Ecolab Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2010; comparisons are with the corresponding 2009 periods. Ecolab provides cleaning, sanitizing, pest elimination, and related services. Interim financial statements are unaudited and were reviewed, not audited, by the independent accountant.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $1,561.9 million | $1,546.4 million | $4,514.2 million | $4,336.1 million |
| Operating income | $245.1 million | $223.0 million | $603.2 million | $485.5 million |
| Net income attributable to Ecolab | $174.2 million | $145.0 million | $399.0 million | $301.5 million |
| Diluted EPS | $0.74 | $0.60 | $1.68 | $1.26 |
| Gross margin | 51.1% | 50.6% | 50.6% | 49.3% |
- Q3 sales rose 1% reported and 3% at fixed currency; nine-month sales rose 4% reported and 3% at fixed currency. Q3 volume contributed 3%, while foreign exchange reduced reported growth by 2%.
- Reported Q3 operating income increased 10%; excluding special gains and charges, it increased 4% (5% at fixed currency). Nine-month adjusted operating income increased 9% (7% at fixed currency).
- Reported Q3 diluted EPS increased 23%. Adjusted diluted EPS, excluding special items and discrete tax items, increased 8% to $0.66. For nine months, adjusted EPS increased 13% to $1.63.
- Q3 SG&A was 35.8% of sales, unchanged year over year; nine-month SG&A was 37.3% versus 36.8%. Management cited business investment and other cost increases as offsets to savings and sales leverage.
Cash flow, liquidity, and capital
- Nine-month operating cash flow was $638.2 million, versus $531.5 million in 2009; management attributed the increase mainly to improved earnings and lower pension contributions, partly offset by working-capital changes. The 2009 period included $125 million of voluntary U.S. pension contributions.
- Investing cash use was $239.8 million, including $188.2 million of capital expenditures and $39.6 million net cash paid for acquisitions. Financing cash use was $285.5 million, including $345.1 million for share repurchases and $109.6 million of dividends.
- Cash and cash equivalents were $168.4 million at September 30, 2010, up from $73.6 million at year-end 2009. Total debt was approximately $991 million, versus $967 million at year-end; debt to capitalization rose to 33% from 32%.
- Short-term debt was $343.6 million and long-term debt $647.3 million. Debt due within one year increased to $344 million, primarily because $150 million of 6.875% notes due February 2011 became current and commercial paper borrowings increased.
- The company reported $167 million of U.S. commercial paper outstanding and none under its European program. A $600 million multi-year credit facility, expiring June 2012, supports the combined commercial paper programs, subject to a $600 million borrowing limit. Management said it was in covenant compliance and had sufficient borrowing capacity.
- During the first nine months, Ecolab repurchased 7.4 million shares for approximately $345 million. The Q3 share-repurchase authorization had 5.35 million shares remaining at September 30.
Material changes, outlook, and risks
- Growth was led by U.S. Cleaning & Sanitizing, up 4% in Q3, and International sales, up 3% at fixed currency. Asia Pacific grew 8% and Latin America 7%; U.S. Other Services was flat. EMEA sales were comparable to the prior year. Management described end markets as mixed, including soft foodservice conditions and a recovering Asia Pacific hospitality market.
- Special items affected comparisons: Q3 2010 included a $5.9 million gain on sale of an investment, partly offset by other charges; Q3 2009 included $6.7 million of net special charges. Nine-month 2009 special charges were $66.3 million, including restructuring. 2010 also included a $4.2 million first-quarter charge from Venezuela’s currency devaluation.
- Reported Q3 tax rate was 24.3% versus 30.2%; adjusted rates were 30.3% and 32.0%. The 2010 quarter included $12.1 million of discrete tax benefits, primarily from favorable IRS appeal settlements and prior-year reserve adjustments. Nine-month 2010 tax benefits also included an international audit settlement, partly offset by a U.S. health-care-law-related charge and international tax costs.
- Management expected to meet reasonably foreseeable cash requirements over the next 12 months using operating cash flow, cash reserves, and borrowings. The filing provides no specific earnings or sales guidance. Management did not expect Venezuela currency remeasurement effects to materially affect future consolidated results or financial position.
- In September, Ecolab agreed to acquire Australia’s Cleantec business, with approximately $55 million in annual sales; closing remained subject to Australian antitrust clearance and customary conditions. Separately, it acquired Dober Chemical’s commercial laundry division, with approximately $37 million in 2009 annual sales.
- Goodwill testing found no impairment; the GCS Service reporting unit’s estimated fair value would need to decline approximately 30% to indicate potential impairment. Management identified revenue growth as the most sensitive assumption, with risks including difficult economic conditions, uncertainty in U.S. foodservice, and timing of new customers.
- Contingencies include ordinary-course litigation and environmental matters. The company warned that adverse developments could result in charges materially affecting results or cash flows in the period recorded, though it did not expect a material effect on consolidated financial position. No material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Whether fixed-currency sales and adjusted earnings trends persist, and how much reported performance continues to depend on currency and non-GAAP adjustments.
- Ability to refinance or repay the $344 million of debt due within one year, including the February 2011 notes, while funding operations and capital returns.
- Cash-flow sustainability after the unusually high 2009 pension contribution comparison, and the impact of working capital and planned business investment.
- Completion and integration of Cleantec, and whether acquisition-related growth and expected benefits materialize.
- Developments in litigation, environmental matters, uncertain tax positions, Venezuela currency exposure, and GCS Service performance relative to impairment assumptions.