What is Restructuring Charge?
1877 reads · Last updated: December 5, 2024
A restructuring charge is a one-time expense that a company pays when reorganizing its operations. Examples of one-time expenses include furloughing or laying off employees, closing manufacturing plants or shifting production to a new location. Companies undertake these moves in an effort to boost profitability, but first must take a one-off hit in the form of an upfront restructuring charge.
Definition
Restructuring costs refer to the one-time expenses a company incurs when reorganizing its operations. These costs typically include severance or termination payments to employees, closing manufacturing plants, or relocating production to new sites. Companies undertake these actions to improve profitability, but they must first bear the upfront one-time restructuring costs.
Origin
The concept of restructuring costs developed with the widespread adoption of corporate restructuring strategies. In the late 20th century, as globalization and market competition intensified, many companies began restructuring their operations to enhance efficiency and competitiveness, leading to the recognition of these expenses as restructuring costs.
Categories and Features
Restructuring costs can be categorized into several types: employee severance costs, asset disposal costs, facility closure costs, and other related expenses. Employee severance costs refer to compensation paid due to layoffs; asset disposal costs involve selling or disposing of unnecessary assets; facility closure costs include the expenses of shutting down plants or offices. The characteristics of restructuring costs are that they are one-time and non-recurring, typically listed separately in financial statements to help investors understand their impact on company earnings.
Case Studies
A typical case is General Electric (GE) in 2017, when GE announced a major restructuring plan, including layoffs and the sale of some businesses. The company incurred significant restructuring costs during this process, but the move aimed to streamline operations and enhance long-term profitability. Another example is Nokia's restructuring in 2011. Nokia closed several factories and laid off employees to cope with fierce competition in the smartphone market, resulting in substantial restructuring costs.
Common Issues
Common issues investors face when analyzing restructuring costs include whether these costs will continue to affect the company's profitability. Typically, restructuring costs are one-time and do not impact long-term profitability, although they may lead to short-term profit declines. Another misconception is treating restructuring costs as recurring expenses, whereas they are non-recurring and should be considered separately.
