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Ecolab 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-15
  3. Ex-31
  4. Ex-32
  5. 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 June 30, 2011

 

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 July 31, 2011.

 

231,958,167 shares of common stock, par value $1.00 per share.

 

 

 



 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ECOLAB INC.

CONSOLIDATED STATEMENT OF INCOME

 

 

 

Second Quarter Ended

 

 

 

June 30

 

(millions, except per share)

 

2011

 

2010

 

 

 

(unaudited)

 

 

 

 

 

 

 

Net sales

 

$

1,698.8

 

$

1,520.2

 

 

 

 

 

 

 

Cost of sales

 

860.8

 

750.0

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

609.6

 

565.3

 

 

 

 

 

 

 

Special (gains) and charges

 

30.1

 

0.6

 

 

 

 

 

 

 

Operating income

 

198.3

 

204.3

 

 

 

 

 

 

 

Interest expense, net

 

13.1

 

15.0

 

 

 

 

 

 

 

Income before income taxes

 

185.2

 

189.3

 

 

 

 

 

 

 

Provision for income taxes

 

59.0

 

59.8

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

126.2

 

129.5

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interest

 

0.3

 

0.2

 

 

 

 

 

 

 

Net income attributable to Ecolab

 

$

125.9

 

$

129.3

 

 

 

 

 

 

 

Earnings attributable to Ecolab per common share

 

 

 

 

 

Basic

 

$

0.54

 

$

0.55

 

Diluted

 

$

0.53

 

$

0.54

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.1750

 

$

0.1550

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

231.6

 

233.4

 

Diluted

 

236.1

 

237.4

 

 

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

 

2



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF INCOME

 

 

 

Six Months Ended

 

 

 

June 30

 

(millions, except per share)

 

2011

 

2010

 

 

 

(unaudited)

 

 

 

 

 

 

 

Net sales

 

$

3,217.1

 

$

2,952.3

 

 

 

 

 

 

 

Cost of sales (including special charges of $0.8 in 2011)

 

1,631.2

 

1,466.7

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

1,191.2

 

1,123.4

 

 

 

 

 

 

 

Special (gains) and charges

 

44.7

 

4.1

 

 

 

 

 

 

 

Operating income

 

350.0

 

358.1

 

 

 

 

 

 

 

Interest expense, net

 

26.6

 

30.0

 

 

 

 

 

 

 

Income before income taxes

 

323.4

 

328.1

 

 

 

 

 

 

 

Provision for income taxes

 

103.4

 

102.9

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

220.0

 

225.2

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interest

 

0.5

 

0.4

 

 

 

 

 

 

 

Net income attributable to Ecolab

 

$

219.5

 

$

224.8

 

 

 

 

 

 

 

Earnings attributable to Ecolab per common share

 

 

 

 

 

Basic

 

$

0.95

 

$

0.96

 

Diluted

 

$

0.93

 

$

0.94

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.3500

 

$

0.3100

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

231.8

 

234.4

 

Diluted

 

236.2

 

238.1

 

 

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

 

3



 

ECOLAB INC.

CONSOLIDATED BALANCE SHEET

 

 

 

June 30

 

December 31

 

(millions)

 

2011

 

2010

 

 

 

(unaudited)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

163.2

 

$

242.3

 

 

 

 

 

 

 

Accounts receivable, net

 

1,106.7

 

999.6

 

 

 

 

 

 

 

Inventories

 

495.5

 

447.6

 

 

 

 

 

 

 

Deferred income taxes

 

92.8

 

78.9

 

 

 

 

 

 

 

Other current assets

 

136.0

 

101.5

 

 

 

 

 

 

 

Total current assets

 

1,994.2

 

1,869.9

 

 

 

 

 

 

 

Property, plant and equipment, net

 

1,212.7

 

1,148.3

 

 

 

 

 

 

 

Goodwill

 

1,503.3

 

1,329.3

 

 

 

 

 

 

 

Other intangible assets, net

 

429.8

 

282.5

 

 

 

 

 

 

 

Other assets

 

267.4

 

242.2

 

 

 

 

 

 

 

Total assets

 

$

5,407.4

 

$

4,872.2

 

 

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

 

(Continued)

 

4



 

ECOLAB INC.

CONSOLIDATED BALANCE SHEET (continued)

 

 

 

June 30

 

December 31

 

(millions, except shares and per share)

 

2011

 

2010

 

 

 

(unaudited)

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

Short-term debt

 

$

403.5

 

$

189.2

 

 

 

 

 

 

 

Accounts payable

 

400.5

 

349.3

 

 

 

 

 

 

 

Compensation and benefits

 

271.3

 

308.1

 

 

 

 

 

 

 

Income taxes

 

36.9

 

36.7

 

 

 

 

 

 

 

Other current liabilities

 

527.4

 

441.5

 

 

 

 

 

 

 

Total current liabilities

 

1,639.6

 

1,324.8

 

 

 

 

 

 

 

Long-term debt

 

703.3

 

656.4

 

 

 

 

 

 

 

Postretirement health care and pension benefits

 

494.4

 

565.8

 

 

 

 

 

 

 

Other liabilities

 

227.7

 

192.2

 

 

 

 

 

 

 

Equity (a)

 

 

 

 

 

Common stock

 

334.9

 

333.1

 

Additional paid-in capital

 

1,388.5

 

1,310.2

 

Retained earnings

 

3,417.5

 

3,279.1

 

Accumulated other comprehensive loss

 

(159.5

)

(271.9

)

Treasury stock

 

(2,643.2

)

(2,521.3

)

Total Ecolab shareholders’ equity

 

2,338.2

 

2,129.2

 

Noncontrolling interest

 

4.2

 

3.8

 

Total equity

 

2,342.4

 

2,133.0

 

 

 

 

 

 

 

Total liabilities and equity

 

$

5,407.4

 

$

4,872.2

 

 


(a)          Common stock, 400 million shares authorized, $1.00 par value per share, 231.9 million shares outstanding at June 30, 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.

 

5



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

 

 

 

Six Months Ended

 

 

 

June 30

 

(millions)

 

2011

 

2010

 

 

 

(unaudited)

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

$

220.0

 

$

225.2

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

187.9

 

178.0

 

Deferred income taxes

 

7.3

 

(0.8

)

Share-based compensation expense

 

21.0

 

14.2

 

Excess tax benefits from share-based payment arrangements

 

(7.8

)

(6.9

)

Pension and postretirement plan contributions

 

(123.0

)

(12.7

)

Pension and postretirement plan expense

 

40.1

 

44.7

 

Restructuring, net of cash paid

 

36.3

 

 

Other, net

 

4.0

 

7.5

 

 

 

 

 

 

 

Changes in operating assets and liabilities, net of effect of acquisitions:

 

 

 

 

 

Accounts receivable

 

(34.3

)

(26.8

)

Inventories

 

(16.8

)

12.3

 

Other assets

 

(26.1

)

(7.3

)

Accounts payable

 

34.4

 

(9.4

)

Other liabilities

 

(40.9

)

(53.0

)

 

 

 

 

 

 

Cash provided by operating activities

 

302.1

 

365.0

 

 

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

 

(Continued)

 

6



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)

 

 

 

Six Months Ended

 

 

 

June 30

 

(millions)

 

2011

 

2010

 

 

 

(unaudited)

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

(145.8

)

$

(125.4

)

Capitalized software expenditures

 

(11.9

)

(21.1

)

Property and other assets sold

 

2.5

 

1.4

 

Businesses acquired and investments in affiliates, net of cash acquired

 

(281.1

)

(0.7

)

Sale of business

 

 

10.0

 

Deposit into indemnification escrow

 

(28.1

)

 

Receipt from indemnification escrow

 

 

0.9

 

Cash used for investing activities

 

(464.4

)

(134.9

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net issuances (repayments) of commercial paper and notes payable

 

362.3

 

73.2

 

Long-term debt repayments

 

(153.8

)

(3.3

)

Reacquired shares

 

(122.2

)

(202.0

)

Cash dividends on common stock

 

(81.2

)

(73.4

)

Exercise of employee stock options

 

50.7

 

34.8

 

Excess tax benefits from share-based payment arrangements

 

7.8

 

6.9

 

Other, net

 

(0.1

)

 

Cash provided by (used for) financing activities

 

63.5

 

(163.8

)

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

19.7

 

(18.6

)

 

 

 

 

 

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

(79.1

)

47.7

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

242.3

 

73.6

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

163.2

 

$

121.3

 

 

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 second quarter and six months ended June 30, 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 second quarter and six months ended June 30, 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 August 4, 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:

 

 

 

Second Quarter Ended
June 30

 

Six Months Ended
June 30

 

(millions)

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

 

 

 

 

 

 

 

Restructuring charges

 

$

 

$

 

$

0.8

 

$

 

 

 

 

 

 

 

 

 

 

 

Special (gains) and charges

 

 

 

 

 

 

 

 

 

Restructuring charges

 

29.8

 

 

40.2

 

 

Business structure and optimization

 

0.3

 

0.6

 

0.9

 

1.2

 

Acquisition integration costs

 

 

 

3.6

 

 

Venezuela currency devaluation

 

 

 

 

4.2

 

Business write-downs and closure

 

 

 

 

(1.0

)

Other items

 

 

 

 

(0.3

)

Total

 

30.1

 

0.6

 

44.7

 

4.1

 

 

 

 

 

 

 

 

 

 

 

Total special (gains) and charges

 

$

30.1

 

$

0.6

 

$

45.5

 

$

4.1

 

 

8



 

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

 

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, restructuring will be undertaken outside of Europe, the costs of which 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) through 2013, 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. The remaining $25 million of the pre-tax charges represent estimated asset disposals.

 

As a result of restructuring activities, the company recorded restructuring charges of $29.8 million ($25.2 million after tax) or $0.11 per diluted share and $41.0 million ($34.2 million after tax) or $0.15 per diluted share, during the second quarter and six months ended June 30, 2011, respectively.

 

Restructuring charges and subsequent reductions for the first six months of 2011 related to the 2011 Restructuring Plan include the following:

 

 

 

Employee

 

 

 

 

 

 

 

 

 

Termination

 

Asset

 

 

 

 

 

(millions)

 

Costs

 

Disposals

 

Other

 

Total

 

 

 

 

 

 

 

 

 

 

 

2011 Restructuring Plan:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded expense and accrual

 

$

36.0

 

$

0.2

 

$

4.8

 

$

41.0

 

Cash payments

 

(4.3

)

 

(0.4

)

(4.7

)

Non-cash charges

 

 

(0.2

)

 

(0.2

)

Effect of foreign currency translation

 

0.5

 

 

 

0.5

 

 

 

 

 

 

 

 

 

 

 

Restructuring liability, June 30, 2011

 

$

32.2

 

$

 

$

4.4

 

$

36.6

 

 

9



 

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. Asset disposals include leasehold improvement write-downs. 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 December 31, 2010, the remaining liability related to the 2009 Restructuring Plan was $2.8 million.  A minimal amount remains as a liability related to the 2009 Restructuring Plan as of June 30, 2011.

 

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.

 

10



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3.     Selected Balance Sheet Information

 

 

 

June 30

 

December 31

 

(millions)

 

2011

 

2010

 

 

 

(unaudited)

 

Accounts receivable, net

 

 

 

 

 

Accounts receivable

 

$

1,155.8

 

$

1,044.5

 

Allowance for doubtful accounts

 

(49.1

)

(44.9

)

Total

 

$

1,106.7

 

$

999.6

 

 

 

 

 

 

 

Inventories

 

 

 

 

 

Finished goods

 

$

281.9

 

$

254.2

 

Raw materials and parts

 

235.6

 

216.1

 

Inventories at FIFO cost

 

517.5

 

470.3

 

Excess of FIFO cost over LIFO cost

 

(22.0

)

(22.7

)

Total

 

$

495.5

 

$

447.6

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

 

 

 

Land

 

$

35.8

 

$

28.4

 

Buildings and improvements

 

305.6

 

279.9

 

Leasehold improvements

 

77.9

 

75.9

 

Machinery and equipment

 

732.9

 

699.1

 

Merchandising equipment

 

1,532.2

 

1,419.2

 

Capitalized software

 

339.0

 

321.2

 

Construction in progress

 

56.7

 

48.9

 

 

 

3,080.1

 

2,872.6

 

Accumulated depreciation

 

(1,867.4

)

(1,724.3

)

Total

 

$

1,212.7

 

$

1,148.3

 

 

 

 

 

 

 

Other intangible assets, gross

 

 

 

 

 

Customer relationships

 

$

440.3

 

$

276.0

 

Trademarks

 

122.4

 

111.3

 

Patents

 

81.2

 

79.0

 

Customer lists

 

5.6

 

5.6

 

Other intangibles

 

82.5

 

73.3

 

 

 

$

732.0

 

$

545.2

 

Accumulated amortization

 

 

 

 

 

Customer relationships

 

$

(187.1

)

$

(159.5

)

Trademarks

 

(45.2

)

(41.0

)

Patents

 

(31.3

)

(28.2

)

Customer lists

 

(5.6

)

(5.5

)

Other intangibles

 

(33.0

)

(28.5

)

Other intangible assets, net

 

$

429.8

 

$

282.5

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

Deferred income taxes

 

$

106.4

 

$

112.0

 

Pension

 

1.4

 

1.5

 

Other

 

159.6

 

128.7

 

Total

 

$

267.4

 

$

242.2

 

 

11



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3.       Selected Balance Sheet Information (Continued)

 

 

 

June 30

 

December 31

 

(millions)

 

2011

 

2010

 

 

 

(unaudited)

 

 

 

 

 

 

 

Short-term debt

 

 

 

 

 

Commercial paper

 

$

361.0

 

$

 

Notes payable

 

34.7

 

32.4

 

Long-term debt, current maturities

 

7.8

 

156.8

 

Total

 

$

403.5

 

$

189.2

 

 

 

 

 

 

 

Other current liabilities

 

 

 

 

 

Discounts and rebates

 

$

236.3

 

$

220.7

 

Dividends payable

 

40.6

 

40.7

 

Interest payable

 

14.6

 

9.3

 

Taxes payable, other than income

 

48.8

 

49.2

 

Foreign exchange contracts

 

16.5

 

5.1

 

Restructuring

 

36.6

 

2.8

 

Other

 

134.0

 

113.7

 

Total

 

$

527.4

 

$

441.5

 

 

 

 

 

 

 

Other liabilities

 

 

 

 

 

Deferred income taxes

 

$

71.5

 

$

65.3

 

Income taxes payable - non-current

 

37.6

 

38.1

 

Other

 

118.6

 

88.8

 

Total

 

$

227.7

 

$

192.2

 

 

 

 

 

 

 

Accumulated other comprehensive loss

 

 

 

 

 

Unrealized loss on derivative financial instruments, net of tax

 

$

(12.8

)

$

(3.3

)

Unrecognized pension and postretirement benefit expense, net of tax

 

(385.9

)

(387.4

)

Cumulative translation, net of tax

 

239.2

 

118.8

 

Total

 

$

(159.5

)

$

(271.9

)

 

4.       Interest

 

 

 

Second Quarter Ended

 

Six Months Ended

 

 

 

June 30

 

June 30

 

(millions)

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

14.8

 

$

16.1

 

$

29.8

 

$

32.4

 

Interest income

 

(1.7

)

(1.1

)

(3.2

)

(2.4

)

Interest expense, net

 

$

13.1

 

$

15.0

 

$

26.6

 

$

30.0

 

 

12



 

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 interest rate swap 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:

 

 

 

June 30, 2011

 

December 31, 2010

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

(millions)

 

Amount

 

Value

 

Amount

 

Value

 

 

 

 

 

 

 

 

 

 

 

Long-term debt (including current maturities)

 

$

711.1

 

$

766.0

 

$

813.2

 

$

850.6

 

 

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.

 

13



 

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 six months of 2011, the company entered into four 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 anticipated debt issuance. The company expects to complete the long-term debt issuance by the end of 2011. 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.

 

14



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

5.       Financial Instruments and Hedging Transactions (Continued)

 

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.

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

June 30

 

December 31

 

June 30

 

December 31

 

(millions)

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

0.7

 

$

0.5

 

$

5.4

 

$

3.2

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

 

 

8.5

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

9.6

 

1.3

 

2.6

 

1.9

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

10.3

 

$

1.8

 

$

16.5

 

$

5.1

 

 

The company had foreign currency forward exchange contracts with notional values that totaled approximately $523 million at June 30, 2011, and $433 million at December 31, 2010.

 

The company had interest rate swap contracts with notional values that totaled $250 million at June 30, 2011.

 

15



 

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:

 

 

 

 

 

Second Quarter Ended

 

Six Months Ended

 

 

 

 

 

June 30

 

June 30

 

(millions)

 

Location

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

AOCI (equity)

 

$

(1.4

)

$

1.1

 

$

(5.6

)

$

2.3

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

AOCI (equity)

 

(8.7

)

 

(7.8

)

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Sales

 

$

(0.1

)

$

0.3

 

$

(0.2

)

$

0.1

 

 

 

Cost of sales

 

(1.3

)

(1.3

)

(2.4

)

(3.0

)

 

 

SG&A

 

(0.6

)

0.2

 

(0.9

)

0.5

 

 

 

 

 

(2.0

)

(0.8

)

(3.5

)

(2.4

)

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap

 

Interest expense, net

 

(0.1

)

(0.1

)

(0.2

)

(0.2

)

 

 

 

 

$

(2.1

)

$

(0.9

)

$

(3.7

)

$

(2.6

)

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Interest expense, net

 

$

(0.4

)

$

(0.3

)

$

(0.8

)

$

(0.5

)

 

16



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

5.       Financial Instruments and Hedging Transactions (Continued)

 

The impact on earnings from derivative contracts that are not designated as hedging instruments was as follows:

 

 

 

 

 

Second Quarter Ended

 

Six Months Ended

 

 

 

 

 

June 30

 

June 30

 

(millions)

 

Location

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) recognized in income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

SG&A

 

$

2.1

 

$

2.1

 

$

5.5

 

$

(4.0

)

 

 

Interest expense, net

 

(1.3

)

(1.4

)

(2.8

)

(2.8

)

 

 

 

 

$

0.8

 

$

0.7

 

$

2.7

 

$

(6.8

)

 

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

 

Net Investment Hedge

 

The company designates its euro 300 million ($432 million as of June 30, 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:

 

 

 

Second Quarter Ended

 

Six Months Ended

 

 

 

June 30

 

June 30

 

(millions)

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Transaction gains (losses), net of tax

 

$

(11.0

)

$

24.7

 

$

(27.9

)

$

50.2

 

 

17



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

6.       Comprehensive Income

 

 

 

Second Quarter Ended

 

Six Months Ended

 

 

 

June 30

 

June 30

 

(millions)

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

$

126.2

 

$

129.5

 

$

220.0

 

$

225.2

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

51.7

 

(84.0

)

120.4

 

(174.3

)

Derivative instruments

 

(8.2

)

1.5

 

(9.5

)

2.6

 

Pension and postretirement benefits

 

2.2

 

9.6

 

1.5

 

24.0

 

Total

 

45.7

 

(72.9

)

112.4

 

(147.7

)

 

 

 

 

 

 

 

 

 

 

Total comprehensive income, including noncontrolling interest

 

171.9

 

56.6

 

332.4

 

77.5

 

 

 

 

 

 

 

 

 

 

 

Less: Comprehensive income (loss) attributable to noncontrolling interest

 

0.2

 

0.3

 

0.4

 

(0.6

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to Ecolab

 

$

171.7

 

$

56.3

 

$

332.0

 

$

78.1

 

 

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 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 related to general representations and warranties. 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.

 

18



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7.       Business Acquisitions and Dispositions (Continued)

 

In July 2011, the company entered into an agreement and plan of merger with Nalco Holding Company (“Nalco”), under which Nalco will be merged with a subsidiary of the company. Based in Naperville, Illinois, Nalco is the world’s leading water treatment and process improvement company, offering water management sustainability services focused on industrial, energy and institutional market segments. Nalco sales were approximately $4.3 billion in 2010. Subject to the terms of the merger agreement, the company will issue approximately 68.9 million shares of Ecolab stock and pay approximately $1.6 billion in cash to Nalco shareholders. This represents a fully-diluted offer value for Nalco’s equity of $5.4 billion and, inclusive of $2.7 billion in Nalco net debt, a total transaction value of $8.1 billion, based on the company’s closing stock price on July 19, 2011. The transaction is expected to close in the fourth quarter, subject to customary closing conditions, regulatory clearances, as well as approval of both the company’s and Nalco’s shareholders.

 

The weighted average useful life of identifiable intangible assets acquired during 2011 is 14 years.

 

There were no acquisitions during the first six months of 2010. The company made an earnout payment in the second quarter of 2010 related to a previous acquisition. The company sold a small joint venture in its international segment during the second quarter of 2010. The impact of this divestiture was not material.

 

Completed 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 purchase price allocations, the components of the aggregate purchase prices of acquisitions are shown in the table below. The contingent consideration relates to an immaterial acquisition completed during the second quarter of 2011.

 

 

 

Second Quarter Ended
June 30

 

Six Months Ended
June 30

 

(millions)

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Net tangible assets acquired

 

$

3.5

 

$

 

$

57.4

 

$

 

Identifiable intangible assets

 

 

 

 

 

 

 

 

 

Customer relationships

 

1.9

 

 

144.7

 

 

Trademarks

 

 

 

11.2

 

 

Patents

 

 

 

0.3

 

 

Other intangibles

 

(0.7

)

 

8.4

 

 

Total

 

1.2

 

 

164.6

 

 

Goodwill

 

3.6