5. RESTRUCTURING AND RELATED CHARGES
2012 Restructuring Actions
General
As part of Lexmark's ongoing strategy to increase the focus of its talent and resources on higher usage business platforms, the Company announced restructuring actions (the "2012 Restructuring Actions") on January 31 and August 28, 2012. These actions better align the Company's sales, marketing and development resources, and align and reduce its support structure consistent with its focus on business customers. The 2012 Restructuring Actions include exiting the development and manufacturing of the company's remaining inkjet hardware, with reductions primarily in the areas of inkjet-related manufacturing, research and development, supply chain, marketing and sales as well as other support functions. The Company will continue to provide service, support and aftermarket supplies for its inkjet installed base. The Company expects these actions to be principally complete by the end of 2015.
The 2012 Restructuring Actions are expected to impact about 2,325 positions worldwide, including 1,100 manufacturing positions. The 2012 Restructuring Actions will result in total pre-tax charges of approximately $137 million, with $110.5 million incurred to date, approximately $14.9 million to be incurred in 2013, and approximately $11.6 million to be incurred in 2014 and 2015. The Company expects the total cash costs of the 2012 Restructuring Actions to be approximately $57 million with $51.1 incurred to date, and approximately $5.9 million impacting 2013 and 2014.
The Company expects to incur total charges related to the 2012 Restructuring Actions of approximately $111 million in ISS, $25 million in All other and $1 million in Perceptive Software.
At the close of 2012, the Company was in the process of identifying potential buyers and gauging interest in certain inkjet technology and intellectual property. The asset group did not qualify as held for sale under the FASB guidance on accounting for the impairment or disposal of long-lived assets at December 31, 2012.
Impact to 2012 and 2011 Financial Results
For the years ended December 31, 2012 and 2011, the Company incurred charges for the Company's 2012 Restructuring Actions as follows:
| 2012 | 2011 | |||
| Accelerated depreciation charges | $ | 49.3 | $ | 4.5 |
| Impairment of long-lived assets held for sale | 0.6 | - | ||
| Excess components and other inventory-related charges | 17.7 | - | ||
| Employee termination benefit charges | 31.1 | 3.1 | ||
| Contract termination and lease charges | 4.2 | - | ||
| Total restructuring-related charges | $ | 102.9 | $ | 7.6 |
The estimated useful lives of certain long-lived assets changed as a result of the Company's decision to exit the development and manufacture of inkjet hardware. Accelerated depreciation and impairment charges for the 2012 Restructuring Actions and all of the other restructuring actions were determined in accordance with FASB guidance on accounting for the impairment or disposal of long-lived assets. For the year ended December 31, 2012, the Company incurred accelerated depreciation charges of $29.5 million in Cost of revenue, and $19.8 million in Selling, general and administrative, on the Consolidated Statements of Earnings. For the year ended December 31, 2011, the Company incurred accelerated depreciation charges of $4.5 million in Cost of revenue on the Consolidated Statements of Earnings.
Impairment charges of $0.6 million were incurred in Cost of revenue on the Consolidated Statements of Earnings related to machinery and equipment located in Juarez, Mexico, which is held for sale, for which the current fair value has fallen below the carrying value.
As a result of the Company's decision to cease the manufacturing of inkjet hardware, it became liable for components under certain supplier agreements. The loss in utility of inkjet components and inventories attributable to the decision to exit were determined in accordance with FASB guidance on inventory measurements. For the year ended December 31, 2012, the Company incurred excess component and other inventory-related charges of $17.7 million in Cost of revenue on the Consolidated Statements of Earnings.
Employee termination benefit charges and contract termination and lease charges for the 2012 Restructuring Actions and all of the other restructuring actions were recorded in accordance with FASB guidance on employers' accounting for postemployment benefits and guidance on accounting for costs associated with exit or disposal activities, as appropriate. For the years ended December 31, 2012 and 2011, employee termination benefit charges, which include severance, medical and other benefits, and contract termination and lease charges are included in Restructuring and related charges on the Consolidated Statements of Earnings.
For the years ended December 31, 2012 and 2011, the Company incurred restructuring-related charges in connection with the 2012 Restructuring Actions in the Company's segments as follows:
| 2012 | 2011 | |||
| ISS | $ | 84.7 | $ | 7.6 |
| All other | 17.5 | - | ||
| Perceptive Software | 0.7 | - | ||
| Total charges | $ | 102.9 | $ | 7.6 |
Pension and postretirement plan curtailment and termination benefit losses related to the 2012 Restructuring Actions were not included in the tables above. Refer to Note 17 of the Notes to Consolidated Financial Statements for more information.
Liability Rollforward
The following table represents a rollforward of the liability incurred for employee termination benefits and contract termination and lease charges in connection with the 2012 Restructuring Actions. Of the total $18.1 million restructuring liability, $13.8 million is included in Accrued liabilities and $4.3 million is included in Other Liabilities on the Company's Consolidated Statements of Financial Position.
| Employee | Contract | ||||||||
| Termination | Termination & | ||||||||
| Benefits | Lease Charges | Total | |||||||
| Balance at January 1, 2011 | $ | - | $ | - | $ | - | |||
| Costs incurred | 3.1 | - | 3.1 | ||||||
| Balance at December 31, 2011 | $ | 3.1 | $ | - | $ | 3.1 | |||
| Costs incurred | 31.3 | 4.7 | 36.0 | ||||||
| Payments & Other (1) | (16.4 | ) | (3.9 | ) | (20.3 | ) | |||
| Reversals (2) | (0.2 | ) | (0.5 | ) | (0.7 | ) | |||
| Balance at December 31, 2012 | $ | 17.8 | $ | 0.3 | $ | 18.1 |
(1) Other consists of changes in the liability balance due to foreign currency translations.
(2) Reversals due to changes in estimates for employee termination benefits.
Summary of Other Restructuring Actions
General
In response to global economic weakening, to improve the efficiency and effectiveness of its operations, enhance the efficiency of the Company's inkjet cartridge manufacturing operations and to reduce the Company's business support cost and expense structure, the Company announced various restructuring actions ("Other Restructuring Actions") from 2006 to October 2009. The Other Restructuring Actions include closing the Company's inkjet supplies manufacturing facilities in Mexico, the consolidating of its cartridge manufacturing capacity, as well as impacting positions in the Company's general and administrative functions, supply chain and sales support, marketing and sales management, and consolidating of the Company's research and development programs. The Other Restructuring Actions are considered substantially completed and any remaining charges to be incurred from these actions are expected to be immaterial.
Impact to 2012, 2011 and 2010 Financial Results
For the years ended December 31, 2012, 2011 and 2010, the Company incurred charges (reversals) for the Company's Other Restructuring Actions as follows:
| 2012 | 2011 | 2010 | |||||||
| Accelerated depreciation charges | $ | 0.1 | $ | 2.4 | $ | 5.9 | |||
| Impairment of long-lived assets held for sale | 1.5 | 4.6 | - | ||||||
| Employee termination benefit charges (reversals) | (0.1 | ) | (1.0 | ) | (0.1 | ) | |||
| Contract termination and lease charges (reversals) | 0.9 | (0.1 | ) | 2.5 | |||||
| Total restructuring-related charges | $ | 2.4 | $ | 5.9 | $ | 8.3 |
For the years ended December 31, 2012, 2011 and 2010, accelerated depreciation charges of $0.1 million, $2.4 million and $1.8 million, respectively, are included in Selling, general and administrative on the Consolidated Statements of Earnings. For the year ended December 31, 2010, accelerated depreciation charges of $4.1 million are included in Cost of revenue on the Consolidated Statements of Earnings.
In 2012 and 2011, the Company recorded impairment charges of $1.5 million and $3.6 million, respectively, related to its site in Boigny, France held for sale for which the current fair value has fallen below the carrying value. The asset impairment charges are included in Selling, general and administrative on the Company's Consolidated Statement of Earnings.
In 2011, the Company recorded impairment charges of $1.0 million related to its manufacturing facility in Juarez, Mexico for which the current fair value had fallen below the carrying value. The asset impairment charge is included in Selling, general and administrative on the Company's Consolidated Statements of Earnings. Subsequent to the impairment charge, the Juarez, Mexico facility was sold and the Company recognized a $0.6 million pre-tax gain on the sale that is included in Selling, general and administrative on the Company's Consolidated Statements of Earnings. This gain is not included in the total restructuring-related charges (reversals) presented in the table above.
During 2010, the Company sold one of its inkjet supplies manufacturing facilities in Chihuahua, Mexico for $5.6 million and recognized a $0.5 million pre-tax gain on the sale that is included in Selling, general and administrative on the Company's Consolidated Statements of Earnings. This gain is not included in the total restructuring-related charges (reversals) presented in the table above.
For the years ended December 31, 2012, 2011 and 2010, Employee termination benefit charges (reversals) and contract termination and lease charges (reversals) are included in Restructuring and related charges on the Consolidated Statements of Earnings.
For the year ended December 31, 2011, the $(1.0) million reversal for employee termination benefit charges is due primarily to revisions in assumptions.
For the years ended December 31, 2012, 2011 and 2010, the Company incurred restructuring-related charges in connection with the Company's Other Restructuring Actions in the Company's segments as follows:
| 2012 | 2011 | 2010 | ||||
| ISS | $ | 0.8 | $ | 2.1 | $ | 7.5 |
| All other | 1.6 | 3.8 | 0.8 | |||
| Total charges | $ | 2.4 | $ | 5.9 | $ | 8.3 |
Liability Rollforward
The following table represents a rollforward of the liability incurred for employee termination benefits and contract termination and lease charges in connection with the Company's Other Restructuring Actions. Of the total $3.5 million restructuring liability, $3.2 million is included in Accrued liabilities and $0.3 million is included in Other Liabilities on the Company's Consolidated Statements of Financial Position.
| Employee | Contract | ||||||||
| Termination | Termination & | ||||||||
| Benefits | Lease Charges | Total | |||||||
| Balance at January 1, 2010 | $ | 68.9 |
$ |
3.4 | $ | 72.3 | |||
| Costs incurred | 6.7 | 4.9 | 11.6 | ||||||
| Payments & Other (1) | (42.2 | ) | (4.9 | ) | (47.1 | ) | |||
| Reversals (2) | (6.9 | ) | (2.3 | ) | (9.2 | ) | |||
| Balance at December 31, 2010 | $ | 26.5 | $ | 1.1 | $ | 27.6 | |||
| Costs incurred | 1.0 | 0.4 | 1.4 | ||||||
| Payments & Other (1) | (18.0 | ) | (1.0 | ) | (19.0 | ) | |||
| Reversals (2) | (2.2 | ) | (0.5 | ) | (2.7 | ) | |||
| Balance at December 31, 2011 | $ | 7.3 | $ | - | $ | 7.3 | |||
| Costs incurred | 0.6 | 0.9 | 1.5 | ||||||
| Payments & Other (1) | (4.1 | ) | (0.2 | ) | (4.3 | ) | |||
| Reversals (2) | (1.0 | ) | - | (1.0 | ) | ||||
| Balance at December 31, 2012 | $ | 2.8 | $ | 0.7 | $ | 3.5 |
(1) Other consists of changes in the liability balance due to foreign currency translations.
(2) Reversals due to changes in estimates for employee termination benefits.