NOTE 7 – CHARGES ASSOCIATED WITH RESTRUCTURING AND OTHER ACTIVITIES

During fiscal 2018, 2017 and 2016, the Company incurred charges associated with restructuring and other activities in connection with its Leading Beauty Forward and Global Technology Infrastructure initiatives as follows:

	Sales Returns				Operating Expenses
(In millions)	(included in Net Sales)		Cost of Sales		Restructuring Charges		Other Charges		Total

Fiscal 2018
Leading Beauty Forward	$	8	$	18	$	127	$	104	$	257


Fiscal 2017
Leading Beauty Forward	$	2	$	15	$	122	$	73	$	212


Fiscal 2016
Leading Beauty Forward	$	1	$	—	$	75	$	5	$	81
Global Technology Infrastructure	—		—		46		7		53

Total	$	1	$	—	$	121	$	12	$	134

The types of activities included in restructuring and other charges, and the related accounting criteria, are described below.

Leading Beauty Forward

Background

In May 2016, the Company announced a multi-year initiative (“Leading Beauty Forward,” “LBF” or the “Program”) 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. 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 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.

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. The Company previously estimated that LBF would result in related restructuring and other charges totaling between $600 million and $700 million, before taxes. After reviewing additional potential initiatives and the progress of previously approved initiatives under LBF that are being implemented, the Company has revised its estimates for cost approvals under the Program. Inclusive of approvals from inception through June 30, 2018, the Company now estimates that LBF may result in related restructuring and other charges totaling between $900 million and $950 million, before taxes.

The Company previously estimated a net reduction over the duration of LBF in the range of approximately 900 to 1,200 positions globally. The Company revised these estimates based on the review of the Program noted above. At this time, the Company estimates a net reduction over the duration of LBF in the range of 1,800 to 2,000 positions globally, which is about 4% of its current workforce. This reduction takes into account the elimination of certain positions, inclusive of positions that are unfilled, as well as retraining and redeployment of certain employees and investment in new positions in key areas.

Program-to-Date Approvals

Of the total restructuring and other charges expected to be incurred, total cumulative charges approved by the Company through June 30, 2018, some of which were recorded during fiscal 2018, 2017 and 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		$	87		$	71		$	190
Fiscal 2017	11			10			132			118			271
Fiscal 2018	—			24			166			68			258
Adjustments through June 30, 2018	(1		)	(1		)	(40		)	(1		)	(43		)

Cumulative through June 30, 2018	$	14		$	61		$	345		$	256		$	676

Included in the above table, cumulative restructuring initiatives approved by the Company through June 30, 2018 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
Fiscal 2017	126			1		—			5		132
Fiscal 2018	161			—		1			4		166
Adjustments through June 30, 2018	(39		)	—		(1		)	—		(40		)

Cumulative through June 30, 2018	$	323		$	4	$	5		$	13	$	345

Specific actions taken since the Program inception include:

Optimize Select Corporate Functions – The Company approved initiatives to realign and optimize its organization to better leverage scale, improve productivity, reduce complexity and achieve cost savings across various functions, including finance, research and development, human resources, information technology and legal. Such approvals included consulting and other professional services for the design, project management, implementation and integration of new processes and technologies and, to a lesser extent, costs for temporary labor backfill, training and recruiting related to new capabilities, as well as similar expenses for certain other corporate functions. These actions are resulting in a net reduction of the workforce, which includes position eliminations, the re-leveling of certain positions and an investment in new capabilities. The Company also approved other charges to support the LBF Project Management Office (“PMO”), primarily consisting of internal costs for employees dedicated solely to project management activities, with a focus on project integration and change management.

The design of certain corporate functions includes the creation of a shared-services structure, either using Company resources or through external service providers. As part of the service delivery model, the Company approved the organizational design of the management and governance platform of a shared-services structure using Company resources, as well as the transition of select transactional activities to an external service provider, which is resulting in other charges for implementation, project and consulting costs.

Optimize Supply Chain – An initiative to centralize the Company’s supply chain management was approved. This includes the relocation of certain operations and positions, with some employees being separated and positions replaced in a new location. Other charges approved are primarily related to consulting fees for design and implementation, temporary labor backfill during the transition and project management costs.

In addition, the Company approved certain activities related to initiatives to enable distribution capabilities and generate efficiencies through an external service provider and to optimize certain supply chain activities through organizational design in certain key areas. Collectively, these actions are resulting in a net reduction of the workforce, which includes position eliminations, the re-leveling of certain positions and an investment in new capabilities. Initiatives to redesign certain supply chain planning and transportation management activities and to improve the organizational design of manufacturing and engineering processes related to certain product lines were also approved, primarily resulting in consulting fees and, to a lesser extent, project management costs.

Optimize Corporate and Region Market Support Structures – The Company approved 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 are resulting in a net reduction of the workforce, which includes position eliminations, the re-leveling of certain positions and an investment in new capabilities. The Company also approved consulting and other professional services related to the design of future structures, processes and technologies and, to a lesser extent, other costs for recruitment and training related to new capabilities. In addition, the Company approved initiatives to enhance consumer engagement strategies across certain channels in Europe, which is expected to result in product returns.

Exit Underperforming Businesses – To further improve profitability in certain areas of the Company’s brands and regions, the Company approved initiatives to exit certain businesses in select markets and channels of distribution. The Company has also decided to close a number of underperforming freestanding retail stores and exit mid-tier department stores for certain brands in the United States to redirect resources to other retail locations and channels with potential for greater profitability. These activities resulted in product returns, inventory write-offs, reduction of workforce, accelerated depreciation and termination of contracts.

As initiatives under LBF progress through implementation, the Company has identified certain costs that were approved but will not be incurred. These costs, reflected as adjustments to the cumulative approved restructuring and other charges presented above, were primarily related to estimated employee-related costs for certain employees who either resigned or transferred to other existing positions within the Company.

Program-to-Date Restructuring and Other Charges

Restructuring charges are comprised of the following:

Employee-Related Costs – Employee-related costs are primarily comprised of severance and other post-employment benefit costs, calculated based on salary levels, prior service and other statutory minimum benefits, if applicable. Employee-related costs are expensed when specific employees have been identified and when payment is probable and estimable, which generally occurs upon approval of the related initiative by management with authority delegated from the Company’s Board of Directors.

Asset-Related Costs – Asset-related costs primarily consist of asset write-offs or accelerated depreciation related to long-lived assets that will be taken out of service prior to their existing useful life as a direct result of a restructuring initiative. The accelerated portion of depreciation expense will be expensed on a straight-line basis and be classified as restructuring charges, while the portion relating to the previous existing useful life will continue to be reported in Selling, general and administrative expenses.

Contract Terminations – Costs related to contract terminations include continuing payments to a third party after the Company has ceased benefiting from the rights conveyed in the contract, or a payment made to terminate a contract prior to its expiration. These may include continuing operating lease payments (less estimated sublease payments) to a landlord after exiting a location prior to the lease-end date as a direct result of an approved restructuring initiative. Contract terminations also include minimum payments or fees related to the early termination of license or other personal service contracts. Costs related to contract terminations are expensed upon the cease-use date of a leased property or upon the notification date to the third party in the event of a license or personal service contract termination.

Other Exit Costs – Other exit costs related to restructuring activities generally include costs to relocate facilities or employees, recruiting to fill positions as a result of relocation of operations, and employee outplacement for separated employees. Other exit costs are charged to expense as incurred.

Other charges associated with restructuring activities are comprised of the following:

Sales Returns and Cost of Sales – Product returns (offset by the related cost of sales) and inventory write-offs or write-downs as a direct result of an approved restructuring initiative to exit certain businesses or locations will be recorded as a component of Net Sales and/or Cost of Sales when estimable and reasonably assured. Consulting, other professional services and temporary labor backfill, primarily related to the design and implementation of supply chain activities, are expensed in Cost of Sales as incurred.

Other Charges – The Company approved other charges related to the design and implementation of approved initiatives, which are charged to Operating Expenses as incurred and primarily include the following:

Consulting and other professional services for organizational design of the future structures, processes and technologies, and implementation thereof,

Temporary labor backfill,

Costs to establish and maintain a PMO for the duration of Leading Beauty Forward, including internal costs for employees dedicated solely to project management activities, and other PMO-related expenses incremental to the Company’s ongoing operations (e.g., rent and utilities), and

Recruitment and training costs for new and reskilled employees to acquire and apply the capabilities needed to perform responsibilities as a direct result of an approved restructuring initiative.

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 activities 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
Fiscal 2017	2		15		122		73		212
Fiscal 2018	8		18		127		104		257

Cumulative through June 30, 2018	$	11	$	33	$	324	$	182	$	550

The major cost types related to the cumulative restructuring charges set forth above were:

(In millions)	Employee- Related Costs		Asset- Related Costs		Contract Terminations		Other Exit Costs		Total
Fiscal 2016	$	74	$	1	$	—	$	—	$	75
Fiscal 2017	116		2		2		2		122
Fiscal 2018	124		1		1		1		127

Cumulative through June 30, 2018	$	314	$	4	$	3	$	3	$	324

Accrued restructuring charges from Program inception through June 30, 2018 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	116			2			2			2			122
Cash payments	(39		)	—			(2		)	(2		)	(43		)
Noncash asset write-offs	—			(2		)	—			—			(2		)

Balance at June 30, 2017	150			—			—			—			150

Charges	124			1			1			1			127
Cash payments	(92		)	—			—			(1		)	(93		)
Noncash asset write-offs	—			(1		)	—			—			(1		)
Translation adjustments	(2		)	—			—			—			(2		)

Balance at June 30, 2018	$	180		$	—		$	1		$	—		$	181

Restructuring charges for employee-related costs are net of adjustments to the accrual estimate for certain employees who either resigned or transferred to other existing positions within the Company. These adjustments were not material for all periods presented. Accrued restructuring charges at June 30, 2018 are expected to result in cash expenditures funded from cash provided by operations of approximately $125 million, $44 million, $9 million and $3 million for each of fiscal 2019, 2020, 2021 and 2022, respectively.

Global Technology Infrastructure

In October 2015, the Company approved plans to transform and modernize its global technology infrastructure (“GTI”) to fundamentally change the way the Company delivers information technology services internally (such initiative, the “GTI Restructuring”). As part of the GTI Restructuring, the Company transitioned its GTI from Company-owned assets to a primarily vendor-owned, cloud-based model where the Company pays for services as they are used. The Company incurred restructuring charges of $46 million for the year ended June 30, 2016, reflecting contract terminations of $24 million, asset write-offs of $18 million and employee-related costs of $4 million. Other charges in connection with the implementation of this initiative were $7 million for the year ended June 30, 2016, primarily related to consulting services. These charges are included in Restructuring and other charges in the accompanying consolidated statement of earnings. The implementation of the GTI Restructuring was substantially completed during fiscal 2016.