Ecolab (ECL) to Restructure, Will Trim 500 Jobs; Guides Q4, FY11 In-Line, Affirms FY12 EPS Outlook

Ecolab Inc. (NYSE: ECL) plans to undertake restructuring and other cost-saving actions to help enable and enhance realization of its merger-related cost synergies as well as streamline and strengthen its global business. These actions, along with merger-related costs, will result in restructuring and other special charges in the fourth quarter of 2011 and in 2012 and 2013. Total merger-related restructuring costs over the period are expected to be approximately $180 million, with other special charges approximately $300 million. It is expected that the restructuring will be completed by the end of 2013.

2011 and 2012 Cost Synergy Actions and Benefits

Actions associated with the merger to improve the effectiveness and efficiency of the company include the following:

• A reduction of the combined company’s current global workforce by approximately 500 positions, primarily in corporate G&A. A number of these reductions are expected to be achieved through open positions and attrition. Those whose jobs are eliminated will be offered severance and outplacement as appropriate. As previously announced, none of the positions affected will be in sales or R&D.
  
  
• Procurement savings from the company’s larger scale.
  
  
• Preparation work to simplify the combined company’s global supply chain.
  
  
• Significant cost and capability leverage within IT and other global functions through our Shared Services approach.

As a result, Ecolab has increased its cost synergy target for 2012 to approximately $75 million from the previous forecast of $35 million.

Future Cost Synergy Actions and Benefits

Additional actions beyond 2012 include:

• Supply chain plant and warehouse rationalization to create a lower cost, leaner and more efficient infrastructure. This will include the reduction of plant and distribution center locations, as well as the rationalization of sales offices and other redundant facilities.
  
  
• These and additional productivity and efficiency actions are expected to reduce the need for future position additions by approximately 1,500 over the next several years.

These result in the annual merger cost synergy target being raised to $250 million from the prior $150 million objective. We expect this synergy run rate to be achieved by the end of 2014.

2011 Fourth Quarter Special Charges

Ecolab expects to record pretax special charges in the fourth quarter of 2011 of approximately $100 million ($60 million after tax, or approximately $0.25 per share) that will include approximately $50 million for transaction and integration costs, $10 million for merger-related restructuring and severance, and $30 million related to the modification of a long-term customer agreement that was part of a previous water-related acquisition. In addition, fourth quarter special charges will include approximately $10 million primarily related to the previously announced Europe restructuring.

2012 Special Charges

In 2012, Ecolab expects to incur pretax special charges of approximately $230 million ($170 million after tax, or approximately $0.60 per share), including approximately $60 million non-cash charges for the fair value step up of Nalco inventory, Nalco merger-related restructuring charges of approximately $50 million, approximately $20 million in Nalco debt breakage costs and approximately $20 million for merger integration costs. Approximately $70 million of the 2012 special charge is part of the previously announced restructuring primarily related to Europe.

2013 Special Charges

In 2013, Ecolab expects to incur pretax special charges of approximately $150 million ($85 million after tax, or approximately $0.35 per share), including Nalco merger-related restructuring charges of approximately $120 million and approximately $30 million as part of the previously announced restructuring primarily related to Europe.

BUSINESS OUTLOOK

2011 Outlook

Ecolab expects adjusted diluted earnings per share, excluding the impact of the Nalco merger, to rise 14% to $2.54 for the year ended December 31, 2011. Ecolab had previously forecast 2011 adjusted earnings per share, excluding the impact of the Nalco merger, in a $2.53 - $2.55 range. Fourth quarter 2011 adjusted earnings per share, excluding the impact of the Nalco merger, are expected to be $0.70, a 17% increase over the prior year.

The Street sees Q4 EPS of 70 cents and FY11 EPS of $2.54.

2012 Outlook

Ecolab expects 2012 sales before acquisitions and divestitures to show strong volume growth and appropriate pricing moderated by continued weakness in several key economies and unfavorable foreign exchange. Adjusted gross margins are expected to decline versus 2011 due to the Nalco merger but are expected to increase compared with the combined companies’ prior year gross margin, reflecting the benefits of pricing and efficiency initiatives which should offset moderating increases in delivered product cost increases. The SG&A ratio should improve (excluding the impact of purchase accounting) from 2011 levels and approximate the combined companies’ prior year levels reflecting the synergies, which are expected to more than offset continued investment in the business and higher pension expense. The tax rate is expected to improve from both 2011 and the combined companies’ prior year levels due to tax benefits from integration projects.

Ecolab continues to expect adjusted diluted earnings per share, excluding special gains and charges and discrete tax items, for the year ending December 31, 2012 of approximately $3.00 per share, and has established a forecast range of $2.95 - $3.05 per diluted share. This would represent a 16% to 20% increase over expected 2011 adjusted earnings per share (which exclude the impact of the Nalco merger).

The quarterly earnings growth rate is expected to improve throughout 2012 as the benefits of synergies and cost reductions take effect, and as higher depreciation and amortization expense is offset by seasonally higher revenues.

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