2. SPECIAL (GAINS) AND CHARGES

Special (gains) and charges reported on the Consolidated Statement of Income include the following:


	Third Quarter Ended				Nine Months Ended
	September 30				September 30
(millions)	2016		2015		2016		2015
Cost of sales
Restructuring activities		$ -		$ -		$ 0.9		$ 2.2
Energy related charges		-		-		51.0		-
Fixed asset impairment and other inventory charges		-		-		10.0		-
Venezuela related activities		-		23.8		-		33.2
Subtotal		-		23.8		61.9		35.4

Special (gains) and charges
Restructuring activities		(7.7)		12.1		(6.8)		33.1
Champion and Nalco integration costs		-		4.7		-		14.9
Energy related charges		-		-		12.6		-
Venezuela related activities		-		111.9		(7.8)		132.7
Other		10.9		14.0		37.7		35.4
Subtotal		3.2		142.7		35.7		216.1

Operating income subtotal		3.2		166.5		97.6		251.5

Net income attributable to noncontrolling interest
Venezuela related activities		-		(11.1)		-		(11.1)

Total special (gains) and charges		$ 3.2		$ 155.4		$ 97.6		$ 240.4

For segment reporting purposes, special (gains) and charges are not allocated to reportable segments, which is consistent with the company’s internal management reporting.

Restructuring Activities

The company’s restructuring activities are associated with plans to enhance its efficiency and effectiveness and sharpen its competitiveness. Its restructuring plans include net costs associated with significant actions involving employee-related severance charges, contract termination costs and asset write-downs and disposals. Employee termination costs are largely based on policies and severance plans, and include personnel reductions and related costs for severance, benefits and outplacement services. These charges are reflected in the quarter when the actions are probable and the amounts are estimable, which typically is when management approves the actions. Contract termination costs include charges to terminate leases prior to the end of their respective terms and other contract terminations. Asset write-downs and disposals include leasehold improvement write-downs, other asset write-downs associated with combining operations and disposal of assets.

Restructuring activities have been included as a component of cost of sales and special (gains) and charges on the Consolidated Statement of Income. Amounts included as a component of cost of sales include supply chain related severance and other asset write-downs associated with combining operations. Restructuring liabilities have been classified as a component of both other current and other noncurrent liabilities on the Consolidated Balance Sheet.

Energy Restructuring Plan

In April 2013, following the completion of the acquisition of privately held Champion Technologies and its related company Corsicana Technologies (collectively “Champion”), the company commenced plans to undertake restructuring and other cost-saving actions to realize its acquisition-related cost synergies as well as streamline and strengthen Ecolab’s position in the global energy market (the “Energy Restructuring Plan”). Actions associated with the acquisition to improve the effectiveness and efficiency of the business included a reduction of the combined business’s global workforce. Actions also included leveraging and simplifying its global supply chain, including the reduction of plant, distribution center and redundant facility locations and product line optimization.

Restructuring charges within the Energy Restructuring Plan were substantially completed during the fourth quarter of 2015. The company recorded net gains of $0.4 million ($0.2 million after tax) and net charges of $0.9 million ($0.6 million after tax) during the third quarter of 2016 and 2015, respectively. During the nine months ended September 30, 2016 and 2015, the company recorded net charges of $4.2 million ($2.4 million after tax) and $15.0 million ($10.5 million after tax), respectively.

Restructuring activity related to the Energy Restructuring Plan since inception of the underlying actions includes the following:



	Employee
	Termination		Asset
(millions)	Costs		Disposals		Other		Total
2013 - 2015 Activity
Recorded expense and accrual	$	55.6	$	13.2	$	15.3	$	84.1
Net cash payments		(44.3)		3.9		(2.1)		(42.5)
Non-cash charges		-		(17.1)		-		(17.1)
Effect of foreign currency translation		0.4		-		-		0.4
Restructuring liability, December 31, 2015		11.7		-		13.2		24.9

2016 Activity
Recorded expense (income) and accrual		(0.8)		0.8		4.2		4.2
Net cash payments		(5.6)		-		(6.7)		(12.3)
Non-cash charges		-		(0.8)		-		(0.8)
Restructuring liability, September 30, 2016	$	5.3	$	-	$	10.7	$	16.0

The majority of cash payments under this plan are related to severance, with the current accrual expected to be paid over a period of a few months to several quarters. The company anticipates the remaining cash expenditures will continue to be funded from operating activities.

Combined Restructuring Plan

In February 2011, the company commenced a comprehensive plan to substantially improve the efficiency and effectiveness of its European business, as well as undertake certain restructuring activities outside of Europe, historically referred to as the “2011 Restructuring Plan”. Additionally, in January 2012, following the merger with Nalco Holding Company (“Nalco”), the company formally commenced plans to undertake restructuring actions related to the reduction of its global workforce and optimization of its supply chain and office facilities, including planned reductions of plant and distribution center locations, historically referred to as the “Merger Restructuring Plan”. During the first quarter of 2013, the company determined that the objectives of the plans discussed above were aligned, and consequently, the previously separate restructuring plans were combined into one plan.

The combined restructuring plan (the “Combined Plan”) combines opportunities and initiatives from both plans and continues to follow the original format of the Merger Restructuring Plan by focusing on global actions related to optimization of the supply chain and office facilities, including reductions of the global workforce, plant and distribution center locations.

Restructuring charges within the Combined Plan were substantially completed during the fourth quarter of 2015. The company recorded net gains of $7.3 million ($7.0 million after tax) and $10.1 million ($9.7 million after tax) during the third quarter and first nine months of 2016. The company recorded net charges of $11.2 million ($9.4 million after tax) and $20.2 million ($15.7 million after tax), during the third quarter and first nine months of 2015, respectively.

Restructuring activity related to the Combined Plan since inception of the underlying actions includes the following:



	Employee
	Termination		Asset
(millions)	Costs		Disposals		Other		Total
2011 - 2015 Activity
Recorded expense and accrual	$	349.7	$	6.1	$	48.4	$	404.2
Net cash payments		(281.3)		16.3		(38.1)		(303.1)
Non-cash net charges		0.6		(22.4)		(4.7)		(26.5)
Effect of foreign currency translation		(9.4)		-		-		(9.4)
Restructuring liability, December 31, 2015		59.6		-		5.6		65.2

2016 Activity
Recorded expense (income) and accrual		0.2		(10.1)		(0.2)		(10.1)
Net cash payments		(26.4)		22.3		(3.6)		(7.7)
Non-cash net charges		-		(12.2)		-		(12.2)
Effect of foreign currency translation		2.4		-		-		2.4
Restructuring liability, September 30, 2016	$	35.8	$	-	$	1.8	$	37.6

Asset disposals in 2016 include gains from the sale of certain facilities, during the second and third quarters, related to previous restructuring actions at these locations. The majority of cash payments under this plan are related to severance, with the current accrual expected to be paid over a period of a few months to several quarters. The company anticipates the remaining cash expenditures will continue to be funded from operating activities.

Non-Restructuring Special (Gains) and Charges

Energy Related Charges

Oil industry activity remained depressed during 2016 when compared with 2014 levels, resulting from continued excess oil supply pressures, which have negatively impacted exploration and production investments in the energy industry, particularly in North America. As a result of these conditions and their corresponding impact on the company’s business outlook, the company recorded total charges of $63.6 million ($42.9 million after tax) during the second quarter of 2016, comprised of inventory write-downs and related disposal costs, fixed asset charges, headcount reductions and other charges. No additional charges were recorded during the third quarter of 2016.

The inventory write-downs and related disposal costs of $31.1 million include lower of cost or market adjustments due to the significant decline in activity and related prices of certain specific-use and other products, coupled with declines in replacement costs, as well as estimated costs to dispose the respective excess inventory. The fixed asset charges of $18.2 million resulted from the write-down of certain assets related to the reduction in certain aspects of the company’s North American Global Energy segment, as well as abandonment of certain projects under construction. The carrying value of the corresponding fixed assets was reduced to zero. The employee termination costs of $12.8 million include a reduction in the Global Energy segment’s global workforce to better align its workforce with anticipated activity levels in the near term. As of the end of the third quarter of 2016, the company had $9.3 million of corresponding severance remaining to be paid, which is expected to paid in the next twelve months and be funded from operating activities.

The charges discussed above have been included as a component of both cost of sales and special (gains) and charges on the Consolidated Statement of Income.

See discussion of the company’s goodwill and intangible asset impairment review in Note 6.

Venezuela related activities

Effective as of the end of the fourth quarter of 2015, the company deconsolidated its Venezuelan subsidiaries. Prior to deconsolidation, the company remeasured its Venezuelan bolivar operations within its Water, Paper, Food & Beverage, Institutional and the bolivar portion of its Venezuelan Energy operating units from the official exchange rate at the time of 6.3 bolivares to 1 U.S. dollar to the Marginal Currency System (“SIMADI”) rate at the time of approximately 200 bolivares to 1 U.S. dollar and recorded devaluation charges of $124.6 million ($124.6 million after tax) and $154.8 million ($154.8 million after tax) during the third quarter and first nine months of 2015, respectively. As a result of the ownership structure of the company’s Food & Beverage and Institutional operations in Venezuela, it reflected a portion of the devaluation impact as a component of net income (loss) attributable to noncontrolling interest on the Consolidated Statement of Income.

During the second quarter of 2016 the company recorded a gain of $7.8 million ($4.9 million after tax) resulting from U.S. dollar cash recoveries of intercompany receivables written off at the time of deconsolidation. No additional gains or charges were recorded during the third quarter of 2016.

Champion and Nalco integration costs

Integration related special charges for the Champion acquisition and Nalco merger were completed during the fourth quarter of 2015, and the company did not incur any special charges related to such transactions during the first nine months of 2016. As a result of the Champion acquisition, the company incurred charges of $3.9 million ($2.4 million after tax) and $13.4 million ($8.4 million after tax) during the third quarter and the first nine months of 2015, respectively. As a result of the Nalco merger, the company incurred charges of $0.8 million ($0.6 million after tax) and $1.5 million ($1.2 million after tax) during the third quarter and the first nine months of 2015, respectively.

Other special (gains) and charges

During the second quarter of 2016, the company recorded a charge of $10.0 million ($6.3 million after tax) related to a fixed asset impairment and related inventory charges. The fixed asset impairment corresponds to additional charges of certain U.S. production equipment and buildings, resulting from further lower production, initially impaired during the fourth quarter of 2015. The impaired facility is a specialized facility used for dry polymer production. Due to market contraction in the oil and the mining industries, and the aggressive competitive pricing environment for dry polymers, the facility has not reached production volumes to recover the value of the underlying fixed assets. Subsequent to the charge, the remaining value of the underlying fixed assets is less than $5 million. Inventory charges include lower of cost or market adjustments due to the significant decline in activity and related prices of the corresponding dry polymer products. No additional charges were recorded during the third quarter of 2016.

The company also recorded charges of $10.9 million ($6.6 million after tax) and $37.7 million ($23.8 million after tax) during the third quarter and first nine months of 2016, respectively, primarily consisting of litigation related and other charges.

During the third quarter of 2015, the company recognized a net charge of $14.0 million ($7.8 million after tax), related to litigation related charges and the recovery of funds deposited into escrow as part of the Champion transaction. During the first nine months of 2015, the company recognized a net charge of $35.4 million ($21.1 million after tax), including the Champion escrow recovery, recognition of a loss on the sale of a portion of its Ecovation business, and other litigation related charges.