Avon Products Inc. (NYSE: AVP) announced poor earnings for the first quarter. However, the most important part of its disclosure was that it settled a federal case brought against it under the Foreign Corrupt Practices Act (FCPA). The firm said the final tally for the costs of the investigation and resolution was $135 million. In specific:
During the first quarter of 2014, the Company recorded an additional accrual related to the previously disclosed government Foreign Corrupt Practices Act (“FCPA”) investigations of $46 million, or $0.11 per diluted share, within operating profit, bringing the total liability accrued at March 31, 2014 to $135 million. As further discussed in the Form 10-Q, the Company has now reached an understanding with respect to terms of settlement with each of the DOJ and the staff of the SEC, subject to authorization by the Commission, including payments of $135 million with respect to alleged violations of the books and records and internal control provisions of the FCPA, a deferred prosecution agreement with the DOJ, a compliance monitor for 18 months, which can then be replaced, if the government approves, with self-monitoring and reporting for an additional 18 months and a guilty plea by a subsidiary of the Company operating in China in connection with alleged violations of the books and records provision of the FCPA. See the Form 10-Q for additional information with respect to these matters.
Earning disappointed Wall Street, which pushed shares to a multiyear low.
In its release about the period that ended March 30, management reported:
[T]otal revenue of $2.2 billion decreased 11%, or 3% in constant dollars. Total units decreased 6% and price/mix was up 3% during the quarter. Active Representatives² were down 4%, while average order² increased 1%.
Beauty sales declined 12%, or 4% in constant dollars. Fashion & Home sales declined 9%, or 1% in constant dollars.
First-quarter 2014 gross margin was 56.2%. Gross margin included a $116 million charge associated with highly inflationary accounting for Avon Venezuela and the Company’s move from the official exchange rate to a new foreign exchange system (“SICAD II”) rate to remeasure its Venezuelan operations as of March 31, 2014. Adjusted gross margin was 61.5%, 120 basis points lower than the prior-year quarter, primarily due to the unfavorable impact of foreign exchange driven by Europe, Middle East & Africa.
Operating loss was $51 million and operating margin was (2.3)% in the quarter. Adjusted operating profit was $134 million and Adjusted operating margin was 6.1%, down 240 basis points from the first quarter of 2013. The decline in Adjusted operating margin was driven by the unfavorable impact of foreign exchange, primarily in Europe, Middle East & Africa. Adjusted operating margin was also negatively impacted by the revenue decline with respect to fixed expenses.
First-quarter 2014’s effective tax rate from continuing operations was (18.6)%, compared with 139.4% in the first quarter of 2013. The Adjusted effective tax rate was 46.3% for the first quarter of 2014, compared with 33.8% for the first quarter of 2013. The higher 2014 Adjusted effective tax rate is primarily due to valuation allowances for deferred taxes and the country mix of earnings.
First-quarter 2014’s net loss from continuing operations was $167 million, or a loss of $0.38 per diluted share, compared with net loss from continuing operations of $12 million, or a loss of $0.03 per diluted share, for the first quarter of 2013. First-quarter 2014’s Adjusted net income from continuing operations was $52 million, or $0.12 per diluted share, compared with net income from continuing operations of $113 million, or $0.26 per diluted share, for the first quarter of 2013.
Net cash used by operating activities was $113 million for the three months ended March 31, 2014, compared with $117 million for the same period in 2013. The overall net cash used during the three months ended March 31, 2014 was $313 million, due to cash used by operating activities and a significant exchange rate impact on cash balances, primarily due to the Venezuelan currency. This compares with cash provided of $279 million for the same period in 2013, which benefited from cash inflows from financing transactions in that period.
Avon’s net debt (total debt less cash) for the first quarter of 2014 was $1.9 billion, up $299 million from the year-end 2013 level, and $239 million lower than at March 31, 2013.
The numbers show, once again, that the turnaround under CEO Sheri McCoy, has failed.