Ecolab Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2009. Interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance
| Metric | Third quarter 2009 | Third quarter 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Net sales | $1,546.4 million | $1,626.3 million | $4,336.1 million | $4,654.2 million |
| Operating income | $223.0 million | $201.4 million | $485.5 million | $572.6 million |
| Net income attributable to Ecolab | $145.0 million | $126.2 million | $301.5 million | $368.1 million |
| Diluted EPS | $0.60 | $0.50 | $1.26 | $1.46 |
| Gross margin | 50.6% | 48.7% | 49.3% | 49.0% |
- Third-quarter reported sales fell 5%; sales at fixed exchange rates were approximately flat. The nine-month reported decline was 7%, also approximately flat at fixed rates. Volume declines were offset by pricing; foreign exchange reduced reported sales.
- Quarterly operating income rose 11% (8% excluding special gains and charges); nine-month operating income fell 15% as reported and 3% excluding those items. Ecolab attributed underlying improvement to pricing, cost savings and favorable delivered product costs, partly offset by lower volume, continued investment and other costs.
- Quarterly net income attributable to Ecolab rose 15%, and diluted EPS rose 20%. For the nine months, net income declined 18% and diluted EPS declined 14%. Comparisons include special items and discrete tax effects.
- Net cash provided by operating activities was $531.5 million for nine months, versus $496.2 million. Investing used $201.9 million, versus $486.6 million; financing used $292.8 million, versus $49.1 million. Capital expenditures were $169.0 million and capitalized software expenditures $29.7 million.
Financial position and liquidity
- At September 30, cash and equivalents were $107.5 million; current assets were $1,816.0 million and current liabilities $1,292.9 million.
- Total debt was approximately $1.0 billion, down from $1.1 billion at year-end 2008. Debt to capitalization declined to 33% from 42%. Short-term debt was $121.0 million, compared with $338.9 million at year-end; long-term debt was $850.0 million.
- Ecolab reported compliance with debt covenants and sufficient borrowing capacity. Its $600 million multi-year credit facility supports its U.S. and European commercial-paper programs; $98 million of U.S. commercial paper was outstanding and none under the European program. About $156 million of additional committed and uncommitted bank credit lines was available.
- Operating cash flow included $125 million in voluntary U.S. pension contributions, versus $75 million in the prior-year period. Ecolab said it expected operating cash flow, cash reserves and borrowing capacity to fund foreseeable requirements.
Material changes, outlook and risks
- Management cited recession-related weakness and unfavorable currency effects, while reporting support from new account gains, pricing and cost savings. U.S. Healthcare sales grew 11% in the quarter, including H1N1-related hand-sanitizer demand; U.S. Other Services sales declined 6%. International sales rose 1% at fixed exchange rates, with growth in Latin America and Canada offsetting weakness in EMEA.
- The 2009 restructuring plan targets a global workforce reduction of about 1,000 positions (4%) and fewer plant and distribution-center locations. Nine-month restructuring charges were $62 million after rounding. Full-year pretax charges were expected to total approximately $70 million ($50 million after tax), with annualized pretax savings of approximately $75 million ($50 million after tax); $50 million of pretax savings was expected in 2009. Approximately $65 million of charges were expected to be cash expenditures; $33 million had been paid by September 30.
- No material change in risk factors from the prior quarterly filing was reported. Risks include uncertain litigation and environmental matters, end-market conditions, foreign exchange and credit-market volatility, and pension obligations. The company said it did not expect significant uncertain-tax-position payments within the next year.
- An October 2009 payment of $34.6 million settled two California wage-hour class actions; the amount had been accrued. A separate wage-hour settlement remained subject to court approval and had been fully accrued. Ecolab stated that no material subsequent events required disclosure as of November 6, 2009.
- The filing does not provide a clear full-year sales or earnings forecast. Management did anticipate completing restructuring actions during 2009 and described funding plans for foreseeable cash needs.
Important facts for investors to verify
- Underlying results versus reported results, including the effects of restructuring charges, prior-year gains and discrete tax items.
- Whether planned restructuring charges, cash payments and savings meet management’s estimates.
- Sales trends by segment and region, especially the persistence of recession-related weakness and H1N1-related Healthcare demand.
- Cash generation after pension contributions, liquidity availability and progress in reducing short-term borrowing.
- Developments in remaining litigation, environmental contingencies and pension funding requirements.