UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
For the fiscal year ended | ||||||||
| OR | ||||||||
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
| For the transition period from__________________ to _______________ | ||||||||
| Commission File Number | Registrant; State of Incorporation; Address and Telephone Number | IRS Employer Identification No. | ||||||||||||||||||
| Securities registered pursuant to Section 12(b) or 12(g) of the Act: | ||||||||||||||||||||
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||||||||
| Revlon, Inc. | * | |||||||||||||||||||
| Revlon Consumer Products Corporation | None | N/A | N/A | |||||||||||||||||
*Revlon, Inc.'s Class A Common Stock began trading exclusively on the over-the-counter market on October 21, 2022 under the symbol REVRQ following receipt of a final delisting notice from the New York Stock Exchange on October 20, 2022.
Indicate by check mark if the registrants are a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Revlon, Inc. | No ☐ | |||||||
Revlon Consumer Products Corporation | Yes ☐ | |||||||
Indicate by check mark whether the registrants (1) have 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 registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.
| Revlon, Inc. | No ☐ | |||||||
| Revlon Consumer Products Corporation | Yes ☐ | |||||||
Indicate by check mark whether the registrants have submitted electronically every Interactive Data File required to be submitted 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 such files). Yes
1
Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | Accelerated filer | Smaller Reporting Company | Emerging Growth Company | |||||||||||||||||||||||||||||||||||||||||
| Revlon, Inc. | Yes ☐ No ☒ | Yes ☐ No ☒ | Yes ☒ No ☐ | Yes | No ☐ | Yes | ☐ | No | ||||||||||||||||||||||||||||||||||||
| Revlon Consumer Products Corporation | Yes ☐ No ☒ | Yes ☐ No ☒ | Yes ☒ No ☐ | Yes | No ☐ | Yes | ☐ | No | ||||||||||||||||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrants have elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether each registrant is a shell company (as defined in Rule 12b-2 of the Act).
| Revlon, Inc. | Yes | ☐ | No | ||||||||||||||
| Revlon Consumer Products Corporation | Yes | ☐ | No | ||||||||||||||
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
| Revlon, Inc. | Yes | ☐ | No | ||||||||||||||
| Revlon Consumer Products Corporation | Yes | ☐ | No | ||||||||||||||
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.
| Revlon, Inc. | ☐ | ||||
| Revlon Consumer Products Corporation | ☐ | ||||
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to 240.10D-1(b).
| Revlon, Inc. | ☐ | ||||
| Revlon Consumer Products Corporation | ☐ | ||||
The aggregate market value of Revlon, Inc. Class A Common Stock held by non-affiliates (using the New York Stock Exchange closing price as of June 30, 2022, the last business day of the registrant's most recently completed second fiscal quarter) was approximately $43,676,149 . Accordingly, the registrant qualifies under the SEC's revised rules as a "smaller reporting company."
Number of shares of common stock outstanding as of December 31, 2022:
| Revlon, Inc. Class A Common Stock: | |||||
| Revlon Consumer Products Corporation Common Stock: | |||||
At such date, (i) 46,223,321 shares of Revlon, Inc. Class A Common Stock were beneficially owned by MacAndrews & Forbes Incorporated and certain of its affiliates; and (ii) all shares of Revlon Consumer Products Corporation ("Products Corporation") Common Stock were held by Revlon, Inc.
Products Corporation meets the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-K as, among other things, all of Products Corporation's equity securities are owned directly by Revlon, Inc., which is a reporting company under the Securities Exchange Act of 1934, as amended, and which filed with the SEC on March 16, 2023 all of the material required to be filed pursuant to Section 13, 14 or 15(d) thereof. Products Corporation is therefore filing this Form 10-K with a reduced disclosure format applicable to Products Corporation.
DOCUMENTS INCORPORATED BY REFERENCE
2
REVLON, INC. AND SUBSIDIARIES
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
For the Year Ended December 31, 2022
INDEX
| PART I | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 1B. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
| Item 7. | ||||||||
| Item 7A. | ||||||||
| Item 8. | ||||||||
| Item 9. | ||||||||
| Item 9A. | ||||||||
| Item 9B. | ||||||||
| PART III | ||||||||
| Item 10. | ||||||||
| Item 11. | ||||||||
| Item 12. | ||||||||
| Item 13. | ||||||||
| Item 14. | ||||||||
| PART IV | ||||||||
| Item 15. | ||||||||
| Item 16. | ||||||||
| Certifications | ||||||||
| Exhibits | ||||||||
3
PART I - FINANCIAL INFORMATION
Item 1. Business
Background
Revlon, Inc. ("Revlon" 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 is an indirect majority-owned subsidiary of MacAndrews & Forbes Incorporated (together with certain of its affiliates other than the Company, "MacAndrews & Forbes"), a corporation beneficially owned by Ronald O. Perelman. Mr. Perelman is Chairman of Revlon's and Products Corporation's Board of Directors.
The Company was founded over 90 years ago by Charles Revson, who revolutionized the cosmetics industry by introducing nail enamels matched to lipsticks in fashion colors. Today, the Company continues Revson's legacy by producing and marketing innovative products that address consumers' wants and needs for beauty and personal care products.
The Company is a leading global beauty company with an iconic portfolio of brands. The Company develops, manufactures, markets, distributes and sells worldwide an extensive array of beauty and personal care products, including color cosmetics, hair color, hair care and hair treatments, fragrances, skin care, beauty tools, men’s grooming products, anti-perspirant deodorants and other beauty care products across a variety of distribution channels. The Company is entrepreneurial, agile and boldly creative, with a passion for beauty. The Company has a diverse portfolio of iconic brands that it continues to evolve and transform, with the goal of inspiring and attracting consumers around the world wherever and however they shop for beauty. The Company is committed to operating as an ethical business and driving sustainable and responsible growth.
Business Strategy
The Company remains focused on its 3 key strategic pillars to drive its future success and growth. First, strengthening its iconic brands through innovation and relevant product portfolios; second, building its capabilities to better communicate and connect with its consumers through media channels where they spend the most time; and third, ensuring availability of its products where consumers shop, both in-store and increasingly online. The Company has continued to deliver against the objectives of the Revlon 2020 Restructuring Program (subsequently renamed during 2021 the Revlon Global Growth Accelerator, “RGGA”, as herein after defined), which includes rightsizing our organization with the objectives of driving improved profitability, cash flow and liquidity. The Company is also managing the business to conserve cash and liquidity, as well as continuing to focus on stabilizing the business, growing e-commerce and preparing the foundation for achieving future growth.
Voluntary Reorganization under Chapter 11
On June 15, 2022 (the “Petition Date”), Revlon Inc. and certain of its subsidiaries, including Revlon Consumer Products Corporation (collectively, the “Debtors”), filed voluntary petitions (the “Bankruptcy Petitions”) for reorganization under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court (the “Bankruptcy Court”) for the Southern District of New York (Case No. 22-10760) (collectively, the “Chapter 11 Cases”). Since the Petition Date, the Debtors have operated their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.
As previously disclosed by the Company, the filing of the Bankruptcy Petitions constituted an event of default that accelerated the Company’s obligations under the following debt instruments:
•Term Loan Agreement, dated as of September 7, 2016 (as amended, the "2016 Term Loan Agreement" or the "2016 Term Loan Facility"), by and among Products Corporation, Revlon, certain lenders party thereto and Citibank, N.A., as administrative agent and collateral agent, related to $872.4 million outstanding aggregate principal amount of loans;
•Asset-Based Revolving Credit Agreement, dated as of September 7, 2016 (as amended, the “Amended 2016 Revolving Credit Agreement” or the "Amended 2016 Revolving Credit Facility"), by and among Products Corporation, certain local borrowing subsidiaries from time to time party thereto, Revlon, certain lenders party thereto and MidCap Funding IV Trust, as administrative agent and collateral agent, related to $289.0 million outstanding aggregate principal amount of loans, consisting of $109.0 million of Tranche A revolving loans, $50.0 million of Tranche B first-
4
in, last-out term loans (the "2020 ABL FILO Term Loan Facility") and $130.0 million of loans under the Company's senior secured second-in, second-out term loan facility (the "SISO Term Loan Facility");
•BrandCo Credit Agreement, dated as of May 7, 2020 (as amended, the “ 2020 BrandCo Credit Agreement” or "2020 BrandCo Facilities"), by and among Products Corporation, Revlon, the other loan parties and lenders party thereto and Jefferies Finance LLC, as administrative agent, related to $1,878.0 million outstanding aggregate principal amount of loans; and
•Indenture, dated as of August 4, 2016 (as amended, the "6.25% Senior Notes Indenture"), between Products Corporation and U.S. Bank National Association, as Trustee, governing the 6.25% Senior Notes which mature on August 1, 2024, of which $431.3 million aggregate principal amount were outstanding.
The debt instruments set forth above provide that as a result of the Bankruptcy Petitions, the principal and interest due thereunder shall be immediately due and payable. Any efforts to enforce such payment obligations under the debt instruments set forth above are automatically stayed as a result of the Bankruptcy Petitions, and the creditors’ rights of enforcement in respect of the debt instruments set forth above are subject to the applicable provisions of the Bankruptcy Code. In addition, the filing of the Bankruptcy Petitions and resulting event of default under the debt instruments set forth above constituted an event of default under the Asset-Based Term Loan Credit Agreement, dated as of March 2, 2021 (as amended, the “2021 Foreign Asset-Based Term Agreement”) by and among Revlon Finance LLC, as the borrower, the guarantors party thereto, the lenders party thereto, and Blue Torch Finance LLC, as administrative agent and collateral agent. The 2021 Foreign Asset-Based Term Agreement lenders agreed not to enforce remedies, subject to the terms and conditions of a forbearance agreement, and the 2021 Foreign Asset-Based Term Agreement was subsequently repaid in full and discharged.
The Debtors have obtained requested relief from the Bankruptcy Court that enables the Debtors to maintain business-as-usual operations and uphold their respective commitments to their stakeholders, including employees, customers, and vendors during the restructuring process, subject to the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. While the Chapter 11 Cases are pending, the Debtors have not made, and do not anticipate making, interest payments due under the majority of their debt instruments; however, the Debtors expect to pay interest payments in full as they come due under the DIP Facilities (as defined below) and certain other senior secured debt instruments.
DIP Facilities
On June 17, 2022, Revlon, Products Corporation, and certain of its subsidiaries entered into (i) a superpriority senior secured debtor-in-possession asset-based loan facility (the “DIP ABL Facility”), in the maximum aggregate principal amount of $400 million, (ii) a superpriority senior secured debtor-in-possession term loan facility (the “DIP Term Loan Facility”), in the aggregate principal amount of $575 million, and (iii) a superpriority junior secured debtor-in-possession intercompany credit facility (the “Intercompany DIP Facility” and, together with the DIP ABL Facility and the DIP Term Loan Facility, the “DIP Facilities”) with certain Debtors that are “BrandCos” under the Company’s previously disclosed 2020 BrandCo Credit Agreement (the “BrandCos”).
Restructuring
Under the terms of the Restructuring Support Agreement and the Plan (each as described below and elsewhere in this 2022 Form 10-K), the Plan, once consummated, will reduce the Debtors’ total debt burden by approximately $2.7 billion and capitalize the Company with approximately $1.4 billion of new money debt and equity investments. The Company is expected to emerge from Chapter 11 bankruptcy as a privately held company by no later than April 28, 2023 (such reorganized entity, "Reorganized Holdings"). The Plan also includes a global settlement of litigation claims by certain of the Company’s lenders. The Plan is subject to approval by the Bankruptcy Court.
Restructuring Support Agreement
On December 19, 2022, Revlon, Products Corporation, and certain of Revlon’s direct and indirect subsidiaries (collectively, the “Company Parties”) entered into a Restructuring Support Agreement (as amended the “Restructuring Support Agreement”) with certain of the Company’s prepetition lenders under the 2020 BrandCo Credit Agreement (the “Consenting BrandCo Lenders”), and the Official Committee of Unsecured Creditors in the Debtors’ Chapter 11 Cases (the "Creditors' Committee" and together with the Consenting BrandCo Lenders, the “Original Consenting Creditor Parties” and, together with the Company Parties, the "Original RSA Parties”). On February 21, 2023, the Company Parties amended and restated the Restructuring Support Agreement with the Original Consenting Creditor Parties and certain of the Company’s prepetition lenders under the Company’s 2016 Term Loan Agreement (the “Consenting 2016 Lenders”, and together with the Original Consenting Creditor Parties, the “Consenting Creditor Parties,” and together with the Company Parties, the “RSA Parties”). The Restructuring Support Agreement contains certain covenants on the part of the RSA Parties, including, but not limited to, the
5
Consenting Creditor Parties voting in favor of the Plan (as defined below), and provides that the Debtors shall achieve certain milestones (unless extended or waived in writing). For additional information on the Restructuring Support Agreement, see Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the "2022 Form 10-K").
Plan and Disclosure Statement
On December 23, 2022, the Debtors filed a Joint Plan of Reorganization of Revlon, Inc. and Its Debtor Affiliates Pursuant to Chapter 11 of the Bankruptcy Code and a related proposed disclosure statement. On February 21, 2023, the Debtors filed the First Amended Joint Plan of Reorganization of Revlon, Inc. and Its Debtor Affiliates Pursuant to Chapter 11 of the Bankruptcy Code (the “Plan”) and a related proposed form of Disclosure Statement (the “Disclosure Statement”) with the Bankruptcy Court. The Plan is intended to implement the restructuring contemplated by the Restructuring Support Agreement. Also, on February 21, 2023, the Debtors filed the solicitation versions of the Plan and the Disclosure Statement, and the Bankruptcy Court entered an order approving the Disclosure Statement (the “Disclosure Statement Order”). The Plan and Disclosure Statement, along with other solicitation materials, were distributed by the Debtors’ notice and claims agent, Kroll, to creditors entitled to vote on the Plan in accordance with the applicable deadlines set by the Disclosure Statement Order.
The Plan and the Disclosure Statement describe, among other things, the proposed Plan; the restructuring contemplated by the Restructuring Support Agreement; the events leading to the Chapter 11 Cases; certain events that have occurred or are anticipated to occur during the Chapter 11 Cases, including the anticipated solicitation of votes to approve the proposed Plan from certain of the Debtors’ creditors; and certain other aspects of the restructuring, including the expectation that the Company will emerge from Chapter 11 bankruptcy as a privately held company and its outstanding equity will be cancelled. For additional information on the Plan and the Disclosure Statement, see Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this 2022 Form 10-K.
Equity Rights Offering, Backstop Commitment Agreement and Debt Commitment Letter
On January 17, 2023, the Debtors entered into a Backstop Commitment Agreement (as amended, the “Backstop Commitment Agreement”) with certain of the Consenting BrandCo Lenders (the “Original Equity Commitment Parties”), pursuant to which each of the Equity Commitment Parties has agreed to backstop, severally and not jointly and subject to the terms and conditions in the Backstop Commitment Agreement, an equity rights offering (the "Equity Rights Offering") in the aggregate amount of $650 million. On February 21, 2023, as contemplated by the Restructuring Support Agreement, the Company Parties amended and restated the Backstop Commitment Agreement with the Original Equity Commitment Parties and certain of the Consenting 2016 Lenders (together with the Original Equity Commitment Parties, the “Equity Commitment Parties”), pursuant to which each of the Equity Commitment Parties has agreed to backstop, severally and not jointly and subject to the terms and conditions in the Backstop Commitment Agreement, an upsized $670 million Equity Rights Offering, subject to reduction on account of the Excess Liquidity Cutback as discussed herein.
Also on January 17, 2023, the Debtors entered into a Debt Commitment Letter (the “Debt Commitment Letter”) with certain of the Consenting BrandCo Lenders (the “Debt Commitment Parties”), pursuant to which the Debt Commitment Parties have committed to fund up to $200 million in net cash proceeds to the Debtors in connection with a new senior first lien term loan facility upon emergence from Chapter 11. For additional information on the Backstop Commitment Agreement and the Debt Commitment Letter, see Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this 2022 Form 10-K.
NYSE Delisting Proceedings
As a result of the filing of the Chapter 11 Cases, on October 20, 2022, the New York Stock Exchange (the “NYSE”) informed us that the Company’s Class A common stock (the "Class A Common Stock") was no longer suitable for listing on the NYSE and the NYSE suspended trading in the Company's Class A Common Stock. On October 21, 2022, the NYSE applied to the Securities and Exchange Commission (the "SEC") pursuant to Form 25 to remove the Company’s Class A Common Stock from listing and registration on the NYSE at the opening of business on November 1, 2022. As a result of the suspension and delisting, the Company's Class A Common Stock began trading exclusively on the OTC market on October 21, 2022 under the symbol “REVRQ.”
Financial Information about Operating Segments
Operating segments include components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (the Company's "Chief Executive Officer") in deciding how to allocate resources and in assessing the Company's performance. The Company operates in four brand-centric reporting units that are aligned with its organizational structure based on four global brand teams: Revlon; Elizabeth Arden; Portfolio; and
6
Fragrances. The Company manufactures, markets and sells an extensive array of beauty and personal care products worldwide, including color cosmetics; fragrances; skin care; hair color, hair care and hair treatments; beauty tools; men's grooming products; anti-perspirant deodorants; and other beauty care products.
As of December 31, 2022, the Company’s operations are organized into the following reportable segments:
•Revlon - The Revlon segment is comprised of the Company's flagship Revlon brands. Revlon segment products are primarily marketed, distributed and sold in the mass retail channel, large volume retailers, chain drug and food stores, chemist shops, hypermarkets, general merchandise stores, e-commerce sites, television shopping, department stores, professional hair and nail salons, one-stop shopping beauty retailers and specialty cosmetic stores in the U.S. and internationally under brands such as Revlon in color cosmetics; Revlon ColorSilk and Revlon Professional in hair color; and Revlon in beauty tools.
•Elizabeth Arden - The Elizabeth Arden segment is comprised of the Company's Elizabeth Arden branded products. The Elizabeth Arden segment markets, distributes and sells fragrances, skin care and color cosmetics primarily to prestige retailers, department and specialty stores, perfumeries, boutiques, e-commerce sites, the mass retail channel, travel retailers and distributors, as well as direct sales to consumers via its Elizabeth Arden branded retail stores and elizabetharden.com e-commerce website, in the U.S. and internationally, under brands such as Elizabeth Arden Ceramide, Prevage, Eight Hour, SUPERSTART, Visible Difference and Skin Illuminating in the Elizabeth Arden skin care brands; and Elizabeth Arden White Tea, Elizabeth Arden Red Door, Elizabeth Arden 5th Avenue and Elizabeth Arden Green Tea in Elizabeth Arden fragrances.
•Portfolio - The Company’s Portfolio segment markets, distributes and sells a comprehensive line of premium, specialty and mass products primarily to the mass retail channel, hair and nail salons and professional salon distributors in the U.S. and internationally and large volume retailers, specialty and department stores under brands such as Almay and SinfulColors in color cosmetics; American Crew in men’s grooming products (which are also sold direct-to-consumer on its americancrew.com website); CND in nail polishes, gel nail color and nail enhancements; Cutex nail care products; and Mitchum in anti-perspirant deodorants. The Portfolio segment also includes a multi-cultural hair care line consisting of Creme of Nature hair care products, which are sold in both professional salons and in large volume retailers and other retailers, primarily in the U.S.; and a hair color line under the Llongueras brand (licensed from a third party) that is sold in the mass retail channel, large volume retailers and other retailers, primarily in Spain.
•Fragrances - The Fragrances segment includes the development, marketing and distribution of certain owned and licensed fragrances, as well as the distribution of prestige fragrance brands owned by third parties. These products are typically sold to retailers in the U.S. and internationally, including prestige retailers, specialty stores, e-commerce sites, the mass retail channel, travel retailers and other international retailers. The owned and licensed fragrances include brands such as: (i) Juicy Couture (which are also sold direct-to-consumer on its juicycouturebeauty.com website), John Varvatos and AllSaints in prestige fragrances; (ii) Britney Spears, Elizabeth Taylor, Christina Aguilera and Jennifer Aniston in celebrity fragrances; and (iii) Curve, Giorgio Beverly Hills, Ed Hardy, Charlie, Lucky Brand, ‹PS› (logo of former Paul Sebastian brand), Alfred Sung, Halston, Geoffrey Beene and White Diamonds in mass fragrances.
For certain information regarding the Company's segments' performance, foreign and domestic operations and classes of similar products, refer to Note 16, "Segment Data and Related Information," to the Company’s Audited Consolidated Financial Statements in this 2022 Form 10-K.
7
Products
The following table sets forth the Company's principal brands that are included in its Revlon, Elizabeth Arden, Portfolio and Fragrances segments by product category:
| Segment | COSMETICS | HAIR | MEN'S GROOMING | BEAUTY TOOLS | FRAGRANCES | ANTI-PERSPIRANT DEODORANTS | SKIN CARE / BODY CARE | ||||||||||||||||||||||||||||||||||||||||
| Owned | Licensed* | ||||||||||||||||||||||||||||||||||||||||||||||
| Revlon | Revlon | Revlon ColorSilk | Revlon | ||||||||||||||||||||||||||||||||||||||||||||
| Revlon ColorStay | Revlon Professional | ||||||||||||||||||||||||||||||||||||||||||||||
| Elizabeth Arden | Elizabeth Arden | Elizabeth Arden White Tea | Visible Difference | ||||||||||||||||||||||||||||||||||||||||||||
| Elizabeth Arden 5th Avenue | Elizabeth Arden Ceramide | ||||||||||||||||||||||||||||||||||||||||||||||
| Elizabeth Arden Green Tea | Elizabeth Arden Pro | ||||||||||||||||||||||||||||||||||||||||||||||
| Elizabeth Arden Red Door | Prevage | ||||||||||||||||||||||||||||||||||||||||||||||
| Elizabeth Arden Always Red | Skin Illuminating | ||||||||||||||||||||||||||||||||||||||||||||||
| Eight Hour | |||||||||||||||||||||||||||||||||||||||||||||||
| SUPERSTART | |||||||||||||||||||||||||||||||||||||||||||||||
| Portfolio | CND | Creme of Nature | American Crew | Mitchum | Gatineau*** | ||||||||||||||||||||||||||||||||||||||||||
| Almay | Intercosmo | d:fi | |||||||||||||||||||||||||||||||||||||||||||||
| SinfulColors | Orofluido | ||||||||||||||||||||||||||||||||||||||||||||||
| Cutex | Llongueras* | ||||||||||||||||||||||||||||||||||||||||||||||
| Fragrances | Curve | Juicy Couture | |||||||||||||||||||||||||||||||||||||||||||||
| Giorgio Beverly Hills | John Varvatos | ||||||||||||||||||||||||||||||||||||||||||||||
| Charlie | AllSaints**** | ||||||||||||||||||||||||||||||||||||||||||||||
| Halston | Britney Spears | ||||||||||||||||||||||||||||||||||||||||||||||
| Jean Naté | Christina Aguilera | ||||||||||||||||||||||||||||||||||||||||||||||
PS** | Elizabeth Taylor | ||||||||||||||||||||||||||||||||||||||||||||||
| White Diamonds | Jennifer Aniston**** | ||||||||||||||||||||||||||||||||||||||||||||||
| Alfred Sung | |||||||||||||||||||||||||||||||||||||||||||||||
| Ed Hardy | |||||||||||||||||||||||||||||||||||||||||||||||
| Lucky Brand | |||||||||||||||||||||||||||||||||||||||||||||||
| Geoffrey Beene | |||||||||||||||||||||||||||||||||||||||||||||||
*Licensed from a third party.
**Logo of former Paul Sebastian brand.
***Gatineau brand sold during 2021.
****Licenses rejected or expired as of December 31, 2022.
8
The Company operates in four operating segments: Revlon; Elizabeth Arden; Portfolio; and Fragrances, which represent the Company's four reporting segments. For certain information regarding the Company's segments and domestic and foreign operations, refer to Note 16, "Segment Data and Related Information," to the Company’s Audited Consolidated Financial Statements in this 2022 Form 10-K. Further information on the Company's brands by segment appears below.
Revlon Segment:
The Company’s Revlon segment includes cosmetics, hair color and hair care, beauty tools and skin care products sold in approximately 150 countries in the mass retail channel, large volume retailers, chain drug and food stores, chemist shops, hypermarkets, general merchandise stores, e-commerce sites, television shopping, department stores, professional hair and nail salons, one-stop shopping beauty retailers and specialty cosmetics stores in the U.S. and internationally.
Cosmetics - The Company manufactures and markets a broad range of cosmetics, including face, lip, eye and nail products. Certain of the Company’s products incorporate patented, patent-pending or proprietary technology into their production, formulation or design. See "Research and Development" for more information.
•Revlon: The Company sells a broad range of cosmetics under its flagship Revlon brand, which are designed to fulfill consumer wants and needs and are principally priced in the upper range for large volume retailers. The Revlon brand is comprised of face makeup, including foundation, powder, blush and concealers; lip makeup, including lipstick, lip gloss and lip liner; eye makeup, including mascaras, eyeliners, eye shadows and brow products; and nail color. Revlon products include innovative formulas and attractive colors that appeal to a wide range of consumers. The following are the key brands within the Revlon segment:
◦Revlon ColorStay offers consumers a full range of products with long-wearing technology in face, lip, eye, and nail;
◦Revlon PhotoReady products that are offered in face and eye makeup and are designed with innovative photochromatic pigments that bend and reflect light to give a flawless, airbrushed appearance in any light;
◦Revlon Age Defying, which consists of face makeup for women in the over-35 age bracket, with ingredients to help reduce the appearance of fine lines and wrinkles;
◦Revlon Ultra HD, which is a liquid-based lip color offered globally; and a one-coat vegan and 20-free nail color;
◦Revlon Super Lustrous, which is the Company’s flagship wax-based lip color and is offered in a wide variety of shades of lipstick and lip gloss; and
◦Revlon So Fierce, which is a line of trend forward eyeliner, mascara, and eye shadow products that offer unique textures and shades to create bold looks.
Hair - The Company sells hair color, hair care and hair treatment products primarily under the Company's Revlon ColorSilk and Revlon Professional franchises.
•Revlon ColorSilk hair color and hair care products are sold throughout the world in the mass retail channel to large volume retailers and other retailers and provide radiant, long-lasting color that leaves hair nourished, hydrated and ultra-conditioned.
•Revlon Professional includes hair color, hair care and hair treatment products that are distributed exclusively to professional salons, salon professionals and salon distributors and are sold in more than 85 countries. Revlon Professional is synonymous with innovation, fashion and technology to service the most creative salon professionals and their clients. Revlon Professional salon hair color and hair care products include Revlonissimo, Eksperience, Nutri Color Creme, UniqOne and Revlon Professional Equave.
Beauty tools - The Company sells Revlon beauty tools, which include nail, eye, skin and manicure and pedicure grooming tools, eye lash curlers and a full line of makeup brushes under the Revlon brand name.
Elizabeth Arden Segment:
The Elizabeth Arden segment is comprised of the Company's Elizabeth Arden branded products. The Elizabeth Arden segment markets, distributes and sells fragrances, skin care and color cosmetics primarily to prestige retailers, department and specialty stores, perfumeries, boutiques, e-commerce sites, the mass retail channel, travel retailers and distributors, as well as direct sales to consumers via its Elizabeth Arden branded retail stores and elizabetharden.com e-commerce website, in the U.S. and internationally.
9
The Elizabeth Arden segment is comprised of skin care, color cosmetics and fragrances under the Elizabeth Arden brand, including the following:
Skin Care: Elizabeth Arden sells skin care and color cosmetics products including Visible Difference, Ceramide, SUPERSTART, Prevage, Eight Hour and Skin Illuminating.
Fragrances: The Elizabeth Arden segment produces fragrances including Elizabeth Arden 5th Avenue, Elizabeth Arden White Tea, Elizabeth Arden Red Door and Elizabeth Arden Green Tea.
Portfolio Segment:
The Company’s Portfolio segment includes a comprehensive lineup of products sold to hair and nail salons and professional salon distributors, including hair color, shampoos, conditioners, styling products, nail polishes and nail enhancements. The Portfolio segment also includes a multi-cultural line of products sold in both professional salons, large volume retailers and mass retailers.
•American Crew: The Company sells men’s styling, hair care, and other grooming products for use and sale by professional salons and barber shops under the American Crew brand name. The brand is also distributed in select retailers, both on and offline. In 2020, the American Crew brand introduced a Lather Shave Cream, Finishing Spray, and Detox Shampoo, as well as relaunched three other formulas within its extensive hair care line of shampoos and conditioners. American Crew is the "Official Supplier to Men" of quality grooming products that provide the ultimate usage experience and enhance a man’s personal image. American Crew is the leading salon brand created specifically for men and is sold in more than 70 countries (as well as being sold direct-to-consumer on its americancrew.com website).
•d:fi: The Company also sells unisex hair products under the d:fi brand, which is a value-priced full line of cleansing, conditioning and styling products.
•Almay: The Company’s Almay brand consists of hypo-allergenic, dermatologist-tested, fragrance-free cosmetics and skin care products. The Almay brand is comprised of face makeup, including foundation, pressed powder, primer and concealer; eye makeup, including eye shadows, mascaras and eyeliners; lip makeup; and makeup removers. Key brands within Almay include Almay Smart Shade in face; Almay Intense Eye Color in eye; and Almay Color + Care in lip. The Almay brand also has a significant makeup remover business under the core Almay brand name.
•SinfulColors: The Company's SinfulColors brand consists of nail enamels in bold, vivid and on-trend colors.
•Cutex: The Company's Cutex brand consists of nail care products, including both nail polish remover and nail care treatments.
•CND: The Company sells nail enhancement systems, nail polishes, gel nail color, treatment products, nail service accessories, electronics, SPA products and services for use by the professional nail salon industry under the CND brand name. CND-branded professional nail, hand and foot care products are sold in more than 50 countries. CND nail products include:
◦CND Shellac brand 14+ day nail color system, which delivers 14+ days of flawless wear, superior color and mirror shine with zero dry-time and no nail damage. The CND Shellac system is a true innovation in chip-free, extended-wear nail color.
◦CND Vinylux weekly polish, a breakthrough nail polish that uses a patent-pending technology and lasts approximately a week. While ordinary polishes become brittle and deteriorate over time, CND Vinylux dries with exposure to natural light to a flawless finish and strengthens its resistance to chips over time.
•Mitchum: The Company's Mitchum brand consists of anti-perspirant deodorant products for men and women, with patented ingredients that provide consumers with up to 48 hours of protection.
•The Company sells professional hair products under brand names such as Orofluido and Intercosmo, as well as under the premium priced Llongueras brand (licensed from a third party) in Spain. Multi-cultural hair-care products are sold under the Creme of Nature brand, primarily in the U.S., to professional salons, large volume retailers and other retailers.
•The Company also sold certain skin care products in the U.S. and internationally under various regional brands, including the Company's Gatineau brand. The Company's Gatineau brand was sold during 2021.
10
Fragrances Segment:
The Company's Fragrances segment includes the development, marketing and distribution of certain owned and licensed fragrances. These products are typically sold to retailers in the U.S. and internationally, including prestige retailers, specialty stores, e-commerce sites, the mass retail channel, travel retailers and other international retailers. The owned and licensed fragrances include brands such as: (i) Juicy Couture (which are also sold direct-to-consumer on its juicycouturebeauty.com website), John Varvatos and AllSaints in prestige fragrances; (ii) Britney Spears, Elizabeth Taylor, Christina Aguilera, and Jennifer Aniston in celebrity fragrances; and (iii) Curve, Giorgio Beverly Hills, Ed Hardy, Charlie, Lucky Brand, ‹PS› (logo of former Paul Sebastian brand), Alfred Sung, Halston, Geoffrey Beene and White Diamonds in mass fragrances.
The Company also distributes approximately 27 additional prestige fragrance brands owned by third parties. These products are typically sold to retailers in the U.S. and internationally, including prestige retailers and specialty stores and mass retailers, including mid-tier and chain drug retailers, e-commerce sites and other international and travel retailers.
Marketing
The Company uses various marketing techniques depending on the brand, type of product or target customer, among other variables. For its mass retail products, the Company markets its extensive product lines covering a broad range of price points within large volume retailers and e-commerce sites in the U.S. and within large volume retailers and other retailers internationally. The Company uses social media and other digital marketing, television, outdoor and print advertising and public relations and influencer marketing, as well as point-of-sale merchandising, including displays and samples, coupons and other trial incentives. The Company coordinates its marketing and advertising campaigns for new product launches and innovation with an omni-channel approach. The Company develops, jointly with retailers, customized, tailored point-of-purchase and other focused marketing programs.
The Company also uses cooperative advertising programs, Company-paid or Company-subsidized demonstrators and coordinates in-store promotions and displays. Other marketing strategies, including trial-size products and couponing, are designed to introduce the Company's newest products to consumers and encourage trial and purchase in-store.
For products primarily sold to professional salons and distributors, the Company markets products through educational seminars on such products' application methods and consumer benefits. In addition, the Company uses professional trade advertising, social media and other digital marketing, displays and samples to communicate to professionals and consumers the quality and performance characteristics of its products. In some countries, the Company's direct sales force provides customers with point of sale communication and merchandising for its professional products.
The Company believes that its presence in professional salons benefits the marketing and sale of its products sold through other channels, such as mass retailers or specialty stores, as it enables the Company to improve many of its other product categories, such as hair color, hair care, nail color, nail care and skin care. The presence of regional brands internationally provides the Company with broader brand, geographic coverage and retail diversification beyond large volume retailers, among others.
Additionally, the Company maintains many brand-specific websites, such as www.revlon.com, www.elizabetharden.com, www.almay.com, www.revlonprofessional.com, www.americancrew.com, www.cnd.com and www.mitchum.com, devoted to the Revlon, Elizabeth Arden, Almay, Revlon Professional, American Crew, CND and Mitchum brands, respectively. Each of these websites features product and promotional information for the brands and are updated regularly to stay current with the Company's new product launches and other marketing, advertising and promotional campaigns. The Company sells direct-to-consumer on-line through its elizabetharden.com, americancrew.com and revlonprofessional.com websites.
Research and Development
The Company believes that it is an industry leader in the development of innovative and technologically-advanced cosmetics and beauty products. The Company's marketing and research and development groups identify consumer needs and shifts in consumer preferences in order to develop new products, introduce line extensions and promotions and redesign or reformulate existing products to satisfy these needs and preferences. The Company's research and development group is comprised of departments specialized in the technologies critical to many of the Company's product lines. The Company also utilizes specialty laboratories and manufacturers in its supply chain for the development of certain new products, such as fragrances and skin care. The Company continues to refine its rigorous process for the ongoing development and evaluation of new product concepts, led by executives in marketing, sales, research and development, and including input from operations, law and finance. This process has created a comprehensive, long-term portfolio strategy that is intended to optimize the Company's ability to regularly launch innovative new product offerings and to effectively manage the Company’s product portfolio.
11
The Company operates an extensive research and development facility in Edison, New Jersey for products under brands such as Revlon, Almay and Elizabeth Arden. The Company also has research facilities for its professional products in the U.S. (California), Spain and Mexico. The scientists at these various facilities are responsible for performing all of the Company’s research and development activities for new products, ideas, concepts and packaging. The Company’s package development and engineering function is also part of the greater research and development organization and fosters a strong synergy of package and formula development, which is integral to a product’s success. The research and development group performs extensive safety and quality testing on the Company’s products, including toxicology, microbiology, efficacy and package testing. Additionally, quality control testing is performed at each of the Company’s manufacturing facilities.
As of December 31, 2022, the Company employed approximately 200 people in its research and development activities, including specialists in pharmacology, toxicology, chemistry, microbiology, engineering, biology, dermatology and quality assurance.
Manufacturing and Related Operations and Raw Materials
During 2022, the Company’s products were primarily produced at the Company’s facilities in the U.S. (North Carolina and Florida), Spain, Mexico, South Africa, and Italy. The Company's products were also produced by third-party suppliers and contract manufacturers in the U.S. and Europe.
The Company continually reviews its manufacturing needs against its manufacturing capacities to identify opportunities to reduce costs and operate more efficiently. The Company continuously pursues reductions in cost of goods through the global sourcing of raw materials and components from qualified vendors, leveraging its purchasing capacity to optimize cost reductions. The Company’s global sourcing strategy from qualified vendors is also designed to provide that the Company maintains a continuous supply of high-quality raw materials and components.
Distribution
The Company's products are sold in approximately 150 countries across six continents. The Company utilizes a dedicated sales force in countries where the Company maintains operations, and also utilizes sales representatives and independent distributors to serve certain territories and retailers. (See Item 1A. Risk Factors - "The Company depends on a limited number of customers for a large portion of its net sales, and the loss of one or more of these customers could reduce the Company's net sales and have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows" and "Competition in the beauty industry could have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows.")
United States. Net sales in the U.S. accounted for approximately 46% of the Company's 2022 net sales, which were made in multiple channels, including mass and prestige retail, e-commerce sites and specialty cosmetics stores. The Company also sells a broad range of beauty products to U.S. government military exchanges and commissaries. The Company licenses its Revlon trademark to select manufacturers for complementary beauty-related products and accessories that the Company believes have the potential to extend the Company's brand names and image. As of December 31, 2022, 8 of such licenses were in effect relating to more than 20 product categories, which are marketed principally in the mass retail channel. Pursuant to such licenses, the Company retains control over product design and development, product quality, advertising and the use of its trademarks. These licensing arrangements offer opportunities for the Company to generate revenues and cash flow through royalties or other payments.
The Company sells its products through the mass retail channel, prestige retailers, perfumeries, boutiques, department and specialty stores, travel retailers and distributors, as well as direct sales to consumers via its Elizabeth Arden branded retail stores and e-commerce business. In 2019 and 2018, the Company launched direct-to-consumer on-line selling capabilities on its elizabetharden.com, juicycouturebeauty.com, and americancrew.com websites. In 2020, the Company continued expansion of its e-commerce business in various markets. Retail merchandisers maintain the Company's point-of-sale wall displays intended to ensure that high-selling SKUs are in stock and to ensure the optimal presentation of the Company's products in retailers. Products for use in professional salons are sold primarily through wholesale beauty supply distributors in the U.S.
Outside of the United States. Net sales outside the U.S. accounted for approximately 54% of the Company's 2022 net sales. The three countries outside the U.S. with the highest net sales were China, Australia and the U.K. which together accounted for approximately 17% of the Company's 2022 net sales. The Company distributes its mass retail products, prestige products and fragrances through large volume retailers, chain drug and food stores, chemist shops, hypermarkets, general merchandise stores, e-commerce sites, television shopping, department and specialty stores, one-stop shopping beauty retailers, perfumeries, boutiques, travel retailers and distributors. Products for use in professional hair and nail salons are sold directly to the salons by the Company's direct sales force in countries where it has operations and through wholesale beauty supply distributors in other countries outside the U.S.
12
At December 31, 2022, the Company actively sold its products through wholly-owned subsidiaries established in approximately 25 countries outside of the U.S., as well as through joint ventures in Asia and the Middle East, and through a large number of independent distributors and licensees elsewhere around the world.
Customers
The Company's principal customers for its mass retail products, prestige products and fragrances include large volume retailers and chain drug stores, including well-known retailers such as Walmart, CVS, Target, Kohl’s, Walgreens, TJ Maxx and Marshalls, department stores such as Macy’s, Dillard’s, Ulta, Belk and Sephora in the U.S.; Shoppers DrugMart in Canada; A.S. Watson & Co. retail chains in Asia Pacific and Europe; Walgreens Boots Alliance in the U.S. and the U.K.; Debenhams and Superdrug Stores in the U.K.; as well as a range of specialty stores, perfumeries and boutiques such as The Perfume Shop, Hudson’s Bay, Shoppers Drug Mart, Myer, Douglas and various international and travel retailers such as Nuance, Heinemann and World Duty Free throughout various international regions, and e-commerce retailers such as Tmall in China.
The Company's principal customers for its professional products include Beauty Systems Group, Salon Centric and Ulta Salon, Cosmetics & Fragrance, as well as individual hair and nail salons and other distributors to professional salons.
As is customary in the industry, none of the Company’s customers are under an obligation to continue purchasing products from the Company in the future.
Walmart and its affiliates worldwide accounted for approximately 14% of the Company's 2022 consolidated net sales. The Company expects that Walmart and a small number of other customers will, in the aggregate, continue to account for a large portion of the Company's net sales. (See Item 1A. Risk Factors - "The Company depends on a limited number of customers for a large portion of its net sales, and the loss of one or more of these customers could reduce the Company's net sales and have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows.")
Competition
The Company's cosmetics, fragrance, skin care, hair and beauty care products business categories are highly competitive. The Company competes primarily by:
•developing quality products with innovative performance features, shades, finishes, components and packaging;
•educating consumers, retail customers and salon professionals about the benefits of the Company’s products;
•anticipating and responding to changing consumer, retail customer and salon professional demands in a timely manner, including the timing of new product introductions and line extensions;
•offering attractively priced products relative to the product benefits provided;
•maintaining favorable brand recognition;
•generating competitive margins and inventory turns for its customers by providing relevant products and executing effective pricing, incentive and promotional programs and marketing campaigns, as well as social media and influencer marketing activities;
•ensuring product availability through effective planning and replenishment collaboration with the Company's customers;
•providing strong and effective advertising, marketing, promotion, social media, influencer and merchandising support;
•leveraging e-commerce, social media and mobile commerce initiatives and developing an effective omni-channel strategy to optimize the opportunity for consumers to interact with and purchase the Company's products both on-line and in brick and mortar outlets;
•maintaining an effective sales force and distributor network; and
•obtaining and retaining sufficient retail display and floor space, optimal in-store positioning and effective presentation of its products on-shelf.
The Company competes in selected product categories against numerous multi-national manufacturers, as well as with expanding private label and store-owned brands, particularly in the mass retail channel. In addition to products sold in large volume retailers, distributors, wholesalers, professional salons and demonstrator-assisted retailers, the Company's products also compete with products sold in prestige and department stores, television shopping, door-to-door, specialty stores, one-stop shopping beauty retailers, e-commerce sites, perfumeries and other distribution outlets. The Company's competitors include,
13
among others, L'Oréal S.A., The Procter & Gamble Company, The Estée Lauder Companies Inc., Coty Inc., Shiseido Co., Johnson & Johnson, Kao Corp., Henkel AG & Co., Unilever PLC/Unilever N.V., Beiersdorf AG, Chanel S.A., L Brands, Inc., AmorePacific Corporation, LG Household & Healthcare, Natura & Co./Avon Products, Colgate-Palmolive Company, Puig, Mary Kay Inc., Hand & Nail Harmony, Inc., Oriflame Holding AG, Markwins International Corporation, Sephora (a division of LVMH Moët Henessy Louis Vuitton SE), Boots UK Limited and e.l.f. Beauty, Inc. The Company also competes to a growing extent against e-commerce focused micro-beauty brands, such as Glossier, Inc., NYX Cosmetics and Urban Decay Cosmetics (both acquired by L'Oréal), Anastasia Beverly Hills, Sigma Beauty, Benefit Cosmetics LLC (a subsidiary of LVMH), and Too Faced Cosmetics, LLC (both acquired by Estée Lauder). (See Item 1A. Risk Factors - "Competition in the beauty industry could have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows.")
Patents, Trademarks and Proprietary Technology
The Company considers trademark protection to be very important to its business. The Company’s trademarks are registered in the U.S. and in approximately 150 other countries. The Company’s significant trademarks include: (i) in the Company’s Revlon segment, Revlon, Revlon ColorStay, Revlon ColorSilk, Revlon PhotoReady, Revlon Super Lustrous and Revlon Professional; (ii) in the Company’s Elizabeth Arden segment, Elizabeth Arden, Prevage, Eight Hour, SuperStart, Visible Difference, Elizabeth Arden Red Door, Elizabeth Arden 5th Avenue, Elizabeth Arden White Tea and Elizabeth Arden Green Tea; (iii) in the Company’s Portfolio segment, Almay, Almay Smart Shade, American Crew, CND, CND Shellac, CND Vinylux, SinfulColors, Mitchum, Cutex, Intercosmo, Orofluido, and Creme of Nature; and (iv) in the Company’s Fragrances segment, owned marks such as Curve, Giorgio Beverly Hills, Charlie, Halston, Jean Naté, ‹PS› (logo of former Paul Sebastian brand), and White Diamonds, as well as licensed trademarks such as Juicy Couture, John Varvatos and AllSaints in prestige fragrances; Britney Spears, Elizabeth Taylor, Christina Aguilera, and Jennifer Aniston in celebrity fragrances; and Ed Hardy, Lucky Brand, Alfred Sung and Geoffrey Beene in mass fragrances. The Company regularly renews its trademark registrations in the ordinary course of business.
The Company utilizes certain proprietary and/or patented technologies in the formulation, packaging and/or manufacture of a number of the Company’s products, including, among others, certain Prevage skin care products, Mitchum deodorants, CND Shellac nail color systems and CND Vinylux nail polishes. The Company considers its proprietary technology and patent protection to be important to its business.
The Company files patent applications in the ordinary course of business for certain of the Company’s new technologies. In general, utility patents are enforceable for up to 20 years from the patent application filing date, subject to paying periodic maintenance fees. The patents that the Company currently owns expire at various times between 2022 and 2040 and the Company expects to continue to file patent applications for certain of its technologies in the ordinary course of business.
Government Regulation
The Company is subject to regulation by the Federal Trade Commission (the "FTC") and the Food and Drug Administration (the "FDA") in the U.S., as well as various other federal, state, local and foreign regulatory authorities, including those in the European Union (the "EU"), Canada and other countries in which the Company operates. The Company’s Oxford, North Carolina manufacturing facility is registered with the FDA as a drug manufacturing establishment, permitting the manufacture of cosmetics and other beauty-care products that contain over-the-counter drug ingredients, such as sunscreens, anti-perspirant deodorants and anti-dandruff hair-care products. Compliance with federal, state, local and foreign laws and regulations pertaining to the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had, and is not anticipated to have, a material effect on the Company's capital expenditures, earnings or competitive position. Regulations in the U.S., the EU, Canada and in other countries in which the Company operates that are designed to protect consumers or the environment have an increasing influence on the Company's product claims, ingredients and packaging. (See Item 1A. Risk Factors - "The Company's products are subject to federal, state and international regulations that could have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows.")
Human Capital Resources
As of December 31, 2022, the Company employed approximately 5,600 people, of which approximately 23% were covered by collective bargaining agreements. The Company has employees in 28 countries. The Company's total employee population includes the impacts of integration initiatives in connection with the 2018 Optimization Program and the 2020 Revlon Restructuring Program (subsequently renamed during 2021 the Revlon Global Growth Accelerator, “RGGA”, as further defined below), including the impacts of insourcing efforts. The Company is committed to its core values of Innovation, Inclusion, Collaboration & Accountability. We recognize the diversity of our employees, consumers, partners and community, and are committed to diversity and inclusion, as driven by our employee-led Diversity & Inclusion Council. As a consumer
14
products company, we believe that it is important for our workforce to reflect the diversity of our consumers. As of December 31, 2022, approximately 40% of Revlon’s Board of Directors and Executive Leadership team are women. We are also committed to the health, safety and well-being of our employees. The Company offers employees a wide array of company-paid benefits and wellness programs, which we believe are competitive in the industry. The Company utilizes employee surveys to measure organizational health and employee experiences. The Company believes that its employee relations are positive.
Available Information
The public may access materials that the Company files with the SEC, including, without limitation, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, on the SEC's website at http://www.sec.gov. The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and amendments to those reports, are also available free of charge on the Company's Internet website at http://www.revloninc.com as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC.
Item 1A. Risk Factors
In addition to the other information in this 2022 Form 10-K, investors should consider carefully the following risk factors when evaluating the Company’s business.
Summary Risk Factors
Some of the factors that could materially and adversely affect our business, financial condition, results of operations and cash flows include, but are not limited to, the following:
Risks Related to the Chapter 11 Cases
a.We are subject to the risks and uncertainties associated with the Chapter 11 Cases.
b.Material delays in or other negative events during the pendency of our Chapter 11 Cases increase the risk of us being unable to reorganize our business and successfully emerge from bankruptcy and also increase our costs associated with the bankruptcy process.
c.Operating under Chapter 11 protection for a long period of time may harm our business.
d.The Chapter 11 Cases limit the flexibility of our management team in running our business.
e.We may not be able to obtain confirmation of a Chapter 11 plan of reorganization, including the proposed Plan.
f.The Plan may not satisfy the requirements for non-consensual confirmation of a chapter 11 plan under the Bankruptcy Code.
g.We may seek to amend, waive, modify, or withdraw the Plan at any time before confirmation.
h.We cannot make any assurances that the conditions precedent to the Plan’s effectiveness will occur or be waived by the effective date.
i.The Restructuring Support Agreement, Backstop Commitment Agreement, and/or the Debt Commitment Letter may be terminated, which could adversely affect the Chapter 11 Cases.
j.The Restructuring is subject to conditions and milestones that we may be unable to satisfy.
k.Termination of our exclusive right to file a Chapter 11 Plan and the exclusive right to solicit acceptances could result in competing plans of reorganization, which could have less favorable terms or result in significant litigation and expenses.
l.We may fail to obtain the proceeds of the Exit Facilities or the Equity Rights Offering, which would adversely affect our ability to consummate the Plan.
m.Our long-term liquidity requirements and the adequacy of our capital resources are difficult to predict at this time.
n.As a result of the Chapter 11 Cases, our financial results may be volatile and may not reflect historical trends.
o.We have experienced, and may continue to experience, increased levels of employee attrition as a result of the Chapter 11 Cases.
p.Our post-bankruptcy capital structure has yet to be implemented, and any changes to our capital structure may have a material adverse effect on existing debt and security holders, including holders of our Class A Common Stock.
q.The Plan is based upon assumptions that we developed that may prove incorrect and could render the Plan unsuccessful.
r.The allowed amount of claims and estimated percentage of recoveries set forth in the proposed Disclosure Statement may differ from current estimates.
s.Parties-in-Interest may object to our classification of claims and interests.
t.The consenting unsecured noteholder recovery may not be approved.
15
u.Releases, injunctions and exculpations may not be approved.
v.In certain instances, a Chapter 11 case may be converted to a case under Chapter 7 of the Bankruptcy Code, in which case our Class A Common Stock would likely be worthless.
w.The Chapter 11 Cases are expected to render our Class A Common Stock worthless.
x.Trading in shares of our Class A Common Stock during the pendency of the Chapter 11 Cases is highly speculative and we expect that you will lose your investment.
y.The DIP Facilities may be insufficient to fund our business operations, or may be unavailable to us if we do not comply with certain covenants.
z.The Company's ability to service its debt and meet its cash requirements depends on many factors, including achieving anticipated levels of revenue and expenses. If such revenue or expense levels prove to be other than as anticipated, the Company may be unable to meet its cash requirements or Products Corporation may be unable to meet the requirements of the DIP Term Loan Facility and/or the DIP ABL Facility, which could have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows.
Risks Related to Securities to be Issued under the Plan Generally
a.There is no public market for the securities to be issued under the Plan.
b.The securities to be issued under the Plan will be subject to dilution.
c.No dividends will be paid on the securities to be issued under the Plan.
d.The New Common Stock and New Warrants to be issued under the Plan will be subordinated to the indebtedness of Reorganized Holdings.
e.The ownership of the New Common Stock and/or New Warrants may be concentrated.
Risks Related to Reorganized Holdings
a.We may be subject to claims that may not be discharged in the Chapter 11 Cases, which could have a material adverse effect on the financial condition and results of operations of Reorganized Holdings.
b.Upon emergence from Chapter 11 bankruptcy, future liability claims could have adversely affect the financial condition and results of operations of Reorganized Holdings.
c.Upon emergence from Chapter 11 bankruptcy, Reorganized Holdings will be subject to risks related to its substantial indebtedness.
Risks Related to the Company’s Industry, Business and Operations
a.The COVID-19 pandemic resulted in significantly decreased net sales for the Company particularly during 2020 and has had, and could continue to have, a significant adverse effect on the Company's business, results of operations, financial condition and/or cash flows.
b.The Company depends on its Oxford, North Carolina facility for production of a substantial portion of its products. Disruptions or delays at this facility and/or at other Company or third-party facilities at which the Company's products are manufactured could have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows. Such delays and difficulties in manufacturing can result in product shortages, declines in sales, and reputational impact as well as significant remediation and related costs associated with addressing such shortages.
c.Volatility in costs, along with delays and disruptions in the supply of materials and services, as a result of the recent global supply chain disruptions, could have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows.
d.The Company's financial performance depends on its ability to anticipate and respond to consumer trends and changes in consumer preferences. New product introductions may not be as successful as the Company anticipates, which could have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows.
e.The Company depends on a limited number of customers for a large portion of its net sales, and the loss of one or more of these customers could reduce the Company's net sales and have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows.
f.The Company may be unable to maintain or increase its sales through the Company's primary retailers, which could have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows.
g.Competition in the beauty industry could have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows.
16
h.The Company's Fragrances segment depends on various brand licenses and distribution arrangements for a significant portion of its sales, and the loss of one or more of these licenses or distribution arrangements could have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows.
i.The success of the Company’s Fragrances segment depends, in part, on the demand for heritage and designer fragrance products. A decrease in demand for such products, or the loss or infringement of any intellectual property rights, could have a material adverse effect on the Company’s business, prospects, results of operations, financial condition and/or cash flows.
j.The Company's inability to acquire or license additional fragrance brands or secure additional distribution arrangements and arrangements could have an adverse effect on the Company's net sales and a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows.
k.The illegal distribution and sale by third parties of counterfeit versions of the Company’s products or the unauthorized diversion by third parties of the Company’s products could have an adverse effect on the Company’s net sales and a negative impact on the Company’s reputation and business.
l.The Company's success depends, in part, on the quality, efficacy and safety of its products.
m.The Company’s success largely depends upon its ability to attract, hire and retain its senior management team, other key employees and a highly skilled and diverse workforce, as well as effectively implement succession planning for its senior management team, and, as such, the Company’s inability to do so could adversely affect the Company’s business, prospects, results of operations, financial condition and/or cash flows.
n.The Company previously identified a material weakness in its internal control over financial reporting, which has now been remediated. Any failure to maintain effective internal control over financial reporting could have a material adverse effect on the Company’s business, prospects, results of operations, financial condition and/or cash flows.
o.The Company may not realize the cost reductions and other benefits that it expects from its various restructuring programs that may be in effect from time to time, which could have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows.
General Business and Regulatory Risks
a.The Company's foreign operations are subject to a variety of social, political and economic risks and have been, and are expected to continue to be, affected by foreign currency exchange fluctuations, foreign currency controls, government-mandated pricing controls, duties, tariffs and/or other trade measures, which could have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows and the value of its foreign assets.
b.Adverse economic conditions could have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows and/or on the financial condition of its customers and suppliers.
c.The ongoing conflict between Russia and Ukraine has caused, and is currently expected to continue to cause, negative effects on geopolitical conditions and the global economy, including financial markets, inflation, and the global supply chain, which could have an adverse impact on our business, financial condition and results of operations.
d.The United Kingdom’s ongoing withdrawal process from the European Union may have a negative effect on global economic conditions, financial markets and on the Company's business, prospects, results of operations, financial condition and/or cash flows.
e.Terrorist attacks, acts of war or military actions and/or other civil unrest may adversely affect the territories in which the Company operates and the Company's business, prospects, results of operations, financial condition and/or cash flows.
f.Declines in the financial markets may result in increased pension expense and increased cash contributions to the Company's pension plans.
g.Extreme weather conditions and natural disasters due to climate change or otherwise could have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows.
h.The Company's products are subject to federal, state and international regulations that could have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows.
i.Any violation of the U.S. Foreign Corrupt Practices Act or other similar foreign anti-corruption laws could have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows.
j.Disruptions to or breaches of the Company's information technology systems, and the potential failure to adequately detect or resolve such interruptions or breaches in a timely manner, may have a material adverse effect on the Company's business operations, prospects, results of operations and financial condition which could lead to reputational damage and significant liabilities.
k.Uncertainties in the interpretation and application of the income tax provisions could have a material impact on the Company's financial condition, results of operations and/or cash flows.
17
Risks Related to the Chapter 11 Cases
We are subject to the risks and uncertainties associated with Chapter 11 Cases.
On the Petition Date, the Debtors filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code. On February 21, 2023, the Debtors filed the Plan. Although the Plan is intended to effectuate a coordinated financial restructuring of the Company, and enjoys support from the Creditors’ Committee, the Consenting BrandCo Lenders, and the Consenting 2016 Lenders, it is impossible to predict with certainty the amount of time that the Company may spend in bankruptcy, or to assure parties in interest that the Plan will be confirmed or consummated and the timing of such confirmation and consummation. Even if confirmed on a timely basis, court proceedings to confirm the Plan could have an adverse effect on the Company’s business. The proceedings also involve additional expense and may divert some of the attention of the Company’s management away from business operations. For the duration of our Chapter 11 Cases, our operations and our ability to develop and execute our business plan, as well as our continuation as a going concern, are subject to the risks and uncertainties associated with Chapter 11 bankruptcy. These risks include the following:
•our ability to develop, obtain support for, confirm and consummate the Plan, another Chapter 11 plan or alternative restructuring transaction;
•termination of the Restructuring Support Agreement, including due to our inability to meet the significant conditions and milestones in the Restructuring Support Agreement, which may be difficult to satisfy;
•termination of the Backstop Commitment Agreement and/or the Debt Commitment Letter and the potential incurrence of cash termination fees in connection therewith;
•our ability to obtain and/or maintain timely approval by the Bankruptcy Court with respect to motions that we have filed or will file in the Chapter 11 Cases from time to time;
•our ability to operate within the restrictions and the liquidity limitations of the DIP Facilities and any related orders entered by the Bankruptcy Court in connection with the Chapter 11 Cases;
•our ability to obtain sufficient financing to allow us to emerge from Chapter 11 bankruptcy and execute our business plan post-emergence;
•our ability to maintain our relationships with our suppliers, vendors, customers, employees, and other third parties;
•our ability to maintain contracts that are critical to our operations;
•our ability to execute on our business plan during the pendency of the Chapter 11 Cases;
•our ability to attract, motivate and retain key employees;
•the high costs of operating our business while in Chapter 11 bankruptcy and related fees;
•the ability of third parties to seek and obtain Bankruptcy Court approval to terminate contracts and other agreements with us;
•the expiration, termination, or shortening of the exclusive period for us to propose and confirm a Chapter 11 plan, whether caused by third parties or otherwise;
•the ability of third parties to seek and obtain court approval to appoint a Chapter 11 trustee or examiner or to convert the Chapter 11 Cases to cases under Chapter 7 of the Bankruptcy Code;
•the actions and decisions of our creditors and other third parties who have interests in our Chapter 11 Cases that may be inconsistent with our plans; and
•uncertainties and continuing risks associated with our ability to achieve our stated goals and continue as a going concern.
Material delays in or other negative events during the pendency of our Chapter 11 Cases increase the risk of us being unable to reorganize our business and successfully emerge from bankruptcy and also increase our costs associated with the bankruptcy process.
Material delays in or other negative events during the pendency of our Chapter 11 Cases could adversely affect our relationships with our creditors, suppliers, vendors, customers, employees, and other third parties, and our ability to negotiate favorable terms with them. While we expect to continue normal operations, public perception of our continued viability may affect, among other things, the desire of new and existing customers, vendors, landlords, employees, or other parties to enter into or continue their agreements or arrangements with us. The failure to maintain any of these important relationships could adversely affect our business, financial condition, and results of operations. Because of the public disclosure of the Chapter 11 Cases and concerns certain vendors may have about our liquidity, our ability to maintain normal credit terms with vendors may be impaired.
In addition, we need the prior approval of the Bankruptcy Court for transactions outside the ordinary course of business, which may lead to delays and/or limit our ability to respond timely to certain events or take advantage of certain opportunities. Also, the terms of the Final DIP Order and DIP Facilities may limit our ability to undertake certain business initiatives. Any material delays or other negative events during the pendency of our Chapter 11 Cases could increase the risks of us being
18
unable to reorganize our business and successfully emerge from bankruptcy. Additionally, any such material delays or other negative events during the pendency of our Chapter 11 Cases could increase our costs associated with the bankruptcy process.
Operating under Chapter 11 bankruptcy protection for a long period of time may harm our business.
Our future results are dependent upon the successful confirmation and implementation of a plan of reorganization. A long period of operation under Chapter 11 bankruptcy protection could have a material adverse effect on our business, financial condition, results of operations and liquidity. So long as the Chapter 11 Cases continue, our senior management will be required to spend a significant amount of time and effort managing the Chapter 11 process rather than focusing exclusively on our business operations. A prolonged period of operating under Chapter 11 protection also may make it more difficult to retain management and other key personnel necessary to the success and growth of our business.
Additionally, so long as the Chapter 11 Cases continue, we will be required to incur significant costs for professional fees and other expenses associated with the administration of the Chapter 11 Cases. We have obtained funding under the DIP Facilities in an aggregate principal amount of $975 million (consisting of (i) $575 million under the DIP Term Loan Facility and (ii) $400 million under the DIP ABL Facility (subject to a borrowing base limitation)), but this amount may prove insufficient to meet our costs under prolonged Chapter 11 proceedings.
Furthermore, we cannot predict the ultimate amount of all settlement terms for the liabilities that will be subject to a plan of reorganization. Even once a plan of reorganization is approved and implemented, our operating results may be adversely affected by the possible reluctance of prospective lenders and other counterparties to do business with a company that recently emerged from Chapter 11.
The Chapter 11 Cases limit the flexibility of our management team in running our business.
While we operate our businesses as debtors-in-possession under supervision by the Bankruptcy Court, we are required to obtain the approval of the Bankruptcy Court and, in some cases, certain lenders prior to engaging in activities or transactions outside the ordinary course of business. Bankruptcy Court approval of non-ordinary course activities entails preparation and filing of appropriate motions with the Bankruptcy Court, negotiation with creditors’ committees and other parties-in-interest and regularly scheduled hearings. Parties-in interest may be heard at any Bankruptcy Court hearing and may raise objections with respect to these motions. This process may delay major transactions and limit our ability to respond quickly to opportunities and events in the marketplace. Furthermore, in the event the Bankruptcy Court does not approve a proposed activity or transaction, we would be prevented from engaging in activities and transactions that we believe are beneficial to us.
We may not be able to obtain confirmation of a Chapter 11 plan of reorganization, including the proposed Plan.
To emerge successfully from Bankruptcy Court protection as a viable entity, we must meet certain statutory requirements with respect to adequacy of disclosure with respect to the plan of reorganization, solicit and obtain the requisite acceptances of such a plan and fulfill other statutory conditions for confirmation of such a plan, which have not occurred to date. The confirmation process is subject to numerous, unanticipated potential delays, including a delay in the Bankruptcy Court’s commencement of the confirmation hearing regarding our proposed Plan (or any Chapter 11 plan). The confirmation hearing regarding our proposed Plan is currently scheduled to begin on April 3, 2023.
Though we have entered into the Restructuring Support Agreement with certain of our creditors to support our proposed Plan, we may not receive the requisite acceptances of constituencies in the Chapter 11 Cases to confirm the proposed Plan. Even if the requisite acceptances of our Plan are received, the Bankruptcy Court may not confirm the Plan. Even if all voting classes vote in favor of the Plan or the Bankruptcy Code requirements for "cramdown" are met with respect to any class that voted to reject or was deemed to reject the Plan, the Bankruptcy Court, which may exercise its substantial discretion as a court of equity, may choose not to confirm the Plan. The precise requirements and evidentiary showing for confirming a plan, notwithstanding its rejection by one or more impaired classes of claims or equity interests, depends upon a number of factors including, without limitation, the status and seniority of the claims or equity interests in the rejecting class (i.e., secured claims or unsecured claims or subordinated or senior claims). If our proposed Plan (or any Chapter 11 plan of reorganization) is not confirmed by the Bankruptcy Court, it is unclear whether we would be able to reorganize our business and what, if anything, holders of claims against us would ultimately receive with respect to their claims under a subsequent plan of reorganization (or liquidation).
Even if the proposed Plan or another plan of reorganization is confirmed by the Bankruptcy Court, it may not become effective because it is subject to the satisfaction of certain conditions precedent (some of which are beyond our control). There can be no assurance that such conditions will be satisfied and, therefore, that a plan of reorganization will become effective and that we will emerge from the Chapter 11 Cases as contemplated by a plan of reorganization. If emergence is delayed, we may not have sufficient cash available to operate our business. In that case, we may need new or additional post-petition financing,
19
which may increase the cost of consummating a plan of reorganization. There can be no assurance of the terms on which such financing may be available or if such financing will be available. If the transactions contemplated by the Plan are not completed, it may become necessary to amend the Plan. The terms of any such amendment are uncertain and could result in material additional expense and result in material delays to the Chapter 11 Cases. As a result, there can be no assurance as to whether we will successfully reorganize and emerge from the Chapter 11 Cases or, if we do successfully reorganize, as to when we would emerge from the Chapter 11 Cases. If we are unable to successfully reorganize, we may not be able to continue our operations.
Further, although we have obtained commitments from our creditors to backstop the exit financing contemplated in the Restructuring Support Agreement and Plan, the Backstop Commitment Agreement and/or Debt Commitment Letter may be terminated upon the occurrence of certain events. In those circumstances, there is no guarantee that we will be able to obtain alternative commitments to support the exit financing as proposed in the Plan, or obtain any exit financing at all. Even if we are able to obtain exit financing, there is no guarantee that such financing will be on as favorable terms as the Backstop Commitment Agreement and Debt Commitment Letter. Inability to raise exit financing on similar terms to the Backstop Commitment Agreement and Debt Commitment Letter may create risk to our ability to successfully reorganize. For additional information on the Restructuring Support Agreement, the Plan, the Backstop Commitment Agreement and the Debt Commitment Letter, see Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this 2022 Form 10-K.
The Plan may not satisfy the requirements for non-consensual confirmation of a chapter 11 plan under the Bankruptcy Code.
In the event that any impaired class of claims does not accept or is deemed not to accept the Plan, the Bankruptcy Court may nevertheless confirm the Plan at the Debtors’ request if at least one impaired class has accepted the Plan (with such acceptance being determined without including the vote of any “insider” in such class), and as to each impaired class that has not accepted the Plan, the Bankruptcy Court determines that the Plan “does not discriminate unfairly” and is “fair and equitable” with respect to the dissenting impaired classes. Since certain classes are deemed to reject the Plan, regardless of whether any voting classes reject the Plan, the requirements for non-consensual confirmation must be satisfied with respect to rejecting classes. While the Debtors believe that the Plan satisfies the requirements for non-consensual confirmation, there can be no assurance that the Bankruptcy Court will reach the same conclusion. If the Bankruptcy Court does not find that the Plan satisfies the requirements for non-consensual confirmation, the Bankruptcy Court may not confirm the Plan.
We may seek to amend, waive, modify, or withdraw the Plan at any time before confirmation.
Subject to and in accordance with the terms of the Restructuring Support Agreement, the Backstop Commitment Agreement and the Debt Commitment Letter, we reserve the right, in accordance with the Bankruptcy Code, to amend or modify the Plan before the entry of the confirmation order or waive any conditions thereto if and to the extent such amendments or waivers are necessary or desirable to consummate the Plan. The potential impact of any such amendment or waiver on the holders of claims and interests cannot presently be foreseen but may include a change in the economic impact of the Plan on some or all of the proposed classes or a change in the relative rights of such classes. All holders of claims and interests will receive notice of such amendments or waivers required by applicable law and the Bankruptcy Court. If we seek to modify the Plan after receiving sufficient acceptances but before the Bankruptcy Court’s entry of an order confirming the Plan, the previously solicited acceptances will be valid only if (i) all classes of adversely affected holders accept the modification in writing or (ii) the Bankruptcy Court determines, after notice to designated parties, that such modification was de minimis or purely technical or otherwise did not adversely change the treatment of holders of accepting claims or interests, or is otherwise permitted by the Bankruptcy Code.
We cannot make any assurances that the conditions precedent to the Plan’s effectiveness will occur or be waived by the effective date.
Even if the Plan is confirmed by the Bankruptcy Court, there can be no assurance as to the timing of the effective date of the Plan. If the conditions precedent to the effective date set forth in the Plan do not occur or are not waived as set forth in the Plan, then any order entered by the Bankruptcy Court confirming the Plan may be vacated, in which event no distributions would be made under the Plan, the Debtors and all holders of claims and interests would be restored to the status quo ante as of the day immediately preceding the confirmation date, and the Debtors’ obligations with respect to claims and interests would remain unchanged. Notably, the conditions precedent set forth in Article XI of the Plan include the requirement that the Debtors obtain all authorizations, consents, regulatory approvals, or rulings that are necessary to implement and effectuate a Plan. Moreover, absent an extension, the Restructuring Support Agreement may be terminated by the Required Consenting BrandCo Lenders if the effective date does not occur by April 28, 2023.
20
The Restructuring Support Agreement, Backstop Commitment Agreement, and/or the Debt Commitment Letter may be terminated, which could adversely affect the Company's Chapter 11 Cases.
The Restructuring Support Agreement contains provisions that give one or more of the Consenting Creditor Parties the ability to terminate the Restructuring Support Agreement if certain conditions are not satisfied or waived, including the failure to achieve certain milestones. Similarly, the Backstop Commitment Agreement and Debt Commitment Letter contain provisions that give the Equity Commitment Parties and the Debt Commitment Parties, as applicable, the ability to terminate their obligations to fully backstop the Equity Rights Offering, or the ability to terminate their commitment to provide the Incremental New Money Facility, as applicable, upon the occurrence of certain events or if certain conditions are not satisfied. Termination of the Restructuring Support Agreement, Backstop Commitment Agreement, and/or Debt Commitment Letter could result in protracted Chapter 11 Cases, which could significantly and detrimentally impact the Debtors’ relationships with vendors, employees, and major customers, or potentially the conversion of the Chapter 11 Cases into cases under Chapter 7 of the Bankruptcy Code (“Chapter 7”). For additional information on the Restructuring Support Agreement, the Backstop Commitment Agreement and the Debt Commitment Letter, see Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this 2022 Form 10-K.
The Restructuring is subject to conditions and milestones that we may be unable to satisfy.
There are certain material conditions we must satisfy under the Restructuring Support Agreement, including the timely satisfaction of milestones in the Chapter 11 Cases, which include the confirmation of the Plan and the consummation of the restructuring transactions thereunder. The satisfaction of such conditions is subject to risks and uncertainties, many of which are beyond our control.
Termination of our exclusive right to file a Chapter 11 plan and the exclusive right to solicit acceptances could result in competing plans of reorganization, which could have less favorable terms or result in significant litigation and expenses.
We currently have the exclusive right to file a Chapter 11 plan through and including May 9, 2023, and the exclusive right to solicit acceptances of any such plan through May 9, 2023. Such deadlines may be extended from time to time by the Bankruptcy Court “for cause” (as permitted by §1121(d) of the Bankruptcy Code) until the dates 18 months and 20 months after the date we filed the Chapter 11 Cases, respectively. However, it is possible that (i) parties in interest could seek to shorten or terminate such exclusive plan filing and solicitation periods “for cause” (as permitted by section 1121(d) of the Bankruptcy Code)) or (ii) that such periods could expire without extension prior to confirmation and consummation of the Plan.
If our exclusive plan filing and solicitation periods expire or are terminated, other parties in interest will be permitted to file alternative plans of reorganization. There can be no assurances that recoveries under any such alternative plan would be as favorable to creditors as the Plan. In addition, the proposal of competing plans of reorganization may entail significant litigation and significantly increase the expenses of administration of the Debtors' cases, which could deplete creditor recoveries under any plan.
We may fail to obtain the proceeds of the Exit Facilities or the Equity Rights Offering, which would adversely affect our ability to consummate the Plan.
There can be no assurance that we will receive any or all of the proceeds of the Exit Facilities and the Equity Rights Offering. Because final documentation relating to the Exit Facilities has not yet been executed, there can be no assurance that we will be able to obtain the proceeds of the Exit Facilities. In addition, and notwithstanding the Backstop Commitment Agreement applicable to the Equity Rights Offering, because the Equity Rights Offering has not yet been completed, there can be no assurance that the Debtors will receive any or all of the proceeds of the Equity Rights Offering. If the Debtors do not receive the proceeds of the Exit Facilities and the Equity Rights Offering, the Debtors will not be able to consummate the Plan in its current form.
Our long-term liquidity requirements and the adequacy of our capital resources are difficult to predict at this time.
We face uncertainty regarding the adequacy of our liquidity and capital resources. In addition to the cash requirements necessary to fund ongoing operations, we have incurred significant professional fees and other costs in connection with preparation for the Chapter 11 Cases and expect that we will continue to incur significant professional fees and costs throughout our Chapter 11 Cases. In addition, we must comply with the covenants of our DIP Facilities and other agreements associated therewith in order to continue to access our borrowings thereunder. We cannot assure you that cash on hand, cash flow from operations and the DIP Facilities will be sufficient to continue to fund our operations and allow us to satisfy our obligations related to the Chapter 11 Cases until we are able to emerge from the Chapter 11 Cases.
21
Our liquidity, including our ability to meet our ongoing operational obligations, is dependent upon, among other things: (i) our ability to comply with the terms and conditions of our DIP Facilities and associated agreements; (ii) our ability to comply with the terms and conditions of any cash collateral order that may be entered by the Bankruptcy Court in connection with the Chapter 11 Cases; (iii) our ability to maintain adequate cash on hand; (iv) our ability to generate cash flow from operations; (v) our ability to develop, confirm and consummate a Chapter 11 plan or other alternative restructuring transaction; and (vi) the cost, duration and outcome of the Chapter 11 Cases.
As a result of the Chapter 11 Cases, our financial results may be volatile and may not reflect historical trends.
During the Chapter 11 Cases, we expect our financial results to continue to be volatile as restructuring activities and expenses, contract terminations and rejections, and claims assessments significantly impact our consolidated financial statements. As a result, our historical financial performance is likely not indicative of our financial performance after the Petition Date. In addition, if we emerge from Chapter 11, the amounts reported in subsequent consolidated financial statements may materially change relative to historical consolidated financial statements, due to, among other things, revisions to our operating plans pursuant to a plan of reorganization. We also may be required to adopt fresh start accounting, in which case our assets and liabilities will be recorded at fair value as of the fresh start reporting date. Such value may differ materially from the recorded values of assets and liabilities on our consolidated balance sheets. Our financial results after the application of fresh start accounting also may be different from historical trends.
We have experienced, and may continue to experience, increased levels of employee attrition as a result of the Chapter 11 Cases.
As a result of the Chapter 11 Cases, we have experienced, and may continue to experience, increased levels of employee attrition, and our employees have faced, and likely will continue to face, considerable distraction and uncertainty. A loss of key personnel or material erosion of employee morale could adversely affect our business and results of operations. Our ability to engage, motivate and retain key employees or take other measures intended to motivate and incentivize key employees to remain with us through the pendency of the Chapter 11 Cases may be limited by restrictions on implementation of incentive programs under the Bankruptcy Code. On July 25, 2022, the Bankruptcy Court approved a key employee retention program for key non-insider employees. The loss of services of members of our senior management team and other employees could impair our ability to execute our strategy and implement operational initiatives, which would be likely to have a material adverse effect on our business, financial condition and results of operations.
Our post-bankruptcy capital structure has yet to be implemented, and any changes to our capital structure may have a material adverse effect on existing debt and security holders, including holders of our Class A Common Stock.
Our proposed post-bankruptcy capital structure will be set pursuant to the Plan that requires Bankruptcy Court approval. The reorganization of our capital structure may include exchanges of new debt or equity securities for our existing debt, equity securities, and claims against us. Such new debt may be issued at different interest rates, payment schedules and maturities than our existing debt securities.
If our proposed Plan is approved by the Bankruptcy Court, existing securities, including our Class A Common Stock, will be cancelled without receiving any distribution. The success of a reorganization through any such exchanges or modifications will depend on approval by the Bankruptcy Court and the willingness of existing debt and security holders to agree to the exchange or modification, subject to the provisions of the Bankruptcy Code, and there can be no guarantee of success. If such exchanges or modifications are successful, holders of our debt or of claims against us may find their holdings no longer have any value or are materially reduced in value, or they may be converted to equity and be diluted or may be modified or replaced by debt with a principal amount that is less than the outstanding principal amount, longer maturities and reduced interest rates. Holders of our Class A Common Stock may also find that their holdings no longer have any value and face highly uncertain or no recoveries under a plan. There can be no assurance that any new debt or equity securities will maintain their value at the time of issuance. If existing debt or equity holders are adversely affected by a reorganization, it may adversely affect our ability to issue new debt or equity in the future. Although we cannot predict how the claims and interests of stakeholders in the Chapter 11 Cases, including holders of Class A Common Stock, will ultimately be resolved, we expect that Class A common stockholders will not receive a recovery through any plan of reorganization unless the holders of more senior claims and interests, such as secured and unsecured indebtedness (which is currently trading at a significant discount), are paid in full. Consequently, there is a significant risk that the holders of our Class A Common Stock would receive no recovery under the plan of reorganization and that our Class A Common Stock will be worthless.
22
The Plan is based upon assumptions that we developed that may prove incorrect and could render the Plan unsuccessful.
The Plan and the restructuring transactions contemplated thereby reflect assumptions and analyses based on our experience and perception of historical trends, current conditions, management’s plans, and expected future developments, as well as other factors that we consider appropriate under the circumstances. The feasibility of the Plan for confirmation purposes under the Bankruptcy Code relies on financial projections we developed in connection with developing our business plan, including with respect to revenues, EBITDA, debt service, and cash flow. Financial forecasts are necessarily speculative, and it is likely that one or more of the assumptions and estimates that are the basis of these financial forecasts will not be accurate.
Whether actual future results and developments will be consistent with our expectations and assumptions depends on a number of factors, including, but not limited to: (i) the ability to maintain customers’ confidence in our viability as a continuing entity and to attract and retain sufficient business from them; (ii) the ability to retain key employees; and (iii) the overall strength and stability of general economic conditions in the United States and in the specific markets in which we currently do business. The failure of any of these factors could not only vitiate the projections and analyses that informed the Plan, but also otherwise materially adversely affect the successful reorganization of our businesses.
We expect that our actual financial condition and results of operations may differ, perhaps materially, from what was anticipated. Consequently, there can be no assurance that the results or developments contemplated by the Plan (or any other plan of reorganization we may implement) will occur or, even if they do occur, that they will have the anticipated effects on us and our subsidiaries or our businesses or operations. The failure of any such results or developments to materialize as anticipated could materially adversely affect the successful execution of the Plan.
The allowed amount of claims and the estimated percentage of recoveries set forth in the proposed Disclosure Statement may differ from current estimates.
There can be no assurance that the estimated claim amounts set forth in the proposed Disclosure Statement are correct, and the actual amount of allowed claims may differ materially from the estimates. There can be no assurance that the allowed amount of claims in Classes 9(a) (talc personal injury claims), 9(b) (non-qualified pension claims), 9(c) (trade claims), and 9(d) (other general unsecured claims) will not be significantly more than currently estimated, which, in turn could cause the estimated value of distributions to be reduced substantially. The estimated amounts are subject to certain risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, the actual amount of allowed claims may vary materially from those estimated in the proposed Disclosure Statement.
Furthermore, although the Claims Bar Date (as defined below) has passed, on March 7, 2023, the Bankruptcy Court entered an order extending the Claims Bar Date for claimants alleging harm from the Company’s chemical hair straightening/hair relaxer products (such claimants, the “Hair Relaxer Claimants”) to April 11, 2023 for such claimants. To be entitled to vote on the Plan, Hair Relaxer Claimants must file a simplified proof of claim online by March 23, 2023. As a result, we anticipate that numerous additional personal injury claims will be filed against the Debtors relating to chemical hair straighteners and/or hair relaxer products. If additional claims are filed, the recovery for each allowed claim in Class 9(d) (other general unsecured claims) may be reduced.
Parties-in-Interest may object to our classification of claims and interests.
Section 1122 of the Bankruptcy Code provides that a plan may place a claim or an equity interest in a particular class only if such claim or equity interest is substantially similar to the other claims or equity interests in such class. We believe that the classification of claims and interests under the Plan complies with the requirements set forth in the Bankruptcy Code because we created classes of claims and interests, each encompassing claims or interests, as applicable, that are substantially similar to the other claims or interests in each such class. Nevertheless, there can be no assurance that the Bankruptcy Court will reach the same conclusion.
The consenting unsecured noteholder recovery in the Plan may not be approved.
The Plan provides that if Class 8 (unsecured notes claims) does not accept the Plan, holders of such claims that vote to accept the Plan on account of their claim and do not, directly or indirectly, object to, or otherwise impede, delay, or interfere with, solicitation, acceptance, confirmation, or consummation of the Plan, will receive the Consenting Unsecured Noteholder Recovery (as defined in the Plan), unless the Bankruptcy Court finds that such Consenting Unsecured Noteholder Recovery is improper. The Consenting Unsecured Noteholder Recovery may be subject to substantial challenges, including on the basis that it provides unequal treatment within Class 8 pursuant to section 1123(a)(4) of the Bankruptcy Code, or is other otherwise impermissible under applicable bankruptcy law. If the Bankruptcy Court were to sustain any such challenge, consenting
23
unsecured noteholders would not be eligible to receive the Consenting Unsecured Noteholder Recovery. As such, members of Class 8 should not rely on the Consenting Unsecured Noteholder Recovery in making a decision to vote to accept the Plan.
Releases, injunctions and exculpations in the Plan may not be approved.
Article X of the Plan provides for certain releases, injunctions, and exculpations, including a release of liens and causes of action that may otherwise be asserted against the Debtors, Reorganized Holdings, or released parties, as applicable. The releases, injunctions, and exculpations provided in the Plan are subject to objection by parties and may not be approved. If the releases, injunctions, and exculpations are not approved, certain released parties may withdraw their support for the Plan. The releases provided to the released parties and the exculpation provided to the exculpated parties are necessary to the success of the Debtors’ reorganization because the released parties and exculpated parties have made significant contributions to the Debtors’ reorganization efforts and have agreed to make further contributions, including by agreeing to convert certain of their claims against the Debtors’ estates into equity in Reorganized Holdings, but only if they receive the full benefit of the Plan’s release and exculpation provisions. The Plan’s release and exculpation provisions are an inextricable component of the Restructuring Support Agreement and the significant deleveraging and financial benefits embodied in the Plan.
In certain instances, a Chapter 11 case may be converted to a case under Chapter 7 of the Bankruptcy Code, in which case our Class A Common Stock would likely be worthless.
There can be no assurance as to whether we will successfully reorganize and emerge from the Chapter 11 Cases or, if we do successfully reorganize, as to when we would emerge from the Chapter 11 Cases. If the Bankruptcy Court finds that it would be in the best interest of creditors and/or the Debtors, the Bankruptcy Court may convert our Chapter 11 Cases to cases under Chapter 7 of the Bankruptcy Code. In such event, a Chapter 7 trustee would be appointed or elected to liquidate the Debtors’ assets for distribution in accordance with the priorities established by the Bankruptcy Code. We believe that liquidation under Chapter 7 would result in significantly smaller distributions being made to our creditors than those provided for in a Chapter 11 plan or reorganization because of (i) the likelihood that the assets would have to be sold or otherwise disposed of in a disorderly fashion over a short period of time rather than reorganizing or selling in a controlled manner the Debtors’ businesses as a going concern, (ii) additional administrative expenses involved in the appointment of a Chapter 7 trustee, and (iii) additional expenses and claims, some of which would be entitled to priority, that would be generated during the liquidation and from the rejection of leases and other executory contracts in connection with a cessation of operations. We believe our Class A Common Stock would receive no distribution if the Chapter 11 Cases were converted to cases under Chapter 7 of the Bankruptcy Code. Under the Plan, our Class A Common Stock will be cancelled without receiving any distribution. As a result, in either scenario, it is likely that our Class A Common Stock is worthless.
The Chapter 11 Cases are expected to render our Class A Common Stock worthless.
We have a substantial amount of indebtedness that is senior to the Company’s existing shares of Class A Common Stock in our capital structure. Recoveries in the Chapter 11 Cases for holders of Class A Common Stock, if any, will depend upon our ability to confirm the Plan (or another Chapter 11 plan), the terms of such plan, the performance of our business, the value of our assets and other factors. Under the proposed Plan, our Class A Common Stock will be cancelled without receiving any distribution. The Class A common stockholders will not receive any recovery unless the holders of more senior claims and interests, such as secured and unsecured indebtedness (which are not expected to recover in full under the Plan), are paid in full. Consequently, we expect that our Class A Common Stock will become worthless.
Trading in shares of our Class A Common Stock during the pendency of the Chapter 11 Cases is highly speculative and we expect that you will lose your investment.
The price of our Class A Common Stock has been volatile following the commencement of the Chapter 11 Cases. As described above, we expect that the Class A Common Stock will be worthless under the Plan. Accordingly, any trading in our Class A Common Stock during the pendency of our Chapter 11 Cases is highly speculative and poses substantial risks to purchasers of our Class A Common Stock. Furthermore, we have experienced extreme price and volume fluctuations in our Class A Common Stock that have often been unrelated or disproportionate to the operating performance of our Company and/or macro-industry and macroeconomic trends. These price and volume fluctuations have been due in large part to trading activity by retail investors and/or short sellers which has put and may continue to put pressure on the supply and demand for our Class A Common Stock, further increasing volatility in its market price. These and other external factors have caused and may continue to cause the market price and demand for our Class A Common Stock to fluctuate substantially. Accordingly, we cannot assure you of the liquidity of an active trading market, your ability to sell your shares of our Class A Common Stock when desired, or the prices that you may obtain for your shares of our Class A Common Stock.
The DIP Facilities may be insufficient to fund our business operations, or may be unavailable to us if we do not comply with certain covenants.
24
There can be no assurance that the revenue generated by our business operations and the cash made available to us under the DIP Facilities will be sufficient to fund our operations. There can be no assurance that additional financing would be available or, if available, offered on terms that are acceptable to us or the Bankruptcy Court. If, for one or more reasons, we need to and are unable to obtain such additional financing, our business and assets may be subject to liquidation under Chapter 7 and we may cease to continue as a going concern.
The DIP Facilities include affirmative and negative covenants applicable to us, including milestones related to the progress of the Chapter 11 Cases and compliance with a budget and maintenance of certain minimum liquidity. There can be no assurance that we will be able to comply with these covenants and meet our obligations as they become due or to comply with the other terms and conditions of the DIP Facilities. Any event of default under the DIP Facilities could imperil our ability to reorganize.
Additionally, limits on Products Corporation’s borrowing capacity under the DIP ABL Facility may affect our ability to finance our operations. At December 31, 2022, Products Corporation had $171.8 million in aggregate borrowings outstanding under the DIP ABL Facility. While the DIP ABL Facility provides for up to $270 million of revolving commitments, the Company’s ability to borrow funds under such facility is limited by a borrowing base determined relative to the value, from time-to-time, of certain eligible assets. Under the DIP ABL Facility, if the value of the Company's eligible assets is not sufficient to support the full borrowing base under the facility, Products Corporation will not have complete access to the entire commitment available under the facility, but rather would have access to a lesser amount as determined by the borrowing base. The applicable borrowers must prepay loans under the DIP ABL Facility to the extent that outstanding loans exceed its borrowing base.
As Products Corporation continues to manage its working capital (including its and its subsidiaries’ inventory and accounts receivable, which are significant components of the eligible assets comprising the borrowing base under the DIP ABL Facility), this could reduce the borrowing base under the DIP ABL Facility. Further, if Products Corporation borrows funds under the DIP ABL Facility, subsequent changes in the value or eligibility of the assets within the borrowing base could require Products Corporation to pay down amounts outstanding under such facility so that there is no amount outstanding in excess of the then-existing borrowing base.
If one or more lenders under the DIP ABL Facility are unable to fulfill their commitment to advance funds to Products Corporation under such facility, it would impact the Company’s liquidity and, depending upon the amount involved and the Company’s liquidity requirements, it could have an adverse effect on the Company’s ability to fund its operations, which could have a material adverse effect on the Company’s business, prospects, results of operations, financial condition and/or cash flows.
Recently, the Company’s working capital and borrowing base availability under the DIP ABL Facility has been negatively impacted by global supply chain issues which have affected the Company’s accounts receivable and inventory. These global supply chain issues have resulted from the COVID-19 pandemic and macroeconomic headwinds, and have led to the unavailability of raw materials and cost increases in raw materials, labor and transportation. Although the Company has taken actions to increase its liquidity, these global supply chain issues and other developments that may negatively affect the Company’s liquidity, such as the ongoing Russia-Ukraine conflict, may continue or recur in the future. Actions previously taken by the Company to address these issues, such as cost cutting, may have a negative effect on the future business and results of operations of the Company. There can be no assurance that these global supply chain issues and other developments will not impact the Company’s liquidity in the future. If the Company is unable to finance its business on either a short-term or long-term basis due to a decrease in borrowing capacity or liquidity, it could result in a material adverse effect on the Company’s business, prospects, results of operations, financial condition and/or cash flows.
At December 31, 2022, the Company had a liquidity position of $308.3 million, consisting of: (i) $249.3 million of unrestricted cash and cash equivalents (with approximately $94.6 million held outside the U.S.); (ii) $60.4 million in available borrowing capacity under the DIP ABL Facility (which had $41.8 million drawn at such date); and less (iii) approximately $1.4 million of outstanding checks. See Note 8, “Debt,” to the Company's Consolidated Financial Statements in this Form 10-K and “Recent Debt Transactions” in Item 7. “Combined Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
The Company's ability to service its debt and meet its cash requirements depends on many factors, including achieving anticipated levels of revenue and expenses. If such revenue or expense levels prove to be other than as anticipated, the Company may be unable to meet its cash requirements or Products Corporation may be unable to meet the requirements of
25
the DIP Term Loan Facility and/or the DIP ABL Facility, which could have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows.
The Company currently expects that operating revenues, cash on hand, and funds that may be available for borrowing under the DIP ABL Facility and other permissible borrowings will be sufficient to enable the Company to cover its operating expenses for the first half of 2023, including: cash requirements for the payment of expenses in connection with executing the Company's business initiatives and its advertising, promotional, pricing and/or marketing plans; purchases of permanent wall displays; capital expenditure requirements; debt service payments and costs; cash tax payments; pension and other post-retirement plan contributions; payments in connection with the Company's restructuring programs (including, without limitation, the 2018 Optimization Program and the Revlon 2020 Restructuring Program (subsequently renamed during 2021 as RGGA, as hereinafter defined)); severance not otherwise included in the Company's restructuring programs; business and/or brand acquisitions (including, without limitation, through licensing transactions), if any; costs related to litigation; and payments in connection with discontinuing non-core business lines and/or exiting and/or entering certain territories and/or channels of trade. See Note 8, “Debt,” to the Company's Consolidated Financial Statements in this Form 2022 10-K and “Recent Debt Transactions” in Item 7. “Combined Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
However, if the Company's anticipated level of revenue is not achieved because of, for example, decreased consumer spending in response to challenging economic conditions or weakness in the consumption of beauty products in one or more of the Company's segments; adverse changes in tariffs, foreign currency exchange rates, foreign currency controls and/or government-mandated pricing controls; decreased sales of the Company's products as a result of increased competitive activities by the Company's competitors and/or decreased performance by third-party suppliers, whether due to shortages of raw materials or otherwise; changes in consumer purchasing habits, including with respect to retailer preferences and/or sales channels, such as due to the consumption declines in core beauty categories in the mass retail channel in North America; inventory management by the Company's customers; space reconfigurations or reductions in display space by the Company's customers; retail store closures in brick-and-mortar channels where the Company sells its products, as consumers continue to shift purchases to online and e-commerce channels; changes in pricing, marketing, advertising and/or promotional strategies by the Company's customers; less than anticipated results from the Company's existing or new products or from its advertising, promotional, pricing and/or marketing plans; or if the Company's expenses, including, without limitation, those for pension expense under its benefit plans, capital expenditures, restructuring and severance costs (including, without limitation, for the 2018 Optimization Program and the Revlon 2020 Restructuring Program (subsequently renamed during 2021 as RGGA)), acquisition and integration costs, costs related to litigation, advertising, promotional or marketing activities or for sales returns related to any reduction of space by the Company's customers, product discontinuances or otherwise, exceed the anticipated level of expenses, the Company's current sources of funds may be insufficient to meet its cash requirements. In addition, such developments, if significant, could reduce the Company's revenues and could have a material adverse effect on the DIP Facilities (See also Item 1A. Risk Factors - "The DIP Facilities may be insufficient to fund our business operations, or may be unavailable to us if we do not comply with certain covenants," which discusses, among other things, the consequences of noncompliance with Products Corporation's debt covenants under the DIP Facilities).
If the Company's operating revenues, cash on hand and/or funds that may be available for borrowing are insufficient to cover the Company's expenses and/or are insufficient to enable Products Corporation to comply with the requirements of the DIP Facilities, the Company could be required to adopt one or more of the alternatives listed below:
•delaying the implementation of or revising certain aspects of the Company's business initiatives;
•reducing or delaying purchases of wall displays and/or expenses related to the Company's advertising, promotional and/or marketing activities;
•reducing or delaying capital spending;
•implementing new 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; and/or
•reducing other discretionary spending.
The Company may not be able to take any of these actions because of a variety of commercial or market factors or constraints in one or more of Products Corporation's various debt instruments, including, for example, additional capital contributions or loans not being available from affiliates and/or third parties, or that the transactions may not be permitted under the terms of one or more of Products Corporation's various debt instruments then in effect, such as due to restrictions on the
26
incurrence of debt, incurrence of liens, asset dispositions and/or related party transactions. If the Company is required to take any of these actions, it could have a material adverse effect on its business, prospects, results of operations, financial condition and/or cash flows.
Such actions, if ever taken, may not enable the Company to satisfy its cash requirements or enable Products Corporation and its subsidiaries to comply with the terms of the DIP Facilities if the actions do not result in sufficient cost reductions or generate a sufficient amount of additional capital, as the case may be. (See also Item "Risk Factors - "The DIP Facilities may be insufficient to fund our business operations, or may be unavailable to us if we do not comply with certain covenants," which discusses, among other things, the consequences of noncompliance with Products Corporation's debt covenants under the DIP Facilities).
Risks Related to Securities to be Issued Under the Plan Generally
There is no public market for the securities to be issued under the Plan.
If the Plan is confirmed by the Bankruptcy Court, Reorganized Holdings is expected to emerge from Chapter 11 bankruptcy as a privately held company and its outstanding equity is expected to be cancelled. There will be no public market for the new common stock (the “New Common Stock”) or new warrants (the “New Warrants”) to be issued under the Plan and there can be no assurance as to the development or liquidity of any market for the New Common Stock, or New Warrants, or that such securities will be listed upon any national securities exchange or any over-the-counter market after the effective date. If a trading market does not develop, is not maintained, or remains inactive, holders of the New Common Stock and New Warrants may experience difficulty in reselling such securities or may be unable to sell them at all. Even if such a market were to exist, the price of such securities will depend upon many factors, including, without limitation, prevailing interest rates, markets for similar securities, industry conditions, and the performance of, and investor expectations for, Reorganized Holdings. Furthermore, persons to whom the New Common Stock or New Warrants are issued pursuant to the Plan may prefer to liquidate their investments rather than hold such securities on a long-term basis. Accordingly, the market price for such securities could decline and any market that does develop for such securities may be volatile.
The securities to be issued under the Plan will be subject to dilution.
The ownership percentage represented by the New Common Stock distributed on the effective date under the Plan will be subject to dilution from the equity issued in connection with the (i) Equity Rights Offering (including the Backstop Commitment Premium (as defined in this 2022 Form 10-K)), (ii) the management incentive plan, (iii) the exercise of the New Warrants, (iv) other post-emergence issuances and (v) the conversion of any options, warrants, convertible securities, exercisable securities, or other securities that may be issued post-emergence.
No dividends will be paid on the securities to be issued under the Plan.
Reorganized Holdings does not anticipate paying any dividends on the New Common Stock as it expects to retain any future cash flows for debt reduction and to support its operations. In addition, covenants in the documents governing Reorganized Holdings’ indebtedness may restrict its ability to pay cash dividends and may prohibit the payment of dividends and certain other payments. As a result, the success of an investment in the New Common Stock (including the New Common Stock issuable upon the exercise of the New Warrants) will depend entirely upon any future appreciation in the value of the New Common Stock. There is, however, no guarantee that the New Common Stock will appreciate in value or even maintain its initial value.
The New Common Stock and New Warrants to be issued under the Plan will be subordinated to the indebtedness of Reorganized Holdings.
In any future liquidation, dissolution, or winding up of Reorganized Holdings, the New Common Stock and the New Warrants will rank below all debt claims against Reorganized Holdings including claims under the definitive documents pertaining to the Exit Facilities (the "Exit Facilities Documents"). Therefore, holders of the New Common Stock and/or the New Warrants will not be entitled to receive any payment or other distribution of assets upon the liquidation, dissolution, or winding up of Reorganized Holdings until after all Reorganized Holdings’ obligations to its debt holders have been satisfied.
The ownership of the New Common Stock and/or New Warrants may be concentrated.
Certain holders of allowed claims are expected to acquire a significant ownership interest in the New Common Stock and/or New Warrants pursuant to the Plan. If such holders were to act as a group, such holders would be in a position to control the outcome of all actions requiring stockholder approval, including the election of directors, without the approval of other
27
stockholders. This concentration of ownership could also facilitate or hinder a negotiated change of control of Reorganized Holdings and, consequently, have an impact upon the value of the New Common Stock and/or New Warrants.
Risks Related to Reorganized Holdings
We may be subject to claims that may not be discharged in the Chapter 11 Cases, which could have a material adverse effect on the financial condition and results of operations of Reorganized Holdings.
The Bankruptcy Code provides that the confirmation of a Chapter 11 plan of reorganization discharges a debtor from substantially all debts arising prior to confirmation. With few exceptions, all claims that arose prior to confirmation of the plan of reorganization (i) would be subject to compromise and/or treatment under the plan of reorganization and (ii) would be discharged in accordance with the Bankruptcy Code and the terms of the plan of reorganization. The Company currently faces the potential for numerous products liability claims brought by the Hair Relaxer Claimants. In late January, these claimants filed various motions seeking to extend the Claims Bar Date for such claims, or, in the alternative, leave to file late proofs of claims. On March 6, 2023, the Debtors filed a statement in response to these motions, which included a proposal to extend the Claims Bar Date for Hair Relaxer Claimants. On March 7, 2023, the Bankruptcy Court approved the relief sought in the Debtors’ response and entered an order extending the Claims Bar Date for Hair Relaxer Claimants to April 11, 2023. To be entitled to vote on the Plan, Hair Relaxer Claimants must file a simplified proof of claim by March 23, 2023. The Company believes that the claims raised by the Hair Relaxer Claimants are dischargeable and without merit. The Company is not currently aware of any material claims against a Debtor that would not be discharged in the Chapter 11 cases, however, any claims not ultimately discharged through a Chapter 11 plan of reorganization could be asserted against Reorganized Holdings and may have an adverse effect on our financial condition and results of operations on a post-reorganization basis.
Upon emergence from Chapter 11 bankruptcy, future liability claims could adversely affect the financial condition and results of operations of Reorganized Holdings.
Parties may assert in the future certain liability claims, including, but not limited to, claims related to the presence of talc in certain products sold by the Company and/or claims raised by the Hair Relaxer Claimants. While the Company believes that such claims do not have merit, such claims could cause reputational damage for the Company. Such claims could also result in liability that could adversely affect the business and financial results of Reorganized Holdings. It is not possible to predict with certainty the potential claims that Reorganized Holdings may face, nor the final resolution of such claims. The impact of any such claim on the business and financial stability of Reorganized Holdings could be adverse and material.
Upon emergence from Chapter 11 bankruptcy, Reorganized Holdings will be subject to risks related to its substantial indebtedness.
On the effective date, on a consolidated basis, it is expected that Reorganized Holdings will have total secured, outstanding indebtedness of approximately $1.8 billion, which is expected to consist of the Exit Facilities, as described above. This level of expected indebtedness and the funds required to service such debt could, among other things, make it difficult for Reorganized Holdings to satisfy its obligations under such indebtedness, increasing the risk that it may default on such debt obligations.
Reorganized Holdings’ earnings and cash flow may vary significantly from year to year. Additionally, Reorganized Holdings’ future cash flow may be insufficient to meet its debt obligations and commitments. Any insufficiency could negatively impact Reorganized Holdings’ business. A range of economic, competitive, business, and industry factors will affect Reorganized Holdings’ future financial performance and, as a result, its ability to generate cash flow from operations and to pay its debt. Many of these factors are beyond its control.
If Reorganized Holdings does not generate enough cash flow from operations to satisfy its debt obligations, it may have to undertake alternative financing plans, such as:
a.refinancing or restructuring debt;
b.selling assets;
c.reducing or delaying capital investments; or
d.seeking to raise additional capital.
It cannot be assured, however, that undertaking alternative financing plans, if necessary, would be possible on commercially reasonable terms, or at all, and allow Reorganized Holdings to meet its debt obligations. An inability to generate sufficient cash flow to satisfy its debt obligations or to obtain alternative financing could materially and adversely affect the Reorganized Holdings’ ability to make payments on the Exit Facilities, as well as Reorganized Holdings’ business, financial condition, results of operations, and prospects.
28
“The Exit Facilities Documents”) will contain restrictions, limitations, and specific covenants that could significantly affect Reorganized Holdings’ ability to operate its business, as well as adversely affect its liquidity, and therefore could adversely affect its results of operations. These covenants are expected to restrict its ability (subject to certain exceptions) to: (i) incur additional indebtedness and guarantee indebtedness; (ii) pay dividends or make other distributions or repurchase or redeem capital stock; (iii) prepay, redeem, or repurchase certain debt; (iv) make loans and investments; (v) sell assets; (vi) incur liens; (vii) enter into transactions with affiliates; (viii) alter the businesses it conducts; (ix) enter into agreements restricting any restricted subsidiary’s ability to pay dividends; and (x) consolidate, merge, or sell all or substantially all of its assets.
As a result of these restrictive covenants in the Exit Facilities Documents, Reorganized Holdings may be:
a.limited in how it conducts its business;
b.unable to raise additional debt or equity financing;
c.unable to compete effectively or to take advantage of new business opportunities; or
d.limited or unable to make certain changes in its business and to respond to changing circumstances;
any of which could have a material adverse effect on its financial condition or results of operations.
Borrowings under the Exit Facilities Documents are at variable rates of interest and will expose Reorganized Holdings to interest rate risk, which could cause Reorganized Holdings’ debt service obligations to increase significantly. If interest rates increase, Reorganized Holdings’ debt service obligations on variable rate indebtedness would increase even though the amount borrowed remained the same, and its net income and cash flow available for capital expenditures and debt repayment would decrease. As a result, a significant increase in interest rates could have a material adverse effect on Reorganized Holdings’ financial condition.
Risks Related to the Company’s Industry, Business and Operations
The COVID-19 pandemic resulted in significantly decreased net sales for the Company particularly during 2020 and has had, and could continue to have, a significant adverse effect on the Company's business, results of operations, financial condition and/or cash flows.
The COVID-19 pandemic has had, and continues to periodically have, an adverse effect on the Company’s business around the globe, which could continue for the foreseeable future. These adverse conditions contributed to a significant decline in net sales within each of the Company’s reporting segments and regions worldwide, particularly in 2020. However, with the roll out of COVID-19 vaccinations in the United States in 2021 and the gradual easing of COVID-19 restrictions in 2021, the Company saw a gradual rebound in consumer spending and consumption in 2021. With the accelerated loosening of COVID-19 restrictions in 2022, the Company saw a robust rebound in consumer spending and consumption in 2022.
The COVID-19 pandemic has also caused the Company and various of its key third party suppliers to from time to time temporarily close or restrict operations at one or more of their manufacturing facilities which has resulted in a shortage of raw materials, components and finished products. These shortages have in turn caused the Company to be unable to ship products to retailers and consumers from time to time, which has adversely impacted the Company’s net sales. Also, if one or more of the Company’s key customers were required to close for an extended period, the Company might not be able to ship products to them and consumers may decrease their level of purchasing activity, which would adversely impact the Company’s net sales. In addition, U.S. and/or foreign governmental authorities may from time to time recommend or impose other measures, such as China's former Zero Covid Policy, that could cause significant disruptions to the Company’s business operations in the regions most impacted by the coronavirus. The continuation of any of the foregoing events or other unforeseen consequences of the COVID-19 pandemic would significantly adversely affect the Company’s business, results of operations, financial condition and/or cash flows. The Company continues to closely monitor the associated impacts of COVID-19, including the impacts of any new variants of COVID-19 and subsequent “waves” of the pandemic, and will take appropriate actions in an effort to mitigate the COVID-19 pandemic’s negative effects on the Company’s operations and financial results.
The Company depends on its Oxford, North Carolina facility for production of a substantial portion of its products. Disruptions or delays at this facility and/or at other Company or third-party facilities at which the Company's products are manufactured could have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows. Such delays and difficulties in manufacturing can result in product shortages, declines in sales, and reputational impact as well as significant remediation and related costs associated with addressing such shortages.
The Company produces a substantial portion of its products at its Oxford, North Carolina facility. Significant unscheduled downtime or a reduction in capacity at this facility, or at other Company facilities and/or third-party facilities at which the Company's products are manufactured, whether due to the impact of the Company's Chapter 11 Cases and related vendor
29
negotiations or to equipment breakdowns, power failures, natural disasters (due to climate change or otherwise), pandemics (including COVID-19), weather conditions hampering delivery schedules, shortages of raw materials and products, technology disruptions or other disruptions, including those caused by transitioning manufacturing across these facilities, or any other cause could have a material adverse effect on the Company's ability to provide products to its customers, which could have a material adverse effect on the Company's sales, business, prospects, reputation, results of operations, financial condition and/or cash flows. For example, as of December 31, 2022, the Oxford, North Carolina facility was operating at 44% of its production utilization. Additionally, if product sales exceed the Company's forecasts, internal or third-party production capacities and/or the Company's ability to procure sufficient levels of finished goods, raw materials and/or components from third-party suppliers, the Company could, from time-to-time, not have an adequate supply of products to meet customer demand, which could have a material adverse effect on the Company's business, prospects, reputation, results of operations, financial condition and/or cash flows.
Volatility in costs, along with delays and disruptions in the supply of materials and services, as a result of the recent global supply chain disruptions, could have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows.
The Company purchases raw materials, including essential oils, alcohols, chemicals, containers and packaging components, from various third-party suppliers. Substantial cost increases delays and the unavailability of raw materials or other commodities, as a result of ongoing vendor negotiations during the Chapter 11 Cases and continued global supply chain disruptions, and higher costs for energy, transportation and other necessary services have adversely affected and may continue to adversely affect the Company’s profit margins if it is unable to wholly or partially offset them, such as by achieving cost efficiencies in its supply chain, manufacturing and/or distribution activities. In addition, the Company purchases certain finished goods, raw materials, packaging and other components from single-source suppliers or a limited number of suppliers and if the Company is required to find alternative sources of supply, these new suppliers may have to be qualified under applicable industry, governmental and Company-mandated vendor standards, which can require additional investment and be time-consuming. Any significant disruption to the Company’s manufacturing or sourcing of products or raw materials, packaging and other components for any reason (including the continued global supply chain disruptions) could materially impact the Company’s inventory levels and interrupt and delay the Company’s supply of products to its retail customers.
Also, the Company is continually looking for opportunities to provide essential business services in a more cost-effective manner. In some cases, the Company outsources certain functions that it believes can be performed more efficiently by third parties, such as in the areas of IT, finance, tax and human resources. These third parties could fail to provide the expected level of services, provide them on a timely basis or to provide them at the expected fees. Such events, if not promptly remedied, could have a material adverse effect on the Company’s business, prospects, reputation, results of operation, financial condition and/or cash flows.
The Company's financial performance depends on its ability to anticipate and respond to consumer trends and changes in consumer preferences. New product introductions may not be as successful as the Company anticipates, which could have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows.
The Company has a rigorous process for the continuous development and evaluation of new product concepts, led by executives in marketing, sales, research and development, product development, operations, law and finance. However, consumer preference and spending patterns change rapidly and cannot be predicted with certainty. There can be no assurance that the Company will anticipate and respond to trends for beauty products effectively. Each new product launch, including those resulting from the Company's recently updated product development process, carries risks, as well as the possibility of unexpected consequences, including:
•the acceptance of the Company's new product launches by, and sales of such new products to, the Company's customers may not be as high as the Company anticipates;
•the Company's marketing, promotional, advertising and/or pricing strategies for its new products may be less effective than planned and may fail to effectively reach the targeted consumer base or engender the desired consumption of the Company's products by consumers;
•the rate of purchases by the Company's consumers may not be as high as the Company anticipates;
•the Company's wall displays to showcase its new products may fail to achieve their intended effects;
•the Company may experience out-of-stocks and/or product returns exceeding its expectations as a result of the Company's new product launches or space reconfigurations or as a result of reductions in retail display space by the Company's customers;
30
•the Company's net sales may also be impacted by inventory management by its customers or changes in pricing, marketing, advertising and/or promotional strategies by its customers;
•the Company may incur costs exceeding its expectations as a result of the continued development and launch of new products, including, for example, unanticipated levels of research and development costs, advertising, promotional and/or marketing expenses, sales return expenses or other costs related to launching new products;
•the Company may experience a decrease in sales of certain of the Company's existing products as a result of newly-launched products, the impact of which could be exacerbated by shelf space limitations and/or any shelf space loss. (See also Item 1A. Risk Factors - "Competition in the beauty industry could have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows.").
•the Company's product pricing strategies for new product launches may not be accepted by its customers and/or its consumers, which may result in the Company's sales being less than it anticipates;
•continued global supply chain disruptions and difficulty in procuring raw materials could delay the Company’s development or introduction of new products or require the Company to make unexpected changes to its products;
•the Company may experience a decrease in sales of certain of the Company's products as a result of counterfeit products and/or products sold outside of their intended territories; and/or
•delays or difficulties impacting the Company's ability, or the ability of the Company's suppliers, to timely manufacture, distribute and ship products or raw materials, as the case may be, displays or display walls in connection with launching new products, such as due to inclement weather conditions or other delays or difficulties (such as those discussed under Item 1A. Risk Factors - "The Company depends on its Oxford, North Carolina facility for production of a substantial portion of its products. Disruptions or delays at this facility and/or at other Company or third-party facilities at which the Company's products are manufactured could have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows. Such delays and difficulties in manufacturing can result in product shortages, declines in sales, and reputational impact as well as significant remediation and related costs associated with addressing such shortages."), could have a material adverse effect on the Company's ability to ship and deliver products to meet its customers’ reset deadlines.
Each of the risks referred to above could delay or impede the Company's ability to achieve its sales objectives, which could have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows.
The Company depends on a limited number of customers for a large portion of its net sales, and the loss of one or more of these customers could reduce the Company's net sales and have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows.
Walmart and its affiliates worldwide accounted for approximately 14% of the Company’s worldwide net sales in both 2022 and 2021. The Company expects that, for future periods, Walmart and a small number of other customers will, in the aggregate, continue to account for a large portion of the Company's net sales. The Company may be affected by changes in the policies and demands of its customers relating to service levels, inventory de-stocking, pricing, marketing, advertising and/or promotional strategies or limitations on access to wall display space. As is customary in the consumer products industry, none of the Company's customers is under any obligation to continue purchasing products from the Company in the future.
The loss of Walmart and/or one or more of the Company's other customers that account for a significant portion of the Company's net sales, or any significant decrease in sales to these customers, including as a result of consolidation among such customers, retail store closures in response to the growth in retail sales through e-commerce channels, inventory management by these customers, changes in pricing, marketing, advertising and/or promotional strategies by such customers, space reconfigurations by the Company's customers or any significant decrease in the Company's display space, could reduce the Company's net sales and/or operating income and therefore could have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows.
31
The Company may be unable to maintain or increase its sales through the Company's primary retailers, which could have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows.
A decrease in consumer demand in the U.S. and/or internationally for beauty products, including as a result of inventory management by the Company's customers, changes in pricing, marketing, advertising and/or promotional strategies by the Company's customers (such as the development and/or continued expansion of private label or their own store-owned brands), a reduction in display space by the Company's customers, store closures in the brick-and-mortar channels where the Company sells its products, as consumers continue to shift purchases to online and e-commerce channels and/or a change in consumers’ purchasing habits, such as with respect to retailer preferences and/or sales channels, could result in decreased sales of the Company's products, which could have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows.
Competition in the beauty industry could have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows.
The beauty industry is highly competitive. The Company competes primarily by:
•developing quality products with innovative performance features, shades, finishes, components and packaging;
•educating consumers, retail customers and salon professionals about the benefits of the Company’s products both on-line and in brick and mortar retail outlets;
•anticipating and responding to changing consumer, retail customer and salon professional demands in a timely manner, including as to the timing of new product introductions and line extensions;
•offering attractively priced products relative to the product benefits provided;
•maintaining favorable brand recognition;
•generating competitive margins and inventory turns for the Company’s customers by providing relevant products and executing effective pricing, incentive and promotional programs and marketing and advertising campaigns, as well as social media and influencer marketing activities;
•ensuring product availability through effective planning and replenishment collaboration with the Company's customers;
•providing strong and effective advertising, promotion, marketing, social media, influencer and merchandising support;
•leveraging e-commerce, social media and mobile commerce initiatives and developing an effective omni-channel strategy to optimize the opportunity for consumers to interact with and purchase the Company's products both on-line and in brick and mortar retail outlets;
•maintaining an effective sales force and distribution network; and
•obtaining and retaining sufficient display space, optimal in-store positioning and effective presentation of the Company’s products on-shelf.
An increase in or change in the current level of competition that the Company faces could have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows.
In addition to competing with expanding private label and store-owned brands, the Company competes against a number of multi-national manufacturers, some of which are larger and have substantially greater resources than the Company, and which may therefore have the ability to spend more aggressively than the Company on new business acquisitions, research and development activities, technological advances to evolve in their e-commerce capabilities and advertising, promotional, social media influencer and/or marketing activities and have more flexibility than the Company to respond to changing business and economic conditions.
Additionally, the Company's major customers periodically assess the allocation of display space among competitors and in the course of doing so could elect to reduce the display space allocated to the Company's products, if, for example, the Company's marketing, promotional, advertising and/or pricing strategies for its new and/or existing products are less effective than planned, fail to effectively reach the targeted consumer base, fail to engender the desired consumption of the Company's products by consumers and/or fail to sustain productive levels of consumption dollar share and/or the rate of purchases by the Company's consumers are not as high as the Company anticipates. Among the factors used by the Company’s major customers in assessing the allocation of display space is a brand’s share of the color cosmetics category. The Company's color cosmetics
32
brands have experienced, over time, year-over-year declines in their share of the color cosmetics category in the U.S. and it is possible that the Company may continue to experience further share declines. Further declines in the Company's share for one or more of its principal brands could, among other things, contribute to the additional loss of display space and/or decreased revenues. Any significant loss of display space could have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows.
The Company's Fragrances segment depends on various brand licenses and distribution arrangements for a significant portion of its sales, and the loss of one or more of these licenses or distribution arrangements could have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows.
The Company’s rights to market and sell certain of its prestige fragrance brands are derived from licenses and other distribution arrangements from unaffiliated third parties and such business is dependent upon the continuation and renewal of such licenses and distribution arrangements on terms favorable to the Company. Each license is for a specific term and may have optional renewal terms. In addition, such licenses and distribution arrangements may be subject to the Company satisfying required minimum royalty payments, minimum advertising and promotional expenditures and satisfying minimum sales requirements. In addition, under certain circumstances, lower net sales may shorten the duration of the applicable license agreement. The loss of one or more of these licenses or other significant distribution arrangements, renewal of one or more of these arrangements on less than favorable terms, the failure to renew one or more of these arrangements and/or difficulties in finding replacement brand licenses for terminated or expired licenses could have a material adverse effect on the Company’s business, prospects, results of operations, financial condition and/or cash flows.
The success of the Company's Fragrances segment depends, in part, on the demand for heritage and designer fragrance products. A decrease in demand for such products, or the loss or infringement of any intellectual property rights, could have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows.
The Company's Fragrances segment has license agreements to manufacture, market and distribute a number of heritage and designer fragrance products, including those of (i) Juicy Couture, John Varvatos and AllSaints in prestige fragrances; (ii) Britney Spears, Christina Aguilera, Elizabeth Taylor, and Jennifer Aniston in celebrity fragrances; and (iii) Ed Hardy, Lucky Brand and Geoffrey Beene in mass fragrances. In 2022, the Company's Fragrances segment derived approximately 75% of its net sales from heritage and designer fragrance brands. The demand for these products is affected by general economic conditions, and, to some extent, dependent on the appeal to consumers of the particular designer or talent and the designer’s or talent’s reputation. The Company also cannot assure that the owners of the trademarks that it licenses can or will successfully maintain their intellectual property rights. If other parties infringe on the intellectual property rights that the Company licenses, the value of such brands in the marketplace may be diluted. To the extent that the heritage or designer fragrance category or a particular designer or talent ceases to be appealing to consumers or a designer’s or talent’s reputation is adversely affected, sales of the related products and the value of the impacted brands could decrease materially, which could have a material adverse effect on the Company’s business, prospects, results of operations, financial condition and/or cash flows.
The Company's inability to acquire or license additional fragrance brands or secure additional distribution arrangements and arrangements could have an adverse effect on the Company's net sales and a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows.
The success of the Fragrances segment depends in part upon the continued growth of its portfolio of owned, licensed and distributed brands, including expanding its geographic presence to take advantage of opportunities in developed and emerging regions. Efforts to increase sales of the Company's prestige fragrance portfolio and expand its geographic market presence depend upon a number of factors, including its ability to:
•develop its fragrance brand portfolio through branding, innovation and execution;
•identify and develop new and existing fragrance brands with the potential to become successful global brands;
•innovate and develop new fragrance products that are appealing to consumers;
•acquire or license additional fragrance brands or secure additional distribution arrangements and the Company's ability to obtain the required financing for these agreements and arrangements;
•expand the Company's geographic presence to take advantage of opportunities in developed and emerging regions;
•continue to expand the Company's distribution channels within existing geographies to increase trade presence, brand recognition and sales;
•expand the Company's trade presence through alternative distribution channels, such as through e-commerce channels;
33
•expand margins through sales growth, the development of higher margin products and overhead and supply chain integration and efficiency initiatives;
•effectively manage capital investments and working capital to improve the generation of cash flow; and
•execute any acquisitions quickly and efficiently and integrate new businesses successfully.
There can be no assurance that the Company can successfully achieve any or all of the above objectives in the manner or time period that it expects. Further, achieving these objectives will require investments, which may result in material short-term costs without generating any current net sales and the Company may not ultimately achieve its net sales objectives associated with such efforts. The future expansion of the Fragrances segment through acquisitions, new fragrance licenses, e-commerce initiatives or other new fragrance distribution arrangements, if any, will depend upon the ability to identify suitable brands to acquire, license or distribute and to obtain the required financing for these acquisitions, licenses or distribution arrangements or to launch or support the brands associated with these agreements or arrangements. The Company may not be able to identify, negotiate, finance or consummate such acquisitions, licenses or arrangements on terms acceptable to the Company, or at all. In addition, the Company may decide to divest or discontinue certain brands or streamline operations and may incur costs and charges in doing so. The inability to acquire or license additional fragrance brands or secure additional distribution arrangements for the Fragrances segment (such as optimizing its e-commerce sales opportunities) and obtain the required financing for these agreements and arrangements could have an adverse effect on the Company’s net sales and a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows.
The illegal distribution and sale by third parties of counterfeit versions of the Company’s products or the unauthorized diversion by third parties of the Company’s products could have an adverse effect on the Company’s net sales and a negative impact on the Company’s reputation and business.
Third parties may illegally distribute and sell counterfeit versions of the Company’s products. These counterfeit products may be inferior in terms of quality and other characteristics compared to the Company’s authentic products and/or the counterfeit products could pose safety risks that the Company’s authentic products would not otherwise present to consumers. Consumers could confuse counterfeit products with the Company’s authentic products, which could damage or diminish the image, reputation and/or value of the Company’s brands and cause consumers to refrain from purchasing the Company’s products in the future, which could adversely affect the Company’s net sales and have a negative impact on the Company’s reputation.
The Company sells a substantial portion of its professional products to professional salon distributors and/or wholesalers. Products sold to these customers are meant to be used exclusively by salons and individual salon professionals or are sold exclusively to the retail consumers of these salons. Despite the Company’s efforts to prevent diversion of such products from these customers, incidents have occurred and continue to occur whereby the Company’s products are sold to sales outlets other than the intended salons and salon professionals, such as to general merchandise retailers or unapproved outlets. In some instances, these diverted products may be old, damaged or otherwise adulterated, which could damage or diminish the image, reputation and/or value of the Company’s brands. In addition, such diversion may result in lower net sales of the Company’s products if consumers choose to purchase diverted products and/or choose to purchase products manufactured or sold by the Company’s competitors because of any perceived damage or diminishment to the image, reputation and/or value of the Company’s brands.
The Company believes that its trademarks, patents and other intellectual property rights are extremely important to the Company’s success and its competitive position. The Company devotes significant resources to registering and protecting its intellectual property rights and maintaining t