Ecolab Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods unless noted. Interim financial statements are unaudited and were reviewed, not audited, by the independent accountant.
Financial performance
| Metric | Q3 2013 | Q3 2012 | First nine months 2013 | First nine months 2012 |
|---|---|---|---|---|
| Net sales | $3.484bn (+15%) | $3.023bn | $9.694bn (+10%) | $8.793bn |
| Operating income | $476.0m (+19%) | $401.2m | $1.090bn (+22%) | $893.5m |
| Net income attributable to Ecolab | $308.0m (+29%) | $238.0m | $680.7m (+44%) | $472.2m |
| Diluted EPS | $1.00 (+25%) | $0.80 | $2.23 (+41%) | $1.58 |
| Reported gross margin | 46.0% | 46.5% | 45.6% | 45.0% |
| Operating cash flow | Not separately provided | Not separately provided | $929.2m | $720.8m |
Management’s non-GAAP adjusted diluted EPS was $1.04 for Q3, up 20% from $0.87, and $2.50 for the first nine months, up 20% from $2.09. Adjusted operating income increased 18% in Q3 and 16% year to date. These measures exclude special items and, for adjusted EPS and net income, discrete tax items.
Q3 adjusted gross margin was 46.1%, down from 46.6%; the nine-month adjusted margin was 45.8% versus 45.9%. Pricing, volume, synergies and cost savings were offset by unfavorable Global Energy mix, including Champion, and other costs. SG&A declined to 31.5% of sales in Q3 from 32.3%, and to 32.8% year to date from 33.5%.
Liquidity, debt and cash flow
- Cash was $394.4m at September 30, 2013, down from $1.158bn at year-end 2012. Cash provided by operations was $929.2m; investing used $1.887bn, primarily reflecting $1.442bn of acquisitions; financing provided $194.3m.
- Balance-sheet short-term debt was $713.2m and long-term debt was $6.537bn, approximately $7.25bn combined, versus $6.54bn combined at December 31, 2012. Debt increased primarily to fund Champion. Debt-to-capitalization was 51%, versus 52% at year-end.
- Ecolab reported compliance with debt covenants and access to a $1.5bn revolving credit facility expiring in September 2016. U.S. commercial paper outstanding was $497m; no facility borrowings were outstanding. Management said it expected operating cash, cash reserves and additional borrowing capacity to cover foreseeable requirements.
- Operating cash flow growth benefited from higher income and lower pension contributions, partly offset by acquisition-related liability payments, taxes and restructuring payments. Capital expenditures were $423.4m.
Material changes and business context
- Ecolab completed its acquisition of Champion Technologies on April 10, 2013, for $1.973bn of cash and stock consideration. Champion’s acquired business had approximately $1.3bn of 2012 sales and is included in Global Energy. The preliminary purchase-price allocation included $1.013bn of goodwill; certain acquired values remained subject to change.
- Q3 fixed-currency sales increased 16%, while acquisition-adjusted fixed-currency sales rose 5%. Acquisitions and divestitures contributed 11 percentage points to reported sales growth; volume contributed 4 points and pricing 1 point. Foreign exchange reduced reported growth by about 1 point.
- Global Energy sales rose 68% at fixed currency rates, largely due to Champion; acquisition-adjusted growth was 9%. Global Industrial grew 3% and Global Institutional 5%; Other declined 3% (up 6% on an acquisition-adjusted basis excluding the Vehicle Care divestiture).
- Global Energy’s acquisition-adjusted operating income grew 20% in Q3. Global Industrial and Global Institutional operating income rose 10% and 14%, respectively, at fixed currency rates; Other declined 10%.
- The company reorganized reporting into Global Industrial, Global Institutional, Global Energy and Other in 2013; prior-year segment figures were recast for comparison.
Outlook, commentary and risks
- No formal company-wide earnings or revenue guidance is stated in the supplied filing text. Management said it expected strong operating cash flow and sufficient borrowing capacity for foreseeable needs.
- The Champion-related Energy Restructuring Plan is expected to incur about $80m of pretax charges through 2015, including approximately $30m in 2013. Management targeted at least $25m of 2013 savings and $150m of annual savings and synergies by 2015; about $15m had been achieved through Q3.
- The Combined Restructuring Plan was expected to incur about $100m of pretax charges, mostly by the end of 2013 with some activity extending into 2014. Management expected approximately $110m of incremental savings in 2013 versus 2012; about $80m had been achieved through the first nine months.
- Special items totaled $34.1m in Q3 and $176.6m for the first nine months of 2013. They included restructuring, Champion acquisition and integration costs, Champion inventory fair-value step-up, Nalco integration costs and a $23.3m Venezuelan currency-devaluation charge year to date. Discrete tax benefits also increased reported earnings; Q3 reported and adjusted tax rates were 24.9% and 28.4%, respectively.
- Foreign currency translation reduced Q3 comprehensive income substantially: Ecolab reported $188.8m of comprehensive income attributable to the company, compared with $357.8m a year earlier. Venezuela represented approximately 1% of sales year to date; management cited exchange controls, potential further devaluation, supply constraints and government pricing actions as risks.
- Legal matters include Deepwater Horizon-related claims against Nalco. The court dismissed claims against Nalco in the B3 master complaint, but the filing noted the order was not then a final judgment for appeal purposes; other related claims and cross-claims remained. Ecolab said it believed the claims were without merit and would defend them. It also disclosed wage-hour cases and other ordinary-course claims; management did not believe material loss beyond accrued amounts was reasonably possible for the described general legal matters.
- Management reported no subsequent events and concluded disclosure controls were effective. The filing refers investors to risk factors in the 2012 Form 10-K.
Important facts for investors to verify
- How much of sales and earnings growth is sustainable organic performance versus Champion consolidation and other acquisition effects.
- Whether restructuring charges, timing and targeted savings are tracking management’s plans, and how much of the savings translate into cash flow and margins.
- Final Champion purchase accounting, the estimated $83.9m additional seller consideration, and the remaining integration and financing costs.
- Debt repayment, liquidity and cash conversion after the acquisition, alongside planned dividends and share repurchases.
- Developments in Deepwater Horizon litigation, Venezuelan currency and operating conditions, and other disclosed legal or tax contingencies.