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What are Restructuring Costs?
A company will report restructuring costs when it incurs one-time or infrequent expenses in the process of reorganizing its operations to improve the long-term profitability and efficiency of its company.
Restructuring costs are reported as non-operating charges and aren’t expected to recur in the future. Although they are non-recurring costs, they still are reported in the income statement and used to calculate the net income. Often analysts will ‘normalize’ or ‘clean’ earning of restructuring costs to give a better understanding of the long-term profitability of the firm.
Common Restructuring Costs
- Mergers and acquisitions with companies.
- Selling a subsidiary or downsizing.
- Moving assets to a new location.
- Laying off employees.
Example
Company A. has decided to make the following changes to its operations:
Install a new inventory system |
$30,000.0 |
Move its trucks to a bigger depot |
$10,000.0 |
Retrenchment packages for 10 employees |
$100,000.0 |
Merge with a competitor |
$1,000,000.0 |
The total cost Company A would report in the income statement as Restructuring Costs would be $1,140,000.0 (1,000,000.0 + 100,000.0 + 10,000.0 + 30,000.0)
Although companies might need to pay out restructuring costs over time, the whole amount should be expensed as soon as reasonably probable. When a company reports the restructuring costs, it will expense them and create a liability until the cash is paid out.
Restructuring example: Company A | ||||
Total restructuring cost | 1,140.0 | |||
Paid out over 3 years | ||||
Year 1 | Assets | L&E | ||
RE – restructuring expense |
(1,140.0) |
|||
Restructuring provision (liability) |
1,140.0 |
|||
Cash |
(380.0) |
Restructuring provision (liability) |
(380.0) |
|
Year 2 | Cash |
(380.0) |
Restructuring provision (liability) |
(380.0) |
Year 3 | Cash |
(380.0) |
Restructuring provision (liability) |
(380.0) |
Points To Note
- Amounts are shown in thousands.
- Company A has raised a restructuring provision, which it plans to pay over 3 years.
- Annual payments are $380,000.0 ($1,1400,00.0 / 3 years).
- The balance on the Restructuring provision at Year 1 after payment is $760,000.0 ($1,140,000 – $380,000.0).
- The balance on the Restructuring provision at Year 2 after payment is $380,000.0 ($760,000.0 – $380,000.0).
- The balance on the Restructuring provision at Year 3 after payment is $0 ($380,000.0 – $380,000.0).
- Often companies will present ‘cleaned’ or ‘normalized’ earnings to help investors understand the long-term profitability of the company..
Kellogg Inc.
Below, Kellogg Inc. is reporting $0.42 cents per share, but adjusted for non-recurring items it’s suggesting its recurring EPS is $0.91 cents per share. The detail below is taken from Kellogg’s 8-K filing at the SEC. Companies usually present this type of analysis in the press release related to earnings announcements.
Kellogg Company – Extract from 8-K
Kellogg’s disclosure and explanation of the non-recurring items:
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