Restructuring

6 Months Ended

Jun. 30, 2011

2. Restructuring

Merger Restructuring Program

In February 2010, the Company commenced actions under a global restructuring program (the “Merger Restructuring Program”) in conjunction with the integration of the legacy Merck and legacy Schering-Plough businesses. This Merger Restructuring Program is intended to optimize the cost structure of the combined company. Additional actions under the program continued during 2010. On July 29, 2011, the Company announced the next phase of the Merger Restructuring Program during which the Company expects to reduce its workforce measured at the time of the Merger by an additional 12% to 13% across the Company worldwide. A majority of the workforce reductions in this phase of the Merger Restructuring Program relate to manufacturing, including Animal Health, administrative and headquarters organizations. Previously announced workforce reductions of approximately 17% in earlier phases of the 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. The Company will continue to hire employees in strategic growth areas of the business as necessary. The Company will continue to pursue productivity efficiencies and evaluate its manufacturing supply chain capabilities on an ongoing basis which may result in future restructuring actions.

The Company recorded total pretax restructuring costs of $808 million and $830 million in the second quarter of 2011 and 2010, respectively, and $921 million and $1.1 billion for the first six months of 2011 and 2010, respectively, related to this program. Since inception of the Merger Restructuring Program through June 30, 2011, Merck has recorded total pretax accumulated costs of approximately $4.2 billion and eliminated approximately 12,900 positions comprised of employee separations, as well as the elimination of contractors and over 2,500 positions that were vacant at the time of the Merger. The restructuring actions under the Merger Restructuring Program are expected to be substantially completed by the end of 2013, with the exception of certain actions, principally manufacturing-related, which are expected to be completed by 2015, with the total cumulative pretax costs estimated to be approximately $5.8 billion to $6.6 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 Global Restructuring Program

In October 2008, Old Merck announced a global restructuring program (the “2008 Restructuring Program”) to reduce its cost structure, increase efficiency, and enhance competitiveness. As part of the 2008 Restructuring Program, the Company expects to eliminate approximately 7,200 positions — 6,800 active employees and 400 vacancies — across the Company worldwide by the end of 2011. Pretax restructuring costs of $1 million and $66 million were recorded in the second quarter of 2011 and 2010, respectively, and $5 million and $131 million in the first six months of 2011 and 2010, respectively, related to the 2008 Restructuring Program. Since inception of the 2008 Restructuring Program through June 30, 2011, Merck has recorded total pretax accumulated costs of $1.6 billion and eliminated approximately 5,980 positions comprised of employee separations and the elimination of contractors and vacant positions. The 2008 Restructuring Program is expected to be completed by the end of 2011, except for certain manufacturing-related actions, with the total cumulative pretax costs estimated to be up to $2.0 billion. The Company estimates that two-thirds of the cumulative pretax costs relate to cash outlays, primarily from 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.

For segment reporting, restructuring charges are unallocated expenses.

The following tables summarize the charges related to Merger Restructuring Program and 2008 Restructuring Program activities by type of cost:


	Three Months Ended June 30, 2011											Six Months Ended June 30, 2011
	Separation			Accelerated								Separation			Accelerated
($ in millions)	Costs			Depreciation		Other			Total			Costs			Depreciation		Other			Total

Merger Restructuring Program

Materials and production	$	—		$	91	$	5		$	96		$	—		$	152	$	5		$	157
Marketing and administrative		—			22		1			23			—			45		1			46
Research and development		—			38		(22	)		16			—			80		(19	)		61
Restructuring costs		646			—		27			673			607			—		50			657

		646			151		11			808			607			277		37			921


2008 Restructuring Program

Materials and production		—			4		2			6			—			6		2			8
Restructuring costs		(7	)		—		2			(5	)		(8	)		—		5			(3	)

		(7	)		4		4			1			(8	)		6		7			5

	$	639		$	155	$	15		$	809		$	599		$	283	$	44		$	926


	Three Months Ended June 30, 2010								Six Months Ended June 30, 2010
	Separation		Accelerated						Separation		Accelerated
($ in millions)	Costs		Depreciation		Other		Total		Costs		Depreciation		Other		Total

Merger Restructuring Program

Materials and production	$	—	$	149	$	22	$	171	$	—	$	174	$	22	$	196
Research and development		—		113		31		144		—		113		37		150
Restructuring costs		374		41		100		515		583		41		143		767

		374		303		153		830		583		328		202		1,113


2008 Restructuring Program

Materials and production		—		11		36		47		—		40		36		76
Restructuring costs		12		—		7		19		31		—		24		55

		12		11		43		66		31		40		60		131

	$	386	$	314	$	196	$	896	$	614	$	368	$	262	$	1,244

Separation costs are associated with actual headcount reductions, as well as those headcount reductions which were probable and could be reasonably estimated. In the first six months of 2011, separation costs for the Merger Restructuring Program include a reduction of separation reserves of approximately $50 million resulting from the Company’s decision in the first quarter to retain approximately 380 employees at its Oss, Netherlands research facility that had previously been expected to be separated. In the second quarter of 2011 and 2010, approximately 585 positions and 2,435 positions, respectively, were eliminated under the Merger Restructuring Program and approximately 60 positions and 240 positions, respectively, were eliminated under the 2008 Restructuring Program. In the first six months of 2011 and 2010, approximately 1,335 positions and 7,585 positions, respectively, were eliminated under the Merger Restructuring Program and approximately 180 positions and 775 positions, respectively, were eliminated under the 2008 Restructuring Program. 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 cash flows were sufficient to recover the respective book values, Merck was required to accelerate depreciation of the site assets rather than write them off immediately.

Other activity in the second quarter of 2011 and 2010 includes asset abandonment, shut-down and other related costs. Additionally, other activity includes employee-related costs such as curtailment, settlement and termination charges associated with pension and other postretirement benefit plans (see Note 12) and share-based compensation costs.

The following table summarizes the charges and spending relating to Merger Restructuring Program and 2008 Restructuring Program activities for the six months ended June 30, 2011:


	Separation			Accelerated
($ in millions)	Costs			Depreciation			Other			Total

Merger Restructuring Program

Restructuring reserves January 1, 2011	$	859		$	—		$	64		$	923
Expense		607			277			37			921
(Payments) receipts, net		(257	)		—			(71	)		(328	)
Non-cash activity		—			(277	)		16			(261	)

Restructuring reserves June 30, 2011 ⁽¹⁾	$	1,209		$	—		$	46		$	1,255

2008 Restructuring Program

Restructuring reserves January 1, 2011	$	196		$	—		$	—		$	196
Expense		(8	)		6			7			5
(Payments) receipts, net		(13	)		—			(2	)		(15	)
Non-cash activity		—			(6	)		(5	)		(11	)

Restructuring reserves June 30, 2011 ⁽¹⁾	$	175		$	—		$	—		$	175


⁽¹⁾		The cash outlays associated with the Merger Restructuring Program and the 2008 Restructuring Program are expected to be substantially completed by the end of 2013 and 2011, respectively, with the exception of certain actions, principally manufacturing-related, which are expected to be completed by 2015.

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. The Company recorded accelerated depreciation costs included in Materials and production of $7 million and $6 million for the second quarter of 2011 and 2010, respectively, and $16 million and $9 million for the first six months of 2011 and 2010, respectively. In addition, the second quarter and first six months of 2010 includes a net gain of $8 million reflected in Restructuring costs primarily related to the sale of a manufacturing facility. The remaining reserve associated with this program was $38 million at June 30, 2011.

- Definition

The entire disclosure for restructuring and related activities. Description of restructuring activities such as exit and disposal activities, include facts and circumstances leading to the plan, the expected plan completion date, the major types of costs associated with the plan activities, total expected costs, the accrual balance at the end of the period, and the periods over which the remaining accrual will be settled.

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