Special (Gains) and Charges

9 Months Ended

Sep. 30, 2012

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:

	Third Quarter Ended					Nine Months Ended
	September 30					September 30
(millions)	2012			2011		2012			2011
Cost of sales
Restructuring charges	$	1.7		$	4.5	$	9.6		$	5.3
Recognition of Nalco inventory fair value step-up	1.5			—		72.7			—
Subtotal	3.2			4.5		82.3			5.3
Special (gains) and charges
Restructuring charges	20.8			12.6		73.2			52.8
Champion acquisition costs	3.8			—		3.8			—
Nalco merger and integration costs	16.4			10.3		47.0			10.3
Gain on sale of business	(13.0		)	—		(13.0		)	—
Business structure and optimization	—			0.3		—			1.2
Cleantec acquisition integration costs	—			0.1		—			3.7
Subtotal	28.0			23.3		111.0			68.0
Operating income subtotal	31.2			27.8		193.3			73.3
Interest expense, net
Debt extinguishment costs	—			—		18.2			—
Net income attributable to noncontrolling interest
Recognition of Nalco inventory fair value step-up	—			—		(4.5		)	—
Total special (gains) and charges	$	31.2		$	27.8	$	207.0		$	73.3

For segment reporting purposes, special (gains) and charges are included in the Corporate segment, which is consistent with the company’s internal management reporting.

Restructuring Charges

Restructuring actions generally include significant actions involving employee-related severance charges, contract termination costs and asset write-downs associated with such actions. 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 associated actions. Asset disposals include leasehold improvement write-downs and other asset write-downs associated with combining operations. Other charges include lease terminations prior to the end of their respective terms, and other contract termination costs.

Restructuring charges have been included as a component of both 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 other current liabilities on the Consolidated Balance Sheet.

2011 Restructuring Plan

In February 2011, the company commenced a comprehensive plan to substantially improve the efficiency and effectiveness of its European business, sharpen its competitiveness and accelerate its growth and profitability. Additionally, restructuring has been and will continue to be undertaken outside of Europe, the costs of which have not been and are not expected to be significant (collectively, the “2011 Restructuring Plan”). Through the 2011 Restructuring Plan, approximately 750 positions are expected to be eliminated.

The company expects to incur pretax restructuring charges of approximately $150 million ($125 million after tax) under the 2011 Restructuring Plan through the completion of the Plan in 2013. Approximately $70 million ($55 million after tax) of those charges are expected to occur in 2012.

The company anticipates that approximately $140 million of the pre-tax charge will represent cash expenditures. The remaining $10 million of the pre-tax charges represent estimated asset disposals. No decisions have been made for any remaining asset disposals and estimates could vary depending on the actual actions taken.

As a result of restructuring activities under the 2011 Restructuring Plan, the company has recorded restructuring charges of $110.9 million ($85.6 million after tax) since the inception of the Plan. During the third quarter of 2012 and 2011, the company recorded restructuring charges of $10.6 million ($6.2 million after tax) and $17.1 million ($14.8 million after tax), respectively. During the nine months ended September 30, 2012 and 2011, the company recorded restructuring charges of $42.8 million ($31.4 million after tax) and $58.1 million ($49.0 million after tax), respectively.

Merger Restructuring Plan

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 (the “Merger Restructuring Plan”). Actions associated with the merger to improve efficiency and effectiveness are expected to lead to a reduction of the company’s workforce by approximately 600 positions through 2012, with additional productivity and efficiency actions beyond 2012 expected to reduce the need for future positions by approximately 1,500.

The company expects that restructuring activities under the Merger Restructuring Plan will be completed by the end of 2013, with total costs through the end of 2013 anticipated to be approximately $180 million ($120 million after tax). Approximately $75 million ($55 million after tax) of those charges are expected to occur in 2012.

The company anticipates that approximately $160 million of the pre-tax restructuring charges will represent cash expenditures. The remaining $20 million of the pretax charges represent estimated asset disposals. No decisions have been made for any remaining asset disposals and estimates could vary depending on the actual actions taken.

As a result of restructuring activities under the Merger Restructuring Plan, the company has recorded restructuring charges of $46.5 million ($32.7 million after tax) since the inception of the Plan. The company recorded restructuring charges of $12.0 million ($8.6 million after tax) and $39.9 million ($28.6 million after tax) during the third quarter and nine months ended September 30, 2012, respectively.

Restructuring charges and subsequent activity related to the 2011 Restructuring Plan and the Merger Restructuring Plan, since the inception of each respective Plan, include the following:

	2011 Restructuring Plan												Merger Restructuring Plan
	Employee												Employee
	Termination			Asset									Termination			Asset
(millions)	Costs			Disposals			Other			Subtotal			Costs			Disposals			Other			Subtotal			Total
2011 Activity:
Recorded expense and accrual	$	60.5		$	0.5		$	7.1		$	68.1		$	6.6		$	—		$	—		$	6.6		$	74.7
Cash payments	(22.2		)	—			(2.6		)	(24.8		)	(0.3		)	—			—			(0.3		)	(25.1		)
Non-cash charges	—			(0.5		)	—			(0.5		)	—			—			—			—			(0.5		)
Effect of foreign currency translation	(2.2		)	—			—			(2.2		)	—			—			—			—			(2.2		)
Restructuring liability, December 31, 2011	36.1			—			4.5			40.6			6.3			—			—			6.3			46.9
2012 Activity:
Recorded expense and accrual	41.3			—			1.5			42.8			35.4			1.8			2.7			39.9			82.7
Cash payments	(21.5		)	—			(5.2		)	(26.7		)	(15.0		)	—			(1.6		)	(16.6		)	(43.3		)
Non-cash charges	—			—			(0.8		)	(0.8		)	—			(1.6		)	—			(1.6		)	(2.4		)
Effect of foreign currency translation	(2.4		)	—			—			(2.4		)	—			—			—			—			(2.4		)
Restructuring liability, September 30, 2012	$	53.5		$	—		$	—		$	53.5		$	26.7		$	0.2		$	1.1		$	28.0		$	81.5

Nalco Restructuring Plan

Prior to the Nalco merger, Nalco conducted various restructuring programs to redesign and optimize its business and work processes (the “Nalco Restructuring Plan”). As part of the Nalco merger, Ecolab assumed the Nalco Restructuring Plan liability balance of $10.6 million, which was primarily related to accrued severance and termination benefits. As of September 30, 2012 and December 31, 2011, the remaining liability balance related to the Nalco Restructuring Plan was $4.7 million and $10.6 million, respectively. Cash payments during the nine months of 2012 related to this Plan were $6.0 million. The company expects to utilize the remaining liability through 2013 as part of the run-out of this Plan.

Non-restructuring Special (Gains) and Charges

As a result of the Nalco merger, the company incurred special charges of $17.9 million ($11.8 million after tax) and $133.4 million ($98.3 million after tax) during the third quarter and nine months of 2012, respectively. Nalco related special charges have been included as a component of cost of sales, special (gains) and charges, net interest expense and net income (loss) attributable to noncontrolling interest on the Consolidated Statement of Income. Amounts within cost of sales and net income (loss) attributable to noncontrolling interest include the recognition of fair value step-up of Nalco inventory. Amounts within special (gains) and charges include merger and integration charges. Amounts within net interest expense include a loss on the extinguishment of Nalco’s senior notes, which were assumed as part of the merger.

Special charges incurred during the third quarter of 2011 related to the Nalco merger include costs for advisory and legal fees, as well as integration costs. Further details related to the Nalco merger are included in Note 3.

In October 2012, the company entered into an agreement and plan of merger under which the company expects to acquire privately-held Champion Technologies and its related company Corsicana Technologies (collectively “Champion”). Special charges incurred during the third quarter 2012 include charges related to the anticipated acquisition, including costs for advisory and legal fees. Further information related to the anticipated acquisition of Champion is included in Note 3.

During the third quarter of 2012, the company received additional payments related to the sale of an investment in a U.S. business, originally sold prior to 2012. The corresponding gain recognized during the third quarter of 2012 was recorded in special (gains) and charges.

In the first quarter of 2011, the company completed the purchase of the assets of the Cleantec business of Campbell Brothers Ltd., Brisbane, Queensland, Australia (“Cleantec”). Special (gains) and charges in 2011 include acquisition integration costs incurred to optimize the Cleantec business structure. Further details related to the Cleantec acquisition are included in Note 3.