Ecolab Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Interim financial statements are unaudited and were reviewed, not audited. Comparisons with 2011 reported results are materially affected by Nalco, acquired December 1, 2011; pro forma comparisons are more informative but are non-GAAP and not predictive of future results.
Financial performance
| Metric | Q3 2012 | Prior-period comparison |
|---|---|---|
| Net sales | $3,023.3 million | Reported +74%; +2% versus Q3 2011 pro forma, or +7% at fixed currency rates |
| Operating income | $401.2 million | Reported +67%; +16% versus pro forma. Adjusted operating income +14% |
| Net income attributable to Ecolab | $238.0 million | Reported +54% |
| Diluted EPS | $0.80 | Reported +23%; adjusted EPS was $0.87, up 16% from $0.75 |
| Gross margin | 46.5% reported; 46.6% adjusted | Reported 49.4% in Q3 2011; adjusted pro forma margin was 46.1% |
| Net interest expense | $64.2 million | Up from $13.2 million, mainly due to merger-related debt and share repurchases |
Nine-month results: Sales were $8,792.9 million, up 4% versus pro forma 2011. Reported operating income was $893.5 million; it declined 10% versus pro forma 2011, while adjusted operating income rose 16%. Net income attributable to Ecolab was $472.2 million, up 26% against reported 2011; diluted EPS was $1.58, unchanged. Adjusted diluted EPS was $2.09, up 14%. Reported gross margin was 45.0%, versus 49.3% in 2011; adjusted margin was 45.9% versus 46.1% pro forma.
Q3 sales growth against pro forma 2011 reflected 4% volume growth and 2% pricing, offset by a 5% adverse currency effect. Global Energy was a strong contributor: fixed-currency sales rose 20% in Q3 and 22% year to date. Global Paper sales declined 4% in Q3 and 1% year to date on a fixed-currency pro forma basis. Ecolab reported six segments after adding Nalco’s Global Water, Global Paper and Global Energy businesses.
Cash flow, balance sheet and liquidity
- Operating cash flow for the first nine months was $720.8 million, versus $540.7 million in 2011. Capital expenditures were $394.0 million; cash used for investing was $414.9 million and for financing was $1,815.8 million.
- Cash and cash equivalents were $324.0 million at September 30, down from $1,843.6 million at year-end 2011, primarily reflecting repayment of Nalco debt. $289 million of cash was held outside the U.S.
- Total debt was approximately $6.02 billion, versus $7.64 billion at December 31, 2011. Debt to capitalization fell to 50% from 57%. Short-term debt was $631.0 million and long-term debt was $5,386.7 million. Management reported covenant compliance and sufficient borrowing capacity.
- Current assets were $4,072.9 million and current liabilities $2,818.7 million. The company had $560 million of U.S. commercial paper outstanding at an average annual rate of 0.5%, no European commercial paper outstanding, and no borrowings under its credit facilities.
- In August, Ecolab issued $500 million of 1.00% senior notes due 2015. It had a $1.5 billion multi-year credit facility and a $500 million 364-day facility.
Material changes, outlook and risks
- Reported comparisons reflect the Nalco acquisition and significant merger-related costs. Nine-month special items included $72.7 million of Nalco inventory fair-value step-up, $47.0 million of merger and integration costs, $73.2 million of restructuring charges, and an $18.2 million debt-extinguishment loss; a $13.0 million gain on sale partly offset charges. Total special gains and charges were $207.0 million for the nine months.
- Two restructuring programs were underway. The 2011 plan was expected to cost about $150 million pretax through 2013, with approximately $120 million in annualized savings when fully realized. The Nalco merger restructuring plan was expected to cost about $180 million pretax through 2013; restructuring and merger synergies were expected to reach an annual run rate of approximately $250 million by the end of 2014. These estimates and timing are uncertain.
- After quarter-end, Ecolab agreed to acquire Champion Technologies for approximately $2.2 billion, about 75% cash and 25% stock, subject to customary conditions. Financing was expected to include term loans and commercial paper, with some short-term borrowing later refinanced. The deal was expected to close in Q4 2012; the filing describes regulatory, closing, integration, cost and financing risks, and a potential $100 million termination fee in certain circumstances.
- After quarter-end, Ecolab also agreed to sell Vehicle Care for approximately $120 million and estimated a pretax gain of about $75 million, subject to closing conditions. It announced an agreement to acquire Quimiproductos, a business with approximately $35 million in annual sales, subject to regulatory and other conditions.
- Management cited continued European economic weakness and potential euro disruption, and Venezuelan currency, exchange-control, supply and pricing risks. Venezuela represented about 1% of nine-month sales; the five named European countries facing particular concern represented about 4%.
- Nalco-related Deepwater Horizon litigation remained unresolved, including claims seeking unspecified damages and cross-claims for contribution or indemnity. Ecolab said it intended to defend the claims and could not predict outcomes. Other claims include wage-hour lawsuits and environmental and product-liability matters; management did not believe material losses beyond recorded accruals were reasonably possible, while noting adverse outcomes could result in future charges.
- The company reported an immaterial correction to prior balance-sheet classifications involving deferred taxes and liabilities, with no effect on income or total operating cash flow. Goodwill testing in Q2 found no impairment; Nalco-related goodwill and intangible valuations remained subject to estimation and impairment risk.
Investor verification points
- Reconcile reported GAAP results to pro forma and adjusted measures, including the effect of Nalco and the $207.0 million of nine-month special items.
- Track whether expected restructuring savings and merger synergies materialize, and whether the stated costs and completion schedules change.
- Verify the Champion transaction’s completion, final consideration, funding mix, resulting leverage and integration performance; also monitor the Vehicle Care sale and Quimiproductos acquisition.
- Monitor operating cash generation, pension contributions, capital spending, commercial-paper balances and debt maturities as cash reserves have fallen substantially.
- Follow developments in Deepwater Horizon and other litigation, European and Venezuelan exposures, and final Nalco purchase-accounting valuations and goodwill impairment assessments.