3. SPECIAL (GAINS) AND CHARGES

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




(millions)	2016		2015		2014
Cost of sales
Restructuring activities		$ (0.4)		$ 16.5		$ 13.9
Inventory costs		(6.2)		(14.5)		-
Inventory reserves		-		20.6		-
Energy related charges		62.6		-		-
Fixed asset impairment and other inventory charges		10.0		24.7		0.4
Venezuela related activities		-		33.3		-
Subtotal		66.0		80.6		14.3

Special (gains) and charges
Restructuring activities		(8.7)		83.8		69.2
Champion and Nalco integration costs		-		18.7		28.4
Energy related charges		14.2		-		-
Venezuela related activities		(7.8)		256.0		-
Other		41.8		56.3		(28.8)
Subtotal		39.5		414.8		68.8

Operating income subtotal		105.5		495.4		83.1

Net income attributable to noncontrolling interest
Restructuring activities		-		(1.7)		-
Venezuela related activities		-		(11.1)		-
Subtotal		-		(12.8)		-

Total special (gains) and charges		$ 105.5		$ 482.6		$ 83.1

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

Energy Restructuring Plan

In April 2013, following the completion of the Champion transaction, 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. 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 with certain immaterial actions continuing into 2016. Cumulative restructuring charges of $89 million ($60 million after tax and net of the impact from noncontrolling interest), are materially consistent with the Company’s initial expectation of $80 million ($55 million after tax).

The Company recorded restructuring charges of $4.5 million ($2.6 million after tax), $47.2 million ($33.0 million after tax) and $9.5 million ($6.4 million after tax) during 2016, 2015 and 2014, respectively. As a result of the ownership structure of certain entities holding Energy Restructuring Plan charges, the Company reflected $1.7 million of the 2015 charges as a component of net income (loss) attributable to noncontrolling interest on the Consolidated Statement of Income.

Restructuring charges and activity related to the Energy Restructuring Plan since inception of the underlying actions include 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		(1.0)		0.8		4.7		4.5
Net cash payments		(6.2)		-		(8.2)		(14.4)
Non-cash charges		-		(0.8)		-		(0.8)
Effect of foreign currency translation		(0.2)		-		-		(0.2)
Restructuring liability, December 31, 2016	$	4.3	$	-	$	9.7	$	14.0

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 Plan

In February 2011, the Company commenced a comprehensive plan to substantially improve the efficiency and effectiveness of its European business, as well as to undertake certain restructuring activities outside of Europe, historically referred to as the “2011 Restructuring Plan”. Additionally, in January 2012 and following the merger with 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 reduction of plant and distribution center locations, historically referred to as the “Merger Restructuring Plan”. During the first quarter of 2013, the Company determined that because the objectives of the plans discussed above were aligned, the previously separate restructuring plans should be combined into one 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, with certain immaterial actions continuing into 2016. Cumulative restructuring charges of $391 million ($297 million after tax), are materially consistent with the Company’s initial expectation of $400 million ($300 million after tax).

The Company recorded net gains of $13.6 million ($13.4 million after tax) during 2016 primarily related to gains on the sale of certain facilities related to previous restructuring initiatives. The Company recorded net charges of $53.0 million ($44.2 million after tax) and $73.5 million ($58.5 million after tax) during 2015 and 2014, respectively.

Restructuring charges and activity related to the Combined Plan since inception of the underlying actions include 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		(3.1)		(9.9)		(0.6)		(13.6)
Net cash payments		(32.8)		22.3		(4.4)		(14.9)
Non-cash net charges		-		(12.4)		-		(12.4)
Effect of foreign currency translation		1.3		-		-		1.3
Restructuring liability, December 31, 2016	$	25.0	$	-	$	0.6	$	25.6

The majority of cash payments under the Combined 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. During the second and fourth quarters of 2016, as a result of these conditions and their corresponding impact on the Company’s business outlook, the Company recorded total charges of $76.8 million ($50.0 million after tax), comprised of inventory write-downs and related disposal costs, fixed asset charges, headcount reductions and other charges.

The inventory write-downs and related disposal costs of $40.5 million include 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 $20.4 million resulted from the write-down of certain assets related to the reduction of certain aspects of the Company’s North American operations within 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 $13.1 million include a reduction in the Company’s Global Energy segment’s global workforce to better align its workforce with anticipated activity levels in the near term. As of the end of 2016, the Company had $7.4 million of corresponding severance remaining to be paid, which is expected to be paid within 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.

Venezuela related activities

Effective as of the end of the fourth quarter of 2015, the Company deconsolidated its Venezuelan subsidiaries and began accounting for the investments in its Venezuelan subsidiaries using the cost method of accounting effective in the first quarter of 2016. The Company used the cost method of accounting for the investment in its Venezuelan subsidiaries throughout 2016 as the conditions within Venezuela driving this decision remained in place during 2016. Prior to deconsolidation, the Company remeasured its Venezuelan bolivar operations within its Water, Paper, Food & Beverage, Institutional and the bolivar portion of the Company’s Venezuelan operations included within Energy operating segments from the official exchange rate at the time of 6.3 bolivares to 1 U.S. dollar to the SIMADI rate at the time of approximately 200 bolivares to 1 U.S. dollar. Upon deconsolidation, the Company recorded a charge to fully write off its intercompany receivables and investment.

The total charges during 2015 related to the Company’s actions in Venezuela were $289.3 million ($246.8 million after tax). As a result of the ownership structure of the Company’s Food & Beverage and Institutional operations in Venezuela, it reflected $11.1 million as a component of net income (loss) attributable to noncontrolling interest on the Consolidated Statement of Income, resulting in a net charge of $235.7 million net of the impact from noncontrolling interest.

During 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.

Venezuela related charges have been included as a component of cost of sales, special (gains) and charges and net income (loss) attributable to noncontrolling interest on the Consolidated Statement of Income.

Fixed asset impairment and other inventory charges

During 2015, the Company recorded a fixed asset impairment charge of $24.7 million ($15.4 million after tax), consisting of certain production equipment and buildings within one of the Company’s U.S. plants. 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. The fair value of the underlying assets was determined using the discounted cash flow method.

During 2016, the Company recorded an additional charge of $10.0 million ($6.3 million after tax) related to the dry polymer fixed asset impairment, as well as related inventory charges. Subsequent to the charge, the remaining value of the underlying fixed assets is less than $5 million. Inventory charges include adjustments due to the significant decline in activity and related prices of the corresponding dry polymer products.

These items have been included as a component of cost of sales on the Consolidated Statement of Income.

Inventory costs and inventory reserve

During 2015, the Company improved and standardized estimates related to its inventory reserves and product costing, resulting in a net pre-tax charge of approximately $6 million. Separately, the actions resulted in a charge of $20.6 million ($15.9 million after tax), related to inventory reserve calculations, partially offset by a gain of $14.5 million ($12.2 million after tax), related to the capitalization of certain cost components into inventory. During 2016, the Company took additional actions related to capitalization of certain cost components into inventory, which resulted in a gain of $6.2 million ($4.6 million after tax).

These items have been included as a component of cost of sales on the Consolidated Statement of Income.

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 2016. As a result of the Champion acquisition and Nalco merger, the Company incurred charges of $18.7 million ($12.0 million after tax) and $28.4 million ($19.8 million after tax), during 2015 and 2014, respectively.

Champion and Nalco integration charges have been included as a component of special (gains) and charges on the Consolidated Statement of Income.

Other special (gains) and charges

During 2016, the Company recorded other charges of $41.8 million ($26.4 million after tax), primarily consisting of litigation related charges.

During 2015, the Company recorded a net charge of $56.3 million ($34.5 million after tax), primarily made up of litigation related charges and the recognition of a loss on the sale of a portion of the Company’s Ecovation business, offset partially by the recovery of funds deposited into escrow as part of the Champion transaction.

During 2014, the Company recorded a special gain of $28.4 million ($23.3 million after tax), as a result of a favorable licensing settlement and other settlement gains, the consolidation of the Emochem entity and removal of the corresponding equity method investment and the disposition of a business.

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