ECOLAB INC. annual report, FY2015

Ecolab Inc. — 2015 Form 10-K Summary

Business context and reporting period

Fiscal year ended December 31, 2015; the filing also reports unaudited fourth-quarter results. Ecolab provides water, hygiene, energy and related services in more than 170 countries. Its reportable segments are Global Industrial, Global Institutional and Global Energy, with Pest Elimination and Equipment Care reported as Other. The company reported approximately 47,145 employees.

Financial performance

Metric	FY 2015	FY 2014
Net sales	$13.545 billion	$14.281 billion
GAAP operating income	$1.561 billion	$1.955 billion
Net income attributable to Ecolab	$1.002 billion	$1.203 billion
Diluted GAAP EPS	$3.32	$3.93
Adjusted diluted EPS, non-GAAP	$4.37	$4.18
Cash from operating activities	$2.000 billion	$1.816 billion
Capital expenditures	$771 million	$749 million

Reported sales declined 5%; fixed-currency sales increased 1%. Foreign currency translation reduced reported sales growth by approximately 7 percentage points. Volume and price were each approximately flat; acquisitions and divestitures added 1 percentage point.
Reported gross margin was 46.7%, compared with 46.2%; adjusted gross margin was 47.3%, compared with 46.3%. Reported operating margin fell to 11.5% from 13.7%, while adjusted operating margin improved to 15.2% from 14.3%.
Reported operating income declined 20%; adjusted operating income increased 1%, or 7% at fixed currency. Reported diluted EPS fell 16%, while adjusted diluted EPS rose 5%.
Operating cash flow increased $184 million year over year. Cash used for investing was $916 million and cash used for financing was $1.151 billion. The company paid $401 million in dividends and repurchased $755 million of shares.
At year-end, total debt was $6.466 billion, cash was $92.8 million and net debt was $6.373 billion. Net debt to EBITDA was 2.6 times; net debt to adjusted EBITDA was 2.2 times. Total debt to capitalization was 48.1%.
Current assets were $4.448 billion and current liabilities were $4.764 billion. Ecolab reported $605 million of commercial paper outstanding and no borrowings under its $2.0 billion revolving credit facility. Management stated it was in compliance with debt covenants.

Material changes versus prior period

Global Industrial fixed-currency sales increased 5% and operating income increased 14%; Global Institutional sales increased 6% and operating income increased 12%; Other sales increased 6% and operating income increased 16%.
Global Energy fixed-currency sales declined 8% and operating income declined 10%, reflecting lower oilfield activity, volume reductions and pricing pressure. Management attributed the weakness to depressed oil prices and reduced North American drilling and completion activity.
Currency headwinds were significant: management estimated an approximately $0.30 per-share adverse effect on 2015 EPS compared with 2014. Approximately 48% of 2015 sales originated outside the United States.
Venezuela-related actions produced a reported 2015 charge of $289.3 million before tax, $246.8 million after tax and $235.7 million net of noncontrolling interest. Ecolab deconsolidated its Venezuelan subsidiaries at year-end after restrictions on currency exchange, imports, pricing and operations impaired its control. Beginning in 2016, it expected to recognize sales to those subsidiaries when cash was received.
Acquisitions included Jianghai Environmental Protection for approximately $190 million, Swisher Hygiene’s U.S. operations for approximately $40 million and Ultra Fab Industries for approximately $115 million. Net cash paid for acquisitions in 2015 was approximately $266 million.

Fourth-quarter results and unusual items

Fourth-quarter 2015 sales were $3.412 billion, compared with $3.681 billion in fourth-quarter 2014. Operating income was $322.8 million, net income attributable to Ecolab was $208.9 million, and diluted EPS was $0.69, versus $520.5 million, $335.5 million and $1.10, respectively, in the prior-year quarter. Fourth-quarter special charges were $198.7 million, including Venezuela-related items, restructuring, litigation and other charges.

Total special gains and charges for 2015 were $482.6 million, including $256.0 million of Venezuela-related charges in the special-charges line, $83.8 million of restructuring charges, $56.3 million of litigation, divestiture and other net charges, and $17.1 million of Champion acquisition and integration costs. Additional special items were recorded in cost of sales.
Two restructuring programs were substantially completed in the fourth quarter. Management reported cumulative cost savings and synergies of $125 million under the Energy plan and $395 million under the Combined plan in 2015, targeting $150 million and $420 million, respectively, on an annualized cumulative basis by the end of 2016. Cash payments continued into 2016.
Management expected operating cash flow to remain strong and anticipated funding foreseeable 2016 needs—including debt repayments, investment, repurchases, dividends, acquisitions and pension contributions—with operating cash, available foreign cash and borrowings. It anticipated foreign-exchange pressure to continue into 2016, but expressed confidence in the long-term prospects of Global Energy.
Environmental remediation accruals were approximately $26 million at year-end; 2015 remediation expenditures were approximately $6.5 million. Ecolab was involved in assessments or remediation at approximately 35 locations. The filing states that ultimate costs could differ from accruals.
Five wage-hour lawsuits were pending, including two certified for class treatment; one matter had been settled and another had received summary judgment on federal claims, with state claims remaining. Nalco had obtained dismissal of claims concerning its Deepwater Horizon dispersant in the relevant master complaint, but the dismissal was not a final judgment for appeal purposes. The company also disclosed environmental, product-liability and other litigation risks.

Key financial and risk considerations

Approximately $2.2 billion of debt was floating-rate; management estimated a one-percentage-point increase in average rates would raise annual interest expense by approximately $22 million.
Oil-market weakness, foreign exchange movements, emerging-market conditions, acquisition integration, customer and supplier concentration, raw-material costs, regulation, cybersecurity, litigation and environmental liabilities were identified as risks.
Management reported that goodwill impairment testing found fair value above carrying value for all operating units; goodwill was $6.491 billion at year-end. The 2015 Venezuela deconsolidation and a U.S. plant asset impairment were among the unusual items affecting reported results.
In January 2016, Ecolab issued $800 million of notes and used proceeds partly to repay commercial paper and its remaining $125 million term loan. In February 2016, it entered into a separate $300 million accelerated share repurchase agreement.

Important facts for investors to verify

Reconcile GAAP performance with non-GAAP adjusted EPS and operating results, particularly the treatment and scale of 2015 special charges and discrete tax benefits.
Assess whether management’s 2016 restructuring savings targets are achieved and whether remaining cash costs and integration work are completed as expected.
Monitor Global Energy trends, oilfield customer activity and the impact of lower oil prices on segment sales, margins and pricing.
Track currency exposure and the financial and cash consequences of Venezuela’s deconsolidation; the filing contains differing Venezuela charge presentations in certain passages, so confirm the reconciled amounts in the audited notes.
Review debt maturities, refinancing and interest-rate exposure, alongside cash generation, capital spending, share repurchases and dividend commitments.
Follow the outcomes of wage-hour, Deepwater Horizon and environmental matters, including any appeals, settlements or changes to recorded accruals.