Restructuring
2013 Restructuring Program
In October 2013, the Company announced a new global restructuring program (the “2013 Restructuring Program”) as part of a global initiative to sharpen its commercial and research and development focus. As part of the new program, the Company expects to reduce its total workforce by approximately 8,500 positions. These workforce reductions will primarily come from the elimination of positions in sales, administrative and headquarters organizations, as well as research and development. The Company will also reduce its global real estate footprint and continue to improve the efficiency of its manufacturing and supply network. The Company will continue to hire employees in strategic growth areas of the business as necessary.
The Company recorded total pretax costs of $1.2 billion in 2013 related to this restructuring program. The actions under the 2013 Restructuring Program are expected to be substantially completed by the end of 2015 with the cumulative pretax costs estimated to be approximately $2.5 billion to $3.0 billion. The Company estimates that approximately two-thirds of the cumulative pretax costs will result in cash outlays, primarily related to employee separation expense. Approximately one-third of the cumulative pretax costs are non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested.
Merger Restructuring Program
In 2010, subsequent to the Merck and Schering-Plough Corporation (“Schering-Plough”) merger (the “Merger”), the Company commenced actions under a global restructuring program (the “Merger Restructuring Program”) designed to streamline the cost structure of the combined company. Further actions under this program were initiated in 2011. The actions under this program primarily reflect the elimination of positions in sales, administrative and headquarters organizations, as well as from the sale or closure of certain manufacturing and research and development sites and the consolidation of office facilities.
On October 1, 2013, the Company sold its active pharmaceutical ingredient (“API”) manufacturing business, including the related manufacturing facility, in the Netherlands to Aspen Holdings (“Aspen”) as part of planned manufacturing facility rationalizations under the Merger Restructuring Program. In conjunction with the sale, the parties entered into a strategic long-term supply agreement whereby Aspen will supply API to the Company and approximately 960 employees who support the API business were transferred from Merck to Aspen. Also in connection with the sale, Aspen acquired certain branded products from Merck, which transferred to Aspen effective December 31, 2013. Consideration for the transaction included cash of $705 million and notes receivable with a present value of $198 million at the time of disposition. The notes receivable consist of a $261 million note with a present value of $138 million due in 2023 and a $67.5 million note with a present value of $60 million that is payable over five years beginning on December 31, 2014. Of the cash portion of the consideration, the Company received $172 million in the fourth quarter of 2013. The remaining $533 million was received by the Company in January 2014; therefore, at December 31, 2013, this amount was recorded as a receivable within Deferred income taxes and other current assets on the Consolidated Balance Sheet. In conjunction with this transaction, the Company transferred inventory of $420 million, property, plant and equipment of $220 million and cash of $125 million to Aspen, reduced goodwill by $45 million, other intangible assets by $45 million and other assets by $23 million and recorded $90 million of transaction-related liabilities. This transaction resulted in a loss of $65 million that was recorded within Restructuring costs in 2013.
The Company recorded total pretax costs of $1.1 billion in 2013, $951 million in 2012 and $1.8 billion in 2011 related to this restructuring program. Since inception of the Merger Restructuring Program through December 31, 2013, Merck has recorded total pretax accumulated costs of approximately $7.2 billion and eliminated approximately 26,880 positions comprised of employee separations, as well as the elimination of contractors and vacant positions. Approximately 6,300 position eliminations remain pending under this program as of December 31, 2013, which include the remaining actions under the 2008 Restructuring Program that are now being reported as part of the Merger Restructuring Program as discussed below. The restructuring actions under the Merger Restructuring Program were substantially completed by the end of 2013, with the exception of certain actions, principally manufacturing-related. Subsequent to the Merger, the Company has rationalized a number of manufacturing sites worldwide. The remaining actions under this program will result in additional manufacturing facility rationalizations, which are expected to be substantially completed by 2016. The Company expects the estimated total cumulative pretax costs for this program to be approximately $7.4 billion to $7.7 billion. The Company estimates that approximately two-thirds of the cumulative pretax costs relate to cash outlays, primarily related to employee separation expense. Approximately one-third of the cumulative pretax costs are non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested.
2008 Restructuring Program
In October 2008, Merck announced a global restructuring program (the “2008 Restructuring Program”) to reduce its cost structure, increase efficiency, and enhance competitiveness. Pretax costs of $54 million, $48 million and $45 million were recorded in 2013, 2012 and 2011, respectively, related to the 2008 Restructuring Program. Since inception of the 2008 Restructuring Program through June 30, 2013, Merck has recorded total pretax accumulated costs of $1.7 billion and eliminated approximately 6,460 positions comprised of employee separations and the elimination of contractors and vacant positions. The 2008 Restructuring Program was substantially completed in 2011, with the exception of certain manufacturing-related actions, which are expected to be completed by 2015. As of July 1, 2013, the remaining accrued liability for future separations under the 2008 Restructuring Program was transferred to the Merger Restructuring Program and any remaining activities under the 2008 Restructuring Program are now being accounted for as part of the Merger Restructuring Program.
For segment reporting, restructuring charges are unallocated expenses.
The following table summarizes the charges related to restructuring program activities by type of cost:
|
| | | | | | | | | | | | | | | |
Year Ended December 31, 2013 | Separation Costs | | Accelerated Depreciation | | Other | | Total |
2013 Restructuring Program | | | | | | | |
Materials and production | $ | — |
| | $ | 186 |
| | $ | 7 |
| | $ | 193 |
|
Marketing and administrative | — |
| | 72 |
| | 3 |
| | 75 |
|
Research and development | — |
| | 76 |
| | (1 | ) | | 75 |
|
Restructuring costs | 866 |
| | — |
| | 32 |
| | 898 |
|
| 866 |
| | 334 |
| | 41 |
| | 1,241 |
|
Merger Restructuring Program | | | | | | | |
Materials and production | — |
| | 151 |
| | 98 |
| | 249 |
|
Marketing and administrative | — |
| | 63 |
| | 3 |
| | 66 |
|
Research and development | — |
| | 27 |
| | (1 | ) | | 26 |
|
Restructuring costs | 481 |
| | — |
| | 284 |
| | 765 |
|
| 481 |
| | 241 |
| | 384 |
| | 1,106 |
|
2008 Restructuring Program | | | | | | | |
Materials and production | — |
| | (2 | ) | | 6 |
| | 4 |
|
Marketing and administrative | — |
| | 4 |
| | — |
| | 4 |
|
Restructuring costs | 34 |
| | — |
| | 12 |
| | 46 |
|
| 34 |
| | 2 |
| | 18 |
| | 54 |
|
| $ | 1,381 |
| | $ | 577 |
| | $ | 443 |
| | $ | 2,401 |
|
Year Ended December 31, 2012 | | | | | | | |
Merger Restructuring Program | | | | | | | |
Materials and production | $ | — |
| | $ | 92 |
| | $ | 70 |
| | $ | 162 |
|
Marketing and administrative | — |
| | 75 |
| | 6 |
| | 81 |
|
Research and development | — |
| | 53 |
| | 4 |
| | 57 |
|
Restructuring costs | 497 |
| | — |
| | 154 |
| | 651 |
|
| 497 |
| | 220 |
| | 234 |
| | 951 |
|
2008 Restructuring Program | | | | | | | |
Materials and production | — |
| | 7 |
| | 19 |
| | 26 |
|
Marketing and administrative | — |
| | 8 |
| | 1 |
| | 9 |
|
Restructuring costs | (8 | ) | | — |
| | 21 |
| | 13 |
|
| (8 | ) | | 15 |
| | 41 |
| | 48 |
|
| $ | 489 |
| | $ | 235 |
| | $ | 275 |
| | $ | 999 |
|
Year Ended December 31, 2011 | | | | | | | |
Merger Restructuring Program | | | | | | | |
Materials and production | $ | — |
| | $ | 282 |
| | $ | 17 |
| | $ | 299 |
|
Marketing and administrative | — |
| | 108 |
| | 11 |
| | 119 |
|
Research and development | — |
| | 151 |
| | (17 | ) | | 134 |
|
Restructuring costs | 1,117 |
| | — |
| | 177 |
| | 1,294 |
|
| 1,117 |
| | 541 |
| | 188 |
| | 1,846 |
|
2008 Restructuring Program | | | | | | | |
Materials and production | — |
| | 24 |
| | 5 |
| | 29 |
|
Research and development | — |
| | 4 |
| | — |
| | 4 |
|
Restructuring costs | (6 | ) | | — |
| | 18 |
| | 12 |
|
| (6 | ) | | 28 |
| | 23 |
| | 45 |
|
| $ | 1,111 |
| | $ | 569 |
| | $ | 211 |
| | $ | 1,891 |
|
Separation costs are associated with actual headcount reductions, as well as those headcount reductions which were probable and could be reasonably estimated. In 2013, approximately 1,540 positions were eliminated under the 2013 Restructuring Program. Positions eliminated under the Merger Restructuring Program were approximately 4,475 in 2013, 3,975 in 2012 and 6,880 in 2011 and positions eliminated under the 2008 Restructuring Program were approximately 55 in 2013, 155 in 2012 and 450 in 2011. These position eliminations were comprised of actual headcount reductions and the elimination of contractors and vacant positions.
Accelerated depreciation costs primarily relate to manufacturing, research and administrative facilities and equipment to be sold or closed as part of the programs. Accelerated depreciation costs represent the difference between the depreciation expense to be recognized over the revised useful life of the site, based upon the anticipated date the site will be closed or divested, and depreciation expense as determined utilizing the useful life prior to the restructuring actions. All of the sites have and will continue to operate up through the respective closure dates and, since future undiscounted cash flows were sufficient to recover the respective book values, Merck was required to accelerate depreciation of the site assets rather than record an impairment charge. Anticipated site closure dates, particularly related to manufacturing locations, have been and may continue to be adjusted to reflect changes resulting from regulatory or other factors.
Other activity in 2013, 2012 and 2011 includes $259 million, $155 million and $72 million, respectively, of asset abandonment, shut-down and other related costs. Additionally, other activity includes certain employee-related costs associated with pension and other postretirement benefit plans (see Note 13) and share-based compensation. Other activity also reflects net pretax (losses) gains resulting from sales of facilities and related assets of $(64) million in 2013 (primarily reflecting the loss on the transaction with Aspen discussed above), $28 million in 2012 and $10 million in 2011.
Adjustments to the recorded amounts were not material in any period.
The following table summarizes the charges and spending relating to restructuring activities by program:
|
| | | | | | | | | | | | | | | |
| Separation Costs | | Accelerated Depreciation | | Other | | Total |
| | | | | | | |
2013 Restructuring Program | | | | | | | |
Restructuring reserves January 1, 2013 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Expenses | 866 |
| | 334 |
| | 41 |
| | 1,241 |
|
(Payments) receipts, net | (121 | ) | | — |
| | 9 |
| | (112 | ) |
Non-cash activity | — |
| | (334 | ) | | (27 | ) | | (361 | ) |
Restructuring reserves December 31, 2013 (1) | $ | 745 |
| | $ | — |
| | $ | 23 |
| | $ | 768 |
|
| | | | | | | |
Merger Restructuring Program | | | | | | | |
Restructuring reserves January 1, 2012 | $ | 1,144 |
| | $ | — |
| | $ | 51 |
| | $ | 1,195 |
|
Expenses | 497 |
| | 220 |
| | 234 |
| | 951 |
|
(Payments) receipts, net | (942 | ) | | — |
| | (170 | ) | | (1,112 | ) |
Non-cash activity | — |
| | (220 | ) | | (96 | ) | | (316 | ) |
Restructuring reserves December 31, 2012 | 699 |
| | — |
| | 19 |
| | 718 |
|
Expenses | 481 |
| | 241 |
| | 384 |
| | 1,106 |
|
(Payments) receipts, net | (517 | ) | | — |
| | (258 | ) | | (775 | ) |
Non-cash activity | 62 |
| | (241 | ) | | (133 | ) | | (312 | ) |
Restructuring reserves December 31, 2013 (1) | $ | 725 |
| | $ | — |
| | $ | 12 |
| | $ | 737 |
|
| | | | | | | |
2008 Restructuring Program | | | | | | | |
Restructuring reserves January 1, 2012 | $ | 126 |
| | $ | — |
| | $ | — |
| | $ | 126 |
|
Expenses | (8 | ) | | 15 |
| | 41 |
| | 48 |
|
(Payments) receipts, net | (41 | ) | | — |
| | (21 | ) | | (62 | ) |
Non-cash activity | — |
| | (15 | ) | | (20 | ) | | (35 | ) |
Restructuring reserves December 31, 2012 | 77 |
| | — |
| | — |
| | 77 |
|
Expenses | 34 |
| | 2 |
| | 18 |
| | 54 |
|
(Payments) receipts, net | (49 | ) | | — |
| | (11 | ) | | (60 | ) |
Non-cash activity | (62 | ) | | (2 | ) | | (7 | ) | | (71 | ) |
Restructuring reserves December 31, 2013 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| |
(1) | The cash outlays associated with the 2013 Restructuring Program are expected to be substantially completed by the end of 2015. The cash outlays associated with the Merger Restructuring Program were substantially completed by the end of 2013 with the exception of certain actions, principally manufacturing-related, which are expected to be substantially completed by 2016. |
Legacy Schering-Plough Program
Prior to the Merger, Schering-Plough commenced a Productivity Transformation Program which was designed to reduce and avoid costs and increase productivity. During 2011, the Company recorded $20 million of accelerated depreciation costs included in Materials and production costs for this program which was substantially complete at the end of 2011.
