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Ecolab 10-Q 2013

Documents found in this filing:

  1. 10-Q
  2. Ex-15.1
  3. Ex-31.1
  4. Ex-32.1
  5. 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 March 31, 2013

 

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 March 31, 2013.

 

296,011,975 shares of common stock, par value $1.00 per share.

 

 

 



 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ECOLAB INC.

CONSOLIDATED STATEMENT OF INCOME

 

 

 

First Quarter Ended

 

 

 

March 31

 

(millions, except per share amounts)

 

2013

 

2012

 

 

 

(unaudited)

 

 

 

 

 

 

 

Net sales

 

$

2,872.1

 

$

2,810.9

 

 

 

 

 

 

 

Cost of sales (including special charges of $2.0 in 2013 and $76.0 in 2012)

 

1,564.9

 

1,614.0

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

995.8

 

989.7

 

 

 

 

 

 

 

Special (gains) and charges

 

49.7

 

41.4

 

 

 

 

 

 

 

Operating income

 

261.7

 

165.8

 

 

 

 

 

 

 

Interest expense, net (including special charges of $2.2 in 2013 and $18.2 in 2012)

 

61.5

 

86.1

 

 

 

 

 

 

 

Income before income taxes

 

200.2

 

79.7

 

 

 

 

 

 

 

Provision for income taxes

 

39.2

 

35.6

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

161.0

 

44.1

 

 

 

 

 

 

 

Less: Net income (loss) attributable to noncontrolling interest (including special charges of $0.5 in 2013 and $4.5 in 2012)

 

1.4

 

(5.6

)

 

 

 

 

 

 

Net income attributable to Ecolab

 

$

159.6

 

$

49.7

 

 

 

 

 

 

 

Earnings attributable to Ecolab per common share

 

 

 

 

 

Basic

 

$

0.54

 

$

0.17

 

Diluted

 

$

0.53

 

$

0.17

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.2300

 

$

0.2000

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

295.4

 

291.5

 

Diluted

 

300.9

 

297.9

 

 

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

 

2



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

 

 

First Quarter Ended

 

 

 

March 31

 

(millions)

 

2013

 

2012

 

 

 

(unaudited)

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

$

161.0

 

$

44.1

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

 

 

 

Foreign currency translation

 

(61.6

)

82.4

 

Gain (loss) on net investment hedge

 

(2.2

)

7.6

 

 

 

(63.8

)

90.0

 

 

 

 

 

 

 

Derivatives and hedging instruments

 

3.9

 

(1.6

)

 

 

 

 

 

 

Pension and postretirement benefits

 

 

 

 

 

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

 

10.4

 

7.0

 

 

 

 

 

 

 

Subtotal

 

(49.5

)

95.4

 

 

 

 

 

 

 

Total comprehensive income, including noncontrolling interest

 

111.5

 

139.5

 

 

 

 

 

 

 

Less: Comprehensive income (loss) attributable to noncontrolling interest

 

(7.9

)

(5.3

)

 

 

 

 

 

 

Comprehensive income attributable to Ecolab

 

$

119.4

 

$

144.8

 

 

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

 

3



 

ECOLAB INC.

CONSOLIDATED BALANCE SHEET

 

 

 

March 31

 

December 31

 

(millions)

 

2013

 

2012

 

 

 

(unaudited)

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

824.3

 

$

1,157.8

 

 

 

 

 

 

 

Accounts receivable, net

 

2,182.1

 

2,225.1

 

 

 

 

 

 

 

Inventories

 

1,145.3

 

1,088.1

 

 

 

 

 

 

 

Deferred income taxes

 

201.3

 

205.2

 

 

 

 

 

 

 

Other current assets

 

250.4

 

215.8

 

 

 

 

 

 

 

Total current assets

 

4,603.4

 

4,892.0

 

 

 

 

 

 

 

Property, plant and equipment, net

 

2,415.5

 

2,409.1

 

 

 

 

 

 

 

Goodwill

 

5,908.5

 

5,920.5

 

 

 

 

 

 

 

Other intangible assets, net

 

4,022.5

 

4,044.1

 

 

 

 

 

 

 

Other assets

 

346.3

 

306.6

 

 

 

 

 

 

 

Total assets

 

$

17,296.2

 

$

17,572.3

 

 

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

 

(Continued)

 

4



 

ECOLAB INC.

CONSOLIDATED BALANCE SHEET (continued)

 

 

 

March 31

 

December 31

 

(millions, except shares and per share amounts)

 

2013

 

2012

 

 

 

(unaudited)

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

Short-term debt

 

$

497.1

 

$

805.8

 

 

 

 

 

 

 

Accounts payable

 

845.0

 

879.7

 

 

 

 

 

 

 

Compensation and benefits

 

405.4

 

518.8

 

 

 

 

 

 

 

Income taxes

 

108.1

 

77.4

 

 

 

 

 

 

 

Other current liabilities

 

828.6

 

771.0

 

 

 

 

 

 

 

Total current liabilities

 

2,684.2

 

3,052.7

 

 

 

 

 

 

 

Long-term debt

 

5,737.1

 

5,736.1

 

 

 

 

 

 

 

Postretirement health care and pension benefits

 

1,219.2

 

1,220.5

 

 

 

 

 

 

 

Other liabilities

 

1,423.2

 

1,402.9

 

 

 

 

 

 

 

Total liabilities

 

11,063.7

 

11,412.2

 

 

 

 

 

 

 

Equity (a)

 

 

 

 

 

Common stock

 

343.6

 

342.1

 

Additional paid-in capital

 

4,309.7

 

4,249.1

 

Retained earnings

 

4,112.3

 

4,020.6

 

Accumulated other comprehensive loss

 

(509.2

)

(459.7

)

Treasury stock

 

(2,094.7

)

(2,075.1

)

Total Ecolab shareholders’ equity

 

6,161.7

 

6,077.0

 

Noncontrolling interest

 

70.8

 

83.1

 

Total equity

 

6,232.5

 

6,160.1

 

 

 

 

 

 

 

Total liabilities and equity

 

$

17,296.2

 

$

17,572.3

 

 


(a)         Common stock, 800 million shares authorized, $1.00 par value per share, 296.0 million shares outstanding at March 31, 2013, 294.7 million shares outstanding at December 31, 2012. 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

 

 

 

First Quarter Ended

 

 

 

March 31

 

(millions)

 

2013

 

2012

 

 

 

(unaudited)

 

 

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

$

161.0

 

$

44.1

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

122.6

 

115.5

 

Amortization

 

62.7

 

61.7

 

Deferred income taxes

 

(26.9

)

(18.9

)

Share-based compensation expense

 

21.1

 

20.9

 

Excess tax benefits from share-based payment arrangements

 

(12.3

)

(7.1

)

Pension and postretirement plan contributions

 

(19.0

)

(26.0

)

Pension and postretirement plan expense

 

35.7

 

27.3

 

Restructuring, net of cash paid

 

(9.2

)

17.1

 

Venezuela currency devaluation

 

23.4

 

 

Other, net

 

4.6

 

2.7

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

30.1

 

30.5

 

Inventories

 

(54.2

)

18.6

 

Other assets

 

(50.4

)

(45.0

)

Accounts payable

 

(38.0

)

(23.9

)

Other liabilities

 

(65.2

)

(107.0

)

 

 

 

 

 

 

Cash provided by operating activities

 

$

186.0

 

$

110.5

 

 

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

 

(Continued)

 

6



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (continued)

 

 

 

First Quarter Ended

 

 

 

March 31

 

(millions)

 

2013

 

2012

 

 

 

(unaudited)

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

(129.2

)

$

(124.2

)

Capitalized software expenditures

 

(6.3

)

(4.3

)

Property and other assets sold

 

0.9

 

2.2

 

Businesses acquired and investments in affiliates, net of cash acquired

 

(91.2

)

(11.8

)

Deposit into indemnification escrow

 

(8.0

)

(1.3

)

Release from indemnification escrow

 

13.0

 

2.1

 

 

 

 

 

 

 

Cash used for investing activities

 

(220.8

)

(137.3

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net issuances (repayments) of commercial paper and notes payable

 

(310.0

)

319.6

 

Long-term debt borrowings

 

0.2

 

 

Long-term debt repayments

 

(1.7

)

(1,689.5

)

Reacquired shares

 

(22.2

)

(85.3

)

Dividends paid

 

(4.5

)

(61.2

)

Exercise of employee stock options

 

32.0

 

39.5

 

Excess tax benefits from share-based payment arrangements

 

12.3

 

7.1

 

Other, net

 

0.4

 

 

 

 

 

 

 

 

Cash used for financing activities

 

(293.5

)

(1,469.8

)

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

(5.2

)

7.0

 

 

 

 

 

 

 

DECREASE IN CASH AND CASH EQUIVALENTS

 

(333.5

)

(1,489.6

)

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

1,157.8

 

1,843.6

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

824.3

 

$

354.0

 

 

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 first quarter ended March 31, 2013 and 2012 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, 2012 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, 2012.

 

With respect to the unaudited financial information of the company for the first quarter ended March 31, 2013 and 2012 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 2, 2013 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 previously 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 did 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 2012 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.

 

8



 

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:

 

 

 

First Quarter Ended

 

 

 

March 31

 

(millions)

 

2013

 

2012

 

Cost of sales

 

 

 

 

 

Restructuring charges

 

$

    2.0

 

$

    2.1

 

Recognition of Nalco inventory fair value step-up

 

 

73.9

 

Subtotal

 

2.0

 

76.0

 

 

 

 

 

 

 

Special (gains) and charges

 

 

 

 

 

Restructuring charges

 

18.5

 

26.5

 

Champion acquisition costs

 

7.8

 

 

Nalco merger and integration costs

 

3.8

 

14.9

 

Venezuela currency devaluation

 

23.4

 

 

Litigation related charges and other

 

(3.8

)

 

Subtotal

 

49.7

 

41.4

 

 

 

 

 

 

 

Operating income subtotal

 

51.7

 

117.4

 

 

 

 

 

 

 

Interest expense, net

 

 

 

 

 

Acquisition debt costs

 

2.2

 

 

Debt extinguishment costs

 

 

18.2

 

Subtotal

 

2.2

 

18.2

 

 

 

 

 

 

 

Net income attributable to noncontrolling interest

 

 

 

 

 

Venezuela currency devaluation

 

(0.5

)

 

Recognition of Nalco inventory fair value step-up

 

 

(4.5

)

Subtotal

 

(0.5

)

(4.5

)

 

 

 

 

 

 

Total special (gains) and charges

 

$

   53.4

 

$

   131.1

 

 

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

 

The company incurs costs for restructuring activities associated with plans to enhance its efficiency and effectiveness and sharpen its competitiveness. These restructuring plans include costs associated with significant actions involving employee-related severance charges, contract termination costs and asset write-downs. 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. Contract termination costs include charges to terminate leases prior to the end of their respective terms and other contract terminations. Asset write-downs include leasehold improvement write-downs and other asset write-downs associated with combining operations.

 

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.

 

9



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2.     Special (Gains) and Charges (Continued)

 

Combined 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 (collectively, the “2011 Restructuring Plan”). Total anticipated charges under this Plan from 2011 through 2013 were expected to be $150 million ($125 million after tax). Through 2012, $134 million of charges ($100 million after tax) were incurred.

 

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”). Total anticipated charges from 2012 through 2013 were expected to be $180 million ($120 million after tax) under this Plan. Through 2012, $80 million of charges ($59 million after tax) were incurred.

 

As the company looks for opportunities to enhance the efficiency and effectiveness of its operations, it has decided that because the objectives of the plans discussed above are aligned, the previously separate restructuring plans should be combined into one plan.

 

The Combined Restructuring Plan (the “Combined Plan”) will combine opportunities and initiatives from both plans and is expected to be substantially completed by the end of 2013. The Combined Plan will continue to follow the original format of the Merger Restructuring Plan by focusing on global actions related to optimization of the supply chain and office facilities, including reductions of plant and distribution center locations and the global workforce. Through the completion of the Combined Plan, the company expects to incur total pretax restructuring charges of approximately $80 million to $100 million ($55 million to $70 million after tax).

 

The company anticipates that approximately $70 million to $85 million of the total pre-tax charges represent net cash expenditures. The remaining 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.

 

During the first quarter of 2013, the company recorded restructuring charges of $20.8 million ($14.3 million after tax) under the Combined Plan.

 

Combined restructuring charges and activity related to Combined Plan since inception of the underlying actions include the following:

 

10



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.       Special (Gains) and Charges (Continued)

 

 

 

Combined Plan

 

 

 

Employee

 

 

 

 

 

 

 

 

 

Termination

 

Asset

 

 

 

 

 

(millions)

 

Costs

 

Disposals

 

Other

 

Total

 

 

 

 

 

 

 

 

 

 

 

2011 Activity:

 

 

 

 

 

 

 

 

 

Recorded expense and accrual

 

$

   67.1

 

$

    0.5

 

$

    7.1

 

$

   74.7

 

Cash payments

 

(22.5

)

 

(2.6

)

(25.1

)

Non-cash charges

 

 

(0.5

)

 

(0.5

)

Effect of foreign currency translation

 

(2.2

)

 

 

(2.2

)

Restructuring liability, December 31, 2011

 

42.4

 

 

4.5

 

46.9

 

 

 

 

 

 

 

 

 

 

 

2012 Activity:

 

 

 

 

 

 

 

 

 

Recorded expense and accrual

 

126.1

 

3.2

 

10.1

 

139.4

 

Cash payments

 

(62.0

)

 

(3.3

)

(65.3

)

Non-cash charges

 

 

(3.2

)

(3.9

)

(7.1

)

Effect of foreign currency translation

 

(0.7

)

 

 

(0.7

)

Restructuring liability, December 31, 2012

 

105.8

 

 

7.4

 

113.2

 

 

 

 

 

 

 

 

 

 

 

2013 Activity:

 

 

 

 

 

 

 

 

 

Recorded expense and accrual

 

9.7

 

1.6

 

9.5

 

20.8

 

Cash payments

 

(20.0

)

 

(9.3

)

(29.3

)

Non-cash charges

 

 

(1.6

)

(0.3

)

(1.9

)

Effect of foreign currency translation

 

0.1

 

 

 

0.1

 

Restructuring liability, March 31, 2013

 

$

   95.6

 

$

     —

 

$

    7.3

 

$

  102.9

 

 

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 of March 31, 2013 and December 31, 2012, the remaining liability balance related to the Nalco Restructuring Plan was $2.8 million and $3.4 million, respectively. Cash payments during the three months of 2013 related to this Plan were $0.3 million. The company expects to utilize the remaining liability by the end of 2013.

 

11



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.       Special (Gains) and Charges (Continued)

 

Non-restructuring Special (Gains) and Charges

 

Nalco merger & integration costs

 

As a result of the Nalco merger, the company incurred charges of $3.8 million ($2.7 million after tax) and $102.5 million ($77.7 million after tax) during the first quarter of 2013 and 2012, respectively. Nalco related special charges for 2013 have been included as a component of special (gains) and charges on the Consolidated Statement of Income, and include integration charges. Nalco related special charges for 2012 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 in Nalco international inventory, which is maintained on a FIFO basis. Amounts within special (gains) and charges include merger and integration charges. Amounts within net interest expense for 2012 include a loss on the extinguishment of Nalco’s senior notes, which were assumed as part of the merger.

 

Champion acquisition costs

 

In October 2012, the company entered into an agreement and plan of merger to acquire privately-held Champion Technologies and its related company Corsicana Technologies (collectively “Champion”). On April 10, 2013, subsequent to the close of the company’s first quarter, the company completed its acquisition of Champion.

 

As a result of the company’s efforts to acquire Champion, the company incurred charges of $10.0 million ($7.1 million after tax), during the first quarter of 2013. Champion acquisition related costs have been included as a component of special (gains) and charges and net interest expense on the Consolidated Statement of Income. Amounts included in special (gains) and charges include acquisition costs and advisory fees. Amounts included in net interest expense include the interest expense of the company’s $500 million public debt issuance in December 2012 and fees to secure term loans and short-term debt, all of which were initiated to fund the Champion acquisition. Further information related to the acquisition of Champion is included in Note 3.

 

Venezuelan currency devaluation

 

On February 8, 2013, the Venezuelan government devalued its currency, the Bolivar Fuerte. As a result of the devaluation, during the first quarter of 2013, the company recorded a charge of $22.9 million ($15.0 million after tax), reflected as a component of special (gains) and charges, due to the remeasurement of the local balance sheet. Due to the ownership structure in place in Venezuela, the company also reflected a portion of the impact of the devaluation as a component of net income (loss) attributable to noncontrolling interest on the Consolidated Statement of Income.

 

12



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3.       Acquisitions and Dispositions

 

Champion acquisition

 

In October 2012, the company entered into an agreement and plan of merger 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.

 

In December 2012, the company amended the acquisition agreement, such that Champion’s downstream business would not be acquired by the company. Further, in April 2013, subsequent to the close of the company’s first quarter, the company entered into a consent agreement with the U.S. Department of Justice requiring Ecolab to take certain steps designed to ensure continued independent competition utilizing Champion technology for deepwater Gulf of Mexico energy services. The amendment and consent agreement discussed above do not significantly impact the value of the acquisition transaction. On April 10, 2013, the company completed its acquisition of Champion. Champion’s sales for the business being acquired by the company were approximately $1.3 billion in 2012. The business will become part of the company’s Global Energy reportable segment starting in the second quarter of 2013.

 

Pursuant to the terms of the acquisition agreement, after adjustments for assumed debt and other adjustments, the company paid consideration of approximately $2.0 billion (valued based on Ecolab’s closing share price on April 10, 2013), consisting of $1.4 billion in cash and 6.6 million shares of Ecolab common stock. The company deposited approximately $100 million of the consideration in the form of shares of Ecolab common stock in an escrow fund to satisfy adjustments to the consideration and indemnification obligations of the acquired entity’s stockholders (including covenant obligations) for a period of two years following the effective time of the acquisition. Additionally, except under limited circumstances, the company will be required to pay an additional amount in cash, up to $100 million in the aggregate, equal to 50% of the incremental federal tax on the merger consideration as a result of increases in applicable capital gains and investment taxes after December 31, 2012. Such additional payment will be due on January 31, 2014, and will be based on 2013 tax rates as in effect on January 1, 2014.

 

The company funded the initial cash component of the merger consideration through a $900 million unsecured term loan, initiated in April 2013, the proceeds from the December 2012 issuance of $500 million of 1.450% senior notes due 2017 and commercial paper borrowings backed by its syndicated credit facility. The Champion acquisition is not material to the company’s consolidated financial statements; therefore, pro forma financial information will not be presented. Based on the timing of the close of the transaction, it is impractical to include a preliminary purchase price allocation.

 

Other significant acquisition activity

 

2013 Activity

 

In January 2013, the company completed the acquisition of Mexico-based Quimiproductos S.A. de C.V. (“Quimiproductos”), a wholly-owned subsidiary of Fomento Economico 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 are approximately $43 million. As shown in the table on the following page, approximately $8 million of the purchase price was placed in an escrow account for indemnification purposes related to general representations and warranties. The business became part of the company’s Global Industrial reportable segment during the first quarter of 2013. The purchase price allocation is preliminary, pending completion of the fair value determination of the acquired assets and liabilities, including valuation of the acquired intangibles.

 

13



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3.       Acquisitions and Dispositions (continued)

 

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 is included in the company’s Global Institutional reportable segment. Further information related to the recast of the company’s reportable segments is included in Notes 6 and 13.

 

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 is included in the company’s Other reportable segment. Further information related to the recast of the company’s reportable segments is included in Notes 6 and 13.

 

Other significant acquisition summary

 

Completed acquisitions during the first quarter of 2013 and all of 2012 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. As shown in the table below, during the first quarter of 2013, the remaining $13 million escrow balance related to the O.R. Solutions Inc. acquisition was paid to the seller. The 2013 contingent consideration activity relates to payments on legacy Nalco acquisitions. The 2012 contingent consideration relates to immaterial acquisitions completed during 2012. Based upon purchase price allocations, the components of the aggregate purchase prices of completed acquisitions during the first quarter 2013 and 2012 are shown in the following table.

 

 

 

First Quarter Ended

 

 

 

March 31

 

(millions)

 

2013

 

2012

 

 

 

 

 

 

 

Net tangible assets acquired

 

$

    (4.2

)

$

     1.7

 

Identifiable intangible assets

 

 

 

 

 

Customer relationships

 

47.2

 

2.3

 

Trademarks

 

0.1

 

0.1

 

Patents

 

 

2.8

 

Other technology

 

 

0.2

 

Total intangible assets

 

47.3

 

5.4

 

Goodwill

 

33.3

 

14.2

 

Total aggregate purchase price

 

76.4

 

21.3

 

Contingent consideration

 

9.8

 

(2.6

)

Liability for indemnification

 

5.0

 

(0.8

)

Net cash paid for acquisitions

 

$

    91.2

 

$

    17.9

 

 

The weighted average useful lives of identifiable intangible assets acquired in the above table during the three months of 2013 and 2012 were 13 and 12 years, respectively.

 

Dispositions

 

There were no significant business disposals during the first quarter of 2013 or 2012.

 

14



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4.     Balance Sheet Information

 

 

 

March 31

 

December 31

 

(millions)

 

2013

 

2012

 

 

 

(unaudited)

 

Accounts receivable, net

 

 

 

 

 

Accounts receivable

 

$

  2,254.5

 

$

  2,298.3

 

Allowance for doubtful accounts

 

(72.4

)

(73.2

)

Total

 

$

 2,182.1

 

$

  2,225.1

 

 

 

 

 

 

 

Inventories

 

 

 

 

 

Finished goods

 

$

    816.5

 

$

    774.3

 

Raw materials and parts

 

348.6

 

338.3

 

Inventories at FIFO cost

 

1,165.1

 

1,112.6

 

Excess of FIFO cost over LIFO cost

 

(19.8

)

(24.5

)

Total

 

$

  1,145.3

 

$

  1,088.1

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

 

 

 

Land

 

$

    163.5

 

$

    158.9

 

Buildings and improvements

 

566.2

 

562.1

 

Leasehold improvements

 

79.8

 

80.5

 

Machinery and equipment

 

1,288.8

 

1,281.2

 

Merchandising and customer equipment

 

1,772.1

 

1,812.5

 

Capitalized software

 

392.5

 

385.7

 

Construction in progress

 

247.6

 

207.2

 

 

 

4,510.5

 

4,488.1

 

Accumulated depreciation

 

(2,095.0

)

(2,079.0

)

Total

 

$

  2,415.5

 

$

  2,409.1

 

 

 

 

 

 

 

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

 

$

  2,625.0

 

$

  2,588.6

 

Trademarks

 

185.3

 

185.2

 

Patents

 

416.2

 

414.7

 

Other technology

 

174.6

 

174.8

 

 

 

$

  3,401.1

 

$

  3,363.3

 

Accumulated amortization

 

 

 

 

 

Customer relationships

 

$

   (417.3

)

$

   (373.1

)

Trademarks

 

(54.1

)

(51.2

)

Patents

 

(73.3

)

(65.6

)

Other technology

 

(63.9

)

(59.3

)

Other intangible assets, net

 

$

  4,022.5

 

$

  4,044.1

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

Deferred income taxes

 

$

     83.6

 

$

     51.0

 

Pension

 

7.1

 

7.0

 

Other

 

255.6

 

248.6

 

Total

 

$

    346.3

 

$

    306.6

 

 

15



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4.       Balance Sheet Information (Continued)

 

 

 

March 31

 

December 31

 

(millions)

 

2013

 

2012

 

 

 

(unaudited)

 

Other current liabilities

 

 

 

 

 

Discounts and rebates

 

$

    253.0

 

$

    244.4

 

Dividends payable

 

68.0

 

 

Interest payable

 

62.6

 

19.5

 

Taxes payable, other than income

 

81.7

 

97.3

 

Derivative liabilities

 

12.7

 

9.9

 

Restructuring

 

105.7

 

116.6

 

Other

 

244.9

 

283.3

 

Total

 

$

    828.6

 

$

    771.0

 

 

 

 

 

 

 

Other liabilities

 

 

 

 

 

Deferred income taxes

 

$

  1,190.3

 

$

  1,174.2

 

Income taxes payable - non-current

 

78.1

 

81.5

 

Other

 

154.8

 

147.2

 

Total

 

$

  1,423.2

 

$

  1,402.9

 

 

 

 

 

 

 

Accumulated other comprehensive loss

 

 

 

 

 

Unrealized loss on derivative financial instruments, net of tax

 

$

    (9.7

)

$

    (13.6

)

Unrecognized pension and postretirement benefit expense, net of tax

 

(602.3

)

(613.8

)

Cumulative translation, net of tax

 

102.8

 

167.7

 

Total

 

$

   (509.2

)

$

   (459.7

)

 

16



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

5.                    Debt and Interest

 

 

 

March 31

 

December 31

 

(millions)

 

2013

 

2012

 

 

 

(unaudited)

 

Short-term debt

 

 

 

 

 

Commercial paper

 

$

275.0

 

$

593.7

 

Notes payable

 

53.7

 

44.5

 

Long-term debt, current maturities

 

168.4

 

167.6

 

Total

 

$

497.1

 

$

805.8

 

 

As of March 31, 2013, the company had in place a $1.5 billion multi-year credit facility, which expires in September 2016 and a $500 million, 364 day credit facility, which expires in August 2013. The credit facilities support the company’s U.S. commercial paper program, which, as shown in the previous table, had $275 million and $594 million outstanding as of March 31, 2013 and December 31, 2012, respectively.

 

Long-term debt

 

 

 

 

 

Description / 2013 Principal Amount

 

 

 

 

 

Series A private placement senior euro notes (125 million euro)

 

$

163.2

 

$

162.3

 

Series B private placement senior euro notes (175 million euro)

 

228.5

 

227.3

 

Seven year 2008 senior notes ($250 million)

 

249.5

 

249.4

 

Series A private placement senior notes ($250 million)

 

250.0

 

250.0

 

Series B private placement senior notes ($250 million)

 

250.0

 

250.0

 

Three year 2011 senior notes ($500 million)

 

499.8

 

499.8

 

Five year 2011 senior notes ($1.25 billion)

 

1,248.2

 

1,248.1

 

Ten year 2011 senior notes ($1.25 billion)

 

1,249.3

 

1,249.3

 

Thirty year 2011 senior notes ($750 million)

 

742.6

 

742.6

 

Three year 2012 senior notes ($500 million)

 

499.8

 

499.8

 

Five year 2012 senior notes ($500 million)

 

499.6

 

499.6

 

Capital lease obligations

 

13.7

 

13.8

 

Other

 

11.3

 

11.7

 

Total debt

 

5,905.5

 

5,903.7

 

Long-term debt, current maturities

 

(168.4

)

(167.6

)

Total long-term debt

 

$

5,737.1

 

$

5,736.1

 

 

In November 2012, the company entered into a $900 million term loan credit agreement with various banks. Under the agreement, which had not been drawn upon as of March 31, 2013, the term loan will bear interest at a floating base rate plus a credit rating based margin.

 

In April 2013, in connection with the close of the Champion transaction, the company initiated term loan borrowings of $900 million. The term loan can be repaid in part or in full at any time without penalty, but in any event must be repaid in full by the third anniversary date of the funding date. Further information related to the acquisition of Champion is included in Note 3.

 

17



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

5.                    Debt and Interest (continued)

 

Interest expense and interest income recognized during the first quarter ended 2013 and 2012 were as follows:

 

 

 

First Quarter Ended

 

 

 

March 31

 

(millions)

 

2013

 

2012

 

 

 

 

 

 

 

Interest expense

 

$

65.0

 

$

88.7

 

Interest income

 

(3.5

)

(2.6

)

Interest expense, net

 

$

61.5

 

$

86.1

 

 

The decrease in interest expense was driven primarily by the inclusion of an $18.2 million loss on extinguishment of Nalco debt, recognized in the first quarter of 2012.

 

6.                          Goodwill and Other Intangible Assets

 

Goodwill

 

The company tests goodwill for impairment on an annual basis during the second quarter. The company’s reporting units are its operating segments, which subsequent to the change in the company’s organizational model during the first quarter of 2013 are discussed below. If circumstances change significantly, the company would also test a reporting unit’s goodwill for impairment during interim periods between its annual tests. Based on the ongoing performance of the company’s operating units, updating the impairment testing during the first quarter of 2013 was not deemed necessary. There has been no impairment of goodwill since the adoption of Financial Accounting Standards Board (“FASB”) guidance for goodwill and other intangibles on January 1, 2002.

 

The merger with Nalco resulted in the addition of $4.5 billion of goodwill. Subsequent performance of the reporting units acquired through the Nalco merger relative to projections used for the purchase price allocation of goodwill could result in an impairment if there is either underperformance by the reporting unit or if the carrying value of the reporting unit were to fluctuate significantly due to working capital changes or other reasons that did not proportionately increase fair value.

 

Effective in the first quarter of 2013, the company changed its reportable segments due to a change in its underlying organizational model designed to support the business following the Nalco merger and to facilitate global growth. The company did not operate under the realigned reportable segment structure prior to 2013. The company’s new segment structure will focus on global businesses, with its ten operating units, which are also operating segments, aggregated into four reportable segments as follows:

 

·                  Global Industrial consists of the Global Water, Global Food & Beverage, Global Paper and Global Textile Care operating units.

·                  Global Institutional consists of the Global Institutional, Global Specialty and Global Healthcare operating units.

·                  Global Energy consists of the Global Energy operating unit.

·                  Other consists of the Global Pest Elimination and Equipment Care operating units.

 

Based on the changes in the company’s organizational model, the company has preliminarily updated its goodwill allocation both for March 31, 2013, as well as December 31, 2012. Reported goodwill amounts by reportable segment remain subject to change as the company finalizes its underlying allocation procedures. The company expects to finalize its procedures in the second quarter of 2013. No impairments were noted in connection with the preliminary goodwill allocation procedures performed.

 

18



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

6.                          Goodwill and Other Intangible Assets (continued)

 

The changes in the carrying amount of goodwill for each of the company’s reportable segments during the three months ended March 31, 2013 were as follows:

 

 

 

Global

 

Global

 

Global

 

 

 

 

 

(millions)

 

Industrial

 

Institutional

 

Energy

 

Other

 

Total

 

Goodwill as of December 31, 2012

 

$

2,750.0

 

$

725.0

 

$

2,325.3

 

$

120.2

 

$

5,920.5

 

Current year business acquisitions(a)

 

33.3

 

 

 

 

33.3

 

Effect of foreign currency translation

 

(21.2

)

(5.5

)

(17.7

)

(0.9

)

(45.3

)

Goodwill as of March 31, 2013

 

$

2,762.1

 

$

719.5

 

$

2,307.6

 

$

119.3

 

$

5,908.5

 

 


(a)         For 2013, none of the goodwill related to businesses acquired is expected to be tax deductible.

 

Other Intangible Assets

 

As part of the Nalco merger, the company added the “Nalco” trade name as an indefinite life intangible asset. The $1.2 billion carrying value of this asset is tested for impairment on an annual basis during the second quarter. There has been no impairment of the Nalco trade name intangible asset since it was acquired.

 

The company’s other intangible assets subject to amortization 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, 2013 and 2012 was $60.5 million and $59.3 million, respectively. As of March 31, 2013, future estimated expense related to amortizable other identifiable intangible assets is expected to be:

 

(millions)

 

 

 

 

 

 

 

2013 (Remainder: nine-month period)

 

$

182

 

2014

 

227

 

2015

 

225

 

2016

 

220

 

2017

 

217

 

 

19



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7.                    Fair Value Measurements

 

The company’s financial instruments include cash and cash equivalents, money market funds in a rabbi trust, accounts receivable, accounts payable, contingent consideration obligations, commercial paper, notes payable, foreign currency forward contracts and long-term debt.

 

Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. A hierarchy has been established for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels:

 

Level 1 - Inputs are quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.

 

Level 2 - Inputs include observable inputs other than quoted prices in active markets.

 

Level 3 - Inputs are unobservable inputs for which there is little or no market data available.

 

The carrying amount and the estimated fair value for assets and liabilities measured on a recurring basis were:

 

 

 

2013

 

 

 

Carrying

 

Fair Value Measurements

 

March 31 (millions)

 

Amount

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Money market funds held in rabbi trusts

 

$

2.1

 

$

2.1

 

$

 

$

 

Foreign currency forward contracts

 

12.1

 

 

12.1

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

12.7

 

 

12.7

 

 

Contingent consideration obligations

 

13.7

 

 

 

13.7

 

 

 

 

2012

 

 

 

Carrying

 

Fair Value Measurements

 

December 31 (millions)

 

Amount

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Money market funds held in rabbi trusts

 

$

2.2

 

$

2.2

 

$

 

$

 

Foreign currency forward contracts

 

6.5

 

 

6.5

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

9.9

 

 

9.9

 

 

Contingent consideration obligations

 

23.2

 

 

 

23.2

 

 

Money market funds held in rabbi trusts are classified within level 1 because they are valued using quoted prices in active markets. The carrying value of foreign currency forward contracts is at fair value, which is determined based on foreign currency exchange rates as of the balance sheet date, and is classified within level 2.

 

20



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7.                    Fair Value Measurements (continued)

 

Contingent consideration liabilities are classified within level 3 because fair value is measured based on the probability-weighted present value of the consideration expected to be transferred. The consideration expected to be transferred is based on the company’s expectations of various financial measures. The ultimate payment of contingent consideration could deviate from current estimates based on the actual results of these financial measures. Changes in the fair value of contingent consideration obligations for the three months ended March 31, 2013 were as follows:

 

(millions)

 

 

 

Contingent consideration, December 31, 2012

 

$

23.2

 

Liabilities recognized at acquisition date

 

 

Loss (gain) recognized in earnings

 

0.2

 

Settlements

 

(9.8

)

Foreign currency translation

 

0.1

 

Contingent consideration, March 31, 2013

 

$

13.7

 

 

The carrying values of accounts receivable and accounts payable approximate fair value because of their short maturities. The carrying value of cash and cash equivalents, commercial paper and notes payable approximate fair value because of their short maturities, and as such are classified within level 1.

 

The fair value of long-term debt is based on quoted market prices for the same or similar debt instruments and as such is classified within level 1. The carrying amount and the estimated fair value of long-term debt, including current maturities, held by the company were:

 

 

 

March 31, 2013

 

December 31, 2012

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

(millions)

 

Amount

 

Value

 

Amount

 

Value

 

 

 

 

 

 

 

 

 

 

 

Long-term debt (including current maturities)

 

$

5,905.5

 

$

6,344.7

 

$

5,903.7

 

$

6,417.6

 

 

21



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

8.       Derivatives and Hedging Transactions

 

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 does not hold derivative financial instruments of a speculative nature or for trading purposes. 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. For derivatives designated as cash flow hedges, the effective portion of changes in fair value of hedges is 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 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, and therefore, recording a valuation allowance against the company’s derivative balance is not considered necessary.

 

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

 

The company occasionally enters into interest rate swap contracts to manage interest rate exposures. In 2011, the company entered into and subsequently closed six forward starting swap agreements in connection with the issuance of its private placement debt during the fourth quarter of 2011. The interest rate swap agreements were designated and effective as cash flow hedges of the expected interest payments related to the anticipated 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 amounts recorded in AOCI for both the 2011 and 2006 transactions are recognized as part of interest expense over the remaining life of the notes as the forecasted interest transactions occur. The company did not have any forward starting interest rate swap agreements outstanding at March 31, 2013 or December 31, 2012.

 

22



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

8.                    Derivatives and Hedging Transactions (Continued)

 

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 held at foreign subsidiaries, primarily receivables and payables, which are remeasured at the end of each period. 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.

 

Derivative Summary

 

The following table summarizes the fair value of the company’s outstanding derivatives. The amounts represent gross values of derivative assets and liabilities and are included in other current assets and other current liabilities on the Consolidated Balance Sheet.

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

March 31

 

December 31

 

March 31

 

December 31

 

(millions)

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

3.2

 

$

0.8

 

$

1.0

 

$

1.7

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments