SPECIAL (GAINS) AND CHARGES

6 Months Ended

Jun. 30, 2020

SPECIAL (GAINS) AND CHARGES

SPECIAL (GAINS) AND CHARGES

2. SPECIAL (GAINS) AND CHARGES

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

	Second Quarter Ended				Six Months Ended
	June 30				June 30
(millions)	2020		2019		2020		2019
Cost of sales
Restructuring activities		$2.6		$6.5		$5.6		$9.9
Acquisition and integration activities		2.2		1.3		2.6		1.5
Other		22.2		-		27.9		-
Cost of sales subtotal		27.0		7.8		36.1		11.4
Special (gains) and charges
Restructuring activities		0.3		19.8		4.5		50.9
Acquisition and integration activities		(2.6)		0.4		2.8		2.9
Disposal and impairment activities		44.7		-		45.9		-
Other		27.0		4.2		32.1		10.1
Special (gains) and charges subtotal		69.4		24.4		85.3		63.9
Operating income subtotal		96.4		32.2		121.4		75.3
Interest expense, net		0.7		-		0.7		0.2
Total special (gains) and charges		$97.1		$32.2		$122.1		$75.5

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

Restructuring activities are primarily related to Accelerate 2020 (described below) and other restructuring (described on the following page). Restructuring activities have been included as a component of both cost of sales and special (gains) and charges on the Consolidated Statement of Income. Restructuring liabilities have been classified as a component of other current and other noncurrent liabilities on the Consolidated Balance Sheet. Restructuring charges directly related to the ChampionX business have been recorded as discontinued operations, refer to Note 4.

Accelerate 2020

During the third quarter of 2018, the Company formally commenced a restructuring plan Accelerate 2020 (“the Plan”), to leverage technology and system investments and organizational changes. During the first quarter of 2019, the Company raised its goals for the Plan to simplify and automate processes and tasks, reduce complexity and management layers, consolidate facilities and focus on key long-term growth areas by further leveraging technology and structural improvements. The Company expects that the restructuring activities will be completed by the end of 2020, with total anticipated costs of $215 million ($165 million after tax) over this period of time, when revised for continuing operations. The costs are expected to be primarily cash expenditures for severance costs and some facility closure costs relating to team reorganizations. Actual costs may vary from these estimates depending on actions taken.

The Company recorded restructuring charges of $2.8 million ($2.4 million after tax) and $9.1 million ($7.7 million after tax) in the second quarter and first six months of 2020, respectively, primarily related to severance. The liability related to the Plan was $72.5 million as of the end of the second quarter of 2020. The Company has recorded $206.5 million ($158.6 million after tax) of cumulative restructuring charges under the Plan. Cash payments during 2020 related to Accelerate 2020 were $31.8 million.

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

	Employee
	Termination		Asset
(millions)	Costs		Disposals		Other		Total
2018 - 2019 Activity
Recorded expense		$182.5		$0.2		$14.7		$197.4
Net cash payments		(87.5)		1.2		(11.2)		(97.5)
Non-cash charges		-		(1.4)		(2.0)		(3.4)
Effect of foreign currency translation		(1.0)		-		-		(1.0)
Restructuring liability, December 31, 2019		94.0		-		1.5		95.5
2020 Activity
Recorded expense		6.6		-		2.5		9.1
Net cash payments		(30.7)		-		(1.1)		(31.8)
Non-cash charges				-		-		-
Effect of foreign currency translation		(0.3)		-		-		(0.3)
Restructuring liability, June 30, 2020		$69.6		$-		$2.9		$72.5

Other Restructuring Activities

During the second quarter and first six months of 2020, the Company incurred restructuring charges of $0.1 million (less than $0.1 million after tax) and $1.0 million ($0.6 million after tax), respectively, related to an immaterial restructuring plan. The charges are primarily related to severance. Prior to 2018, the Company engaged in a number of restructuring plans. During the second quarters and first six months of 2020 and 2019, net restructuring charges related to prior year plans were minimal. The restructuring liability balance for all plans other than Accelerate 2020 was $6.1 million and $7.7 million as of June 30, 2020 and December 31, 2019, respectively. The reduction in liability was driven primarily by severance payments. The remaining liability is expected to be paid over a period of a few months to several quarters and will continue to be funded from operating activities.

Cash payments during 2020 related to all other restructuring plans excluding Accelerate 2020 were $2.4 million.

Acquisition and integration related costs

Acquisition and integration costs reported in special (gains) and charges on the Consolidated Statement of Income include ($2.6) million ($1.7 million after tax) and $2.8 million ($2.1 million after tax) in the second quarter and first six months of 2020, respectively. Charges are related to the Copal Invest NV, including its primary operating entity CID Lines (collectively, “CID Lines”), Bioquell, PLC (“Bioquell”) and the Laboratoires Anios (“Anios”) acquisitions and consist of integration costs, advisory and legal fees. Acquisition and integration costs reported in product and equipment cost of sales of $2.2 million ($1.7 million after tax) and $2.6 million ($1.9 million after tax) on the Consolidated Statement of Income in the second quarter and first six months of 2020, respectively, related to the recognition of fair value step-up in the CID Lines inventory, severance and the closure of a facility. The Company also incurred $0.7 million ($0.5 million after tax) of interest expense in the second quarter of 2020.

Acquisition and integration costs reported in special (gains) and charges on the Consolidated Statement of Income include $0.4 million ($0.3 million after tax) and $2.9 million ($2.1 million after tax) in the second quarter and first six months of 2019, respectively. Charges are related to Bioquell and the Anios acquisitions and consist of integration costs, advisory and legal fees. Acquisition and integration costs reported in product and equipment cost of sales of $1.5 million ($1.1 million after tax) on the Consolidated Statement of Income in the first six months of 2019 relate to the recognition of fair value step-up in the Bioquell inventory. The Company also incurred $0.2 million ($0.1 million after tax) of interest expense in the first six months of 2019.

Further information related to the Company’s acquisitions is included in Note 3.

Disposal and impairment charges

Disposal and impairment charges reported in special (gains) and charges on the Consolidated Statement of Income include $44.7 million ($44.1 million after tax) and $45.9 million ($45.0 million after tax) in the second quarter and first six months of 2020, respectively. During the second quarter of 2020, the Company recorded a $28.6 million ($28.6 million after tax) impairment for a minority equity method investment due to the impact of the economic environment and the liquidity of the minority equity method investment. In addition, the Company recorded charges of $16.1 million ($15.5 million after tax) related to the disposal of Holchem Group Limited (“Holchem”) for the loss on sale and related transaction fees.

Further information related to the Company’s disposal is included in Note 3.

Other

During the second quarter and first six months of 2020, the Company recorded charges of $26.5 million to protect the pay for certain employees directly impacted by the COVID-19 pandemic. In addition, the Company received subsidies and government assistance, which was recorded as a special (gain) of $9.4 million. The specific COVID-19 pandemic charges of $1.1 million are recorded in product and equipment sales on the Consolidated Statement of Income, $5.8 million in service and lease sales on the Consolidated Statement of Income and $10.2 million in special (gains) and charges on the Consolidated statement of income. After tax-charges related to the COVID-19 pandemic were $13.2 million during the second quarter and first six months of 2020.

During the second quarter and first six months of 2020, the Company recorded special charges of $15.3 million ($10.5 million after tax) and $21.0 million ($14.3 million after tax), respectively, in product and equipment cost of sales on the Consolidated Statement of Income primarily related to a Healthcare product recall in Europe.

Other special charges of $16.8 million ($12.6 million after tax) and $21.9 million ($16.5 million after tax), respectively, recorded in the second quarter and first six months of 2020 relate primarily to a specific legal reserve and related legal charges which are recorded in special (gains) and charges on the Consolidated Statement of Income.

During the second quarter and first six months of 2019, the Company recorded other special gains in special (gains) and charges on the Consolidated Statement of Income, of $4.1 million ($3.1 million after tax) and $10.0 million ($7.5 million after tax), respectively, which primarily related to legal charges.