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  • 10-Q (Aug 3, 2017)
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8-K

 
Other

Ecolab 10-Q 2015

Documents found in this filing:

  1. 10-Q
  2. Ex-10.1
  3. Ex-15.1
  4. Ex-31.1
  5. Ex-32.1
  6. Ex-32.1

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 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 September 30, 2015.

 

295,303,509 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)

 

 

 

Third Quarter Ended

 

 

 

September 30

 

(millions, except per share amounts)

 

2015

 

2014

 

 

 

 

 

 

 

Net sales

 

$

3,446.4

 

$

3,694.9

 

 

 

 

 

 

 

Cost of sales (including special charges of $23.8 in 2015 and $0.8 in 2014)

 

1,820.0

 

1,970.6

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

1,070.7

 

1,145.9

 

 

 

 

 

 

 

Special (gains) and charges

 

142.7

 

7.0

 

 

 

 

 

 

 

Operating income

 

413.0

 

571.4

 

 

 

 

 

 

 

Interest expense, net

 

57.6

 

63.3

 

 

 

 

 

 

 

Income before income taxes

 

355.4

 

508.1

 

 

 

 

 

 

 

Provision for income taxes

 

105.3

 

138.7

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

250.1

 

369.4

 

 

 

 

 

 

 

Less: Net income (loss) attributable to noncontrolling interest (including special charges of $11.1 in 2015)

 

(7.7

)

4.5

 

 

 

 

 

 

 

Net income attributable to Ecolab

 

$

257.8

 

$

364.9

 

 

 

 

 

 

 

Earnings attributable to Ecolab per common share

 

 

 

 

 

Basic

 

$

0.87

 

$

1.22

 

Diluted

 

$

0.86

 

$

1.19

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.3300

 

$

0.2750

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

295.2

 

300.0

 

Diluted

 

300.0

 

305.7

 

 

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

 

2



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF INCOME

(unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30

 

(millions, except per share amounts)

 

2015

 

2014

 

 

 

 

 

 

 

Net sales

 

$

10,133.1

 

$

10,599.7

 

 

 

 

 

 

 

Cost of sales (including special charges of $35.4 in 2015 and $7.9 in 2014)

 

5,391.8

 

5,699.2

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

3,286.7

 

3,435.5

 

 

 

 

 

 

 

Special (gains) and charges

 

216.1

 

30.5

 

 

 

 

 

 

 

Operating income

 

1,238.5

 

1,434.5

 

 

 

 

 

 

 

Interest expense, net

 

181.3

 

194.6

 

 

 

 

 

 

 

Income before income taxes

 

1,057.2

 

1,239.9

 

 

 

 

 

 

 

Provision for income taxes

 

262.9

 

361.0

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

794.3

 

878.9

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interest (including special charges of $11.1 in 2015)

 

1.1

 

11.6

 

 

 

 

 

 

 

Net income attributable to Ecolab

 

$

793.2

 

$

867.3

 

 

 

 

 

 

 

Earnings attributable to Ecolab per common share

 

 

 

 

 

Basic

 

$

2.67

 

$

2.89

 

Diluted

 

$

2.63

 

$

2.83

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.9900

 

$

0.8250

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

296.5

 

300.1

 

Diluted

 

301.5

 

306.0

 

 

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

 

3



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

 

 

 

Third Quarter Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

(millions)

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

$

250.1

 

$

369.4

 

$

794.3

 

$

878.9

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

(211.5

)

(41.5

)

(556.3

)

(86.3

)

Gain (loss) on net investment hedges

 

(12.0

)

7.4

 

66.8

 

5.6

 

 

 

(223.5

)

(34.1

)

(489.5

)

(80.7

)

 

 

 

 

 

 

 

 

 

 

Derivatives and hedging instruments

 

7.2

 

5.0

 

12.1

 

0.9

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement benefits

 

 

 

 

 

 

 

 

 

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

 

7.5

 

2.6

 

23.6

 

7.7

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

(208.8

)

(26.5

)

(453.8

)

(72.1

)

 

 

 

 

 

 

 

 

 

 

Total comprehensive income, including noncontrolling interest

 

41.3

 

342.9

 

340.5

 

806.8

 

 

 

 

 

 

 

 

 

 

 

Less: Comprehensive income (loss) attributable to noncontrolling interest

 

(7.0

)

3.2

 

 

10.3

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to Ecolab

 

$

48.3

 

$

339.7

 

$

340.5

 

$

796.5

 

 

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

 

4



 

ECOLAB INC.

CONSOLIDATED BALANCE SHEET

(unaudited)

 

 

 

September 30

 

December 31

 

(millions)

 

2015

 

2014

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

184.8

 

$

209.6

 

 

 

 

 

 

 

Accounts receivable, net

 

2,450.0

 

2,626.7

 

 

 

 

 

 

 

Inventories

 

1,439.2

 

1,466.9

 

 

 

 

 

 

 

Deferred income taxes

 

235.0

 

183.2

 

 

 

 

 

 

 

Other current assets

 

333.4

 

366.6

 

 

 

 

 

 

 

Total current assets

 

4,642.4

 

4,853.0

 

 

 

 

 

 

 

Property, plant and equipment, net

 

3,212.2

 

3,050.6

 

 

 

 

 

 

 

Goodwill

 

6,499.2

 

6,717.0

 

 

 

 

 

 

 

Other intangible assets, net

 

4,172.4

 

4,456.8

 

 

 

 

 

 

 

Other assets

 

357.1

 

350.0

 

 

 

 

 

 

 

Total assets

 

$

18,883.3

 

$

19,427.4

 

 

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

 

(Continued)

 

5



 

ECOLAB INC.

CONSOLIDATED BALANCE SHEET (continued)

(unaudited)

 

 

 

September 30

 

December 31

 

(millions, except shares and per share amounts)

 

2015

 

2014

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

Short-term debt

 

$

1,009.1

 

$

1,704.8

 

 

 

 

 

 

 

Accounts payable

 

1,034.5

 

1,162.4

 

 

 

 

 

 

 

Compensation and benefits

 

465.1

 

560.4

 

 

 

 

 

 

 

Income taxes

 

103.6

 

88.6

 

 

 

 

 

 

 

Other current liabilities

 

944.3

 

851.7

 

 

 

 

 

 

 

Total current liabilities

 

3,556.6

 

4,367.9

 

 

 

 

 

 

 

Long-term debt

 

5,753.7

 

4,843.4

 

 

 

 

 

 

 

Postretirement health care and pension benefits

 

1,146.8

 

1,188.5

 

 

 

 

 

 

 

Other liabilities

 

1,583.6

 

1,645.5

 

 

 

 

 

 

 

Total liabilities

 

12,040.7

 

12,045.3

 

 

 

 

 

 

 

Equity (a)

 

 

 

 

 

Common stock

 

349.5

 

347.7

 

Additional paid-in capital

 

5,022.8

 

4,874.5

 

Retained earnings

 

6,055.0

 

5,555.1

 

Accumulated other comprehensive loss

 

(1,404.6

)

(951.9

)

Treasury stock

 

(3,239.5

)

(2,509.5

)

Total Ecolab shareholders’ equity

 

6,783.2

 

7,315.9

 

Noncontrolling interest

 

59.4

 

66.2

 

Total equity

 

6,842.6

 

7,382.1

 

 

 

 

 

 

 

Total liabilities and equity

 

$

18,883.3

 

$

19,427.4

 

 


(a) Common stock, 800 million shares authorized, $1.00 par value per share, 295.3 million shares outstanding at September 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)

 

 

 

Nine Months Ended

 

 

 

September 30

 

(millions)

 

2015

 

2014

 

 

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

$

794.3

 

$

878.9

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

422.7

 

417.4

 

Amortization

 

224.4

 

236.6

 

Deferred income taxes

 

(176.2

)

(79.1

)

Share-based compensation expense

 

60.1

 

55.1

 

Excess tax benefits from share-based payment arrangements

 

(36.2

)

(41.7

)

Pension and postretirement plan contributions

 

(54.0

)

(61.0

)

Pension and postretirement plan expense

 

87.0

 

65.4

 

Restructuring, net of cash paid

 

(9.9

)

(22.4

)

Venezuela currency devaluation

 

165.9

 

 

Loss (gain) on sale of businesses

 

13.7

 

(1.4

)

Other, net

 

2.2

 

8.4

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(11.6

)

(163.5

)

Inventories

 

(77.4

)

(168.7

)

Other assets

 

(79.8

)

(51.7

)

Accounts payable

 

(63.9

)

29.5

 

Other liabilities

 

133.9

 

43.2

 

 

 

 

 

 

 

Cash provided by operating activities

 

$

1,395.2

 

$

1,145.0

 

 

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

 

(Continued)

 

7



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (continued)

(unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30

 

(millions)

 

2015

 

2014

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

(551.6

)

$

(488.7

)

Capitalized software expenditures

 

(24.7

)

(31.9

)

Property and other assets sold

 

10.2

 

8.6

 

Acquisitions and investments in affiliates, net of cash acquired

 

(129.5

)

(70.8

)

Divestiture of businesses

 

0.3

 

9.2

 

Release from acquisition related escrow

 

44.4

 

8.7

 

Settlement of net investment hedges

 

101.8

 

 

 

 

 

 

 

 

Cash used for investing activities

 

(549.1

)

(564.9

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net issuances (repayments) of commercial paper and notes payable

 

(227.4

)

310.2

 

Long-term debt borrowings

 

1,225.0

 

 

Long-term debt repayments

 

(884.2

)

(407.3

)

Reacquired shares

 

(727.8

)

(341.0

)

Dividends paid

 

(301.6

)

(258.9

)

Exercise of employee stock options

 

57.8

 

51.5

 

Excess tax benefits from share-based payment arrangements

 

36.2

 

41.7

 

Acquisition related liabilities and contingent consideration

 

(0.8

)

(101.5

)

Acquisition of noncontrolling interest

 

 

(8.4

)

 

 

 

 

 

 

Cash used for financing activities

 

(822.8

)

(713.7

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(48.1

)

(7.8

)

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

(24.8

)

(141.4

)

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

209.6

 

339.2

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

184.8

 

$

197.8

 

 

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 third quarter and nine months ended September 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.

 

During the third quarter of 2015, the company early-adopted the updated accounting guidance related to simplifying the presentation of debt issue costs, using the retrospective application method. The company updated its December 31, 2014 Consolidated Balance Sheet, resulting in reductions to other assets, short-term debt and long-term debt of $21.2 million, $0.6 million and $20.6 million, respectively. The corresponding footnote disclosures have also been updated to reflect the changes. Debt issuance costs incurred related to the company’s credit facility remain within other assets on the Consolidated Balance Sheet. The updated guidance had no impact on previously reported earnings or consolidated cash flows.

 

With respect to the unaudited financial information of the company for the third quarter and nine months ended September 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 November 2, 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.

 

9



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

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)

 

2015

 

2014

 

2015

 

2014

 

Cost of sales

 

 

 

 

 

 

 

 

 

Restructuring charges

 

$

 

$

0.4

 

$

2.2

 

$

7.5

 

Venezuela currency devaluation

 

23.8

 

 

33.2

 

 

Recognition of inventory fair value step-up

 

 

0.4

 

 

0.4

 

Subtotal

 

23.8

 

0.8

 

35.4

 

7.9

 

 

 

 

 

 

 

 

 

 

 

Special (gains) and charges

 

 

 

 

 

 

 

 

 

Restructuring charges

 

12.1

 

6.3

 

33.1

 

34.9

 

Champion acquisition and integration costs

 

3.9

 

4.1

 

13.4

 

15.8

 

Nalco merger and integration costs

 

0.8

 

2.0

 

1.5

 

4.8

 

Venezuela currency devaluation

 

111.9

 

 

132.7

 

 

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

 

14.0

 

(5.4

)

35.4

 

(25.0

)

Subtotal

 

142.7

 

7.0

 

216.1

 

30.5

 

 

 

 

 

 

 

 

 

 

 

Operating income subtotal

 

166.5

 

7.8

 

251.5

 

38.4

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to noncontrolling interest

 

 

 

 

 

 

 

 

 

Venezuela currency devaluation

 

(11.1

)

 

(11.1

)

 

 

 

 

 

 

 

 

 

 

 

Total special (gains) and charges

 

$

155.4

 

$

7.8

 

$

240.4

 

$

38.4

 

 

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.

 

10



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

2.         Special (Gains) and Charges (continued)

 

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 two-thirds of the remaining Energy Plan pre-tax charges will represent cash expenditures. Decisions for any remaining non-cash charges are expected to be made by the end of 2015, and estimates could vary depending on the actual actions taken.

 

The company recorded restructuring charges related to the Energy Restructuring Plan of $0.9 million ($0.6 million after tax) and $1.3 million ($0.7 million after tax) during the third quarter of 2015 and 2014, respectively. During the nine months ended September 30, 2015 and 2014, the company incurred charges of $15.0 million ($10.5 million after tax) and $8.9 million ($5.9 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 - 2014 Activity:

 

 

 

 

 

 

 

 

 

Recorded expense and accrual

 

$

30.8

 

$

4.2

 

$

1.9

 

$

36.9

 

Net cash payments

 

(29.6

)

 

(1.8

)

(31.4

)

Non-cash net 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

 

14.1

 

0.1

 

0.8

 

15.0

 

Net cash payments

 

(9.0

)

3.9

 

(0.8

)

(5.9

)

Non-cash net charges

 

 

(4.0

)

 

(4.0

)

Effect of foreign currency translation

 

 

 

 

 

Restructuring liability, September 30, 2015

 

$

7.1

 

$

 

$

0.1

 

$

7.2

 

 

As shown in the previous table, net cash payments under the Energy Restructuring Plan were $5.9 million during the first nine 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.

 

11



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

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 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.

 

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 one-half of the remaining Combined Plan pre-tax charges will represent net cash expenditures. Decisions for any remaining non-cash charges are expected to be made by the end of 2015, and estimates could vary depending on the actual actions taken.

 

The company recorded restructuring charges related to the Combined Plan of $11.2 million ($9.4 million after tax) and $5.4 million ($3.3 million after tax) during the third quarter of 2015 and 2014, respectively. During the nine months ended September 30, 2015 and 2014, the company incurred charges of $20.2 million ($15.7 million after tax) and $33.4 million ($27.0 million after tax), respectively.

 

12



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

2.                                      Special (Gains) and Charges (continued)

 

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

 

18.9

 

0.2

 

1.1

 

20.2

 

Net cash payments

 

(28.3

)

4.6

 

(7.0

)

(30.7

)

Non-cash net charges

 

 

(4.8

)

 

(4.8

)

Effect of foreign currency translation

 

(5.5

)

 

 

(5.5

)

Restructuring liability, September 30, 2015

 

$

49.6

 

$

 

$

3.1

 

$

52.7

 

 

As shown in the previous table, net cash payments under the Combined Plan were $30.7 million during the first nine 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 charges of $3.9 million ($2.4 million after tax) and $4.1 million ($2.7 million after tax) during the third quarter of 2015 and 2014, respectively. During the nine months ended September 30, 2015 and 2014, the company incurred charges of $13.4 million ($8.4 million after tax) and $15.8 million ($10.2 million after tax), respectively.

 

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 charges of $0.8 million ($0.6 million after tax) and $2.0 million ($2.0 million after tax) during the third quarter of 2015 and 2014, respectively. During the nine months ended September 30, 2015 and 2014, the company incurred charges of $1.5 million ($1.2 million after tax) and $4.8 million ($4.0 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.

 

13



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

2.                                      Special (Gains) and Charges (continued)

 

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 (“bolivar”) for U.S. dollars at a bid rate established via weekly auctions. As of August 31, 2015, the fiscal quarter end for the company’s international operations, the SICAD 1 exchange rate closed at 12.8 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 August 31, 2015 of 199.7 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.

 

The company’s third quarter 2015 Consolidated Balance Sheet reflects the remeasurement of its Venezuelan Food & Beverage and Institutional net assets and bolivar portion of its Venezuelan Energy net assets at the SIMADI exchange rate. Under current contract agreements, certain Energy transactions are completed in U.S. dollars, making that portion of the company’s operations in Venezuela less dependent on the bolivar to U.S. dollar exchange rate. The company previously reflected, as of the second quarter of 2015, its Venezuelan Water and Paper net assets at the SIMADI exchange rate. The company believes that based on the underlying transactions, the application of the SIMADI rate better represents the economics of its bolivar operations noted above.

 

As a result, the company recorded charges of $124.6 million ($124.6 million after tax) and $154.8 million ($154.8 million after tax) during the third quarter and first nine months of 2015, respectively, including the remeasurement of its monetary assets and impairment of certain other net assets. As a result of the ownership structure of the company’s Food & Beverage and Institutional operations in Venezuela, it reflected a portion of the devaluation impact as a component of net income (loss) attributable to noncontrolling interest on the Consolidated Statement of Income.

 

As of August 31, 2015, the company had net assets of approximately $100 million within its Venezuelan operations. Included within this amount is approximately $30 million of property, plant and equipment and other intangible assets as well as approximately $65 million of goodwill. The remainder is largely made up of U.S. dollar accounts receivable and inventory, offset by approximately $80 million of intercompany payables to the U.S. While these intercompany balances offset in consolidation, were the company to deconsolidate its Venezuelan operations in the future, its total exposure would increase by $80 million. The majority of the net assets are aligned to the company’s Energy operating unit.

 

During the first nine months of 2015, net sales within Venezuela represented approximately 2% of the company’s consolidated net sales. Assets held in Venezuela at August 31, 2015 represented approximately 1% of the company’s consolidated assets.

 

14



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

2.                                      Special (Gains) and Charges (continued)

 

Other special (gains) and charges

 

During the third quarter of 2015, the company recognized a net charge of $14.0 million ($7.8 million after tax), related to litigation related charges and the recovery of funds deposited into escrow as part of the Champion transaction. During the first nine months of 2015, the company recognized a net charge of $35.4 million ($21.1 million after tax), including the Champion escrow recovery, recognition of a loss on the sale of a portion of its Ecovation business, and other litigation related 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

 

Acquisitions

 

2015 Activity

 

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. An immaterial portion of the transaction based in Colombia closed effective September 2015, which is subsequent to the company’s quarter end for international operations.

 

In June 2015, the company acquired Jianghai Environmental Protection Co. Ltd (“Jianghai”), 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 became part of the company’s Global Industrial reportable segment during the third quarter of 2015. The purchase price allocation is preliminary, pending completion of fair value determination of the acquired assets and liabilities.

 

15



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

3.                                      Acquisitions and Dispositions (Continued)

 

2015 Activity (continued)

 

In August 2015, the company entered into an agreement to acquire the U.S. operations of Charlotte, N.C. - based Swisher Hygiene Inc. (“Swisher”) for approximately $40 million. Swisher provides hygiene and sanitizing solutions for the foodservice, hospitality, retail and healthcare markets. Sales in 2014 for the operations included in the agreement were approximately $176 million. The transaction closed on November 2, 2015, subsequent to the company’s third quarter end, and will become part of the company’s Global Institutional reportable segment in the fourth quarter of 2015.

 

2014 Activity

 

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 acquired 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.

 

In June 2014, the company purchased the remaining interest in a joint venture in Indonesia. The transaction was 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 was 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 acquired business became part of the company’s Global Industrial reportable segment during the third quarter of 2014.

 

16



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

3.                                      Acquisitions and Dispositions (Continued)

 

Acquisition summary

 

Acquisitions during the first nine 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 third quarter and the first nine months of 2015 and 2014 are shown in the following table.

 

 

 

Third Quarter Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

(millions)

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

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

 

$

49.4

 

$

(10.8

)

$

52.9

 

$

12.9

 

Identifiable intangible assets

 

 

 

 

 

 

 

 

 

Customer relationships

 

25.6

 

27.7

 

28.2

 

30.6

 

Patents

 

13.5

 

 

13.5

 

 

Trademarks

 

3.5

 

2.6

 

3.6

 

3.4

 

Other technology

 

 

1.2

 

2.7

 

4.1

 

Non-compete

 

 

 

 

0.1

 

Total intangible assets

 

42.6

 

31.5

 

48.0

 

38.2

 

Goodwill

 

83.5

 

16.8

 

90.2

 

28.1

 

Total aggregate purchase price

 

175.5

 

37.5

 

191.1

 

79.2

 

Acquisition related liabilities and contingent consideration

 

(60.7

)

14.9

 

(60.8

)

15.1

 

 

 

 

 

 

 

 

 

 

 

Net cash paid for acquisitions, including contingent consideration

 

$

114.8

 

$

52.4

 

$

130.3

 

$

94.3

 

 

The acquisition related liability activity during 2015 is related to hold-back liabilities as part of the Jianghai acquisition, payable from the fourth quarter of 2015 through the third quarter of 2016. The contingent consideration activity during 2014 primarily relates to payments on legacy Nalco acquisitions. The weighted average useful lives of identifiable intangible assets acquired during the first nine months of 2015 and 2014, as shown in the previous table, were 15 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.

 

17



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

3.                                      Acquisitions and Dispositions (Continued)

 

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. During the third quarter of 2015, the company reached a settlement of approximately $35 million regarding the indemnification obligations of the acquired entities’ former stockholders. The recovered funds adjusted certain other asset and other liability positions of approximately $29 million on the company’s Consolidated Balance Sheet. Approximately $4 million was reflected in selling, general and administrative expenses, with the remainder recorded in special (gains) and charges, both 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.

 

18



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

4.                          Balance Sheet Information

 

 

 

September 30

 

December 31

 

(millions)

 

2015

 

2014

 

 

 

 

 

 

 

Accounts receivable, net

 

 

 

 

 

Accounts receivable

 

$

2,531.0

 

$

2,704.2

 

Allowance for doubtful accounts

 

(81.0

)

(77.5

)

Total

 

$

2,450.0

 

$

2,626.7

 

 

 

 

 

 

 

Inventories

 

 

 

 

 

Finished goods

 

$

984.9

 

$

1,044.1

 

Raw materials and parts

 

444.8

 

447.3

 

Inventories at FIFO cost

 

1,429.7

 

1,491.4

 

FIFO cost to LIFO cost difference

 

9.5

 

(24.5

)

Total

 

$

1,439.2

 

$

1,466.9

 

 

 

 

 

 

 

Other current assets

 

 

 

 

 

Prepaid assets

 

$

109.1

 

$

104.7

 

Taxes receivable

 

120.5

 

133.0

 

Derivative assets

 

59.2

 

57.4

 

Other

 

44.6

 

71.5

 

Total

 

$

333.4

 

$

366.6

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

 

 

 

Land

 

$

223.6

 

$

199.9

 

Buildings and improvements

 

925.7

 

759.9

 

Leasehold improvements

 

83.8

 

84.6

 

Machinery and equipment

 

1,898.2

 

1,858.1

 

Merchandising and customer equipment

 

1,995.9

 

1,917.5

 

Capitalized software

 

479.9

 

443.9

 

Construction in progress

 

362.7

 

277.5

 

 

 

5,969.8

 

5,541.4

 

Accumulated depreciation

 

(2,757.6

)

(2,490.8

)

Total

 

$

3,212.2

 

$

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

 

$

3,261.5

 

$

3,385.7

 

Trademarks

 

300.6

 

311.1

 

Patents

 

430.3

 

434.5

 

Other technology

 

203.6

 

214.0

 

 

 

$

 4,196.0

 

$

4,345.3

 

Accumulated amortization

 

 

 

 

 

Customer relationships

 

$

(913.7

)

$

(794.6

)

Trademarks

 

(99.2

)

(91.5

)

Patents

 

(122.1

)

(124.9

)

Other technology

 

(118.6

)

(107.5

)

Total

 

$

4,172.4

 

$

4,456.8

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

Deferred income taxes

 

$

73.3

 

$

71.5

 

Pension

 

24.8

 

15.9

 

Other

 

259.0

 

262.6

 

Total

 

$

357.1

 

$

350.0

 

 

19



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

 

4.                          Balance Sheet Information (continued)

 

 

 

September 30

 

December 31

 

(millions)

 

2015

 

2014

 

 

 

 

 

 

 

Other current liabilities

 

 

 

 

 

Discounts and rebates

 

$

263.8

 

$

255.4

 

Dividends payable

 

97.5

 

99.1

 

Interest payable

 

65.8

 

18.9

 

Taxes payable, other than income

 

107.5

 

122.6

 

Derivative liabilities

 

28.9

 

34.0

 

Restructuring

 

49.4

 

66.3

 

Other

 

331.4

 

255.4

 

Total

 

$

944.3

 

$

851.7

 

 

 

 

 

 

 

Other liabilities

 

 

 

 

 

Deferred income taxes

 

$

1,355.8

 

$

1,415.8

 

Income taxes payable - non-current

 

83.9

 

86.4

 

Restructuring

 

10.5

 

9.3

 

Other

 

133.4

 

134.0

 

Total

 

$

1,583.6

 

$

1,645.5

 

 

 

 

 

 

 

Accumulated other comprehensive loss

 

 

 

 

 

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

 

$

9.4

 

$

(2.7

)

Unrecognized pension and postretirement benefit expense, net of tax

 

(507.2

)

(552.5

)

Cumulative translation, net of tax

 

(906.8

)

(396.7

)

Total

 

$

(1,404.6

)

$

(951.9

)

 

5.                          Debt and Interest

 

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

 

 

 

September 30

 

December 31

 

(millions)

 

2015

 

2014

 

 

 

 

 

 

 

Short-term debt

 

 

 

 

 

Commercial paper

 

$

686.8

 

$

887.8

 

Notes payable

 

35.6

 

62.1

 

Long-term debt, current maturities

 

286.7

 

754.9

 

Total

 

$

1,009.1

 

$

1,704.8

 

 

As of September 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 $687 million and $888 million outstanding as of September 30, 2015 and December 31, 2014, respectively.

 

20



 

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 September 30, 2015 and December 31, 2014.

 

 

 

Maturity

 

September 30

 

December 31

 

(millions)

 

by year

 

2015

 

2014

 

Long-term debt

 

 

 

 

 

 

 

Description / Third Quarter 2015 Principal Amount

 

 

 

 

 

 

 

Seven year 2008 senior notes ($0 million)

 

2015

 

$

 

$

250.0

 

Three year 2012 senior notes ($0 million)

 

2015

 

 

499.4

 

Term loan ($275 million)

 

2016

 

275.0

 

399.7

 

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

 

2016

 

196.1

 

217.7

 

Five year 2011 senior notes ($1.25 billion)

 

2016

 

1,247.8

 

1,245.3

 

Five year 2012 senior notes ($500 million)

 

2017

 

501.2

 

495.0

 

Three year 2015 senior notes ($300 million)

 

2018

 

299.9

 

 

Series A private placement senior notes ($250 million)

 

2018

 

251.1

 

249.3

 

Five year 2015 senior notes ($300 million)

 

2020

 

298.0

 

 

Ten year 2011 senior notes ($1.25 billion)

 

2021