Ecolab Inc. — Q1 2011 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2011, compared with Q1 2010. Ecolab provides cleaning, sanitizing and related services. The interim financial information received a limited review by PwC, not an audit.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $1,518.3 million | $1,432.1 million | Up 6% |
| Operating income, reported | $151.7 million | $153.8 million | Down 1% |
| Net income attributable to Ecolab | $93.6 million | $95.5 million | Down 2% |
| Diluted EPS, reported | $0.40 | $0.40 | Flat |
| Adjusted diluted EPS, non-GAAP | $0.45 | $0.41 | Up 10% |
| Gross margin | 49.3% | 50.0% | Down 0.7 percentage points |
| Operating cash flow | $56.1 million | $135.4 million | Down $79.3 million |
Sales rose 6% at fixed currency rates, comprising 4% volume growth, 1% pricing and 2% acquisitions and divestitures, with rounding. Excluding acquisitions, sales increased 4%. Higher delivered product costs more than offset volume and pricing gains, reducing gross margin. SG&A was 38.3% of sales versus 39.0% a year earlier.
Reported operating income included $15.4 million of special charges in Q1 2011, compared with $3.5 million in Q1 2010. Excluding special items, adjusted operating income increased 6%; adjusted net income increased 9%. These are company-presented non-GAAP measures and are not substitutes for GAAP results.
Segments and material changes
- U.S. Cleaning & Sanitizing: Sales increased 8% to $681.5 million, or 6% excluding acquisitions; operating income decreased 1% to $111.9 million, as delivered product cost increases outweighed sales gains.
- U.S. Other Services: Sales rose 2% to $107.2 million and operating income rose 1% to $14.7 million.
- International: Fixed-currency sales increased 5% to $716.2 million; operating income at fixed currency rose 12% to $45.0 million. Asia Pacific sales grew 17% (6% excluding acquisitions), Latin America 11%, EMEA 1%, while Canada declined 4%.
- Q1 acquisitions included O.R. Solutions, purchased for approximately $260 million, and the Cleantec business, purchased for approximately $43 million. Net cash paid for acquisitions was $277.5 million; acquired businesses each had annual sales of approximately $55 million.
Cash, debt and liquidity
- Cash and cash equivalents were $151.4 million at March 31, down from $242.3 million at December 31, 2010.
- Total debt was approximately $1.2 billion, versus $846 million at year-end; debt to capitalization increased to 35% from 28%, primarily because of higher commercial paper borrowings. Short-term debt was $506.4 million, including $459.5 million of commercial paper; long-term debt was $683.7 million.
- Operating cash flow was reduced by a $100 million voluntary U.S. pension contribution. Investing activities used $377.8 million, including acquisition spending and a $28.1 million indemnification escrow deposit. Capital expenditures were $65.8 million.
- Financing activities provided $219.1 million, including $465.7 million of net commercial paper and notes payable issuance; Ecolab repurchased approximately $70 million of shares and paid $40.6 million in dividends.
- The company reported compliance with debt covenants and said it expected to meet foreseeable cash needs using operating cash flow, cash reserves and short- or long-term borrowing. Its $600 million multi-year credit facility expires in June 2012 and supports commercial paper programs; combined borrowing under those programs may not exceed $600 million. U.S. commercial paper outstanding was $460 million at an average annual rate of 0.2%; none was outstanding under the European program.
Outlook, risks and unusual items
- 2011 restructuring plan: Expected to eliminate approximately 900 positions, primarily in Europe. Ecolab expects about $150 million in pretax charges over three years, of which $50 million to $70 million is expected in 2011; approximately $125 million is expected to be cash expenditure. The company estimates $120 million in annualized cost savings when fully realized, with $4 million to $6 million expected in 2011.
- The reported effective tax rate was 32.1%, compared with 31.1%; the adjusted rates were 30.2% and 30.6%, respectively. Ecolab attributed the adjusted-rate decrease primarily to international tax benefits and the R&D credit.
- The company said the March 2011 Japan earthquake and tsunami caused minor facility damage and were not expected to have a material operational impact.
- Contingencies include ordinary-course litigation and environmental matters. Three wage-hour suits were in initial stages and none had been certified as a class action. Ecolab cautioned that adverse developments could cause charges affecting results or cash flows, though it did not expect a material effect on consolidated financial position.
- Gross liability for uncertain tax positions was $67 million. Certain IRS examinations and 2007–2008 U.S. tax returns remained open; the company could not reasonably estimate changes in the liability but did not expect significant payments within the next year.
- No material change in risk factors from the 2010 Form 10-K was reported. Management stated disclosure controls were effective and reported no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether sales growth, pricing and cost efficiencies can offset delivered product cost pressure and restore gross margin.
- Actual restructuring charges, timing of the expected $120 million annualized savings, and whether savings are achieved without impairing growth.
- Cash generation after pension contributions and acquisition spending, and the effect of increased commercial paper and short-term debt on liquidity.
- Final purchase-price allocations and integration performance for O.R. Solutions and Cleantec.
- Developments in wage-hour litigation, environmental matters and tax examinations, including any change to estimated exposure or cash payments.
- Reported results alongside the company’s non-GAAP adjustments; the filing notes interim results are not necessarily indicative of full-year performance.