Avon said in October that possible fines related to the investigations may materially hurt earnings. Photo: Bloomberg
Avon Products Inc. (AVP), the world’s largest door-to-door seller of cosmetics, said it may spend as much as $132 million to resolve criminal and civil inquiries into whether it paid bribes in China and other countries.
About $77 million was added to a reserve for the potential settlements with the U.S. Securities and Exchange Commission and Department of Justice in the fourth quarter, bringing the total set aside for the matter to $89 million, New York-based Avon said yesterday. Potential settlements may exceed that amount by as much as $43 million, the company said.
While the final settlement probably will be lower than the 10 largest fines ever paid by companies to resolve possible violations of the Foreign Corrupt Practices Act, the five-year-old probe has cast a pall over Avon, which has struggled with slowing growth, posted net losses for two years and undergone changes in the executive suite during the inquiry.
Chief Executive Officer Sheri McCoy, who took the helm in April 2012 from Andrea Jung, has been trying to reach a settlement with the government while also working to reduce Avon’s costs and abandon unprofitable markets such as South Korea, Vietnam and Ireland. Avon’s revenue in China has plunged during the investigation, which a person familiar with the inquiry told Bloomberg News this week is close to being resolved.
“We’ve made significant progress,” McCoy said about the prospects for resolving the probe during an earnings call yesterday. She said negotiations with the government are continuing and “while differences remain, our team is working hard to bring these matters to a close.”
The company has spent more than $300 million over the past five years on an internal investigation and compliance reviews amid the probe, making the case one of the most expensive investigations under the FCPA, which bars payment of money or anything of value to foreign officials to obtain or retain business.
Avon sought last year to end the SEC probe by offering to pay $12 million, and regulators sought a “significantly greater” amount, according to company filings.
Even if Avon pays more than it initially proposed, the higher figure “is encouraging given the relatively small size compared to worst-case fears,” Mark Astrachan, an analyst with Stifel Financial Corp. in New York, said in a note yesterday. Avon has enough cash to settle the case, company executives said on the call.
The 10 biggest penalties levied in the U.S. for violations of the FCPA range from $137 million against Alcatel-Lucent SA in 2010 to $800 million against Siemens AG in 2008.
Avon’s shares dropped 3.1 percent to $14.60 at the close in New York. Avon fell 15 percent this year, compared with a 1 percent decline for the Standard & Poor’s 500 Index.
The investigation dates to mid-2008 when Avon began looking into allegations of improper payments in China. Chinese authorities ended a ban on direct sales in 2006. Avon was among the first companies to obtain a license to sell products directly to consumers -– the cornerstone of its business model.
In May 2011, Avon fired four executives connected to the bribery inquiry and named a new head to the China unit in 2012. Revenue in China was down 48 percent in the fourth quarter, according to Avon’s earnings report yesterday.
Companies typically resolve FCPA probes through so-called deferred-prosecution agreements, with prosecutors filing charges and putting them on hold if the company makes payments and changes required by the government.
The time it’s taken Avon to resolve the bribery case -- almost six years -- isn’t unusual, according to Mike Koehler, a law professor at Southern Illinois University who writes the FCPA Professor blog. While most cases are wrapped up in two to four years, some take longer, he said. For example, Pfizer Inc. took eight years to reach a $60.2 million settlement, he said.
In December, Avon said it plans to cut 650 jobs as part of an effort to trim $400 million in costs by 2016. The cuts and other actions are expected to be completed this year and will result in charges of as much as $45 million before taxes, with about $35 million recorded in the fourth quarter of 2013, Avon said in a Dec. 13 filing.
Avon also said yesterday that its net loss for the three months ended Dec. 31 narrowed to $69.1 million, or 16 cents a share, from a loss of $162.2 million, or 37 cents, a year earlier. Excluding the probe accrual, restructuring charges and items related to the devaluation of Venezuela’s currency and a revamp of its service model, profit was 34 cents a share. The average of 15 analysts’ estimates compiled by Bloomberg was 30 cents. Sales fell about 9.7 percent to $2.67 billion, trailing analysts’ $2.75 billion average estimate.