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, 2014

 

OR

 

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

 

For the transition period from                to               

 

Commission File No. 1-9328

 

ECOLAB INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

41-0231510

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

370 Wabasha Street N., St. Paul, Minnesota  55102

(Address of principal executive offices) (Zip Code)

 

1-800-232-6522

(Registrant’s telephone number, including area code)

 

(Not Applicable)

(Former name, former address and former fiscal year,

if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of March 31, 2014.

 

300,199,314 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)

 

2014

 

2013

 

 

 

(unaudited)

 

 

 

 

 

 

 

Net sales

 

$

3,336.6

 

$

2,872.1

 

 

 

 

 

 

 

Cost of sales (including special charges of $6.0 in 2014 and $2.0 in 2013)

 

1,819.2

 

1,539.7

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

1,136.9

 

1,021.0

 

 

 

 

 

 

 

Special (gains) and charges

 

29.6

 

49.7

 

 

 

 

 

 

 

Operating income

 

350.9

 

261.7

 

 

 

 

 

 

 

Interest expense, net (including special charges of $2.2 in 2013)

 

65.1

 

61.5

 

 

 

 

 

 

 

Income before income taxes

 

285.8

 

200.2

 

 

 

 

 

 

 

Provision for income taxes

 

91.3

 

39.2

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

194.5

 

161.0

 

 

 

 

 

 

 

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

 

3.5

 

1.4

 

 

 

 

 

 

 

Net income attributable to Ecolab

 

$

191.0

 

$

159.6

 

 

 

 

 

 

 

Earnings attributable to Ecolab per common share

 

 

 

 

 

Basic

 

$

0.64

 

$

0.54

 

Diluted

 

$

0.62

 

$

0.53

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.2750

 

$

0.2300

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

300.6

 

295.4

 

Diluted

 

306.5

 

300.9

 

 

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

 

2



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

 

 

 

First Quarter Ended

 

 

 

March 31

(millions)

 

2014

 

2013

 

 

 

(unaudited)

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

$

194.5

 

$

161.0

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

 

 

 

Foreign currency translation

 

(67.0

)

(61.6

)

Loss on net investment hedge

 

(3.7

)

(2.2

)

 

 

(70.7

)

(63.8

)

 

 

 

 

 

 

Derivatives and hedging instruments

 

 

3.9

 

 

 

 

 

 

 

Pension and postretirement benefits

 

 

 

 

 

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

 

2.6

 

10.4

 

 

 

 

 

 

 

Subtotal

 

(68.1

)

(49.5

)

 

 

 

 

 

 

Total comprehensive income, including noncontrolling interest

 

126.4

 

111.5

 

 

 

 

 

 

 

Less: Comprehensive income (loss) attributable to noncontrolling interest

 

3.5

 

(7.9

)

 

 

 

 

 

 

Comprehensive income attributable to Ecolab

 

$

122.9

 

$

119.4

 

 

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

 

3



 

ECOLAB INC.

CONSOLIDATED BALANCE SHEET

 

 

 

March 31

 

December 31

 

(millions)

 

2014

 

2013

 

 

 

(unaudited)

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

300.3

 

$

339.2

 

 

 

 

 

 

 

Accounts receivable, net

 

2,519.6

 

2,568.0

 

 

 

 

 

 

 

Inventories

 

1,367.1

 

1,321.9

 

 

 

 

 

 

 

Deferred income taxes

 

170.8

 

163.0

 

 

 

 

 

 

 

Other current assets

 

345.2

 

306.3

 

 

 

 

 

 

 

Total current assets

 

4,703.0

 

4,698.4

 

 

 

 

 

 

 

Property, plant and equipment, net

 

2,889.0

 

2,882.0

 

 

 

 

 

 

 

Goodwill

 

6,856.6

 

6,862.9

 

 

 

 

 

 

 

Other intangible assets, net

 

4,701.3

 

4,785.3

 

 

 

 

 

 

 

Other assets

 

413.5

 

407.9

 

 

 

 

 

 

 

Total assets

 

$

19,563.4

 

$

19,636.5

 

 

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)

 

2014

 

2013

 

 

 

(unaudited)

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

Short-term debt

 

$

1,507.4

 

$

861.0

 

 

 

 

 

 

 

Accounts payable

 

951.2

 

1,021.9

 

 

 

 

 

 

 

Compensation and benefits

 

474.7

 

571.1

 

 

 

 

 

 

 

Income taxes

 

89.3

 

80.9

 

 

 

 

 

 

 

Other current liabilities

 

881.8

 

953.8

 

 

 

 

 

 

 

Total current liabilities

 

3,904.4

 

3,488.7

 

 

 

 

 

 

 

Long-term debt

 

5,696.6

 

6,043.5

 

 

 

 

 

 

 

Postretirement health care and pension benefits

 

795.9

 

795.6

 

 

 

 

 

 

 

Other liabilities

 

1,893.4

 

1,899.3

 

 

 

 

 

 

 

Total liabilities

 

12,290.3

 

12,227.1

 

 

 

 

 

 

 

Equity (a)

 

 

 

 

 

Common stock

 

346.4

 

345.1

 

Additional paid-in capital

 

4,757.0

 

4,692.0

 

Retained earnings

 

4,807.2

 

4,699.0

 

Accumulated other comprehensive loss

 

(373.3

)

(305.2

)

Treasury stock

 

(2,326.8

)

(2,086.6

)

Total Ecolab shareholders’ equity

 

7,210.5

 

7,344.3

 

Noncontrolling interest

 

62.6

 

65.1

 

Total equity

 

7,273.1

 

7,409.4

 

 

 

 

 

 

 

Total liabilities and equity

 

$

19,563.4

 

$

19,636.5

 

 


(a)   Common stock, 800 million shares authorized, $1.00 par value per share, 300.2 million shares outstanding at March 31, 2014, 301.1 million shares outstanding at December 31, 2013. Shares outstanding are net of treasury stock.

 

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

 

5



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

 

 

 

First Quarter Ended

 

 

 

March 31

 

(millions)

 

2014

 

2013

 

 

 

(unaudited)

 

 

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

$

194.5

 

$

161.0

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

136.5

 

122.6

 

Amortization

 

80.3

 

62.7

 

Deferred income taxes

 

(8.3

)

(26.9

)

Share-based compensation expense

 

22.8

 

21.1

 

Excess tax benefits from share-based payment arrangements

 

(22.9

)

(12.3

)

Pension and postretirement plan contributions

 

(28.0

)

(19.0

)

Pension and postretirement plan expense

 

21.9

 

35.7

 

Restructuring, net of cash paid

 

2.7

 

(9.2

)

Venezuela currency devaluation

 

 

23.4

 

Other, net

 

3.7

 

4.6

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

38.3

 

30.1

 

Inventories

 

(54.8

)

(54.2

)

Other assets

 

(44.9

)

(50.4

)

Accounts payable

 

(69.6

)

(38.0

)

Other liabilities

 

(57.8

)

(65.2

)

 

 

 

 

 

 

Cash provided by operating activities

 

$

214.4

 

$

186.0

 

 

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)

 

2014

 

2013

 

 

 

(unaudited)

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

(142.2

)

$

(129.2

)

Capitalized software expenditures

 

(8.7

)

(6.3

)

Property and other assets sold

 

0.7

 

0.9

 

Businesses acquired and investments in affiliates, net of cash acquired

 

(25.3

)

(91.2

)

Deposit into indemnification escrow

 

 

(8.0

)

Release from indemnification escrow

 

1.1

 

13.0

 

 

 

 

 

 

 

Cash used for investing activities

 

(174.4

)

(220.8

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net issuances (repayments) of commercial paper and notes payable

 

397.5

 

(310.0

)

Long-term debt borrowings

 

 

0.2

 

Long-term debt repayments

 

(101.4

)

(1.7

)

Reacquired shares

 

(242.6

)

(22.2

)

Dividends paid

 

(85.9

)

(4.5

)

Exercise of employee stock options

 

24.0

 

32.0

 

Excess tax benefits from share-based payment arrangements

 

22.9

 

12.3

 

Acquisition related contingent consideration

 

(87.6

)

 

Other, net

 

 

0.4

 

 

 

 

 

 

 

Cash used for financing activities

 

(73.1

)

(293.5

)

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

(5.8

)

(5.2

)

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

(38.9

)

(333.5

)

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

339.2

 

1,157.8

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

300.3

 

$

824.3

 

 

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, 2014 and 2013 reflect, in the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations, comprehensive income and cash flows of Ecolab Inc. (“Ecolab” or “the company”) for the interim periods presented. The financial results for any interim period are not necessarily indicative of results for the full year. The consolidated balance sheet data as of December 31, 2013 was derived from the audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The unaudited consolidated financial information should be read in conjunction with the consolidated financial statements and notes thereto incorporated in the company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

With respect to the unaudited financial information of the company for the first quarter ended March 31, 2014 and 2013 included in this Form 10-Q, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their separate report dated May 8, 2014 appearing herein states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933, as amended (the “Act”), for their report on the unaudited financial information because that report is not a “report” or a “part” of a registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.

 

Effective in the first quarter of 2014, certain employee-related costs from the company’s recently acquired businesses that were historically presented within cost of sales were revised and reclassified to selling, general and administrative expenses on the Consolidated Statement of Income. These immaterial revisions were made to conform with management’s view of the respective costs within the global organizational model. Total costs reclassified were $25.2 million for the first quarter ended March 31, 2013 and $78.9 million for the year ended December 31, 2013.

 

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

 

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)

 

2014

 

2013

 

Cost of sales

 

 

 

 

 

Restructuring charges

 

$

6.0

 

$

2.0

 

 

 

 

 

 

 

Special (gains) and charges

 

 

 

 

 

Restructuring charges

 

22.6

 

18.5

 

Champion acquisition and integration costs

 

6.5

 

7.8

 

Nalco merger and integration costs

 

1.3

 

3.8

 

Venezuela currency devaluation

 

 

23.4

 

Litigation related charges and other

 

(0.8

)

(3.8

)

Subtotal

 

29.6

 

49.7

 

 

 

 

 

 

 

Operating income subtotal

 

35.6

 

51.7

 

 

 

 

 

 

 

Interest expense, net

 

 

 

 

 

Acquisition debt costs

 

 

2.2

 

 

 

 

 

 

 

Net income attributable to noncontrolling interest

 

 

 

 

 

Venezuela currency devaluation

 

 

(0.5

)

 

 

 

 

 

 

Total special (gains) and charges

 

$

35.6

 

$

53.4

 

 

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 incurs net costs for restructuring activities associated with plans to enhance its efficiency and effectiveness and sharpen its competitiveness. These restructuring plans include net costs associated with significant actions involving employee-related severance charges, contract termination costs and asset write-downs and disposals. Employee termination costs are largely based on policies and severance plans, and include personnel reductions and related costs for severance, benefits and outplacement services. These charges are reflected in the quarter when the actions are probable and the amounts are estimable, which typically is when management approves the associated actions. Contract termination costs include charges to terminate leases prior to the end of their respective terms and other contract terminations. Asset write-downs and disposals include leasehold improvement write-downs, other asset write-downs associated with combining operations and disposal of assets.

 

Restructuring charges have been included as a component of both cost of sales and special (gains) and charges on the Consolidated Statement of Income. Amounts included as a component of cost of sales include supply chain related severance and other asset write-downs associated with combining operations. Restructuring liabilities have been classified as a component of both other current and non-current liabilities on the Consolidated Balance Sheet.

 

9



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2.                                      Special (Gains) and Charges (continued)

 

Energy Restructuring Plan

 

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

 

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

 

The company expects to incur pretax restructuring charges of approximately $80 million ($55 million after tax) under the Energy Restructuring Plan through the completion of the Plan in 2015. Approximately $35 million ($25 million after tax) of those charges are expected to occur in 2014. During 2013, the company incurred $27 million ($19 million after tax) of charges related to the Energy Restructuring Plan.

 

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

 

As a result of restructuring activities under the Energy Restructuring Plan, the company recorded restructuring charges of $4.9 million ($3.0 million after tax), during the first quarter of 2014.

 

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

 

 

 

Energy Restructuring Plan

 

 

 

Employee

 

 

 

 

 

 

 

 

 

Termination

 

Asset

 

 

 

 

 

(millions)

 

Costs

 

Disposals

 

Other

 

Total

 

 

 

 

 

 

 

 

 

 

 

2013 Activity:

 

 

 

 

 

 

 

 

 

Recorded expense and accrual

 

$

22.9

 

$

3.6

 

$

0.9

 

$

27.4

 

Cash payments

 

(16.7

)

 

(0.8

)

(17.5

)

Non-cash charges

 

 

(3.6

)

 

(3.6

)

Effect of foreign currency translation

 

0.6

 

 

 

0.6

 

Restructuring liability, December 31, 2013

 

6.8

 

 

0.1

 

6.9

 

 

 

 

 

 

 

 

 

 

 

2014 Activity:

 

 

 

 

 

 

 

 

 

Recorded expense and accrual

 

4.4

 

 

0.5

 

4.9

 

Cash payments

 

(3.7

)

 

(0.5

)

(4.2

)

Non-cash charges

 

 

 

 

 

Effect of foreign currency translation

 

 

 

 

 

Restructuring liability, March 31, 2014

 

$

7.5

 

$

 

$

0.1

 

$

7.6

 

 

Cash payments under the Energy Restructuring Plan were $4.2 million during the first three months of 2014 and $17.5 million during 2013. The majority of cash payments under this Plan are related to severance, with the current accrual expected to be paid over the next twelve months.

 

10



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2.                                      Special (Gains) and Charges (continued)

 

Combined Restructuring Plan

 

In February 2011, the company commenced a comprehensive plan to substantially improve the efficiency and effectiveness of its European business, as well as to undertake certain restructuring activities outside of Europe (the “2011 Restructuring Plan”). Additionally, in January 2012, following the merger with Nalco Holding Company (“Nalco”), the company formally commenced plans to undertake restructuring actions related to the reduction of its global workforce and optimization of its supply chain and office facilities, including planned reductions of plant and distribution center locations (the “Merger Restructuring Plan”). During the first quarter of 2013, the company determined that because the objectives of the plans discussed above were aligned, the previously separate restructuring plans should be combined into one plan.

 

The combined restructuring plan (the “Combined Plan”) combines opportunities and initiatives from both plans and continues to follow the original format of the Merger Restructuring Plan by focusing on global actions related to optimization of the supply chain and office facilities, including reductions of plant and distribution center locations and the global workforce. Through substantial completion of the Combined Plan at the end of 2014, the company expects to incur pre-tax charges of approximately $50 million ($40 million after tax) during 2104. During 2013, the company incurred $64 million ($48 million after tax) of charges related to the Combined Plan.

 

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

 

As a result of restructuring activities under the Combined Plan, the company recorded restructuring charges of $23.7 million ($19.8 million after tax) and $20.8 million ($14.3 million after tax), during the first quarter of 2014 and 2013, respectively.

 

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

 

 

 

Combined Plan

 

 

 

Employee

 

 

 

 

 

 

 

 

 

Termination

 

Asset

 

 

 

 

 

(millions)

 

Costs

 

Disposals

 

Other

 

Total

 

 

 

 

 

 

 

 

 

 

 

2011 - 2013 Activity:

 

 

 

 

 

 

 

 

 

Recorded expense and accrual

 

$

248.2

 

$

(1.2

)

$

30.7

 

$

277.7

 

Net cash payments

 

(182.2

)

9.1

 

(19.1

)

(192.2

)

Non-cash charges

 

 

(7.9

)

(4.3

)

(12.2

)

Effect of foreign currency translation

 

(0.1

)

 

 

(0.1

)

Restructuring liability, December 31, 2013

 

65.9

 

 

7.3

 

73.2

 

 

 

 

 

 

 

 

 

 

 

2014 Activity:

 

 

 

 

 

 

 

 

 

Recorded net expense and accrual

 

21.2

 

 

2.5

 

23.7

 

Net cash payments

 

(19.5

)

 

(2.2

)

(21.7

)

Non-cash net charges

 

 

 

 

 

Effect of foreign currency translation

 

0.5

 

 

 

0.5

 

Restructuring liability, March 31, 2014

 

$

68.1

 

$

 

$

7.6

 

$

75.7

 

 

11



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2.                                      Special (Gains) and Charges (continued)

 

Net cash payments under the Combined Plan were $21.7 million during the first three months of 2014 and $192.2 million from 2011 through 2013. The majority of cash payments under this Plan are related to severance, with the current accrual expected to be paid over a period of a few months to several quarters.

 

Non-restructuring Special (Gains) and Charges

 

Champion acquisition and integration costs

 

As a result of the Champion acquisition completed in 2013, the company incurred charges of $6.5 million ($4.1 million after tax) and $10.0 million ($7.1 million after tax) during the first quarter of 2014 and 2013, respectively.

 

Champion related costs incurred during the first quarter of 2014 and 2013 have been included as a component of special (gains) and charges and net interest expense on the Consolidated Statement of Income. Amounts included in special (gains) and charges include acquisition costs, advisory and legal fees and integration charges. Amounts included in net interest expense include the interest expense through the close date of the Champion transaction of the company’s $500 million public debt issuance in December 2012 as well as amortizable fees to secure term loans and short-term debt, all of which were initiated to fund the Champion acquisition. Further information related to the acquisition of Champion is included in Note 3.

 

Nalco merger and integration costs

 

As a result of the Nalco merger completed in 2011, the company incurred charges of $1.3 million ($0.9 million after tax) and $3.8 million ($2.7 million after tax) during the first quarter of 2014 and 2013, respectively. Nalco related special charges for 2014 and 2013 have been included as a component of special (gains) and charges on the Consolidated Statement of Income, and include integration charges.

 

Venezuelan currency devaluation

 

On February 8, 2013, the Venezuelan government devalued its currency, the Bolivar Fuerte (“Bolivar”). As a result of the devaluation, during the first quarter of 2013, the company recorded a charge of $22.9 million ($15.0 million after tax), reflected as a component of special (gains) and charges, due to the remeasurement of the local balance sheet. Due to the ownership structure in place in Venezuela, the company also reflected a portion of the impact of the devaluation as a component of net income (loss) attributable to noncontrolling interest on the Consolidated Statement of Income.

 

3.                                      Acquisitions and Dispositions

 

Champion acquisition

 

On April 10, 2013, the company completed its acquisition of Champion, a global energy specialty products and services company delivering its offerings to the oil and gas industry. The total fair value of cash and stock consideration transferred to acquire all of Champion’s stock was approximately $2 billion. Champion’s sales for the business acquired by the company were approximately $1.3 billion in 2012. The business became part of the company’s Global Energy reportable segment in the second quarter of 2013.

 

12



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3.                                      Acquisitions and Dispositions (continued)

 

The company incurred certain acquisition related costs associated with the transaction that were expensed as incurred and are reflected in the Consolidated Statement of Income. A total of $6.5 million and $10.0 million were incurred during the first quarter of 2014 and 2013, respectively. Amounts included in special (gains) and charges include acquisition costs, advisory and legal fees and integration charges. Amounts included in net interest expense include the interest expense through the close date of the Champion transaction of the company’s $500 million public debt issuance in December 2012 as well as amortizable fees to secure term loans and short-term debt, all of which were initiated to fund the Champion acquisition.

 

The Champion acquisition has been accounted for using the acquisition method of accounting, which requires, among other things, that most assets acquired and liabilities assumed be recognized at fair value as of the acquisition date.

 

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

 

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

 

(millions)

 

Allocation at
December 31,
2013

 

Purchase
Price
Adjustments

 

Final
Allocation at

March 31,
2014

 

Current assets

 

$

592.3

 

$

(4.5

)

$

587.8

 

Property, plant and equipment

 

357.8

 

(2.5

)

355.3

 

Other assets

 

16.2

 

0.1

 

16.3

 

Identifiable intangible assets

 

 

 

 

 

 

 

Customer relationships

 

840.0

 

 

840.0

 

Trademarks

 

120.0

 

 

120.0

 

Other technology

 

36.5

 

 

36.5

 

Total assets acquired

 

1,962.8

 

(6.9

)

1,955.9

 

 

 

 

 

 

 

 

 

Current liabilities

 

409.5

 

3.6

 

413.1

 

Long-term debt

 

70.8

 

 

70.8

 

Net deferred tax liability

 

427.4

 

9.3

 

436.7

 

Noncontrolling interest and other liabilities

 

30.5

 

(2.9

)

27.6

 

Total liabilities and noncontrolling interests assumed

 

938.2

 

10.0

 

948.2

 

 

 

 

 

 

 

 

 

Goodwill

 

1,030.1

 

16.9

 

1,047.0

 

Total aggregate purchase price

 

2,054.7

 

 

2,054.7

 

Future consideration payable to sellers

 

(86.4

)

86.4

 

 

Total consideration transferred

 

$

1,968.3

 

$

86.4

 

$

2,054.7

 

 

13



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3.                                      Acquisitions and Dispositions (continued)

 

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

 

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

 

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

 

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

 

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

 

Other acquisition activity

 

2014 Activity

 

During the first quarter of 2014, the company completed one business combination. In addition, two transactions were completed subsequent to the end of the first quarter.

 

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

 

In March 2014, subsequent to the company’s quarter end for international operations, the company acquired AK Kraus & Hiller Schädlingsbekamäpfung, one of Germany’s leading commercial pest elimination service providers. Pre-acquisition annual sales of the business were approximately $4 million. The business will become part of the company’s Other reportable segment during the second quarter of 2014.

 

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

 

14



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3.         Acquisitions and Dispositions (continued)

 

2013 Activity

 

During the first quarter of 2013, the company completed one business combination.

 

In January 2013, the company completed the acquisition of Mexico-based Quimiproductos S.A. de C.V. (“Quimiproductos”), a wholly-owned subsidiary of Fomento Economico Mexicano, S.A.B. de C.V. (commonly known as FEMSA). Quimiproductos produces and supplies cleaning, sanitizing and water treatment goods and services to breweries and beverage companies located in Mexico and Central and South America. Pre-acquisition annual sales of the business were approximately $43 million. Approximately $8 million of the purchase price was placed in an escrow account for indemnification purposes related to general representations and warranties. The business became part of the company’s Global Industrial reportable segment during the first quarter of 2013.

 

Other acquisition summary

 

Acquisitions during the first three months of 2014 and all of 2013 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, the components of the aggregate purchase prices of completed acquisitions during the first quarter of 2014 and 2013 are shown in the following table.

 

 

 

First Quarter Ended

 

 

 

March 31

 

(millions)

 

2014

 

2013

 

 

 

 

 

 

 

Net tangible assets acquired

 

$

11.7

 

$

(4.2

)

Identifiable intangible assets

 

 

 

 

 

Customer relationships

 

1.9

 

47.2

 

Trademarks

 

0.8

 

0.1

 

Other technology

 

2.9

 

 

Total intangible assets

 

5.6

 

47.3

 

Goodwill

 

6.9

 

33.3

 

Total aggregate purchase price

 

24.2

 

76.4

 

Contingent consideration

 

1.2

 

9.8

 

Liability for indemnification, net

 

1.1

 

5.0

 

Net cash paid for acquisitions, including contingent consideration

 

$

26.5

 

$

91.2

 

 

During the first quarter of 2013, the remaining $13 million escrow balance related to the O.R. Solutions Inc. acquisition was paid to the seller, and as previously discussed, approximately $8 million of the Quimiproductos purchase price was placed in an escrow account. The contingent consideration activity primarily relates to payments on legacy Nalco acquisitions.

 

The weighted average useful lives of identifiable intangible assets acquired during the first three months of 2014 and 2013, as shown in the previous table, were 10 and 13 years, respectively.

 

Dispositions

 

There were no business disposals during the first quarter of 2014 or 2013.

 

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

 

15



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4.         Balance Sheet Information

 

 

 

March 31

 

December 31

 

(millions)

 

2014

 

2013

 

 

 

(unaudited)

 

Accounts receivable, net

 

 

 

 

 

Accounts receivable

 

$

2,603.7

 

$

2,648.9

 

Allowance for doubtful accounts

 

(84.1

)

(80.9

)

Total

 

$

2,519.6

 

$

2,568.0

 

 

 

 

 

 

 

Inventories

 

 

 

 

 

Finished goods

 

$

963.9

 

$

953.3

 

Raw materials and parts

 

421.2

 

391.0

 

Inventories at FIFO cost

 

1,385.1

 

1,344.3

 

Excess of FIFO cost over LIFO cost

 

(18.0

)

(22.4

)

Total

 

$

1,367.1

 

$

1,321.9

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

 

 

 

Land

 

$

190.8

 

$

191.4

 

Buildings and improvements

 

674.0

 

666.0

 

Leasehold improvements

 

89.8

 

87.9

 

Machinery and equipment

 

1,716.0

 

1,677.5

 

Merchandising and customer equipment

 

1,836.3

 

1,802.8

 

Capitalized software

 

442.9

 

435.4

 

Construction in progress

 

313.4

 

291.6

 

 

 

5,263.2

 

5,152.6

 

Accumulated depreciation

 

(2,374.2

)

(2,270.6

)

Total

 

$

2,889.0

 

$

2,882.0

 

 

 

 

 

 

 

Other intangible assets, net

 

 

 

 

 

Cost of intangible assets not subject to amortization

 

 

 

 

 

Trade names

 

$

1,230.0

 

$

1,230.0

 

Cost of intangible assets subject to amortization

 

 

 

 

 

Customer relationships

 

$

3,443.8

 

$

3,455.6

 

Trademarks

 

309.2

 

308.1

 

Patents

 

431.2

 

425.6

 

Other technology

 

210.2

 

210.2

 

 

 

$

4,394.4

 

$

4,399.5

 

 

 

 

 

 

 

Accumulated amortization

 

 

 

 

 

Customer relationships

 

$

(654.7

)

$

(594.9

)

Trademarks

 

(75.9

)

(70.4

)

Patents

 

(103.2

)

(95.7

)

Other technology

 

(89.3

)

(83.2

)

Other intangible assets, net

 

$

4,701.3

 

$

4,785.3

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

Deferred income taxes

 

$

49.1

 

$

54.5

 

Deferred financing costs

 

29.4

 

31.7

 

Pension

 

90.0

 

90.2

 

Other

 

245.0

 

231.5

 

Total

 

$

413.5

 

$

407.9

 

 

16



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4.         Balance Sheet Information (continued)

 

 

 

March 31

 

December 31

 

(millions)

 

2014

 

2013

 

 

 

(unaudited)

 

Other current liabilities

 

 

 

 

 

Discounts and rebates

 

$

282.3

 

$

263.2

 

Dividends payable

 

82.7

 

82.8

 

Interest payable

 

61.0

 

19.6

 

Taxes payable, other than income

 

104.2

 

115.3

 

Derivative liabilities

 

11.3

 

14.2

 

Restructuring

 

72.4

 

68.3

 

Future consideration payable to Champion sellers

 

 

86.4

 

Other

 

267.9

 

304.0

 

Total

 

$

881.8

 

$

953.8

 

 

 

 

 

 

 

Other liabilities

 

 

 

 

 

Deferred income taxes

 

$

1,659.7

 

$

1,661.3

 

Income taxes payable - non-current

 

86.7

 

90.2

 

Restructuring

 

10.9

 

12.9

 

Other

 

136.1

 

134.9

 

Total

 

$

1,893.4

 

$

1,899.3

 

 

 

 

 

 

 

Accumulated other comprehensive loss

 

 

 

 

 

Unrealized loss on derivative financial instruments, net of tax

 

$

(6.6

)

$

(6.6

)

Unrecognized pension and postretirement benefit expense, net of tax

 

(233.6

)

(235.0

)

Cumulative translation, net of tax

 

(133.1

)

(63.6

)

Total

 

$

(373.3

)

$

(305.2

)

 

5.         Debt and Interest

 

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

 

 

 

March 31

 

December 31

 

(millions)

 

2014

 

2013

 

 

 

(unaudited)

 

Short-term debt

 

 

 

 

 

Commercial paper

 

$

696.6

 

$

304.8

 

Notes payable

 

55.8

 

50.9

 

Long-term debt, current maturities

 

755.0

 

505.3

 

Total

 

$

1,507.4

 

$

861.0

 

 

As of March 31, 2014, the company had in place a $1.5 billion multi-year credit facility, which expires in September 2016. The credit facility has been established with a diverse syndicate of banks and supports the company’s $1.5 billion U.S. commercial paper program and the company’s $200 million European commercial paper program. Combined borrowing under these two commercial paper programs may not exceed $1.5 billion. The company’s U.S. commercial paper program, as shown in the previous table, had $697 million and $305 million outstanding as of March 31, 2014 and December 31, 2013, respectively.

 

17



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

5.         Debt and Interest (continued)

 

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

 

 

 

March 31

 

December 31

 

(millions)

 

2014

 

2013

 

 

 

(unaudited)

 

Long-term debt

 

 

 

 

 

Description / 2014 Principal Amount

 

 

 

 

 

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

 

$

241.5

 

$

237.8

 

Seven year 2008 senior notes ($250 million)

 

249.8

 

249.7

 

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)

 

499.9

 

499.9

 

Five year 2011 senior notes ($1.25 billion)

 

1,248.7

 

1,248.6

 

Ten year 2011 senior notes ($1.25 billion)

 

1,249.4

 

1,249.3

 

Thirty year 2011 senior notes ($750 million)

 

742.9

 

742.8

 

Three year 2012 senior notes ($500 million)

 

499.9

 

499.9

 

Five year 2012 senior notes ($500 million)

 

499.7

 

499.7

 

Term loan ($700 million)

 

700.0

 

800.0

 

Capital lease obligations

 

12.1

 

12.7

 

Other

 

7.7

 

8.4

 

Total debt

 

6,451.6

 

6,548.8

 

Long-term debt, current maturities

 

(755.0

)

(505.3

)

Total long-term debt

 

$

5,696.6

 

$

6,043.5

 

 

In February 2014, the company repaid $100 million of term loan borrowings. In April 2014, subsequent to the company’s quarter end, it repaid an additional $150 million of term loan borrowings.

 

The company is in compliance with its debt covenants as of March 31, 2014.

 

Interest expense and interest income recognized during the first quarter 2014 and 2013 were as follows:

 

 

 

First Quarter Ended

 

 

 

March 31

 

(millions)

 

2014

 

2013

 

 

 

 

 

 

 

Interest expense

 

$

67.3

 

$

65.0

 

Interest income

 

(2.2

)

(3.5

)

Interest expense, net

 

$

65.1

 

$

61.5

 

 

18



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

6.         Goodwill and Other Intangible Assets

 

Goodwill

 

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired. The company’s reporting units are its ten operating segments. The company tests goodwill for impairment on an annual basis during the second quarter. If circumstances change significantly, the company would also test a reporting unit’s goodwill for impairment during interim periods between its annual tests. No impairments were noted during the first quarter of 2014 in connection with the immaterial segment changes discussed further in Note 13. There has been no impairment of goodwill since the adoption of Financial Accounting Standards Board (“FASB”) guidance for goodwill and other intangibles on January 1, 2002.

 

The merger with Nalco and the acquisition of Champion resulted in the addition of $4.5 billion and $1.0 billion of goodwill, respectively. Subsequent performance of the reporting units holding the additional goodwill relative to projections used for the purchase price allocation of goodwill 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 significantly due to reasons that did not proportionately change fair value.

 

The changes in the carrying amount of goodwill for each of the company’s reportable segments during the three months ended March 31, 2014 were as follows:

 

 

 

Global

 

Global

 

Global

 

 

 

 

 

(millions)

 

Industrial

 

Institutional

 

Energy

 

Other

 

Total

 

Goodwill as of December 31, 2013

 

$

2,729.5

 

$

706.6

 

$

3,306.2

 

$

120.6

 

$

6,862.9

 

Current year business acquisitions(a)

 

7.0

 

 

 

 

7.0

 

Prior year business acquisitions

 

(0.1

)

 

16.9

 

 

16.8

 

Reclassifications(b)

 

(28.9

)

5.0

 

23.9

 

 

 

Effect of foreign currency translation

 

(11.9

)

(3.1

)

(14.6

)

(0.5

)

(30.1

)

Goodwill as of March 31, 2014

 

$

2,695.6

 

$

708.5

 

$

3,332.4

 

$

120.1

 

$

6,856.6

 

 


(a)                     For 2014, none of the goodwill related to businesses acquired is expected to be tax deductible.

(b)                     The reclassifications line represents immaterial transfers related to certain changes to the company’s reportable segments. See Note 13 for additional information.

 

Other Intangible Assets

 

As part of the Nalco merger, the company added the “Nalco” trade name as an indefinite life intangible asset. The $1.2 billion carrying value of this asset is tested for impairment on an annual basis during the second quarter. Based on the ongoing performance of the company’s operating units, updating the impairment testing during the first quarter of 2014 was not deemed necessary. There has been no impairment of the Nalco trade name intangible asset since it was acquired.

 

19



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

6.         Goodwill and Other Intangible Assets (continued)

 

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, 2014 and 2013 was $78.1 million and $60.5 million, respectively. The increase from 2013 to 2014 is primarily due to amortizable intangible assets acquired as part of the Champion transaction.

 

As of March 31, 2014, future estimated expense related to amortizable other identifiable intangible assets is expected to be:

 

(millions)

 

 

 

2014                    (Remainder: nine-month period)

 

$

226

 

2015

 

301

 

2016

 

296

 

2017

 

293

 

2018

 

287

 

2019

 

274

 

 

7.         Fair Value Measurements

 

The company’s financial instruments include cash and cash equivalents, investments held in rabbi trusts, accounts receivable, accounts payable, contingent consideration obligations, commercial paper, notes payable, foreign currency forward 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 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.

 

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:

 

March 31 (millions)

 

2014

 

 

 

Carrying

 

Fair Value Measurements

 

 

 

Amount

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Investments held in rabbi trusts

 

$

3.5

 

$

3.5

 

$

 

$

 

Foreign currency forward contracts

 

14.5

 

 

14.5

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

11.3

 

 

11.3

 

 

Contingent consideration obligations

 

15.2

 

 

 

15.2

 

 

December 31 (millions)

 

2013

 

 

 

Carrying

 

Fair Value Measurements

 

 

 

Amount

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Investments held in rabbi trusts

 

$

4.3

 

$

4.3

 

$

 

$

 

Foreign currency forward contracts

 

20.2

 

 

20.2

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

14.2

 

 

14.2

 

 

Contingent consideration obligations

 

16.4

 

 

 

16.4

 

Future consideration payable to Champion sellers

 

86.4

 

 

 

86.4

 

 

Investments 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. Prior to its repayment in January 2014, the future consideration payable to Champion sellers was valued using level 3 inputs.

 

Contingent consideration obligations are recognized and measured at fair value at the acquisition date. 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 three months ended March 31, 2014 were as follows:

 

(millions)

 

 

 

Contingent consideration, December 31, 2013

 

$

16.4

 

Liabilities recognized at acquisition date

 

 

Loss (gain) recognized in earnings

 

(0.1

)

Settlements

 

(1.2

)

Foreign currency translation

 

0.1

 

Contingent consideration, March 31, 2014

 

$

15.2

 

 

21



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7.         Fair Value Measurements (continued)

 

The carrying values of accounts receivable, accounts payable, 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. The carrying amount and the estimated fair value of long-term debt, including current maturities, held by the company were:

 

 

 

March 31, 2014

 

December 31, 2013

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

(millions)

 

Amount

 

Value

 

Amount

 

Value

 

 

 

 

 

 

 

 

 

 

 

Long-term debt (including current maturities)

 

$

6,451.6

 

$

6,785.8

 

$

6,548.8

 

$

6,766.0

 

 

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 or for trading purposes. 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. For derivatives designated as cash flow hedges, 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 risk 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, and therefore, recording a valuation allowance against the company’s derivative balance is not considered necessary.

 

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: 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. The company did not have any forward starting interest rate swap agreements outstanding at March 31, 2014 or December 31, 2013.

 

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 held at foreign subsidiaries, primarily receivables and payables, which are remeasured at the end of each period. 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 represent gross values of derivative assets and liabilities and are included in other current assets and other current liabilities on the Consolidated Balance Sheet.

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

March 31

 

December 31

 

March 31

 

December 31

 

(millions)

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated  as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

5.6

 

$

4.4

 

$

2.4

 

$

1.1

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated  as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

8.9

 

15.8

 

8.9

 

13.1

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

14.5

 

$

20.2

 

$

11.3

 

$

14.2

 

 

The company’s derivative transactions are subject to master netting arrangements that allow the company to net settle contracts with the same counterparties. These arrangements generally do not call for collateral. Had the company elected to offset amounts in its Consolidated Balance Sheet, it would have net assets of $3.2 million and $6.0 million as of March 31, 2014 and December 31, 2013, respectively.

 

The company had foreign currency forward exchange contracts with notional values that totaled approximately $1.6 billion at March 31, 2014, and $2.0 billion at December 31, 2013.

 

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

 

2014

 

2013

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

AOCI (equity)

 

$

0.2

 

$

3.6

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Cost of sales

 

$

(0.2

)

$

(0.3

)

 

 

SG&A

 

0.6

 

 

 

 

 

 

0.4

 

(0.3

)

 

 

 

 

 

 

 

 

Interest rate swap

 

Interest expense, net

 

(1.0

)

(1.0

)

 

 

 

 

$

(0.6

)

$

(1.3

)

 

Gains and losses recognized in income related to the ineffective portion of the company’s cash flow hedges were insignificant during first quarter of 2014 and 2013.

 

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

 

 

 

 

 

First Quarter Ended

 

 

 

 

 

March 31

 

(millions)

 

Location

 

2014

 

2013

 

 

 

 

 

 

 

 

 

Gain (loss) recognized in income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

SG&A

 

$

3.1

 

$

(6.3

)

 

 

Interest expense, net

 

(2.4

)

(1.2

)

 

 

 

 

$

0.7

 

$

(7.5

)

 

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.

 

24



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

8.         Derivatives and Hedging Transactions (continued)

 

Net Investment Hedge

 

The company designates its outstanding euro 175 million ($242 million as of March 31, 2014) 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 maturing in December 2013, the Ecolab Series A euro denominated senior notes were also designated as a hedge of existing foreign currency exposures.

 

In the third quarter of 2012, the company entered into a forward contract with a notional amount of euro 100 million to hedge an additional portion of the company’s net investment in euro functional subsidiaries. The forward contract was closed during the second quarter of 2013.

 

The revaluation gains and losses on the euronotes and of the forward contract, through the date of its closing, 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 revaluation gains and losses related to the euronotes and forward contract charged to shareholders’ equity were as follows:

 

 

 

First Quarter Ended

 

 

 

March 31

 

(millions)

 

2014

 

2013

 

 

 

 

 

 

 

Revaluation losses, net of tax

 

$

(3.7

)

$

(2.2

)

 

25



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

9.         Other Comprehensive Income Information

 

Comprehensive income (loss) includes net income, foreign currency translation adjustments, unrecognized gains and losses on securities, defined benefit pension and postretirement plan adjustments, gains and losses on derivative instruments designated and effective as cash flow hedges and non-derivative instruments designated and effective as foreign currency net investment hedges that are charged or credited to the accumulated other comprehensive loss account in shareholders’ equity.

 

The following table provides other comprehensive income information related to the company’s derivatives and hedging instruments and pension and postretirement benefits.

 

 

 

First Quarter Ended

 

 

 

March 31

 

(millions)

 

2014

 

2013

 

Derivative & Hedging Instruments

 

 

 

 

 

Unrealized gains (losses) on derivative & hedging instruments

 

 

 

 

 

Amount recognized into AOCI

 

$

0.2

 

$

3.6

 

 

 

 

 

 

 

(Gains) losses reclassified from AOCI into income

 

 

 

 

 

Cost of sales

 

0.2

 

0.3

 

SG&A

 

(0.6

)

 

Interest expense, net

 

1.0

 

1.0

 

 

 

0.6

 

1.3

 

 

 

 

 

 

 

Translation & other insignificant activity

 

0.7

 

0.5

 

Tax impact

 

(1.5

)

(1.5

)

Net of tax

 

$

 

$

3.9

 

 

 

 

 

 

 

Pension & Postretirement Benefits

 

 

 

 

 

Amount reclassified from AOCI

 

 

 

 

 

Actuarial losses

 

$

5.8

 

$

18.7

 

Prior service costs

 

(1.7

)

(1.9

)

 

 

4.1

 

16.8

 

Tax impact

 

(1.5

)

(6.4

)

Net of tax

 

$

2.6

 

$

10.4

 

 

The derivative losses reclassified from AOCI into income, net of tax, were $0.3 million and $0.9 million in first quarter of 2014 and 2013, respectively. The pension and postretirement net actuarial loss and prior service cost reclassified from AOCI into income, net of tax, were $2.6 million and $10.4 million in first quarter of 2014 and 2013, respectively.

 

See Note 8 for additional information related to the company’s derivatives and hedging transactions. See Note 12 for additional information related to the company’s recognition of net actuarial losses and amortization of prior service benefits.

 

26



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

10.      Shareholders’ Equity

 

Champion acquisition

 

On April 10, 2013, the company issued 6,596,444 shares of common stock for the stock consideration portion of the Champion acquisition. Of the total shares issued, the company deposited 1,258,115 shares, or approximately $100 million of the total consideration, into an escrow fund to satisfy adjustments to the consideration and indemnification obligations of the acquired company’s stockholders. Further information related to the acquisition of Champion is included in Note 3.

 

Share repurchases

 

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 accordance with its share repurchase program through open market or private purchases, the company reacquired 3,096,464 shares of its common stock during 2013. The number of shares repurchased in 2013 includes 1,258,115 shares the company repurchased from the Champion escrow account, with the cash paid to the beneficial shareholders deposited back into escrow. During the first three months of 2014, the company repurchased 2,284,261 shares of its common stock.

 

As of March 31, 2014, 10,701,912 shares remained to be repurchased under the company’s repurchase authorization. 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.

 

11.      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 amounts)

 

2014

 

2013

 

 

 

 

 

 

 

Net income attributable to Ecolab

 

$

191.0

 

$

159.6

 

 

 

 

 

 

&