Avon 2004 Annual Report Download - page 58

Global Beauty 79
Notes to Consolidated
Financial Statements
13 Special Charges
In May 2001, Avon announced its new Business Trans-
formation plans, which were designed to significantly
reduce costs and expand profit margins, while continu-
ing to focus on consumer growth strategies. Those
original Business Transformation initiatives include an
end-to-end evaluation of business processes in key
operating areas, with target completion dates through
2004. Specifically, the initiatives focus on simplifying
Avon’s marketing processes, taking advantage of supply
chain opportunities, strengthening Avon’s sales model
through the Sales Leadership program and the Internet,
streamlining the Company’s organizational structure and
integrating certain similar activities across markets to
achieve efficiencies. Avon has realized benefits from
these Business Transformation initiatives during 2002
through 2004.
Special Charges – Fourth Quarter 2001
In the fourth quarter of 2001, Avon recorded special
charges (“2001 Special Charges”) of $97.4 pretax primarily
associated with facility rationalizations and workforce
reduction programs related to implementation of cer-
tain Business Transformation initiatives. Approximately
80% of the charges related to future cash expenditures.
Substantially all of these cash expenditures were made
by December 2004. All payments were funded by cash
flow from operations. While project plans associated
with these initiatives have not changed, the Company
has experienced favorable adjustments to its original
cost estimates. As a result, the Company reversed pretax
amounts totaling $2.5, $2.1 and $7.3 in 2004, 2003 and
2002, respectively. The favorable adjustments primarily
related to certain employees pursuing reassignments
in other Avon locations, lower severance costs resulting
from higher than anticipated lump-sum distributions
(associates who elected lump-sum distributions did
not receive benefits during the severance period) and
favorable contract termination negotiations.
The remaining liability at December 31, 2004 was $.3
and relates to amounts payable under the terms of the
plan to employees already receiving severance.
Special Charges – Third Quarter 2002
In September 2002, the Company authorized a plan
related to the implementation of its Business Trans-
formation initiatives. In connection with these initia-
tives, in the third quarter of 2002, Avon recorded
special charges of $43.6 pretax ($30.4). These charges
were primarily associated with the following initiatives:
• Supply chain initiatives, including actions to improve
efficiencies and productivity in manufacturing, logis-
tics, transportation and distribution activities;
• Workforce reduction programs focused on
realigning the organization and leveraging
regional structures; and
• Sales transformation initiatives, including a shift
to a more variable expense base and changes in
the selling structure due to a variety of initiatives
to contemporize the sales model.
Approximately 90% of the charge resulted in future
cash expenditures. Approximately 96% of these cash
expenditures were made by December 31, 2004. All
payments were funded by cash flow from operations.
The third quarter charges (net of the $7.3 adjustment
to the 2001 special charges as previously disclosed)
were included in the Consolidated Statements of
Income as special charges ($34.3) and as inventory
write-downs, which were included in cost of sales ($2.0).