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Ecolab 10-Q 2014

 

 

 

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, 2014

 

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, 2014.

 

300,116,468 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)

 

2014

 

2013

 

 

 

(unaudited)

 

Net sales

 

$

3,694.9

 

$

3,484.0

 

 

 

 

 

 

 

Cost of sales (including special charges of $0.8 in 2014 and $6.3 in 2013)

 

1,970.6

 

1,866.1

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

1,145.9

 

1,114.1

 

 

 

 

 

 

 

Special (gains) and charges

 

7.0

 

27.8

 

 

 

 

 

 

 

Operating income

 

571.4

 

476.0

 

 

 

 

 

 

 

Interest expense, net

 

63.3

 

67.0

 

 

 

 

 

 

 

Income before income taxes

 

508.1

 

409.0

 

 

 

 

 

 

 

Provision for income taxes

 

138.7

 

101.8

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

369.4

 

307.2

 

 

 

 

 

 

 

Less: Net income (loss) attributable to noncontrolling interest

 

4.5

 

(0.8

)

 

 

 

 

 

 

Net income attributable to Ecolab

 

$

364.9

 

$

308.0

 

 

 

 

 

 

 

Earnings attributable to Ecolab per common share

 

 

 

 

 

Basic

 

$

1.22

 

$

1.02

 

Diluted

 

$

1.19

 

$

1.00

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.2750

 

$

0.2300

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

300.0

 

301.2

 

Diluted

 

305.7

 

307.2

 

 

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)

 

2014

 

2013

 

 

 

(unaudited)

 

Net sales

 

$

10,599.7

 

$

9,693.9

 

 

 

 

 

 

 

Cost of sales (including special charges of $7.9 in 2014 and $23.5 in 2013)

 

5,699.2

 

5,216.0

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

3,435.5

 

3,236.8

 

 

 

 

 

 

 

Special (gains) and charges

 

30.5

 

151.1

 

 

 

 

 

 

 

Operating income

 

1,434.5

 

1,090.0

 

 

 

 

 

 

 

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

 

194.6

 

194.7

 

 

 

 

 

 

 

Income before income taxes

 

1,239.9

 

895.3

 

 

 

 

 

 

 

Provision for income taxes

 

361.0

 

211.3

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

878.9

 

684.0

 

 

 

 

 

 

 

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

 

11.6

 

3.3

 

 

 

 

 

 

 

Net income attributable to Ecolab

 

$

867.3

 

$

680.7

 

 

 

 

 

 

 

Earnings attributable to Ecolab per common share

 

 

 

 

 

Basic

 

$

2.89

 

$

2.27

 

Diluted

 

$

2.83

 

$

2.23

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.8250

 

$

0.6900

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

300.1

 

299.4

 

Diluted

 

306.0

 

305.3

 

 

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)

 

2014

 

2013

 

2014

 

2013

 

 

 

(unaudited)

 

Net income including noncontrolling interest

 

$

369.4

 

$

307.2

 

$

878.9

 

$

684.0

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

(41.5

)

(126.2

)

(86.3

)

(276.9

)

Gain (loss) on net investment hedge

 

7.4

 

(4.2

)

5.6

 

(4.2

)

 

 

(34.1

)

(130.4

)

(80.7

)

(281.1

)

 

 

 

 

 

 

 

 

 

 

Derivatives and hedging instruments

 

5.0

 

1.6

 

0.9

 

9.1

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement benefits

 

 

 

 

 

 

 

 

 

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

 

2.6

 

10.4

 

7.7

 

31.3

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

(26.5

)

(118.4

)

(72.1

)

(240.7

)

 

 

 

 

 

 

 

 

 

 

Total comprehensive income, including noncontrolling interest

 

342.9

 

188.8

 

806.8

 

443.3

 

 

 

 

 

 

 

 

 

 

 

Less: Comprehensive income (loss) attributable to noncontrolling interest

 

3.2

 

 

10.3

 

(11.0

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to Ecolab

 

$

339.7

 

$

188.8

 

$

796.5

 

$

454.3

 

 

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

 

4



 

ECOLAB INC.

CONSOLIDATED BALANCE SHEET

 

 

 

September 30

 

December 31

 

(millions)

 

2014

 

2013

 

 

 

(unaudited)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

197.8

 

$

339.2

 

 

 

 

 

 

 

Accounts receivable, net

 

2,694.4

 

2,568.0

 

 

 

 

 

 

 

Inventories

 

1,464.4

 

1,321.9

 

 

 

 

 

 

 

Deferred income taxes

 

166.1

 

163.0

 

 

 

 

 

 

 

Other current assets

 

349.1

 

306.3

 

 

 

 

 

 

 

Total current assets

 

4,871.8

 

4,698.4

 

 

 

 

 

 

 

Property, plant and equipment, net

 

2,978.5

 

2,882.0

 

 

 

 

 

 

 

Goodwill

 

6,849.1

 

6,862.9

 

 

 

 

 

 

 

Other intangible assets, net

 

4,583.1

 

4,785.3

 

 

 

 

 

 

 

Other assets

 

403.3

 

407.9

 

 

 

 

 

 

 

Total assets

 

$

19,685.8

 

$

19,636.5

 

 

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)

 

2014

 

2013

 

 

 

(unaudited)

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

Short-term debt

 

$

1,922.8

 

$

861.0

 

 

 

 

 

 

 

Accounts payable

 

1,047.3

 

1,021.9

 

 

 

 

 

 

 

Compensation and benefits

 

547.1

 

571.1

 

 

 

 

 

 

 

Income taxes

 

81.9

 

80.9

 

 

 

 

 

 

 

Other current liabilities

 

855.9

 

953.8

 

 

 

 

 

 

 

Total current liabilities

 

4,455.0

 

3,488.7

 

 

 

 

 

 

 

Long-term debt

 

4,874.0

 

6,043.5

 

 

 

 

 

 

 

Postretirement health care and pension benefits

 

785.0

 

795.6

 

 

 

 

 

 

 

Other liabilities

 

1,805.5

 

1,899.3

 

 

 

 

 

 

 

Total liabilities

 

11,919.5

 

12,227.1

 

 

 

 

 

 

 

Equity (a)

 

 

 

 

 

Common stock

 

347.2

 

345.1

 

Additional paid-in capital

 

4,832.6

 

4,692.0

 

Retained earnings

 

5,318.7

 

4,699.0

 

Accumulated other comprehensive loss

 

(377.3

)

(305.2

)

Treasury stock

 

(2,423.3

)

(2,086.6

)

Total Ecolab shareholders’ equity

 

7,697.9

 

7,344.3

 

Noncontrolling interest

 

68.4

 

65.1

 

Total equity

 

7,766.3

 

7,409.4

 

 

 

 

 

 

 

Total liabilities and equity

 

$

19,685.8

 

$

19,636.5

 

 


(a)         Common stock, 800 million shares authorized, $1.00 par value per share, 300.1 million shares outstanding at September 30, 2014, 301.1 million shares outstanding at December 31, 2013. 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)

 

2014

 

2013

 

 

 

(unaudited)

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

$

878.9

 

$

684.0

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

417.4

 

381.3

 

Amortization

 

236.6

 

220.5

 

Deferred income taxes

 

(79.1

)

(102.7

)

Share-based compensation expense

 

55.1

 

53.6

 

Excess tax benefits from share-based payment arrangements

 

(41.7

)

(26.2

)

Pension and postretirement plan contributions

 

(61.0

)

(62.0

)

Pension and postretirement plan expense

 

65.4

 

106.9

 

Restructuring, net of cash paid

 

(22.4

)

(20.5

)

Venezuela currency devaluation

 

 

23.3

 

Gain on sale of business

 

(1.4

)

 

Other, net

 

8.4

 

12.9

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(163.5

)

(70.3

)

Inventories

 

(168.7

)

(92.3

)

Other assets

 

(51.7

)

(109.5

)

Accounts payable

 

29.5

 

(40.7

)

Other liabilities

 

43.2

 

(29.1

)

 

 

 

 

 

 

Cash provided by operating activities

 

$

1,145.0

 

$

929.2

 

 

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)

 

2014

 

2013

 

 

 

(unaudited)

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

(488.7

)

$

(423.4

)

Capitalized software expenditures

 

(31.9

)

(25.7

)

Property and other assets sold

 

8.6

 

9.6

 

Businesses acquired and investments in affiliates, net of cash acquired

 

(70.8

)

(1,442.3

)

Divestiture of businesses

 

9.2

 

(7.9

)

Deposit into indemnification escrow

 

 

(10.6

)

Release from indemnification escrow

 

8.7

 

13.0

 

 

 

 

 

 

 

Cash used for investing activities

 

(564.9

)

(1,887.3

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net issuances (repayments) of commercial paper and notes payable

 

310.2

 

(90.6

)

Long-term debt borrowings

 

 

900.1

 

Long-term debt repayments

 

(407.3

)

(337.8

)

Reacquired shares

 

(341.0

)

(228.5

)

Dividends paid

 

(258.9

)

(143.6

)

Exercise of employee stock options

 

51.5

 

77.7

 

Excess tax benefits from share-based payment arrangements

 

41.7

 

26.2

 

Acquisition related liabilities and contingent consideration

 

(101.5

)

(9.8

)

Acquisition of noncontrolling interest

 

(8.4

)

 

Other, net

 

 

0.6

 

 

 

 

 

 

 

Cash provided by (used for) financing activities

 

(713.7

)

194.3

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

(7.8

)

0.4

 

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

(141.4

)

(763.4

)

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

339.2

 

1,157.8

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

197.8

 

$

394.4

 

 

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, 2014 and 2013 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, 2013 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, 2013.

 

With respect to the unaudited financial information of the company for the third quarter and nine months ended September 30, 2014 and 2013 included in this Form 10-Q, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their separate report dated October 30, 2014 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.

 

Effective in the first quarter of 2014, certain employee-related costs from the company’s recently acquired businesses that were historically presented within cost of sales were revised and reclassified to selling, general and administrative expenses (“SG&A”) on the Consolidated Statement of Income. These immaterial revisions were made to conform with management’s view of the respective costs within the global organizational model. Total costs reclassified were $16.7 million for the third quarter ended September 30, 2013, $60.3 million for the nine months ended September 30, 2013 and $78.9 million for the year ended December 31, 2013.

 

Results for 2013 have been revised to conform to the current year presentation. The reclassification had no impact on net earnings, financial position or cash flows.

 

9



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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)

 

2014

 

2013

 

2014

 

2013

 

Cost of sales

 

 

 

 

 

 

 

 

 

Restructuring charges

 

$

0.4

 

$

1.9

 

$

7.5

 

$

5.5

 

Recognition of inventory fair value step-up

 

0.4

 

4.4

 

0.4

 

18.0

 

Subtotal

 

0.8

 

6.3

 

7.9

 

23.5

 

 

 

 

 

 

 

 

 

 

 

Special (gains) and charges

 

 

 

 

 

 

 

 

 

Restructuring charges

 

6.3

 

11.9

 

34.9

 

75.4

 

Champion acquisition and integration costs

 

4.1

 

10.7

 

15.8

 

42.5

 

Nalco merger and integration costs

 

2.0

 

5.3

 

4.8

 

13.5

 

Venezuela currency devaluation

 

 

(0.1

)

 

23.3

 

Litigation activity, settlements, and other gains

 

(5.4

)

 

(25.0

)

(3.6

)

Subtotal

 

7.0

 

27.8

 

30.5

 

151.1

 

 

 

 

 

 

 

 

 

 

 

Operating income subtotal

 

7.8

 

34.1

 

38.4

 

174.6

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

 

 

 

 

 

 

 

Acquisition debt costs

 

 

 

 

2.5

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to noncontrolling interest

 

 

 

 

 

 

 

 

 

Venezuela currency devaluation

 

 

 

 

(0.5

)

 

 

 

 

 

 

 

 

 

 

Total special (gains) and charges

 

$

7.8

 

$

34.1

 

$

38.4

 

$

176.6

 

 

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.

 

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 within 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 both other current and non-current liabilities on the Consolidated Balance Sheet.

 

10



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.                          Special (Gains) and Charges (continued)

 

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 pre-tax restructuring charges of approximately $80 million ($55 million after tax) under the Energy Restructuring Plan through substantial completion of the Plan in 2015. During 2013, the company incurred $27 million ($19 million after tax) of charges related to the Energy Restructuring Plan. Approximately $15 million ($10 million after tax) of charges are expected to occur in 2014.

 

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.

 

The company recorded restructuring charges related to the Energy Restructuring Plan of $1.3 million ($0.7 million after tax) and $8.4 million ($6.7 million after tax) during the third quarter of 2014 and 2013, respectively. During the nine months ended September 30, 2014 and 2013, the company incurred charges of $8.9 million ($5.9 million after tax) and $20.6 million ($14.3 million after tax), 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

 

$

22.9

 

$

3.6

 

$

0.9

 

$

27.4

 

Cash payments

 

(16.7

)

 

(0.8

)

(17.5

)

Non-cash charges

 

 

(3.6

)

 

(3.6

)

Effect of foreign currency translation

 

0.6

 

 

 

0.6

 

Restructuring liability, December 31, 2013

 

6.8

 

 

0.1

 

6.9

 

 

 

 

 

 

 

 

 

 

 

2014 Activity:

 

 

 

 

 

 

 

 

 

Recorded expense and accrual

 

7.5

 

0.5

 

0.9

 

8.9

 

Cash payments

 

(11.9

)

 

(0.9

)

(12.8

)

Non-cash charges

 

 

(0.5

)

 

(0.5

)

Effect of foreign currency translation

 

0.3

 

 

 

0.3

 

Restructuring liability, September 30, 2014

 

$

2.7

 

$

 

$

0.1

 

$

2.8

 

 

As shown in the previous table, cash payments under the Energy Restructuring Plan were $12.8 million during the first nine months of 2014 and $17.5 million during 2013. 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, as well as to undertake certain restructuring activities outside of Europe (the “2011 Restructuring Plan”). Additionally, 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”). During the first quarter of 2013, the company 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”) combines opportunities and initiatives from both plans and 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 the global workforce and plant and distribution center locations.

 

During 2013, the company incurred $64 million ($48 million after tax) of charges related to the Combined Plan. The company recorded restructuring charges related to the Combined Plan of $5.4 million ($3.3 million after tax) and $5.3 million ($2.1 million after tax), during the third quarter of 2014 and 2013, respectively. During the nine months ended September 30, 2014 and 2013, the company incurred charges of $33.4 million ($27.0 million after tax) and $60.5 million ($42.5 million after tax), respectively.

 

Through substantial completion of the Combined Plan at the end of 2015, the company expects to incur pretax charges of approximately $50 million ($40 million after tax) during the remainder of 2014 and 2015.

 

The company anticipates that substantially all of the remaining Combined Plan pre-tax charges will represent net cash expenditures.

 

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

 

 

 

Combined Plan

 

 

 

Employee

 

 

 

 

 

 

 

 

 

Termination

 

Asset

 

 

 

 

 

(millions)

 

Costs

 

Disposals

 

Other

 

Total

 

2011 - 2013 Activity:

 

 

 

 

 

 

 

 

 

Recorded net expense and accrual

 

$

248.2

 

$

(1.2

)

$

30.7

 

$

277.7

 

Net cash payments

 

(182.2

)

9.1

 

(19.1

)

(192.2

)

Non-cash net charges

 

 

(7.9

)

(4.3

)

(12.2

)

Effect of foreign currency translation

 

(0.1

)

 

 

(0.1

)

Restructuring liability, December 31, 2013

 

65.9

 

 

7.3

 

73.2

 

 

 

 

 

 

 

 

 

 

 

2014 Activity:

 

 

 

 

 

 

 

 

 

Recorded net expense and accrual

 

28.9

 

(1.1

)

5.6

 

33.4

 

Net cash payments

 

(47.4

)

2.6

 

(7.0

)

(51.8

)

Non-cash net charges

 

 

(1.5

)

 

(1.5

)

Effect of foreign currency translation

 

(0.7

)

 

 

(0.7

)

Restructuring liability, September 30, 2014

 

$

46.7

 

$

 

$

5.9

 

$

52.6

 

 

12



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.                          Special (Gains) and Charges (continued)

 

As shown in the previous table, net cash payments under the Combined Plan were $51.8 million during the first nine months of 2014 and $192.2 million from 2011 through 2013. 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.

 

Non-restructuring Special (Gains) and Charges

 

Champion acquisition and integration costs

 

As a result of the Champion acquisition completed in 2013, the company incurred charges of $4.1 million ($2.7 million after tax) and $15.1 million ($10.3 million after tax) during the third quarter of 2014 and 2013, respectively. During the nine months ended September 30, 2014 and 2013, the company incurred charges of $15.8 million ($10.2 million after tax) and $63.0 million ($44.9 million after tax), respectively.

 

Champion 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 amortizable 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 net charges of $2.0 million ($2.0 million after tax) and $5.3 million ($3.5 million after tax) during the third quarter of 2014 and 2013, respectively. During the nine months ended September 30, 2014 and 2013, the company incurred charges of $4.8 million ($4.0 million after tax) and $13.5 million ($9.2 million after tax), respectively. Nalco related special charges for 2014 and 2013 have been included as a component of special (gains) and charges on the Consolidated Statement of Income, and include integration charges.

 

Venezuelan currency devaluation

 

Venezuela is a country with a highly inflationary economy under U.S. GAAP. As a result, the U.S. dollar is the functional currency for our subsidiaries in Venezuela. Any currency remeasurement adjustments for non-dollar denominated monetary assets and liabilities held by our subsidiaries and other transactional foreign exchange gains and losses are reflected in earnings.

 

On February 8, 2013, the Venezuelan government devalued its currency, the Bolivar Fuerte (“bolivar”) from 4.30 bolivars to 1 U.S. dollar to 6.30 bolivars to 1 U.S. dollar, resulting in a charge during 2013 of $22.7 million ($16.1 million after tax), due to the remeasurement of the local balance sheet. As a result of the ownership structure in place in Venezuela, the company also reflected a portion of the devaluation impact as a component of net income (loss) attributable to noncontrolling interest on the Consolidated Statement of Income.

 

13



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.                          Special (Gains) and Charges (continued)

 

In 2013, the Venezuelan government created a new foreign exchange mechanism known as the “Complementary System of Foreign Currency Acquirement” (“SICAD 1”). It operates similar to an auction system and allows entities to exchange a limited number of bolivars for U.S. dollars at a bid rate established via weekly auctions under SICAD 1. As of August 31, 2014, the fiscal quarter end for the company’s international operations, the SICAD 1 exchange rate closed at 11.5 bolivars to 1 U.S. dollar. The company does not use the SICAD 1 rate or expect to use the SICAD 1 currency exchange mechanism.

 

In January 2014, the Venezuelan government announced the replacement of the Commission for the Administration of Foreign Exchange (“CADIVI”) with a new foreign currency administration, the National Center for Foreign Commerce (“CENCOEX”). As of August 31, 2014, the company had $102 million of net monetary assets denominated in bolivars that were required to be remeasured to U.S. dollars. During the nine month period ended August 31, 2014, the company continued to obtain approvals and authorization to pay amounts at the CENCOEX fixed currency exchange rate of 6.30 bolivars to 1 U.S. dollar. As the company believes the fixed currency exchange rate of 6.30 bolivars to 1 U.S. dollar remains legally available to it and the company continues to transact at this rate, the company intends to continue to remeasure the net monetary assets of its Venezuela subsidiaries at this rate.

 

In March 2014, the Venezuelan government introduced an additional currency exchange auction mechanism (“SICAD 2”). At August 31, 2014, the SICAD 2 exchange rate closed at 49.97 bolivars to 1 U.S. dollar. The company does not use the SICAD 2 rate, but is evaluating whether it will use the SICAD 2 currency exchange mechanism in future periods.

 

Net sales within Venezuela are approximately 1% of the company’s consolidated net sales. Assets held in Venezuela at August 31, 2014 represented less than 2% of the company’s consolidated assets.

 

Other special (gains) and charges

 

The company recognized other special gains of $5.0 million ($3.1 million after tax) and $24.6 million ($19.5 million after tax) during the third quarter and the first nine months of 2014, respectively. The gain recognized in the third quarter of 2014 resulted from the consolidation of the Emirates National Chemicals Company LLC (“Emochem”) entity and removal of the corresponding equity method investment. The gains recognized during the first six months of 2014 related to a favorable licensing settlement and other settlement gains.

 

3.                          Acquisitions and Dispositions

 

Champion acquisition

 

On April 10, 2013, the company completed its acquisition of Champion, a global energy specialty products and services company delivering its offerings to the oil and gas industry. The total fair value of cash and stock consideration transferred to acquire all of Champion’s stock was approximately $2.1 billion. 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.

 

The company incurred certain acquisition related costs associated with the transaction that were expensed as incurred and are reflected in the Consolidated Statement of Income. Amounts included in cost of sales relate 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 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 amortizable fees to secure term loans and short-term debt, all of which were initiated to fund the Champion acquisition.

 

14



 

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.

 

The following table summarizes the value of Champion assets acquired and liabilities assumed as of December 31, 2013. During 2013, adjustments of $37.1 million were made to the preliminary purchase price allocation of the assets and liabilities assumed with a corresponding adjustment to goodwill.

 

Also summarized in the table, during the first quarter of 2014, net adjustments of $16.9 million were made to the value of Champion assets acquired and liabilities assumed. As the adjustments were not significant, they have been recorded in 2014 and are not reflected in the 2013 Consolidated Balance Sheet. Purchase price allocations were finalized during the first quarter of 2014.

 

(millions)

 

Allocation at
December 31, 2013

 

Purchase Price
Adjustments

 

Final
Allocation at
March 31, 2014

 

Current assets

 

$

592.3

 

$

(4.5

)

$

587.8

 

Property, plant and equipment

 

357.8

 

(2.5

)

355.3

 

Other assets

 

16.2

 

0.1

 

16.3

 

Identifiable intangible assets

 

 

 

 

 

 

 

Customer relationships

 

840.0

 

 

840.0

 

Trademarks

 

120.0

 

 

120.0

 

Other technology

 

36.5

 

 

36.5

 

Total assets acquired

 

1,962.8

 

(6.9

)

1,955.9

 

 

 

 

 

 

 

 

 

Current liabilities

 

409.5

 

3.6

 

413.1

 

Long-term debt

 

70.8

 

 

70.8

 

Net deferred tax liability

 

427.4

 

9.3

 

436.7

 

Noncontrolling interest and other liabilities

 

30.5

 

(2.9

)

27.6

 

Total liabilities and noncontrolling interests assumed

 

938.2

 

10.0

 

948.2

 

 

 

 

 

 

 

 

 

Goodwill

 

1,030.1

 

16.9

 

1,047.0

 

Total aggregate purchase price

 

2,054.7

 

 

2,054.7

 

Future consideration payable to sellers

 

(86.4

)

86.4

 

 

Total consideration transferred

 

$

1,968.3

 

$

86.4

 

$

2,054.7

 

 

The adjustments to the purchase price allocation during the first quarter of 2014 primarily related to estimated contingent liabilities, updated property, plant and equipment values and deferred taxes.

 

In accordance with the acquisition agreement, except under limited circumstances, the company was required to pay an additional amount in cash, up to $100 million in the aggregate, equal to 50% of the incremental tax on the merger consideration as a result of increases in applicable gains and investment taxes after December 31, 2012. In January 2014, in accordance with the above discussion, an additional payment of $86.4 million was made to the acquired entity’s former stockholders.

 

The customer relationships, trademarks and other technology are being amortized over weighted average lives of 14, 12 and 7 years, respectively.

 

15



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3.                          Acquisitions and Dispositions (continued)

 

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 has been integrated with the company’s Global Energy segment, including all customer selling activity, discrete financial data specific to the legacy Champion business is no longer 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 acquisition activity

 

2014 Activity

 

During the first nine months of 2014, the company completed six business combination transactions. In addition, one transaction was completed subsequent to the end of the third quarter.

 

In December 2013, subsequent to the company’s year end for international operations, the company completed the acquisition of AkzoNobel’s Purate business, which specializes in global antimicrobial water treatment. Pre-acquisition annual sales of the business were approximately $23 million. The acquired business became part of the company’s Global Industrial reportable segment during the first quarter of 2014.

 

In March 2014, the company acquired AK Kraus & Hiller Schädlingsbekämpfung, one of Germany’s leading commercial pest elimination service providers. Pre-acquisition annual sales of the business were approximately $4 million. The business became part of the company’s Other reportable segment during the second quarter of 2014.

 

In March 2014, the company purchased the remaining interest in a joint venture held in South Africa. The transaction is not significant to the company’s operations.

 

In June 2014, the company purchased the remaining interest in a joint venture in Indonesia. The transaction is not significant to the company’s operations.

 

In July 2014, the company obtained control of a joint venture in the United Arab Emirates through an amendment in the related shareholder agreements. This amendment resulted in the company consolidating the entity and removing the related equity method investment. The transaction is not significant to the company’s operations. As discussed in Note 2, the company recognized a gain of $5.0 million during the third quarter of 2014 as a result of this transaction.

 

In July 2014, the company acquired the chemical division of AKJ Industries, a leading provider of chemical solutions in the coal industry. Pre-acquisition annual sales of the business were approximately $21 million. The business became part of the company’s Industrial reportable segment during the third quarter of 2014.

 

In September 2014, subsequent to the company’s third quarter end for international operations, the company acquired certain assets in Turkey. The transaction is not significant to the company’s operations.

 

16



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3.                          Acquisitions and Dispositions (continued)

 

2013 Activity

 

During the first nine months of 2013, in addition to the Champion acquisition, the company completed two business combination transactions.

 

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. (commonly known as FEMSA). 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. Pre-acquisition annual sales of the business were 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. During the third quarter of 2014 the escrow balance was paid to the seller. The business became part of the company’s Global Industrial reportable segment during the first quarter of 2013.

 

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. Pre-acquisition annual sales of the business were 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 second quarter of 2013.

 

Other acquisition summary

 

Other acquisitions during the first nine months of 2014 and all of 2013 were not material to the company’s consolidated financial statements; therefore, pro forma financial information has not been presented. The aggregate purchase price of acquisitions has been reduced for any cash or cash equivalents acquired with the acquisitions. Based upon purchase price allocations, the components of the aggregate purchase prices of other completed acquisitions during the third quarter and first nine months of 2014 and 2013 are shown in the following table.

 

 

 

Third Quarter Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

(millions)

 

2014

 

2013

 

2014

 

2013

 

Net tangible assets acquired, including impact of joint venture consolidation activity

 

$

(18.8

)

$

 

$

4.1

 

$

(2.3

)

Identifiable intangible assets

 

 

 

 

 

 

 

 

 

Customer relationships

 

27.7

 

 

30.6

 

58.8

 

Trademarks

 

2.6

 

 

3.4

 

1.4

 

Other technology

 

1.2

 

 

4.1

 

1.0

 

Non-compete

 

 

 

0.1

 

 

Total intangible assets

 

31.5

 

 

38.2

 

61.2

 

Goodwill

 

16.8

 

 

28.1

 

41.2

 

Total aggregate purchase price

 

29.5

 

 

70.4

 

100.1

 

Acquisition related liabilities and contingent consideration

 

15.0

 

 

15.1

 

9.8

 

Liability for indemnification, net

 

8.0

 

 

8.7

 

2.4

 

Net cash paid for acquisitions, including contingent consideration

 

$

52.5

 

$

 

$

94.2

 

$

112.3

 

 

17



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3.                          Acquisitions and Dispositions (continued)

 

The contingent consideration activity primarily relates to payments on legacy Nalco 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. As previously discussed, during the first quarter of 2013, approximately $8 million of the Quimiproductos purchase price was placed in an escrow account and was subsequently paid to the seller in the third quarter of 2014. During the third quarter of 2013, approximately $3 million of the Master Chemicals purchase price was placed in an escrow account.

 

The weighted average useful lives of identifiable intangible assets acquired during the first nine months of 2014 and 2013, as shown in the previous table, were 10 and 12 years, respectively.

 

Dispositions

 

2014 Activity

 

In April 2014, the company sold an immaterial business in Italy that was part of the company’s Institutional reportable segment.

 

There were no other business disposals during the first nine months of 2014.

 

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 retained Mobotec’s chemical business.

 

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

 

18



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4.                          Balance Sheet Information

 

 

 

September 30

 

December 31

 

(millions)

 

2014

 

2013

 

 

 

(unaudited)

 

Accounts receivable, net

 

 

 

 

 

Accounts receivable

 

$

2,779.6

 

$

2,648.9

 

Allowance for doubtful accounts

 

(85.2

)

(80.9

)

Total

 

$

2,694.4

 

$

2,568.0

 

 

 

 

 

 

 

Inventories

 

 

 

 

 

Finished goods

 

$

1,020.0

 

$

953.3

 

Raw materials and parts

 

457.7

 

391.0

 

Inventories at FIFO cost

 

1,477.7

 

1,344.3

 

Excess of FIFO cost over LIFO cost

 

(13.3

)

(22.4

)

Total

 

$

1,464.4

 

$

1,321.9

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

 

 

 

Land

 

$

193.0

 

$

191.4

 

Buildings and improvements

 

698.1

 

666.0

 

Leasehold improvements

 

86.7

 

87.9

 

Machinery and equipment

 

1,750.1

 

1,677.5

 

Merchandising and customer equipment

 

1,942.5

 

1,802.8

 

Capitalized software

 

456.7

 

435.4

 

Construction in progress

 

398.2

 

291.6

 

 

 

5,525.3

 

5,152.6

 

Accumulated depreciation

 

(2,546.8

)

(2,270.6

)

Total

 

$

2,978.5

 

$

2,882.0

 

 

 

 

 

 

 

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

 

$

3,459.8

 

$

3,455.6

 

Trademarks

 

311.7

 

308.1

 

Patents

 

432.7

 

425.6

 

Other technology

 

214.1

 

210.2

 

 

 

$

 4,418.3

 

$

4,399.5

 

 

 

 

 

 

 

Accumulated amortization

 

 

 

 

 

Customer relationships

 

$

(759.4

)

$

(594.9

)

Trademarks

 

(86.5

)

(70.4

)

Patents

 

(117.7

)

(95.7

)

Other technology

 

(101.6

)

(83.2

)

Other intangible assets, net

 

$

4,583.1

 

$

4,785.3

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

Deferred income taxes

 

$

48.2

 

$

54.5

 

Deferred financing costs

 

25.0

 

31.7

 

Pension

 

88.7

 

90.2

 

Other

 

241.4

 

231.5

 

Total

 

$

403.3

 

$

407.9

 

 

19



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4.                          Balance Sheet Information (continued)

 

 

 

September 30

 

December 31

 

(millions)

 

2014

 

2013

 

 

 

(unaudited)

 

Other current liabilities

 

 

 

 

 

Discounts and rebates

 

$

261.0

 

$

263.2

 

Dividends payable

 

82.5

 

82.8

 

Interest payable

 

65.3

 

19.6

 

Taxes payable, other than income

 

121.7

 

115.3

 

Derivative liabilities

 

19.9

 

14.2

 

Restructuring

 

46.6

 

68.3

 

Future consideration payable to Champion sellers

 

 

86.4

 

Other

 

258.9

 

304.0

 

Total

 

$

855.9

 

$

953.8

 

 

 

 

 

 

 

Other liabilities

 

 

 

 

 

Deferred income taxes

 

$

1,583.1

 

$

1,661.3

 

Income taxes payable - non-current

 

86.5

 

90.2

 

Restructuring

 

8.8

 

12.9

 

Other

 

127.1

 

134.9

 

Total

 

$

1,805.5

 

$

1,899.3

 

 

 

 

 

 

 

Accumulated other comprehensive loss

 

 

 

 

 

Unrealized loss on derivative financial instruments, net of tax

 

$

(5.7

)

$

(6.6

)

Unrecognized pension and postretirement benefit expense, net of tax

 

(224.2

)

(235.0

)

Cumulative translation, net of tax

 

(147.4

)

(63.6

)

Total

 

$

(377.3

)

$

(305.2

)

 

5.                                      Debt and Interest

 

The following table provides the components of the company’s short-term debt obligations as of September 30, 2014 and December 31, 2013.

 

 

 

September 30

 

December 31

 

(millions)