Ecolab Inc. — Q2 2011 Form 10-Q
Business context and reporting period. Ecolab provides cleaning, sanitizing, pest-elimination and related services. This unaudited filing covers the quarter and six months ended June 30, 2011, compared with the corresponding 2010 periods. The interim financial statements were reviewed by PwC, not audited.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $1,698.8 million | $1,520.2 million | $3,217.1 million | $2,952.3 million |
| Operating income | $198.3 million | $204.3 million | $350.0 million | $358.1 million |
| Net income attributable to Ecolab | $125.9 million | $129.3 million | $219.5 million | $224.8 million |
| Diluted EPS | $0.53 | $0.54 | $0.93 | $0.94 |
- Q2 sales rose 12% as reported and 8% at fixed currency; first-half sales rose 9% as reported and 7% at fixed currency. Q2 growth reflected 4% volume, 1% price, 3% acquisitions and divestitures, and 4% currency translation.
- Management reported adjusted Q2 operating income of $228.4 million, up 11%, and adjusted diluted EPS of $0.64, up 14%. For the first half, adjusted operating income was $395.5 million, up 9%, and adjusted diluted EPS was $1.09, up 12%. These non-GAAP measures exclude special items and, where applicable, discrete tax items.
- Gross margin was 49.3% in Q2 versus 50.7% a year earlier, and 49.3% for the first half versus 50.3%. Higher delivered product costs more than offset volume and pricing gains. SG&A declined as a share of sales: 35.9% versus 37.2% in Q2 and 37.0% versus 38.1% for the first half.
- Q2 reported operating income and Ecolab-attributable net income each fell 3%; first-half amounts fell 2%. Reported diluted EPS declined 2% in Q2 and 1% for the first half. Special charges materially affected these comparisons.
- By segment, Q2 U.S. Cleaning & Sanitizing sales increased 9% (6% excluding acquisitions), U.S. Other Services sales increased 1%, and International sales increased 7% at fixed currency (5% excluding acquisitions and divestitures). International operating income rose 26% at fixed currency; U.S. Other Services operating income fell 15%.
Cash flow, balance sheet and liquidity
- First-half cash from operations was $302.1 million, down from $365.0 million. Management attributed much of the decrease to a $100 million voluntary U.S. pension contribution; working-capital movements also affected cash flow.
- Investing activities used $464.4 million, including $281.1 million net cash paid for acquisitions and $145.8 million of capital expenditures. Financing activities provided $63.5 million, including increased commercial paper and notes payable. Cash declined to $163.2 million from $242.3 million at year-end 2010.
- Total debt was approximately $1.1 billion at June 30, versus $845.6 million at December 31, 2010; debt-to-capitalization increased to 32% from 28%. Short-term debt was $403.5 million and long-term debt $703.3 million. Management cited acquisitions, the pension contribution and share repurchases as drivers of increased borrowing.
- Current assets were $1,994.2 million and current liabilities $1,639.6 million at June 30. The company reported $361 million of U.S. commercial paper outstanding at an average annual rate of 0.1%, none under its European program, and a $600 million multi-year credit facility expiring June 2012. Management said it was in compliance with debt covenants and had sufficient capacity for foreseeable operating needs.
- Dividends declared were $0.175 per share in Q2, versus $0.155 in Q2 2010. First-half dividends declared were $0.35 per share versus $0.31.
Material changes, outlook and risks
- In February 2011, Ecolab began a restructuring plan focused principally on improving its European business. It expects to eliminate approximately 900 positions and incur about $150 million of pretax charges through 2013, including $50–$70 million in 2011. Expected annualized savings are approximately $120 million when fully realized; about $4–$6 million is expected in 2011. Approximately $125 million of total charges are expected to be cash expenditures. Q2 restructuring charges were $29.8 million; first-half charges were $41.0 million.
- Acquisitions included Cleantec, purchased in late 2010, and O.R. Solutions, acquired in March 2011 for approximately $260 million. The acquisitions contributed to increased goodwill and intangible assets and acquisition-related cash outflows.
- After quarter-end, Ecolab agreed to acquire Nalco. The announced transaction had an estimated total value of $8.1 billion, including Nalco’s $2.7 billion net debt; consideration was expected to be approximately 70% Ecolab shares and 30% cash, including about $1.6 billion cash and 68.9 million Ecolab shares. Closing was expected in Q4 2011, subject to shareholder, regulatory and other conditions. Ecolab expected to fund the cash portion through capital markets and planned to replace and enlarge its credit facility and commercial-paper capacity. Rating agencies placed its programs on negative watch for a possible downgrade.
- Merger risks include approval or regulatory delays, integration challenges, unexpected costs, possible rating changes and business disruption. Ecolab disclosed potential merger termination obligations of $275 million plus reimbursement of up to $8 million of Nalco transaction expenses in specified circumstances. A purported Nalco shareholder class action filed August 1 sought to enjoin the merger; Ecolab said it considered the allegations without merit.
- The company faces ordinary-course litigation and environmental, product-liability, antitrust and other contingencies. It said an adverse development could result in charges affecting results or cash flows, though it did not expect any such future charge to materially affect consolidated financial position. Three wage-hour suits had not been certified as class actions; Ecolab said it did not believe they posed a reasonably possible risk of material loss.
- Management cited higher delivered product costs as a continuing pressure, partly offset by sales growth, pricing and efficiencies. The filing provides no formal consolidated earnings or sales guidance beyond the restructuring and merger-related expectations summarized above.
Investor verification points
- Track organic, fixed-currency sales and segment operating trends, particularly whether pricing and productivity continue to offset delivered-cost inflation.
- Verify restructuring charges, the pace and cash cost of implementation, position reductions, and realization of the stated savings targets.
- Monitor acquisition integration and the Nalco transaction’s approvals, financing, dilution, closing conditions, termination exposure and any effect on credit ratings or borrowing costs.
- Assess operating cash generation, working-capital needs, pension contributions, debt maturities and refinancing capacity, including the credit facility’s June 2012 expiry.
- Review developments in litigation, environmental matters and uncertain tax positions; the filing does not quantify potential losses for all contingencies.