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Ecolab 10-Q 2012

Documents found in this filing:

  1. 10-Q
  2. Ex-4.1
  3. Ex-15.1
  4. Ex-31.1
  5. Ex-32.1
  6. Ex-32.1

 

 

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, 2012

 

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 September 30, 2012.

 

292,908,272 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 amounts)

 

2012

 

2011

 

 

 

(unaudited)

 

 

 

 

 

 

 

Net sales

 

$

3,023.3

 

$

1,736.1

 

 

 

 

 

 

 

Cost of sales (including special charges of $3.2 in 2012 and $4.5 in 2011)

 

1,616.4

 

877.9

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

977.7

 

595.3

 

 

 

 

 

 

 

Special (gains) and charges

 

28.0

 

23.3

 

 

 

 

 

 

 

Operating income

 

401.2

 

239.6

 

 

 

 

 

 

 

Interest expense, net

 

64.2

 

13.2

 

 

 

 

 

 

 

Income before income taxes

 

337.0

 

226.4

 

 

 

 

 

 

 

Provision for income taxes

 

97.7

 

71.9

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

239.3

 

154.5

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interest

 

1.3

 

0.2

 

 

 

 

 

 

 

Net income attributable to Ecolab

 

$

238.0

 

$

154.3

 

 

 

 

 

 

 

Earnings attributable to Ecolab per common share

 

 

 

 

 

Basic

 

$

0.81

 

$

0.67

 

Diluted

 

$

0.80

 

$

0.65

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.2000

 

$

0.1750

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

292.7

 

231.9

 

Diluted

 

298.6

 

236.1

 

 

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 amounts)

 

2012

 

2011

 

 

 

(unaudited)

 

 

 

 

 

 

 

Net sales

 

$

8,792.9

 

$

4,953.2

 

 

 

 

 

 

 

Cost of sales (including special charges of $82.3 in 2012 and $5.3 in 2011)

 

4,839.3

 

2,509.1

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

2,949.1

 

1,786.5

 

 

 

 

 

 

 

Special (gains) and charges

 

111.0

 

68.0

 

 

 

 

 

 

 

Operating income

 

893.5

 

589.6

 

 

 

 

 

 

 

Interest expense, net (including special charges of $18.2 in 2012)

 

214.2

 

39.8

 

 

 

 

 

 

 

Income before income taxes

 

679.3

 

549.8

 

 

 

 

 

 

 

Provision for income taxes

 

212.5

 

175.3

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

466.8

 

374.5

 

 

 

 

 

 

 

Less: Net income (loss) attributable to noncontrolling interest (including special charges of $4.5 in 2012)

 

(5.4

)

0.7

 

 

 

 

 

 

 

Net income attributable to Ecolab

 

$

472.2

 

$

373.8

 

 

 

 

 

 

 

Earnings attributable to Ecolab per common share

 

 

 

 

 

Basic

 

$

1.62

 

$

1.61

 

Diluted

 

$

1.58

 

$

1.58

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.6000

 

$

0.5250

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

292.0

 

231.8

 

Diluted

 

298.3

 

236.2

 

 

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

 

3



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

 

 

Third Quarter Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

(millions)

 

2012

 

2011

 

2012

 

2011

 

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

$

239.3

 

$

154.5

 

$

466.8

 

$

374.5

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

121.5

 

(0.4

)

(47.4

)

139.0

 

Gain (loss) on net investment hedge

 

(5.9

)

0.5

 

19.8

 

(27.4

)

 

 

115.6

 

0.1

 

(27.6

)

111.6

 

Derivatives & hedging instruments

 

 

 

 

 

 

 

 

 

Unrealized losses during the period

 

(4.0

)

(8.3

)

(2.5

)

(21.7

)

Reclassification adjustment for losses included in net income

 

1.5

 

1.8

 

1.4

 

5.7

 

 

 

(2.5

)

(6.5

)

(1.1

)

(16.0

)

Pension and postretirement benefits

 

 

 

 

 

 

 

 

 

Pension and postretirement benefit adjustment

 

 

 

(1.6

)

 

Amortization of net actuarial loss and prior service cost included in net periodic pension cost

 

7.0

 

5.2

 

21.6

 

15.6

 

 

 

7.0

 

5.2

 

20.0

 

15.6

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

120.1

 

(1.2

)

(8.7

)

111.2

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income, including noncontrolling interest

 

359.4

 

153.3

 

458.1

 

485.7

 

 

 

 

 

 

 

 

 

 

 

Less: Comprehensive income (loss) attributable to noncontrolling interest

 

1.6

 

0.3

 

(6.3

)

0.7

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to Ecolab

 

$

357.8

 

$

153.0

 

$

464.4

 

$

485.0

 

 

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

 

4



 

ECOLAB INC.

CONSOLIDATED BALANCE SHEET

 

 

 

September 30

 

December 31

 

(millions)

 

2012

 

2011

 

 

 

(unaudited)

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

324.0

 

$

1,843.6

 

 

 

 

 

 

 

Accounts receivable, net

 

2,199.0

 

2,095.3

 

 

 

 

 

 

 

Inventories

 

1,103.8

 

1,069.6

 

 

 

 

 

 

 

Deferred income taxes

 

186.3

 

164.0

 

 

 

 

 

 

 

Other current assets

 

259.8

 

223.5

 

 

 

 

 

 

 

Total current assets

 

4,072.9

 

5,396.0

 

 

 

 

 

 

 

Property, plant and equipment, net

 

2,334.2

 

2,295.4

 

 

 

 

 

 

 

Goodwill

 

5,893.7

 

5,855.3

 

 

 

 

 

 

 

Other intangible assets, net

 

4,103.3

 

4,275.2

 

 

 

 

 

 

 

Other assets

 

318.7

 

362.8

 

 

 

 

 

 

 

Total assets

 

$

16,722.8

 

$

18,184.7

 

 

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

 

(Continued)

 

5



 

ECOLAB INC.

CONSOLIDATED BALANCE SHEET (continued)

 

 

 

September 30

 

December 31

 

(millions, except shares and per share amounts)

 

2012

 

2011

 

 

 

(unaudited)

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

Short-term debt

 

$

631.0

 

$

1,023.0

 

 

 

 

 

 

 

Accounts payable

 

858.6

 

815.7

 

 

 

 

 

 

 

Compensation and benefits

 

459.6

 

497.2

 

 

 

 

 

 

 

Income taxes

 

73.0

 

81.7

 

 

 

 

 

 

 

Other current liabilities

 

796.5

 

748.7

 

 

 

 

 

 

 

Total current liabilities

 

2,818.7

 

3,166.3

 

 

 

 

 

 

 

Long-term debt

 

5,386.7

 

6,613.2

 

 

 

 

 

 

 

Postretirement health care and pension benefits

 

997.0

 

1,173.4

 

 

 

 

 

 

 

Other liabilities

 

1,494.2

 

1,490.7

 

 

 

 

 

 

 

Total liabilities

 

10,696.6

 

12,443.6

 

 

 

 

 

 

 

Equity (a)

 

 

 

 

 

Common stock

 

340.1

 

336.1

 

Additional paid-in capital

 

4,162.5

 

3,980.8

 

Retained earnings

 

3,856.9

 

3,559.9

 

Accumulated other comprehensive loss

 

(353.6

)

(344.9

)

Treasury stock

 

(2,060.5

)

(1,865.2

)

Total Ecolab shareholders’ equity

 

5,945.4

 

5,666.7

 

Noncontrolling interest

 

80.8

 

74.4

 

Total equity

 

6,026.2

 

5,741.1

 

 

 

 

 

 

 

Total liabilities and equity

 

$

16,722.8

 

$

18,184.7

 

 


(a)         Common stock, 800 million shares authorized, $1.00 par value per share, 292.9 million shares outstanding at September 30, 2012, 292.0 million shares outstanding at December 31, 2011. Shares outstanding are net of treasury stock.

 

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

 

6



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

 

 

 

Nine Months Ended

 

 

 

September 30

 

(millions)

 

2012

 

2011

 

 

 

(unaudited)

 

 

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

$

466.8

 

$

374.5

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

348.5

 

245.3

 

Amortization

 

185.1

 

39.7

 

Deferred income taxes

 

14.6

 

3.3

 

Share-based compensation expense

 

50.7

 

28.0

 

Excess tax benefits from share-based payment arrangements

 

(28.1

)

(8.9

)

Pension and postretirement plan contributions

 

(232.0

)

(132.0

)

Pension and postretirement plan expense

 

82.2

 

60.6

 

Restructuring, net of cash paid

 

33.4

 

44.7

 

Other, net

 

(3.2

)

5.6

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(174.7

)

(74.1

)

Inventories

 

(27.4

)

(28.0

)

Other assets

 

(48.6

)

(40.7

)

Accounts payable

 

46.7

 

47.1

 

Other liabilities

 

6.8

 

(24.4

)

 

 

 

 

 

 

Cash provided by operating activities

 

$

720.8

 

$

540.7

 

 

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

 

(Continued)

 

7



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (continued)

 

 

 

Nine Months Ended

 

 

 

September 30

 

(millions)

 

2012

 

2011

 

 

 

(unaudited)

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

(394.0

)

$

(228.3

)

Capitalized software expenditures

 

(17.6

)

(16.5

)

Property and other assets sold

 

9.9

 

3.1

 

Businesses acquired and investments in affiliates, net of cash acquired

 

(43.0

)

(281.9

)

Sale of businesses

 

13.8

 

 

Deposit into indemnification escrow

 

(1.3

)

(28.1

)

Release from indemnification escrow

 

17.3

 

 

 

 

 

 

 

 

Cash used for investing activities

 

(414.9

)

(551.7

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net issuances (repayments) of commercial paper and notes payable

 

(389.6

)

297.0

 

Long-term debt borrowings

 

501.6

 

 

Long-term debt repayments

 

(1,692.9

)

(155.7

)

Reacquired shares

 

(193.1

)

(122.5

)

Cash dividends on common stock

 

(180.5

)

(122.3

)

Exercise of employee stock options

 

113.7

 

60.2

 

Excess tax benefits from share-based payment arrangements

 

28.1

 

8.9

 

Other, net

 

(3.1

)

(8.3

)

 

 

 

 

 

 

Cash used for financing activities

 

(1,815.8

)

(42.7

)

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

(9.7

)

18.7

 

 

 

 

 

 

 

DECREASE IN CASH AND CASH EQUIVALENTS

 

(1,519.6

)

(35.0

)

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

1,843.6

 

242.3

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

324.0

 

$

207.3

 

 

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

 

8



 

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, 2012 and 2011 reflect, in the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations, comprehensive income and cash flows of Ecolab Inc. (“Ecolab” or “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, 2011 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, 2011.

 

With respect to the unaudited financial information of the company for the third quarter and nine months ended September 30, 2012 and 2011 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 October 30, 2012 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.

 

In connection with its quarterly report on Form 10-Q for the quarter ended June 30, 2012, the company has revised its consolidated balance sheet as of December 31, 2011 to correct the jurisdictional netting of long-term deferred tax assets and liabilities. This revision decreased other assets and other liabilities by $56.1 million and does not impact the consolidated statements of income or comprehensive income or the consolidated statement of cash flows for any period. This correction also impacted the March 31, 2012 interim financial statements. In addition to jurisdictional netting, additional classification differences primarily related to the January debt repayment were identified between deferred income taxes and income taxes payable which together had the net effect of reducing other assets by $57.1 million, income taxes payable by $64.9 million, and increasing other liabilities by $7.8 million as of March 31, 2012. There was no impact to total cash provided by operations on the statement of cash flows for the three months ended March 31, 2012, but cash used by deferred income taxes was reduced by $64.9 million with an offsetting impact to other liabilities within the components of operating cash flows. There was no impact on the consolidated statements of income or comprehensive income. The company believes that these revisions were immaterial to previously issued financial statements.

 

9



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2.                    Special (Gains) and Charges

 

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

 

 

 

Third Quarter Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

(millions)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

 

 

 

 

 

 

 

Restructuring charges

 

$

1.7

 

$

4.5

 

$

9.6

 

$

5.3

 

Recognition of Nalco inventory fair value step-up

 

1.5

 

 

72.7

 

 

Subtotal

 

3.2

 

4.5

 

82.3

 

5.3

 

 

 

 

 

 

 

 

 

 

 

Special (gains) and charges

 

 

 

 

 

 

 

 

 

Restructuring charges

 

20.8

 

12.6

 

73.2

 

52.8

 

Champion acquisition costs

 

3.8

 

 

3.8

 

 

Nalco merger and integration costs

 

16.4

 

10.3

 

47.0

 

10.3

 

Gain on sale of business

 

(13.0

)

 

(13.0

)

 

Business structure and optimization

 

 

0.3

 

 

1.2

 

Cleantec acquisition integration costs

 

 

0.1

 

 

3.7

 

Subtotal

 

28.0

 

23.3

 

111.0

 

68.0

 

 

 

 

 

 

 

 

 

 

 

Operating income subtotal

 

31.2

 

27.8

 

193.3

 

73.3

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

 

 

 

 

 

 

 

Debt extinguishment costs

 

 

 

18.2

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to noncontrolling interest

 

 

 

 

 

 

 

 

 

Recognition of Nalco inventory fair value step-up

 

 

 

(4.5

)

 

 

 

 

 

 

 

 

 

 

 

Total special (gains) and charges

 

$

31.2

 

$

27.8

 

$

207.0

 

$

73.3

 

 

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

 

Restructuring Charges

 

Restructuring actions generally include significant actions involving employee-related severance charges, contract termination costs and asset write-downs associated with such actions. Employee termination costs are largely based on policies and severance plans, and include personnel reductions and related costs for severance, benefits and outplacement services. These charges are reflected in the quarter when the actions are probable and the amounts are estimable, which typically is when management approves the associated actions. Asset disposals include leasehold improvement write-downs and other asset write-downs associated with combining operations. Other charges include lease terminations prior to the end of their respective terms, and other contract termination costs.

 

10



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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 supply chain related severance and other asset write-downs associated with combining operations. Restructuring liabilities have been classified as a component of other current liabilities on the Consolidated Balance Sheet.

 

2011 Restructuring Plan

 

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

 

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

 

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

 

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

 

Merger Restructuring Plan

 

In January 2012, following the merger with Nalco Holding Company (“Nalco”), the company formally commenced plans to undertake restructuring actions related to the reduction of its global workforce and optimization of its supply chain and office facilities, including planned reductions of plant and distribution center locations (the “Merger Restructuring Plan”). Actions associated with the merger to improve efficiency and effectiveness are expected to lead to a reduction of the company’s workforce by approximately 600 positions through 2012, with additional productivity and efficiency actions beyond 2012 expected to reduce the need for future positions by approximately 1,500.

 

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

 

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

 

11



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.       Special (Gains) and Charges (Continued)

 

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

 

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

 

 

 

2011 Restructuring Plan

 

Merger Restructuring Plan

 

 

 

 

 

Employee

 

 

 

 

 

 

 

Employee

 

 

 

 

 

 

 

 

 

 

 

Termination

 

Asset

 

 

 

 

 

Termination

 

Asset

 

 

 

 

 

 

 

(millions)

 

Costs

 

Disposals

 

Other

 

Subtotal

 

Costs

 

Disposals

 

Other

 

Subtotal

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011 Activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded expense and accrual

 

$

60.5

 

$

0.5

 

$

7.1

 

$

68.1

 

$

6.6

 

$

 

$

 

$

6.6

 

$

74.7

 

Cash payments

 

(22.2

)

 

(2.6

)

(24.8

)

(0.3

)

 

 

(0.3

)

(25.1

)

Non-cash charges

 

 

(0.5

)

 

(0.5

)

 

 

 

 

(0.5

)

Effect of foreign currency translation

 

(2.2

)

 

 

(2.2

)

 

 

 

 

(2.2

)

Restructuring liability, December 31, 2011

 

36.1

 

 

4.5

 

40.6

 

6.3

 

 

 

6.3

 

46.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012 Activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded expense and accrual

 

41.3

 

 

1.5

 

42.8

 

35.4

 

1.8

 

2.7

 

39.9

 

82.7

 

Cash payments

 

(21.5

)

 

(5.2

)

(26.7

)

(15.0

)

 

(1.6

)

(16.6

)

(43.3

)

Non-cash charges

 

 

 

(0.8

)

(0.8

)

 

(1.6

)

 

(1.6

)

(2.4

)

Effect of foreign currency translation

 

(2.4

)

 

 

(2.4

)

 

 

 

 

(2.4

)

Restructuring liability, September 30, 2012

 

$

53.5

 

$

 

$

 

$

53.5

 

$

26.7

 

$

0.2

 

$

1.1

 

$

28.0

 

$

81.5

 

 

Nalco Restructuring Plan

 

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

 

12



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.       Special (Gains) and Charges (Continued)

 

Non-restructuring Special (Gains) and Charges

 

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

 

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

 

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

 

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

 

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

 

3.       Acquisitions and Dispositions

 

Nalco Merger

 

On December 1, 2011, the company completed its merger with Nalco, the leading water treatment and process improvement company. The total fair value of cash and stock consideration transferred to acquire all of Nalco’s common stock was approximately $5.5 billion.

 

The company incurred certain Nalco related special charges associated with the merger during 2012, which were expensed as incurred and are reflected in the Consolidated Statement of Income. During the first nine months of 2012, a total of $133.4 million were incurred with $47.0 million included in special (gains) and charges related to merger and integration charges, $72.7 million and a corresponding reduction of $4.5 million included in cost of sales and net income attributable to Ecolab, respectively, related to recognition of fair value step-up in Nalco inventory and $18.2 million included in net interest expense related to a loss on the extinguishment of Nalco’s senior notes. During the third quarter of 2012, $17.9 million of Nalco related special charges were incurred.

 

The merger has been accounted for using the acquisition method of accounting which requires, among other things, that most assets acquired and liabilities assumed be recognized at fair value as of the acquisition date. Certain estimated values are not yet finalized and are subject to change, which could be significant.

 

13



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3.       Acquisitions and Dispositions (Continued)

 

The following table summarizes the value of Nalco assets acquired and liabilities assumed as of the merger date. Also summarized in the table, subsequent to the merger, net adjustments of $52.5 million have been made to the preliminary purchase price allocations of the assets acquired and liabilities assumed, with a corresponding adjustment to goodwill. The additional consideration of $2.1 million transferred in 2012, and corresponding adjustment to goodwill, relates to the resolution of an appraisal action with respect to dissenting Nalco shares.

 

 

 

 

 

2012

 

 

 

 

 

Initial

 

Adjustments

 

September 30

 

(millions)

 

Valuation

 

to Fair Value

 

2012

 

Current assets

 

$

1,869.6

 

$

(0.1

)

$

1,869.5

 

Property, plant and equipment

 

1,069.2

 

(1.2

)

1,068.0

 

Other assets

 

97.3

 

(3.3

)

94.0

 

Identifiable intangible assets

 

 

 

 

 

 

 

Customer relationships

 

2,160.0

 

 

2,160.0

 

Patents

 

321.0

 

 

321.0

 

Trade names

 

1,230.0

 

 

1,230.0

 

Trademarks

 

79.0

 

 

79.0

 

Other technology

 

91.0

 

 

91.0

 

Total assets acquired

 

6,917.1

 

(4.6

)

6,912.5

 

 

 

 

 

 

 

 

 

Current liabilities

 

1,105.5

 

19.7

 

1,125.2

 

Long-term debt

 

2,858.4

 

 

2,858.4

 

Pension and postretirement benefits

 

505.7

 

5.7

 

511.4

 

Net deferred tax liability

 

1,188.7

 

(8.6

)

1,180.1

 

Noncontrolling interest and other liabilities

 

167.7

 

31.1

 

198.8

 

Total liabilities and noncontrolling interests assumed

 

5,826.0

 

47.9

 

5,873.9

 

 

 

 

 

 

 

 

 

Goodwill

 

4,403.9

 

54.6

 

4,458.5

 

 

 

 

 

 

 

 

 

Total consideration transferred

 

$

5,495.0

 

$

2.1

 

$

5,497.1

 

 

The adjustments to the purchase price allocation during 2012 primarily relate to accruals, contingent liabilities, current and noncurrent deferred tax assets and liabilities and other assets and liabilities of non-wholly owned subsidiaries.

 

The company will finalize the amounts recognized as information necessary to complete the analyses is obtained. The company expects to finalize these amounts no later than one year from the merger date (by November 30, 2012). Amounts for certain contingent liabilities, certain deferred tax assets and liabilities and goodwill remain subject to change.

 

The customer relationships, patents, finite-lived trademarks and other technology are being amortized over weighted average lives of 15, 14, 15 and 8 years, respectively. The Nalco trade name has been determined to have an indefinite life.

 

14



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3.       Acquisitions and Dispositions (continued)

 

The following table provides unaudited pro forma net sales and pro forma results of operations for the third quarter and nine months ended September 30, 2011, assuming the Nalco merger had been completed on January 1, 2010. The unaudited pro forma results reflect certain adjustments that are directly attributable to the merger, supportable and expected to have a continuing impact on the combined results. The unaudited pro forma results do not include any anticipated cost savings from operating efficiencies or synergies that could result from the merger. Accordingly, such unaudited pro forma amounts are not necessarily indicative of the results that actually would have occurred had the merger been completed on January 1, 2010, nor are they indicative of future operating results of the combined company.

 

 

 

Third Quarter
Ended

 

Nine Months
Ended

 

(millions)

 

September 30,
2011

 

September 30,
2011

 

Net sales

 

$

2,967.3

 

$

8,419.6

 

Net income attributable to Ecolab

 

189.2

 

548.5

 

Earnings attributable to Ecolab per common share

 

 

 

 

 

Basic

 

$

0.63

 

$

1.82

 

Diluted

 

$

0.61

 

$

1.78

 

 

Other significant acquisition activity

 

2012 Activity

 

In December 2011, subsequent to the company’s fiscal year end for international operations, the company completed the acquisition of Esoform, an independent Italian healthcare manufacturer focused on infection prevention and personal care. Based outside of Venice, Italy, with annual sales of approximately $12 million, the business became part of the company’s International Cleaning, Sanitizing & Other Services reportable segment during the first quarter of 2012.

 

Also in December 2011, the company completed the acquisition of the InsetCenter pest elimination business in Brazil. Annual sales of the acquired business are approximately $6 million. The business operations and staff have been integrated with the company’s existing Brazil Pest Elimination business, and became part of the company’s International Cleaning, Sanitizing & Other Services reportable segment during the first quarter of 2012.

 

In March 2012, the company acquired Econ Indústria e Comércio de Produtos de Higiene e Limpeza Ltda., a provider of cleaning and sanitizing products and services to the Brazilian foodservice industry. Based in Sao Paulo, Brazil, its annual sales are approximately $9 million. The business operations have been integrated within the company’s existing Brazil Institutional business and became part of the company’s International Cleaning, Sanitizing & Other Services reportable segment during the second quarter of 2012.

 

In September 2012, subsequent to the company’s fiscal quarter end for international operations, the company announced it had agreed to acquire Mexico-based Quimiproductos S.A. de C.V., a wholly-owned subsidiary of Fomento Econominco Mexicano, S.A.B. de C.V. Quimiproductos produces and supplies cleaning, sanitizing and water treatment goods and services to breweries and beverage companies located in Central and South America. Annual sales of the business to be acquired are approximately $35 million. As of the date of this report, the transaction has not yet been completed. Completion of the transaction is subject to regulatory clearance and other customary closing conditions.

 

15



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3.       Acquisitions and Dispositions (continued)

 

In October 2012, the company entered into an agreement and plan of merger under which the company has agreed to acquire Champion. Based in Houston, Texas, Champion is a global energy specialty products and services company delivering product and service-based offerings to the oil and gas industry. Champion sales were approximately $1.2 billion in 2011. Subject to certain adjustments set out in the merger agreement, total consideration is expected to be approximately $2.2 billion, paid through a mix of approximately 75% cash and 25% Ecolab stock. In connection with the agreement, Ecolab will deposit $100 million of the consideration in an escrow account to satisfy adjustments to the consideration or indemnification obligations of Champion for up to two years following the effective date of the transaction. Financing for this transaction is expected to initially be met through a combination of term loan funding and the company’s U.S. commercial paper program. The company anticipates terming out a portion of the short-term borrowings through the issuance of publicly or privately held debt securities. The transaction is expected to close in the fourth quarter of 2012, subject to regulatory clearance and other customary closing conditions.

 

2011 Activity

 

In December 2010, subsequent to the company’s fiscal year end for international operations, the company completed the purchase of the assets of Cleantec located in 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 business, which had annual sales of approximately $55 million, became part of the company’s International Cleaning, Sanitizing & Other Services segment during the first quarter of 2011. The total purchase price was approximately $43 million, of which $2 million was placed in an escrow account for indemnification purposes. During the third quarter of 2012, the $2 million escrow balance was paid to the seller.

 

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 business, which had annual sales of approximately $55 million, became part of the company’s U.S. Cleaning & Sanitizing segment during the first quarter of 2011. The total purchase price was approximately $260 million, of which $26 million was placed in an escrow account for indemnification purposes related to general representations and warranties. During the third quarter of 2012, $13 million of the escrow balance was paid to the seller. Assuming the general representations and warranties continue to be met, the remaining $13 million escrow balance is expected to be paid to the seller in the first quarter of 2013.

 

Other significant acquisition summary

 

Completed acquisitions during the nine months of 2012 and all of 2011 (excluding Nalco) were 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, excluding the Nalco merger, the components of the aggregate purchase prices of completed acquisitions during the third quarter and nine months 2012 and 2011 are shown in the following table.

 

16



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3.       Acquisitions and Dispositions (continued)

 

 

 

Third Quarter Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

(millions)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net tangible assets acquired

 

$

0.3

 

$

 

$

(1.0

)

$

57.4

 

Identifiable intangible assets

 

 

 

 

 

 

 

 

 

Customer relationships

 

 

0.2

 

8.4

 

144.9

 

Trademarks

 

 

 

0.5

 

11.2

 

Patents

 

 

 

2.8

 

0.3

 

Other technology

 

 

 

0.3

 

8.4

 

Total intangible assets

 

 

0.2

 

12.0

 

164.8

 

Goodwill

 

0.1

 

0.6

 

23.3

 

92.5

 

Total aggregate purchase price

 

0.4

 

0.8

 

34.3

 

314.7

 

Contingent consideration

 

 

 

(2.6

)

(4.7

)

Liability for indemnification

 

15.2

 

 

16.0

 

(28.1

)

Net cash paid for acquisitions

 

$

15.6

 

$

0.8

 

$

47.7

 

$

281.9

 

 

The weighted average useful lives of identifiable intangible assets acquired in the above table during the nine months of 2012 and 2011 were 13 and 14 years, respectively.

 

Dispositions

 

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

 

In October 2012, the company entered into an agreement to sell its Vehicle Care business. Vehicle Care sales were approximately $65 million in 2011, the majority of which were within the company’s U.S. Cleaning & Sanitizing reportable segment. Subject to the terms of the agreement, total consideration is expected to be approximately $120 million. Based on the company’s current assessment, the company expects to recognize a gain of approximately $75 million (approximately $45 million after tax). The transaction is expected to close in the fourth quarter, subject to regulatory clearance and other customary closing conditions.

 

There were no other significant business disposals during the first nine months of 2012.

 

There were no business disposals during 2011.

 

17



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4.     Balance Sheet Information

 

 

 

September 30

 

December 31

 

(millions)

 

2012

 

2011

 

 

 

(unaudited)

 

Accounts receivable, net

 

 

 

 

 

Accounts receivable

 

$

2,265.0

 

$

2,144.6

 

Allowance for doubtful accounts

 

(66.0

)

(49.3

)

Total

 

$

2,199.0

 

$

2,095.3

 

 

 

 

 

 

 

Inventories

 

 

 

 

 

Finished goods

 

$

758.8

 

$

745.5

 

Raw materials and parts

 

362.9

 

351.4

 

Inventories at FIFO cost

 

1,121.7

 

1,096.9

 

Excess of FIFO cost over LIFO cost

 

(17.9

)

(27.3

)

Total

 

$

1,103.8

 

$

1,069.6

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

 

 

 

Land

 

$

154.9

 

$

158.8

 

Buildings and improvements

 

531.2

 

483.8

 

Leasehold improvements

 

79.3

 

77.3

 

Machinery and equipment

 

1,234.4

 

1,206.1

 

Merchandising and customer equipment

 

1,807.0

 

1,682.7

 

Capitalized software

 

366.5

 

385.7

 

Construction in progress

 

220.9

 

182.7

 

 

 

4,394.2

 

4,177.1

 

Accumulated depreciation

 

(2,060.0

)

(1,881.7

)

Total

 

$

2,334.2

 

$

2,295.4

 

 

 

 

 

 

 

Other intangible assets, net

 

 

 

 

 

Cost of intangible assets not subject to amortization

 

 

 

 

 

Trade names

 

$

1,230.0

 

$

1,230.0

 

Cost of intangible assets subject to amortization

 

 

 

 

 

Customer relationships

 

$

2,576.5

 

$

2,593.2

 

Trademarks

 

201.9

 

201.0

 

Patents

 

413.0

 

404.4

 

Other technology

 

174.6

 

174.6

 

 

 

$

3,366.0

 

$

3,373.2

 

Accumulated amortization

 

 

 

 

 

Customer relationships

 

$

(323.0

)

$

(204.8

)

Trademarks

 

(57.5

)

(48.6

)

Patents

 

(58.3

)

(36.3

)

Other technology

 

(53.9

)

(38.3

)

Other intangible assets, net

 

$

4,103.3

 

$

4,275.2

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

Deferred income taxes

 

$

46.7

 

$

61.9

 

Pension

 

22.5

 

22.3

 

Other

 

249.5

 

278.6

 

Total

 

$

318.7

 

$

362.8

 

 

18



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4.       Balance Sheet Information (Continued)

 

 

 

September 30

 

December 31

 

(millions)

 

2012

 

2011

 

 

 

(unaudited)

 

Other current liabilities

 

 

 

 

 

Discounts and rebates

 

$

246.0

 

$

239.9

 

Dividends payable

 

58.6

 

60.0

 

Interest payable

 

68.6

 

51.0

 

Taxes payable, other than income

 

65.0

 

74.1

 

Derivative liabilities

 

15.8

 

3.3

 

Restructuring

 

86.2

 

57.5

 

Other

 

256.3

 

262.9

 

Total

 

$