its manufacturing, sourcing and organizational size and structure. Any of these actions, whose intended purpose would be to create value through profitable growth, could result in the Company making investments and/or recognizing charges related to executing against such opportunities.
 
The Company may also, from time to time, seek to retire or purchase its outstanding debt obligations in open market purchases, in privately negotiated transactions or otherwise and may seek to refinance some or all of its indebtedness based upon market conditions. Any retirement, purchase of debt or other refinancing may be funded with operating cash flows of the business or other sources and will depend upon prevailing market conditions, liquidity requirements, contractual restrictions and other factors, and the amounts involved may be material.
 
The Company expects that operating revenues, cash on hand and funds available for borrowing under the 2010 Revolving Credit Facility and other permitted lines of credit will be sufficient to enable the Company to cover its operating expenses for 2010, including cash requirements in connection with the payment of operating expenses, including expenses in connection with the execution of the Company’s business strategy, purchases of permanent wall displays, capital expenditure requirements, payments in connection with the Company’s restructuring programs (including, without limitation, the 2008 Programs and the 2009 Programs), severance not otherwise included in the Company’s restructuring programs, debt service payments and costs, debt repurchases and regularly scheduled pension and post-retirement plan contributions and benefit payments.
 
There can be no assurance that available funds will be sufficient to meet the Company’s cash requirements on a consolidated basis. If the Company’s anticipated level of revenues is not achieved because of, among other things, decreased consumer spending in response to weak economic conditions or weakness in the cosmetics category in the mass retail channel; adverse changes in currency exchange rates; decreased sales of the Company’s products as a result of increased competitive activities by the Company’s competitors; changes in consumer purchasing habits, including with respect to shopping channels; retailer inventory management, retailer space reconfigurations or reductions in retailer display space; changes in retailer pricing or promotional strategies; or less than anticipated results from the Company’s existing or new products or from its advertising, promotional and/or marketing plans; or if the Company’s expenses, including, without limitation, for pension expense under its benefit plans, advertising, promotional and marketing activities or for sales returns related to any reduction of retail space, product discontinuances or otherwise, exceed the anticipated level of expenses, the Company’s current sources of funds may be insufficient to meet the Company’s cash requirements.
 
Any such development, if significant, could reduce the Company’s revenues and could adversely affect Products Corporation’s ability to comply with certain financial covenants under the 2010 Credit


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REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
 
Agreements and in such event the Company could be required to take measures, including, among other things, reducing discretionary spending. (See also Item 1A. “Risk Factors” in Revlon, Inc.’s 2009 Form 10-K for further discussion of certain risks associated with the Company’s business and indebtedness.)
 
If the Company is unable to satisfy its cash requirements from the sources identified above or comply with its debt covenants, the Company could be required to adopt one or more of the following alternatives:
 
  •   delaying the implementation of or revising certain aspects of the Company’s business strategy;
 
  •   reducing or delaying purchases of wall displays or advertising, promotional or marketing expenses;
 
  •   reducing or delaying capital spending;
 
  •   delaying, reducing or revising the Company’s restructuring programs;
 
  •   refinancing Products Corporation’s indebtedness;
 
  •   selling assets or operations;
 
  •   seeking additional capital contributions and/or loans from MacAndrews & Forbes, the Company’s other affiliates and/or third parties;
 
  •   selling additional Revlon, Inc. equity securities or debt securities of Revlon, Inc. or Products Corporation; or
 
  •   reducing other discretionary spending.
 
There can be no assurance that the Company would be able to take any of the actions referred to above because of a variety of commercial or market factors or constraints in Products Corporation’s debt instruments, including, without limitation, market conditions being unfavorable for an equity or debt issuance, additional capital contributions and/or loans not being available from affiliates and/or third parties, or that the transactions may not be permitted under the terms of Products Corporation’s various debt instruments then in effect, such as due to restrictions on the incurrence of debt, incurrence of liens, asset dispositions and related party transactions. In addition, such actions, if taken, may not enable the Company to satisfy its cash requirements or enable Products Corporation to comply with its debt covenants if the actions do not generate a sufficient amount of additional capital. (See also Item 1A. “Risk Factors” in Revlon, Inc.’s 2009 Form 10-K for further discussion of certain risks associated with the Company’s business and indebtedness.)
 
Revlon, Inc. expects that the payment of the quarterly dividends on its Preferred Stock will be funded by cash interest payments to be received by Revlon, Inc. from Products Corporation on the Contributed Loan, subject to Revlon, Inc. having sufficient surplus or net profits in accordance with Delaware law. Additionally, Revlon, Inc. expects to pay the liquidation preference of the Preferred Stock on October 8, 2013 with the cash payment to be received by Revlon, Inc. from Products Corporation in respect of the maturity of the principal amount outstanding under the Contributed Loan, subject to Revlon, Inc. having sufficient surplus in accordance with Delaware law. The payment of such interest and principal under the Contributed Loan to Revlon, Inc. by Products Corporation is permissible under the 2010 Credit Agreements, the Senior Subordinated Term Loan Agreement and the 93/4% Senior Secured Notes Indenture.
 
In accordance with the terms of the certificate of designation of the Preferred Stock, on April 8, 2010, Revlon, Inc. paid to holders of record of the Preferred Stock at the close of business on March 26, 2010 the Regular Dividend in the amount of $0.163794 per share for the period from January 8, 2009 through and including April 8, 2010. In addition, on July 8, 2010, Revlon, Inc. paid to holders of record of the Preferred Stock at the close of business on June 25, 2010 the Regular Dividend in the amount of $0.165614 per share


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REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
 
for the period from April 8, 2010 through and including July 8, 2010. As of June 30, 2010, the Company accrued $1.4 million in interest expense related to the quarterly Regular Dividend on the Preferred Stock which was paid in July 2010.
 
Products Corporation enters into foreign currency forward exchange contracts and option contracts from time to time to hedge certain net cash flows denominated in currencies other than the local currencies of the Company’s foreign and domestic operations. The foreign currency forward exchange contracts are entered into primarily for the purpose of hedging anticipated inventory purchases and certain intercompany payments denominated in currencies other than the local currencies of the Company’s foreign and domestic operations and generally have maturities of less than one year. There were foreign currency forward exchange contracts with a notional amount of $43.5 million outstanding at June 30, 2010. The fair value of foreign currency forward exchange contracts outstanding at June 30, 2010 was $0.6 million.
 
Disclosures about Contractual Obligations and Commercial Commitments
 
As of June 30, 2010, there had been no material changes to the Company’s total contractual cash obligations, as set forth in the contractual obligations and commercial commitments table included in Revlon, Inc.’s 2009 Form 10-K, other than those entered into in connection with consummating the 2010 Refinancing.
 
The following table reflects the impact of the 2010 Refinancing on the Company’s long-term debt obligations:
 
                                           
      Payments Due by Period
 
      (dollars in millions)  
Contractual Obligations
          2010
                   
As of June 30, 2010     Total     Q3-Q4     2011-2012     2013-2014     After 2014  
Long-term debt, including current portion
    $ 1,128.0     $ 4.0     $ 16.0     $ 16.0     $ 1,092.0  
Interest on long-term debt(a)
      408.6       49.9       159.9       157.8       41.0  
                                           
 
(a) Consists of interest on the $330.0 million in aggregate principal amount of the 93/4% Senior Secured Notes and on the $798.0 million in aggregate principal amount outstanding under the 2010 Term Loan Facility through the respective maturity dates based upon assumptions regarding the amount of debt outstanding under the 2010 Credit Facilities and assumed interest rates.
 
Off-Balance Sheet Transactions
 
The Company does not maintain any off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
 
Discussion of Critical Accounting Policies
 
For a discussion of the Company’s critical accounting policies, see Revlon, Inc.’s 2009 Form 10-K.
 
Effect of Recent Accounting Pronouncements
 
See discussion of recent accounting pronouncements in Note 1, “Description of Business and Basis of Presentation,” to the Unaudited Consolidated Financial Statements in this Form 10-Q.


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REVLON, INC. AND SUBSIDIARIES
 
Item 3.   Quantitative and Qualitative Disclosures about Market Risk
 
The Company has exposure to market risk both as a result of changing interest rates and movements in foreign currency exchange rates. The Company’s policy is to manage market risk through a combination of fixed and floating rate debt, the use of foreign exchange forward contracts, interest rate hedging transactions and option contracts. The Company does not hold or issue financial instruments for trading purposes. The qualitative and quantitative information presented in Item 7A of Revlon, Inc.’s 2009 Form 10-K (“Item 7A”) describes significant aspects of the Company’s financial instrument programs that have material market risk as of December 31, 2009. The following table presents the information required by Item 7A as of June 30, 2010:
 
                                                                 
    Expected Maturity Date for the year ended December 31,
          Fair Value
 
    (dollars in millions, except for rate information)           June 30,
 
Debt
  2010     2011     2012     2013     2014     Thereafter     Total     2010  
 
Short-term variable rate (various currencies)
  $ 5.7                                             $ 5.7     $ 5.7  
Average interest rate(a)
    8.4 %                                                        
Long-term fixed rate — third party ($US)
                          $ 48.6 (b)           $ 330.0       378.6       382.4  
Average interest rate
                            12.75 %             9.75 %                
Long-term fixed rate — affiliates ($US)
                                  $ 58.4 (c)             58.4       54.1  
Average interest rate
                                    12.0 %                        
Long-term variable rate — third party ($US)
    4.0     $ 8.0     $ 8.0       8.0       8.0       762.0       798.0       777.1  
Average interest rate(a)
    6.0 %     6.0 %     6.0 %     6.1 %     6.3 %     6.4 %                
                                                                 
Total debt
  $ 9.7     $ 8.0     $ 8.0     $ 56.6     $ 66.4     $ 1,092.0     $ 1,240.7     $ 1,219.3  
                                                                 
 
(a) Weighted average variable rates are based upon implied forward rates from the U.S. Dollar LIBOR yield curves at June 30, 2010.
 
(b) Represents the $48.6 million to be paid by Revlon, Inc. at maturity for the Preferred Stock issued in the voluntary exchange offer consummated in October 2009 (i.e., the earlier of (i) October 8, 2013 and (ii) the consummation of certain change of control transactions), subject to Revlon, Inc. having sufficient surplus in accordance with Delaware law to effect such payments. Annual cash dividends of 12.75% on the Preferred Stock are payable quarterly over the four-year term of the Preferred Stock, subject to Revlon, Inc. having sufficient surplus or net profits in accordance with Delaware law to effect such payments.
 
(c) Represents the $58.4 million aggregate principal amount outstanding of the Non-Contributed Loan as of June 30, 2010 which loan matures on October 8, 2014 and bears interest at an annual rate of 12%, which is payable in arrears in cash on January 8, April 8, July 8, and October 8 of each year.
 
                                 
    Average
    Original
    Contract
       
    Contractual
    US Dollar
    Value
    Fair Value
 
    Rate
    Notional
    June 30,
    June 30,
 
Forward Contracts
  $/FC     Amount     2010     2010  
 
Sell Canadian Dollars/Buy USD
    0.9528     $ 13.7     $ 13.9     $ 0.2  
Sell Australian Dollars/Buy USD
    0.8530       9.3       9.6       0.3  
Sell British Pounds/Buy USD
    1.5354       5.3       5.5       0.2  
Sell South African Rand/Buy USD
    0.1279       5.1       5.1        
Sell USD/Buy Japanese Yen
    0.0111       4.7       4.8       0.1  
Sell USD/Buy Australian Dollars
    0.8698       2.6       2.5       (0.1 )
Buy Australian Dollars/Sell New Zealand Dollars
    1.2553       2.5       2.4       (0.1 )
Sell New Zealand Dollars/Buy USD
    0.6892       0.3       0.3        
                                 
Total forward contracts
          $ 43.5     $ 44.1     $ 0.6  
                                 


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