Ecolab Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Interim financial statements are unaudited; PwC performed a review, not an audit. Amounts below are in U.S. dollars.
Business context and results
Ecolab provides water, hygiene, energy and related services through Global Industrial, Global Institutional, Global Energy and Other segments. Q3 sales growth was led by Energy and Specialty; Latin America performed strongly, with good results in North America and Asia Pacific.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $3,694.9m (+6%) | $3,484.0m | $10,599.7m (+9%) | $9,693.9m |
| Operating income | $571.4m (+20%) | $476.0m | $1,434.5m (+32%) | $1,090.0m |
| Net income attributable to Ecolab | $364.9m (+18%) | $308.0m | $867.3m (+27%) | $680.7m |
| Diluted EPS | $1.19 (+19%) | $1.00 | $2.83 (+27%) | $2.23 |
| Reported gross margin | 46.7% | 46.4% | 46.2% | 46.2% |
| Net interest expense | $63.3m | $67.0m | $194.6m | $194.7m |
| Operating cash flow | — | — | $1,145.0m | $929.2m |
Management’s non-GAAP adjusted diluted EPS was $1.21 in Q3 (+16%) and $2.98 year to date (+19%); adjusted operating income rose 14% in Q3 and 16% year to date. These measures exclude specified special items and, for adjusted EPS, discrete tax items. Sales growth reflected volume gains of 5% and pricing of 1% in Q3; year-to-date growth included 5% from acquisitions and divestitures.
Segments and material changes
- Global Industrial: Q3 fixed-currency sales +3%; operating income +2%. Water and Food & Beverage led, while Paper and Textile Care were weaker.
- Global Institutional: Q3 fixed-currency sales +4%; operating income +5%, with margin up 0.3 percentage points to 21.1%. Specialty grew strongly.
- Global Energy: Q3 fixed-currency sales +14% and operating income +39%; operating margin increased to 16.0% from 13.1%. Champion was fully annualized in the quarter; acquisition-adjusted sales rose 14% and operating income 42%.
- Other: Q3 fixed-currency sales +7% and operating income +15%.
Reported earnings comparisons benefited from substantially lower special charges: operating-income special charges were $7.8m in Q3 2014 versus $34.1m in Q3 2013, and $38.4m versus $174.6m for the nine-month periods. Items included restructuring and integration costs, partly offset in 2014 by litigation, licensing and other gains. The effective tax rate rose to 27.3% from 24.9% in Q3 and to 29.1% from 23.6% year to date; management cited special items and discrete tax effects. Adjusted tax rates were 27.7% and 27.8%, respectively, for the comparable Q3 and nine-month 2014 periods.
Cash, debt and liquidity
At September 30, 2014, cash was $197.8m, down from $339.2m at year-end 2013; current assets were $4,871.8m and current liabilities $4,455.0m. Total debt was approximately $6.8bn, down from $6.9bn at December 31, 2013; debt-to-capitalization was 47%, versus 48%. Short-term debt was $1,922.8m, including $630.2m commercial paper and $1,255.8m of current maturities. The company reported compliance with debt covenants and no borrowings under its $1.5bn credit facility, which expires September 2016.
Nine-month investing cash use was $564.9m, mainly reflecting $488.7m of capital expenditures and $70.8m of net acquisition/investment cash outflow; 2013 investing use was $1,887.3m, including the Champion acquisition. Financing used $713.7m in 2014 versus providing $194.3m in 2013. 2014 financing included $341.0m of share repurchases, $258.9m of dividends, $407.3m of long-term debt repayments and a $310.2m net increase in commercial paper and notes payable. Declared dividends were $0.275 per share in Q3, up from $0.23.
Outlook, risks and unusual items
- No consolidated revenue or EPS guidance was provided in the supplied filing text. Management expected operating cash flow to remain strong and believed cash, operating cash flow and borrowing capacity would fund foreseeable needs over the next 12 months.
- Energy restructuring: expected total pre-tax charges of approximately $80m through substantial completion in 2015; management targeted at least $80m of 2014 savings and $150m of annual savings and synergies by end-2015. About $45m of savings had been achieved in the first nine months of 2014.
- Combined restructuring plan: approximately $50m of additional pre-tax charges expected through 2015; at least $335m of cumulative savings and synergies anticipated in 2014. Approximately $60m of savings had been achieved year to date.
- Venezuela: Ecolab continued to remeasure $102m of net bolivar-denominated monetary assets at 6.30 bolivars per U.S. dollar, citing continued access to that rate. If it used the SICAD 2 rate instead, management estimated a pre-tax loss of approximately $90m based on August 31 rates. Venezuela represented about 1% of sales and less than 2% of assets.
- Other exposures: Kashagan project delays could affect an approximately $25m inventory-related joint-venture investment; management did not expect a material consolidated impact. The filing also describes pending wage-hour actions, environmental matters and Deepwater Horizon-related litigation; outcomes remain uncertain. Management believed no reasonably possible material litigation loss exceeded recorded accruals, while noting adverse developments could cause future charges.
- Foreign exchange, international political and economic conditions, customer demand, integration and restructuring execution, and tax matters remain risks. Approximately half of sales were outside the U.S. Management reported no significant Ukraine/Russia impact to date.
Important facts for investors to verify
- Whether Energy and Combined Plan cost savings, synergies, charges and completion timelines meet management’s targets.
- How the Venezuelan exchange-rate policy develops and whether any remeasurement loss is recognized.
- The maturity and refinancing plan for $1.9bn of debt due within one year, including 2015 senior notes, and commercial-paper funding levels.
- Whether Global Energy growth and margin expansion persist after Champion’s full annualization, and the underlying performance of other segments.
- Developments in Deepwater Horizon, wage-hour and environmental matters, and any resulting changes to accruals or cash exposure.