Ecolab Inc. — Q1 2010 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2010, compared with Q1 2009. Ecolab provides cleaning, sanitizing, pest elimination and related services. Management stated that interim results are not necessarily indicative of full-year results. The interim financial statements received a review, not an audit.
Financial performance
| Metric | Q1 2010 | Q1 2009 | Change / context |
|---|---|---|---|
| Net sales | $1,432.1 million | $1,348.2 million | Up 6% reported; up 2% at fixed currency rates. Volume and price each contributed 1%; currency contributed 4%. |
| Gross margin | 50.0% | 47.5% | Improved with volume, pricing and lower delivered product costs; Q1 2009 included $8 million of restructuring charges in cost of sales. |
| Operating income | $153.8 million | $97.5 million | Up 58% reported; adjusted for special items, up 19% to $157.3 million from $132.0 million. |
| Net income attributable to Ecolab | $95.5 million | $57.4 million | Up 66% reported; adjusted for special items and discrete tax items, up 24% to $98.5 million from $79.5 million. |
| Diluted EPS | $0.40 | $0.24 | Up 67% reported; adjusted diluted EPS was $0.41 versus $0.33, up 24%. |
| Net interest expense | $15.0 million | $15.8 million | Lower short-term borrowings and average rates, partly offset by lower interest income. |
| Cash from operating activities | $135.4 million | $27.4 million | 2010 benefited from higher earnings and lower tax payments; 2009 included a $50 million voluntary U.S. pension contribution. |
| Cash used for investing activities | $57.5 million | $63.0 million | Lower acquisition activity; capital and software spending was comparable. |
| Cash from/(used for) financing activities | $(53.9) million | $48.7 million | Included $144.7 million of share repurchases and $36.8 million of dividends. |
Segments and material changes
- U.S. Cleaning & Sanitizing: Sales rose 2% to $632.3 million; operating income increased 11% to $113.4 million. Kay sales grew 13%; Institutional rose 1%, Food & Beverage was comparable, and Healthcare declined 1%.
- U.S. Other Services: Sales fell 2% to $104.7 million, while operating income rose 11% to $14.6 million. Pest Elimination and GCS sales declined amid weak customer demand and market conditions.
- International: Sales rose 2% at fixed currency rates to $699.6 million; operating income increased 46% at fixed rates to $37.2 million. Asia Pacific grew 10%, Canada 8% and Latin America 6%; EMEA declined 1%. Public-currency sales growth was 12%.
- Reported sales and earnings comparisons benefited from currency effects and from significantly lower restructuring charges than in Q1 2009. Adjusted figures are non-GAAP measures; the filing provides reconciliations.
Financial position and liquidity
- Cash and cash equivalents were $85.3 million at March 31, 2010, versus $73.6 million at December 31, 2009. Total assets were $4.77 billion, down from $5.02 billion, primarily due to currency translation.
- Total debt was $1.039 billion, compared with $967 million at year-end; debt-to-capitalization rose to 36% from 32%. Short-term debt increased to $361.1 million from $98.5 million, including $157.7 million of current long-term maturities. The company cited reclassification of $150 million of 6.875% notes due February 2011 and higher U.S. commercial paper.
- Working capital balances declined from year-end: accounts receivable was $950.2 million versus $1.016 billion, and inventory was $468.9 million versus $493.4 million.
- Ecolab reported compliance with debt covenants and sufficient borrowing capacity for foreseeable needs. It had a $600 million credit facility expiring in June 2012, supporting commercial paper programs; $168 million of U.S. commercial paper and none under the European program were outstanding.
- The company expected operating cash flow, cash reserves and borrowing to fund foreseeable 2010 needs, including scheduled debt repayments, investment, dividends, possible acquisitions and pension contributions. It expected approximately $20 million of additional international pension contributions in 2010; no U.S. pension or postretirement contribution was required for the year.
Outlook, risks and unusual items
- No quantified full-year earnings or sales guidance is provided. Management expected gradual improvement in institutional demand, described improving customer tone, and said it expected operating cash flow to remain strong; it also noted continuing weak conditions in parts of Europe and U.S. service markets.
- Q1 2010 special charges totaled $3.5 million, including a $4.2 million Venezuela currency remeasurement charge, partly offset by business write-down/closure and other gains. Venezuela was designated hyper-inflationary; management did not expect ongoing remeasurement gains or losses to materially affect consolidated results or financial position.
- Q1 2009 included $32.7 million of restructuring charges ($20.9 million after tax). The 2009 program reduced the global workforce by about 950 positions, or 4%; remaining accrued restructuring liability was $10.5 million at March 31, 2010, mostly expected to be paid during 2010.
- The reported Q1 2010 tax rate was 31.1%; adjusted rate was 30.6%. Discrete tax items included a $5 million charge tied to U.S. health-care legislation and a $6 million benefit from settling an international tax audit.
- Ordinary-course litigation and environmental matters could result in charges above recorded liabilities; the company said any future charge was not expected to materially affect consolidated financial position. A wage-hour class-action settlement had preliminary court approval, remained subject to final approval, and was fully accrued at an amount management considered immaterial.
- Foreign exchange is a key exposure. Ecolab used currency forwards, foreign-currency debt and interest-rate swaps for risk management and stated it did not hold derivatives for speculative purposes. Management reported no material change in risk factors from its 2009 Form 10-K.
Investor verification priorities
- Confirm the durability of sales and earnings growth, especially after separating currency effects, restructuring comparisons and other adjusted/non-GAAP items.
- Monitor short-term debt and the February 2011 note maturity, commercial paper usage, covenant compliance and refinancing capacity.
- Assess cash conversion and capital allocation, including the $145 million Q1 share repurchase, ongoing dividends, planned investment and pension funding.
- Track business conditions in EMEA and U.S. service operations, and whether management’s expectation of gradual demand improvement materializes.
- Review subsequent developments in Venezuela currency remeasurement, legal and environmental contingencies, and the final approval and payment of the wage-hour settlement.