Ecolab Inc. — Form 10-Q Summary
Reporting period: First quarter ended March 31, 2014. The interim financial statements are unaudited and were subject to a limited review, not an audit.
Business context and results
Ecolab provides water, hygiene, energy and related services globally. It reports Global Industrial, Global Institutional, Global Energy and Other segments. Champion Technologies, acquired in April 2013, significantly increased Global Energy’s reported sales.
| Metric | Q1 2014 | Q1 2013 | Change / context |
|---|---|---|---|
| Net sales | $3,336.6 million | $2,872.1 million | Up 16% reported; fixed-currency sales up 18%; acquisition-adjusted fixed-currency sales up 5% |
| Operating income | $350.9 million | $261.7 million | Up 34%; adjusted operating income, a non-GAAP measure, up 23% |
| Net income attributable to Ecolab | $191.0 million | $159.6 million | Up 20%; adjusted net income, a non-GAAP measure, up 26% |
| Diluted EPS | $0.62 | $0.53 | Up 17%; adjusted diluted EPS was $0.74 versus $0.60, up 23% |
| Gross margin | 45.5% | 46.4% | Adjusted margins were 45.7% and 46.5%, respectively |
| Net interest expense | $65.1 million | $61.5 million | Up 6% reported; higher debt levels contributed |
| Effective tax rate | 31.9% | 19.6% | Adjusted rates were 27.9% and 28.2%; discrete tax items affected reported comparison |
| Cash from operations | $214.4 million | $186.0 million | Increased year over year |
Financial position and liquidity
- At March 31, 2014, cash and equivalents were $300.3 million, total assets $19.6 billion, and total liabilities $12.3 billion. Cash was down from $339.2 million at year-end 2013; $278 million was held outside the U.S.
- Total debt was approximately $7.2 billion, compared with $6.9 billion at December 31, 2013. Debt to capitalization was 50%, up from 48%. Short-term debt rose to $1.507 billion from $861 million, including $697 million of commercial paper and $755 million of current maturities.
- The company reported compliance with debt covenants and no borrowings under its $1.5 billion credit facility, which expires in September 2016. Management said it expects operating cash flow, cash reserves and borrowing capacity to fund foreseeable needs.
- Investing activities used $174.4 million, including $142.2 million of capital expenditures. Financing activities used $73.1 million; share repurchases were $242.6 million, dividends paid were $85.9 million, and the company paid $87.6 million of acquisition-related contingent consideration. Cash decreased $38.9 million during the quarter.
Material changes and operating drivers
- Sales growth included 4% volume, 1% pricing, 14% acquisitions and divestitures, and a 2% unfavorable currency effect. Fixed-currency sales growth was led by Global Energy, up 78%, largely due to Champion; acquisition-adjusted Global Energy sales rose 8%.
- At fixed currency, Global Industrial sales rose 3%, Global Institutional 3%, and Other 4%. Adjusted Global Energy operating income rose 36% on an acquisition-adjusted fixed-currency basis.
- Gross margin declined as Champion-related and other Global Energy mix effects and cost increases offset volume, pricing, synergies and savings. Excluding acquisition and divestiture effects, adjusted gross margin increased 0.5 percentage points. SG&A was 34.1% of sales versus 35.5%, benefiting from leverage, synergies and cost savings.
- Currency translation reduced reported sales growth by approximately two percentage points and had an unfavorable estimated $0.02 effect on diluted EPS. Foreign currency translation adjustments reduced comprehensive income.
- Reported results included $35.6 million of special charges in Q1 2014, versus $53.4 million in Q1 2013. The 2013 comparison included a Venezuela devaluation charge; 2014 charges were principally restructuring and acquisition/integration costs.
Outlook, commentary and risks
- Management expected at least $80 million of cumulative savings in 2014 from the Energy Restructuring Plan and annual savings and synergies of $150 million by the end of 2015; approximately $15 million of Energy Plan savings were achieved in Q1. The plan calls for approximately 500 workforce reductions and is expected to incur about $80 million of pretax charges through 2015.
- The Combined Restructuring Plan was expected to incur about $50 million of pretax charges in 2014 and achieve at least $325 million of cumulative savings and synergies in 2014; approximately $25 million of savings were achieved in Q1. Substantial completion was expected by year-end 2014.
- Management expected strong operating cash flow and planned to fund foreseeable requirements, including debt repayments, investment, repurchases, dividends, acquisitions and pension contributions from operations, cash and borrowings.
- Venezuela held approximately $80 million of net monetary assets subject to remeasurement. If Ecolab were to remeasure using SICAD 1 or SICAD 2 rates rather than the 6.30 bolivars per U.S. dollar rate it used, it estimated a possible pretax loss of $30 million to $70 million. Venezuela represented approximately 1% of sales and assets.
- The company had approximately $40 million invested in a Kazakhstan joint venture related to the delayed Kashagan oil-field startup. Management did not expect a material adverse effect from further delays, but continued to monitor the situation.
- Risks include foreign-exchange and political instability, challenging European conditions, raw-material and operating-cost pressures, and litigation. Ecolab disclosed ongoing Deepwater Horizon-related claims involving Nalco and multiple wage-hour cases; it said it believed the claims against Nalco were without merit and intended to defend them. It did not identify a reasonably possible material loss above accrued amounts for the legal matters discussed, while noting litigation outcomes remain uncertain.
- Subsequent events included repayment of an additional $150 million of term loans in April 2014, acquisitions completed after the international quarter-end, and the sale of an immaterial Italian business.
Most important facts for investors to verify
- Whether acquisition-adjusted organic growth and restructuring savings persist, particularly in Global Energy and after Champion integration.
- Progress toward restructuring milestones, the remaining charges and cash expenditures, and whether projected savings are realized.
- Near-term debt maturities, commercial-paper usage, refinancing capacity and the effect of continued repurchases and dividends on leverage.
- Venezuelan exchange-rate policy and whether any remeasurement loss becomes necessary; also the status and recoverability of the Kazakhstan joint-venture investment.
- Developments in Deepwater Horizon and wage-hour litigation, environmental matters, and other contingencies.
- Reported versus non-GAAP adjusted performance: adjustments exclude specified special charges and discrete tax items and are not GAAP measures.