Q. 2005 actions
In May 2005, management announced its plans to implement a series of restructuring actions designed to improve the company’s efficiencies, strengthen its client-facing operations and capture opportunities in high-growth markets. The company’s actions primarily included voluntary and involuntary workforce reductions, with the majority impacting the Global Services segments, primarily in Europe, as well as costs incurred in connection with the vacating of leased facilities. These actions were in addition to the company’s ongoing workforce reduction and rebalancing activities that occur each quarter. The total charges expected to be incurred in connection with all second-quarter 2005 initiatives is approximately $1,771 million ($1,765 million of which has been recorded cumulatively through December 31, 2007). Approximately $1,631 million of the total charges require cash payments, of which approximately $1,453 million have been made as of December 31, 2007 and $73 million are expected to be made over the next 12 months.
Total pre-tax restructuring activity was as follows:
|($ in millions)|
|Pre-tax Charges Recorded in Second-Qtr. 2005||Asset Impairments||Liability Recorded in Second-Qtr. 2005||Payments||Other**||Liability as of Dec. 31, 2005|
* $1,574 million recorded in SG&A expense and $236 million recorded in Other (income) and expense in the Consolidated Statement of Earnings.
** Consists of foreign currency translation adjustments ($38 million), net balance sheet reclassifications ($41 million) and reversals of previously recorded liabilities ($34 million) for changes in the estimated cost of employee terminations and vacant space, offset by approximately $1 million of accretion expense. The reversals were recorded primarily in SG&A expense.
+ $391 million recorded as a current liability in Accounts payable and accruals and $146 million as a noncurrent liability in Other liabilities in the Consolidated Statement of Financial Position.
|Workforce reductions||$ 1,574||$ —||$ 1,574||$ (1,013)||$ (107)||$ 454|
|Total restructuring activity for second-quarter 2005 actions||$ 1,810*||$ 95||$ 1,715||$ (1,066)||$ (112)||$ 537+|
|($ in millions)|
|Liability as of Dec. 31, 2005||Payments||Other*||Liability as of Dec. 31, 2006||Payments||Other+||Liability as of Dec. 31, 2007|
* Consists of foreign currency translation adjustments ($37 million), net balance sheet reclassifications ($2 million), accretion expense ($7 million) and reversals of previous recorded liabilities ($35 million) for changes in the estimated cost of employee terminations and vacant space. These reversals, net of accretion expense, were primarily recorded in SG&A expense.
** $92 million recorded as a current liability in Accounts payable and accruals and $155 million as a noncurrent liability in Other liabilities in the Consolidated Statement of Financial Position.
+ Consists of foreign currency translation adjustments ($20 million) and accretion expense ($6 million), partially offset by adjustments to previously recorded liabilities ($13 million) for changes in the estimated cost of employee terminations and vacant space and net balance sheet reclassification of $2 million. The adjustments and accretion expense were primarily recorded in SG&A expense.
++ $73 million recorded as a current liability in Accounts payable and accruals and $98 million as a noncurrent liability in Other liabilities in the Consolidated Statement of Financial Position.
|Workforce reductions||$ 454||$ (264)||$ 10||$ 199||$ (65)||$ 11||$ 145|
|Total restructuring activity for second-quarter 2005 actions||$ 537||$ (302)||$ 11||$ 247**||$ (86)||$ 11||$ 171++|
Charges incurred for the workforce reductions consisted of severance/termination benefits for approximately 16,000 employees (14,500 of which were for the incremental second-quarter 2005 actions). All separations were substantially completed by March 31, 2006. The noncurrent portion of the liability associated with the workforce reductions relates to terminated employees who were granted annual payments to supplement their income in certain countries. Depending on individual country legal requirements, these required payments will continue until the former employee begins receiving pension benefits or is deceased. Cash payments made through December 31, 2007 associated with the workforce reductions were $1,342 million.
The vacant space accruals are primarily for ongoing obligations to pay rent for vacant space, offset by estimated sublease income, over the respective lease term of the company’s lease agreements. The length of these obligations varies by lease with the longest extending through 2013.
In connection with the company’s restructuring activities initiated in the second quarter of 2005, the company recorded pre-tax impairment charges for certain real estate assets of approximately $95 million during the year ended December 31, 2005. The principal component of such impairment charges resulted from the sale of a facility in Yasu-City, Japan, which closed during the third quarter of 2005. In connection with this sale, the company recorded an impairment charge to write the asset down to its fair value in the second quarter.
These restructuring activities had the following effect on the company’s reportable segments.
|($ in millions)|
|Total Pre-tax Charges Expected to be Incurred||Cumulative Pre-tax Charges Recorded for 2nd-Qtr. 2005 Initiatives*|
* Includes $13 million and $35 million for reversals of previously recorded charges for the years ended December 31, 2007 and 2006, respectively, due to changes in the estimated cost of employee terminations and vacant space. These adjustments were primarily recorded in SG&A expense.
|Global Technology Services||$ 722||$ 719|
|Global Business Services||444||444|
|Systems and Technology||132||132|
|Total reportable segments||1,412||1,408|
|Unallocated corporate amounts||360||357|
|Total||$ 1,771||$ 1,765|