Avon 2006 Annual Report Download - page 77

termination benefits, asset impairment charges and cumulative
foreign currency translation charges previously recorded directly
to shareholders’ equity. The charges included $8.4 to cost of
sales for inventory write-offs, and $43.2 to selling, general and
administrative expenses. Approximately 58% of these charges
resulted in cash expenditures. Additionally, we incurred costs of
$4.9 for professional service fees, which are recorded in selling,
general and administrative expenses, related to the
implementation of these initiatives, resulting in total costs to
implement during 2005 of $56.5.
Restructuring Charges – 2006
During 2006 and January 2007, additional exit and disposal activ-
ities that are a part of our restructuring initiatives were
approved. Specific actions for this phase of our restructuring ini-
tiatives 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;
• the realignment of North America distribution operations;
• the exit of certain unprofitable operations, including the clo-
sure of the Avon Salon & Spa; and
• the reorganization of certain functions, primarily sales-related
organizations.
Many of the actions were completed in 2006, including the
delayering program. A majority of the remaining actions is
expected to be completed in 2007. The outsourcing of certain
services is expected to be completed in phases through 2009.
The realignment of North America distribution operations is
expected to be completed in phases through 2012. The
reorganization of one of our functions is expected to be com-
pleted in phases through 2010.
In connection with these initiatives, we recorded charges of
$218.3 during 2006, primarily for employee-related costs,
including severance, and other termination benefits. These
charges were included in selling, general and administrative
expenses. We recorded adjustments of $16.1 in 2006, primarily
relating to certain employees pursuing reassignments to other
positions and higher than expected turnover (employees leaving
prior to termination). Approximately 85% of these charges are
expected to result in future cash expenditures, with a majority of
the cash payments expected to be made during 2007.
Additionally, related to the implementation of these initiatives
we incurred other costs to implement of $24.9 for professional
service fees in 2006, which are recorded in selling, general and
administrative expenses, $1.7 for accelerated depreciation in
2006, of which $.7 is recorded in cost of sales, and $1.0 in sell-
ing, general and administrative expenses, resulting in total costs
to implement during 2006 of $228.8.
The liability balances for the initiatives that have been approved to date are shown below.
Employee-
Related
Costs
Asset
Write-offs
Inventory
Write-offs
Currency
Translation
Adjustment
Write-offs
Contract
Terminations/
Other Total
2005 Charges $ 30.4 $ 1.4 $ 8.4 $ 11.4 $ – $ 51.6
Cash payments (.5) – – – – (.5)
Non-cash write-offs (.7) (1.4) (8.4) (11.4) – (21.9)
Foreign exchange – – – – – –
Balance January 1, 2006 $ 29.2 $ – $ – $ – $ – $ 29.2
2006 Charges 201.2 9.8 .6 .2 6.5 218.3
Adjustments (13.5) (.6) (1.6) – (.4) (16.1)
Cash payments (112.0) – – – (5.1) (117.1)
Non-cash write-offs (23.0) (9.2) 1.0 (.2) – (31.4)
Foreign exchange 3.0 – – – .1 3.1
Balance December 31, 2006 $ 84.9 $ – $ – $ – $ 1.1 $ 86.0
Non-cash write-offs associated with employee-related costs are the result of settlement, curtailment and special termination benefit charges
for pension plans and postretirement due to the initiatives implemented. Inventory write-offs relate to exited businesses.
A V O N 2006 F-27