Avon 2006 Annual Report Download - page 26

PART II
of $285.3 ($228.8 in 2006 and $56.5 in 2005) for actions asso-
ciated with our restructuring initiatives under the plan, primarily
for employee-related costs, including severance, pension and
other termination benefits and professional service fees related
to these initiatives. Approximately 85% of the restructuring
charges incurred in 2006, have and are expected to result in cash
expenditures, with a majority of the remaining cash payments
expected to be made during 2007. Approximately 58% of the
restructuring charges incurred in 2005 resulted in future cash
expenditures. We expect to incur significant additional charges
over the next few years. We expect our restructuring initiatives
to deliver in excess of $300.0 of annualized savings when fully
realized. The actions implemented to date resulted in savings of
approximately $100.0 in 2006, most of which were associated
with the delayering program that we completed in 2006. We
expect that the actions announced to date will result in savings
in the range of $230.0 in 2007.
Specific actions during 2005, 2006 and January 2007 for this
phase of our restructuring initiatives included:
• organization realignment and downsizing in each region and
global through a process called “delayering,” taking out layers
to bring senior management closer to operations;
• the phased outsourcing of certain services, including certain
key human resource and customer service processes, and the
move of certain services from markets within Europe to lower
cost shared service centers;
• the realignment of our North America distribution operations;
• the exit of certain unprofitable operations, including the clo-
sure of the Avon Salon & Spa, the closure of our operations in
Indonesia, the exit of a product line in China and the exit of
the beComing product line in the U.S.; and
• the reorganization of certain functions, primarily sales-related
organizations.
See Note 13, Restructuring Initiatives, on pages F-26 through
F-28 of this 2006 Annual Report on Form 10-K.
Outlook
We expect that our investments in both the brand and the direct
selling channel will drive sustainable growth and revenue growth
should average mid-single-digits over the long-term.
Our operating margin during 2007 will be impacted by
incremental investments in advertising and the Representative
Value Proposition, as well as continued costs of restructuring and
PLS. While operating margin should expand in 2007 from 2006’s
level of 8.7%, it is expected to be close to 2005’s level of 14.1%
in 2008. As the savings and benefits from restructuring, PLS and
SSI begin to exceed the incremental levels of investment in
advertising and the Representative Value Proposition, operating
margin is then expected to further expand beginning in 2009.
New Accounting Pronouncements
Effective January 1, 2006, we adopted SFAS No. 123, which
requires all share-based payments to employees to be recognized
in the financial statements based on their fair values using an
option-pricing model at the date of grant. The impact from the
adoption of SFAS 123R during 2006, including restricted stock
units granted in connection with design changes to share-based
compensation plans related to the adoption, decreased income
before taxes and minority interest, net income, basic and diluted
earnings per share, and net cash provided by operating activities
for the year ended December 31, 2006, by $49.2, $32.4, $.07
and $8.1 respectively, while it increased net cash provided by
financing activities by $8.1. (See Note 1, Description of the Busi-
ness and Summary of Significant Accounting Policies, and Note
8, Share-Based Compensation Plans and Other Long-Term
Incentive Plan).
Effective December 31, 2006, we adopted SFAS No. 158,
Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans – an amendment of FASB Statements
No. 87, 88, 106 and 132R, (“SFAS 158”). We adopted SFAS 158
as of December 31, 2006. The adoption of SFAS 158 resulted in
a decrease to our shareholders’ equity by $254.7, on an after-tax
basis, a decrease to other assets of $232.8, an increase in
accrued compensation of $35.5 and a decrease in employee
benefit plans liability of $13.4. The adoption of SFAS 158 had no
impact on our Consolidated Statement of Income for the year
ended December 31, 2006, or for any prior period presented,
and it will not affect our operating results in future periods. (See
Note 10, Employee Benefit Plans).
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes – an interpretation
of FASB Statement No. 109, (“FIN 48”). FIN 48 prescribes a con-
sistent recognition threshold and measurement attribute, as well
as criteria for subsequently recognizing, derecognizing and
measuring uncertain tax positions for financial statement pur-
poses. FIN 48 also requires expanded disclosure with respect to
the uncertainty in income taxes. FIN 48 is effective January 1,
2007, for Avon. The impact of adopting FIN 48 is not expected
to be material based on work performed to date, but we con-
tinue to assess the impact of FIN 48 along with implementation
guidance as it is issued.
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements (“SFAS 157”), which defines fair value, estab-
lishes a framework for measuring fair value in accordance with
generally accepted accounting principles, and expands dis-
closures about fair value measurements. SFAS 157 is effective
January 1, 2008 for Avon. We are currently evaluating the
impact of SFAS 157 on our Consolidated Financial Statements.