Avon 2005 Annual Report Download - page 4

MANAGEMENT’S฀DISCUSSION฀AND฀ANALYSIS฀
OF฀FINANCIAL฀CONDITION฀AND฀RESULTS฀OF฀OPERATIONS
implement these initiatives, primarily for employee related costs,
including severance, pension and other termination benefits, asset
impairment charges, cumulative foreign currency translation charges
previously recorded directly to shareholders’ equity and professional
service fees related to these initiatives. Specific actions for this initial
phase of our multi-year restructuring plan include:
• 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 exit of unprofitable lines of business or markets, including the
closure of unprofitable operations in Asia, primarily Indonesia and
the exit of a product line in China, and the exit of the beComing
product line in the U.S.; and
• the move of certain services from markets within Europe to
lower cost shared service centers.
See Note 13, Restructuring Initiatives, for further information. The
charges included $8.4 to cost of sales for inventory write-offs, and
$48.1 to marketing, distribution and administrative expenses.
We expect to record additional restructuring expenses totaling
approximately $3.8 before taxes during 2006 to implement the
actions for which charges were recorded during the fourth quarter
of 2005. In March 2006, additional initiatives were approved under
the multi-year restructuring effort. These initiatives include the
termination of employees under our delayering process and the
termination of employees under initiatives to outsource certain
services and realign certain manufacturing processes. We expect
to record total charges of approximately $35 to $37 before taxes
in connection with these approved initiatives for employee related
costs. We also expect to announce additional initiatives as they
are approved.
Key Performance Indicators
Within the following discussion and analysis, we utilize the key performance indicators (“KPIs”) defined below to assist in the evaluation of
our business.
KPI Definition
Change in Active Representatives This indicator is based on the number of Representatives submitting an order in a campaign,
totaled for all campaigns in the related period. This amount is divided by the number of billing
days in the related period, to exclude the impact of year-to-year changes in billing days (for
example, holiday schedules). To determine the Change in Active Representatives, this calculation
is compared to the same calculation in the corresponding period of the prior year.
Change in Units This indicator is based on the gross number of pieces of merchandise sold during a period, as
compared to the same number in the same period of the prior year. Units sold include samples
sold and product contingent upon the purchase of another product (for example, gift with
purchase or purchase with purchase), but exclude free samples.
Inventory Days This indicator is equal to the number of days of estimated future months’ cost of sales
covered by the inventory balance at the end of the period.
CRITICAL฀ACCOUNTING฀ESTIMATES
We believe the accounting policies described below represent
our critical accounting policies due to the estimation processes
involved in each. See Note 1, Description of the Business and
Summary of Significant Accounting Policies, for a detailed discus-
sion of the application of these and other accounting policies.
Restructuring Reserves
We record severance-related expenses once they are both probable
and estimable in accordance with the provisions of FAS No. 112,
“Employer’s Accounting for Post-Employment Benefits.” One-time
benefit arrangements and disposal costs, primarily contract termina-
tion costs and costs to consolidate or close facilities, are accounted
for under the provisions of FAS No. 146, “Accounting for Costs
Associated with Exit or Disposal Activities.” We evaluate impair-
ment issues under the provisions of FAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets.” We estimate the
expense for these initiatives, when approved by the appropriate
corporate authority, by accumulating detailed estimates of costs for
such plans. This process includes the estimated costs of employee
severance and related benefits, impairment of property, plant and
equipment, contract termination payments for leases, and any
other qualifying exit costs. These estimated costs are grouped by
specific projects within the overall plan and are then monitored on
a monthly basis by global finance personnel, as well as by finance
personnel at each affected geographic region. Such costs represent
management’s best estimate, but require assumptions about the
programs that may change over time. Estimates are evaluated peri-
odically to determine if a change is required.