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Ecolab 10-Q 2009

Documents found in this filing:

  1. 10-Q
  2. Ex-10
  3. Ex-15
  4. Ex-31
  5. Ex-32
  6. Ex-32

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2009

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                         to                       

 

Commission File No. 1-9328

 

ECOLAB INC.

(Exact name of registrant as specified in its charter)

 

Delaware

41-0231510

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

370 Wabasha Street N., St. Paul, Minnesota  55102

(Address of principal executive offices)(Zip Code)

 

1-800-232-6522

(Registrant’s telephone number, including area code)

 

(Not Applicable)

(Former name, former address and former fiscal year,

if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x

Accelerated filer  o

 

 

Non-accelerated filer  o

Smaller reporting company  o

(Do not check if a smaller reporting company)

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of October 30, 2009.

 

237,554,525 shares of common stock, par value $1.00 per share.

 

 

 



 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

ECOLAB INC.

CONSOLIDATED STATEMENT OF INCOME

 

 

 

Third Quarter Ended

 

 

 

September 30

 

(millions, except per share)

 

2009

 

2008

 

 

 

(unaudited)

 

 

 

 

 

 

 

Net sales

 

$

1,546.4

 

$

1,626.3

 

 

 

 

 

 

 

Cost of sales (including special charges of $1.3 in 2009)

 

763.9

 

834.3

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

554.1

 

578.8

 

 

 

 

 

 

 

Special gains and charges

 

5.4

 

11.8

 

 

 

 

 

 

 

Operating income

 

223.0

 

201.4

 

 

 

 

 

 

 

Interest expense, net

 

15.1

 

16.0

 

 

 

 

 

 

 

Income before income taxes

 

207.9

 

185.4

 

 

 

 

 

 

 

Provision for income taxes

 

62.7

 

59.5

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

145.2

 

125.9

 

 

 

 

 

 

 

Less: Net income (loss) attributable to noncontrolling interest

 

0.2

 

(0.3

)

 

 

 

 

 

 

Net income attributable to Ecolab

 

$

145.0

 

$

126.2

 

 

 

 

 

 

 

Net income attributable to Ecolab per common share

 

 

 

 

 

Basic

 

$

0.61

 

$

0.51

 

Diluted

 

$

0.60

 

$

0.50

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.1400

 

$

0.1300

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

237.0

 

247.5

 

Diluted

 

240.6

 

251.8

 

 

The accompanying notes are an integral part of the consolidated financial information.

 

2



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF INCOME

 

 

 

Nine Months Ended

 

 

 

September 30

 

(millions, except per share)

 

2009

 

2008

 

 

 

(unaudited)

 

 

 

 

 

 

 

Net sales

 

$

4,336.1

 

$

4,654.2

 

 

 

 

 

 

 

Cost of sales (including special charges of $9.4 in 2009)

 

2,196.9

 

2,371.4

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

1,596.8

 

1,715.8

 

 

 

 

 

 

 

Special gains and charges

 

56.9

 

(5.6

)

 

 

 

 

 

 

Operating income

 

485.5

 

572.6

 

 

 

 

 

 

 

Interest expense, net

 

46.1

 

46.1

 

 

 

 

 

 

 

Income before income taxes

 

439.4

 

526.5

 

 

 

 

 

 

 

Provision for income taxes

 

137.0

 

158.5

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

302.4

 

368.0

 

 

 

 

 

 

 

Less: Net income (loss) attributable to noncontrolling interest

 

0.9

 

(0.1

)

 

 

 

 

 

 

Net income attributable to Ecolab

 

$

301.5

 

$

368.1

 

 

 

 

 

 

 

Net income attributable to Ecolab per common share

 

 

 

 

 

Basic

 

$

1.27

 

$

1.49

 

Diluted

 

$

1.26

 

$

1.46

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.4200

 

$

0.3900

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

236.5

 

247.2

 

Diluted

 

239.6

 

251.7

 

 

The accompanying notes are an integral part of the consolidated financial information.

 

3



 

ECOLAB INC.

CONSOLIDATED BALANCE SHEET

 

 

 

September 30

 

December 31

 

(millions)

 

2009

 

2008

 

 

 

(unaudited)

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

107.5

 

$

66.7

 

 

 

 

 

 

 

Accounts receivable (net of allowance of $51.6 at September 30, 2009 and $43.8 at December 31, 2008)

 

1,013.0

 

971.0

 

 

 

 

 

 

 

Inventories

 

474.8

 

467.2

 

 

 

 

 

 

 

Deferred income taxes

 

93.8

 

94.7

 

 

 

 

 

 

 

Other current assets

 

126.9

 

91.5

 

 

 

 

 

 

 

Total current assets

 

1,816.0

 

1,691.1

 

 

 

 

 

 

 

Property, plant and equipment, net

 

1,149.1

 

1,135.2

 

 

 

 

 

 

 

Goodwill

 

1,369.8

 

1,267.7

 

 

 

 

 

 

 

Other intangible assets, net

 

312.2

 

326.7

 

 

 

 

 

 

 

Other assets

 

341.7

 

336.2

 

 

 

 

 

 

 

Total assets

 

$

4,988.8

 

$

4,756.9

 

 

The accompanying notes are an integral part of the consolidated financial information.

 

(Continued)

 

4



 

ECOLAB INC.

CONSOLIDATED BALANCE SHEET (Continued)

 

 

 

September 30

 

December 31

 

(millions, except per share)

 

2009

 

2008

 

 

 

(unaudited)

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

Short-term debt

 

$

121.0

 

$

338.9

 

 

 

 

 

 

 

Accounts payable

 

367.3

 

359.6

 

 

 

 

 

 

 

Compensation and benefits

 

271.8

 

261.1

 

 

 

 

 

 

 

Income taxes

 

31.0

 

46.3

 

 

 

 

 

 

 

Other current liabilities

 

501.8

 

436.0

 

 

 

 

 

 

 

Total current liabilities

 

1,292.9

 

1,441.9

 

 

 

 

 

 

 

Long-term debt

 

850.0

 

799.3

 

 

 

 

 

 

 

Postretirement health care and pension benefits

 

601.7

 

680.2

 

 

 

 

 

 

 

Other liabilities

 

274.2

 

256.5

 

 

 

 

 

 

 

Equity (a)

 

 

 

 

 

Common stock

 

329.5

 

328.0

 

Additional paid-in capital

 

1,154.0

 

1,090.5

 

Retained earnings

 

2,819.2

 

2,617.0

 

Accumulated other comprehensive loss

 

(224.6

)

(359.1

)

Treasury stock

 

(2,116.3

)

(2,104.8

)

Total Ecolab shareholders’ equity

 

1,961.8

 

1,571.6

 

Noncontrolling interest

 

8.2

 

7.4

 

Total equity

 

1,970.0

 

1,579.0

 

 

 

 

 

 

 

Total liabilities and equity

 

$

4,988.8

 

$

4,756.9

 

 


(a)

Common stock, 400 million shares authorized, $1.00 par value per share, 237.5 million shares outstanding at September 30, 2009, 236.2 million shares outstanding at December 31, 2008.

 

The accompanying notes are an integral part of the consolidated financial information.

 

5



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

 

 

 

Nine Months Ended

 

 

 

September 30

 

(millions)

 

2009

 

2008

 

 

 

(unaudited)

 

 

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

$

302.4

 

$

368.0

 

 

 

 

 

 

 

Adjustments to reconcile net income including noncontrolling interest to cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

248.6

 

255.2

 

Deferred income taxes

 

20.2

 

70.4

 

Share-based compensation expense

 

22.9

 

22.4

 

Excess tax benefits from share-based payment arrangements

 

(5.9

)

(8.1

)

Pension and postretirement plan contributions

 

(144.8

)

(94.1

)

Pension and postretirement plan expense

 

61.5

 

54.7

 

Special charges-restructuring, net of cash paid

 

28.9

 

 

Gain on sale of plant

 

 

(24.5

)

Other, net

 

7.4

 

(2.4

)

 

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

23.1

 

(129.3

)

Inventories

 

21.7

 

(48.5

)

Other assets

 

(14.6

)

(0.1

)

Accounts payable

 

(12.7

)

40.9

 

Other liabilities

 

(27.2

)

(8.4

)

 

 

 

 

 

 

Cash provided by operating activities

 

$

531.5

 

$

496.2

 

 

The accompanying notes are an integral part of the consolidated financial information.

 

(Continued)

 

6



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)

 

 

 

Nine Months Ended

 

 

 

September 30

 

(millions)

 

2009

 

2008

 

 

 

(unaudited)

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

(169.0

)

$

(248.5

)

Capitalized software expenditures

 

(29.7

)

(51.3

)

Property sold

 

3.2

 

35.7

 

Businesses acquired and investments in affiliates, net of cash acquired

 

(7.1

)

(203.7

)

Sale of businesses

 

0.7

 

2.2

 

Deposit into indemnification escrow

 

 

(21.0

)

 

 

 

 

 

 

Cash used for investing activities

 

(201.9

)

(486.6

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net issuances (repayments) of commercial paper and notes payable

 

(219.8

)

(229.3

)

Long-term debt borrowings

 

 

257.7

 

Long-term debt repayments

 

(5.0

)

(3.4

)

Reacquired shares

 

(11.5

)

(20.9

)

Cash dividends on common stock

 

(99.5

)

(96.3

)

Exercise of employee stock options

 

37.1

 

35.6

 

Excess tax benefits from share-based payment arrangements

 

5.9

 

8.1

 

Other, net

 

 

(0.6

)

 

 

 

 

 

 

Cash used for financing activities

 

(292.8

)

(49.1

)

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

4.0

 

4.2

 

 

 

 

 

 

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

40.8

 

(35.3

)

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

66.7

 

137.4

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

107.5

 

$

102.1

 

 

The accompanying notes are an integral part of the consolidated financial information.

 

7



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.                        Consolidated Financial Information

 

The unaudited consolidated financial information for the third quarter and nine months ended September 30, 2009 and 2008, reflect, in the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows of Ecolab Inc. (“the company”) for the interim periods presented. The financial results for any interim period are not necessarily indicative of results for the full year. The consolidated balance sheet data as of December 31, 2008 was derived from the audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.  The unaudited consolidated financial information should be read in conjunction with the consolidated financial statements and notes thereto incorporated in the company’s Annual Report on Form 10-K for the year ended December 31, 2008.

 

With respect to the unaudited financial information of the company for the three and nine-month periods ended September 30, 2009 and 2008 included in this Form 10-Q, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards for a review of such information. Therefore, their separate report dated November 6, 2009 appearing herein, states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933, as amended (the “Act”) for their report on the unaudited financial information because that report is not a report or a part of a registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.

 

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)

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

 

 

 

 

 

 

 

Restructuring charges

 

$

1.3

 

$

 

$

9.4

 

$

 

 

 

 

 

 

 

 

 

 

 

Special gains and charges

 

 

 

 

 

 

 

 

 

Restructuring charges

 

4.0

 

 

52.6

 

 

Business structure and optimization

 

0.7

 

8.6

 

2.3

 

14.3

 

Gain on sale of plant

 

 

 

 

(24.0

)

Gain on sale of business

 

 

 

 

(1.7

)

Other non-recurring items

 

0.7

 

3.2

 

2.0

 

5.8

 

Total

 

5.4

 

11.8

 

56.9

 

(5.6

)

 

 

 

 

 

 

 

 

 

 

Total special gains and charges

 

$

6.7

 

$

11.8

 

$

66.3

 

$

(5.6

)

 

8



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2.                        Special Gains and Charges (Continued)

 

In the first quarter of 2009, the company announced plans to undertake restructuring and other cost-saving actions during 2009 in order to streamline operations and improve efficiency and effectiveness. The restructuring plan includes a reduction of the company’s global workforce by approximately 1,000 positions or 4% and the reduction of plant and distribution center locations during 2009. As a result of these actions, the company recorded restructuring charges of $5.3 million ($4.4 million after tax) or $0.02 per diluted share and $62.0 million ($44.2 million after tax) or $0.18 per diluted share, during the third quarter and nine months ended September 30, 2009, respectively.

 

The restructuring charges and subsequent reductions to the related liability accounts include the following:

 

 

 

Employee

 

 

 

 

 

 

 

 

 

Termination

 

Asset

 

 

 

 

 

(millions)

 

Costs

 

Disposals

 

Other

 

Total

 

 

 

 

 

 

 

 

 

 

 

Recorded expense and accrual

 

$

31.2

 

$

0.6

 

$

0.9

 

$

32.7

 

Cash payments

 

(8.0

)

 

 

 

 

(8.0

)

Non-cash charges

 

 

 

(0.6

)

(0.9

)

(1.5

)

Restructuring liability, March 31, 2009

 

23.2

 

 

 

23.2

 

 

 

 

 

 

 

 

 

 

 

Recorded expense and accrual

 

24.0

 

 

 

 

 

24.0

 

Cash payments

 

(14.8

)

 

 

 

 

(14.8

)

Effect of foreign currency translation

 

1.2

 

 

 

 

 

1.2

 

Restructuring liability, June 30, 2009

 

33.6

 

 

 

33.6

 

 

 

 

 

 

 

 

 

 

 

Recorded expense and accrual

 

3.4

 

1.2

 

0.7

 

5.3

 

Cash payments

 

(10.3

)

 

 

 

 

(10.3

)

Non-cash charges

 

 

 

(1.2

)

(0.5

)

(1.7

)

Effect of foreign currency translation

 

0.3

 

 

 

 

 

0.3

 

Restructuring liability, September 30, 2009

 

$

27.0

 

$

 

$

0.2

 

$

27.2

 

 

Restructuring charges on the Consolidated Statement of Income have been included both as a component of cost of sales and as a component of special gains and charges. Amounts included as a component of cost of sales include asset write-downs and manufacturing related severance. Restructuring liabilities have been classified as a component of other current liabilities on the Consolidated Balance Sheet.

 

Employee termination costs include personnel reductions and related costs for severance, benefits and outplacement services.  Asset disposals include inventory and intangible asset write-downs related to the discontinuance of product lines which are not consistent with the company’s long-term strategies. Other charges include one-time curtailment and settlement charges related to the company’s International pension plans and U.S. postretirement health care benefits plan.

 

The restructuring plan is expected to be finalized and actions completed during the current year.  The company anticipates additional restructuring expenses during the remainder of 2009, which are expected to result in total pretax charges of approximately $70 million ($50 million after tax) for the full year 2009. The company anticipates that approximately $65 million of the total restructuring charges represent cash expenditures, of which $33 million has been paid as of September 30, 2009 and the majority of the remainder is expected to be paid within the next twelve months.

 

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

 

9



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3.                        Selected Balance Sheet Information

 

 

 

September 30

 

December 31

 

(millions)

 

2009

 

2008

 

 

 

 

 

 

 

Inventories

 

 

 

 

 

Finished goods

 

$

280.6

 

$

263.8

 

Raw materials and parts

 

220.2

 

232.8

 

Inventories at FIFO cost

 

500.8

 

496.6

 

Excess of FIFO cost over LIFO cost

 

(26.0

)

(29.4

)

Total

 

$

474.8

 

$

467.2

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

 

 

 

 

 

Land

 

$

28.1

 

$

26.5

 

Buildings and leaseholds

 

353.6

 

330.6

 

Machinery and equipment

 

724.6

 

673.5

 

Merchandising equipment

 

1,430.0

 

1,333.3

 

Capitalized software

 

204.7

 

162.9

 

Construction in progress

 

113.9

 

125.5

 

 

 

2,854.9

 

2,652.3

 

Accumulated depreciation

 

(1,705.8

)

(1,517.1

)

Total

 

$

1,149.1

 

$

1,135.2

 

 

 

 

 

 

 

Other intangible assets, gross

 

 

 

 

 

 

 

Customer relationships

 

$

291.9

 

$

266.9

 

Intellectual property

 

81.6

 

78.3

 

Trademarks

 

115.0

 

111.9

 

Other intangibles

 

54.2

 

54.0

 

 

 

542.7

 

511.1

 

 

 

 

 

 

 

Accumulated amortization

 

 

 

 

 

Customer relationships

 

(151.1

)

(120.3

)

Intellectual property

 

(28.1

)

(22.8

)

Trademarks

 

(37.1

)

(31.1

)

Other intangibles

 

(14.2

)

(10.2

)

Other intangible assets, net

 

$

312.2

 

$

326.7

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

Deferred income taxes

 

$

162.2

 

$

157.9

 

Pension

 

15.0

 

12.1

 

Other

 

164.5

 

166.2

 

Total

 

$

341.7

 

$

336.2

 

 

10



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3.                         Selected Balance Sheet Information (Continued)

 

 

 

September 30

 

December 31

 

(millions)

 

2009

 

2008

 

 

 

 

 

 

 

Other current liabilities

 

 

 

 

 

Discounts and rebates

 

$

208.9

 

$

211.5

 

Dividends payable

 

33.2

 

33.1

 

Interest payable

 

18.0

 

8.4

 

Restructuring liability

 

27.2

 

 

Taxes payable, other than income

 

57.5

 

44.4

 

Foreign exchange contracts

 

10.0

 

7.6

 

Other

 

147.0

 

131.0

 

Total

 

$

501.8

 

$

436.0

 

 

 

 

 

 

 

Other liabilities

 

 

 

 

 

Deferred income taxes

 

$

80.2

 

$

74.2

 

Income taxes payable - non-current

 

76.5

 

65.4

 

Other

 

117.5

 

116.9

 

Total

 

$

274.2

 

$

256.5

 

 

 

 

 

 

 

Accumulated other comprehensive income

 

 

 

 

 

 

 

Unrealized gain (loss) on financial instruments, net of tax

 

$

(2.8

)

$

8.0

 

Unrecognized pension and postretirement benefit expense, net of tax

 

(359.3

)

(364.7

)

Cumulative translation

 

137.5

 

(2.4

)

Total

 

$

(224.6

)

$

(359.1

)

 

4.                         Interest

 

 

 

Third Quarter Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

(millions)

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

16.4

 

$

17.9

 

$

51.1

 

$

53.0

 

Interest income

 

(1.3

)

(1.9

)

(5.0

)

(6.9

)

Interest expense, net

 

$

15.1

 

$

16.0

 

$

46.1

 

$

46.1

 

 

11



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

5.                     Financial Instruments and Hedging Transactions

 

The carrying amount and the estimated fair value of financial instruments held by the company were:

 

 

 

September 30, 2009

 

December 31, 2008

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

(millions)

 

Amount

 

Value

 

Amount

 

Value

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

107.5

 

$

107.5

 

$

66.7

 

$

66.7

 

Accounts receivable, net

 

1,013.0

 

1,013.0

 

971.0

 

971.0

 

Foreign exchange contracts

 

6.1

 

6.1

 

22.0

 

22.0

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

10.0

 

10.0

 

7.6

 

7.6

 

Notes payable

 

15.8

 

15.8

 

17.8

 

17.8

 

Commercial paper

 

98.5

 

98.5

 

316.0

 

316.0

 

Long-term debt (including current maturities)

 

856.7

 

877.1

 

804.4

 

713.8

 

 

The carrying amounts of cash equivalents, accounts receivable, notes payable and commercial paper approximate fair value because of their short maturities. The carrying amount of foreign exchange contracts is at fair value, which is determined based on foreign currency exchange rates as of the balance sheet date (level 2 - significant other observable inputs). The fair value of long-term debt is based on quoted market prices for the same or similar debt instruments. The company has concluded that it does not have any amounts of financial assets and liabilities measured using the company’s own assumptions of fair market value (level 3 - unobservable inputs).

 

Derivative Instruments and Hedging

 

The company uses foreign currency forward contracts, interest rate swaps and foreign currency debt to manage risks associated with foreign currency exchange rates, interest rates and net investments in foreign operations. The company records all derivatives as assets and liabilities on the balance sheet at fair value. Changes in fair value are recognized immediately in earnings unless the derivative qualifies and is designated as a hedge. The effective portion of changes in fair value of hedges are initially recognized in accumulated other comprehensive income (“AOCI”) on the Consolidated Balance Sheet. Amounts recorded in AOCI are reclassified into earnings in the same period or periods during which the hedged transactions affect earnings. The company evaluates hedge effectiveness at inception and on an ongoing basis. If a derivative is no longer expected to be effective, hedge accounting is discontinued. Hedge ineffectiveness, if any, is recorded in earnings.

 

The company does not hold derivative financial instruments of a speculative nature. The company is exposed to credit loss in the event of nonperformance of counterparties for foreign currency forward exchange contracts and interest rate swap agreements. The company monitors its exposure to credit risk by using credit approvals and credit limits and by selecting major international banks and financial institutions as counterparties. The company does not anticipate nonperformance by any of these counterparties.

 

12



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

5.                     Financial Instruments and Hedging Transactions (Continued)

 

Derivatives Designated as Cash Flow Hedges

 

The company utilizes foreign currency forward contracts to hedge the effect of foreign currency exchange rate fluctuations on forecasted foreign currency transactions, including: sales, inventory purchases, and intercompany royalty and management fee payments. These forward contracts are designated as cash flow hedges. The effective portions of the changes in fair value of these contracts are recorded in AOCI until the hedged items affect earnings, at which time the gain or loss is reclassified into the same line item in the Consolidated Statement of Income as the underlying exposure being hedged. All hedged transactions are forecasted to occur within the next twelve months.

 

The company occasionally enters into interest rate swap contracts to manage interest rate exposures. In 2006 the company entered into and subsequently closed two forward starting swap contracts related to the issuance of its senior euro notes. The settlement payment was recorded in AOCI and is recognized in earnings as part of interest expense over the remaining life of the notes as the forecasted interest transactions occur.

 

Derivatives Not Designated as Hedging Instruments

 

The company also uses foreign currency forward contracts to offset its exposure to the change in value of certain foreign currency denominated assets and liabilities, primarily receivables and payables.  Although the contracts are effective economic hedges, they are not designated as accounting hedges. Therefore, changes in the value of these derivatives are recognized immediately in earnings, thereby offsetting the current earnings effect of the related foreign currency denominated assets and liabilities.

 

The following table summarizes the fair value of the company’s outstanding derivatives as of September 30, 2009:

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

Balance

 

 

 

Balance

 

 

 

 

 

Sheet

 

Fair

 

Sheet

 

Fair

 

(millions)

 

Location

 

Value

 

Location

 

Value

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Other current assets

 

$

 2.8

 

Other current liabilities

 

$

 6.8

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Other current assets

 

3.3

 

Other current liabilities

 

3.2

 

Total Derivatives

 

 

 

$

 6.1

 

 

 

$

10.0

 

 

The company had foreign currency forward exchange contracts with notional values that totaled approximately $397 million at September 30, 2009, and $486 million at December 31, 2008.

 

13



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

5.                         Financial Instruments and Hedging Transactions (Continued)

 

For the third quarter and nine months ended September 30, 2009, the impact on AOCI and earnings from derivative contracts that qualified as cash flow hedges was as follows:

 

 

 

 

 

Third

 

Nine

 

(millions)

 

Location

 

Quarter

 

Months

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) recognized into AOCI (effective portion)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

AOCI (equity)

 

$

(1.4

)

$

(4.2

)

 

 

 

 

 

 

 

 

Gain (loss) reclassified from AOCI into income (effective portion)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Cost of sales

 

$

3.3

 

$

6.6

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

0.5

 

3.0

 

 

 

 

 

3.8

 

9.6

 

 

 

 

 

 

 

 

 

Interest rate swap contract

 

Interest expense, net

 

(0.1

)

(0.3

)

 

 

 

 

$

 3.7

 

$

9.3

 

Gain (loss) recognized in income on derivative (ineffective portion)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Interest expense, net

 

$

(0.4

)

$

(1.2

)

 

For the third quarter and nine months ended September 30, 2009, the impact on earnings from derivative contracts that are not designated as hedging instruments was as follows:

 

 

 

 

 

Third

 

Nine

 

(millions)

 

Location

 

Quarter

 

Months

 

 

 

 

 

 

 

 

 

Gain (loss) recognized in income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Selling, general and administrative expenses

 

$

(5.4

)

$

3.3

 

 

 

Interest expense, net

 

(4.1

)

(5.4

)

 

 

 

 

$

 (9.5

)

$

(2.1

)

 

The amounts recognized in earnings above offset the earnings impact of the related foreign currency denominated assets and liabilities.

 

14



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

5.                         Financial Instruments and Hedging Transactions (Continued)

 

Net Investment Hedge

 

The company designates its euro 300 million ($430 million as of September 30, 2009) senior notes and related accrued interest as a hedge of existing foreign currency exposures related to net investments the company has in certain European subsidiaries. Accordingly, the transaction gains and losses on the euronotes which are designated and effective as hedges of the company’s net investments have been included as a component of the cumulative translation adjustment account. Total transaction gains and losses related to the euronotes charged to shareholders’ equity were as follows:

 

 

 

Third Quarter Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

(millions)

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Transaction gains (losses), net of tax

 

$

(3.3

)

$

16.7

 

$

(31.1

)

$

(0.4

)

 

6.                         Comprehensive Income

 

 

 

Third Quarter Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

(millions)

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

$

145.2

 

$

125.9

 

$

302.4

 

$

368.0

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

20.9

 

(86.4

)

139.9

 

(26.5

)

Derivative instruments

 

(3.7

)

3.6

 

(10.8

)

4.0

 

Pension and postretirement benefits

 

2.5

 

1.5

 

5.4

 

5.0

 

Total

 

19.7

 

(81.3

)

134.5

 

(17.5

)

 

 

 

 

 

 

 

 

 

 

Total comprehensive income, including noncontrolling interest

 

164.9

 

44.6

 

436.9

 

350.5

 

 

 

 

 

 

 

 

 

 

 

Less: Comprehensive income attributable to noncontrolling interest

 

0.4

 

(0.9

)

1.2

 

0.3

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to Ecolab

 

$

164.5

 

$

45.5

 

$

435.7

 

$

350.2

 

 

15



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7.                         Business Acquisitions and Investments

 

In February 2009, the company acquired assets of the Stackhouse business of CORPAK Medsystems, Inc.  Stackhouse is a leading developer, manufacturer and marketer of surgical helmets and smoke evacuators, primarily for use during orthopedic surgeries.  The business, which has annual sales of approximately $4 million, became part of the company’s U.S. Cleaning & Sanitizing operations during the first quarter of 2009.

 

Acquisitions during the first nine months of 2008 included our Ecovation acquisition and other immaterial acquisition activity.

 

Acquisitions in 2009 and 2008 are not material to the company’s consolidated financial statements; therefore pro forma financial information is not presented. The aggregate purchase price of acquisitions and investments in affiliates has been reduced for any cash or cash equivalents acquired with the acquisitions.

 

Based upon purchase price allocations and subsequent adjustments thereto, the components of the aggregate purchase prices of the acquisitions and investments in affiliates made were as follows:

 

 

 

Third Quarter Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

(millions)

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Net tangible assets acquired (liabilities assumed)

 

$

0.2

 

$

(10.5

)

$

2.5

 

$

38.9

 

 

 

 

 

 

 

 

 

 

 

Identifiable intangible assets

 

 

 

 

 

 

 

 

 

Customer relationships

 

0.9

 

0.4

 

1.9

 

10.7

 

Intellectual property

 

 

 

1.0

 

26.8

 

Trademarks

 

0.2

 

 

0.2

 

16.0

 

Other intangibles

 

 

0.3

 

 

9.9

 

Total

 

1.1

 

0.7

 

3.1

 

63.4

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

0.7

 

11.0

 

1.5

 

122.4

 

Total aggregate purchase price

 

$

2.0

 

$

1.2

 

$

7.1

 

$

224.7

 

 

 

 

 

 

 

 

 

 

 

Liability for indemnification

 

 

 

 

(21.0

)

Net cash paid for acquisitions

 

$

2.0

 

$

1.2