Attached files

file filename
8-K - 8-K - ECOLAB INC.a11-30612_18k.htm
EX-3.1 - EX-3.1 - ECOLAB INC.a11-30612_1ex3d1.htm
EX-99.1 - EX-99.1 - ECOLAB INC.a11-30612_1ex99d1.htm
EX-23.2 - EX-23.2 - ECOLAB INC.a11-30612_1ex23d2.htm
EX-99.3 - EX-99.3 - ECOLAB INC.a11-30612_1ex99d3.htm
EX-99.4 - EX-99.4 - ECOLAB INC.a11-30612_1ex99d4.htm
EX-99.7 - EX-99.7 - ECOLAB INC.a11-30612_1ex99d7.htm
EX-99.6 - EX-99.6 - ECOLAB INC.a11-30612_1ex99d6.htm
EX-23.1 - EX-23.1 - ECOLAB INC.a11-30612_1ex23d1.htm
EX-99.2 - EX-99.2 - ECOLAB INC.a11-30612_1ex99d2.htm

Exhibit 99.5

 

Nalco Holding Company and Subsidiaries

Consolidated Financial Statements

 

Reports of Independent Registered Public Accounting Firm

 

Page 2

Consolidated Financial Statements

 

Page 4

 

1


 


 

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Shareholders of Nalco Holding Company

 

In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, equity and cash flows present fairly, in all material respects, the financial position of Nalco Holding Company and its subsidiaries at December 31, 2010, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audit.  We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

 

/s/ PricewaterhouseCoopers LLP

Chicago, Illinois

February 25, 2011

 

2


 


 

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Shareholders of Nalco Holding Company

 

We have audited the consolidated balance sheet of Nalco Holding Company and subsidiaries as of December 31, 2009, and the related consolidated statements of operations, equity, and cash flows for each of the years ended December 31, 2009 and 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Nalco Holding Company and subsidiaries at December 31, 2009, and the consolidated results of their operations and their cash flows for each of the years ended December 31, 2009 and 2008, in conformity with U.S. generally accepted accounting principles.

 

/s/ Ernst & Young LLP

 

Ernst & Young LLP

 

Chicago, Illinois

 

February 26, 2010

 

 

3



 

Nalco Holding Company and Subsidiaries

Consolidated Balance Sheets

(dollars in millions)

 

     December 31,
2010
    December 31,
2009
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 128.1      $ 127.6   

Trade accounts receivable, less allowances of $13.2 and $17.8 in 2010 and 2009, respectively

     765.5        681.2   

Inventories

     330.0        313.8   

Deferred income taxes

     63.9        25.6   

Prepaid expenses, taxes and other current assets

     147.2        96.6   
                

Total current assets

     1,434.7        1,244.8   

Property, plant, and equipment, net

     729.1        678.1   

Goodwill

     1,844.1        1,800.0   

Other intangible assets, net

     1,023.3        1,055.9   

Deferred financing costs

     73.6        60.9   

Other noncurrent assets

     118.9        125.1   
                

Total assets

   $ 5,223.7      $ 4,964.8   
                

Liabilities and equity

    

Current liabilities:

    

Accounts payable

   $ 356.5      $ 315.4   

Accrued expenses

     214.2        209.2   

Accrued compensation

     134.5        139.0   

Short-term debt

     90.0        229.8   

Income taxes

     63.0        32.4   
                

Total current liabilities

     858.2        925.8   

Long-term debt

     2,782.0        2,714.3   

Deferred income taxes

     260.3        202.9   

Accrued pension benefits

     405.6        418.1   

Other liabilities

     190.1        212.1   
                

Total liabilities

     4,496.2        4,473.2   
                

Equity:

    

Nalco Holding Company shareholders’ equity:

    

Common stock, par value $0.01 per share; authorized 500,000,000 shares; 147,925,072 shares and 147,730,531 shares issued in 2010 and 2009, respectively

     1.4        1.4   

Additional paid-in capital

     800.7        776.1   

Treasury stock, at cost; 9,535,943 shares in 2010 and 2009

     (211.3     (211.3

Accumulated deficit

     (45.6     (227.8

Accumulated other comprehensive income

     151.6        133.2   
                

Nalco Holding Company shareholders’ equity

     696.8        471.6   

Noncontrolling interests

     30.7        20.0   
                

Total equity

     727.5        491.6   
                

Total liabilities and equity

   $ 5,223.7      $ 4,964.8   
                

See notes to consolidated financial statements.

 

4


Nalco Holding Company and Subsidiaries

Consolidated Statements of Operations

(dollars in millions, except per share amounts)

 

     Year ended December 31  
     2010     2009     2008  

Net sales

   $ 4,250.5      $ 3,746.8      $ 4,212.4   

Operating costs and expenses:

      

Cost of product sold

     2,336.7        2,040.9        2,381.8   

Selling, administrative and research expenses

     1,285.4        1,206.3        1,246.5   

Amortization of intangible assets

     43.2        47.9        56.8   

Restructuring expenses

     2.6        47.8        33.4   

Gain on divestiture

                   (38.1

Impairment of goodwill

     4.9               544.2   
                        

Total operating costs and expenses

     3,672.8        3,342.9        4,224.6   
                        

Operating earnings (loss)

     577.7        403.9        (12.2

Other income (expense), net

     (45.1     (17.6     (17.4

Interest income

     4.3        3.9        8.3   

Interest expense

     (231.9     (254.5     (258.8
                        

Earnings (loss) before income taxes

     305.0        135.7        (280.1

Income tax provision

     103.3        67.8        54.5   
                        

Net earnings (loss)

     201.7        67.9        (334.6

Less: Net earnings attributable to noncontrolling interests

     5.5        7.4        8.0   
                        

Net earnings (loss) attributable to Nalco Holding Company

   $ 196.2      $ 60.5      $ (342.6
                        

Net earnings (loss) per share attributable to Nalco Holding Company common shareholders:

      

Basic

   $ 1.42      $ 0.44      $ (2.44
                        

Diluted

   $ 1.41      $ 0.44      $ (2.44
                        

Weighted-average shares outstanding (millions):

      

Basic

     138.3        138.2        140.1   
                        

Diluted

     139.4        138.6        140.1   
                        

See notes to consolidated financial statements.

 

5


Nalco Holding Company and Subsidiaries

Consolidated Statements of Equity

(dollars in millions, except per share amounts)

 

     Nalco Holding Company Shareholders’ Equity              
    Common Stock     Treasury Stock     Additional
Paid-In
Capital
    Retained
Earnings
(Accumulated
Deficit)
    Accumulated
Other

Comprehensive
Income
    Noncontrolling
Interests
    Comprehensive
Income (Loss)
 
    Shares     Amount     Shares     Amount            

Balance at January 1, 2008

    144,377,068      $ 1.4        4,588,500      $ (108.0   $ 749.7      $ 100.7      $ 374.0      $ 16.7     

Share-based compensation

    238,647                             6.5                          

Reclassification of restricted stock no longer subject to cash settlement

                                8.0                          

Warrant exercise

    2,126,650                                                      

Exercise of stock options

    21,665                             0.3                          

Increase in redemption value of noncontrolling interest

                                       (5.1                

Purchases of treasury stock

                  4,947,443        (103.3                              

Dividends on common stock ($0.14 per share)

                                       (19.6                

Dividends paid to noncontrolling interests on subsidiary common stock

                                                     (7.7  

Other changes in noncontrolling interests

                                                     (0.3  

Net loss

                                       (342.6            8.0      $ (334.6

Other comprehensive income (loss):

                 

Net actuarial losses — net of tax benefit of $18.6

                                              (30.7            (30.7

Net prior service cost — net of tax benefit of $1.6

                                              (5.2            (5.2

Gain on derivatives — net of tax of $0.8

                                              1.3               1.3   

Currency translation adjustments — net of tax of $12.3

                                              (231.4     2.7        (228.7
                       

Comprehensive loss

                    (597.9

 

6


Nalco Holding Company and Subsidiaries

Consolidated Statements of Equity (continued)

(dollars in millions, except per share amounts)

 

     Nalco Holding Company Shareholders’ Equity              
    Common Stock     Treasury Stock     Additional
Paid-In
Capital
    Retained
Earnings
(Accumulated
Deficit)
    Accumulated
Other

Comprehensive
Income
    Noncontrolling
Interests
    Comprehensive
Income (Loss)
 
    Shares     Amount     Shares     Amount            

Less: Comprehensive income attributable to noncontrolling interests

                         10.7   
                       

Comprehensive loss attributable to Nalco Holding Company

                       $ (608.6
                       

Adjustment to adopt ASC 715-20-65-1 measurement provision:

                 

Service cost, interest cost and expected return on plan assets for December 2007, net of tax benefit of $1.4

                                       (2.7                

Amortization of net prior service credit for December 2007, net of tax of $0.2

                                       0.4        (0.4         

Amortization of net gain for December 2007, net of tax of $0.1

                                       0.1        (0.1         
                                                                 

Balance at December 31, 2008

    146,764,030        1.4        9,535,943        (211.3     764.5        (268.8     107.5        19.4     

 

7


Nalco Holding Company and Subsidiaries

Consolidated Statements of Equity (continued)

(dollars in millions, except per share amounts)

 

     Nalco Holding Company Shareholders’ Equity              
    Common Stock     Treasury Stock     Additional
Paid-In
Capital
    Retained
Earnings
(Accumulated
Deficit)
    Accumulated
Other

Comprehensive
Income
    Noncontrolling
Interests
    Comprehensive
Income (Loss)
 
    Shares     Amount     Shares     Amount            

Share-based compensation

    308,272                             11.1                          

Warrant exercise

    625,299                                                      

Exercise of stock options

    32,930                             0.5                          

Increase in redemption value of noncontrolling interest

                                       (0.2                

Dividends on common stock ($0.14 per share)

                                       (19.3                

Dividends paid to noncontrolling interests on subsidiary common stock

                                                     (7.2  

Other changes in noncontrolling interests

                                                     0.5     

Net earnings

                                       60.5               7.4      $ 67.9   

Other comprehensive income (loss):

                 

Net actuarial losses — net of tax benefit of $36.2

                                              (106.4            (106.4

Net prior service credit — net of tax benefit of $2.1

                                              14.0               14.0   

Gain on derivatives — net of tax of $0.4

                                              0.6               0.6   

Currency translation adjustments — net of tax benefit of $8.1

                                              117.5        (0.1     117.4   
                       

Comprehensive income

                    93.5   

Less: Comprehensive income attributable to noncontrolling interests

                    7.3   
                       

Comprehensive income attributable to Nalco Holding Company

                  $ 86.2   
                                                                       

Balance at December 31, 2009

    147,730,531        1.4        9,535,943        (211.3     776.1        (227.8     133.2        20.0     

 

 

 

 

8


Nalco Holding Company and Subsidiaries

Consolidated Statements of Equity (continued)

(dollars in millions, except per share amounts)

 

     Nalco Holding Company Shareholders’ Equity              
    Common Stock     Treasury Stock     Additional
Paid-In
Capital
    Retained
Earnings
(Accumulated
Deficit)
    Accumulated
Other

Comprehensive
Income
    Noncontrolling
Interests
    Comprehensive
Income (Loss)
 
    Shares     Amount     Shares     Amount            

Share-based compensation

    128,257                             18.7                          

Exercise of stock options

    66,284                             1.2                          

Acquisition without the transfer of consideration

                                10.3                      10.2     

Dividends on common stock ($0.14 per share)

                                       (19.3                

Dividends paid to noncontrolling interests on subsidiary common stock

                                                     (6.4  

Additional investments in subsidiaries and other changes in non-controlling interests

                                (5.6     5.3               (0.7  

Net earnings

                                       196.2               5.5      $ 201.7   

Other comprehensive income (loss):

                 

Net actuarial losses — net of tax benefit of $3.4

                                              (4.5     (0.1     (4.6

Net prior service credit — net of tax of $2.8

                                              3.6               3.6   

Currency translation adjustments — net of tax of $7.4

                                              19.3        2.2        21.5   
                       

Comprehensive income

                    222.2   

Less: Comprehensive income attributable to noncontrolling interests

                    7.6   
                       

Comprehensive income attributable to Nalco Holding Company

                  $ 214.6   
                                                                       

Balance at December 31, 2010

    147,925,072      $ 1.4        9,535,943      $ (211.3   $ 800.7      $ (45.6   $ 151.6      $ 30.7     
                                                                 

See notes to consolidated financial statements.

 

9


Nalco Holding Company and Subsidiaries

Consolidated Statements of Cash Flows

(dollars in millions)

 

     Year ended December 31  
     2010     2009     2008  

Operating activities

      

Net earnings (loss)

   $ 201.7      $ 67.9      $ (334.6

Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:

      

Depreciation

     123.1        142.3        136.6   

Amortization

     43.2        47.9        56.8   

Gain on divestiture

                   (38.1

Impairment of goodwill

     4.9               544.2   

Amortization of deferred financing costs and accretion of senior discount notes

     11.8        11.0        48.0   

Loss on early extinguishment of debt

     27.4        20.5          

Equity in earnings of unconsolidated subsidiaries, net of distributions

     0.7        1.2        1.9   

Deferred income taxes

     15.0        (6.3     (30.7

Amortization of unearned employee profit sharing and accretion of obligation

            23.3        20.1   

Defined benefit pension plan expense

     21.6        47.3        45.1   

Defined benefit pension plan contributions

     (66.9     (72.9     (86.2

Other, net

     51.4        42.6        14.2   

Changes in current assets and liabilities:

      

Trade accounts receivable

     (92.1     133.7        (18.0

Inventories

     (15.9     117.1        (92.8

Accounts payable

     37.1        7.5        (7.0

Other

     (15.8     10.7        23.6   
                        

Net cash provided by operating activities

     347.2        593.8        283.1   

Investing activities

      

Additions to property, plant, and equipment, net

     (156.3     (102.2     (133.1

Business purchases

     (39.5     (27.6     (21.7

Net proceeds from business divestiture

                   74.1   

Other investing activities

     1.8        (6.0     (14.7
                        

Net cash used for investing activities

     (194.0     (135.8     (95.4

Financing activities

      

Cash dividends

     (19.3     (19.3     (19.7

Proceeds from long-term debt

     1,823.4        1,511.6        34.0   

Payments of long-term debt

     (1,724.3     (1,772.9     (70.8

Short-term debt, net

     (157.4     (45.7     (65.8

Redemption premium on early extinguishment of debt

     (17.8     (9.2       

Deferred financing costs

     (28.9     (54.7       

Purchases of treasury stock

                   (103.3

Other financing activities

     (11.3     (8.4     (7.3
                        

Net cash used for financing activities

     (135.6     (398.6     (232.9

Effect of foreign exchange rate changes on cash and cash equivalents

     (17.1)        6.4        (12.9)   
                        

Increase (decrease) in cash and cash equivalents

     0.5        65.8        (58.1

Cash and cash equivalents at beginning of the period

     127.6        61.8        119.9   
                        

Cash and cash equivalents at end of the period

   $ 128.1      $ 127.6      $ 61.8   
                        

Supplemental cash flows information

      

Cash paid during the period for:

      

Interest

   $ 226.2      $ 234.0      $ 213.7   

Income taxes

     94.3        68.5        84.5   

See notes to consolidated financial statements.

 

10


Nalco Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

(dollars in millions, except per share amounts)

December 31, 2010

1.    Description of Business and Change in Ownership

Description of Business

We provide essential expertise for water, energy and air through the worldwide manufacture and sale of highly specialized service chemical programs. This includes production and service related to the sale and application of chemicals and technology used in water treatment, pollution control, energy conservation, oil production and refining, steelmaking, papermaking, mining, and other industrial processes.

Change in Ownership

On November 4, 2003, Nalco Holding Company’s indirect subsidiary, Nalco Holdings LLC (the “Buyer”), a newly formed entity controlled by affiliates of The Blackstone Group, L.P., Apollo Management, L.P., and The Goldman Sachs Group, Inc. (collectively, the “Sponsors”), pursuant to a Stock Purchase Agreement (as amended, the “Stock Purchase Agreement”) with Suez S.A. (“Suez”) and certain of its affiliates, acquired the net assets of Ondeo Nalco Group (as defined below) for $4,127.1 million, including direct costs of the acquisition of $125.6 million, excluding assumed debt of $30.2 million, and subject to certain closing and post-closing adjustments (the “Acquisition”).

The Ondeo Nalco Group (the “Predecessor”) included Ondeo Nalco Company and subsidiaries (“ONC”) and certain subsidiaries of Nalco International SAS (“NIS”) plus Calgon Europe Limited (UK), owned by Degremont (a former related party). Ondeo Industrial Solutions North America, a subsidiary of ONC, was excluded from the Predecessor, as the Buyer did not acquire it.

2.    Summary of Significant Accounting Policies

Basis of Presentation

All intercompany balances and transactions are eliminated. Investments in companies or partnerships in which we do not have control, but have the ability to exercise significant influence over operating and financial policies, are reported using the equity method.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications

Certain minor reclassifications have been made to the consolidated balance sheet at December 31, 2009 and consolidated statements of operations for the years ended December 31, 2009 and 2008 to conform to the current year presentation. These reclassifications had no effect on net earnings or equity reported for any period.

Foreign Currency Translation

Local currencies are the functional currencies for most foreign operations. Their balance sheets and income statements are translated at current and average exchange rates, respectively, with any resulting

 

11


2.    Summary of Significant Accounting Policies (continued)

 

translation adjustments included in the currency translation adjustment account in shareholders’ equity. The financial statements of any foreign subsidiaries that operate in highly inflationary environments are translated using a combination of current, average, and historical exchange rates, with the resulting translation impact included in results of operations. Exchange adjustments resulting from transactions executed in different currencies are included in other income (expense), net in the statements of operations. (See Note 17.)

Concentration of Credit Risk

Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed to perform as contracted. We believe the likelihood of incurring material losses due to concentration of credit risk is remote. The principal financial instruments subject to credit risk are as follows:

Cash and Cash Equivalents

A formal policy exists of placing these instruments in investment grade companies and institutions and limiting the size of deposits with any single entity.

Accounts Receivable

A large number of customers in diverse industries and geographies, as well as the practice of establishing reasonable credit lines, limits credit risk. The allowance for doubtful accounts is adequate to cover potential credit risk losses.

Foreign Exchange Contracts and Derivatives

Formal policies exist, which establish credit limits and investment grade credit criteria of “A” or better for all counterparties.

Cash and Cash Equivalents

Cash and cash equivalents include all cash balances and highly liquid investments with original maturities of three months or less.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are carried at their face amounts less an allowance for doubtful accounts. On a periodic basis, we evaluate our accounts receivable and establish the allowance for doubtful accounts based on a combination of specific customer circumstances and credit conditions and based on a history of write-offs and collections. Our policy is generally to not charge interest on trade receivables after the invoice becomes past due. A receivable is considered past due if payments have not been received within agreed upon invoice terms. Write-offs are recorded at the time a customer receivable is deemed uncollectible.

Inventory Valuation

Inventories are valued at the lower of cost or market. Approximately 66% and 64% of the inventories at December 31, 2010 and 2009, respectively, are valued using the average cost or first-in, first-out (FIFO) method. The remaining inventories are valued using the last-in, first-out (LIFO) method. Reported inventory amounts would have been $24.3 million and $9.7 million higher at December 31, 2010 and 2009, respectively, if the FIFO method of accounting had been used for all inventories.

The LIFO method is used only in the United States. Most of the countries outside of the United States where we have subsidiaries do not permit the use of the LIFO method. In those countries where its use is permitted, we have not adopted the LIFO method of inventory valuation because the value of the inventories in those countries is not significant.

 

12


2.    Summary of Significant Accounting Policies (continued)

 

Inventories consist of the following:

 

     December 31,
2010
     December 31,
2009
 

Finished products

   $ 246.0       $ 232.6   

Raw materials and work-in-process

     84.0         81.2   
                 
   $ 330.0       $ 313.8   
                 

As of December 31, 2010 and 2009, our finished products inventories included $50.1 million and $47.4 million, respectively, of consignment inventories at customer sites to better serve and meet the needs of our customers.

Property, Plant, and Equipment

Property, plant, and equipment (including major improvements) are recorded at cost. Depreciation of buildings and equipment is calculated over their estimated useful lives generally using the straight-line method. We classify depreciation expense in our consolidated statements of operations as cost of product sold or selling, administrative and research expenses consistent with the utilization of the underlying assets.

Depreciation expense for the years ended December 31, 2010, 2009 and 2008 is as follows:

 

     2010      2009      2008  

Depreciation expense

   $ 123.1       $ 142.3       $ 136.6   
                          

The estimated useful lives of the major classes of depreciable assets are as follows:

 

Classification

  

Estimated Useful Lives

Buildings

   33 to 40 years

Software

   5 years

Equipment

   3 to 15 years

Property, plant, and equipment consist of the following:

 

     December 31,
2010
    December 31,
2009
 

Land

   $ 83.7      $ 83.6   

Buildings

     248.6        226.3   

Software

     153.8        154.9   

Equipment

     1,142.9        1,018.0   
                
     1,629.0        1,482.8   

Accumulated depreciation

     (899.9     (804.7
                

Property, plant, and equipment, net

   $ 729.1      $ 678.1   
                

Goodwill and Other Intangible Assets

We assess the recoverability of goodwill and other intangible assets with indefinite lives annually or whenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable.

We have defined our operating segments as our reporting units. We use a two-step process to test goodwill for impairment. First, the reporting unit’s fair value is compared to its carrying value. Fair value

 

13


2.    Summary of Significant Accounting Policies (continued)

 

is estimated using a discounted cash flow approach. If a reporting unit’s carrying amount exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired, and the second step of the impairment test would be performed, which is used to measure the amount of the impairment loss, if any. In the second step, the implied fair value of the reporting unit’s goodwill is determined by allocating the reporting unit’s fair value to all of its assets and liabilities other than goodwill in a manner similar to a purchase price allocation. The implied fair value of the goodwill that results from the application of this second step is then compared to the carrying amount of the goodwill and an impairment charge would be recorded for the difference if the carrying value exceeds the implied fair value of the goodwill.

We test the carrying value of other intangible assets with indefinite lives by comparing the fair value of the intangible assets to the carrying value. Fair value is estimated using a relief of royalty approach, a discounted cash flow methodology.

We amortize most customer relationship intangibles using a declining-balance method over an estimated useful life of 16 years to reflect the pattern in which the economic benefits of that asset are realized. This amortization method considers the expected rate of customer attrition, which was based on historical attrition data that was also used in estimating the fair value of the customer relationship intangible acquired at the Acquisition date.

The straight-line method is used for all other assets subject to amortization. Patents and developed technology are primarily being amortized over an estimated useful life of 10 years.

Deferred Financing Costs

Deferred financing costs are incurred to obtain long-term financing and are amortized using the effective interest method over the term of the related debt. The amortization of deferred financing costs, which is classified in interest expense in the statement of operations, for the years ended December 31, 2010, 2009 and 2008 is as follows:

 

     2010      2009      2008  

Amortization of deferred financing costs

   $ 11.8       $ 7.7       $ 9.7   
                          

Asset Retirement Obligations

The fair value of a liability for an asset retirement obligation is recognized in the period in which it is incurred. The liability is adjusted to its present value in subsequent periods as accretion expense is recorded. The corresponding asset retirement costs are capitalized as part of the carrying amount of the related long-lived asset and depreciated over the asset’s useful life.

A reconciliation of the beginning and ending aggregate carrying amount of the asset retirement obligation is shown in the following table:

 

     2010     2009  

Balance as of January 1

   $ 14.7      $ 4.8   

Liabilities incurred

     0.9        5.7   

Liabilities settled

     (0.9       

Accretion expense

     0.2        0.4   

Revisions in estimated liabilities

     (5.2     3.4   

Changes due to translation of foreign currencies

     (0.3     0.4   
                

Balance as of December 31

     9.4        14.7   

Less current portion

     (2.5     (3.7
                

Asset retirement obligation, long term

   $ 6.9      $ 11.0   
                

 

14


2.    Summary of Significant Accounting Policies (continued)

 

A liability has been recorded for remediation and demolition activities at certain manufacturing sites where legal obligations associated with the retirement of tangible long-lived assets exist and potential settlement dates can be determined. The liability for other asset retirement obligations cannot currently be measured as the retirement dates are not yet determinable. We will recognize the liability when sufficient information exists to estimate potential settlement dates.

Income Taxes

Income taxes are recognized during the period in which transactions enter into the determination of financial statement income, with deferred income taxes being provided for the tax effect of temporary differences between the carrying amount of assets and liabilities and their tax bases.

Deferred income taxes are provided on the undistributed earnings of foreign subsidiaries except to the extent such earnings are considered to be permanently reinvested in the subsidiary. In cases where available foreign tax credits will not offset income taxes, appropriate provisions are included in the consolidated statement of operations.

Valuation allowances are determined based on the realizability of the deferred tax assets. Relevant factors to determine the realizability of the assets include future taxable income, the expected timing of the reversal of temporary differences, tax planning strategies and the expiration dates of the various tax attributes. Valuation allowances are established for those assets that are determined to be more likely than not to expire without benefit, or for which income of the proper character is not anticipated.

The effect of a valuation allowance for a deferred tax asset that is expected to originate in the current year is included in the annual effective tax rate for the year. The effect of a change in the beginning-of-the-year balance of a valuation allowance resulting from a change in judgment about the realizability of the related deferred tax asset in future years is recognized in the interim period in which the change occurs.

We record liabilities for income tax uncertainties in accordance with the recognition and measurement criteria prescribed in authoritative guidance issued by the Financial Accounting Standards Board (“FASB”). The tax benefits and related reserves are measured throughout the year, taking into account new legislation, regulations, case law and audit results. We recognize income tax-related interest and penalties within the income tax provision.

Derivative Instruments

Derivatives are recognized as either assets or liabilities in the consolidated balance sheets at fair value.

Revenue Recognition

Revenue from sales of products, including amounts billed to customers for shipping and handling costs, is recognized at the time: (1) persuasive evidence of an arrangement exists, (2) ownership and all risks of loss have been transferred to the buyer, (3) the price is fixed and determinable, and (4) collectability is reasonably assured. Revenue from saleable services is recognized when the services are provided to the customer.

Cost of Product Sold

Cost of product sold includes the cost of inventory (materials and conversion costs) sold to customers, shipping and handling costs, and certain warehousing costs. It also includes inbound freight charges, purchasing and receiving costs, packaging, quality assurance costs, internal transfer costs, and other costs

 

15


2.    Summary of Significant Accounting Policies (continued)

 

of our distribution network. It also includes supply chain administration, safety, health and environmental administration, and the costs of labor for services provided, whether as saleable services or as part of a multiple deliverables arrangement.

Selling, Administrative and Research Expenses

Selling expenses include the cost of our sales force and marketing staff and their related expenses.

Administrative expenses primarily represent the cost of support functions, including information technology, finance, human resources and legal, as well as expenses for support facilities, executive management and management incentive plans.

Research and development expenses represent the cost of our research and development personnel and their related expenses, including research facilities. Research and development costs are charged to expense as incurred.

Selling, administrative and research expenses for the years ended December 31, 2010, 2009 and 2008 are as follows:

 

     2010      2009      2008  

Selling expenses

   $ 958.2       $ 875.6       $ 969.7   

Administrative expenses

     246.8         256.3         203.5   

Research expenses

     80.4         74.4         73.3   

Recent Accounting Pronouncements

In June 2009, the FASB issued authoritative guidance that eliminates the qualifying special purpose entity concept, changes the requirements for derecognizing financial assets and requires enhanced disclosures about transfers of financial assets. The guidance also revises earlier guidance for determining whether an entity is a variable interest entity, requires a new approach for determining who should consolidate a variable interest entity, changes when it is necessary to reassess who should consolidate a variable interest entity, and requires enhanced disclosures related to an enterprise’s involvement in variable interest entities. We adopted the guidance effective January 1, 2010, which did not have a material effect on our financial statements.

In October 2009, the FASB issued authoritative guidance that amends earlier guidance addressing the accounting for contractual arrangements in which an entity provides multiple products or services (deliverables) to a customer. The amendments address the unit of accounting for arrangements involving multiple deliverables and how arrangement consideration should be allocated to the separate units of accounting, when applicable, by establishing a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific nor third-party evidence is available. The amendments also require that arrangement consideration be allocated at the inception of an arrangement to all deliverables using the relative selling price method. The guidance is effective for us on January 1, 2011. We do not expect adoption of the guidance to have a material effect on our financial statements.

In October 2009, the FASB issued authoritative guidance that amends earlier guidance for revenue arrangements that include both tangible products and software elements. Tangible products containing software components and nonsoftware components that function together to deliver the tangible product’s essential functionality are no longer within the scope of guidance for recognizing revenue from the sale of software, but would be accounted for in accordance with other authoritative guidance. The guidance is effective for us on January 1, 2011. We do not expect adoption of the guidance to have a material effect on our financial statements.

 

16


2.    Summary of Significant Accounting Policies (continued)

 

In January 2010, the FASB issued authoritative guidance that changes the disclosure requirements for fair value measurements. Specifically, the changes require a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. The changes also clarify existing disclosure requirements related to how assets and liabilities should be grouped by class and valuation techniques used for recurring and nonrecurring fair value measurements. We adopted the guidance in the first quarter 2010, which did not have an impact on our financial position, results of operations or cash flows.

In December 2010, the FASB issued authoritative guidance that amends the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires performing Step 2 if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. The guidance is effective for us January 1, 2011. Any impairment to be recorded upon adoption is to be recognized as an adjustment to beginning retained earnings. We do not expect adoption of the guidance to have any impact on our consolidated financial statements.

In December 2010, the FASB issued authoritative guidance that addresses diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. The guidance clarifies that when presenting comparative financial statements, an entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The guidance also requires a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Since this guidance impacts disclosure requirements only, its adoption will not have a material impact on our financial statements.

3.    Acquisitions and Divestitures

In December 2007, we purchased an 87.5% interest in Mobotec USA, Inc. (“Mobotec”), a leading provider of combustion optimization and emission reduction capabilities, including engineering, equipment and chemistry for industrial and utility boilers. Concurrent with the purchase of the 87.5% interest in Mobotec, we entered into an agreement with the minority shareholder that provided us with the option to purchase the remaining shares of Mobotec. In August 2010, we exercised our option and acquired the remaining 12.5% interest for approximately $6.1 million.

In July 2010, we acquired substantially all of the business assets of Fabrication Technologies, Inc. (“FabTech”), a North American supplier of enhanced oil recovery (“EOR”) mixing and injection equipment, for an initial installment of $21.5 million. The purchase agreement provides for a final installment of $2.5 million, which was paid in December 2010 and up to $8.0 million of additional contingent consideration payable in cash if specified gross profit targets are achieved in the years 2010, 2012 or 2013. This additional consideration is not contingent on the former shareholder remaining employed. The agreement also provides for an adjustment to the purchase price for projects that were

in-process at the acquisition date, which was settled in December 2010 for $2.4 million.

The acquisition of FabTech was made to complete our integrated EOR solutions platform that we started in 2008. The purchase price, including the estimated fair value of the additional contingent consideration, exceeded the fair value of the net tangible assets acquired by $18.9 million, of which $15.6 million was allocated to goodwill and $3.3 million was allocated to other intangible assets. The goodwill resulting from this acquisition was allocated to the Energy Services segment and consists largely of our expected future product sales and synergies from combining FabTech’s products with our other EOR product offerings. All of the goodwill is expected to be deductible for income tax purposes. The fair

 

17


3.    Acquisitions and Divestitures (continued)

 

value of the additional contingent consideration was measured using internal cash flow estimates (i.e., Level 3 in the fair value hierarchy established by authoritative guidance issued by the FASB for fair value measurements).

In April 2010, we purchased the assets of Res-Kem Corp. and General Water Services Corp., leading regional suppliers of water treatment services and equipment, including deionized water, for an initial installment of $6.0 million. The purchase agreement provides for a second and final installment of $1.0 million, which was paid in October 2010, and $0.5 million of additional contingent consideration if specified revenue targets are achieved through March 2015. This additional consideration is not contingent on any selling shareholders remaining employed. The purchase price, including the estimated fair value of the additional contingent consideration, exceeded the fair value of the net tangible assets acquired by $6.3 million, of which $5.5 million was allocated to goodwill and $0.8 million was allocated to other intangible assets. The goodwill resulting from this acquisition, all of which is expected to be deductible for income tax purposes, was allocated to the Water Services segment. The fair value of the additional contingent consideration was measured using internal cash flow estimates (i.e., Level 3 in the fair value hierarchy established by authoritative guidance issued by the FASB for fair value measurements).

In January 2010, we acquired a 50.1% controlling financial interest in Nalco Africa, a new entity formed with Protea Chemicals, one of Africa’s largest suppliers of industrial chemicals and services. Protea Chemicals is a division of the Omnia Group, a diversified and specialist chemical services company located in Johannesburg, South Africa. The new entity enables us to re-enter the water and process treatment markets of southern Africa. The business combination did not involve the transfer of consideration, but under the terms of a technical assistance and license agreement executed at the time of the combination, we have licensed to Nalco Africa rights to certain of our patents, know-how and trademarks. The fair value of the business acquired was $20.1 million, of which $16.0 million was allocated to goodwill, $5.7 million was allocated to other intangible assets, and $1.6 million was allocated to a deferred tax liability. The goodwill consists primarily of our expectation of future sales growth in this geographic market and intangible assets that do not qualify for separate recognition. The goodwill was allocated to the Water Services segment and is not expected to be deductible for tax purposes. The fair value of the business acquired was measured using internal cash flow estimates (i.e., Level 3 in the

fair value hierarchy established by authoritative guidance issued by the FASB for fair value measurements).

In March 2009, we acquired the assets of Crossbow Water, a regional high-purity water and water pre-treatment company, for $22.1 million. The purchase agreement provides for up to $21.0 million of additional contingent consideration, payable in cash, based upon the achievement of specified revenue targets measured through March 2014. This additional consideration is not contingent on any selling shareholders remaining employed. The purchase price, including the estimated fair value of the additional contingent consideration, exceeded the fair value of the net tangible assets acquired by $25.1 million, of which $10.8 million was allocated to goodwill and $14.3 million was allocated to other intangible assets. The goodwill resulting from this acquisition was allocated to the Water Services segment and largely consists of expected sales growth and synergies resulting from the acquisition. All of the goodwill is expected to be deductible for income tax purposes.

During 2008, we purchased 100% of the outstanding shares of TIORCO, Inc., a company engaged in the enhanced oil recovery business, for $8.5 million, net of cash acquired. The purchase agreement included a provision for two contingent payments. The first payment of $3.1 million was paid during 2008, and the second payment, which was paid in 2009, was $4.8 million. Both payments were accounted for as additional purchase price. The purchase price, including the contingent payments, exceeded the fair value of the net tangible assets acquired by $15.8 million, of which $10.2 million was allocated to goodwill and $5.6 million was allocated to other intangible assets. The goodwill from this acquisition resulted from the expectation of sales growth into this new market and other expected synergies. The goodwill was allocated to the Energy Services segment and is not expected to be deductible for tax purposes.

 

18


3.    Acquisitions and Divestitures (continued)

 

In August 2008, we purchased the assets of G&L Soap Injection Enterprise, LLC and Six Degrees, LLC, companies engaged in the business of treating gas and oil wells, for $7.0 million. The purchase price exceeded the fair value of the net tangible assets acquired by $6.3 million, of which $3.5 million was allocated to goodwill and $2.8 million was allocated to other intangible assets. The purchase agreement included a provision for three contingent payments totaling $2.0 million that are earned if certain targets are achieved in the years 2009, 2010 and 2011. The 2009 target was achieved, and a payment of $0.7 million was made in 2009, which was accounted for as additional purchase price. The 2010 target was achieved, and a payment of $0.7 million was made in January 2011 that will be accounted for as additional purchase price. The goodwill resulting from this acquisition was allocated to the Energy Services segment and is expected to be deductible for tax purposes.

Other small business acquisitions were made during 2008 for a combined purchase price of $3.1 million, net of cash acquired. The purchase price exceeded the fair value of the net tangible assets acquired by $2.1 million, which was allocated to goodwill.

In September 2008, we completed the sale of our Finishing Technologies surface treatment business to Chemetall Corp., a subsidiary of Rockwood Holdings, Inc. Proceeds from the sale were $74.1 million, net of selling and other cash expenses of $0.9 million, and resulted in a gain of $38.1 million before income taxes. A plant in Jackson, Michigan, dedicated to the Finishing Technologies business, was included in the sale, along with dedicated Finishing Technologies sales, service, marketing, research and supply chain employees. The sale also included products, goodwill, customer relationships and other related assets. The Finishing Technologies business was not presented as a discontinued operation because its operations and cash flows were not clearly distinguished from the rest of the entity. On an after-tax basis, the transaction increased diluted earnings per share by 11 cents for the year ended December 31, 2008.

The pro forma impact as if the aforementioned acquisitions had occurred at the beginning of the respective years is not significant.

4.    Securitization of Accounts Receivable

We have an accounts receivable securitization facility with a commercial paper conduit sponsored by Credit Agricole Corporate and Investment Bank that provides up to $150.0 million in funding, based on availability of eligible receivables and satisfaction of other customary conditions, which expires in June 2013. This facility replaced the previous facility that provided up to $160.0 million in funding that expired in June 2010.

Under the facility, Nalco Company (the “Seller”), a wholly owned indirect subsidiary of Nalco Holding Company, transfers all eligible trade accounts receivable (the “Receivables”) to a bankruptcy-remote, wholly owned, special purpose limited liability company (the “Transferor”). Pursuant to a Receivables Transfer Agreement, the Transferor then transfers an undivided interest in the Receivables to the commercial paper conduit or the related bank sponsor (the “Transferees”) in exchange for cash.

The financing fee charged by the Transferees under the facility is based on the amount funded and the conduit’s cost of funds for issuing commercial paper plus a margin that varies based on the leverage ratio as calculated under our senior credit facilities. The Transferees also charge a facility fee of 0.5% per annum on 102% of the total funding commitment under the facility.

Availability of funding under the facility depends primarily upon the outstanding Receivables balance from time to time. The facility may be terminated for, among other reasons, material breaches of representations and warranties, bankruptcies of the Seller or the Transferor, a judgment or order for the payment of money rendered against the Transferor, cross-defaults to our other debt, or breach of specified financial covenants. We are currently in compliance with these covenants.

 

19


4.    Securitization of Accounts Receivable (continued)

 

The facility is accounted for as a general financing agreement resulting in the funding and related Receivables being shown as liabilities and assets, respectively, on our consolidated balance sheet and the costs associated with the facility being recorded as interest expense. We had $67.8 million of outstanding borrowings at December 31, 2010 and no outstanding borrowings at December 31, 2009.

5.    Goodwill

Changes in the carrying value of goodwill from January 1, 2009 to December 31, 2010 are summarized below:

 

     Water
Services
    Paper
Services
    Energy
Services
    Total  

Balance as of January 1, 2009:

        

Goodwill

   $ 1,176.8      $ 544.2      $ 523.3      $ 2,244.3   

Accumulated impairment losses

            (544.2            (544.2
                                
     1,176.8               523.3        1,700.1   
                                

Acquisitions

     16.2                      16.2   

Contingent consideration

                   5.5        5.5   

Purchase price allocations

                   (3.5     (3.5

Other

     1.6                      1.6   

Effect of foreign currency translation

     58.0               22.1        80.1   
                                

Balance as of December 31, 2009:

        

Goodwill

     1,252.6        544.2        547.4        2,344.2   

Accumulated impairment losses

            (544.2            (544.2
                                
     1,252.6               547.4        1,800.0   
                                

Acquisitions

     21.5               15.6        37.1   

Purchase price allocations

     (5.4                   (5.4

Correction of purchase price allocation

     10.7        4.9        4.5        20.1   

Impairment charge

            (4.9            (4.9

Reclassifications

     4.5               (4.5       

Other

     1.1               1.1        2.2   

Effect of foreign currency translation

     (5.5            0.5        (5.0
                                

Balance as of December 31, 2010:

        

Goodwill

     1,279.5        549.1        564.6        2,392.2   

Accumulated impairment losses

            (549.1            (549.1
                                
   $ 1,279.5      $      $ 564.6      $ 1,844.1   
                                

During 2004, as part of the allocation of the purchase price paid for the Predecessor by the Sponsors, certain deferred tax assets totaling $20.1 million were recorded, with a corresponding reduction to goodwill. During 2010, we determined that these deferred tax assets were recorded in error. In accordance with authoritative guidance issued by the FASB, we corrected this error in the purchase price allocation by reversing the deferred tax asset and increasing goodwill.

Of the $20.1 million adjustment to goodwill, $4.9 million was allocated to our Paper Services reporting unit. Because the entire balance of goodwill of our Paper Services reporting unit was written off in 2008, when it was determined that it was impaired, the $4.9 million was immediately written off.

We performed our annual impairment test during the fourth quarter of 2010 and 2009 with no goodwill impairment indicated.

 

20


6.    Other Intangible Assets

Intangible assets are summarized as follows:

 

     December 31, 2010     December 31, 2009  
     Gross
Amount
     Accumulated
Amortization
    Gross
Amount
     Accumulated
Amortization
 

Intangible assets subject to amortization:

          

Customer relationships

   $ 529.4       $ (394.3   $ 521.5       $ (365.4

Patents and developed technology

     130.5         (80.4     130.4         (67.8

Other

     6.7         (3.4     5.4         (2.6

Intangibles not subject to amortization:

          

Trademarks and trade names

     834.8                834.4           
                                  
   $ 1,501.4       $ (478.1   $ 1,491.7       $ (435.8
                                  

Estimated annual amortization expense for the years 2011 through 2015 is as follows:

 

Year ending December 31       

2011

   $ 39.0   

2012

     34.9   

2013

     29.8   

2014

     18.7   

2015

     16.1   

7.    Profit Sharing and Savings Plan

We sponsor a defined contribution profit sharing and savings plan that enables most U.S. employees to share in our success and growth, and that provides them with additional income for retirement. Under the plan, annual profit sharing contributions are made to the accounts of participating employees that vary based on our financial performance. In addition, the plan provides for matching contributions of up to 4% of pay for employees who elect to contribute to 401(k) accounts. All contributions are made to the Profit Sharing, Investment and Pay Deferral Plan Trust (the “Trust”).

Prior to 2010, participants in the domestic pension plan received lower profit sharing and 401(k) matching contributions than other employees. However, because the domestic pension plan was amended in 2009 such that pension plan participants would no longer earn service credit beginning in 2010, the profit sharing and 401(k) matching contributions for those employees were increased to the same level as all other employees.

The Predecessor previously had an Employee Stock Ownership Plan (“ESOP”), which gave most U.S. employees an additional opportunity to share in the ownership of the Predecessor’s stock. Preferred shares were allocated to eligible employees based on a percentage of pretax earnings.

At the inception of the ESOP, the Predecessor and a trustee entered into a trust agreement, constituting the ESOP Trust, to fund benefits under the Predecessor’s ESOP. As part of its acquisition of Nalco Chemical Company in November 1999, Suez purchased from the trustee all of the issued and outstanding Series B ESOP Convertible Preferred Stock. The trustee credited proceeds from the sale of allocated shares to participants’ accounts. Under the terms of an agreement (the “Contribution Agreement”), the Predecessor and the ESOP trustee agreed that the trustee would use proceeds from the sale of shares held in the loan suspense account to repay the outstanding principal and accrued interest on the ESOP loans. It was also agreed that all proceeds remaining after the repayment of the loans and accrued interest would be allocated to participants’ accounts. In return, the Predecessor agreed to make contributions to the Trust on or before December 31, 2010, having a present value equal to $124.6 million, the outstanding principal and accrued interest paid on the ESOP loans. The plan was amended

 

21


7.    Profit Sharing and Savings Plan (continued)

 

effective January 1, 2003 to also permit matching contributions under the Company’s 401(k) plan to count as contributions to the Trust. The Contribution Agreement provided for specified minimum annual contributions to be made to the Trust, with interest accruing on the outstanding contribution balance at an annual rate of 8.5% compounded monthly.

Pursuant to the Stock Purchase Agreement, we entered into an agreement (the “Reimbursement Agreement”) with Suez on November 4, 2003, whereby Suez would reimburse us for all contributions we made to the Trust in order to satisfy our obligation under the Contribution Agreement. As part of the allocation of the Acquisition purchase price, we recorded a receivable from Suez of $112.7 million, equivalent to our recorded liability to the Trust, and recorded a $115.0 million unearned employee profit sharing asset, which was amortized to reflect profit sharing and 401(k) matching contribution expenses in the period earned by employees. The unearned employee profit sharing asset was fully amortized during 2009, and we paid our remaining obligation under the Contribution Agreement to the Trust during 2010, which was reimbursed to us by Suez. At December 31, 2010, both the receivable from Suez and our obligation to the Trust under the Contribution Agreement were zero.

Because Suez reimbursed us for payments that we made toward satisfying our obligation under the Contribution Agreement, expenses related to the Contribution Agreement were non-cash in nature. All profit sharing and 401(k) matching contribution expenses recognized subsequent to fulfilling our remaining obligation under the Contribution Agreement will require the use of cash. We had a payable to the Trust of $38.9 million at December 31, 2010, which will be paid during 2011.

Contributions to the Trust, profit sharing and 401(k) matching contribution expenses, and expenses recorded related to the Contribution Agreement for the years 2010, 2009 and 2008 were as follows:

 

     2010      2009      2008  

Contributions to the Trust

   $ 34.6       $ 19.0       $ 27.0   
                          

Expense recorded:

        

Amortization of unearned employee profit sharing

   $       $ 22.1       $ 17.4   

Profit sharing and 401(k) matching contribution expense

     49.0         7.4           

Accretion of obligation to Trust

     1.6         1.3         2.7   
                          

Total included in operating expenses

   $ 50.6       $ 30.8       $ 20.1   
                          

Payments received from Suez and income recorded related to the Reimbursement Agreement for the years 2010, 2009 and 2008 were as follows:

 

     2010      2009      2008  

Payments received from Suez

   $ 16.2       $ 20.0       $ 27.0   
                          

Income recorded:

        

Accretion of receivable from Suez

   $ 1.6       $ 1.3       $ 2.7   
                          

8.    Income Tax

The provision for income taxes was calculated based upon the following components of earnings (loss) before income taxes for the years ended December 31, 2010, 2009 and 2008:

 

     2010      2009      2008  

United States

   $ 117.0       $ 34.5       $ (120.8

Foreign

     188.0         101.2         (159.3
                          

Earnings (loss) before income taxes

   $ 305.0       $ 135.7       $ (280.1
                          

 

22


8.    Income Tax (continued)

 

Earnings (loss) before income taxes, as shown above, are based on the location of the entity to which such earnings are attributable.

The components of the income tax provision for the years ended December 31, 2010, 2009 and 2008 are as follows:

 

     2010      2009     2008  

Current:

       

Federal

   $ 17.9       $      $ 2.1   

State and local

     4.3         1.8        4.1   

Foreign

     66.1         72.3        79.0   
                         

Total current

     88.3         74.1        85.2   

Deferred:

       

Federal

     11.9         2.7        (36.1

State and local

     0.5         (6.1     0.1   

Foreign

     2.6         (2.9     5.3   
                         

Total deferred

     15.0         (6.3     (30.7
                         

Income tax provision

   $ 103.3       $ 67.8      $ 54.5   
                         

The effective rate of the provision for income taxes differs from the United States statutory federal tax rate for the years ended December 31, 2010, 2009 and 2008 due to the following items:

 

     2010     2009     2008  

United States statutory federal tax rate

   $ 106.8      $ 47.5      $ (98.0

State income taxes, net of federal benefits

     3.0        1.1        5.5   

Changes in tax laws

     2.6        (5.4       

Nondeductible goodwill

     1.7               163.3   

Foreign tax rate differential

     (25.9     (19.3     (27.4

Withholding taxes

     11.4        9.6        7.0   

United States tax on foreign earnings

     (21.7     1.9        4.6   

Credits and incentives

     (2.4     (2.5     (4.6

Changes in valuation allowances

     (0.7     29.0        (15.6

Uncertain tax positions

     18.2        2.6        1.6   

Nondeductible items

     10.6        8.2        18.1   

Other

     (0.3     (4.9       
                        

Income tax provision

   $ 103.3      $ 67.8      $ 54.5   
                        

As displayed in the table above, the tax provision for the year ended December 31, 2010 was favorably impacted by $21.7 million, reflecting a reduction of our U.S. income tax provision due to repatriations of foreign earnings and taxes, which were available for U.S. foreign tax credit. In addition, the tax provision was favorably impacted by immaterial prior-period adjustments of $6.5 million, which are primarily included in foreign tax rate differential above.

No provision has been made for United States or foreign income taxes related to approximately $466.8 million of undistributed earnings of foreign subsidiaries at December 31, 2010, as we consider these earnings to be permanently reinvested. It is not practicable to estimate the additional income taxes, including applicable withholding taxes, that would be payable on the remittance of such undistributed earnings.

 

23


8.    Income Tax (continued)

 

Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement basis and the tax basis of assets and liabilities using enacted statutory tax rates applicable to future years. Net deferred income tax assets (liabilities) as of December 31, 2010 and 2009 are as follows:

 

     2010     2009  

Retirement benefits

   $ 79.8      $ 59.7   

Pension

     74.9        116.2   

State and local net operating loss carryforwards

     10.9        8.9   

Foreign tax loss carryforwards

     73.3        66.9   

United States foreign tax credits

     92.0        73.6   

Other deferred tax assets

     93.6        136.8   
                

Total deferred tax assets

     424.5        462.1   

Valuation allowance

     (86.5     (95.2
                

Net deferred tax assets

   $ 338.0      $ 366.9   
                

Property

   $ (84.2   $ (87.7

Intangible assets

     (418.8     (437.0

Other deferred tax liabilities

     (37.4     (22.8
                

Total deferred tax liabilities

     (540.4     (547.5

Net deferred tax assets

     338.0        366.9   
                

Total deferred income taxes

   $ (202.4   $ (180.6
                

Included in:

    

Deferred income taxes — current asset

   $ 63.9      $ 25.6   

Other noncurrent assets

     9.9        8.5   

Income taxes

     (15.9     (11.8

Deferred income taxes — noncurrent liability

     (260.3     (202.9
                
   $ (202.4   $ (180.6
                

These deferred tax assets and liabilities are classified in the balance sheet based on the balance sheet classification of the related assets and liabilities. In some instances, certain deferred tax attributes are not related to items otherwise included in financial reporting. Such items are classified in the balance sheet based on their expected reversal date.

Nalco Holding Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, various states and foreign jurisdictions, as required. With few exceptions, we are no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for periods prior to 2005. To the extent we are subject to additional tax assessments greater than $150,000 related to tax periods before November 4, 2003, we are indemnified by our former shareholder, Suez, and therefore have recorded a receivable for the related indemnity claim.

Authoritative guidance issued by the FASB clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

 

24


8.    Income Tax (continued)

 

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:

 

     Unrecognized
Tax Benefit
    Suez
Portion
    Nalco
Portion
 

Balance at January 1, 2008

   $ 5.2      $ 1.6      $ 3.6   

Additions related to current year

     0.3               0.3   

Additions related to prior years

     6.6        0.2        6.4   

Reduction for positions taken in prior years

     (5.1            (5.1

Settlements

     (1.0            (1.0
                        

Balance at December 31, 2008

     6.0        1.8        4.2   

Additions related to current year

     2.3               2.3   

Additions related to prior years

     0.8        0.1        0.7   

Reduction for positions taken in prior years

     (0.4            (0.4

Settlements

                     
                        

Balance at December 31, 2009

     8.7        1.9        6.8   

Additions related to current year

     1.7               1.7   

Additions related to prior years

     19.3        0.1        19.2   

Reduction for positions taken in prior years

     (3.3     (0.6     (2.7

Settlements

                     
                        

Balance at December 31, 2010

   $ 26.4      $ 1.4      $ 25.0   
                        

Unrecognized tax benefits were comprised of the following at December 31, 2010:

 

     Unrecognized
Tax Benefit
     Suez
Portion
     Nalco
Portion
 

Unrecognized tax position

   $ 24.8       $ 1.0       $ 23.8   

Interest

     1.4         0.4         1.0   

Penalties

     0.2                 0.2   
                          

Balance at December 31, 2010

   $ 26.4       $ 1.4       $ 25.0   
                          

As of December 31, 2010, full recognition of the $26.4 million of tax benefits not previously recognized would have resulted in a reduction of the Suez receivable of $1.4 million and a favorable impact to the income tax provision of $25.0 million.

In our financial statements, interest and penalties, when applicable, are an element of the income tax provision. For 2010, interest and penalties related to unrecognized tax benefits negatively impacted the income tax provision by $0.6 million.

During 2010, the Nalco portion of the unrecognized tax benefits reported above increased by $18.2 million. This was caused, in large part, by expanded audit and controversy activity in multiple non-U.S. income tax jurisdictions, much of which occurred in the fourth quarter.

Based on the status of examinations in multiple tax jurisdictions, it is reasonably possible the total amount of unrecognized tax benefits could change during the next 12 months within a range of zero to $6.0 million.

Our balance sheet continues to report state and local tax loss carryforwards, having a gross amount of $138.8 million, a related deferred tax asset balance of $10.9 million and varying expiration dates as the losses relate to multiple tax jurisdictions. No valuation allowances have been placed against these deferred tax assets.

At December 31, 2010, the U.S. foreign tax credit carryforward stands at $92.0 million. The credits have a ten-year carryforward period, and will expire between 2015 and 2021 if not utilized. Utilization of the

 

25


8.    Income Tax (continued)

 

foreign tax credits is dependent upon future U.S. taxable income with the appropriate attributes. We assessed the realizability of the foreign tax credit carryforwards by considering historical trends and future projections of U.S. taxable income, including temporary differences. Disregarding any applicable tax loss carry forwards, we generated U.S. taxable income in 2008 and 2009 and also estimate we will do so for 2010. The U.S. income expectations for future years were evaluated along with the expiration dates of the carryforwards. We concluded that recognizing the tax benefits of these credit carryforwards is appropriate.

As of December 31, 2010, amounts and expiration dates of net operating loss carryforwards in various tax jurisdictions were as follows:

 

     As of December 31, 2010  
Expiration Dates    2013 - 2029      Unlimited      Total  

Amounts

   $ 88.4       $ 187.8       $ 276.2   
                          

The losses listed above relate primarily to Brazil, France, the Netherlands and United Kingdom. The losses listed above have related deferred tax assets of $73.7 million.

Valuation allowances associated with these deferred tax assets total $66.1 million. We have valuation allowances on certain other foreign net deferred tax assets totaling $20.4 million.

9.    Debt

Debt consists of the following:

 

     December 31,
2010
     December 31,
2009
 

Short-term

     

Checks outstanding and bank overdrafts

   $ 24.0       $ 7.5   

Notes payable to banks

     55.5         44.8   

Current maturities of long-term debt

     10.5         177.5   
                 
   $ 90.0       $ 229.8   
                 

Long-term

     

Securitized trade accounts receivable facility

   $ 67.8       $   

Term loan B, due November 2010

             167.0   

Term loan B, due October 2017 (including discount of $3.1 in 2010)

     645.3           

Term loan B, due May 2016

             746.2   

Term loan C, due May 2016 (including discount of $22.5 in 2010 and $26.7 in 2009.)

     274.5         273.3   

Term loan C-1, due May 2016 (including discount of $4.3 in 2010)

     95.4           

Senior notes, due January 2019

     750.0           

Senior notes (euro), due January 2019

     267.4           

Senior subordinated notes, due November 2013

             465.0   

Senior subordinated notes (euro), due November 2013

             287.7   

Senior discount notes, due February 2014 (including premium of $0.4 in 2010 and $1.1 in 2009)

     200.4         461.9   

Senior notes, due May 2017 (including discount of $8.5 in 2010 and $9.8 in 2009)

     491.5         490.2   

Other

     0.2         0.5   
                 
     2,792.5         2,891.8   

Less: Current portion

     10.5         177.5   
                 
   $ 2,782.0       $ 2,714.3   
                 

 

26


9.    Debt (continued)

 

The weighted-average interest rate on short-term debt was 5.81% and 2.80% at December 31, 2010 and December 31, 2009, respectively.

Senior Secured Credit Facilities

As part of a series of refinancing transactions in May 2009, Nalco Company entered into new senior secured credit facilities consisting of a revolving credit facility expiring in May 2014 and a $750.0 million term loan B facility maturing in May 2016. As part of a refinancing transaction described below, the outstanding balance of the term loan B facility was repaid in October 2010.

The revolving credit facility provides for borrowings of up to $250.0 million and replaced the former $250.0 million revolving credit facility that would have otherwise expired in November 2009. The U.S. dollar equivalent of $150.0 million under the revolving credit facility can be used, subject to certain collateral obligations, for borrowings by Nalco Company and certain non-U.S. subsidiaries in euros, pounds sterling and other currencies to be agreed. At December 31, 2010, we had $230.8 million of borrowing capacity available under our revolving credit facility, which reflects no outstanding borrowings and reduced availability as a result of $19.2 million in outstanding letters of credit.

The terms of the senior secured credit facilities allowed us to make future additional term loan borrowings of up to $250.0 million on terms to be agreed with future lenders. In November 2009, the senior secured credit facilities were amended to increase the amount of future additional term loan borrowings from $250.0 million to $550.0 million. The senior secured credit facilities were further amended in May 2010 to increase the aggregate principal amount of additional term loan borrowings from $550.0 million to an amount that would not cause the secured leverage ratio of Nalco Holdings LLC (the direct parent company of Nalco Company) and its subsidiaries on a consolidated basis to exceed 2.00 to 1.00.

In December 2009, Nalco Company entered into a Joinder Agreement to the senior secured credit facilities that provided for a $300.0 million term loan C, which was borrowed at a discount of $27.0 million and matures in May 2016.

In October 2010, Nalco Company entered into two Joinder Agreements to the senior secured credit facilities. One of the Joinder Agreements provided for an additional $650.0 million term loan B facility maturing in October 2017, and the other Joinder Agreement provided for a $100.0 million addition (term loan C-1) to the existing term loan C that matures in May 2016. We borrowed the full amount of these term loans in October 2010, net of an original issue discount equal to 0.5% and 4.5% for the term loan B facility and the term loan C-1 facility, respectively. The net proceeds of these borrowings were used to repay the term loan B that had been borrowed in May 2009 and that was to mature in May 2016.

Borrowings under the revolving credit facility and term loan C bear interest at a floating base rate plus an applicable margin. The applicable margin for borrowings under the revolving credit facility ranges from 2.00% to 3.00% with respect to base rate borrowings and 3.00% to 4.00% with respect to LIBOR or Eurocurrency borrowings depending on our leverage ratio as defined by the revolving credit agreement. The initial margin for the revolving credit facility is 2.50% with respect to base rate borrowings and 3.50% with respect to LIBOR or Eurocurrency borrowings. The applicable margin for borrowings under term loan C is 0.75% with respect to base rate borrowings and 1.75% with respect to LIBOR or Eurocurrency borrowings.

Term loan B bears interest at a floating base rate plus a credit-rating-based margin of 2.75% or 3.00% with respect to LIBOR borrowings and 3.75% or 4.00% with respect to base rate borrowings. It also provides for a LIBOR minimum of 1.50%. Term loan C-1 bears interest at a floating base rate plus a margin of 1.75% with respect to LIBOR borrowings and a margin of 2.75% with respect to base rate borrowings.

 

27


9.    Debt (continued)

 

Interest is generally due quarterly in arrears, and is also due upon expiration of any particular loan. In addition, there is an annual loan commitment fee of 0.50% on the unused portion of the revolving credit facility. We are also required to pay a participation fee in respect of the undrawn portion of the letters of credit, at a rate per annum equal to the applicable margin for LIBOR or Eurocurrency borrowings under the revolving credit facility, a fronting fee at a rate of 0.25% per annum of the daily average amount, as well as customary letter of credit fees.

Term loan B, term loan C and term loan C-1 are subject to amortization at 1% of the original principal amount per annum, payable quarterly. The remaining principal amount of term loan B is due on October 5, 2017, and the remaining principal amounts of term loan C and term loan C-1 are due on May 13, 2016.

The senior secured credit facilities are unconditionally guaranteed by Nalco Company, Nalco Holdings LLC, and certain domestic subsidiaries of Nalco Holdings LLC. The repayment of these facilities is secured by substantially all the assets of Nalco Company and the guarantors, including, but not limited to, a pledge of their capital stock and 65% of the capital stock of each non-U.S. subsidiary owned by the guarantors.

At December 31, 2010, the weighted-average interest rate on borrowings under the senior secured credit facilities was 3.57%. Amounts outstanding, as well as the base rates and applicable margins, at December 31, 2010 and December 31, 2009 were as follows:

 

     December 31, 2010     December 31, 2009  
     Amount      Weighted-
Average

Base Rate
    Applicable
Margin
    Amount      Weighted-
Average

Base Rate
    Applicable
Margin
 

Revolving credit facility

   $                     $                  

Term loan B

                           746.2         3.00     3.50

Term loan B (before discount of $3.1)

     648.4         1.50     3.00                      

Term Loan C (before discount of $22.5 in 2010 and $26.7 in 2009)

     297.0         0.30     1.75     300.0         0.23     1.75

Term Loan C-1 (before discount of $4.3)

     99.7         0.28     1.75                      

Senior Notes, Senior Subordinated Notes and Senior Discount Notes

On December 22, 2010, Nalco Company issued $750 million aggregate principal amount of 6.625% senior unsecured notes (“Dollar Notes”) and €200 million aggregate principal amount of 6.875% senior unsecured notes (“Euro Notes”, and, together with the Dollar Notes, the “2010 Notes”). The 2010 Notes mature on January 15, 2019, with interest payable in cash on January 15 and July 15 of each year beginning on July 15, 2011. Additional interest is payable in certain circumstances if we do not consummate an exchange offer or shelf registration for the 2010 Notes within 365 days following their issuance. The 2010 Notes do not have required principal payments prior to maturity. Each of the direct and indirect subsidiaries of Nalco Holdings LLC and Nalco Company that guarantees Nalco Company’s obligations under its senior secured credit facilities guarantees the 2010 Notes.

The net proceeds from the issuance of the 2010 Notes, along with cash on hand, were used to fund: (i) the repurchase of $113.1 million of the $465.0 million 8.875% dollar-denominated senior subordinated notes due 2013, and €114.5 million of the €200.0 million aggregate principal amount of 9% euro-denominated senior subordinated notes due 2013, tendered pursuant to a tender offer launched on December 7, 2010 and related tender offer premium; (ii) the redemption of the remaining $351.9 million dollar notes and €85.5 million euro notes; (iii) the repurchase of $260.8 million aggregate principal amount of 9.0% senior discount notes due 2014 co-issued by Nalco Finance Holdings LLC, our direct wholly-owned subsidiary, and Nalco Finance Holdings Inc., and to pay a related premium; and (iv) the

 

28


9.    Debt (continued)

 

payment of fees and expenses incurred in connection with the issuance of the 2010 Notes and the tender offer. As a result, we incurred a $27.4 million loss on extinguishment of debt, which is included in other income (expense), net for the year ended December 31, 2010. The loss was comprised of a $17.8 million premium paid to redeem the existing senior subordinated notes and discount notes, $5.4 million of accelerated amortization of deferred financing costs related to the existing senior subordinated notes and discount notes, and $4.2 million of other related charges.

At any time prior to January 15, 2014, Nalco Company may redeem all or a part of the 2010 Notes at a redemption price equal to 100% of the principal amount of the notes plus a specified “make-whole” premium.

On and after January 15, 2014, Nalco Company may redeem some or all of the 2010 Notes at the redemption prices (expressed as percentages of principal amount of the notes to be redeemed) set forth below, plus accrued interest , if any, if redeemed during the twelve-month period beginning on January 15 of each of the years indicated below:

 

Period

   Dollar  Notes
Redemption
Price
    Euro Notes
Redemption
Price
 

2014

     104.969     105.156

2015

     103.313     103.438

2016

     101.656     101.719

2017 and thereafter

     100.000     100.000

In May 2009, Nalco Company issued $500.0 million aggregate principal amount of 8.25% senior unsecured notes (the “2009 Notes”). The 2009 Notes were issued at a discount of $10.7 million. The 2009 Notes mature on May 15, 2017, with interest payable semi-annually on May 15 and November 15 of each year. The 2009 Notes do not have required principal payments prior to maturity. Each of the direct and indirect subsidiaries of Nalco Holdings LLC and Nalco Company that guarantees Nalco Company’s obligations under the senior secured credit facilities guarantees the 2009 Notes.

At its option, Nalco Company has the right to redeem some or all of the 2009 Notes beginning May 15, 2013, at the redemption prices set forth below (expressed as a percentage principal amount), plus accrued interest, if any, if redeemed during the twelve-month period commencing on May 15 of the years set forth below:

 

Period

   Redemption
Price
 

2013

     104.125

2014

     102.063

2015 and thereafter

     100.000

Nalco Company also has the right to redeem some or all of the Notes prior to May 15, 2013, at a price equal to the principal amount of the notes, plus a specified “make-whole” premium.

In May 2009, net proceeds from the 2009 Notes and term loan B were used to repay $735.0 million of existing term loan borrowings and to redeem $475.0 million aggregate principal amount of dollar-denominated senior notes due November 2011. In December 2009, available cash and net proceeds from term loan C were used to redeem €200.0 million aggregate principal amount of euro-denominated senior notes due November 2011 and the remaining $190.0 million aggregate principal amount of dollar-denominated senior notes due November 2011. As a result, we incurred a $20.5 million loss on extinguishment of debt, which is included in other income (expense), net for the year ended December 31, 2009. The loss was comprised of $10.4 million of accelerated amortization of deferred financing costs related to the existing term loans and senior notes, a $9.2 million premium paid to redeem the $475.0 million of existing senior notes, and $0.9 million of other related charges.

 

29


9.    Debt (continued)

 

In January 2004, Nalco Finance Holdings LLC and Nalco Finance Holdings Inc. (together, the “Issuers”), issued $694.0 million aggregate principal amount at maturity of 9.00% senior discount notes due 2014. In December 2004, the Issuers redeemed a portion of the senior discount notes using proceeds from the initial public offering of common stock of Nalco Holding Company. In December 2010, the Issuers redeemed an additional $260.8 million of the senior discount notes using proceeds from the 2010 Notes.

After the partial redemption in 2004, the aggregate principal amount at maturity of the notes declined to $460.8 million. Prior to February 1, 2009, interest accrued on the notes in the form of an increase in the accreted value of such notes. The accreted value of each note increased from the date of issuance until February 1, 2009, at a rate of 9.00% per annum, reflecting the accrual of non-cash interest, such that the accreted value equaled the then principal amount at maturity of $460.8 million. Cash interest payments on the notes became due and payable beginning in August 2009. After the additional partial redemption in 2010, the aggregate principal amount at maturity of the notes declined to $200.0 million.

Nalco Holding Company and the Issuers do not generate any revenue, and Nalco Finance Holdings Inc. was incorporated solely to accommodate the issuance of the senior discount notes by Nalco Finance Holdings LLC. All of Nalco Holding Company’s consolidated assets are owned, and all of its consolidated net sales are earned, by its direct and indirect subsidiaries. As of December 31, 2010, Nalco Holding Company’s subsidiaries had $607.5 million of restricted net assets.

The terms of the senior secured credit facilities limit the amount of dividends and other transfers by Nalco Holdings LLC and its subsidiaries to the Issuers or Nalco Holding Company. Further, the terms of the indentures governing the 2010 Notes and 2009 Notes significantly restrict Nalco Company and the Issuers’ other subsidiaries from paying dividends or otherwise transferring assets to the Issuers or Nalco Holding Company. The ability of Nalco Company to make such payments is governed by a formula based on its consolidated net income, as well as meeting certain other conditions. Notwithstanding such restrictions, such indentures permit an aggregate of the lower of $150.0 million or 3% of total assets of such payments to be made whether or not there is availability under the formula or the conditions to its use are met.

Covenants

The senior secured credit facilities, the 2009 Notes, the 2010 Notes, and the senior discount notes contain a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to sell assets; incur additional indebtedness or issue preferred stock; repay other indebtedness; pay dividends and distributions or repurchase certain capital stock; create liens on assets; make investments, loans or advances; make acquisitions, mergers or consolidations; enter into sale and leaseback transactions; engage in certain transactions with affiliates; amend certain material agreements governing our indebtedness; change our business; and enter into hedging agreements. In addition, we must maintain financial covenants, including a maximum total leverage ratio, a maximum secured leverage ratio, a minimum interest coverage ratio, and a maximum capital expenditure limitation. We were in compliance with all covenants at December 31, 2010.

The following table presents the projected annual maturities of long-term debt for years after 2010:

 

Year ending December 31       

2011

   $ 10.5   

2012

     10.5   

2013

     78.3   

2014

     210.5   

2015

     10.5   

Thereafter

     2,510.2   
        
   $ 2,830.5   
        

 

30


9.    Debt (continued)

 

The $38.0 million difference between the total projected annual maturities of long-term debt of $2,830.5 million and the carrying value of $2,792.5 million is attributable to the $22.5 million discount on term loan C, the $8.5 million discount on the senior notes due 2017, the $4.3 million discount on term loan C-1, the $3.1 million discount on the term loan B and the $0.4 million unamortized premium attributable to the senior discount notes.

10.    Leases

We lease administrative, research, manufacturing, and warehouse facilities and data processing and other equipment under non-cancelable leases that expire at various dates through 2040. Rent expense for the years ended December 31, 2010, 2009 and 2008 is as follows:

 

     2010      2009      2008  

Rent expense

   $ 47.1       $ 44.4       $ 43.1   
                          

Future minimum rental payments for operating leases related to facilities, with initial or remaining terms greater than one year, are as follows:

 

Year ending December 31       

2011

   $ 56.9   

2012

     26.6   

2013

     20.1   

2014

     17.4   

2015

     15.1   

Thereafter

     129.5   
        
   $ 265.6   
        

The amounts in the table above include future minimum rental payments for our corporate headquarters and research facility of $35.1 million in 2011, $12.7 million in each of the years 2012 through 2015, and $99.3 million from 2016 through 2023.

11.    Pension and Other Postretirement Benefit Plans

We have several noncontributory, defined benefit pension plans covering most employees in the U.S. and those with certain foreign subsidiaries. We also provide a supplementary, nonqualified, unfunded plan for U.S. employees whose pension benefits exceed ERISA limitations. In addition, we have defined benefit postretirement plans that provide medical and life insurance benefits for substantially all U.S. retirees and eligible dependents. We retain the right to change or terminate these benefits.

In 2009, the domestic pension plan was amended such that effective January 1, 2010, participants no longer earn service credit. The net periodic pension cost for this plan no longer has a service component beginning in 2010.

 

31


11.    Pension and Other Postretirement Benefit Plans (continued)

 

The following tables detail the changes in the funded status of defined benefit pension and other postretirement benefit plans for the years 2010 and 2009:

 

     Pension Benefits  
     U.S.     Non-U.S.  
     2010     2009     2010     2009  

Change in benefit obligation

        

Benefit obligation at beginning of year

   $ 459.8      $ 391.0      $ 374.2      $ 290.5   

Service cost

            13.9        9.1        8.1   

Interest cost

     25.1        25.3        18.5        18.0   

Participant contributions

                   0.8        1.6   

Plan amendments

                          (17.3

Settlements and curtailments

                   (1.2     (5.3

Actuarial loss

     67.0        105.6        0.4        64.2   

Benefits paid

     (7.5     (76.0     (10.9     (11.0

Other

                   0.4        0.3   

Foreign currency exchange rate changes

                   (17.0     25.1   
                                

Benefit obligation at end of year

     544.4        459.8        374.3        374.2   
                                

Change in plan assets

        

Fair value of plan assets at beginning of year

     197.3        183.4        218.0        176.3   

Actual return on plan assets

     32.5        36.1        27.8        20.4   

Employer contributions

     50.8        53.8        16.1        19.1   

Participant contributions

                   0.8        1.6   

Settlements

                   (1.6     (5.1

Benefits paid

     (7.5     (76.0     (10.9     (11.0

Foreign currency exchange rate changes

                   (9.7     16.7   
                                

Fair value of plan assets at end of year

     273.1        197.3        240.5        218.0   
                                

Funded status at December 31

   $ (271.3   $ (262.5   $ (133.8   $ (156.2
                                

Accumulated benefit obligation

   $ 468.2      $ 353.1      $ 334.3      $ 333.9   
                                

 

     Other Postretirement Benefits  
         2010             2009      

Change in benefit obligation

    

Benefit obligation at beginning of year

   $ 158.5      $ 140.4   

Service cost

     4.2        3.6   

Interest cost

     8.5        9.0   

Participant contributions

     7.4        7.0   

Medicare subsidy

            0.7   

Actuarial (gain) loss

     (30.4     9.6   

Prior service credit

     (11.6       

Other

     0.1        0.3   

Benefits paid

     (13.7     (12.1
                

Benefit obligation at end of year

     123.0        158.5   
                

Change in plan assets

    

Fair value of plan assets at beginning of year

              

Employer contributions

     6.3        5.1   

Participant contributions

     7.4        7.0   

Benefits paid

     (13.7     (12.1
                

Fair value of plan assets at end of year

              
                

Funded status at December 31

   $ (123.0   $ (158.5
                

 

32


11.    Pension and Other Postretirement Benefit Plans (continued)

 

Amounts recognized in the balance sheets at December 31, 2010 and 2009 consist of:

 

     Pension Benefits     Other
Postretirement
Benefits
 
     U.S.     Non-U.S.    
     2010     2009     2010     2009     2010     2009  

Other assets

   $      $      $ 4.6      $ 3.0      $      $   

Accrued compensation

     (0.3     (0.4     (3.7     (3.2     (6.6     (7.2

Accrued pension benefits

     (271.0     (262.1     (134.7     (156.0              

Other liabilities

                                 (116.4     (151.3
                                                

Net amount recognized

   $ (271.3   $ (262.5   $ (133.8   $ (156.2   $ (123.0   $ (158.5
                                                

The following amounts that have not yet been recognized in net pension expense and net other postretirement benefit expense are included in accumulated other comprehensive income at December 31, 2010:

 

     Pension Benefits     Other
Postretirement
Benefits
 
     U.S.     Non-U.S.    

Net prior service (credit)

   $ (16.0   $ (15.3   $ (11.0

Net actuarial loss (gain)

     193.4        3.1        (58.4

The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for all defined benefit pension plans with projected benefit obligations in excess of plan assets at December 31, 2010 and 2009 were as follows:

 

     U.S.      Non-U.S.  
     2010      2009      2010      2009  

Projected benefit obligation

   $ 544.4       $ 459.8       $ 374.3       $ 359.0   

Accumulated benefit obligation

     468.2         353.1         334.3         323.6   

Fair value of plan assets

     273.1         197.3         240.5         199.5   

The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for all defined benefit pension plans with accumulated benefit obligations in excess of plan assets at December 31, 2010 and 2009 were as follows:

 

     U.S.      Non-U.S.  
     2010      2009      2010      2009  

Projected benefit obligation

   $ 544.4       $ 459.8       $ 349.8       $ 352.3   

Accumulated benefit obligation

     468.2         353.1         317.8         319.2   

Fair value of plan assets

     273.1         197.3         213.8         194.5   

Net pension expense for all defined benefit pension plans for the years ended December 31, 2010, 2009 and 2008 was comprised of:

 

     U.S.     Non-U.S.  
     2010     2009     2008     2010     2009     2008  

Service cost

   $      $ 13.9      $ 15.4      $ 9.1      $ 8.1      $ 10.2   

Interest cost

     25.1        25.3        26.6        18.5        18.0        20.9   

Expected return on plan assets

     (21.1     (23.0     (22.2     (14.1     (13.8     (14.5

Amortization of prior service cost (credit)

     (2.3     (2.3     (2.3     (1.0     0.1        0.1   

Amortization of net actuarial (gain) loss

     6.2        0.6        0.2        0.2        (2.3     0.1   

Settlements and curtailments

     0.3        22.2        10.5        0.7        0.5        0.1   
                                                

Net benefit expense

   $ 8.2      $ 36.7      $ 28.2      $ 13.4      $ 10.6      $ 16.9   
                                                

 

33


11.    Pension and Other Postretirement Benefit Plans (continued)

 

The principal U.S. defined benefit pension plan provides terminating participants with an option to receive their pension benefits in the form of lump sum payments. Authoritative guidance for pension accounting requires settlement accounting if lump sum payments exceed the sum of the service and interest cost components of net periodic pension cost of the plan for the fiscal year. During 2009, a number of terminating participants received lump sum benefit payments, and the settlement accounting requirement was triggered, resulting in a $21.4 million settlement loss attributable to the principal U.S. pension plan in 2009.

Net other postretirement benefit expense for the years ended December 31, 2010, 2009 and 2008 was comprised of:

 

     2010     2009     2008  

Service cost

   $ 4.2      $ 3.6      $ 4.3   

Interest cost

     8.5        9.0        8.9   

Amortization of prior service credit

     (1.9     (3.3     (4.7

Amortization of net actuarial gain

     (2.5     (3.8     (2.6
                        

Net benefit expense

   $ 8.3      $ 5.5      $ 5.9   
                        

The following amounts included in accumulated other comprehensive income at December 31, 2010 are expected to be recognized in net pension expense and net other postretirement benefit expense during the year ended December 31, 2011:

 

     Pension Benefits     Other
Postretirement
Benefits
 
     U.S.     Non-U.S.    

Net prior service credit

   $ (2.3   $ (1.1   $ (2.1

Net actuarial loss (gain)

     14.1        0.4        (6.8

The weighted-average assumptions used for the U.S. defined benefit plan obligations as of December 31, 2010 and 2009 were as follows:

 

     Pension Benefits     Other
Postretirement
Benefits
 
         2010           2009       2010     2009  

Discount rates

     4.65     5.50     5.15     5.85

Rates of increase in compensation levels

     3.44     4.44     3.37     4.37

The weighted-average assumptions used for the non-U.S. defined benefit pension plan obligations as of December 31, 2010 and 2009 were as follows:

 

     2010     2009  

Discount rates

     5.28     5.31

Rates of increase in compensation levels

     2.44     2.43

 

34


11.    Pension and Other Postretirement Benefit Plans (continued)

 

The weighted-average assumptions used to determine net pension and other postretirement benefit expense for the years ended December 31, 2010, 2009 and 2008 for the U.S. defined benefit plans were as follows:

 

 

     2010     2009     2008  

Discount rates:

      

Pension benefits

     5.50     6.02     6.25

Other postretirement benefits

     5.85     6.80     6.45

Rates of increase in compensation levels:

      

Pension benefits

     4.44     4.44     4.44

Other postretirement benefits

     4.37     4.37     4.37

Expected long-term return on plan assets

     8.00     8.25     8.25

The weighted-average assumptions used to determine net pension expense for the non-U.S. defined benefit pension plans for the years ended December 31, 2010, 2009 and 2008 were as follows:

 

     2010     2009     2008  

Discount rates

     5.31     6.08     5.78

Rates of increase in compensation levels

     2.43     3.48     3.88

Expected long-term return on plan assets

     6.25     6.32     6.44

The assets in the principal domestic pension plan are invested to obtain a reasonable long-term rate of return at an acceptable level of investment risk. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and corporate financial condition. Investment risk is measured and monitored on an ongoing basis through periodic investment portfolio reviews, liability measurements and asset/liability studies. A similar approach to assessing investment risk and obtaining reasonable investment returns is employed for the foreign pension plans.

The assets in the principal domestic pension plan are diversified across equity, fixed income and alternative investments such as hedge funds and private equity. The investment portfolio has target allocations of approximately 49% equity, 32% fixed income and 19% alternative investments. Other assets such as real estate may be used judiciously to enhance portfolio returns and diversification. The foreign pension plans have comparable asset allocation to the principal domestic plan, with some variances for local practices.

The expected long-term rate of return is established using historical market data for each asset class as well as the target allocation. Historical markets are analyzed and long-term historical relationships between equity and fixed income investments are preserved consistent with the widely accepted capital market principle that assets with higher volatility will generate a greater return over the long run. The total weighted-average return on each asset class supports the long-term expected rate of return assumption.

 

35


11.    Pension and Other Postretirement Benefit Plans (continued)

 

The fair values of our pension plan assets by asset category at December 31, 2010 were as follows:

 

Asset Category

   Total      Quoted
Prices
(Level 1)
     Other
Observable
Inputs
(Level 2)
     Unobservable
Inputs

(Level 3)
 

U.S.:

           

Equity securities:

           

Large-cap disciplined (1)

   $ 90.7       $ 90.7       $       $   

Small/mid-cap (2)

     21.7         21.7                   

International

     33.2         33.2                   

Emerging markets

     3.4         3.4                   

Fixed income securities:

           

Corporate and government

     59.2         59.2                   

High-yield bonds

     18.9         18.9                   

Emerging markets

     5.2         5.2                   

Alternative investments:

           

Private equity funds (3)

     15.5                         15.5   

Hedge funds (4)

     23.5                         23.5   

Other

     1.8         1.3         0.5           
                                   

Total plan assets — U.S.

   $ 273.1       $ 233.6       $ 0.5       $ 39.0   
                                   

Non-U.S.:

           

Equity securities

   $ 114.8       $ 114.7       $ 0.1       $   

Fixed income securities

     101.2         101.0         0.2           

Other

     24.5         1.8                 22.7   
                                   

Total plan assets — Non-U.S.

   $ 240.5       $ 217.5       $ 0.3       $ 22.7   
                                   

 

36


11.    Pension and Other Postretirement Benefit Plans (continued)

 

The fair values of our pension plan assets by asset category at December 31, 2009 were as follows:

 

Asset Category

   Total      Quoted
Prices
(Level 1)
     Other
Observable
Inputs
(Level 2)
     Unobservable
Inputs
(Level 3)
 

U.S.:

           

Equity securities:

           

Large-cap disciplined (1)

   $ 63.2       $ 63.2       $       $   

Small/mid-cap (2)

     16.0         16.0                   

International

     24.0         24.0                   

Emerging markets

     2.2         2.2                   

Fixed income securities:

           

Corporate and government

     41.1         41.1                   

High-yield bonds

     14.9         14.9                   

Emerging markets

     4.1         4.1                   

Alternative investments:

           

Private equity funds (3)

     9.4                         9.4   

Hedge funds (4)

     21.3                         21.3   

Other

     1.1                 1.1           
                                   

Total plan assets — U.S.

   $ 197.3       $ 165.5       $ 1.1       $ 30.7   
                                   

Non-U.S.:

           

Equity securities

   $ 103.4       $ 103.4       $       $   

Fixed income securities

     87.5         87.5                   

Other

     17.1         0.1         17.0           
                                   
     208.0       $ 191.0       $ 17.0           
                             

All Other

     10.0            
                 

Total plan assets — Non-U.S.

   $ 218.0            
                 

 

(1) Primarily common stocks included in the S&P 500 index.

 

(2) Primarily common stocks with market capitalizations in the range of companies in the Russell 2500 index.

 

(3) Primarily limited partnership interests in corporate finance and venture capital funds.

 

(4) Consists of index-listed and over-the-counter securities including U.S. and international common and preferred stocks, debt securities, asset-backed securities and derivative instruments.

Changes in the fair values of U.S. pension plan level 3 assets for the years ended December 31, 2010 and 2009 were as follows:

 

     Total     Private
Equity  Funds
    Hedge Funds  

Balance at January 1, 2009

   $ 27.3      $ 9.2      $ 18.1   

Actual return on plan assets:

      

Relating to assets still held at year end

     (0.5     (3.2     2.7   

Relating to assets sold during the year

                     

Purchases, sales and settlements

     3.9        3.4        0.5   
                        

Balance at December 31, 2009

     30.7        9.4        21.3   

Actual return on plan assets:

      

Relating to assets still held at year end

     3.3        1.1        2.2   

Relating to assets sold during the year

                     

Purchases, sales and settlements

     5.0        5.0          
                        

Balance at December 31, 2010

   $ 39.0      $ 15.5      $ 23.5   
                        

 

37


11.    Pension and Other Postretirement Benefit Plans (continued)

 

Changes in the fair values of non-U.S. pension plan level 3 assets, which consisted entirely of insurance contracts, for the year ended December 31, 2010 were as follows:

 

     Insurance
Contracts
 

Balance at January 1, 2010

   $   

Reclassification from Level 2

     16.6   

Amounts not classified at December 31, 2009

     4.3   

Actual return on plan assets:

  

Relating to assets still held at year end

     2.9   

Relating to assets sold during the year

       

Purchases, sales and settlements

     0.1   

Exchange rate loss

     (1.2
        

Balance at December 31, 2010

   $ 22.7   
        

The assumed health care cost trend rates used as of December 31, 2010 and 2009 were as follows:

 

     2010     2009  

Health care cost trend rate assumed for next year

    

Pre-age 65

     8.0     8.5

Post-age 65

     9.0     9.5

Ultimate trend rate

    

Pre-age 65

     5.5     5.5

Post-age 65

     5.5     5.5

Year that the rate reaches the ultimate trend rate

    

Pre-age 65

     2016        2016   

Post-age 65

     2018        2018   

A one-percentage-point change in assumed health care cost trend rates would have the following effects:

 

     One-Percentage-Point  
     Increase     Decrease  

Effect on total of service and interest cost components

   $ (0.1   $   

Effect on postretirement benefit obligation

     (0.4     (1.2

We expect to contribute $66.2 million to our pension plans and $6.6 million to our other postretirement benefit plans in 2011.

The following estimated future benefit payments are expected to be paid in the years indicated:

 

     Pension Benefits      Other Postretirement Benefits  

Year

   U.S.      Non-U.S.      Gross      Medicare Subsidy      Net  

2011

   $ 53.0       $ 11.6       $ 7.4       $ 0.8       $ 6.6   

2012

     52.4         10.9         8.2         1.0         7.2   

2013

     53.3         12.9         7.8                 7.8   

2014

     53.2         13.2         8.5                 8.5   

2015

     50.4         14.6         9.1                 9.1   

2016-2020

     225.2         74.7         52.3                 52.3   

12.     Equity Compensation Plans

The Nalco Holding Company 2004 Stock Incentive Plan (the “Plan”) was adopted to aid us in recruiting and retaining key employees, directors and consultants and to motivate them to exert their best efforts on our behalf. The Plan, which permits the grant of stock options, stock appreciation rights, restricted

 

38


12.     Equity Compensation Plans (continued)

 

stock and other stock-based awards for up to 7.5 million shares of common stock, is administered by the Compensation Committee of the Board of Directors. The Compensation Committee may delegate its duties and powers in whole or in part as it determines.

In connection with his employment as our President and Chief Executive Officer in 2008, J. Erik Fyrwald was granted 200,000 shares of restricted stock and 190,000 stock options outside the Plan. Of the restricted stock awards, 100,000 shares vest on each of the third and fourth anniversaries after the grant date. Of the stock option awards, which have a contractual term of ten years, 75,000 options vest on each of the third and fourth anniversaries after the grant date. The remaining 40,000 options vest ratably beginning on December 31, 2008, and on December 31 of the following three years.

Stock option awards granted under the Plan have a contractual term of ten years, and usually vest ratably over four years after the grant date. The exercise price of option awards is usually equal to the market price of Nalco Holding Company common stock on the date granted.

The fair value of option awards granted in 2010, 2009 and 2008 was estimated using the Black-Scholes option-pricing model and the following assumptions:

 

     2010    2009    2008

Expected life (years)

   5.5 - 7.0    6.25    6.125 - 6.75

Risk-free interest rate

   1.90% - 3.05%    2.55%    2.83% - 3.42%

Expected volatility

   28.36% - 34.50%    58.68%    38.34% - 55.63%

Expected dividend yield

   0.50% - 0.60%    1.17%    0.61% - 0.98%

The expected volatility of the option awards was estimated using an implied volatility from traded options on Nalco Holding Company common stock. Since historical information concerning option exercise behavior by our employees is very limited and such information is not readily available from a peer group of companies, the expected life was estimated using the “simplified method” permitted by Staff Accounting Bulletin Nos. 107 and 110 issued by the SEC.

The following table summarizes the status of option awards as of December 31, 2010, and changes during the year then ended:

 

     Number of
Shares
    Weighted-
Average
Exercise
Price
     Weighted-
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic
Value
 

Outstanding at January 1, 2010

     1,151,582      $ 16.86         

Granted

     273,803        23.55         

Exercised

     (66,284     18.55         

Forfeited

     (36,263     16.14         
                

Outstanding at December 31, 2010

     1,322,838        18.18         7.8       $ 18.2   
                      

Exercisable at December 31, 2010

     661,367        17.23         7.4       $ 9.7   
                      

The following table summarizes the weighted-average grant-date fair value of option awards granted, the total intrinsic value of options exercised and the total cash received from the exercise of options for the years ended December 31, 2010, 2009 and 2008:

 

     2010      2009      2008  

Weighted-average grant-date fair value of options granted

   $ 9.09       $ 6.16       $ 8.20   

Total intrinsic value of options exercised

   $ 0.7       $ 0.5       $ 0.5   

Total cash received from exercise of options

     1.2         0.6         0.4   

 

39


12.     Equity Compensation Plans (continued)

 

Restricted stock awards are granted to non-management directors and certain key employees. Awards granted to non-management directors vest approximately two years after the grant date. Awards granted to key employees vest over periods ranging from approximately one to five years following the grant date. The fair value of restricted stock awards is determined based on the market price of Nalco Holding Company common stock on the date of grant.

The following table summarizes the status of restricted stock awards as of December 31, 2010, and changes during the year then ended:

 

     Number of
Shares
    Weighted-
Average
Grant-Date
Fair Value
 

Nonvested restricted stock awards at January 1, 2010

     892,018      $ 16.63   

Granted

     720,581        23.76   

Vested

     (88,387     22.29   

Forfeited

     (100,696     13.68   
          

Nonvested restricted stock awards at December 31, 2010

     1,423,516        20.09   
          

The following table summarizes the weighted-average grant-date fair value of restricted stock awards granted and the total fair value of restricted stock awards vested for the years ended December 31, 2010, 2009 and 2008:

 

     2010      2009