Restructuring

6 Months Ended

Jun. 30, 2020

Restructuring and Related Activities [Abstract]

In early 2019, Merck approved a new global restructuring program (Restructuring Program) as part of a worldwide initiative focused on further optimizing the Company’s manufacturing and supply network, as well as reducing its global real estate footprint. This program is a continuation of the Company’s plant rationalization, builds on prior restructuring programs and does not include any actions associated with the planned spin-off of Organon. As the Company continues to evaluate its global footprint and overall operating model, it subsequently identified additional actions under the Restructuring Program, and could identify further actions over time. The actions currently contemplated under the Restructuring Program are expected to be substantially completed by the end of 2023, with the cumulative pretax costs to be incurred by the Company to implement the program estimated to be approximately $2.5 billion. The Company estimates that approximately 60% of the cumulative pretax costs will result in cash outlays, primarily related to employee separation expense and facility shut-down costs. Approximately 40% of the cumulative pretax costs will be non-cash, relating primarily to the accelerated depreciation of facilities to be closed or divested. The Company expects to record charges of approximately $800 million in 2020 related to the Restructuring Program. Actions under previous global restructuring programs have been substantially completed.

The Company recorded total pretax costs of $150 million and $159 million in the second quarter of 2020 and 2019, respectively, and $318 million and $346 million for the first six months of 2020 and 2019, respectively, related to restructuring program activities. Since inception of the Restructuring Program through June 30, 2020, Merck has recorded total pretax accumulated costs of approximately $1.2 billion. For segment reporting, restructuring charges are unallocated expenses.

The following tables summarize the charges related to restructuring program activities by type of cost:



	Three Months Ended June 30, 2020									Six Months Ended June 30, 2020
($ in millions)	Separation Costs		Accelerated Depreciation		Other			Total		Separation Costs		Accelerated Depreciation		Other		Total
Cost of sales	$	—	$	31	$	(6	)	$	25	$	—	$	56	$	37	$	93
Selling, general and administrative	—		11		—			11		—		22		—		22
Research and development	—		31		—			31		—		48		—		48
Restructuring costs	35		—		48			83		82		—		73		155
	$	35	$	73	$	42		$	150	$	82	$	126	$	110	$	318



	Three Months Ended June 30, 2019								Six Months Ended June 30, 2019
($ in millions)	Separation Costs		Accelerated Depreciation		Other		Total		Separation Costs		Accelerated Depreciation		Other		Total
Cost of sales	$	—	$	64	$	1	$	65	$	—	$	98	$	1	$	99
Selling, general and administrative	—		32		—		32		—		32		—		32
Research and development	—		2		1		3		—		2		1		3
Restructuring costs	25		—		34		59		153		—		59		212
	$	25	$	98	$	36	$	159	$	153	$	132	$	61	$	346

Separation costs are associated with actual headcount reductions, as well as those headcount reductions which were probable and could be reasonably estimated.

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 asset, based upon the anticipated date the site will be closed or divested or the equipment disposed of, and depreciation expense as determined utilizing the useful life prior to the restructuring actions. All the sites have and will continue to operate up through the respective closure dates and, since future undiscounted cash flows are sufficient to recover the respective book values, Merck is recording accelerated depreciation over the revised useful life of the site assets. 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 2020 and 2019 includes asset abandonment, facility shut-down and other related costs, as well as pretax gains and losses resulting from the sales of facilities and related assets. Additionally, other activity includes certain employee-related costs associated with pension and other postretirement benefit plans (see Note 11) and share-based compensation.

The following table summarizes the charges and spending relating to restructuring program activities for the six months ended June 30, 2020:



($ in millions)	Separation Costs			Accelerated Depreciation			Other			Total
Restructuring reserves January 1, 2020	$	690		$	—		$	69		$	759
Expense	82			126			110			318
(Payments) receipts, net	(328		)	—			(163		)	(491		)
Non-cash activity	—			(126		)	34			(92		)
Restructuring reserves June 30, 2020 ⁽¹⁾	$	444		$	—		$	50		$	494

⁽¹⁾

The remaining cash outlays are expected to be substantially completed by the end of 2023.