Ecolab 10-Q 2011
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended March 31, 2011
OR
For the transition period from to
Commission File No. 1-9328
ECOLAB INC. (Exact name of registrant as specified in its charter)
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.
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 April 30, 2011.
231,994,433 shares of common stock, par value $1.00 per share.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ECOLAB INC. CONSOLIDATED STATEMENT OF INCOME
The accompanying notes are an integral part of the consolidated financial information.
ECOLAB INC. CONSOLIDATED BALANCE SHEET
The accompanying notes are an integral part of the consolidated financial information.
(Continued)
ECOLAB INC. CONSOLIDATED BALANCE SHEET (continued)
(a) Common stock, 400 million shares authorized, $1.00 par value per share, 231.7 million shares outstanding at March 31, 2011, 232.5 million shares outstanding at December 31, 2010. Shares outstanding are net of treasury stock.
The accompanying notes are an integral part of the consolidated financial information.
ECOLAB INC. CONSOLIDATED STATEMENT OF CASH FLOWS
The accompanying notes are an integral part of the consolidated financial information.
(Continued)
ECOLAB INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
The accompanying notes are an integral part of the consolidated financial information.
ECOLAB INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Consolidated Financial Information
The unaudited consolidated financial information for the first quarter ended March 31, 2011 and 2010, 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, 2010 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, 2010.
With respect to the unaudited financial information of the company for the first quarter ended March 31, 2011 and 2010 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. However, their separate report dated May 5, 2011 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:
ECOLAB INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Special Gains and Charges (Continued)
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
As previously disclosed, following the recent implementation of new business systems in Europe, 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, a small amount of restructuring will be undertaken outside of Europe. The costs outside of Europe are not expected to be significant (collectively, the “2011 Restructuring Plan”). Through the 2011 Restructuring Plan, approximately 900 positions are expected to be eliminated.
The company expects to incur pretax restructuring charges of approximately $150 million ($125 million after tax) over the next three years, as the 2011 Restructuring Plan continues to roll out. Approximately $50 million to $70 million ($40 million to $60 million after tax) of those charges are expected to occur in 2011. The company anticipates that approximately $125 million of the pre-tax charge will represent cash expenditures.
As a result of restructuring activities during the first quarter, the company recorded restructuring charges of $11.2 million ($9.0 million after tax) or $0.04 per diluted share.
Restructuring charges and subsequent reductions related to the 2011 Restructuring Plan include the following:
ECOLAB INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Special Gains and Charges (Continued)
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 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. Other charges include lease terminations.
As previously disclosed, in 2009, the company completed restructuring and other cost-saving actions in order to streamline operations and improve efficiency and effectiveness (the “2009 Restructuring Plan”). The 2009 Restructuring Plan was finalized and all actions, except for certain cash payments, were completed as of December 31, 2009. As of March 31, 2011, the remaining liability related to the 2009 Restructuring Plan is $2.7 million, as compared to $2.8 million at December 31, 2010.
Non-restructuring Special Gains and Charges
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 7.
Beginning in 2010, Venezuela was designated hyper-inflationary and as such all foreign currency fluctuations are recorded in income. On January 8, 2010 the Venezuelan government devalued its currency, the Bolivar Fuerte. As a result of the devaluation, the company recorded a charge in the first quarter of 2010 due to the remeasurement of the local balance sheet using the “official” rate of exchange for the Bolivar Fuerte.
ECOLAB INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Selected Balance Sheet Information
ECOLAB INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Selected Balance Sheet Information (Continued)
4. Interest
ECOLAB INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Financial Instruments and Hedging Transactions
Fair Value of Financial Instruments
The company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, commercial paper, notes payable, foreign currency forward contracts and long-term debt. The carrying values of cash and cash equivalents, accounts receivable, accounts payable, commercial paper and notes payable approximate fair value because of their short maturities. The carrying values of foreign currency forward contracts and interest rate swap contracts are at fair value, which is determined based on foreign currency exchange rates and current interest rates, respectively, as of the balance sheet date (level 2 - significant other observable inputs).
The carrying amount and the estimated fair value of long-term debt, including current maturities, held by the company were:
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 level 3 financial instruments (unobservable inputs) measured using the company’s own assumptions of fair market value.
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.
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. During the first quarter of 2011, the company entered into two forward starting swap agreements in anticipation of a long-term debt issuance. The interest rate swap agreements were designated and effective as a cash flow hedge of the expected interest payments related to the debt issuance. 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. The amounts are included in other current assets and other current liabilities on the balance sheet.
ECOLAB INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Financial Instruments and Hedging Transactions (Continued)
The company had foreign currency forward exchange contracts with notional values that totaled approximately $492 million at March 31, 2011, and $433 million at December 31, 2010.
The company had interest rate swap contracts with notional values that totaled $125 million at March 31, 2011.
ECOLAB INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Financial Instruments and Hedging Transactions (Continued)
The impact on AOCI and earnings from derivative contracts that qualified as cash flow hedges was as follows:
The impact on earnings from derivative contracts that are not designated as hedging instruments was as follows:
The amounts recognized in earnings above offset the earnings impact of the related foreign currency denominated assets and liabilities.
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 ($414 million as of March 31, 2011) senior notes and related accrued interest as a hedge of existing foreign currency exposures related to net investments the company has in certain Euro functional 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:
6. Comprehensive Income
ECOLAB INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Business Acquisitions and Dispositions
In December 2010, subsequent to the company’s fiscal year end for international operations, the company completed the purchase of the assets of the Cleantec business of Campbell Brothers Ltd., Brisbane, Queensland, Australia. Cleantec is a developer, manufacturer and marketer of cleaning and hygiene products principally within the Australian food and beverage processing, foodservice, hospitality and textile care markets. The total purchase price was approximately $43 million, of which $2 million remains payable and was placed in an escrow for indemnification purposes. The business, which has annual sales of approximately $55 million, became part of the company’s International segment during the first quarter of 2011.
In March 2011, the company closed on the previously announced purchase of the assets of O.R. Solutions, Inc., a privately-held developer and marketer of surgical fluid warming and cooling systems in the U.S. The total purchase price was approximately $260 million, of which $26 million remains payable and was placed in an escrow for indemnification purposes. The business, which has annual sales of approximately $55 million, became part of the company’s U.S. Cleaning & Sanitizing segment during the first quarter of 2011.
There were no acquisitions or material business disposals during the first quarter of 2010.
Acquisitions in 2011 are not material to the company’s consolidated financial statements; therefore pro forma financial information is not presented. The aggregate purchase price of acquisitions has been reduced for any cash or cash equivalents acquired with the acquisitions.
Based upon preliminary purchase price allocations, the components of the aggregate purchase prices of acquisitions are shown in the table below. First quarter 2011 allocations are preliminary, pending finalization of intangible asset valuations.
ECOLAB INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Earnings Attributable to Ecolab Per Common Share
The computations of the basic and diluted earnings attributable to Ecolab per share amounts were as follows:
ECOLAB INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Pension and Postretirement Plans
The company is not required to make any contributions to its U.S. pension plan and postretirement health care benefits plan for 2011. However, the company made a $100 million voluntary contribution to the U.S. pension plan in the first quarter of 2011.
Certain international pension benefit plans are required to be funded in accordance with local government requirements. The company contributed $9 million to its international pension benefit plans during the first quarter of 2011. The company currently estimates that it will contribute approximately $26 million more to the international pension benefit plans during the remainder of 2011.
The components of net periodic pension and postretirement health care benefit costs for the first quarter ended March 31 are as follows:
ECOLAB INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Operating Segments
The company’s twelve operating segments have been aggregated into three reportable segments. Financial information for each of the company’s reportable segments is as follows:
The International amounts included above are based on translation into U.S. dollars at the fixed currency exchange rates used by management for 2011.
Consistent with the company’s internal management reporting, the Corporate segment includes special gains and charges reported on the Consolidated Statement of Income. The Corporate segment also includes investments in the development of business systems and other corporate investments the company is making as part of ongoing efforts to improve efficiency and returns.
Total service revenue for the U.S. Other Services and International segments, at public exchange rates are as follows:
ECOLAB INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Goodwill and Other Intangible Assets
The company tests goodwill for impairment on an annual basis during the second quarter. The company’s reporting units are its operating segments. If circumstances change significantly, the company would also test a reporting unit for impairment during interim periods between its annual tests. There has been no impairment of goodwill since the adoption of FASB guidance for goodwill and other intangibles on January 1, 2002.
The changes in the carrying amount of goodwill for each of the company’s reportable segments during the three months ended March 31, 2011 were as follows:
(a) For 2011, goodwill related to businesses acquired of $85.0 million is expected to be tax deductible.
ECOLAB INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Goodwill and Other Intangible Assets (Continued)
The company’s other intangible assets primarily include customer relationships, trademarks, patents and other technology. Other intangible assets are amortized on a straight-line basis over their estimated economic lives. Total amortization expense related to other intangible assets during the first quarter ended March 31, 2011 and 2010 was $11.5 million and $10.3 million, respectively. As of March 31, 2011, future estimated amortization expense related to amortizable other identifiable intangible assets will be:
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