17) Restructuring and Management Transition Charges

 

In 2011 and 2010, we incurred $451 million and $32 million, respectively, of restructuring and management transition charges. Restructuring and management transition charges include costs related to activities to streamline our supply chain operations, exit our catalog and catalog outlet businesses, cost savings initiatives to reduce store and home office expenses, the VERP, management transition charges related to the hiring and departure of certain members of management and other miscellaneous restructuring costs including the exit of our two specialty websites, CLAD^TM and Gifting Grace^TM.

 

Supply chain

As a result of consolidating and streamlining our supply chain organization as part of a restructuring program during 2011, we recorded $28 million of increased depreciation, $8 million of costs to close and consolidate facilities and $5 million of employee severance. Increased depreciation resulted from shortening the useful lives of assets related to the closing and consolidating of selected facilities. We are expecting to incur a total of approximately $55 million in expense related to this restructuring activity, with $41 million incurred in 2011 and the remainder to be incurred in 2012.

 

Catalog and catalog outlet stores

In the fourth quarter of 2010, we announced our plan to exit the catalog outlet stores and wind down our catalog business. As a result, in 2010 we recorded $17 million of increased depreciation and $4 million of employee severance. Increased depreciation resulted from shortening the useful lives of assets associated with our catalog and catalog outlet stores. On October 16, 2011, we completed an asset purchase agreement to sell the assets related to the operations of our catalog outlet stores. We sold fixed assets and inventory with combined net book values of approximately $31 million, for a total purchase price of $7 million, which resulted in a loss of $24 million. In 2011, we also recorded an additional $10 million of severance and other costs related to the sale of our catalog outlet stores. In total for 2011 and 2010, we recorded $55 million related to the exit of our catalog and catalog outlet stores. We do not expect to incur any additional costs related to this program, as the catalog outlet stores were sold during 2011 and the catalog operations were discontinued at the end of 2010.

 

Employment termination benefits

In 2011 and 2010, we recorded $41 million and $4 million, respectively, of employee termination benefits for actions to reduce our store and home office expenses. We are expecting to incur additional charges in 2012 related to this restructuring activity.

 

VERP

As a part of several restructuring and cost-savings initiatives designed to reduce salary and related costs across the Company, in August 2011 we announced a VERP which was offered to approximately 8,000 eligible associates. In the third quarter of 2011, we recorded a total charge of $179 million related to the VERP. Charges included $176 million related to enhanced retirement benefits for the approximately 4,000 associates who accepted the VERP, $1 million related to curtailment charges for our Supplemental Retirement Program and Benefit Restoration Plan as a result of the reduction in the expected years of future service related to these plans, and an additional $2 million of costs associated with administering the VERP. This program was completed in 2011 and we do not expect to incur any additional costs related to the enhanced benefits associated with the VERP.

 

Management transition

During 2011, we announced and implemented several changes within our management leadership team which resulted in management transition costs of $130 million during the year. Ronald B. Johnson became Chief Executive Officer on November 1, 2011, succeeding Myron E. Ullman, III. Mr. Ullman was Executive Chairman of the Board of Directors until January 27, 2012, at which time he retired from the Company. During 2011, we incurred transition charges of $53 million and $29 million related to Mr. Johnson and Mr. Ullman, respectively. In October 2011, Michael R. Francis was appointed President and as part of his employment package, he was awarded a one-time sign-on bonus of $12 million. In November 2011, Michael W. Kramer and Daniel E. Walker were appointed Chief Operating Officer and Chief Talent Officer, respectively, and as part of their respective employment packages, they were awarded one-time sign-on bonuses of $4 million and $8 million, respectively. We also recorded $24 million of management transition charges primarily related to other members of management in 2011.

 

Other

In 2011, we recorded $26 million of charges primarily related to the restructuring activities associated with streamlining our custom decorating operations, the exit of our specialty websites CLAD and Gifting Grace. In 2010, we recorded $7 million of charges primarily related to the restructuring activities associated with streamlining our custom decorating operations. In 2011 and 2010, we recorded $4 million and $3 million, respectively, of charges primarily related to increased depreciation as a result of closing and consolidating facilities related to our custom decorating operations. In the fourth quarter of 2011, we recorded $8 million related to the exit of our specialty websites primarily related to termination benefits and contract termination costs. In 2011 and 2010, we incurred $14 million and $4 million, respectively, of additional miscellaneous restructuring costs. We expect to incur an additional $2 million of costs associated with the exit of our specialty websites in 2012 related to lease termination costs. We do not expect to incur any additional costs associated with any of the other miscellaneous restructuring programs that were initiated in 2010 and 2011.

 

The following table reconciles the activity for the restructuring and management transition liability for 2011 and 2010:

($ in millions)		Supply Chain			Catalog and Catalog Outlet Stores			Employment Termination Benefits			VERP			Management Transition			Other			Total
January 30, 2010		$       -			$            -			$              -			$         -			$            -			$  -		$	-
Charges		-			21			4			-			-			7			32
Cash payments		-			-			-			-			-			-			-
Non-cash		-			(17) (1)			-			-			-			(7) (1)			(24)
January 29, 2011		-			4			4			-			-			-			8
Charges		41			34			41			179			130			26			451
Cash payments		(10)			(12)			(17)			(2)			(41)			(3)			(85)
Non-cash		(28) (1)			(26) (2)			-			(177) (3)			(79) (4)			(4) (1)			(314)
January 28, 2012		$       3			$          -			$        28			$       -			$      10			19		$	60

(1)     Amounts represent increased depreciation as a result of shortening the useful lives of assets associated with our catalog outlet stores and our supply chain and custom decorating operations.

(2)     Amount includes the loss on the sale of the catalog outlet stores.

(3)     Amount includes $133 million that reduced the prepaid status of our primary plan and $44 million that increased the unfunded status of our Supplemental Retirement Program and Benefit Restoration Plan on October 15, 2011.

(4)     Amount represents stock-based compensation expense related to management transitions.