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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 September 30, 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 September 30, 2013.

 

301,299,251 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)

 

2013

 

2012

 

 

 

(unaudited)

 

 

 

 

 

 

 

Net sales

 

$

3,484.0

 

$

3,023.3

 

 

 

 

 

 

 

Cost of sales (including special charges of $6.3 in 2013 and $3.2 in 2012)

 

1,882.8

 

1,616.4

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

1,097.4

 

977.7

 

 

 

 

 

 

 

Special (gains) and charges

 

27.8

 

28.0

 

 

 

 

 

 

 

Operating income

 

476.0

 

401.2

 

 

 

 

 

 

 

Interest expense, net

 

67.0

 

64.2

 

 

 

 

 

 

 

Income before income taxes

 

409.0

 

337.0

 

 

 

 

 

 

 

Provision for income taxes

 

101.8

 

97.7

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

307.2

 

239.3

 

 

 

 

 

 

 

Less: Net income (loss) attributable to noncontrolling interest

 

(0.8

)

1.3

 

 

 

 

 

 

 

Net income attributable to Ecolab

 

$

308.0

 

$

238.0

 

 

 

 

 

 

 

Earnings attributable to Ecolab per common share

 

 

 

 

 

Basic

 

$

1.02

 

$

0.81

 

Diluted

 

$

1.00

 

$

0.80

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.2300

 

$

0.2000

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

301.2

 

292.7

 

Diluted

 

307.2

 

298.6

 

 

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)

 

2013

 

2012

 

 

 

(unaudited)

 

 

 

 

 

 

 

Net sales

 

$

9,693.9

 

$

8,792.9

 

 

 

 

 

 

 

Cost of sales (including special charges of $23.5 in 2013 and $82.3 in 2012)

 

5,276.3

 

4,839.3

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

3,176.5

 

2,949.1

 

 

 

 

 

 

 

Special (gains) and charges

 

151.1

 

111.0

 

 

 

 

 

 

 

Operating income

 

1,090.0

 

893.5

 

 

 

 

 

 

 

Interest expense, net (including special charges of $2.5 in 2013 and $18.2 in 2012)

 

194.7

 

214.2

 

 

 

 

 

 

 

Income before income taxes

 

895.3

 

679.3

 

 

 

 

 

 

 

Provision for income taxes

 

211.3

 

212.5

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

684.0

 

466.8

 

 

 

 

 

 

 

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

 

3.3

 

(5.4

)

 

 

 

 

 

 

Net income attributable to Ecolab

 

$

680.7

 

$

472.2

 

 

 

 

 

 

 

Earnings attributable to Ecolab per common share

 

 

 

 

 

Basic

 

$

2.27

 

$

1.62

 

Diluted

 

$

2.23

 

$

1.58

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.6900

 

$

0.6000

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

299.4

 

292.0

 

Diluted

 

305.3

 

298.3

 

 

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

 

3



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

 

 

 

Third Quarter Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

(millions)

 

2013

 

2012

 

2013

 

2012

 

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

$

307.2

 

$

239.3

 

$

684.0

 

$

466.8

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

(126.2

)

121.5

 

(276.9

)

(47.4

)

Gain (loss) on net investment hedge

 

(4.2

)

(5.9

)

(4.2

)

19.8

 

 

 

(130.4

)

115.6

 

(281.1

)

(27.6

)

 

 

 

 

 

 

 

 

 

 

Derivatives and hedging instruments

 

1.6

 

(2.5

)

9.1

 

(1.1

)

 

 

 

 

 

 

 

 

 

 

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 and postretirement costs

 

10.4

 

7.0

 

31.3

 

21.6

 

 

 

10.4

 

7.0

 

31.3

 

20.0

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

(118.4

)

120.1

 

(240.7

)

(8.7

)

 

 

 

 

 

 

 

 

 

 

Total comprehensive income, including noncontrolling interest

 

188.8

 

359.4

 

443.3

 

458.1

 

 

 

 

 

 

 

 

 

 

 

Less: Comprehensive income (loss) attributable to noncontrolling interest

 

 

1.6

 

(11.0

)

(6.3

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to Ecolab

 

$

188.8

 

$

357.8

 

$

454.3

 

$

464.4

 

 

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

 

4



 

ECOLAB INC.

CONSOLIDATED BALANCE SHEET

 

 

 

September 30

 

December 31

 

(millions)

 

2013

 

2012

 

 

 

(unaudited)

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

394.4

 

$

1,157.8

 

 

 

 

 

 

 

Accounts receivable, net

 

2,488.9

 

2,225.1

 

 

 

 

 

 

 

Inventories

 

1,378.1

 

1,088.1

 

 

 

 

 

 

 

Deferred income taxes

 

196.6

 

205.2

 

 

 

 

 

 

 

Other current assets

 

338.0

 

215.8

 

 

 

 

 

 

 

Total current assets

 

4,796.0

 

4,892.0

 

 

 

 

 

 

 

Property, plant and equipment, net

 

2,786.1

 

2,409.1

 

 

 

 

 

 

 

Goodwill

 

6,812.8

 

5,920.5

 

 

 

 

 

 

 

Other intangible assets, net

 

4,851.1

 

4,044.1

 

 

 

 

 

 

 

Other assets

 

367.6

 

306.6

 

 

 

 

 

 

 

Total assets

 

$

19,613.6

 

$

17,572.3

 

 

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)

 

2013

 

2012

 

 

 

(unaudited)

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

Short-term debt

 

$

713.2

 

$

805.8

 

 

 

 

 

 

 

Accounts payable

 

926.6

 

879.7

 

 

 

 

 

 

 

Compensation and benefits

 

506.3

 

518.8

 

 

 

 

 

 

 

Income taxes

 

68.6

 

77.4

 

 

 

 

 

 

 

Other current liabilities

 

985.9

 

771.0

 

 

 

 

 

 

 

Total current liabilities

 

3,200.6

 

3,052.7

 

 

 

 

 

 

 

Long-term debt

 

6,537.3

 

5,736.1

 

 

 

 

 

 

 

Postretirement health care and pension benefits

 

1,242.4

 

1,220.5

 

 

 

 

 

 

 

Other liabilities

 

1,787.4

 

1,402.9

 

 

 

 

 

 

 

Total liabilities

 

12,767.7

 

11,412.2

 

 

 

 

 

 

 

Equity (a)

 

 

 

 

 

Common stock

 

344.6

 

342.1

 

Additional paid-in capital

 

4,647.2

 

4,249.1

 

Retained earnings

 

4,494.7

 

4,020.6

 

Accumulated other comprehensive loss

 

(700.4

)

(459.7

)

Treasury stock

 

(2,009.7

)

(2,075.1

)

Total Ecolab shareholders’ equity

 

6,776.4

 

6,077.0

 

Noncontrolling interest

 

69.5

 

83.1

 

Total equity

 

6,845.9

 

6,160.1

 

 

 

 

 

 

 

Total liabilities and equity

 

$

19,613.6

 

$

17,572.3

 

 


(a)   Common stock, 800 million shares authorized, $1.00 par value per share, 301.3 million shares outstanding at September 30, 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.

 

6



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

 

 

 

Nine Months Ended

 

 

 

September 30

 

(millions)

 

2013

 

2012

 

 

 

(unaudited)

 

 

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

$

684.0

 

$

466.8

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

381.3

 

348.5

 

Amortization

 

220.5

 

185.1

 

Deferred income taxes

 

(102.7

)

14.6

 

Share-based compensation expense

 

53.6

 

50.7

 

Excess tax benefits from share-based payment arrangements

 

(26.2

)

(28.1

)

Pension and postretirement plan contributions

 

(62.0

)

(232.0

)

Pension and postretirement plan expense

 

106.9

 

82.2

 

Restructuring, net of cash paid

 

(20.5

)

33.4

 

Venezuela currency devaluation

 

23.3

 

 

Other, net

 

12.9

 

(3.2

)

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(70.3

)

(174.7

)

Inventories

 

(92.3

)

(27.4

)

Other assets

 

(109.5

)

(48.6

)

Accounts payable

 

(40.7

)

46.7

 

Other liabilities

 

(29.1

)

6.8

 

 

 

 

 

 

 

Cash provided by operating activities

 

$

929.2

 

$

720.8

 

 

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)

 

2013

 

2012

 

 

 

(unaudited)

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

(423.4

)

$

(394.0

)

Capitalized software expenditures

 

(25.7

)

(17.6

)

Property and other assets sold

 

9.6

 

9.9

 

Businesses acquired and investments in affiliates, net of cash acquired

 

(1,442.3

)

(43.0

)

Divestiture of business

 

(7.9

)

13.8

 

Deposit into indemnification escrow

 

(10.6

)

(1.3

)

Release from indemnification escrow

 

13.0

 

17.3

 

 

 

 

 

 

 

Cash used for investing activities

 

(1,887.3

)

(414.9

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net issuances (repayments) of commercial paper and notes payable

 

(90.6

)

(389.6

)

Long-term debt borrowings

 

900.1

 

501.6

 

Long-term debt repayments

 

(337.8

)

(1,692.9

)

Reacquired shares

 

(228.5

)

(193.1

)

Dividends paid

 

(143.6

)

(180.5

)

Exercise of employee stock options

 

77.7

 

113.7

 

Excess tax benefits from share-based payment arrangements

 

26.2

 

28.1

 

Acquisition related contingent consideration

 

(9.8

)

 

Other, net

 

0.6

 

(3.1

)

 

 

 

 

 

 

Cash provided by (used) for financing activities

 

194.3

 

(1,815.8

)

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

0.4

 

(9.7

)

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

(763.4

)

(1,519.6

)

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

1,157.8

 

1,843.6

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

394.4

 

$

324.0

 

 

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, 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 third quarter and nine months ended September 30, 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 October 31, 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.

 

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)

 

2013

 

2012

 

2013

 

2012

 

Cost of sales

 

 

 

 

 

 

 

 

 

Restructuring charges

 

$

1.9

 

$

1.7

 

$

5.5

 

$

9.6

 

Recognition of Champion inventory fair value step-up

 

4.4

 

 

18.0

 

 

Recognition of Nalco inventory fair value step-up

 

 

1.5

 

 

72.7

 

Subtotal

 

6.3

 

3.2

 

23.5

 

82.3

 

 

 

 

 

 

 

 

 

 

 

Special (gains) and charges

 

 

 

 

 

 

 

 

 

Restructuring charges

 

11.9

 

20.8

 

75.4

 

73.2

 

Champion acquisition and integration costs

 

10.7

 

3.8

 

42.5

 

3.8

 

Nalco merger and integration costs

 

5.3

 

16.4

 

13.5

 

47.0

 

Venezuela currency devaluation

 

(0.1

)

 

23.3

 

 

Gain on sale of business

 

 

(13.0

)

 

(13.0

)

Litigation related charges and other

 

 

 

(3.6

)

 

Subtotal

 

27.8

 

28.0

 

151.1

 

111.0

 

 

 

 

 

 

 

 

 

 

 

Operating income subtotal

 

34.1

 

31.2

 

174.6

 

193.3

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

 

 

 

 

 

 

 

Acquisition debt costs

 

 

 

2.5

 

 

Debt extinguishment costs

 

 

 

 

18.2

 

Subtotal

 

 

 

2.5

 

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

 

$

34.1

 

$

31.2

 

$

176.6

 

$

207.0

 

 

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 net costs for restructuring activities associated with plans to enhance its efficiency and effectiveness and sharpen its competitiveness. These restructuring plans include net costs associated with significant actions involving employee-related severance charges, contract termination costs and asset write-downs and disposals. 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 and disposals include leasehold improvement write-downs, other asset write-downs associated with combining operations and disposal of assets.

 

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.

 

Energy Restructuring Plan

 

On April 10, 2013, the company completed its acquisition of privately held Champion Technologies and its related company Corsicana Technologies (collectively “Champion”).

 

In April 2013, following the completion of the acquisition of Champion, the company commenced plans to undertake restructuring and other cost-saving actions to realize its acquisition-related cost synergies as well as streamline and strengthen Ecolab’s position in the fast growing global energy market (the “Energy Restructuring Plan”). Actions associated with the acquisition to improve the effectiveness and efficiency of the business include a reduction of the combined business’s current global workforce by approximately 500 positions. A number of these reductions are expected to be achieved through eliminating open positions and attrition. The company also anticipates leveraging and simplifying its global supply chain, including the reduction of plant and distribution center locations and product line optimization, as well as the reduction of other redundant facilities.

 

The company expects to incur pretax restructuring charges of approximately $80 million ($55 million after tax) under the Energy Restructuring Plan through the completion of the Plan in 2015. Approximately $30 million ($20 million after tax) of those charges are expected to occur in 2013.

 

The company anticipates that approximately $60 million of the $80 million of the pre-tax charges represent cash expenditures. The remaining pre-tax charges represent estimated asset write-downs and disposals. No decisions have been made for any asset disposals and estimates could vary depending on the actual actions taken.

 

As a result of restructuring activities under the Energy Restructuring Plan, the company recorded restructuring charges of $8.4 million ($6.7 million after tax) and $20.6 million ($14.3 million after tax), during the third quarter and nine months ended September 30, 2013, respectively.

 

Restructuring charges and activity related to the Energy Restructuring Plan since inception of the underlying actions include the following:

 

 

 

Energy Restructuring Plan

 

 

 

Employee

 

 

 

 

 

 

 

 

 

Termination

 

Asset

 

 

 

 

 

(millions)

 

Costs

 

Disposals

 

Other

 

Total

 

 

 

 

 

 

 

 

 

 

 

2013 Activity:

 

 

 

 

 

 

 

 

 

Recorded expense and accrual

 

$

19.4

 

$

0.8

 

$

0.4

 

$

20.6

 

Cash payments

 

(12.9

)

 

(0.4

)

(13.3

)

Non-cash charges

 

 

(0.8

)

 

(0.8

)

Effect of foreign currency translation

 

(0.1

)

 

 

(0.1

)

Restructuring liability, September 30, 2013

 

$

6.4

 

$

 

$

 

$

6.4

 

 

Cash payments under the Energy Restructuring Plan during 2013 were $13.3 million. The majority of cash payments under this Plan are related to severance, with the current accrual expected to be paid over the next twelve months.

 

11



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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.

 

During the first quarter of 2013, as the company considered opportunities to enhance the efficiency and effectiveness of its operations, it determined that because the objectives of the plans discussed above were aligned, the previously separate restructuring plans should be combined into one plan.

 

The combined restructuring plan (the “Combined Plan”) combined opportunities and initiatives from both plans and is expected to be mostly completed by the end of 2013, with carryover of some projects and expenditures into 2014. The Combined Plan continues 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. After combining the plans, and through the completion of the Combined Plan, the company expects to incur total pretax restructuring charges of approximately $100 million ($70 million after tax), of which approximately $70 million ($50 million after tax) will be incurred in 2013.

 

The company anticipates that approximately $80 million of the total Combined Plan pre-tax charges will represent net cash expenditures. The remaining pre-tax charges represent estimated asset write-downs and 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 Combined Plan, the company recorded restructuring charges of $5.3 million ($2.1 million after tax) and $60.5 million ($42.5 million after tax), during the third quarter and nine months ended September 30, 2013, respectively.

 

12



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.         Special (Gains) and Charges (continued)

 

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

 

 

 

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 net expense and accrual

 

52.0

 

(2.9

)

11.4

 

60.5

 

Net cash payments

 

(76.7

)

5.9

 

(10.0

)

(80.8

)

Non-cash net charges

 

 

(3.0

)

(0.4

)

(3.4

)

Effect of foreign currency translation

 

1.0

 

 

 

1.0

 

Restructuring liability, September 30, 2013

 

$

82.1

 

$

 

$

8.4

 

$

90.5

 

 

Asset disposals include a gain of $5.1 million from the sale of a plant in California during the third quarter of 2013.

 

Net cash payments under the Combined Plan were $80.8 million, $65.3 million and $25.1 million for the first nine months of 2013, full year 2012 and full year 2011, respectively. The majority of cash payments under this Plan are related to severance, with the current accrual expected to be paid over a period of a few months to several quarters.

 

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 September 30, 2013 and December 31, 2012, the remaining liability balance related to the Nalco Restructuring Plan was $2.1 million and $3.4 million, respectively. Cash payments during the nine months of 2013 related to this Plan were $1.1 million. The company expects to substantially utilize the remaining liability by the end of 2014.

 

13



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.         Special (Gains) and Charges (continued)

 

Non-restructuring Special (Gains) and Charges

 

Champion acquisition and integration costs

 

As a result of the company’s efforts to acquire Champion and post acquisition integration costs, the company incurred charges of $15.1 million ($10.3 million after tax) and $63.0 million ($44.9 million) during the third quarter and nine months ended September 30, 2013, respectively. During both the third quarter and nine months ended September 30, 2012, the company incurred charges of $3.8 million ($3.3 million after tax) related to advisory and legal fees.

 

Champion acquisition related costs have been included as a component of cost of sales, special (gains) and charges and net interest expense on the Consolidated Statement of Income. Amounts within cost of sales include the recognition of fair value step-up in Champion international inventory, which is maintained on a FIFO basis. Amounts included in special (gains) and charges include acquisition costs, advisory and legal fees and integration charges. Amounts included in net interest expense include the interest expense through the close date of the Champion transaction of the company’s $500 million public debt issuance in December 2012 as well as 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.

 

Nalco merger and integration costs

 

As a result of the Nalco merger completed in 2011, the company incurred charges of $5.3 million ($3.5 million after tax) and $17.9 million ($11.8 million after tax) during the third quarter of 2013 and 2012, respectively. During the nine months ended September 30, 2013 and 2012, the company incurred charges of $13.5 million ($9.2 million after tax) and $133.4 million ($98.3 million after tax), 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.

 

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.

 

Other special (gains) and charges

 

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.

 

14



 

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 its offerings to the oil and gas industry.

 

In November 2012, the company amended the acquisition agreement to provide that Champion’s downstream business would not be acquired by the company. Further, in April 2013, the company entered into a consent agreement with the U.S. Department of Justice under which Ecolab took certain steps designed to ensure continued independent competition utilizing Champion technology for certain U.S. deepwater Gulf of Mexico products and 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 acquired by the company were approximately $1.3 billion in 2012. The business became part of the company’s Global Energy reportable segment in the second quarter of 2013.

 

Pursuant to the terms of the acquisition agreement, the consideration transferred at closing to acquire all of Champion’s stock was as follows:

 

(millions, except per share)

 

 

 

 

 

 

 

 

Cash consideration

 

$

1,429.9

 

Stock consideration

 

 

 

Ecolab shares issued to Champion shareholders

 

6.6

 

Ecolab’s closing stock price on April 10, 2013

 

$

82.31

 

Total fair value of stock consideration

 

$

543.0

 

Total fair value of cash and stock consideration

 

$

1,972.9

 

 

The company deposited approximately $100 million of the above stock consideration in an escrow account to fund post-closing adjustments to the consideration and covenant and other indemnification obligations of the acquired entity’s stockholders for a period of two years following the effective date of the acquisition. As of the end of the third quarter of 2013, the consideration transferred at closing is subject to working capital and other adjustments in accordance with the acquisition agreement.

 

The company incurred certain acquisition and integration costs associated with the transaction that were expensed as incurred and are reflected in the Consolidated Statement of Income. A total of $63.0 million and $3.8 million was incurred during the first nine months of 2013 and 2012, respectively. Amounts included in cost of sales are related to recognition of fair value step-up in Champion international inventory, which is maintained on a FIFO basis. Amounts included in special (gains) and charges are related to acquisition costs, advisory and legal fees and integration costs. Amounts included in net interest expense are related to interest expense through the close date of the Champion transaction of the company’s $500 million public debt issuance in December 2012 as well as fees to secure term loans and short-term debt.

 

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 1.450% senior notes due 2017 and commercial paper borrowings backed by its syndicated credit facility. See Note 5 for further discussion on the company’s debt.

 

15



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3.         Acquisitions and Dispositions (continued)

 

The Champion acquisition 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.

 

The company will finalize the amounts recognized as information necessary to complete the analysis is obtained. The company expects to finalize these by the filing of the 2013 Form 10-K. Amounts for certain contingent liabilities, certain tangible and intangible assets, certain deferred tax assets and liabilities, income tax uncertainties, non-wholly owned subsidiaries and goodwill remain subject to change.

 

The following table summarizes the value of Champion assets acquired and liabilities assumed as of the acquisition date. Also summarized in the table, subsequent to the acquisition, net adjustments of $20.2 million have been made to the preliminary purchase price allocation of the assets acquired and liabilities assumed, with a corresponding adjustment to goodwill.

 

(millions)

 

Preliminary
Allocation at
Acquisition
Date

 

Adjustments
to Fair
Value

 

Updated
Allocation at
September 30,
2013

 

 

 

 

 

 

 

 

 

Current assets

 

$

593.9

 

$

4.2

 

$

598.1

 

Property, plant and equipment

 

369.3

 

(7.9

)

361.4

 

Other assets

 

43.4

 

(14.3

)

29.1

 

Identifiable intangible assets

 

 

 

 

 

 

 

Customer relationships

 

840.0

 

 

840.0

 

Trademarks

 

120.0

 

 

120.0

 

Other technology

 

36.5

 

 

36.5

 

Total assets acquired

 

2,003.1

 

(18.0

)

1,985.1

 

 

 

 

 

 

 

 

 

Current liabilities

 

418.2

 

(19.4

)

398.8

 

Long-term debt

 

70.8

 

 

70.8

 

Net deferred tax liability

 

433.2

 

22.4

 

455.6

 

Noncontrolling interest and other liabilities

 

17.1

 

(0.8

)

16.3

 

Total liabilities and noncontrolling interests assumed

 

939.3

 

2.2

 

941.5

 

 

 

 

 

 

 

 

 

Goodwill

 

993.0

 

20.2

 

1,013.2

 

Total aggregate purchase price

 

2,056.8

 

 

2,056.8

 

Estimated future consideration payable to sellers

 

(83.9

)

 

(83.9

)

Total consideration transferred

 

$

1,972.9

 

$

 

$

1,972.9

 

 

The adjustments to the purchase price allocation during 2013 primarily relate to an estimated indemnification receivable, income tax liabilities, updated property, plant and equipment values and deferred taxes.

 

In accordance with the acquisition agreement, 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 in effect on January 1, 2014. The company’s current estimate for this additional payment is $84 million, which is classified within other current liabilities.

 

16



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3.         Acquisitions and Dispositions (continued)

 

The customer relationships, trademarks and other technology are being amortized preliminarily over weighted average lives of 14, 12 and 7, respectively. In process research and development associated with the Champion acquisition was not significant.

 

Goodwill is calculated as the excess of consideration transferred over the fair value of identifiable net assets acquired and represents the expected synergies and other benefits of combining the operations of Champion with the operations of the company’s existing Global Energy business. Key areas of cost synergies include leveraging and simplifying the global supply chain, including the reduction of plant and distribution center locations and product line optimization, as well as the reduction of other redundant facilities.

 

The results of Champion’s operations have been included in the company’s consolidated financial statements since the close of the acquisition in April 2013. Due to the rapid pace at which the business is being fully integrated with the company’s Global Energy segment, including all customer selling activity, discrete financial data specific to the legacy Champion business is not necessarily available post acquisition.

 

Based on applicable accounting and reporting guidance, the Champion acquisition is not material to the company’s consolidated financial statements; therefore, pro forma financial information has not been presented.

 

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 Mexico and Central and South America. Annual sales of the business are approximately $43 million. 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.

 

In April 2013, the company completed the acquisition of Russia-based OOO Master Chemicals (“Master Chemicals”). Master Chemicals sells oil field chemicals to oil and gas producers located throughout Russia and parts of the Ukraine. Annual sales of the business are approximately $29 million. Approximately $3 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 Energy reportable segment during the third 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.

 

In April 2013, the company entered into an agreement to acquire AkzoNobel’s Purate business which specializes in global antimicrobial water treatment. With 2012 revenues of approximately $23 million, the Purate business provides patented, proprietary chlorine dioxide generation programs for use in a wide array of water treatment applications. Consummation of this transaction remains subject to certain regulatory clearances and other standard closing conditions. Upon closing, the business is expected to become part of the company’s Global Industrial reportable segment.

 

17



 

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.

 

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 its results are part of 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.

 

Other significant acquisition summary

 

Acquisitions during the first nine months 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. 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, excluding the Champion acquisition, which is shown in a separate table, the components of the aggregate purchase prices of completed acquisitions during the third quarter and first nine months of 2013 and 2012 are shown in the following table.

 

 

 

Third Quarter Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

(millions)

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net tangible assets acquired

 

$

 

$

0.3

 

$

(2.3

)

$

(1.0

)

Identifiable intangible assets

 

 

 

 

 

 

 

 

 

Customer relationships

 

 

 

58.8

 

8.4

 

Trademarks

 

 

 

1.4

 

0.5

 

Patents

 

 

 

 

2.8

 

Other technology

 

 

 

1.0

 

0.3

 

Total intangible assets

 

 

 

61.2

 

12.0

 

Goodwill

 

 

0.1

 

41.2

 

23.3

 

Total aggregate purchase price

 

 

0.4

 

100.1

 

34.3

 

Contingent consideration

 

 

 

9.8

 

(2.6

)

Liability for indemnification, net

 

 

15.2

 

2.4

 

16.0

 

 

 

 

 

 

 

 

 

 

 

Net cash paid for acquisitions

 

$

 

$

15.6

 

$

112.3

 

$

47.7

 

 

18



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3.         Acquisitions and Dispositions (continued)

 

The weighted average useful lives of identifiable intangible assets acquired during the first nine months of 2013 and 2012, as shown in the previous table, were 12 and 13 years, respectively.

 

Dispositions

 

2013 Activity

 

In August 2013, the company sold substantially all the capital equipment design and build business of its Mobotec air emissions control business. The Mobotec equipment design and build business had 2012 sales of approximately $27 million, which were within the company’s Global Industrial reportable segment. An insignificant loss related to the sale was recorded in special (gains) and charges during the third quarter of 2013. The company has retained Mobotec’s chemical business.

 

There were no other business disposals during the first nine months of 2013.

 

2012 Activity

 

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.

 

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

 

19



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4.         Balance Sheet Information

 

 

 

September 30

 

December 31

 

(millions)

 

2013

 

2012

 

 

 

(unaudited)

 

Accounts receivable, net

 

 

 

 

 

Accounts receivable

 

$

2,565.5

 

$

2,298.3

 

Allowance for doubtful accounts

 

(76.6

)

(73.2

)

Total

 

$

2,488.9

 

$

2,225.1

 

 

 

 

 

 

 

Inventories

 

 

 

 

 

Finished goods

 

$

989.0

 

$

774.3

 

Raw materials and parts

 

403.7

 

338.3

 

Inventories at FIFO cost

 

1,392.7

 

1,112.6

 

Excess of FIFO cost over LIFO cost

 

(14.6

)

(24.5

)

Total

 

$

1,378.1

 

$

1,088.1

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

 

 

 

Land

 

$

182.8

 

$

158.9

 

Buildings and improvements

 

630.6

 

562.1

 

Leasehold improvements

 

86.4

 

80.5

 

Machinery and equipment

 

1,612.7

 

1,281.2

 

Merchandising and customer equipment

 

1,781.9

 

1,812.5

 

Capitalized software

 

413.1

 

385.7

 

Construction in progress

 

289.7

 

207.2

 

 

 

4,997.2

 

4,488.1

 

Accumulated depreciation

 

(2,211.1

)

(2,079.0

)

Total

 

$

2,786.1

 

$

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

 

$

3,440.0

 

$

2,588.6

 

Trademarks

 

307.2

 

185.2

 

Patents

 

422.5

 

414.7

 

Other technology

 

210.8

 

174.8

 

 

 

$

 4,380.5

 

$

3,363.3

 

 

 

 

 

 

 

Accumulated amortization

 

 

 

 

 

Customer relationships

 

$

(529.8

)

$

(373.1

)

Trademarks

 

(65.0

)

(51.2

)

Patents

 

(88.2

)

(65.6

)

Other technology

 

(76.4

)

(59.3

)

Other intangible assets, net

 

$

4,851.1

 

$

4,044.1

 

 

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

Deferred income taxes

 

$

73.8

 

$

51.0

 

Deferred financing costs

 

33.8

 

40.8

 

Pension

 

12.9

 

7.0

 

Other

 

247.1

 

207.8

 

Total

 

$

367.6

 

$

306.6