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ECL Ecolab

Filed: 30 Oct 20, 7:32am

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2020

OR

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.)

1 Ecolab Place, 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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock, $1.00 par value

2.625% Euro Notes due 2025

1.000% Euro Notes due 2024

ECL

ECL 25

ECL 24

New York Stock Exchange

New York Stock Exchange

New York Stock Exchange

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 No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No 

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

The number of shares of each of the registrant’s classes of Common Stock outstanding as of September 30, 2020: 285,445,183 shares, par value $1.00 per share.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED STATEMENT OF INCOME

(unaudited)

Third Quarter Ended 

Nine Months Ended 

September 30

September 30

(millions, except per share amounts)

2020

    

2019

    

2020

    

2019

Product and equipment sales

$2,426.4

$2,591.8

$7,017.5

$7,511.6

Service and lease sales

592.2

632.2

1,707.4

1,806.2

Net sales

3,018.6

3,224.0

8,724.9

9,317.8

Product and equipment cost of sales

1,405.4

1,413.0

4,071.6

4,175.7

Service and lease cost of sales

364.2

367.9

1,053.9

1,061.0

Cost of sales (including special charges (a))

1,769.6

1,780.9

5,125.5

5,236.7

Selling, general and administrative expenses

802.6

869.2

2,499.5

2,665.3

Special (gains) and charges

35.0

24.9

120.3

88.8

Operating income

411.4

549.0

 

979.6

1,327.0

Other (income) expense

(15.1)

(20.8)

(45.6)

(62.9)

Interest expense, net (b)

134.8

46.1

241.8

144.6

Income before income taxes

291.7

523.7

 

783.4

1,245.3

Provision for income taxes

42.4

83.4

103.5

202.1

Net income from continuing operations, including noncontrolling interest

249.3

440.3

679.9

1,043.2

Net income from continuing operations attributable to noncontrolling interest

3.1

4.4

12.8

12.3

Net income from continuing operations attributable to Ecolab

246.2

435.9

 

667.1

1,030.9

Net (loss) income from discontinued operations, net of tax (Note 4) (c)

-

28.3

(2,172.5)

98.4

Net (loss) income attributable to Ecolab

$246.2

$464.2

$(1,505.4)

$1,129.3

Earnings (loss) attributable to Ecolab per common share

Basic

Continuing operations

$ 0.86

$ 1.51

$ 2.32

$ 3.58

Discontinued operations

$ -

$ 0.10

$ (7.56)

$ 0.34

Earnings (loss) attributable to Ecolab

$ 0.86

$ 1.61

$ (5.24)

$ 3.92

Diluted

Continuing operations

$ 0.85

$ 1.49

$ 2.29

$ 3.52

Discontinued operations

$ -

$ 0.10

$ (7.47)

$ 0.34

Earnings (loss) attributable to Ecolab

$ 0.85

$ 1.59

$ (5.18)

$ 3.86

Weighted-average common shares outstanding

Basic

 

285.4

��

288.1

 

 

287.5

288.0

 

Diluted

 

288.4

 

292.8

 

 

290.8

 

292.5

 

(a)Cost of sales includes special (gains) and charges, net of $9.5 and $11.4 in the third quarter of 2020 and 2019, respectively, and $45.6 and $22.8 in the first nine months of 2020 and 2019, respectively, which is recorded in product and equipment cost of sales.
(b)Interest expense, net includes special charges of $83.1 in the third quarter of 2020 and $83.8 and $0.2 in the first nine months of 2020 and 2019, respectively.
(c)Net income from discontinued operations, net of tax includes noncontrolling interest of $0.7 in the third quarter of 2019 and $2.2 and $0.3 in the first nine months of 2020 and 2019, respectively.

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

2

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(unaudited)

Third Quarter Ended 

Nine Months Ended 

September 30

September 30

(millions)

    

2020

    

2019

2020

    

2019

    

Net (loss) income attributable to Ecolab

$246.2

$464.2

$(1,505.4)

$1,129.3

Net income from continuing operations attributable to noncontrolling interest

3.1

4.4

12.8

12.3

Net income from discontinued operations attributable to noncontrolling interest

-

0.7

2.2

0.3

Net (loss) income attributable to Ecolab, including noncontrolling interest

$249.3

$469.3

$(1,490.4)

$1,141.9

Other comprehensive income (loss), net of tax

Foreign currency translation adjustments

Foreign currency translation

 

165.9

(73.5)

4.7

(102.7)

 

Separation of ChampionX

-

-

229.9

-

(Loss) gain on net investment hedges

 

(83.4)

20.9

(87.4)

37.0

 

Total foreign currency translation adjustments

 

82.5

(52.6)

 

147.2

 

(65.7)

 

Derivatives and hedging instruments

 

(19.1)

(0.9)

(14.1)

(2.9)

 

Pension and postretirement benefits

Amortization of net actuarial loss and prior service costs included in

 

 

 

 

net periodic pension and postretirement costs

 

(18.5)

5.8

12.0

9.2

 

Total pension and postretirement benefits

 

(18.5)

5.8

 

12.0

 

9.2

 

Subtotal

 

44.9

(47.7)

 

145.1

 

(59.4)

 

Total comprehensive income (loss), including noncontrolling interest

 

294.2

421.6

 

(1,345.3)

 

1,082.5

 

Comprehensive income attributable to noncontrolling interest

 

27.1

5.7

15.0

15.0

 

Comprehensive income (loss) attributable to Ecolab

$267.1

$415.9

$(1,360.3)

$1,067.5

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

3

CONSOLIDATED BALANCE SHEET

(unaudited)

September 30

December 31

(millions, except per share amounts)

    

2020

2019

ASSETS

Current assets

Cash and cash equivalents

$1,034.7

$118.8

Accounts receivable, net

 

2,320.7

2,382.0

Inventories

 

1,287.8

1,081.6

Other current assets

348.8

295.2

Current assets of discontinued operations

 

-

950.8

Total current assets

 

4,992.0

4,828.4

Property, plant and equipment, net

 

3,146.2

3,228.3

Goodwill

 

5,958.0

5,569.1

Other intangible assets, net

 

3,023.4

2,927.5

Operating lease assets

433.9

466.7

Other assets

543.6

516.3

Long-term assets of discontinued operations

 

-

3,332.8

Total assets

$18,097.1

$20,869.1

LIABILITIES AND EQUITY

Current liabilities

Short-term debt

$247.3

$380.5

Accounts payable

 

1,108.4

1,075.3

Compensation and benefits

 

456.0

565.7

Income taxes

 

53.3

136.9

Other current liabilities

1,241.4

1,110.7

Current liabilities of discontinued operations

 

-

361.5

Total current liabilities

 

3,106.4

3,630.6

Long-term debt

 

6,667.7

5,973.1

Postretirement health care and pension benefits

 

1,081.2

1,084.4

Deferred income taxes

580.6

537.3

Operating lease liabilities

310.7

346.0

Other liabilities

301.1

269.8

Long-term liabilities of discontinued operations

 

-

302.1

Total liabilities

 

12,047.7

12,143.3

Commitments and contingencies (Note 17)

Equity (a)

Common stock

 

362.1

359.6

Additional paid-in capital

 

6,177.3

5,907.1

Retained earnings

 

8,079.9

9,993.7

Accumulated other comprehensive loss

 

(1,945.9)

(2,089.7)

Treasury stock

 

(6,658.7)

(5,485.4)

Total Ecolab shareholders’ equity

 

6,014.7

8,685.3

Noncontrolling interest

 

34.7

40.5

Total equity

 

6,049.4

8,725.8

Total liabilities and equity

$18,097.1

$20,869.1

(a)Common stock, 800.0 shares authorized, $1.00 par value per share, 285.4 shares outstanding at September 30, 2020 and 288.4 shares outstanding at December 31, 2019. Shares outstanding are net of treasury stock.

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

4

CONSOLIDATED STATEMENT OF CASH FLOWS

(unaudited)

Nine Months Ended 

September 30

 

(millions)

2020

2019

 

    

 

OPERATING ACTIVITIES

Net (loss) income including noncontrolling interest

$(1,490.4)

$1,141.9

Less: Net (loss) income from discontinued operations including noncontrolling interest

(2,170.3)

98.7

Net income from continuing operations including noncontrolling interest

$679.9

$1,043.2

Adjustments to reconcile net income to cash provided by operating activities:

Depreciation

 

443.1

423.9

Amortization

 

162.1

155.1

Deferred income taxes

 

(16.6)

34.9

Share-based compensation expense

 

65.1

67.7

Pension and postretirement plan contributions

 

(50.1)

(164.0)

Pension and postretirement plan expense

 

27.9

10.7

Restructuring charges, net of cash paid

 

(9.4)

25.4

Debt refinancing

77.1

-

Other, net

 

44.2

11.1

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

Accounts receivable

 

98.5

(118.3)

Inventories

 

(176.1)

(42.2)

Other assets

 

(22.4)

(115.0)

Accounts payable

 

11.8

(3.5)

Other liabilities

 

(243.1)

(30.0)

Cash provided by operating activities - continuing operations

 

1,092.0

1,299.0

Cash provided by operating activities - discontinued operations

118.4

300.7

Cash provided by operating activities

1,210.4

1,599.7

INVESTING ACTIVITIES

Capital expenditures

 

(362.3)

(504.3)

Property and other assets sold

 

2.5

6.9

Acquisitions and investments in affiliates, net of cash acquired

 

(487.0)

(386.6)

Divestiture of businesses

55.4

6.8

Other, net

(4.5)

(3.9)

Cash used for investing activities - continuing operations

 

(795.9)

(881.1)

Cash provided by (used for) investing activities - discontinued operations

443.2

(48.1)

Cash used for investing activities

(352.7)

(929.2)

FINANCING ACTIVITIES

Net issuances of commercial paper and notes payable

 

165.5

149.5

Long-term debt borrowings

 

1,855.9

-

Long-term debt repayments

 

(1,570.0)

(400.6)

Reacquired shares

 

(124.6)

(348.6)

Dividends paid

 

(421.8)

(416.1)

Exercise of employee stock options

 

199.7

171.7

Acquisition related liabilities and contingent consideration

(3.5)

(1.5)

Debt refinancing

(77.1)

-

Other, net

6.2

1.0

Cash provided by (used for) financing activities - continuing operations

 

30.3

(844.6)

Cash used for financing activities - discontinued operations

(1.6)

(2.9)

Cash provided by (used for) financing activities

28.7

(847.5)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

(38.1)

18.9

Increase (decrease) in cash, cash equivalents and restricted cash

 

848.3

(158.1)

Cash, cash equivalents and restricted cash, beginning of period - continuing operations (a)

118.8

230.1

Cash, cash equivalents and restricted cash, beginning of period - discontinued operations

67.6

63.9

Cash, cash equivalents and restricted cash, beginning of period (a)

 

186.4

294.0

Cash, cash equivalents and restricted cash, end of period - continuing operations (b)

1,034.7

58.3

Cash, cash equivalents and restricted cash, end of period - discontinued operations

-

77.6

Cash, cash equivalents and restricted cash, end of period (b)

$1,034.7

$135.9

(a)Restricted cash was $179.3 as of December 31, 2018 and included in Other assets on the Consolidated Balance Sheet.
(b)There was 0 restricted cash as of September 30, 2020 and 2019.

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

5

CONSOLIDATED STATEMENT OF EQUITY

(unaudited)

Third Quarter Ended September 30, 2020 and 2019

 

(millions, except shares and per share amounts)

    

Common
Stock

    

Additional
Paid-in
Capital

    

Retained
Earnings

    

OCI
(Loss)

    

Treasury
Stock

    

Ecolab Shareholders'
Equity

    

Non-Controlling
Interest

    

Total
Equity

 

Balance, June 30, 2019

 

$358.9

$5,815.7

$9,368.0

$(1,836.4)

$(5,480.8)

 

$8,225.4

 

$44.0

 

$8,269.4

Net income

464.2

 

464.2

 

5.1

 

469.3

Other comprehensive income (loss) activity

(48.3)

 

(48.3)

 

0.6

 

(47.7)

Cash dividends declared (b)

(132.5)

 

(132.5)

 

(5.0)

 

(137.5)

Stock options and awards

 

0.5

58.4

1.2

 

60.1

 

60.1

Reacquired shares

(1.2)

 

(1.2)

 

(1.2)

Balance, September 30, 2019

 

$359.4

 

$5,874.1

 

$9,699.7

 

$(1,884.7)

 

$(5,480.8)

 

$8,567.7

 

$44.7

 

$8,612.4

Balance, June 30, 2020

 

$362.0

$6,155.0

$7,967.8

$(1,989.7)

$(6,639.9)

 

$5,855.2

 

$35.0

 

$5,890.2

Net income

246.3

 

246.3

 

3.0

 

249.3

Other comprehensive income (loss) activity

43.8

 

43.8

 

1.1

 

44.9

Cash dividends declared (b)

(134.2)

 

(134.2)

 

(4.4)

 

(138.6)

Stock options and awards

 

0.1

22.3

1.1

 

23.5

 

23.5

Reacquired shares

(19.9)

 

(19.9)

 

(19.9)

Balance, September 30, 2020

 

$362.1

 

$6,177.3

 

$8,079.9

 

$(1,945.9)

 

$(6,658.7)

 

$6,014.7

 

$34.7

 

$6,049.4

Nine Months Ended September 30, 2020 and 2019

(millions, except shares and per share amounts)

    

Common
Stock

    

Additional
Paid-in
Capital

    

Retained
Earnings

    

OCI
(Loss)

    

Treasury
Stock

    

Ecolab Shareholders'
Equity

    

Non-Controlling
Interest

    

Total
Equity

 

Balance, December 31, 2018

 

$357.0

$5,633.2

$8,909.5

$(1,761.7)

$(5,134.8)

 

$8,003.2

 

$50.4

 

$8,053.6

New accounting guidance adoption (a)

58.4

(61.2)

 

(2.8)

 

 

(2.8)

Net income

1,129.3

 

1,129.3

 

12.6

 

1,141.9

Other comprehensive income (loss) activity

(61.8)

 

(61.8)

 

2.4

 

(59.4)

Cash dividends declared (b)

(397.5)

 

(397.5)

 

(20.7)

 

(418.2)

Stock options and awards

 

 

2.4

240.9

2.6

 

245.9

 

245.9

Reacquired shares

(348.6)

 

(348.6)

 

(348.6)

Balance, September 30, 2019

$359.4

$5,874.1

$9,699.7

$(1,884.7)

$(5,480.8)

$8,567.7

$44.7

$8,612.4

Balance, December 31, 2019

 

$359.6

$5,907.1

$9,993.7

$(2,089.7)

$(5,485.4)

 

$8,685.3

 

$40.5

 

$8,725.8

New accounting guidance adoption (c)

(4.3)

 

(4.3)

 

 

(4.3)

Net (loss) income

(1,505.3)

(1,505.3)

14.9

(1,490.4)

Other comprehensive income (loss) activity

143.8

 

143.8

 

1.3

 

145.1

Cash dividends declared (b)

(404.2)

 

(404.2)

 

(16.2)

 

(420.4)

Separation of ChampionX

(8.5)

(1,051.4)

(1,059.9)

3.4

(1,056.5)

Changes in noncontrolling interests

17.6

17.6

(9.2)

8.4

Stock options and awards

 

 

2.5

261.1

2.7

 

266.3

 

266.3

Reacquired shares

(124.6)

 

(124.6)

 

(124.6)

Balance, September 30, 2020

$362.1

$6,177.3

$8,079.9

$(1,945.9)

$(6,658.7)

$6,014.7

$34.7

$6,049.4

(a)Upon adoption of ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, the Company reclassified stranded tax effects resulting from the Tax Cut and Jobs Act from accumulated other comprehensive income to retained earnings. Also, upon adoption of ASU 2016-02, Leases (Topic 842), the Company has established right-of-use assets and lease liabilities for operating leases and the cumulative effect of applying the standard is recognized in retained earnings at the beginning of the period adopted.
(b)Dividends declared per common share were $0.47 and $0.46 in the third quarter of 2020 and 2019, respectively and $1.41 and $1.38 in the first nine months of 2020 and 2019, respectively.
(c)Upon adoption of ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, the Company reclassified the cumulative effect of applying the standard to retained earnings at the beginning of the period adopted.

Refer to Note 18 for additional information regarding adoption of new accounting guidance.

6

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. CONSOLIDATED FINANCIAL INFORMATION

The unaudited consolidated financial information for the third quarter ended September 30, 2020 and 2019 reflects, in the opinion of management, all adjustments necessary for a fair statement of the financial position, results of operations, comprehensive income (loss), equity and cash flows of Ecolab Inc. ("Ecolab" or "the Company") for the interim periods presented. Any adjustments consist of normal recurring items.

In March 2020, coronavirus 2019 (“COVID-19”) was declared a pandemic (“pandemic”) by the World Health Organization. As the impact of the pandemic continues to evolve, estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require judgment. These estimates and assumptions may change in future periods and will be recognized in the consolidated financial information as new events occur and additional information becomes known. To the extent actual results differ materially from those estimates and assumptions, the Company’s future financial statements could be affected.

On June 3, 2020, the Company completed the previously announced separation of its Upstream Energy business (the “ChampionX business”) in a Reverse Morris Trust transaction (the “Transaction”) through the split-off of ChampionX Holding Inc. (“ChampionX”), formed by Ecolab as a wholly owned subsidiary to hold the ChampionX Business, followed immediately by the merger (the “Merger”) of ChampionX with a wholly owned subsidiary of ChampionX Corporation (f/k/a Apergy Corporation, “Apergy”).

As discussed in Note 4 Discontinued Operations, the ChampionX business met the criteria to be reported as discontinued operations because it was a strategic shift in business that had a major effect on the Company's operations and financial results. Therefore, the Company reports the historical results of ChampionX, including the results of operations, cash flows, and related assets and liabilities, as discontinued operations for all periods presented herein. Unless otherwise noted, the accompanying Notes to the Consolidated Financial Statements have all been revised to reflect the effect of the separation of ChampionX and all prior year balances have been revised accordingly to reflect continuing operations only.

Subsequent to the separation of ChampionX, effective the second quarter of 2020, the Company no longer reports the Upstream Energy segment, which previously held the ChampionX business. The Company is aligned into 3 reportable segments and Other.

Except for the changes due to adoption of the new accounting standards, the Company has consistently applied the accounting policies to all periods presented in these consolidated financial statements.

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, 2019 reflects discontinued operations as discussed further in Note 4 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, 2019 filed with the Securities and Exchange Commission (“SEC”) on February 28, 2020 and the Company’s Current Report on Form 8-K, which was filed with the SEC on September 25, 2020 to reflect certain retrospective revisions relating to the ChampionX business as discontinued operations and the changes in the Company’s reportable segments described in Note 16.

With respect to the unaudited financial information of the Company for the third quarter ended September 30, 2020 and 2019 included in this Form 10-Q, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards for a review of such information. Their separate report dated October 30, 2020 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.

7

2. SPECIAL (GAINS) AND CHARGES

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

Third Quarter Ended 

Nine Months Ended 

September 30

September 30

(millions)

    

2020

2019

    

2020

2019

Cost of sales

Restructuring activities

$1.0

$6.3

$6.6

 

$16.2

Acquisition and integration activities

1.5

5.1

4.1

6.6

Other

7.0

-

34.9

-

Cost of sales subtotal

9.5

11.4

45.6

 

22.8

Special (gains) and charges

Restructuring activities

26.9

19.3

31.4

 

70.2

Acquisition and integration activities

2.7

2.0

5.5

4.9

Disposal and impairment activities

-

-

45.9

-

Other

5.4

3.6

37.5

 

13.7

Special (gains) and charges subtotal

35.0

24.9

120.3

 

88.8

Operating income subtotal

44.5

36.3

165.9

111.6

Interest expense, net

83.1

-

83.8

0.2

Total special (gains) and charges

$127.6

$36.3

$249.7

$111.8

For segment reporting purposes, special (gains) and charges are not allocated to reportable segments, which is consistent with the Company’s internal management reporting.

Restructuring activities

Restructuring activities are primarily related to Accelerate 2020 (described below) and other restructuring (described on the following page). Restructuring activities and related costs have been included as a component of both cost of sales and special (gains) and charges on the Consolidated Statement of Income. Restructuring liabilities have been classified as a component of other current and other noncurrent liabilities on the Consolidated Balance Sheet. Restructuring charges directly related to the ChampionX business were recorded as discontinued operations, refer to Note 4.

Accelerate 2020

During the third quarter of 2018, the Company formally commenced a restructuring plan Accelerate 2020 (“the Plan”), to leverage technology and system investments and organizational changes. The goals of the Plan is to simplify and automate processes and tasks, reduce complexity and management layers, consolidate facilities and focus on key long-term growth areas by further leveraging technology and structural improvements. In the third quarter of 2020, the Company expanded the Plan for additional costs and savings to further leverage the technology and structural improvements. The Company now expects that the restructuring activities will be completed by the end of 2022, with total anticipated costs of $275 million ($210 million after tax) over this period of time, when revised for continuing operations. The costs are expected to be primarily cash expenditures for severance costs and some facility closure costs relating to team reorganizations. Actual costs may vary from these estimates depending on actions taken.

The Company recorded restructuring charges of $27.9 million ($21.2 million after tax) and $37.0 million ($28.9 million after tax) in the third quarter and first nine months of 2020, respectively, primarily related to severance. The liability related to the Plan was $87.4 million as of the end of the third quarter of 2020. The Company has recorded $243.5 million ($187.5 million after tax) of cumulative restructuring charges under the Plan. The remaining liability is expected to be paid over a period of several quarters and will continue to be funded from operating activities. Cash payments during 2020 related to the Plan were $45.3 million.

8

Restructuring activity related to the Plan since inception of the underlying actions includes the following:

 

    

Employee

    

    

    

    

 

Termination

Asset

 

(millions)

    

Costs

    

Disposals

    

Other

    

Total

 

2018 - 2019 Activity

Recorded expense

$182.5

$0.2

$14.7

$197.4

Net cash payments

 

(87.5)

1.2

(11.2)

 

(97.5)

Non-cash charges

 

-

(1.4)

(2.0)

 

(3.4)

Effect of foreign currency translation

 

(1.0)

-

-

 

(1.0)

Restructuring liability, December 31, 2019

94.0

-

1.5

95.5

2020 Activity

Recorded expense

34.1

-

2.9

37.0

Net cash payments

 

(41.9)

-

(3.4)

(45.3)

Non-cash charges

 

-

-

-

-

Effect of foreign currency translation

 

0.2

-

-

0.2

Restructuring liability, September 30, 2020

$86.4

$-

$1.0

$87.4

Other Restructuring Activities

During the first nine months of 2020, the Company incurred restructuring charges of $1.0 million ($0.6 million after tax), none of which was incurred during the third quarter, related to an immaterial restructuring plan. The charges are primarily related to severance. Prior to 2018, the Company engaged in a number of restructuring plans. During the third quarters and first nine months of 2020 and 2019, net restructuring charges related to prior year plans were minimal. The restructuring liability balance for all plans other than Accelerate 2020 was $6.1 million and $7.7 million as of September 30, 2020 and December 31, 2019, respectively. The reduction in liability was driven primarily by severance payments. The remaining liability is expected to be paid over a period of a few months to several quarters and will continue to be funded from operating activities.

Cash payments during 2020 related to all other restructuring plans excluding Accelerate 2020 were $2.5 million.

Acquisition and integration related costs

Acquisition and integration costs reported in special (gains) and charges on the Consolidated Statement of Income include $2.7 million ($2.3 million after tax) and $5.5 million ($4.3 million after tax) in the third quarter and first nine months of 2020, respectively. Charges are related to the Copal Invest NV, including its primary operating entity CID Lines (collectively, “CID Lines”), Bioquell, PLC (“Bioquell”) and the Laboratoires Anios (“Anios”) acquisitions and consist of integration costs, advisory and legal fees. Acquisition and integration costs reported in product and equipment cost of sales of $1.5 million ($1.3 million after tax) and $4.1 million ($3.2 million after tax) on the Consolidated Statement of Income in the third quarter and first nine months of 2020, respectively, related to the recognition of fair value step-up in the CID Lines inventory, severance and the closure of a facility. The Company also incurred $0.7 million ($0.6 million after tax) of interest expense in the first nine months of 2020, none of which was incurred during the third quarter.

Acquisition and integration costs reported in special (gains) and charges on the Consolidated Statement of Income include $2.0 million ($1.5 million after tax) and $4.9 million ($3.6 million after tax) in the third quarter and first nine months of 2019, respectively. Charges are related to Bioquell and the Anios acquisitions and consist of integration costs, advisory and legal fees. Acquisition and integration costs reported in product and equipment cost of sales of $5.1 million ($3.8 million after tax) and $6.6 million ($4.9 million after tax) on the Consolidated Statement of Income in the third quarter and first nine months of 2019, respectively, relate to the recognition of fair value step-up in the Bioquell inventory and severance related to the closure of a facility. The Company also incurred $0.2 million ($0.1 million after tax) of interest expense in the first nine months of 2019.

Further information related to the Company’s acquisitions is included in Note 3.

Disposal and impairment charges

Disposal and impairment charges reported in special (gains) and charges on the Consolidated Statement of Income include $45.9 million ($45.0 million after tax) in the first nine months of 2020. During the second quarter of 2020, the Company recorded a $28.6 million ($28.6 million after tax) impairment for a minority equity method investment due to the impact of the economic environment and the liquidity of the minority equity method investment. In addition, the Company recorded charges of $17.3 million ($16.3 million after tax) in the first six months of 2020 related to the disposal of Holchem Group Limited (“Holchem”) for the loss on sale and related transaction fees.

Further information related to the Company’s disposal is included in Note 3.

9

Other

During the third quarter and first nine months of 2020, the Company recorded charges of $4.1 million and $30.6 million, respectively, to protect the pay for certain employees directly impacted by the COVID-19 pandemic. In addition, the Company received subsidies and government assistance, which was recorded as a special (gain) of ($5.3) million and ($14.7) million during the third quarter and first nine months of 2020, respectively. COVID-19 pandemic charges are recorded in product and equipment cost of sales, service and lease cost of sales, and special (gains) and charges on the Consolidated Statement of Income. After tax net charges (gains) related to the COVID-19 pandemic were ($0.9) million and $12.3 million during the third quarter and first nine months of 2020, respectively.

During the third quarter and first nine months of 2020, the Company recorded special charges of $5.2 million ($3.5 million after tax) and $26.2 million ($17.8 million after tax), respectively, in product and equipment cost of sales on the Consolidated Statement of Income primarily related to a Healthcare product recall in Europe.

During the third quarter of 2020, the Company recorded special charges of $83.1 million ($64.0 million after tax) in interest expense on the Consolidated Statement of Income primarily related to debt refinancing charges.

Other special charges of $8.4 million ($7.2 million after tax) and $30.3 million ($23.7 million after tax), respectively, recorded in the third quarter and first nine months of 2020 relate primarily to a specific legal reserve and related legal charges which are recorded in special (gains) and charges on the Consolidated Statement of Income.

During the third quarter and first nine months of 2019, the Company recorded other special gains in special (gains) and charges on the Consolidated Statement of Income, of $3.6 million ($2.7 million after tax) and $13.7 million ($10.3 million after tax), respectively, which primarily related to legal charges.

3. ACQUISITIONS AND DISPOSITIONS

Acquisitions

The Company makes business acquisitions that align with its strategic business objectives. The assets and liabilities of acquired businesses are recorded in the Consolidated Balance Sheet at fair value as of their acquisition dates. The purchase price allocation is based on estimates of the fair value of assets acquired, liabilities assumed and consideration paid. Purchase consideration is reduced by the amount of cash or cash equivalents acquired.

Acquisitions during the first nine months of 2020 and 2019 were not significant to the Company’s consolidated financial statements; therefore, pro forma financial information is not presented.

CID Lines Acquisition

On May 11, 2020, the Company acquired CID Lines for total consideration of $506.9 million in cash. CID Lines had annualized pre-acquisition sales of approximately $110 million and is a leading global provider of livestock biosecurity and hygiene solutions based in Belgium.

 

The CID Lines acquisition has been accounted for using the acquisition method, which requires, among other things, that 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. Measurement of certain carry over tax attributes, deferred income taxes, income tax uncertainties, certain tangible and intangible assets, and goodwill are not yet finalized and are subject to changes as the information necessary to complete the analyses is obtained and analyzed. The Company expects to finalize its purchase accounting within the year.

The Company incurred certain acquisition and integration costs associated with the acquisition that were expensed and are reflected in the Consolidated Statement of Income. Further information related to the Company’s special (gains) and charges is included in Note 2.

The following table summarizes the preliminary value of CID Lines assets acquired and liabilities assumed as of the acquisition date.

(millions)

2020

Tangible assets

$54.2

Identifiable intangible assets

 

Customer relationships

147.5

Trademarks

 

58.6

Acquired technologies and product registrations

47.7

Total assets acquired

 

308.0

Goodwill

270.7

Total liabilities

 

93.2

Net consideration transferred to sellers

$485.5

10

Tangible assets acquired primarily comprised of accounts receivable of $30.3 million, property, plant and equipment of $7.4 million and inventory of $16.3 million. Liabilities assumed primarily consist of deferred tax liabilities of $63.8 million and current liabilities of $29.4 million. Identified intangible assets primarily consist of customer relationships, trademarks, and acquired technology and product registrations and are being amortized over weighted average lives of 14, 14, and 16 years, respectively.

 

Goodwill of $270.7 million arising from the acquisition consists largely of the synergies and economies of scale expected through adding complementary geographies and innovative products to the Food and Beverage industries. This acquired business became part of the Global Industrial reportable segment. None of the goodwill recognized is expected to be deductible for income tax purposes.

Other Acquisitions

Other than CID Lines, the Company did not close on any other business acquisitions during the first nine months of 2020.

During the first quarter of 2019, the Company acquired Bioquell, a life sciences business which sells bio-decontamination products and services to the Life Sciences and Healthcare industries. Effective with changes to the Company’s reporting structure in the first quarter 2020, this acquired business became part of the Global Healthcare & Life Sciences reportable segment. During 2018, the Company deposited $179.3 million (£140.5 million) in an escrow account that was released to the Company upon closing of the transaction in February 2019.

Also, during the first quarter of 2019, the Company acquired Lobster Ink, a leading provider of end-to-end online customer training solutions. This acquired business became part of the Global Institutional & Specialty reportable segment. The purchase price included an earn-out based on the achievement of certain revenue thresholds in any of the three years following the acquisition. The acquisition date fair value of the earn-out was reflected in the total purchase consideration exchanged for Lobster Ink and recorded as contingent consideration liability. The earn-out has not yet been paid or settled and the contingent consideration liability is recorded within other liabilities as of September 30, 2020 at its current fair value.

During the third quarter of 2019, the Company acquired Chemstar Corporation, a leading provider of cleaning and sanitizing products for the retail industry with a focus on cleaning chemicals and food safety. This acquired business became part of the Global Institutional reportable segment.

These acquisitions have been accounted for using the acquisition method. The purchase accounting for both Bioquell and Lobster Ink were finalized in the first quarter of 2020 and the purchase accounting for Chemstar was finalized in the third quarter of 2020.

The components of the cash paid for acquisitions other than CID Lines during the third quarter and first nine months of 2020 and 2019 are shown in the following table.

Third Quarter Ended 

Nine Months Ended 

September 30

September 30

(millions)

    

2020

2019

    

2020

2019

Net tangible assets (liabilities) acquired and equity method investments

$-

$8.0

$-

$(1.4)

Identifiable intangible assets

Customer relationships

 

-

37.0

 

-

108.9

Trademarks

 

-

3.0

 

-

23.4

Other technology

-

3.0

-

48.9

Total intangible assets

 

-

43.0

 

-

181.2

Goodwill

 

-

49.0

 

-

229.5

Total aggregate purchase price

 

-

100.0

 

-

409.3

Acquisition-related liabilities and contingent considerations

 

-

(2.2)

 

-

(22.7)

Net cash paid for acquisitions, including acquisition-related

liabilities and contingent considerations

$-

$97.8

$-

$386.6

During the first nine months of 2020, the Company recorded purchase accounting adjustments associated with its 2019 acquisitions. As a result of these purchase accounting adjustments, the net intangible assets and goodwill recognized from these acquisitions increased by $1.3 million and $0.3 million, respectively. In conjunction with the finalization of its purchase accounting, the Company made $3.5 million of acquisition-related payments which primarily consisted of the release of holdback liabilities and payment of contingent consideration.

The weighted average useful life of identifiable intangible assets acquired during the first nine months of 2019 was 12 years.

Dispositions

In the second quarter of 2020, the Company completed the sale of Holchem, a U.K. based supplier of hygiene and cleaning products and services for the food and beverage, foodservice and hospitality industries for total consideration of $106.6 million. Consideration consisted of $55.4 million of cash and $51.2 million in notes receivable recorded at fair value. After the recognition of transaction costs, the Company recognized an after-tax loss of $16.3 million, which is classified within special charges in the Consolidated Statement of Income. Annual sales of Holchem were approximately $55 million and were included in the Global Industrial reportable segment prior to disposition. Further information related to the Company’s special (gains) and charges is included in Note 2.

11

4. DISCONTINUED OPERATIONS

On June 3, 2020, the Company effected the split-off of ChampionX through an offer to exchange (the “Exchange Offer”) all shares of ChampionX common stock owned by Ecolab for outstanding shares of Ecolab common stock. In the Exchange Offer, which was oversubscribed, the Company accepted approximately 5.0 million shares of Ecolab common stock in exchange for approximately 122.2 million shares of ChampionX common stock. In the Merger, each outstanding share of ChampionX common stock was converted into the right to receive one share of Apergy common stock, and ChampionX survived the Merger as a wholly owned subsidiary of ChampionX Corporation (f/k/a Apergy). In connection with and in accordance with the terms of the Transaction, prior to the consummation of the Exchange Offer and the Merger, ChampionX distributed $527.4 million in cash to Ecolab.

The following is a summary of the assets and liabilities transferred to ChampionX as part of the separation:

(millions)

Assets:

 

Cash and cash equivalent

 

$60.6

Current assets

 

810.5

Non-current assets

 

3,222.3

4,093.4

Liabilities:

Current liabilities

313.0

Non-current liabilities

293.7

606.7

Net assets distributed to ChampionX

$(3,486.7)

Fair value of shares exchanged

1,051.4

Cash received from ChampionX

527.4

Consideration received less net assets

(1,907.9)

ChampionX cumulative translation adjustment ("CTA") write-off

(229.9)

Loss on separation

$(2,137.8)

The Company accounted for this transaction as a sale and recognized a loss based on ChampionX net assets exceeding the effective proceeds.

The ChampionX business, as discussed in Note 1, met the criteria to be reported as discontinued operations because it is a strategic shift in business that has a major effect on the Company’s operations and financial results. Therefore, the results of discontinued operations for the first nine months ended September 30, 2020 and the third quarter and first nine months ended September 30, 2019 include the historical results of ChampionX prior to separation.

Summarized results of the Company’s discontinued operations are as follows:

Third Quarter Ended 

Nine Months Ended 

September 30

September 30

(millions)

2020

    

2019

    

2020

    

2019

Product and equipment sales

$-

$533.4

$858.9

$1,592.0

Service and lease sales

-

60.5

99.6

172.9

Net sales

-

593.9

958.5

1,764.9

Product and equipment cost of sales

-

376.5

621.7

1,129.6

Service and lease cost of sales

-

50.0

80.4

138.9

Cost of sales (including special charges)

-

426.5

702.1

1,268.5

Selling, general and administrative expenses

-

93.3

180.5

308.2

Special (gains) and charges

-

35.5

2,221.7

61.8

Operating (loss) income

-

38.6

 

(2,145.8)

126.4

Other (income) expense

-

-

0.3

-

Interest expense (income), net

-

-

0.2

0.4

(Loss) income before income taxes

-

38.6

 

(2,146.3)

126.0

Provision for income taxes

-

9.6

24.0

27.3

Net (loss) income including noncontrolling interest

-

29.0

 

(2,170.3)

98.7

Net (loss) income attributable to noncontrolling interest

-

0.7

2.2

0.3

Net (loss) income from discontinued operations, net of tax

$-

$28.3

$(2,172.5)

$98.4

Special (gains) and charges of $2,221.7 million in the first nine months of 2020 primarily relate to the loss on separation, transaction fees, and other professional fees incurred to support the Transaction.

Special (gains) and charges of $35.5 million and $61.8 million in the third quarter and first nine months of 2019, respectively, relate to professional fees incurred to support the Transaction and restructuring charges specifically related to the ChampionX business.

12

Assets and liabilities of discontinued operations are summarized below:

December 31

(millions)

    

2019

ASSETS

Current assets

Cash and cash equivalents

$67.6

Accounts receivable, net

 

414.5

Inventories

 

424.0

Other current assets

44.7

Total current assets

 

950.8

Property, plant and equipment, net

 

726.6

Goodwill

 

1,682.6

Other intangible assets, net

 

745.0

Operating lease assets

110.8

Other assets

67.8

Total assets

$4,283.6

LIABILITIES AND EQUITY

Current liabilities

Short-term debt

$0.1

Accounts payable

 

209.0

Compensation and benefits

 

33.8

Income taxes

 

5.9

Other current liabilities

112.7

Total current liabilities

 

361.5

Long-term debt

 

0.4

Postretirement health care and pension benefits

 

3.6

Deferred income taxes

203.1

Operating lease liabilities

79.2

Other liabilities

15.8

Total liabilities

 

$663.6

As of September 30, 2020, there were 0 assets or liabilities classified as discontinued operations.

In connection with the Transaction, the Company entered into agreements with ChampionX and Apergy to effect the separation and to provide a framework for the relationship following the separation, which included a Separation and Distribution Agreement, an Intellectual Property Matters Agreement, an Employee Matters Agreement, a Transition Services Agreement, and a Tax Matters Agreement. Transition services primarily involve the Company providing certain services to ChampionX related to general and administrative services for terms of up to 18 months following the separation. The amounts billed for transition services provided under the above agreements were not material to the Company’s results of operations.

The Company also entered into a Master Cross Supply and Product Transfer agreement with ChampionX to provide, receive or transfer certain products for a period up to 36 months. Sales of product to ChampionX under this agreement are recorded in product and equipment sales in the Corporate segment along with the related cost of sales, while purchases from ChampionX are recorded in inventory. Sales of product to ChampionX post-separation for the third quarter and first nine months of 2020 were $46.6 million and $58.9 million, respectively.

13

5. BALANCE SHEET INFORMATION

September 30

December 31

(millions)

    

2020

2019

Accounts receivable, net

Accounts receivable

$2,408.9

$2,437.5

Allowance for doubtful accounts

(88.2)

(55.5)

Total

$2,320.7

$2,382.0

Inventories

Finished goods

$781.6

$668.5

Raw materials and parts

531.3

437.9

Inventories at FIFO cost

1,312.9

1,106.4

FIFO cost to LIFO cost difference

(25.1)

(24.8)

Total

$1,287.8

$1,081.6

Other current assets

Prepaid assets

$116.5

$101.8

Taxes receivable

184.9

107.0

Derivative assets

9.4

53.3

Other

38.0

33.1

Total

$348.8

$295.2

Property, plant and equipment, net

Land

$159.1

$158.9

Buildings and leasehold improvements

1,036.1

965.5

Machinery and equipment

1,865.9

1,701.7

Merchandising and customer equipment

2,744.4

2,742.9

Capitalized software

815.4

750.4

Construction in progress

250.7

348.1

6,871.6

6,667.5

Accumulated depreciation

(3,725.4)

(3,439.2)

Total

$3,146.2

$3,228.3

Other intangible assets, net

Intangible assets not subject to amortization

Trade names

$1,230.0

$1,230.0

Intangible assets subject to amortization

Customer relationships

2,516.4

2,378.9

Trademarks

347.8

285.2

Patents

490.0

459.0

Other technology

240.3

214.5

3,594.5

3,337.6

Accumulated amortization

Customer relationships

(1,272.0)

(1,147.6)

Trademarks

(149.8)

(135.1)

Patents

(236.6)

(221.7)

Other technology

(142.7)

(135.7)

(1,801.1)

(1,640.1)

Net intangible assets subject to amortization

1,793.4

1,697.5

Total

$3,023.4

$2,927.5

Other assets

Deferred income taxes

$155.6

$136.2

Pension

40.2

31.1

Derivative asset

-

25.4

Other

347.8

323.6

Total

$543.6

$516.3

14

September 30

December 31

(millions)

    

2020

2019

Other current liabilities

Discounts and rebates

$321.5

$331.4

Dividends payable

134.2

135.6

Interest payable

50.9

40.9

Taxes payable, other than income

162.7

102.9

Derivative liabilities

54.3

5.2

Restructuring

89.3

98.5

Contract liability

84.6

76.7

Operating lease liabilities

124.4

122.1

Other

219.5

197.4

Total

$1,241.4

$1,110.7

Accumulated other comprehensive loss

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

$(18.2)

$(4.1)

Unrecognized pension and postretirement benefit expense, net of tax

(811.8)

(823.8)

Cumulative translation, net of tax

(1,115.9)

(1,261.8)

Total

$(1,945.9)

$(2,089.7)

6. DEBT AND INTEREST

Short-term Debt

The following table provides the components of the Company’s short-term debt obligations as of September 30, 2020 and December 31, 2019.

September 30

December 31

(millions)

    

2020

2019

Short-term debt

Commercial paper

$225.0

$55.1

Notes payable

20.7

24.5

Long-term debt, current maturities

1.6

300.9

Total

$247.3

$380.5

Lines of Credit

As of September 30, 2020, the Company had a $2.0 billion multi-year credit facility which expires in November 2022. The credit facility has been established with a diverse syndicate of banks and supports the Company’s U.S. and Euro commercial paper programs. There were 0 borrowings under the Company’s credit facility as of either September 30, 2020 or December 31, 2019.

As of September 30, 2020, the Company had a $500 million 364-day revolving credit agreement which expires in April 2021. The credit agreement has been established with a diverse syndicate of banks and is to be used for general corporate purposes. There were 0 borrowings under the Company’s 364-day credit facility as of September 30, 2020.

Commercial Paper

The Company’s commercial paper program is used as a source of liquidity and consists of a $2.0 billion U.S. commercial paper program and a $2.0 billion Euro commercial paper program. The maximum aggregate amount of commercial paper that may be issued by the Company under its commercial paper programs may not exceed $2.0 billion.

As of September 30, 2020, the Company had $225.0 million of commercial paper outstanding under its U.S. program. As of December 31, 2019, the Company had $55.1 million (€50.0 million) of commercial paper outstanding under its Euro program.

Notes Payable

The Company’s notes payable consists of uncommitted credit lines with major international banks and financial institutions, primarily to support global cash pooling structures. As of September 30, 2020 and December 31, 2019, the Company had $20.7 million and $24.5 million, respectively, outstanding under these credit lines.

15

Long-term Debt

The following table provides the components of the Company’s long-term debt obligations, including current maturities, as of September 30, 2020 and December 31, 2019.

Maturity

September 30

December 31

(millions)

by Year

2020

2019

Long-term debt

Public notes (2020 principal amount)

Five year 2015 senior notes ($300 million)

2020

$-

$300.0

Ten year 2011 senior notes ($1.02 billion)

2021

-

1,018.3

Five year 2017 senior notes ($500 million)

2022

498.4

497.8

Seven year 2016 senior notes ($400 million)

2023

398.9

398.5

Seven year 2016 senior notes (€575 million)

2024

681.9

628.4

Ten year 2015 senior notes (€575 million)

2025

683.0

630.0

Ten year 2016 senior notes ($750 million)

2026

745.1

744.5

Ten year 2017 senior notes ($500 million)

2027

495.9

495.4

Ten year 2020 senior notes ($750 million)

2030

765.7

-

Ten year 2020 senior notes ($600 million)

2031

594.2

-

Thirty year 2011 senior notes ($458 million)

2041

452.1

451.9

Thirty year 2016 senior notes ($250 million)

2046

246.3

246.2

Thirty year 2017 senior notes ($700 million)

2047

611.5

610.4

Thirty year 2020 senior notes ($500 million)

2050

489.9

-

Private notes (2020 principal amount)

Series B private placement senior notes ($250 million)

2023

-

249.6

Finance lease obligations and other

6.4

3.0

Total debt

6,669.3

6,274.0

Long-term debt, current maturities

(1.6)

(300.9)

Total long-term debt

$6,667.7

$5,973.1

Public Notes

In March 2020, the Company issued $750 million aggregate principal ten year fixed rate notes with a coupon rate of 4.80%, and an effective interest rate of 4.58%. The proceeds were used to repay a portion of the Company’s outstanding commercial paper and for general corporate purposes.

In August 2020, the Company issued $600 million aggregate principal ten year fixed rate notes with a coupon rate of 1.30%, and an effective interest rate of 1.39% along with $500 million aggregate principal thirty year fixed rate notes with a coupon rate of 2.13%, and an effective interest rate of 2.19%. In September 2020, the proceeds were used to prepay all of the outstanding 4.32% Series B private placement senior notes due 2023, to redeem all of the outstanding 4.350% senior notes due 2021 and to pay debt refinancing charges in connection with the transactions. Refer to Note 2 for additional information regarding the incremental fees.

The Company’s public notes may be redeemed by the Company at its option at redemption prices that include accrued and unpaid interest and a make-whole premium. Upon the occurrence of a change of control accompanied by a downgrade of the public notes below investment grade rating, within a specified time period, the Company would be required to offer to repurchase the public notes at a price equal to 101% of the aggregate principal amount thereof, plus any accrued and unpaid interest to the date of repurchase. The public notes are senior unsecured and unsubordinated obligations of the Company and rank equally with all other senior and unsubordinated indebtedness of the Company.

Private Notes

In September 2020, the Company redeemed the private notes at redemption prices that included accrued and unpaid interest and a make-whole premium.

Covenants

The Company is in compliance with its debt covenants as of September 30, 2020.

16

Net Interest Expense

Interest expense and interest income recognized during the third quarter and first nine months of 2020 and 2019 were as follows:

Third Quarter Ended 

Nine Months Ended 

September 30

September 30

(millions)

    

2020

2019

2020

2019

Interest expense

$139.0

$52.9

$253.4

$163.4

Interest income

 

(4.2)

(6.8)

 

(11.6)

(18.8)

 

Interest expense, net

$134.8

$46.1

$241.8

$144.6

Interest expense generally includes the expense associated with the interest on the Company’s outstanding borrowings. Interest expense also includes the amortization of debt issuance costs and debt discounts, which are both recognized over the term of the related debt.

During the third quarter of 2020, the Company retired certain long-term debt, and incurred debt refinancing charges of $83.1 million ($64.0 million after tax), which are included as a component of interest expense, net on the Consolidated Statement of Income.

7. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

Goodwill arises from the Company’s acquisitions and represents the excess purchase consideration paid over the fair value of acquired net assets. The Company’s reporting units are its operating segments. The Company assesses goodwill for impairment on an annual basis during the second quarter. If circumstances change or events occur that demonstrate it is more likely than not that the carrying amount of a reporting unit exceeds its fair value, the Company would complete an interim goodwill assessment of that reporting unit prior to the next annual assessment. If the results of a goodwill assessment demonstrate the carrying amount of a reporting unit is greater than its fair value, the Company will recognize an impairment loss for the amount by which the reporting unit’s carrying amount exceeds its fair value, but not to exceed the carrying amount of goodwill assigned to that reporting unit.

During the second quarter of 2020, the Company completed its annual goodwill impairment assessment for each of its 11 reporting units using quantitative analyses using discounted cash flow analyses that incorporated assumptions regarding future growth rates, terminal values, and discount rates. The Company’s goodwill impairment assessment for 2020 indicated the estimated fair values of each of its reporting units exceeded their carrying amounts by significant margins. There has been 0 impairment of goodwill in any of the periods presented.

The changes in the carrying amount of goodwill for each of the Company's reportable segments during the nine-month period ended September 30, 2020 were as follows:

Global

Global

Global

Institutional

Healthcare &

Global

(millions)

    

Industrial

    

& Specialty

    

Life Sciences

Energy

Other

    

Total

 

December 31, 2019

$2,799.2

$1,147.7

$-

$1,417.9

$204.3

$5,569.1

Segment changes (a)

1,124.6

(599.4)

859.3

(1,417.9)

33.4

-

December 31, 2019 revised

3,923.8

548.3

859.3

-

237.7

5,569.1

Current year business combinations (b)

270.7

-

-

-

-

270.7

Prior year business combinations (c)

-

-

0.3

-

-

0.3

Dispositions

(47.6)

-

-

-

-

(47.6)

Effect of foreign currency translation

90.8

16.6

51.4

-

6.7

165.5

September 30, 2020

$4,237.7

$564.9

$911.0

$-

$244.4

$5,958.0

(a)Relates to reclassifications made to reportable segments in the current year. The ChampionX business was previously recorded in the Global Energy reportable segment and has been reported in discontinued operations. Goodwill was assigned to ChampionX and the Downstream operating segment, which is also a reporting unit, based on a relative fair value allocation. The Downstream operating segment, which was previously included in the Global Energy reportable segment is now reported in the Global Industrial reportable segment. In addition, the Company established the Global Healthcare & Life Sciences reportable segment which is comprised of the Healthcare and Life Sciences operating segments, which were previously included in the Global Institutional the and Global Industrial reportable segments, respectively. The Healthcare and Life Sciences operating segments were identified as reporting units both before and after the changes made to the Company’s reportable segments; accordingly, goodwill allocations were not required upon the establishment of the Global Healthcare & Life Sciences reportable segment. The Company also renamed the Global Institutional reportable segment to the Global Institutional & Specialty reportable segment. Refer to Note 16 for further information.
(b)Represents goodwill associated with the acquisition of CID Lines.
(c)Represents purchase price allocation adjustments for acquisitions deemed preliminary as of the end of December 31, 2019.

17

Other Intangible Assets

The Nalco trade name is the Company’s only indefinite life intangible asset. During the second quarter of 2020, the Company completed its annual impairment assessment of the Nalco trade name using the relief from royalty discounted cash flow method, which incorporates assumptions regarding future sales projections, royalty rates and discount rates. Based on this testing, the estimated fair value of the Nalco trade name exceeded its carrying amount by a significant margin; therefore, no adjustment to the $1.2 billion carrying value of this asset was necessary. There has been 0 impairment of the Nalco trade name intangible since it was acquired.

The Company’s intangible assets subject to amortization include customer relationships, trademarks, patents and other technology primarily acquired through business combinations. The fair value of intangible assets acquired in business combinations is estimated primarily using discounted cash flow valuation methods at the time of acquisition. Intangible assets are amortized on a straight-line basis over their estimated lives. Total amortization expense related to intangible assets during the third quarter of 2020 and 2019 was $58.9 million and $51.6 million, respectively. Total amortization expense related to intangible assets during the first nine months of 2020 and 2019 was $162.1 and $155.1 million, respectively. Amortization expense related to intangible assets for the remaining three-month period of 2020 is expected to be approximately $55 million.

18

8. FAIR VALUE MEASUREMENTS

The Company’s financial instruments include cash and cash equivalents, restricted cash, accounts receivable, accounts payable, contingent consideration obligations, commercial paper, notes payable, foreign currency forward contracts, interest rate swap agreements and long-term debt.

Fair value is defined as 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.

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

September 30, 2020

 

(millions)

Carrying

Fair Value Measurements

 

    

Amount

    

Level 1

Level 2

    

Level 3

 

Assets

Foreign currency forward contracts

 

 

$44.7

$-

 

$44.7

 

$-

 

 

Liabilities

Foreign currency forward contracts

 

 

129.8

-

 

129.8

 

-

December 31, 2019

 

(millions)

Carrying

Fair Value Measurements

 

    

Amount

    

Level 1

Level 2

    

Level 3

 

Assets

Foreign currency forward contracts

 

$83.9

 

$-

 

$83.9

 

$-

Liabilities

Foreign currency forward contracts

 

10.0

 

-

 

10.0

 

-

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. For purposes of fair value disclosure above, derivative values are presented gross. Further discussion of gross versus net presentation of the Company's derivatives within Note 9.

Contingent consideration obligations are recognized and measured at fair value at the acquisition date and thereafter until settlement. Contingent consideration is classified within Level 3 as the underlying fair value is determined using income-based valuation approaches appropriate for the terms and conditions of each respective earn-out. 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. Contingent consideration was not material to the Company’s consolidated financial statements.

The carrying values of accounts receivable, accounts payable, cash and cash equivalents, restricted cash, 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 (classified as Level 2). The carrying amount and the estimated fair value of long-term debt, including current maturities, held by the Company were:

September 30, 2020

December 31, 2019

Carrying

Fair

Carrying

Fair

    

Amount

    

Value

    

Amount

    

Value

Long-term debt, including current maturities

$6,669.3

$7,659.9

$6,274.0

$6,861.6

19

9. DERIVATIVES AND HEDGING TRANSACTIONS

The Company uses foreign currency forward contracts, interest rate swap agreements 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 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. Cash flows from derivatives are classified in the statement of cash flows in the same category as the cash flows from the items subject to designated hedge or undesignated (economic) hedge relationships. 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.

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 global 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.

Derivative Positions Summary

Certain of 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 and as of the applicable dates presented in the following table, 0 cash collateral had been received or pledged related to the underlying derivatives.

The respective net amounts are included in other current assets, other assets, other current liabilities and other liabilities on the Consolidated Balance Sheet.

The following table summarizes the gross fair value and the net value of the Company’s outstanding derivatives.

(millions)

Derivative Assets

Derivative Liabilities

September 30

December 31

September 30

December 31

(millions)

    

2020

2019

    

2020

2019

 

Derivatives designated as hedging instruments

Foreign currency forward contracts

$28.7

$67.4

$83.6

$2.1

Derivatives not designated as hedging instruments

Foreign currency forward contracts (a)

16.0

16.5

46.2

7.9

Gross value of derivatives

44.7

83.9

129.8

10.0

Gross amounts offset in the Consolidated Balance Sheet

(35.3)

(4.2)

(35.3)

(4.2)

Net value of derivatives

$9.4

$79.7

$94.5

$5.8

(a)Foreign currency forward contract derivatives not designated as hedging instruments includes discontinued operations of $1.0 million of derivative assets and $0.6 million of derivative liabilities as of December 31, 2019.

The following table summarizes the notional values of the Company’s outstanding derivatives.

Notional Values

September 30

December 31

(millions)

    

2020

    

2019

Foreign currency forward contracts (a)

$ 4,269

$ 4,004

(a)Foreign currency forward contract notional values include discontinued operations of approximately $9 million as of December 31, 2019.

20

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, management fee and other payments. These forward contracts are designated as cash flow hedges. The changes in fair value of these contracts are recorded in accumulated other comprehensive income (“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. Cash flow hedged transactions impacting AOCI are forecasted to occur within the next four years. For forward contracts designated as hedges of foreign currency exchange rate risk associated with forecasted foreign currency transactions, the Company excludes the changes in fair value attributable to time value from the assessment of hedge effectiveness. The initial value of the excluded component (i.e., the forward points) is amortized on a straight-line basis over the life of the hedging instrument and recognized in the same line item in the Consolidated Statement of Income as the underlying exposure being hedged for intercompany loans. For all other cash flow hedge types, the forward points are marked-to-market monthly and recognized in the same line item in the Consolidated Statement of Income as the underlying exposure being hedged. The difference between fair value changes of the excluded component and the amount amortized in the Consolidated Statement of Income is recorded in AOCI.

Fair Value Hedges

The Company manages interest expense using a mix of fixed and floating rate debt. To help manage exposure to interest rate movements and to reduce borrowing costs, the Company may enter into interest rate swaps under which the Company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed upon notional principal amount. The mark-to-market of these fair value hedges is recorded as gains or losses in interest expense and is offset by the gain or loss of the underlying debt instrument, which also is recorded in interest expense. These fair value hedges are highly effective.

Net Investment Hedges

The Company designates its outstanding $1,365 million (€1,150 million at the end of the third quarter of 2020) senior notes (“euronotes”) and related accrued interest as hedges of existing foreign currency exposures related to investments the Company has in certain euro denominated functional currency subsidiaries. The revaluation gains and losses on the euronotes and Euro commercial paper, 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, and were as follows:

Third Quarter Ended 

Nine Months Ended 

September 30

September 30

(millions)

    

2020

2019

2020

2019

 

Revaluation (losses) gains, net of tax

$(83.4)

$20.9

$(87.4)

$37.0

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.

21

Effect of all Derivative Instruments on Income

The gain (loss) of all derivative instruments recognized in product and equipment cost of sales (“COS”), selling, general and administrative expenses (“SG&A”) and interest expense, net (“interest”) is summarized below:

Third Quarter Ended 

September 30

2020

2019

(millions)

COS

SG&A

Interest

    

COS

SG&A

Interest

Gain (loss) on derivatives in cash flow hedging relationship:

Foreign currency forward contracts

Amount of gain (loss) reclassified from AOCI to income

$3.1

$(101.5)

$-

$3.9

$2.8

$-

Amount excluded from the assessment of effectiveness recognized in earnings based on changes in fair value

-

-

(4.9)

-

-

(5.9)

Interest rate swap agreements

Amount of gain (loss) reclassified from AOCI to income

-

-

(0.2)

-

-

(0.2)

Gain (loss) on derivatives not designated as hedging instruments:

Foreign currency forward contracts

Amount of gain (loss) recognized in income (a)

-

(30.2)

11.3

-

11.2

-

Total gain (loss) of all derivative instruments

$3.1

$(131.7)

$6.2

$3.9

$14.0

$(6.1)

Nine Months Ended 

September 30

2020

2019

(millions)

COS

SG&A

Interest

    

COS

SG&A

Interest

Gain (loss) on derivatives in cash flow hedging relationship:

Foreign currency forward contracts

Amount of gain (loss) reclassified from AOCI to income

$9.1

$(108.8)

$-

$13.0

$22.3

$-

Amount excluded from the assessment of effectiveness recognized in earnings based on changes in fair value

-

-

8.6

-

-

8.4

Interest rate swap agreements

Amount of gain (loss) reclassified from AOCI to income

-

-

(0.7)

-

-

(0.7)

Gain (loss) on derivatives in fair value hedging relationship:

Interest rate swaps

Hedged items

-

-

-

-

-

0.2

Derivatives designated as hedging instruments

-

-

-

-

-

(0.2)

Gain (loss) on derivatives not designated as hedging instruments:

Foreign currency forward contracts

Amount of gain (loss) recognized in income (a)

-

(12.3)

11.3

-

25.2

-

Total gain (loss) of all derivative instruments

$9.1

$(121.1)

$19.2

$13.0

$47.5

$7.7

(a)Gain (loss) on derivatives not designated as hedging instruments recognized in income recorded in SG&A includes discontinued operations of $(0.2) million in the third quarter of 2019, and $(2.5) million and $(1.7) million for the first nine months of 2020 and 2019, respectively.

22

10. OTHER COMPREHENSIVE INCOME (LOSS) INFORMATION

Other 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 tables provide other comprehensive income information related to the Company’s derivatives and hedging instruments and pension and postretirement benefits. Refer to Note 9 for additional information related to the Company’s derivatives and hedging transactions. Refer to Note 14 for additional information related to the Company’s pension and postretirement benefits activity.

Third Quarter Ended 

Nine Months Ended 

September 30

September 30

(millions)

    

2020

2019

    

2020

2019

Derivative and Hedging Instruments

Unrealized gains (losses) on derivative & hedging instruments

Amount recognized in AOCI

$(126.2)

$0.1

$(108.3)

$40.2

(Gains) losses reclassified from AOCI into income

COS

(3.1)

(3.9)

(9.1)

(13.0)

SG&A

 

101.5

(2.8)

 

108.8

(22.3)

Interest (income) expense, net

5.1

6.1

(7.9)

(7.7)

 

103.5

(0.6)

 

91.8

(43.0)

Other activity

 

(0.2)

(0.3)

 

(0.2)

(0.4)

Tax impact

 

3.8

(0.1)

 

2.6

0.3

Net of tax

$(19.1)

$(0.9)

$(14.1)

$(2.9)

Pension and Postretirement Benefits

Amount reclassified from AOCI into income

Amortization of net actuarial loss and prior service costs and benefits

15.0

-

44.3

0.2

 

15.0

-

44.3

0.2

Other activity

(29.8)

6.0

(21.5)

9.3

Tax impact

 

(3.7)

(0.2)

 

(10.8)

(0.3)

Net of tax

$(18.5)

$5.8

$12.0

$9.2

The following table summarizes the derivative and pension and postretirement benefit amounts reclassified from AOCI into income.

Third Quarter Ended 

Nine Months Ended 

 

September 30

September 30

 

    

2020

2019

    

2020

2019

 

(millions)

Derivative (gains) losses reclassified from AOCI into income, net of tax

$78.2

$(0.5)

$69.4

$(32.5)

Pension and postretirement benefits net actuarial losses

and prior services costs reclassified from AOCI into income, net of tax

(18.5)

5.8

12.0

9.2

23

11. SHAREHOLDERS’ EQUITY

Share Repurchase Authorization

In February 2015, the Company’s Board of Directors authorized the repurchase of up to 20 million shares of its common stock, including shares to be repurchased under Rule 10b5–1. As of September 30, 2020, 6,342,568 shares remained to be repurchased under the Company’s repurchase authorization. The Company intends to repurchase all shares under its authorization, for which no expiration date has been established, in open market or privately negotiated transactions, subject to market conditions.

Share Repurchases

During the first nine months of 2020, the Company reacquired 648,222 shares of its common stock, of which 462,442 related to share repurchases through open market or private purchases, and 185,780 related to shares withheld for taxes on the exercise of stock options and the vesting of stock awards and units.

During all of 2019, the Company reacquired 1,986,241 shares of its common stock, of which 1,846,384 related to share repurchases through open market or private purchases, and 139,857 related to shares withheld for taxes on the exercise of stock options and the vesting of stock awards and units.

Separation of ChampionX

On June 3, 2020, the Company effected the split-off of ChampionX through the Exchange Offer and all shares of ChampionX common stock owned by Ecolab were exchanged for outstanding shares of Ecolab common stock. In the Exchange Offer, which was oversubscribed, the Company accepted 4,955,552 shares of Ecolab common stock in exchange for approximately 122.2 million shares of ChampionX common stock.

12. EARNINGS ATTRIBUTABLE TO ECOLAB PER COMMON SHARE (“EPS”)

The difference in the weighted average common shares outstanding for calculating basic and diluted EPS is a result of the dilution associated with the Company’s equity compensation plans. As noted in the table below, certain stock options and units outstanding under these equity compensation plans were not included in the computation of diluted EPS because they would not have had a dilutive effect.

The computations of the basic and diluted EPS amounts were as follows:

Third Quarter Ended 

Nine Months Ended 

September 30

September 30

(millions, except per share)

    

2020

    

2019

    

2020

2019

Net income from continuing operations attributable to Ecolab

$246.2

$435.9

$667.1

$1,030.9

Net (loss) income from discontinued operations

-

28.3

(2,172.5)

98.4

Net (loss) income attributable to Ecolab

$246.2

$464.2

$(1,505.4)

$1,129.3

Weighted-average common shares outstanding

Basic

 

285.4

288.1

 

287.5

288.0

Effect of dilutive stock options and units

 

3.0

4.7

 

3.3

4.5

Diluted

 

288.4

292.8

 

290.8

292.5

 

Earnings (loss) attributable to Ecolab per common share

Basic EPS

 

Continuing operations

$ 0.86

$ 1.51

$ 2.32

$ 3.58

Discontinued operations

$ -

$ 0.10

$ (7.56)