Ecolab Inc. — First-Quarter 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Unaudited interim financial statements; the independent accountant performed a review, not an audit. Ecolab provides cleaning, sanitation, water-treatment and related services. Its 2013 reporting segments were Global Industrial, Global Institutional, Global Energy and Other.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change / context |
|---|---|---|---|
| Net sales | $2,872.1 million | $2,810.9 million | Up 2% reported; fixed-currency sales excluding acquisitions and divestitures grew 3%. |
| Gross margin | 45.5% | 42.6% | Adjusted margin was 45.6% versus 45.3%. |
| Operating income | $261.7 million | $165.8 million | Up 58% reported; adjusted operating income rose 11% to $313.4 million. |
| Net income attributable to Ecolab | $159.6 million | $49.7 million | Up 221% reported; adjusted net income increased 20% to $180.5 million. |
| Diluted EPS | $0.53 | $0.17 | Adjusted diluted EPS was $0.60 versus $0.50. |
| Net interest expense | $61.5 million | $86.1 million | Adjusted expense decreased 13%, primarily reflecting prior debt paydowns and lower financing costs. |
| Cash from operations | $186.0 million | $110.5 million | Increase reflected higher income, partly offset by restructuring cash payments. |
Reported results were materially affected by special items: total special gains and charges were $53.4 million in Q1 2013 versus $131.1 million in Q1 2012. The prior-year comparison included $73.9 million of Nalco inventory fair-value step-up and $18.2 million of debt-extinguishment costs. Q1 2013 included restructuring, Champion acquisition costs and a Venezuela currency-devaluation charge. The reported tax rate was 19.6% versus 44.7%; adjusted rates were 28.2% and 30.7%, respectively. Management attributes the difference partly to special items and discrete tax benefits.
Liquidity, debt and cash flows
- At March 31, cash and equivalents were $824.3 million, down from $1,157.8 million at year-end 2012. Current assets were $4,603.4 million and current liabilities $2,684.2 million.
- Total debt, including short-term borrowings, was approximately $6.2 billion, versus approximately $6.5 billion at December 31. Debt to capitalization was 50%, down from 52%. Ecolab reported compliance with debt covenants and available borrowing capacity.
- Cash used in investing was $220.8 million, including $129.2 million of capital expenditures and $91.2 million of net cash paid for acquisitions. Cash used in financing was $293.5 million, including $310.0 million of net repayments of commercial paper and notes payable.
- Credit facilities totaled $2.0 billion; neither facility was drawn at quarter-end. U.S. commercial paper outstanding was $275 million at a 0.3% average annual interest rate.
- After quarter-end, Ecolab drew a $900 million term loan and increased commercial paper borrowings to help fund the Champion acquisition. Management expected debt-to-capitalization to rise in the near term.
Business trends and changes versus prior period
- Global Industrial sales rose 1% in fixed currency; Global Food & Beverage grew 6%, while Global Water declined 2% and Global Paper declined 3%. Segment operating income increased 19%.
- Global Institutional sales increased 2%; Global Specialty grew 13%, Global Healthcare 3%, and the Global Institutional operating unit was flat. Segment operating income increased 9%.
- Global Energy sales increased 7%, driven by upstream volume, market conditions and share gains; operating income decreased 4% amid higher costs, business mix and investment.
- Other segment sales decreased 5%, reflecting the Vehicle Care divestiture; excluding divestitures, sales increased 5% and operating income increased 17%.
- Ecolab realigned its reportable segments in Q1 2013 following the Nalco merger. Prior-period segment figures were recast on the new structure. Adjusted growth reflects management-defined non-GAAP measures, which should be considered alongside GAAP results.
Outlook, significant events and risks
- Management expected Global Energy operating income to return to double-digit growth for full-year 2013. No consolidated full-year revenue or EPS guidance is stated in the supplied filing text.
- The Combined Restructuring Plan was expected to be substantially complete by year-end 2013, with total pretax charges of about $80–$100 million and annual savings and synergies expected to reach about $250 million by the end of 2014, in addition to approximately $120 million of annual European savings. These are estimates subject to execution and other uncertainties.
- Ecolab completed its Champion acquisition on April 10, 2013, after quarter-end. The consideration was approximately $2.0 billion, including $1.4 billion cash and 6.6 million shares; the acquired business had approximately $1.3 billion of 2012 sales. Champion was expected to join Global Energy in Q2.
- Following the acquisition, Ecolab announced an Energy Restructuring Plan with approximately $80 million of pretax costs, about $50 million expected in 2013, and approximately $150 million of annual savings and synergies by the end of 2015. About 500 positions were expected to be reduced across the combined business.
- Venezuela’s February 2013 currency devaluation generated a $22.9 million pretax charge ($15.0 million after tax). Management cited further devaluation, exchange controls, input availability and government price controls as potential risks.
- Other disclosed exposures include challenging European economic conditions and currency risk; litigation and environmental contingencies, including Deepwater Horizon-related claims against Nalco; and uncertain tax positions. Management said it did not currently expect a material loss beyond accrued amounts for the legal matters, but outcomes remain uncertain.
Important facts for investors to verify
- How much of reported earnings growth reflects recurring operating improvement versus prior-year special charges, 2013 special items and discrete tax benefits.
- Champion integration progress, realized cost synergies, acquisition-related borrowing and the resulting debt and interest burden.
- Whether restructuring costs, timing and projected savings remain on plan, including the separate Energy Restructuring Plan.
- Global Energy’s expected full-year return to double-digit operating-income growth and the effects of product costs and business mix.
- Developments in Venezuela’s currency and operating environment, European economic and foreign-exchange conditions, and material legal or tax contingencies.