XNYS:ECL Ecolab Inc Quarterly Report 10-Q Filing - 3/31/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

x

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

 

For the quarterly period ended March 31, 2012

 

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 April 30, 2012.

 

292,185,658 shares of common stock, par value $1.00 per share.

 

 

 



 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ECOLAB INC.

CONSOLIDATED STATEMENT OF INCOME

 

 

 

First Quarter Ended

 

 

 

March 31

 

(millions, except per share amounts)

 

2012

 

2011

 

 

 

(unaudited)

 

 

 

 

 

 

 

Net sales

 

$

2,810.9

 

$

1,518.3

 

Cost of sales (including special charges of $76.0 in 2012 and $0.8 in 2011)

 

1,614.0

 

770.4

 

Selling, general and administrative expenses

 

989.7

 

581.6

 

Special (gains) and charges

 

41.4

 

14.6

 

Operating income

 

165.8

 

151.7

 

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

 

86.1

 

13.5

 

Income before income taxes

 

79.7

 

138.2

 

Provision for income taxes

 

35.6

 

44.4

 

Net income including noncontrolling interest

 

44.1

 

93.8

 

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

 

(5.6

)

0.2

 

Net income attributable to Ecolab

 

$

49.7

 

$

93.6

 

 

 

 

 

 

 

Earnings attributable to Ecolab per common share

 

 

 

 

 

Basic

 

$

0.17

 

$

0.40

 

Diluted

 

$

0.17

 

$

0.40

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.2000

 

$

0.1750

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

291.5

 

232.0

 

Diluted

 

297.9

 

235.9

 

 

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

 

2



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

 

 

First Quarter Ended

 

 

 

March 31

 

(millions)

 

2012

 

2011

 

 

 

(unaudited)

 

Net income including noncontrolling interest

 

$

44.1

 

$

93.8

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

 

 

 

Foreign currency translation

 

82.4

 

79.8

 

Gain (loss) on net investment hedge

 

7.6

 

(16.9

)

 

 

90.0

 

62.9

 

Derivatives & hedging instruments

 

 

 

 

 

Unrealized losses during the period

 

(2.9

)

(3.3

)

Reclassification adjustment for losses included in net income

 

1.3

 

2.0

 

 

 

(1.6

)

(1.3

)

Pension and postretirement benefits

 

 

 

 

 

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

 

7.0

 

5.1

 

Total

 

95.4

 

66.7

 

 

 

 

 

 

 

Total comprehensive income, including noncontrolling interest

 

139.5

 

160.5

 

 

 

 

 

 

 

Less: Comprehensive income (loss) attributable to noncontrolling interest

 

(5.3

)

0.2

 

 

 

 

 

 

 

Comprehensive income attributable to Ecolab

 

$

144.8

 

$

160.3

 

 

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

 

3



 

ECOLAB INC.

CONSOLIDATED BALANCE SHEET

 

 

 

March 31

 

December 31

 

(millions)

 

2012

 

2011

 

 

 

(unaudited)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

354.0

 

$

1,843.6

 

 

 

 

 

 

 

Accounts receivable, net

 

2,049.0

 

2,095.3

 

 

 

 

 

 

 

Inventories

 

1,087.4

 

1,069.6

 

 

 

 

 

 

 

Deferred income taxes

 

183.2

 

164.0

 

 

 

 

 

 

 

Other current assets

 

286.2

 

223.5

 

 

 

 

 

 

 

Total current assets

 

3,959.8

 

5,396.0

 

 

 

 

 

 

 

Property, plant and equipment, net

 

2,331.6

 

2,295.4

 

 

 

 

 

 

 

Goodwill

 

5,946.8

 

5,855.3

 

 

 

 

 

 

 

Other intangible assets, net

 

4,237.8

 

4,275.2

 

 

 

 

 

 

 

Other assets

 

385.7

 

418.9

 

 

 

 

 

 

 

Total assets

 

$

16,861.7

 

$

18,240.8

 

 

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

 

(Continued)

 

4



 

ECOLAB INC.

CONSOLIDATED BALANCE SHEET (continued)

 

 

 

March 31

 

December 31

 

(millions, except shares and per share amounts)

 

2012

 

2011

 

 

 

(unaudited)

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

Short-term debt

 

$

1,346.9

 

$

1,023.0

 

 

 

 

 

 

 

Accounts payable

 

805.1

 

815.7

 

 

 

 

 

 

 

Compensation and benefits

 

409.8

 

497.2

 

 

 

 

 

 

 

Income taxes

 

136.1

 

81.7

 

 

 

 

 

 

 

Other current liabilities

 

808.7

 

748.7

 

 

 

 

 

 

 

Total current liabilities

 

3,506.6

 

3,166.3

 

 

 

 

 

 

 

Long-term debt

 

4,911.0

 

6,613.2

 

 

 

 

 

 

 

Postretirement health care and pension benefits

 

1,164.7

 

1,173.4

 

 

 

 

 

 

 

Other liabilities

 

1,474.3

 

1,546.8

 

 

 

 

 

 

 

Total liabilities

 

11,056.6

 

12,499.7

 

 

 

 

 

 

 

Equity (a) 

 

 

 

 

 

Common stock

 

337.5

 

336.1

 

Additional paid-in capital

 

4,049.5

 

3,980.8

 

Retained earnings

 

3,551.3

 

3,559.9

 

Accumulated other comprehensive loss

 

(249.5

)

(344.9

)

Treasury stock

 

(1,955.6

)

(1,865.2

)

Total Ecolab shareholders’ equity

 

5,733.2

 

5,666.7

 

Noncontrolling interest

 

71.9

 

74.4

 

Total equity

 

5,805.1

 

5,741.1

 

 

 

 

 

 

 

Total liabilities and equity

 

$

16,861.7

 

$

18,240.8

 

 


(a)          Common stock, 800 million shares authorized, $1.00 par value per share, 291.9 million shares outstanding at March 31, 2012, 292.0 million shares outstanding at December 31, 2011. Shares outstanding are net of treasury stock.

 

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

 

5



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

 

 

 

First Quarter Ended

 

 

 

March 31

 

(millions)

 

2012

 

2011

 

 

 

(unaudited)

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

$

44.1

 

$

93.8

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

115.5

 

79.6

 

Amortization

 

61.7

 

11.6

 

Deferred income taxes

 

(83.8

)

0.1

 

Share-based compensation expense

 

20.9

 

11.2

 

Excess tax benefits from share-based payment arrangements

 

(7.1

)

(2.3

)

Pension and postretirement plan contributions

 

(26.0

)

(109.0

)

Pension and postretirement plan expense

 

27.3

 

19.8

 

Restructuring, net of cash paid

 

17.1

 

10.3

 

Other, net

 

2.7

 

1.9

 

 

 

 

 

 

 

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

 

 

 

 

 

Accounts receivable

 

30.5

 

10.2

 

Inventories

 

18.6

 

(9.6

)

Other assets

 

(45.0

)

(25.4

)

Accounts payable

 

(23.9

)

0.6

 

Other liabilities

 

(42.1

)

(36.7

)

 

 

 

 

 

 

Cash provided by operating activities

 

$

110.5

 

$

56.1

 

 

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

 

(Continued)

 

6



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)

 

 

 

First Quarter Ended

 

 

 

March 31

 

(millions)

 

2012

 

2011

 

 

 

(unaudited)

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

(124.2

)

$

(65.8

)

Capitalized software expenditures

 

(4.3

)

(6.8

)

Property and other assets sold

 

2.2

 

0.4

 

Businesses acquired and investments in affiliates, net of cash acquired

 

(11.8

)

(277.5

)

Deposit into indemnification escrow

 

(1.3

)

(28.1

)

Receipt from indemnification escrow

 

2.1

 

 

Cash used for investing activities

 

(137.3

)

(377.8

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net issuances (repayments) of commercial paper and notes payable

 

319.6

 

465.7

 

Long-term debt repayments

 

(1,689.5

)

(151.8

)

Reacquired shares

 

(85.3

)

(70.2

)

Cash dividends on common stock

 

(61.2

)

(40.6

)

Exercise of employee stock options

 

39.5

 

13.8

 

Excess tax benefits from share-based payment arrangements

 

7.1

 

2.3

 

Other, net

 

 

(0.1

)

Cash provided by (used for) financing activities

 

(1,469.8

)

219.1

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

7.0

 

11.7

 

 

 

 

 

 

 

DECREASE IN CASH AND CASH EQUIVALENTS

 

(1,489.6

)

(90.9

)

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

1,843.6

 

242.3

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

354.0

 

$

151.4

 

 

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

 

7



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.                     Consolidated Financial Information

 

The unaudited consolidated financial information for the first quarter ended March 31, 2012 and 2011 reflect, in the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations, comprehensive income and cash flows of Ecolab Inc. (“Ecolab” or “the company”) for the interim periods presented. The financial results for any interim period are not necessarily indicative of results for the full year. The consolidated balance sheet data as of December 31, 2011 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, 2011.

 

With respect to the unaudited financial information of the company for the first quarter ended March 31, 2012 and 2011 included in this Form 10-Q, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their separate report dated May 3, 2012 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.

 

8



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2.                     Special (Gains) and Charges

 

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

 

 

 

First Quarter Ended

 

 

 

March 31

 

(millions)

 

2012

 

2011

 

 

 

 

 

 

 

Cost of sales

 

 

 

 

 

Restructuring charges

 

$

2.1

 

$

0.8

 

Recognition of Nalco inventory fair value step-up

 

73.9

 

 

Subtotal

 

76.0

 

0.8

 

 

 

 

 

 

 

Special (gains) and charges

 

 

 

 

 

Restructuring charges

 

26.5

 

10.4

 

Business structure and optimization

 

 

0.6

 

Nalco merger and integration costs

 

14.9

 

 

Cleantec acquisition integration costs

 

 

3.6

 

Subtotal

 

41.4

 

14.6

 

 

 

 

 

 

 

Operating income subtotal

 

117.4

 

15.4

 

 

 

 

 

 

 

Interest expense, net

 

 

 

 

 

Debt extinguishment costs

 

18.2

 

 

 

 

 

 

 

 

Net income attributable to noncontrolling interest

 

 

 

 

 

Recognition of Nalco inventory fair value step-up

 

(4.5

)

 

 

 

 

 

 

 

Total special (gains) and charges

 

$

131.1

 

$

15.4

 

 

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

 

Restructuring actions generally include significant actions involving employee-related severance charges, contract termination costs and asset write-downs associated with such actions. Employee termination costs are largely based on policies and severance plans, and include personnel reductions and related costs for severance, benefits and outplacement services. These charges are reflected in the quarter when the actions are probable and the amounts are estimable, which typically is when management approves the associated actions. Asset disposals include leasehold improvement write-downs. Other charges include lease terminations prior to the end of their respective terms.

 

Restructuring charges have been included as a component of both cost of sales and special (gains) and charges on the Consolidated Statement of Income. Amounts included as a component of cost of sales include supply chain related severance. Restructuring liabilities have been classified as a component of other current liabilities on the Consolidated Balance Sheet.

 

9



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2.               Special (Gains) and Charges (Continued)

 

2011 Restructuring Plan

 

In February 2011, the company commenced a comprehensive plan to substantially improve the efficiency and effectiveness of its European business, sharpen its competitiveness and accelerate its growth and profitability. Additionally, restructuring has been and will continue to be undertaken outside of Europe, the costs of which have not been and are not expected to be significant (collectively, the “2011 Restructuring Plan”). Through the 2011 Restructuring Plan, approximately 750 positions are expected to be eliminated.

 

The company expects to incur pretax restructuring charges of approximately $150 million ($125 million after tax) under the 2011 Restructuring Plan through the completion of the Plan in 2013. Approximately $70 million ($55 million after tax) of those charges are expected to occur in 2012.

 

The company anticipates that approximately $125 million of the pre-tax charge will represent cash expenditures. The remaining $25 million of the pre-tax charges represent estimated asset disposals. No decisions have been made for any remaining asset disposals and estimates could vary depending on the actual actions taken.

 

As a result of restructuring activities under the 2011 Restructuring Plan, the company has recorded restructuring charges of $83.9 million ($66.8 million after tax) since the inception of the Plan. During the first quarter ended March 31, 2012 and 2011, the company recorded restructuring charges of $15.8 million ($12.6 million after tax) and $11.2 million ($9.0 million after tax), respectively.

 

Merger Restructuring Plan

 

In January 2012, following the merger with Nalco Holding Company (“Nalco”), the company formally commenced plans to undertake restructuring actions related to the reduction of its global workforce and optimization of its supply chain and office facilities, including planned reductions of plant and distribution center locations (the “Merger Restructuring Plan”). Actions associated with the merger to improve efficiency and effectiveness are expected to lead to a reduction of the company’s workforce by 500 positions through 2012, with additional actions beyond 2012 expected to reduce the need for future positions by approximately 1,500 over the next several years.

 

The company expects that restructuring activities under the Merger Restructuring Plan will be completed by the end of 2013, with total costs through the end of 2013 anticipated to be approximately $180 million ($120 million after tax). Approximately $50 million ($35 million after tax) of those charges are expected to occur in 2012.

 

The company anticipates that approximately $150 million of the pre-tax restructuring charges will represent cash expenditures. The remaining $30 million of the pretax charges represent estimated asset disposals. No decisions have been made for any remaining asset disposals and estimates could vary depending on the actual actions taken.

 

As a result of restructuring activities under the Merger Restructuring Plan, the company has recorded restructuring charges of $19.3 million ($12.9 million after tax) since the inception of the Plan, of which $12.7 million ($8.8 million after tax) was recorded during the first quarter ended March 31, 2012.

 

10



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.                     Special (Gains) and Charges (Continued)

 

Restructuring charges and subsequent activity during 2012 related to the 2011 Restructuring Plan and the Merger Restructuring Plan, since the inception of each respective Plan, include the following:

 

 

 

 

 

 

 

 

 

 

 

Merger

 

 

 

 

 

2011 Restructuring Plan

 

Restructuring Plan

 

 

 

 

 

Employee

 

 

 

 

 

 

 

Employee

 

 

 

 

 

 

 

 

 

Termination

 

Asset

 

 

 

 

 

Termination

 

 

 

 

 

 

 

(millions)

 

Costs

 

Disposals

 

Other

 

Subtotal

 

Costs

 

Other

 

Subtotal

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded expense and accrual

 

$

60.5

 

$

0.5

 

$

7.1

 

$

68.1

 

$

6.6

 

$

 

$

6.6

 

$

74.7

 

Cash payments

 

(22.2

)

 

(2.6

)

(24.8

)

(0.3

)

 

(0.3

)

(25.1

)

Non-cash charges

 

 

(0.5

)

 

(0.5

)

 

 

 

(0.5

)

Effect of foreign currency translation

 

(2.2

)

 

 

(2.2

)

 

 

 

(2.2

)

Restructuring liability, December 31, 2011

 

36.1

 

 

4.5

 

40.6

 

6.3

 

 

6.3

 

46.9

 

Recorded expense and accrual

 

15.7

 

 

0.1

 

15.8

 

12.4

 

0.3

 

12.7

 

28.5

 

Cash payments

 

(7.2

)

 

(1.5

)

(8.7

)

(1.4

)

(0.1

)

(1.5

)

(10.2

)

Effect of foreign currency translation

 

0.3

 

 

 

0.3

 

(0.4

)

 

(0.4

)

(0.1

)

Restructuring liability, March 31, 2012

 

$

44.9

 

$

 

$

3.1

 

$

48.0

 

$

16.9

 

$

0.2

 

$

17.1

 

$

65.1

 

 

Nalco Restructuring Plan

 

Prior to the Nalco merger, Nalco conducted various restructuring programs to redesign and optimize its business and work processes (the “Nalco Restructuring Plan”). As part of the Nalco merger, Ecolab assumed the Nalco Restructuring Plan liability balance of $10.6 million, which was primarily related to accrued severance and termination benefits. As of December 31, 2011 and March 31, 2012, the remaining liability balance related to the Nalco Restructuring Plan was $10.6 million and $8.7 million, respectively. Cash payments in the first quarter of 2012 related to this Plan were $1.2 million. The company expects to utilize the remaining liability through 2013 as part of the run-out of this Plan.

 

11



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.                     Special (Gains) and Charges (Continued)

 

Non-restructuring Special (Gains) and Charges

 

As a result of the Nalco merger, during the first quarter of 2012, the company incurred charges of $102.5 million ($77.7 million after tax). Nalco merger and integration charges have been included as a component of cost of sales, special (gains) and charges, net interest expense and net income attributable to noncontrolling interest on the Consolidated Statement of Income. Amounts within cost of sales and net income attributable to noncontrolling interest include the recognition of fair value step-up of Nalco inventory. Amounts within special (gains) and charges include merger and integration charges. Amounts within interest expense, net include a loss on the extinguishment of Nalco’s senior notes, which were assumed as part of the merger. Further details related to the Nalco merger are included in Note 3.

 

In the first quarter of 2011, the company completed the purchase of the assets of the Cleantec business of Campbell Brothers Ltd., Brisbane, Queensland, Australia (“Cleantec”). Special (gains) and charges in 2011 include acquisition integration costs incurred to optimize the Cleantec business structure. Further details related to the Cleantec acquisition are included in Note 3.

 

3.                     Acquisitions and Dispositions

 

Nalco Merger

 

On December 1, 2011, the company completed its merger with Nalco, the world’s leading water treatment and process improvement company. The total fair value of cash and stock consideration transferred to acquire all of Nalco’s common stock was approximately $5.5 billion.

 

The company incurred certain merger and integration costs associated with the merger during the first quarter of 2012, which were expensed as incurred and are reflected in the Consolidated Statement of Income. A total of $102.5 million has been incurred, with $14.9 million included in special (gains) and charges related to merger and integration charges, $73.9 million and a corresponding reduction of $4.5 million included in cost of sales and net income attributable to Ecolab, respectively, related to recognition of fair value step-up in Nalco inventory and $18.2 million included in interest expense, net related to a loss on the extinguishment of Nalco’s senior notes.

 

The merger has been accounted for using the acquisition method of accounting which requires, among other things, that most assets acquired and liabilities assumed be recognized at fair value as of the acquisition date. Certain estimated values are not yet finalized and are subject to change, which could be significant.

 

The following table summarizes the values of Nalco assets acquired and liabilities assumed as of the merger date. Also summarized in the table, subsequent to the merger, net adjustments of $30 million have been made to the purchase price allocations of the assets acquired and liabilities assumed, with a corresponding adjustment to goodwill, as part of finalizing the preliminary purchase price allocations.

 

12



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3.                     Acquisitions and Dispositions (Continued)

 

 

 

 

 

2012

 

 

 

 

 

Initial

 

Adjustments

 

March 31

 

(millions)

 

Valuation

 

to Fair Value

 

2012

 

Current assets

 

$

1,869.6

 

$

5.4

 

$

1,875.0

 

Property, plant and equipment

 

1,069.2

 

2.6

 

1,071.8

 

Other assets

 

97.3

 

(3.2

)

94.1

 

Identifiable intangible assets

 

 

 

 

 

 

 

Customer relationships

 

2,160.0

 

 

2,160.0

 

Patents

 

321.0

 

 

321.0

 

Trade names

 

1,230.0

 

 

1,230.0

 

Trademarks

 

79.0

 

 

79.0

 

Other technology

 

91.0

 

 

91.0

 

Total assets acquired

 

6,917.1

 

4.8

 

6,921.9

 

 

 

 

 

 

 

 

 

Current liabilities

 

1,105.5

 

14.4

 

1,119.9

 

Long-term debt

 

2,858.4

 

 

2,858.4

 

Pension and postretirement benefits

 

505.7

 

 

505.7

 

Net deferred tax liability

 

1,188.7

 

(4.1

)

1,184.6

 

Noncontrolling interest and other liabilities

 

167.7

 

24.5

 

192.2

 

Total liabilities and noncontrolling interests assumed

 

5,826.0

 

34.8

 

5,860.8

 

 

 

 

 

 

 

 

 

Goodwill

 

4,403.9

 

30.0

 

4,433.9

 

 

 

 

 

 

 

 

 

Total consideration transferred

 

$

5,495.0

 

$

 

$

5,495.0

 

 

The adjustments to the purchase price allocation during 2012 primarily relate to accruals, contingent liabilities, current and noncurrent deferred tax assets and liabilities and other assets and liabilities of non-wholly owned subsidiaries.

 

The company will finalize the amounts recognized as information necessary to complete the analyses is obtained. The company expects to finalize these amounts no later than one year from the merger date. Amounts for certain contingent liabilities, certain tangible and intangible assets, certain deferred tax assets and liabilities, non-wholly owned subsidiaries and goodwill remain subject to change.

 

The customer relationships, patents, finite-lived trademarks and other technology are being amortized over weighted average lives of 15, 14, 15 and 8 years, respectively. The Nalco trade name has been determined to have an indefinite life.

 

13



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3.                     Acquisitions and Dispositions (continued)

 

The following table provides unaudited pro forma net sales and pro forma results of operations for the first quarter ended March 31, 2011, assuming the Nalco merger had been completed on January 1, 2010. The unaudited pro forma results reflect certain adjustments that are directly attributable to the merger, supportable and expected to have a continuing impact on the combined results. The unaudited pro forma results do not include any anticipated cost savings from operating efficiencies or synergies that could result from the merger. Accordingly, such unaudited pro forma amounts are not necessarily indicative of the results that actually would have occurred had the merger been completed on January 1, 2010, nor are they indicative of future operating results of the combined company.

 

 

 

First Quarter
Ended

 

(millions)

 

March 31, 2011

 

Net sales

 

$

2,585.6

 

Net income attributable to Ecolab

 

181.3

 

Earnings attributable to Ecolab per common share

 

 

 

Basic

 

$

0.60

 

Diluted

 

$

0.59

 

 

Other significant acquisition activity

 

Other completed acquisitions during the first quarter of 2012 and all of 2011 (excluding Nalco) were not material to the company’s consolidated financial statements; therefore pro forma financial information is not presented. The aggregate purchase price of acquisitions has been reduced for any cash or cash equivalents acquired with the acquisitions. Based upon purchase price allocations, excluding the Nalco merger, the components of the aggregate purchase prices of completed acquisitions during the first quarter of 2012 and 2011 are shown in the following table.

 

 

 

First Quarter Ended
March 31

 

(millions)

 

2012

 

2011

 

 

 

 

 

 

 

Net tangible assets acquired

 

$

1.7

 

$

53.9

 

Identifiable intangible assets

 

 

 

 

 

Customer relationships

 

2.3

 

142.8

 

Trademarks

 

0.1

 

11.2

 

Patents

 

2.8

 

0.3

 

Other technology

 

0.2

 

9.1

 

Total

 

5.4

 

163.4

 

Goodwill

 

14.2

 

88.3

 

Total aggregate purchase price

 

21.3

 

305.6

 

Contingent consideration

 

(2.6

)

 

Liability for indemnification

 

(0.8

)

(28.1

)

Net cash paid for acquisitions

 

$

17.9

 

$

277.5

 

 

The weighted average useful lives of identifiable intangible assets acquired in the above table during the first quarter of 2012 and 2011 were 12 and 14 years, respectively.

 

14



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3.                     Acquisitions and Dispositions (continued)

 

2012 Activity

 

In December 2011, subsequent to the company’s fiscal year end for international operations, the company completed the acquisition of Esoform, an independent Italian healthcare manufacturer focused on infection prevention and personal care. Based outside of Venice, Italy, with annual sales of approximately $12 million, the business became part of the company’s International Cleaning, Sanitizing & Other Services reportable segment during the first quarter of 2012.

 

Also in December 2011, the company completed the acquisition of the InsetCenter pest elimination business in Brazil. Annual sales of the acquired business are approximately $6 million. The business operations and staff have been integrated with the company’s existing Brazil Pest Elimination business, and became part of the company’s International Cleaning, Sanitizing & Other Services reportable segment during the first quarter of 2012.

 

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

 

2011 Activity

 

In March 2011, the company closed on the purchase of the assets of O.R. Solutions, Inc., a privately-held developer and marketer of surgical fluid warming and cooling systems in the U.S. The total purchase price was approximately $260 million, of which $26 million remains payable and was placed in an escrow account for indemnification purposes related to general representations and warranties. The business, which had annual sales of approximately $55 million, became part of the company’s U.S. Cleaning & Sanitizing segment during the first quarter of 2011.

 

In December 2010, subsequent to the company’s fiscal year end for international operations, the company completed the purchase of the assets of Cleantec located in Brisbane, Queensland, Australia. Cleantec is a developer, manufacturer and marketer of cleaning and hygiene products principally within the Australian food and beverage processing, foodservice, hospitality and textile care markets. The total purchase price was approximately $43 million, of which $2 million remains payable and was placed in an escrow account for indemnification purposes. The business, which had annual sales of approximately $55 million, became part of the company’s International Cleaning, Sanitizing & Other Services segment during the first quarter of 2011.

 

There were no business disposals during 2011.

 

15



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4.               Balance Sheet Information

 

 

 

March 31

 

December 31

 

(millions)

 

2012

 

2011

 

 

 

(unaudited)

 

Accounts receivable, net

 

 

 

 

 

Accounts receivable

 

$

2,105.5

 

$

2,144.6

 

Allowance for doubtful accounts

 

(56.5

)

(49.3

)

Total

 

$

2,049.0

 

$

2,095.3

 

 

 

 

 

 

 

Inventories

 

 

 

 

 

Finished goods

 

$

757.3

 

$

745.5

 

Raw materials and parts

 

353.5

 

351.4

 

Inventories at FIFO cost

 

1,110.8

 

1,096.9

 

Excess of FIFO cost over LIFO cost

 

(23.4

)

(27.3

)

Total

 

$

1,087.4

 

$

1,069.6

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

 

 

 

Land

 

$

161.9

 

$

158.8

 

Buildings and improvements

 

500.1

 

483.8

 

Leasehold improvements

 

79.1

 

77.3

 

Machinery and equipment

 

1,221.2

 

1,206.1

 

Merchandising and customer equipment

 

1,744.0

 

1,682.7

 

Capitalized software

 

386.9

 

385.7

 

Construction in progress

 

210.6

 

182.7

 

 

 

4,303.8

 

4,177.1

 

Accumulated depreciation

 

(1,972.2

)

(1,881.7

)

Total

 

$

2,331.6

 

$

2,295.4

 

 

 

 

 

 

 

Other intangible assets, net

 

 

 

 

 

Cost of intangible assets not subject to amortization

 

 

 

 

 

Trade names

 

$

1,230.0

 

$

1,230.0

 

Cost of intangible assets subject to amortization

 

 

 

 

 

Customer relationships

 

$

2,609.7

 

$

2,593.2

 

Trademarks

 

201.4

 

201.0

 

Patents

 

409.2

 

404.4

 

Other technology

 

175.1

 

174.6

 

 

 

3,395.4

 

3,373.2

 

Accumulated amortization

 

 

 

 

 

Customer relationships

 

(248.4

)

(204.8

)

Trademarks

 

(51.6

)

(48.6

)

Patents

 

(43.5

)

(36.3

)

Other technology

 

(44.1

)

(38.3

)

Total

 

$

4,237.8

 

$

4,275.2

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

Deferred income taxes

 

$

107.6

 

$

118.0

 

Pension

 

22.4

 

22.3

 

Other

 

255.7

 

278.6

 

Total

 

$

385.7

 

$

418.9

 

 

16



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4.                     Balance Sheet Information (Continued)

 

 

 

March 31

 

December 31

 

(millions)

 

2012

 

2011

 

 

 

(unaudited)

 

Other current liabilities

 

 

 

 

 

Discounts and rebates

 

$

257.6

 

$

239.9

 

Dividends payable

 

58.5

 

60.0

 

Interest payable

 

59.5

 

51.0

 

Taxes payable, other than income

 

60.4

 

74.1

 

Derivative liabilities

 

13.2

 

3.3

 

Restructuring

 

73.8

 

57.5

 

Other

 

285.7

 

262.9

 

Total

 

$

808.7

 

$

748.7

 

 

 

 

 

 

 

Other liabilities

 

 

 

 

 

Deferred income taxes

 

$

1,241.0

 

$

1,305.3

 

Income taxes payable - noncurrent

 

89.7

 

80.8

 

Other

 

143.6

 

160.7

 

Total

 

$

1,474.3

 

$

1,546.8

 

 

 

 

 

 

 

Accumulated other comprehensive loss

 

 

 

 

 

Unrealized loss on derivative financial instruments, net of tax

 

$

(15.1

)

$

(13.5

)

Unrecognized pension and postretirement benefit expense, net of tax

 

(474.9

)

(481.3

)

Cumulative translation, net of tax

 

240.5

 

149.9

 

Total

 

$

(249.5

)

$

(344.9

)

 

17



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

5.                     Debt and Interest

 

 

 

March 31

 

December 31

 

(millions)

 

2012

 

2011

 

 

 

(unaudited)

 

Short-term debt

 

 

 

 

 

Commercial paper

 

$

1,209.7

 

$

916.1

 

Notes payable

 

130.3

 

100.3

 

Long-term debt, current maturities

 

6.9

 

6.6

 

Total

 

$

1,346.9

 

$

1,023.0

 

 

 

 

 

 

 

Long-term debt

 

 

 

 

 

Description / 2012 Principal Amount

 

 

 

 

 

Series A senior euro notes (125 million euro)

 

$

166.5

 

$

168.1

 

Series B senior euro notes (175 million euro)

 

233.2

 

235.3

 

Senior notes ($250 million)

 

249.2

 

249.1

 

Series A private placement senior notes ($250 million)

 

250.0

 

250.0

 

Series B private placement senior notes ($250 million)

 

250.0

 

250.0

 

Three year 2011 senior notes ($500 million)

 

499.7

 

499.7

 

Five year 2011 senior notes ($1.25 billion)

 

1,247.7

 

1,247.6

 

Ten year 2011 senior notes ($1.25 billion)

 

1,249.2

 

1,249.2

 

Thirty year 2011 senior notes ($750 million)

 

742.4

 

742.3

 

Nalco senior notes ($0)

 

 

838.7

 

Nalco senior euro notes ($0)

 

 

300.7

 

Nalco senior notes ($0)

 

 

558.5

 

Capital lease obligations

 

17.4

 

18.3

 

Other

 

12.6

 

12.3

 

Total

 

 

 

 

 

 

 

4,917.9

 

6,619.8

 

Long-term debt, current maturities

 

(6.9

)

(6.6

)

Total

 

$

4,911.0

 

$

6,613.2

 

 

In January 2012, the company redeemed $1.7 billion of Nalco senior notes, which were assumed in 2011 as part of the merger. As part of the redemption, the company recognized an $18.2 million loss for debt extinguishment. As of December 31, 2011, the Nalco senior notes were fully and unconditionally guaranteed by certain Nalco subsidiaries. In conjunction with the redemption in January 2012, all guarantees in place as of December 31, 2011 were extinguished.

 

In April 2012, the company reduced its 364 day credit facility from $2.0 billion to $1.0 billion.

 

In February 2011, the company repaid its $150 million 6.875% senior notes when they became due.

 

18



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

5.                     Debt and Interest (continued)

 

Interest expense and interest income recognized during the first quarter ended 2012 and 2011 were as follows:

 

 

 

First Quarter Ended

 

 

 

March 31

 

(millions)

 

2012

 

2011

 

 

 

 

 

 

 

Interest expense

 

$

88.7

 

$

15.0

 

Interest income

 

(2.6

)

(1.5

)

Interest expense, net

 

$

86.1

 

$

13.5

 

 

The increase in interest expense was driven primarily by debt issued to fund the cash portion of the Nalco merger consideration, the repayment of Nalco debt and share repurchases. First quarter 2012 interest expense also include an $18.2 million loss on extinguishment of Nalco debt.

 

6.                           Goodwill and Other Intangible Assets

 

The company tests goodwill for impairment on an annual basis during the second quarter. The company’s reporting units are its operating units, which subsequent to the Nalco merger also include Global Water, Global Paper and Global Energy. If circumstances change significantly, the company would also test a reporting unit’s goodwill for impairment during interim periods between its annual tests. There has been no impairment of goodwill since the adoption of FASB guidance for goodwill and other intangibles on January 1, 2002.

 

The changes in the carrying amount of goodwill for each of the company’s reportable segments during the three months ended March 31, 2012 were as follows:

 

 

 

U.S.

 

U.S.

 

Int’l Cleaning,

 

 

 

 

 

 

 

Cleaning &

 

Other

 

Sanitizing &

 

 

 

 

 

(millions)

 

Sanitizing

 

Services

 

Other Services

 

Nalco (b)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning goodwill as of December 31, 2011

 

$

543.6

 

$

50.5

 

$

857.3

 

$

4,403.9

 

$

5,855.3

 

 

 

 

 

 

 

 

 

 

 

 

 

Current year business acquisitions (a)

 

 

 

8.1

 

6.1

 

14.2

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior year business acquisitions

 

 

 

 

30.0

 

30.0

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

 

2.6

 

44.7

 

47.3

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending goodwill as of March 31, 2012

 

$

543.6

 

$

50.5

 

$

868.0

 

$

4,484.7

 

$

5,946.8

 

 


(a)          For 2012, none of the goodwill related to businesses acquired is expected to be tax deductible.

(b)         The Nalco amount is presented in total as allocated amounts by segment are not currently available. Presentation by reportable segment will be provided later in 2012 as preliminary purchase price allocations are finalized.

 

19



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

6.                           Goodwill and Other Intangible Assets (continued)

 

The merger with Nalco resulted in the addition of $4.4 billion of goodwill, which will be maintained in separate reporting units after purchase price allocations are finalized. Subsequent performance of these reporting units relative to projections used in the purchase price allocation could result in an impairment if there is either underperformance by the reporting unit or if the carrying value of the reporting unit were to fluctuate due to working capital changes or other reasons that did not proportionately increase fair value.

 

As part of the Nalco merger, the company added the “Nalco” trade name as an indefinite life intangible asset. The carrying value of this asset of $1.2 billion will be subject to impairment testing in the second quarter.

 

The company’s other intangible assets subject to amortization primarily include customer relationships, trademarks, patents and other technology. Other intangible assets are amortized on a straight-line basis over their estimated economic lives. Total amortization expense related to other intangible assets during the first quarter ended March 31, 2012 and 2011 was $59.3 million and $11.5 million, respectively. The large increase from 2011 to 2012 is primarily due to the Nalco merger. As of March 31, 2012, future estimated amortization expense related to amortizable other identifiable intangible assets will be:

 

(millions)

 

 

 

2012 (Remainder: nine-month period)

 

$

180

 

2013

 

237

 

2014

 

227

 

2015

 

223

 

2016

 

218

 

 

7.                     Fair Value Measurements

 

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

 

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

 

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

 

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

 

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

 

The carrying values of accounts receivable and accounts payable approximate fair value because of their short maturities.

 

20



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7.                     Fair Value Measurements (Continued)

 

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

 

 

 

2012

 

 

 

Carrying

 

Fair Value Measurements

 

March 31 (millions)

 

Amount

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Money market funds held in rabbi trusts

 

$

0.9

 

$

0.9

 

$

 

$

 

Foreign currency forward contracts

 

9.8

 

 

9.8

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

13.2

 

 

13.2

 

 

Contingent consideration obligations

 

29.6

 

 

 

29.6

 

 

 

 

2011

 

 

 

Carrying

 

Fair Value Measurements

 

December 31 (millions)

 

Amount

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Money market funds held in rabbi trusts

 

$

0.9

 

$

0.9

 

$

 

$

 

Foreign currency forward contracts

 

10.4

 

 

10.4

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

3.3

 

 

3.3

 

 

Contingent consideration obligations

 

25.1

 

 

 

25.1

 

 

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

 

Contingent consideration liabilities are classified within level 3 because fair value is measured based on the probability-weighted present value of the consideration expected to be transferred. The consideration expected to be transferred is based on the company’s expectations of various financial measures. The ultimate payment of contingent consideration could deviate from current estimates based on the actual results of these financial measures. Changes in the fair value of contingent consideration obligations for the first quarter ended March 31, 2012 were as follows:

 

(millions)

 

 

 

Contingent consideration, December 31, 2011

 

$

25.1

 

Liabilities recognized at acquisition date

 

2.4

 

Loss (gain) recognized in earnings

 

2.0

 

Foreign currency translation

 

0.1

 

Contingent consideration, March 31, 2012

 

$

29.6

 

 

21



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7.                     Fair Value Measurements (Continued)

 

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

 

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

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

(millions)

 

Amount

 

Value

 

Amount

 

Value

 

 

 

 

 

 

 

 

 

 

 

Long-term debt (including current maturities)

 

$

4,917.9

 

$

5,200.0

 

$

6,619.8

 

$

6,885.3

 

 

8.                     Derivatives and Hedging Transactions

 

Derivative Instruments and Hedging

 

The company uses foreign currency forward contracts, interest rate swaps and foreign currency debt to manage risks associated with foreign currency exchange rates, interest rates and net investments in foreign operations. The company does not hold derivative financial instruments of a speculative nature. The company records all derivatives as assets and liabilities on the balance sheet at fair value. Changes in fair value are recognized immediately in earnings unless the derivative qualifies and is designated as a hedge. The effective portion of changes in fair value of hedges is initially recognized in accumulated other comprehensive income (“AOCI”) on the Consolidated Balance Sheet. Amounts recorded in AOCI are reclassified into earnings in the same period or periods during which the hedged transactions affect earnings. The company evaluates hedge effectiveness at inception and on an ongoing basis. If a derivative is no longer expected to be effective, hedge accounting is discontinued. Hedge ineffectiveness, if any, is recorded in earnings.

 

The company is exposed to credit loss in the event of nonperformance of counterparties for foreign currency forward exchange contracts and interest rate swap agreements. The company monitors its exposure to credit risk by using credit approvals and credit limits and by selecting major international banks and financial institutions as counterparties. The company does not anticipate nonperformance by any of these counterparties.

 

Derivatives Designated as Cash Flow Hedges

 

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

 

22



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

8.                     Derivatives and Hedging Transactions (Continued)

 

The company occasionally enters into interest rate swap contracts to manage interest rate exposures. In 2011, the company entered into and subsequently closed six forward starting swap agreements in connection with the issuance of its private placement debt during the fourth quarter of 2011. The interest rate swap agreements were designated and effective as cash flow hedges of the expected interest payments related to the anticipated debt issuance. In 2006, the company entered into and subsequently closed two forward starting swap contracts related to the issuance of its senior euro notes. The amounts recorded in AOCI for both the 2011 and 2006 transactions are recognized as part of interest expense over the remaining life of the notes as the forecasted interest transactions occur.

 

Derivatives Not Designated as Hedging Instruments

 

The company also uses foreign currency forward contracts to offset its exposure to the change in value of certain foreign currency denominated assets and liabilities, primarily receivables and payables. Although the contracts are effective economic hedges, they are not designated as accounting hedges. Therefore, changes in the value of these derivatives are recognized immediately in earnings, thereby offsetting the current earnings effect of the related foreign currency denominated assets and liabilities.

 

Derivative Summary

 

The following table summarizes the fair value of the company’s outstanding derivatives. The amounts are included in other current assets and other current liabilities on the balance sheet.

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

March 31

 

December 31

 

March 31

 

December 31

 

(millions)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

1.7

 

$

3.8

 

$

2.4

 

$

1.2

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

8.1

 

6.6

 

10.8

 

2.1

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

9.8

 

$

10.4

 

$

13.2

 

$

3.3

 

 

The company had foreign currency forward exchange contracts with notional values that totaled approximately $980 million at March 31, 2012, and $586 million at December 31, 2011. The increase from December 31, 2011 is due to increased hedging activity as a result of the Nalco merger.

 

23



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

8.                     Derivatives and Hedging Transactions (Continued)

 

The impact on AOCI and earnings from derivative contracts that qualified as cash flow hedges was as follows:

 

 

 

 

 

First Quarter Ended

 

 

 

 

 

March 31

 

(millions)

 

Location

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) recognized into AOCI (effective portion)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

AOCI (equity)

 

$

(2.9

)

$

(4.2

)

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

AOCI (equity)

 

 

0.9

 

 

 

 

 

 

 

 

 

Gain (loss) reclassified from AOCI into income (effective portion)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Sales

 

$

 

$

(0.1

)

 

 

Cost of sales

 

0.5

 

(1.1

)

 

 

SG&A

 

0.1

 

(0.3

)

 

 

 

 

0.6

 

(1.5

)

 

 

 

 

 

 

 

 

Interest rate swap

 

Interest expense, net

 

(0.7

)

(0.1

)

 

 

 

 

$

(0.1

)

$

(1.6

)

 

 

 

 

 

 

 

 

Loss recognized in income (ineffective portion)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Interest expense, net

 

$

(0.4

)

$

(0.4

)

 

24



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

8.                     Derivatives and Hedging Transactions (Continued)

 

The impact on earnings from derivative contracts that are not designated as hedging instruments was as follows:

 

 

 

 

 

First Quarter Ended

 

 

 

 

 

March 31

 

(millions)

 

Location

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Gain (loss) recognized in income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

SG&A

 

$

(3.9

)

$

3.4

 

 

 

Interest expense, net

 

(2.2

)

(1.5

)

 

 

 

 

$

(6.1

)

$

1.9

 

 

The amounts recognized in SG&A above offset the earnings impact of the related foreign currency denominated assets and liabilities. The amounts recognized in interest expense above represent the component of the hedging gains (losses) attributable to the difference between the spot and forward rates of the hedges as a result of interest rate differentials.

 

Net Investment Hedge

 

The company designates its euro 300 million ($400 million as of March 31, 2012) senior notes and related accrued interest as a hedge of existing foreign currency exposures related to net investments the company has in certain Euro functional subsidiaries. Prior to redemption in January 2012, the Nalco euro denominated borrowings were also designated as a hedge of existing foreign currency exposures. Accordingly, the transaction gains and losses on the euronotes which are designated and effective as hedges of the company’s net investments have been included as a component of the cumulative translation adjustment account.

 

Total transaction gains and losses related to the euronotes charged to shareholders’ equity were as follows:

 

 

 

First Quarter Ended

 

 

 

March 31

 

(millions)

 

2012

 

2011

 

 

 

 

 

 

 

Transaction gains (losses), net of tax

 

$

7.6

 

$

(16.9

)

 

25



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

9.                     Shareholders’ Equity

 

In May 2011, the company’s Board of Directors authorized the repurchase of up to 15 million shares of common stock, including shares to be repurchased under Rule 10b5-1. In August 2011, the Finance Committee of the company’s Board of Directors, via delegation by the company’s Board of Directors, authorized the repurchase of an additional 10 million common shares which was contingent upon completion of the merger with Nalco.

 

In September 2011, under the existing Board authorization, subject to the completion of the Nalco merger, the company announced a $1.0 billion share repurchase program. As part of this program, in December 2011, the company entered into an accelerated share repurchase (“ASR”) agreement with a financial institution to repurchase $500 million of its common stock. Under the ASR, the company received 8,330,379 shares of its common stock in December 2011. The final per share purchase price and the total number of shares to be repurchased under the ASR agreement generally were based on the volume weighted average price of the company’s common stock during the term of the agreement. The ASR agreement ended in the first quarter of 2012. In connection with the finalization of the ASR agreement, the company received an additional 122,314 shares of common stock. All shares acquired under the ASR agreement were recorded as treasury stock.

 

The company intends to repurchase all shares under its authorizations, for which no expiration date has been established, in open market or privately negotiated transactions, subject to market conditions. As of March 31, 2012, 17,157,465 shares remained to be repurchased under the company’s repurchase authorization and approximately $365 million remained to be purchased as part of the $1 billion program discussed above.

 

26



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

10.               Earnings Attributable to Ecolab Per Common Share

 

The computations of the basic and diluted earnings attributable to Ecolab per share amounts were as follows:

 

 

 

First Quarter Ended

 

 

 

March 31

 

(millions, except per share)

 

2012

 

2011

 

 

 

 

 

 

 

Net income attributable to Ecolab

 

$

49.7

 

$

93.6

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

291.5

 

232.0

 

Effect of dilutive stock options, units and awards

 

6.4

 

3.9

 

Diluted