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Ecolab 10-Q 2015

Documents found in this filing:

  1. 10-Q
  2. Ex-10.1
  3. Ex-10.2
  4. Ex-15.1
  5. Ex-31.1
  6. Ex-32.1
  7. 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 June 30, 2015

 

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 June 30, 2015.

 

295,092,229 shares of common stock, par value $1.00 per share.

 

 

 



 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ECOLAB INC.

CONSOLIDATED STATEMENT OF INCOME

(unaudited)

 

 

 

Second Quarter Ended

 

 

 

June 30

 

(millions, except per share amounts)

 

2015

 

2014

 

 

 

 

 

 

 

Net sales

 

$

3,389.1

 

$

3,568.2

 

 

 

 

 

 

 

Cost of sales (including special charges of $11.0 in 2015 and $1.1 in 2014)

 

1,806.5

 

1,909.4

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

1,079.2

 

1,152.7

 

 

 

 

 

 

 

Special (gains) and charges

 

65.6

 

(6.1

)

 

 

 

 

 

 

Operating income

 

437.8

 

512.2

 

 

 

 

 

 

 

Interest expense, net

 

61.2

 

66.2

 

 

 

 

 

 

 

Income before income taxes

 

376.6

 

446.0

 

 

 

 

 

 

 

Provision for income taxes

 

67.8

 

131.0

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

308.8

 

315.0

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interest

 

6.8

 

3.6

 

 

 

 

 

 

 

Net income attributable to Ecolab

 

$

302.0

 

$

311.4

 

 

 

 

 

 

 

Earnings attributable to Ecolab per common share

 

 

 

 

 

Basic

 

$

1.02

 

$

1.04

 

Diluted

 

$

1.00

 

$

1.02

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.3300

 

$

0.2750

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

296.2

 

299.6

 

Diluted

 

301.1

 

305.2

 

 

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

 

2



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF INCOME

(unaudited)

 

 

 

Six Months Ended

 

 

 

June 30

 

(millions, except per share amounts)

 

2015

 

2014

 

 

 

 

 

 

 

Net sales

 

$

6,686.7

 

$

6,904.8

 

 

 

 

 

 

 

Cost of sales (including special charges of $11.6 in 2015 and $7.1 in 2014)

 

3,571.8

 

3,728.6

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

2,216.0

 

2,289.6

 

 

 

 

 

 

 

Special (gains) and charges

 

73.4

 

23.5

 

 

 

 

 

 

 

Operating income

 

825.5

 

863.1

 

 

 

 

 

 

 

Interest expense, net

 

123.7

 

131.3

 

 

 

 

 

 

 

Income before income taxes

 

701.8

 

731.8

 

 

 

 

 

 

 

Provision for income taxes

 

157.6

 

222.3

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

544.2

 

509.5

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interest

 

8.8

 

7.1

 

 

 

 

 

 

 

Net income attributable to Ecolab

 

$

535.4

 

$

502.4

 

 

 

 

 

 

 

Earnings attributable to Ecolab per common share

 

 

 

 

 

Basic

 

$

1.80

 

$

1.67

 

Diluted

 

$

1.77

 

$

1.64

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.6600

 

$

0.5500

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

297.2

 

300.1

 

Diluted

 

302.2

 

305.9

 

 

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

 

3



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

 

 

 

Second Quarter Ended

 

Six Months Ended

 

 

 

June 30

 

June 30

 

(millions)

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

$

308.8

 

$

315.0

 

$

544.2

 

$

509.5

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

(35.4

)

22.2

 

(344.8

)

(44.8

)

Gain (loss) on net investment hedges

 

21.8

 

1.9

 

78.8

 

(1.8

)

 

 

(13.6

)

24.1

 

(266.0

)

(46.6

)

 

 

 

 

 

 

 

 

 

 

Derivatives and hedging instruments

 

(2.9

)

(4.1

)

4.9

 

(4.1

)

 

 

 

 

 

 

 

 

 

 

Pension and postretirement benefits

 

 

 

 

 

 

 

 

 

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

 

8.1

 

2.5

 

16.1

 

5.1

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

(8.4

)

22.5

 

(245.0

)

(45.6

)

 

 

 

 

 

 

 

 

 

 

Total comprehensive income, including noncontrolling interest

 

300.4

 

337.5

 

299.2

 

463.9

 

 

 

 

 

 

 

 

 

 

 

Less: Comprehensive income attributable to noncontrolling interest

 

6.0

 

3.6

 

7.0

 

7.1

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to Ecolab

 

$

294.4

 

$

333.9

 

$

292.2

 

$

456.8

 

 

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

 

4



 

ECOLAB INC.

CONSOLIDATED BALANCE SHEET

(unaudited)

 

 

 

June 30

 

December 31

 

(millions)

 

2015

 

2014

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

310.6

 

$

209.6

 

 

 

 

 

 

 

Accounts receivable, net

 

2,494.8

 

2,626.7

 

 

 

 

 

 

 

Inventories

 

1,462.7

 

1,466.9

 

 

 

 

 

 

 

Deferred income taxes

 

164.6

 

183.2

 

 

 

 

 

 

 

Other current assets

 

538.4

 

366.6

 

 

 

 

 

 

 

Total current assets

 

4,971.1

 

4,853.0

 

 

 

 

 

 

 

Property, plant and equipment, net

 

3,123.4

 

3,050.6

 

 

 

 

 

 

 

Goodwill

 

6,513.4

 

6,717.0

 

 

 

 

 

 

 

Other intangible assets, net

 

4,231.0

 

4,456.8

 

 

 

 

 

 

 

Other assets

 

378.4

 

371.2

 

 

 

 

 

 

 

Total assets

 

$

19,217.3

 

$

19,448.6

 

 

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

 

(Continued)

 

5



 

ECOLAB INC.

CONSOLIDATED BALANCE SHEET (continued)

(unaudited)

 

 

 

June 30

 

December 31

 

(millions, except shares and per share amounts)

 

2015

 

2014

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

Short-term debt

 

$

2,185.3

 

$

1,705.4

 

 

 

 

 

 

 

Accounts payable

 

961.0

 

1,162.4

 

 

 

 

 

 

 

Compensation and benefits

 

425.1

 

560.4

 

 

 

 

 

 

 

Income taxes

 

45.8

 

88.6

 

 

 

 

 

 

 

Other current liabilities

 

828.9

 

851.7

 

 

 

 

 

 

 

Total current liabilities

 

4,446.1

 

4,368.5

 

 

 

 

 

 

 

Long-term debt

 

5,124.2

 

4,864.0

 

 

 

 

 

 

 

Postretirement health care and pension benefits

 

1,139.6

 

1,188.5

 

 

 

 

 

 

 

Other liabilities

 

1,627.9

 

1,645.5

 

 

 

 

 

 

 

Total liabilities

 

12,337.8

 

12,066.5

 

 

 

 

 

 

 

Equity (a)

 

 

 

 

 

Common stock

 

349.3

 

347.7

 

Additional paid-in capital

 

5,001.6

 

4,874.5

 

Retained earnings

 

5,894.7

 

5,555.1

 

Accumulated other comprehensive loss

 

(1,195.1

)

(951.9

)

Treasury stock

 

(3,238.9

)

(2,509.5

)

Total Ecolab shareholders’ equity

 

6,811.6

 

7,315.9

 

Noncontrolling interest

 

67.9

 

66.2

 

Total equity

 

6,879.5

 

7,382.1

 

 

 

 

 

 

 

Total liabilities and equity

 

$

19,217.3

 

$

19,448.6

 

 


(a) Common stock, 800 million shares authorized, $1.00 par value per share, 295.1 million shares outstanding at June 30, 2015, 299.9 million shares outstanding at December 31, 2014. 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

(unaudited)

 

 

 

Six Months Ended

 

 

 

June 30

 

(millions)

 

2015

 

2014

 

 

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

$

544.2

 

$

509.5

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

285.8

 

276.1

 

Amortization

 

149.9

 

159.3

 

Deferred income taxes

 

(34.9

)

(50.6

)

Share-based compensation expense

 

47.1

 

42.7

 

Excess tax benefits from share-based payment arrangements

 

(31.4

)

(30.9

)

Pension and postretirement plan contributions

 

(38.0

)

(45.0

)

Pension and postretirement plan expense

 

58.1

 

43.5

 

Restructuring, net of cash paid

 

(4.6

)

(9.3

)

Venezuela currency devaluation

 

30.2

 

 

Loss (gain) on sale of businesses

 

13.7

 

(1.6

)

Other, net

 

7.0

 

8.7

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

22.2

 

(79.4

)

Inventories

 

(66.0

)

(107.2

)

Other assets

 

(58.4

)

(34.8

)

Accounts payable

 

(145.7

)

(20.0

)

Other liabilities

 

(142.6

)

(129.1

)

 

 

 

 

 

 

Cash provided by operating activities

 

$

636.6

 

$

531.9

 

 

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

 

(Continued)

 

7



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (continued)

(unaudited)

 

 

 

Six Months Ended

 

 

 

June 30

 

(millions)

 

2015

 

2014

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

(327.5

)

$

(321.7

)

Capitalized software expenditures

 

(14.3

)

(15.5

)

Property and other assets sold

 

6.8

 

5.3

 

Acquisitions and investments in affiliates, net of cash acquired

 

(14.7

)

(34.4

)

Divestiture of businesses

 

0.3

 

5.6

 

Release from acquisition related escrow

 

9.4

 

1.4

 

 

 

 

 

 

 

Cash used for investing activities

 

(340.0

)

(359.3

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net issuances (repayments) of commercial paper and notes payable

 

449.6

 

477.6

 

Long-term debt borrowings

 

599.7

 

 

Long-term debt repayments

 

 

(380.0

)

(256.5

)

Reacquired shares

 

(726.3

)

(336.6

)

Dividends paid

 

(202.5

)

(172.3

)

Exercise of employee stock options

 

49.0

 

30.9

 

Excess tax benefits from share-based payment arrangements

 

31.4

 

30.9

 

Acquisition related liabilities and contingent consideration

 

(0.8

)

(86.6

)

Acquisition of noncontrolling interest

 

 

(7.3

)

Other, net

 

(4.1

)

 

 

 

 

 

 

 

Cash used for financing activities

 

(184.0

)

(319.9

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(11.6

)

(4.9

)

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

101.0

 

(152.2

)

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

209.6

 

339.2

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

310.6

 

$

187.0

 

 

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

 

8



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1.         Consolidated Financial Information

 

The unaudited consolidated financial information for the second quarter and six months ended June 30, 2015 and 2014 reflect, in the opinion of company 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. Any adjustments consist of normal, recurring items.

 

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, 2014 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, 2014.

 

With respect to the unaudited financial information of the company for the second quarter and six months ended June 30, 2015 and 2014 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. Their separate report dated August 6, 2015 appearing herein states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933, as amended (the “Act”), for their report on the unaudited financial information because that report is not a “report” or a “part” of a registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.

 

2.         Special (Gains) and Charges

 

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

 

 

 

Second Quarter Ended

 

Six Months Ended

 

 

 

June 30

 

June 30

 

(millions)

 

2015

 

2014

 

2015

 

2014

 

Cost of sales

 

 

 

 

 

 

 

 

 

Restructuring charges

 

$

1.6

 

$

1.1

 

$

2.2

 

$

7.1

 

Venezuela currency devaluation

 

9.4

 

 

9.4

 

 

Subtotal

 

11.0

 

1.1

 

11.6

 

7.1

 

 

 

 

 

 

 

 

 

 

 

Special (gains) and charges

 

 

 

 

 

 

 

 

 

Restructuring charges

 

18.9

 

6.0

 

21.0

 

28.6

 

Champion acquisition and integration costs

 

4.3

 

5.2

 

9.5

 

11.7

 

Nalco merger and integration costs

 

0.2

 

1.5

 

0.7

 

2.8

 

Venezuela currency devaluation

 

20.8

 

 

20.8

 

 

Loss on sale of business, litigation related charges and other settlements

 

21.4

 

(18.8

)

21.4

 

(19.6

)

Subtotal

 

65.6

 

(6.1

)

73.4

 

23.5

 

 

 

 

 

 

 

 

 

 

 

Total special (gains) and charges

 

$

76.6

 

$

(5.0

)

$

85.0

 

$

30.6

 

 

9



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

2.         Special (Gains) and Charges (continued)

 

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

 

Restructuring Charges

 

The company’s restructuring activities are associated with plans to enhance its efficiency and effectiveness and sharpen its competitiveness. Its 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 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 within 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 other non-current liabilities on the Consolidated Balance Sheet.

 

Energy Restructuring Plan

 

In April 2013, following the completion of the acquisition of privately held Champion Technologies and its related company Corsicana Technologies (collectively “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 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. Actions also include leveraging and simplifying its global supply chain, including the reduction of plant, distribution center and redundant facility locations and product line optimization.

 

The company expects to incur total pre-tax restructuring charges of approximately $80 million ($55 million after tax). The restructuring charges are expected to be substantially complete by the end of 2015, although certain actions will likely continue into 2016. Approximately $40 million ($25 million after tax) of charges are expected to be incurred in 2015. The company anticipates that approximately three-fouths of the remaining Energy Plan pre-tax charges will represent cash expenditures. 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 $13.1 million ($9.1 million after tax) and $2.7 million ($2.2 million after tax) during the second quarter of 2015 and 2014, respectively. During the six months ended June 30, 2015 and 2014, the company incurred charges of $14.1 million ($9.9 million after tax) and $7.6 million ($5.2 million after tax), respectively.

 

10



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

2.         Special (Gains) and Charges (continued)

 

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 - 2014 Activity:

 

 

 

 

 

 

 

 

 

Recorded expense and accrual

 

$

30.8

 

$

4.2

 

$

1.9

 

$

36.9

 

Cash payments

 

(29.6

)

 

(1.8

)

(31.4

)

Non-cash charges

 

 

(4.2

)

 

(4.2

)

Effect of foreign currency translation

 

0.8

 

 

 

0.8

 

Restructuring liability, December 31, 2014

 

2.0

 

 

0.1

 

2.1

 

 

 

 

 

 

 

 

 

 

 

2015 Activity:

 

 

 

 

 

 

 

 

 

Recorded expense and accrual

 

13.4

 

0.1

 

0.6

 

14.1

 

Net cash payments

 

(4.7

)

3.9

 

(0.6

)

(1.4

)

Non-cash charges

 

 

(4.0

)

 

(4.0

)

Effect of foreign currency translation

 

(0.1

)

 

 

(0.1

)

Restructuring liability, June 30, 2015

 

$

10.6

 

$

 

$

0.1

 

$

10.7

 

 

As shown in the previous table, net cash payments under the Energy Restructuring Plan were $1.4 million during the first six months of 2015 and $31.4 million from 2013 through 2014. 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.

 

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 undertake certain restructuring activities outside of Europe, historically referred to as the “2011 Restructuring Plan”.

 

Additionally, in January 2012, following the merger with 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, historically referred to as the “Merger Restructuring Plan”.

 

During the first quarter of 2013, the company determined that the objectives of the plans discussed above were aligned, and consequently, the previously separate restructuring plans were 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, plant and distribution center locations.

 

11



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

2.         Special (Gains) and Charges (continued)

 

The total pre-tax restructuring charges under the Combined Plan are expected to be approximately $400 million ($300 million after tax). The restructuring charges are expected to be substantially complete by the end of 2015, although certain actions will likely continue into 2016. Approximately $50 million ($40 million after tax) of charges are expected to be incurred in 2015. The company anticipates that approximately two-thirds of the remaining Combined Plan pre-tax charges will represent net cash expenditures. No decisions have been made regarding any additional non-cash charges and estimates could vary depending on the actual actions taken.

 

The company recorded restructuring charges related to the Combined Plan of $7.3 million ($5.5 million after tax) and $4.3 million ($3.9 million after tax) during the second quarter of 2015 and 2014, respectively. During the six months ended June 30, 2015 and 2014, the company incurred charges of $9.0 million ($6.3 million after tax) and $28.0 million ($23.7 million after tax), respectively.

 

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 - 2014 Activity:

 

 

 

 

 

 

 

 

 

Recorded net expense and accrual

 

$

308.8

 

$

(1.2

)

$

43.6

 

$

351.2

 

Net cash payments

 

(242.4

)

11.7

 

(30.3

)

(261.0

)

Non-cash net charges

 

 

(10.5

)

(4.3

)

(14.8

)

Effect of foreign currency translation

 

(1.9

)

 

 

(1.9

)

Restructuring liability, December 31, 2014

 

64.5

 

 

9.0

 

73.5

 

 

 

 

 

 

 

 

 

 

 

2015 Activity:

 

 

 

 

 

 

 

 

 

Recorded net expense and accrual

 

8.3

 

0.2

 

0.5

 

9.0

 

Net cash payments

 

(16.7

)

0.2

 

(5.8

)

(22.3

)

Non-cash net charges

 

 

(0.4

)

 

(0.4

)

Effect of foreign currency translation

 

(4.4

)

 

 

(4.4

)

Restructuring liability, June 30, 2015

 

$

51.7

 

$

 

$

3.7

 

$

55.4

 

 

As shown in the previous table, net cash payments under the Combined Plan were $22.3 million during the first six months of 2015 and $261.0 million from 2011 through 2014. 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 net charges of $4.3 million ($2.8 million after tax) and $5.2 million ($3.4 million after tax) during the second quarter of 2015 and 2014, respectively. During the six months ended June 30, 2015 and 2014, the company incurred charges of $9.5 million ($6.0 million after tax) and $11.7 million ($7.5 million after tax), respectively.

 

12



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

2.         Special (Gains) and Charges (continued)

 

Champion related special charges for 2015 and 2014 include integration costs and have been included as a component of special (gains) and charges on the Consolidated Statement of Income.

 

Nalco merger and integration costs

 

As a result of the Nalco merger completed in 2011, the company incurred net charges of $0.2 million ($0.1 million after tax) and $1.5 million ($1.1 million after tax) during the second quarter of 2015 and 2014, respectively. During the six months ended June 30, 2015 and 2014, the company incurred charges of $0.7 million ($0.6 million after tax) and $2.8 million ($2.0 million after tax), respectively. Nalco related special charges for 2015 and 2014 include integration costs and have been included as a component of special (gains) and charges on the Consolidated Statement of Income.

 

Venezuelan currency devaluation

 

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

 

In 2013, the Venezuelan government established 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 Bolivares Fuertes (“bolivares”) for U.S. dollars at a bid rate established via weekly auctions. As of May 31, 2015, the fiscal quarter end for the company’s international operations, the SICAD 1 exchange rate closed at 12.0 bolivares 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”), which did not impact the fixed currency exchange rate of 6.3 bolivares to 1 U.S. dollar. In March 2014, the Venezuelan government introduced an additional currency exchange auction mechanism (“SICAD 2”), which operated similar to SICAD 1. In February 2015, SICAD 2 was replaced by a free-floating rate, the Marginal Currency System (“SIMADI”), with an exchange rate at May 31, 2015 of 199.0 bolivares to 1 U.S. dollar.

 

The company closely monitors the complex economic and political conditions with respect to its operations in Venezuela, which are aligned to five of its ten operating units. During the second quarter of 2015, the company concluded that it was appropriate to apply the SIMADI exchange rate to its Venezuelan Water and Paper operating units, as the company believes that the SIMADI rate best represents the economics of those operating units, based on the underlying transactions within those operating units. As a result, the company recorded a devaluation charge of $30.2 million ($30.2 million after tax), including the remeasurement of its Water and Paper monetary assets and impairment of certain other net assets.

 

During the first six months of 2015, within the Energy, Food & Beverage and Institutional operating units, the company continued to transact business at the CENCOEX fixed currency exchange rate of 6.3 bolivares to 1 U.S. dollar, including transactions with Petróleos de Venezuela (“PDVSA”), the Venezuelan state-owned oil and natural gas company, through its Energy operating unit. As the fixed currency exchange rate of 6.3 bolivares to 1 U.S. dollar remained legally available to the company, and it continued to transact at this rate, the company continued to remeasure the net monetary assets of its Energy, Food & Beverage and Institutional operating units at this rate throughout the first six months of 2015.

 

13



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

2.         Special (Gains) and Charges (continued)

 

As of May 31, 2015, the company had approximately $100 million of net monetary assets denominated in bolivares within its Energy, Food & Beverage and Institutional operating units that were required to be remeasured to U.S. dollars. Approximately 80% of the net monetary assets are aligned to the Energy business unit. As of May 31, 2015, the company had other net assets of approximately $120 million within the Energy, Food & Beverage and Institutional operating units, largely comprised of accounts receivable (denominated in U.S. dollars), inventory, property, plant and equipment and other intangible assets, excluding goodwill. Approximately 85% of the other net assets are aligned to the Energy business unit.

 

Net sales within Venezuela are approximately 1% of the company’s consolidated net sales. Assets held in Venezuela at May 31, 2015 represented less than 2% of the company’s consolidated assets.

 

Other special (gains) and charges

 

The company recognized charges of $21.4 million ($13.4 million after tax) during both the second quarter and first six months of 2015, related to recognition of a loss on the sale of a portion of its Ecovation business, and other litigation related charges.

 

The company recognized gains of $18.8 million ($15.9 million after tax) and $19.6 million ($16.4 million after tax) in the second quarter and the first six months of 2014, respectively, related to a favorable licensing settlement and other settlement gains.

 

3.         Acquisitions and Dispositions

 

Acquisitions

 

2015 Activity

 

During the first six months of 2015, the company completed three business combination transactions. In addition, one transaction was completed subsequent to the end of the second quarter.

 

In December 2014, subsequent to the company’s fiscal year end for international operations, the company entered into a licensing agreement and business acquisition with Aseptix Health Sciences NV. With pre-acquisition annual sales of less than $1 million, the acquired business became part of the company’s Global Institutional reportable segment during the first quarter of 2015.

 

Also in December 2014, subsequent to the company’s fiscal year end for international operations, the company acquired Commercial Pest Control Pty Ltd, an Australian commercial pest control company. With pre-acquisition annual sales of less than $1 million, the acquired business became part of the company’s Other segment during the first quarter of 2015.

 

In April 2015, the company acquired certain assets from Clariant AG, based in Brazil and Argentina. With pre-acquisition annual sales of approximately $4 million, the acquired business became part of the company’s Global Industrial reportable segment during the second quarter of 2015.

 

14



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

3.             Acquisitions and Dispositions (Continued)

 

In June 2015, subsequent to the company’s quarter end for international operations, the company acquired Jianghai Environmental Protection Co. Ltd, an industrial water treatment company headquartered in Changzhou, China. The purchase price of the acquired business is approximately $190 million. Significant assets acquired include customer relationships, trademarks and other technology, with goodwill calculated as the excess of consideration transferred over the fair value of identifiable net assets acquired. With pre-acquisition annual sales of approximately $90 million, the acquired business will become part of the company’s Global Industrial reportable segment during the third quarter of 2015.

 

2014 Activity

 

During the first six months of 2014, the company completed three business combination transactions.

 

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 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 was not significant to the company’s operations.

 

Acquisition summary

 

Acquisitions during the first six months of 2015 and all of 2014 were not material to the company’s consolidated financial statements. 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 completed acquisitions during the second quarter and first six months of 2015 and 2014 are shown in the following table.

 

 

 

Second Quarter Ended

 

Six Months Ended

 

 

 

June 30

 

June 30

 

(millions)

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Net tangible assets acquired

 

$

2.4

 

$

10.9

 

$

3.5

 

$

23.7

 

Identifiable intangible assets

 

 

 

 

 

 

 

 

 

Customer relationships

 

2.0

 

1.0

 

2.6

 

2.9

 

Patents

 

 

 

2.5

 

 

Trademarks

 

 

 

0.1

 

0.8

 

Other technology

 

 

 

0.2

 

2.9

 

Non-compete

 

 

0.1

 

 

0.1

 

Total intangible assets

 

2.0

 

1.1

 

5.4

 

6.7

 

Goodwill

 

0.4

 

4.4

 

6.7

 

11.3

 

Total aggregate purchase price

 

4.8

 

16.4

 

15.6

 

41.7

 

Acquisition related liabilities and contingent consideration

 

 

(1.0

)

(0.1

)

0.2

 

 

 

 

 

 

 

 

 

 

 

Net cash paid for acquisitions, including contingent consideration

 

$

4.8

 

$

15.4

 

$

15.5

 

$

41.9

 

 

15



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

3.             Acquisitions and Dispositions (Continued)

 

The weighted average useful lives of identifiable intangible assets acquired during the first six months of 2015 and 2014, as shown in the previous table, were 9 and 10 years, respectively.

 

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.

 

During the first quarter of 2014 purchase price allocations were finalized, resulting in net adjustments of $16.9 million to the value of Champion assets acquired and liabilities assumed, with an offset to goodwill. The adjustments primarily related to estimated liabilities, updated property, plant and equipment values and deferred taxes. As the adjustments were not significant, they were recorded in 2014 upon identification.

 

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 company deposited approximately $100 million of the original Champion purchase price consideration in an escrow account to fund post-closing adjustments to the consideration, and covenant and other indemnification obligations of the acquired entities’ former stockholders for a period of two years following the effective date of the acquisition. As of the end of the second quarter of 2015, the company is actively working to resolve indemnification obligations of the acquired entities’ former stockholders, with the potential future recovery of amounts from the escrow account by the company expected to be reflected within cost of sales, selling, general and administrative expenses, and/or special (gains) and charges within the Consolidated Statement of Income.

 

Dispositions

 

In June 2015, the company sold a portion of its Ecovation business, resulting in a loss of $13.7 million ($8.6 after tax), recorded in special (gains) and charges. The business was part of the company’s Global Industrial reportable segment.

 

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

 

16



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

4.                          Balance Sheet Information

 

 

 

June 30

 

December 31

 

(millions)

 

2015

 

2014

 

Accounts receivable, net

 

 

 

 

 

Accounts receivable

 

$

2,571.1

 

$

2,704.2

 

Allowance for doubtful accounts

 

(76.3

)

(77.5

)

Total

 

$

2,494.8

 

$

2,626.7

 

 

 

 

 

 

 

Inventories

 

 

 

 

 

Finished goods

 

$

1,015.2

 

$

1,044.1

 

Raw materials and parts

 

451.9

 

447.3

 

Inventories at FIFO cost

 

1,467.1

 

1,491.4

 

Excess of FIFO cost over LIFO cost

 

(4.4

)

(24.5

)

Total

 

$

1,462.7

 

$

1,466.9

 

 

 

 

 

 

 

Other current assets

 

 

 

 

 

Prepaid assets

 

$

111.7

 

$

104.7

 

Taxes receivable

 

228.2

 

133.0

 

Derivative assets

 

128.9

 

57.4

 

Other

 

69.6

 

71.5

 

Total

 

$

538.4

 

$

366.6

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

 

 

 

Land

 

$

208.1

 

$

199.9

 

Buildings and improvements

 

880.7

 

759.9

 

Leasehold improvements

 

83.1

 

84.6

 

Machinery and equipment

 

1,876.2

 

1,858.1

 

Merchandising and customer equipment

 

1,954.7

 

1,917.5

 

Capitalized software

 

469.6

 

443.9

 

Construction in progress

 

318.4

 

277.5

 

 

 

5,790.8

 

5,541.4

 

Accumulated depreciation

 

(2,667.4

)

(2,490.8

)

Total

 

$

3,123.4

 

$

3,050.6

 

 

 

 

 

 

 

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

 

$

3,273.2

 

$

3,385.7

 

Trademarks

 

297.1

 

311.1

 

Patents

 

414.8

 

434.5

 

Other technology

 

203.8

 

214.0

 

 

 

$

4,188.9

 

$

4,345.3

 

Accumulated amortization

 

 

 

 

 

Customer relationships

 

$

(866.1

)

$

(794.6

)

Trademarks

 

(94.0

)

(91.5

)

Patents

 

(115.0

)

(124.9

)

Other technology

 

(112.8

)

(107.5

)

Total

 

$

4,231.0

 

$

4,456.8

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

Deferred income taxes

 

$

60.3

 

$

71.5

 

Deferred financing costs

 

27.4

 

27.1

 

Pension

 

22.2

 

15.9

 

Other

 

268.5

 

256.7

 

Total

 

$

378.4

 

$

371.2

 

 

17



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

4.                          Balance Sheet Information (continued)

 

 

 

June 30

 

December 31

 

(millions)

 

2015

 

2014

 

 

 

 

 

 

 

Other current liabilities

 

 

 

 

 

Discounts and rebates

 

$

269.2

 

$

255.4

 

Dividends payable

 

97.6

 

99.1

 

Interest payable

 

23.7

 

18.9

 

Taxes payable, other than income

 

107.1

 

122.6

 

Derivative liabilities

 

17.4

 

34.0

 

Restructuring

 

54.5

 

66.3

 

Other

 

259.4

 

255.4

 

Total

 

$

828.9

 

$

851.7

 

 

 

 

 

 

 

Other liabilities

 

 

 

 

 

Deferred income taxes

 

$

1,405.4

 

$

1,415.8

 

Income taxes payable - non-current

 

79.7

 

86.4

 

Restructuring

 

11.6

 

9.3

 

Other

 

131.2

 

134.0

 

Total

 

$

1,627.9

 

$

1,645.5

 

 

 

 

 

 

 

Accumulated other comprehensive loss

 

 

 

 

 

Unrealized gain (loss) on derivative financial instruments, net of tax

 

$

2.2

 

$

(2.7

)

Unrecognized pension and postretirement benefit expense, net of tax

 

(514.2

)

(552.5

)

Cumulative translation, net of tax

 

(683.1

)

(396.7

)

Total

 

$

(1,195.1

)

$

(951.9

)

 

5.                          Debt and Interest

 

The following table provides the components of the company’s short-term debt obligations as of June 30, 2015 and December 31, 2014.

 

 

 

June 30

 

December 31

 

(millions)

 

2015

 

2014

 

 

 

 

 

 

 

Short-term debt

 

 

 

 

 

Commercial paper

 

$

1,331.9

 

$

887.8

 

Notes payable

 

63.0

 

62.1

 

Long-term debt, current maturities

 

790.4

 

755.5

 

Total

 

$

2,185.3

 

$

1,705.4

 

 

As of June 30, 2015, the company had in place a $2.0 billion multi-year credit facility which expires in December 2019. The credit facility has been established with a diverse syndicate of banks and supports the company’s $2.0 billion U.S. commercial paper program and the company’s $200 million European commercial paper program. The company’s U.S. commercial paper program, as shown in the previous table, had $1,332 million and $888 million outstanding as of June 30, 2015 and December 31, 2014, respectively.

 

18



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

5.                          Debt and Interest (continued)

 

The following table provides the components of the company’s long-term debt obligations, including current maturities, as of June 30, 2015 and December 31, 2014.

 

 

 

Maturity

 

June 30

 

December 31

 

(millions)

 

by year

 

2015

 

2014

 

Long-term debt

 

 

 

 

 

 

 

Description / 2015 Principal Amount

 

 

 

 

 

 

 

Seven year 2008 senior notes ($0 million)

 

2015

 

$

 

$

250.0

 

Three year 2012 senior notes ($500 million)

 

2015

 

500.0

 

500.0

 

Term loan ($275 million)

 

2016

 

275.0

 

400.0

 

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

 

2016

 

192.2

 

217.9

 

Five year 2011 senior notes ($1.25 billion)

 

2016

 

1,249.4

 

1,249.1

 

Five year 2012 senior notes ($500 million)

 

2017

 

500.5

 

497.6

 

Three year 2015 senior notes ($300 million)

 

2018

 

299.8

 

 

Series A private placement senior notes ($250 million)

 

2018

 

249.0

 

250.0

 

Five year 2015 senior notes ($300 million)

 

2020

 

299.9

 

 

Ten year 2011 senior notes ($1.25 billion)

 

2021

 

1,249.5

 

1,249.4

 

Series B private placement senior notes ($250 million)

 

2023

 

250.0

 

250.0

 

Thirty year 2011 senior notes ($750 million)

 

2041

 

743.2

 

743.1

 

Capital lease obligations

 

 

 

9.2

 

9.3

 

Other

 

 

 

96.9

 

3.1

 

Total debt

 

 

 

5,914.6

 

5,619.5

 

Long-term debt, current maturities

 

 

 

(790.4

)

(755.5

)

Total long-term debt

 

 

 

$

5,124.2

 

$

4,864.0

 

 

In January 2015, the company issued $600 million of debt securities in a public offering consisting of a three-year 1.55% fixed rate note for a par amount of $300 million and a five-year 2.25% fixed rate note for a par amount of $300 million. The proceeds were used to repay a portion of the company’s outstanding commercial paper and for general corporate purposes.

 

In July 2015, subsequent to the company’s second quarter end, the company issued a ten-year 2.63% fixed rate euro note for a par amount of €575 million. The proceeds were used to repay a portion of the company’s outstanding commercial paper.

 

The notes issued by the company in January and July of 2015, pursuant to public debt offerings (the “Public Notes”) may be redeemed by the company at its option at redemption prices that include accrued and unpaid interest and a make-whole premium. Upon the occurrence of a change of control accompanied by a downgrade of the Public Notes below investment grade rating, within a specified time period, the company will be required to offer to repurchase the Public Notes at a price equal to 101% of the aggregate principal amount thereof, plus any accrued and unpaid interest to the date of repurchase. The Public Notes are senior unsecured and unsubordinated obligations of the company and rank equally with all other senior and unsubordinated indebtedness of the company.

 

During the first quarter of 2015, the company acquired the beneficial interest in the trust owning the leased Naperville facility resulting in debt assumption of $100.2 million and the addition of $135.2 million in property, plant and equipment. Certain administrative, divisional, and research and development personnel are based at the Naperville facility. Cash paid as a result of the transaction was $19.8 million. The assumed debt is reflected in the “Other” line the table above. The assumption of debt and the majority of the property, plant and equipment addition represent non-cash financing and investing activities, respectively.

 

19



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

5.                          Debt and Interest (continued)

 

During the first quarter of 2015, the company repaid its $250 million 4.88% seven year senior notes at maturity and $125 million of its term loan borrowings.

 

The company is in compliance with its debt covenants as of June 30, 2015.

 

Interest expense and interest income recognized during the second quarter and the first six months of 2015 and 2014 were as follows:

 

 

 

Second Quarter Ended

 

Six Months Ended

 

 

 

June 30

 

June 30

 

(millions)