Ecolab Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; the filing was signed March 1, 2019. Ecolab provides water, hygiene, energy and related services in more than 170 countries. Figures are U.S. dollars unless stated otherwise.
Financial performance
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $14.668 billion | $13.836 billion | +6% |
| Operating income | $1.947 billion | $1.950 billion | Flat |
| Net income attributable to Ecolab | $1.429 billion | $1.505 billion | -5% |
| Diluted GAAP EPS | $4.88 | $5.12 | -5% |
| Adjusted diluted EPS (non-GAAP) | $5.25 | $4.68 | +12% |
| Operating cash flow | $2.278 billion | $2.091 billion | +$186 million |
| Capital expenditures | $847 million | $869 million | -$22 million |
| Total debt | $7.045 billion | $7.323 billion | -$278 million |
- Organic growth was supported by volume (+4%) and pricing (+2%); acquisition-adjusted fixed-currency sales increased 6%. Foreign-currency translation reduced reported sales by $378 million.
- Reported gross margin declined to 41.2% from 41.7%; adjusted gross margin declined to 41.3% from 42.0%. Management attributed the adjusted decline primarily to delivered product costs exceeding the benefit of pricing and cost savings.
- Reported operating margin was 13.3%, down from 14.1%; adjusted operating margin was 14.2%, down from 14.4%. Adjusted operating income increased 5%.
- Reported tax rate was 20.2%, versus 13.8%; adjusted tax rate was 20.3%, versus 23.8%. The 2017 reported rate benefited significantly from U.S. tax reform accounting.
- Net debt was $6.931 billion and net debt/EBITDA was 2.3x, compared with 2.4x in 2017. Cash and cash equivalents on the balance sheet were $115 million; the company also reported $179 million of restricted cash.
- Cash used in investing activities was $1.030 billion, including $847 million of capital expenditures and $221 million of net cash paid for acquisitions, net of cash received from dispositions. Cash used in financing was $1.173 billion.
- Declared dividends were $1.69 per share for 2018. In December, Ecolab raised its indicated annual dividend rate 12% to $1.84 per share.
- Fourth-quarter sales were $3.761 billion, compared with $3.649 billion in Q4 2017. Q4 net income attributable to Ecolab was $395 million and diluted EPS was $1.35, versus $563 million and $1.92, respectively.
Material changes and segment trends
- Global Industrial sales increased 7% at fixed currency; Global Institutional increased 6%; Global Energy increased 7%. Other sales declined 6%, largely reflecting the 2017 sale of Equipment Care.
- Global Energy operating income increased 7% at fixed currency after declining 4% in 2017. Management cited improved activity, particularly in North American drilling and production, while international activity remained soft.
- Ecolab established the Colloidal Technologies Group within Other in 2018. It also retrospectively adopted the revenue recognition standard and revised presentation of pension costs; prior-period figures in the filing reflect these accounting changes.
- Reported earnings comparisons were affected by special items and tax effects. Adjusted EPS excludes special gains and charges and discrete tax items; it is a non-GAAP measure.
Outlook, risks and notable items
- Restructuring: Accelerate 2020 began in 2018 and was expanded after year-end. Ecolab expects completion by the end of 2020, approximately $260 million of costs ($190 million after tax), and about $325 million of annual savings by 2021. It recorded $105 million of plan charges in 2018.
- Upstream Energy separation: Ecolab intends, subject to approvals and other conditions, to spin off its Upstream business in 2020 in a transaction intended to be tax-free to shareholders. Completion, timing and anticipated benefits are uncertain.
- Near-term funding: Management expects operating cash flow and, as needed, additional borrowings to fund foreseeable requirements over the next 12 months. The company had a $2.0 billion revolving facility maturing in November 2022, with no facility borrowings at year-end, and was in compliance with debt covenants. Ratings were A- from S&P and Fitch and Baa1 from Moody’s.
- Key risks: Raw-material inflation and supply disruptions; foreign exchange, trade and political developments; energy-market volatility; regulatory and environmental compliance; customer/vendor consolidation; execution of the ERP upgrade and cybersecurity; and the debt burden. A one-percentage-point increase in floating rates was estimated to add about $7 million in annual interest expense.
- Contingencies: Environmental remediation accruals were approximately $17 million at year-end. A China subsidiary faced pending environmental charges; management did not expect a material adverse effect. Nine Corexit-related Deepwater Horizon cases remained pending and the company expected dismissal, but outcomes are uncertain.
- Unusual disclosures: During the authorized wind-down of Iran activity, a non-U.S. subsidiary reported $4.7 million of 2018 sales and estimated pretax profit of $0.9 million. Separate Rhum-related sales were $0.6 million through the subsidiary’s November 2018 year-end and $0.1 million in December, with nominal pretax profit.
- No numeric 2019 revenue or earnings guidance is provided in the filing text.
Important facts for investors to verify
- Whether pricing and productivity can offset continued delivered-cost inflation and sustain margin improvement.
- Actual Accelerate 2020 costs, timing and realized savings versus the stated targets.
- Progress, approvals, separation costs and expected economics of the proposed Upstream Energy spin-off.
- Debt maturities, refinancing needs, cash availability and the effect of rates, currencies and working-capital requirements.
- Resolution and potential financial exposure from environmental, product-liability, tax and other litigation matters.
- Comparability of GAAP results with adjusted non-GAAP measures, including the effects of tax reform, restructuring and other special items.