NOTE 5 — CHARGES ASSOCIATED WITH RESTRUCTURING AND OTHER ACTIVITIES

Background

In May 2016, the Company announced a multi-year initiative (“Leading Beauty Forward” or “LBF”) to build on its strengths and better leverage its cost structure to free resources for investment to continue its growth momentum. LBF is designed to enhance the Company’s go-to-market capabilities, reinforce its leadership in global prestige beauty and continue creating sustainable value.

The Company plans to approve specific initiatives under LBF through fiscal 2019 related to the optimization of select corporate functions, supply chain activities, and corporate and regional market support structures, as well as the exit of underperforming businesses, and expects to complete those initiatives through fiscal 2021. Inclusive of charges recorded from inception through December 31, 2016, the Company expects that LBF will result in related restructuring and other charges totaling between $600 million and $700 million before taxes.

Restructuring actions to be taken over the duration of LBF involve the redesigning, resizing and reorganization of select corporate functions and go-to-market structures to improve effectiveness and create cost efficiencies in support of increased investment in growth drivers. As the Company continues to grow, it is important to more efficiently support its diverse portfolio of brands, channels and geographies in the rapidly evolving prestige beauty environment. The initiatives being evaluated include the creation of a shared-services structure, either through Company-owned or third-party service providers in existing or lower-cost locations. The Company also believes that decision-making in key areas of innovation, marketing and digital communications should be moved closer to the consumer to increase speed and local relevance.

In connection with LBF, at this time, the Company estimates a net reduction over the duration of LBF in the range of approximately 900 to 1,200 positions globally, which is about 2.5% of its current workforce. This reduction takes into account the elimination of some positions, retraining and redeployment of certain employees and investment in new positions in key areas.

Program-to-Date Approvals

Of the $600 million to $700 million restructuring and other charges expected to be incurred, total cumulative charges approved by the Company through December 31, 2016 were:

	Sales Returns					Operating Expenses
(In millions)	(included in Net Sales)		Cost of Sales			Restructuring Charges		Other Charges			Total
Approval Period
Fiscal 2016	$	4	$	28	(1)	$	87	$	71	(1)	$	190
Six months ended December 31, 2016	—		2			33		25			60

Cumulative through December 31, 2016	$	4	$	30		$	120	$	96		$	250

⁽¹⁾

Reflects approximately $25 million of supply chain consulting and professional services expected to be recognized in Cost of Sales, which were previously classified under Operating Expenses.

Included in the above table, cumulative restructuring initiatives approved by the Company through December 31, 2016 by major cost type were:

(In millions)	Employee-Related Costs		Asset- Related Costs		Contract Terminations		Other Exit Costs		Total
Approval Period
Fiscal 2016	$	75	$	3	$	5	$	4	$	87
Six months ended December 31, 2016	30		1		—		2		33

Cumulative through December 31, 2016	$	105	$	4	$	5	$	6	$	120

Specific actions taken during the six months ended December 31, 2016 included:

Optimize Corporate and Region Market Support Structures - The Company continued to approve initiatives to enhance its go-to-market support structures and achieve synergies across certain geographic regions, brands and channels. These initiatives are primarily intended to shift certain areas of focus from traditional to social and digital marketing strategies to provide enhanced consumer experience, as well as to support expanded omnichannel opportunities. These actions will result in a net reduction of the workforce, which includes position eliminations, the re-leveling of certain positions and an investment in new capabilities, as well as other charges primarily for recruitment and training related to the new capabilities.

Optimize Select Corporate Functions - The Company approved other charges to support the LBF Project Management Office (“PMO”). The approved charges primarily consist of internal costs for employees dedicated solely to project management activities, with a focus on project integration, program communications and change management.

Optimize Supply Chain - The Company approved certain activities related to an initiative to generate distribution capabilities and efficiencies through a third-party service provider. The Company also approved certain activities related to initiatives to enhance strategic sourcing capabilities for direct and indirect procurement activities. Collectively, these actions will result in a net reduction of the workforce, which includes position eliminations, the re-leveling of certain positions and an investment in new capabilities. To enable the implementation of these initiatives, other charges were approved for PMO costs, professional fees and asset write-offs. The Company also approved consulting fees for an initiative to improve the organizational design of manufacturing and engineering activities related to certain product lines.

Program-to-Date Restructuring and Other Charges

The Company records approved charges associated with restructuring and other activities once the relevant accounting criteria have been met. Total cumulative charges recorded associated with restructuring and other initiatives for LBF were:

	Sales Returns				Operating Expenses
(In millions)	(included in Net Sales)		Cost of Sales		Restructuring Charges		Other Charges		Total
Fiscal 2016	$	1	$	—	$	75	$	5	$	81
Six months ended December 31, 2016	2		7		29		34		72

Cumulative through December 31, 2016	$	3	$	7	$	104	$	39	$	153

Charges recorded during the six months ended December 31, 2016 included returns (and the related cost of sales) and inventory write-offs related to the exit of certain businesses in select markets and channels of distribution. Cost of sales also included consulting and professional services incurred, primarily related to the design of supply chain planning activities. Other charges associated with LBF initiatives primarily reflected consulting and other professional services related to the design of the future structures, processes and technologies of certain corporate functions and, to a lesser extent, costs to establish and maintain the LBF Project Management Office. Other charges are included in Restructuring and other charges in the accompanying consolidated statements of earnings.

Included in the above table, aggregate restructuring charges by major cost type were:

(In millions)	Employee-Related Costs		Asset- Related Costs		Contract Terminations		Other Exit Costs		Total
Fiscal 2016	$	74	$	1	$	—	$	—	$	75
Six months ended December 31, 2016	25		2		1		1		29

Charges recorded through December 31, 2016	$	99	$	3	$	1	$	1	$	104

Accrued restructuring charges from program inception through December 31, 2016 were:

(In millions)	Employee-Related Costs			Asset- Related Costs			Contract Terminations			Other Exit Costs		Total
Charges	$	74		$	1		$	—		$	—	$	75
Noncash asset write-offs	—			(1		)	—			—		(1		)
Translation adjustments	(1		)	—			—			—		(1		)

Balance at June 30, 2016	73			—			—			—		73

Charges	25			2			1			1		29
Cash payments	(16		)	—			(1		)	—		(17		)
Noncash asset write-offs	—			(2		)	—			—		(2		)
Translation adjustments	(2		)	—			—			—		(2		)

Balance at December 31, 2016	$	80		$	—		$	—		$	1	$	81

Accrued restructuring charges at December 31, 2016 are expected to result in cash expenditures funded from cash provided by operations of approximately $21 million, $41 million and $19 million in fiscal 2017, 2018 and 2019, respectively.