UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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(Mark One) |
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☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended March 31, 2019 |
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OR |
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☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
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Commission File No. 1-9328 |
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ECOLAB INC.
(Exact name of registrant as specified in its charter)
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Delaware |
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41-0231510 |
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(State or other jurisdiction of |
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(I.R.S. Employer |
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incorporation or organization) |
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Identification No.) |
1 Ecolab Place, St. Paul, Minnesota 55102
(Address of principal executive offices)(Zip Code)
1-800-232-6522
(Registrant’s telephone number, including area code)
(Not applicable)
(Former name, former address and former fiscal year,
if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Trading symbol(s) |
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Name of each exchange on which registered |
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Common Stock, $1.00 par value 2.625% Euro Notes due 2025 1.000% Euro Notes due 2024 |
ECL ECL 25 ECL 24 |
New York Stock Exchange, Inc. New York Stock Exchange, Inc. New York Stock Exchange, Inc. |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☒ |
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Accelerated filer ☐ |
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Non-accelerated filer ☐ |
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Smaller reporting company ☐ |
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Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of each of the registrant’s classes of Common Stock outstanding as of March 31, 2019: 288,242,150 shares, par value $1.00 per share.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENT OF INCOME
(unaudited)
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First Quarter Ended |
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March 31 |
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(millions, except per share amounts) |
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2019 |
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2018 |
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Product and equipment sales |
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$2,886.3 |
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$2,859.6 |
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Service and lease sales |
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619.1 |
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611.3 |
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Net sales |
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3,505.4 |
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3,470.9 |
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Product and equipment cost of sales |
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1,717.1 |
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1,696.2 |
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Service and lease cost of sales |
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379.6 |
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376.1 |
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Cost of sales (including special charges (a)) |
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2,096.7 |
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2,072.3 |
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Selling, general and administrative expenses |
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1,001.2 |
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1,018.3 |
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Special (gains) and charges |
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40.3 |
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26.0 |
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Operating income |
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367.2 |
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354.3 |
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Other (income) expense |
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(21.2) |
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(19.4) |
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Interest expense, net (b) |
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49.4 |
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56.4 |
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Income before income taxes |
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339.0 |
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317.3 |
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Provision for income taxes |
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38.6 |
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69.1 |
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Net income including noncontrolling interest |
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300.4 |
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248.2 |
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Net income attributable to noncontrolling interest |
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3.9 |
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0.9 |
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Net income attributable to Ecolab |
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$296.5 |
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$247.3 |
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Earnings attributable to Ecolab per common share |
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Basic |
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$ 1.03 |
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$ 0.86 |
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Diluted |
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$ 1.01 |
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$ 0.84 |
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Weighted-average common shares outstanding |
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Basic |
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288.2 |
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288.6 |
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Diluted |
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292.3 |
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292.7 |
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(a) |
Cost of sales includes special (gains) and charges of $3.6 in the first quarter of 2019, which is recorded in product and equipment cost of sales. |
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(b) |
Interest expense, net includes special (gains) and charges of $0.2 in the first quarter of 2019. |
The accompanying notes are an integral part of the consolidated financial statements.
2
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
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First Quarter Ended |
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March 31 |
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(millions) |
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2019 |
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2018 |
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Net income including noncontrolling interest |
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$300.4 |
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$248.2 |
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Other comprehensive income (loss), net of tax |
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Foreign currency translation adjustments |
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Foreign currency translation |
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105.1 |
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115.6 |
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Gain (loss) on net investment hedges |
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(6.6) |
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(26.2) |
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98.5 |
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89.4 |
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Derivatives and hedging instruments |
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(5.6) |
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(2.1) |
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Pension and postretirement benefits |
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Amortization of net actuarial loss and prior service costs included in |
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net periodic pension and postretirement costs |
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(4.0) |
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0.3 |
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(4.0) |
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0.3 |
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Subtotal |
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88.9 |
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87.6 |
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Total comprehensive income, including noncontrolling interest |
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389.3 |
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335.8 |
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Comprehensive income attributable to noncontrolling interest |
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4.8 |
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3.4 |
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Comprehensive income attributable to Ecolab |
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$384.5 |
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$332.4 |
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The accompanying notes are an integral part of the consolidated financial statements.
3
CONSOLIDATED BALANCE SHEET
(unaudited)
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March 31 |
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December 31 |
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(millions, except per share amounts) |
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2019 |
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2018 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$79.0 |
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$114.7 |
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Accounts receivable, net |
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2,691.6 |
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2,662.5 |
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Inventories |
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1,645.6 |
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1,546.4 |
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Other current assets |
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334.8 |
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354.1 |
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Total current assets |
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4,751.0 |
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4,677.7 |
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Property, plant and equipment, net |
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3,878.6 |
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3,836.0 |
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Goodwill |
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7,324.2 |
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7,078.0 |
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Other intangible assets, net |
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3,877.3 |
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3,797.7 |
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Operating lease assets |
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570.9 |
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- |
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Other assets |
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525.6 |
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685.1 |
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Total assets |
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$20,927.6 |
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$20,074.5 |
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LIABILITIES AND EQUITY |
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Current liabilities |
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Short-term debt |
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$1,132.3 |
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$743.6 |
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Accounts payable |
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1,237.7 |
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1,255.6 |
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Compensation and benefits |
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478.2 |
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579.7 |
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Income taxes |
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89.6 |
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100.6 |
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Other current liabilities |
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1,218.2 |
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1,006.1 |
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Total current liabilities |
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4,156.0 |
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3,685.6 |
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Long-term debt |
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6,008.2 |
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6,301.6 |
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Postretirement health care and pension benefits |
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942.3 |
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944.3 |
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Deferred income taxes |
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792.3 |
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764.6 |
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Operating lease liabilities |
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412.2 |
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- |
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Other liabilities |
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349.7 |
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324.8 |
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Total liabilities |
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12,660.7 |
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12,020.9 |
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Commitments and contingencies (Note 17) |
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Equity (a) |
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Common stock |
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358.2 |
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357.0 |
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Additional paid-in capital |
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5,731.0 |
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5,633.2 |
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Retained earnings |
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9,131.8 |
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8,909.5 |
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Accumulated other comprehensive loss |
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(1,734.9) |
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(1,761.7) |
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Treasury stock |
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(5,265.4) |
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(5,134.8) |
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Total Ecolab shareholders’ equity |
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8,220.7 |
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8,003.2 |
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Noncontrolling interest |
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46.2 |
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50.4 |
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Total equity |
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8,266.9 |
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8,053.6 |
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Total liabilities and equity |
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$20,927.6 |
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$20,074.5 |
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(a) |
Common stock, 800.0 shares authorized, $1.00 par value per share, 288.2 shares outstanding at March 31, 2019 and 287.7 shares outstanding at December 31, 2018. Shares outstanding are net of treasury stock. |
The accompanying notes are an integral part of the consolidated financial statements.
4
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
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First Quarter Ended |
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March 31 |
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(millions) |
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2019 |
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2018 |
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OPERATING ACTIVITIES |
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Net income including noncontrolling interest |
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$300.4 |
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$248.2 |
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Adjustments to reconcile net income to cash provided by operating activities: |
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Depreciation |
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159.0 |
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150.9 |
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Amortization |
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79.8 |
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80.2 |
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Deferred income taxes |
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(5.0) |
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13.3 |
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Share-based compensation expense |
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32.2 |
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33.7 |
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Pension and postretirement plan contributions |
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(19.0) |
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(23.0) |
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Pension and postretirement plan expense |
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4.9 |
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8.6 |
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Restructuring charges, net of cash paid |
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16.3 |
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(7.7) |
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Other, net |
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6.4 |
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4.9 |
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Changes in operating assets and liabilities, net of effect of acquisitions: |
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Accounts receivable |
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8.0 |
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33.9 |
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Inventories |
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(83.0) |
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(77.2) |
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Other assets |
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5.9 |
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(1.0) |
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Accounts payable |
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(35.3) |
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40.4 |
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Other liabilities |
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(92.5) |
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(18.0) |
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Cash provided by operating activities |
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378.1 |
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487.2 |
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INVESTING ACTIVITIES |
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Capital expenditures |
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(187.0) |
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(203.3) |
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Property and other assets sold |
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1.4 |
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0.5 |
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Acquisitions and investments in affiliates, net of cash acquired |
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(281.8) |
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(76.5) |
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Divestiture of businesses |
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- |
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9.4 |
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Settlement of net investment hedges |
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- |
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14.1 |
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Other, net |
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(10.0) |
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- |
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Cash used for investing activities |
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(477.4) |
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(255.8) |
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FINANCING ACTIVITIES |
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Net issuances of commercial paper and notes payable |
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487.9 |
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354.3 |
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Long-term debt repayments |
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(400.3) |
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(300.6) |
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Reacquired shares |
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(131.4) |
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(215.1) |
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Dividends paid |
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(141.4) |
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(123.4) |
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Exercise of employee stock options |
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67.7 |
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28.4 |
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Acquisition related liabilities and contingent consideration |
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- |
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(8.6) |
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Cash used for financing activities |
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(117.5) |
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(265.0) |
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Effect of exchange rate changes on cash, cash equivalents and restricted cash |
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1.8 |
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(2.3) |
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Decrease in cash, cash equivalents and restricted cash |
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(215.0) |
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(35.9) |
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Cash, cash equivalents and restricted cash, beginning of period (a) |
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294.0 |
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211.4 |
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Cash, cash equivalents and restricted cash, end of period (b) |
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$79.0 |
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$175.5 |
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(a) |
Restricted cash was $179.3 as of December 31, 2018 and included in Other assets on the Consolidated Balance Sheet. |
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(b) |
There was no restricted cash as of March 31, 2019 and 2018. |
The accompanying notes are an integral part of the consolidated financial statements.
5
CONSOLIDATED STATEMENT OF EQUITY
(unaudited)
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Ecolab Shareholders |
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(millions, except shares and per share amounts) |
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Common |
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Additional |
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Retained |
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OCI |
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Treasury |
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Ecolab Shareholders' |
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Non-Controlling |
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Total |
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Balance, December 31, 2017 |
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$354.7 |
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|
$5,435.7 |
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|
$8,011.6 |
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$(1,643.4) |
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$(4,575.0) |
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|
$7,583.6 |
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$70.2 |
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$7,653.8 |
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New accounting guidance adoption (a) |
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(43.6) |
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(43.6) |
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(43.6) |
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Net income |
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|
|
|
|
|
|
|
247.3 |
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|
|
|
|
|
|
|
247.3 |
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0.9 |
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|
248.2 |
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Comprehensive income (loss) activity |
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85.1 |
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85.1 |
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2.5 |
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87.6 |
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Cash dividends declared (b) |
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(118.3) |
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(118.3) |
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(4.7) |
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(123.0) |
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Stock options and awards |
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0.8 |
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60.8 |
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0.4 |
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62.0 |
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62.0 |
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Reacquired shares |
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(215.1) |
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(215.1) |
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(215.1) |
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Balance, March 31, 2018 |
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$355.5 |
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|
$5,496.5 |
|
|
$8,097.0 |
|
|
$(1,558.3) |
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|
$(4,789.7) |
|
|
$7,601.0 |
|
|
$68.9 |
|
|
$7,669.9 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Balance, December 31, 2018 |
|
|
$357.0 |
|
|
$5,633.2 |
|
|
$8,909.5 |
|
|
$(1,761.7) |
|
|
$(5,134.8) |
|
|
$8,003.2 |
|
|
$50.4 |
|
|
$8,053.6 |
|
|
New accounting guidance adoption (c) |
|
|
|
|
|
|
|
|
58.4 |
|
|
(61.2) |
|
|
|
|
|
(2.8) |
|
|
|
|
|
(2.8) |
|
|
Net income |
|
|
|
|
|
|
|
|
296.5 |
|
|
|
|
|
|
|
|
296.5 |
|
|
3.9 |
|
|
300.4 |
|
|
Comprehensive income (loss) activity |
|
|
|
|
|
|
|
|
|
|
|
88.0 |
|
|
|
|
|
88.0 |
|
|
0.9 |
|
|
88.9 |
|
|
Cash dividends declared (b) |
|
|
|
|
|
|
|
|
(132.6) |
|
|
|
|
|
|
|
|
(132.6) |
|
|
(9.0) |
|
|
(141.6) |
|
|
Stock options and awards |
|
|
1.2 |
|
|
97.8 |
|
|
|
|
|
|
|
|
0.8 |
|
|
99.8 |
|
|
|
|
|
99.8 |
|
|
Reacquired shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(131.4) |
|
|
(131.4) |
|
|
|
|
|
(131.4) |
|
|
Balance, March 31, 2019 |
|
|
$358.2 |
|
|
$5,731.0 |
|
|
$9,131.8 |
|
|
$(1,734.9) |
|
|
$(5,265.4) |
|
|
$8,220.7 |
|
|
$46.2 |
|
|
$8,266.9 |
|
|
(a) |
Upon adoption of ASU 2016-16, Intra-Entity Transfers of Assets Other than Inventory, the Company recorded an adjustment to retained earnings representing the write-off of income tax effects that had been deferred from past transactions and the recording of deferred tax assets which previously were not allowed to be recognized. |
|
(b) |
Dividends declared per common share were $0.460 and $0.410 in the first quarter of 2019 and 2018, respectively. |
|
(c) |
Upon adoption of ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, the Company reclassified stranded tax effects resulting from the Tax Cut and Jobs Act from accumulated other comprehensive income to retained earnings. Also, upon adoption of ASU 2016-02, Leases (Topic 842), the Company has established right-of-use assets and lease liabilities for operating leases and the cumulative effect of applying the standard is recognized to retained earnings at the beginning of the period adopted. |
See Note 18 for additional information regarding adoption of new accounting guidance.
6
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. CONSOLIDATED FINANCIAL INFORMATION
The unaudited consolidated financial information for the first quarter ended March 31, 2019 and 2018 reflect, in the opinion of company management, all adjustments necessary for a fair statement of the financial position, results of operations, comprehensive income (loss), equity and cash flows of Ecolab Inc. ("Ecolab" or "the Company") for the interim periods presented. Any adjustments consist of normal recurring items.
The financial results for any interim period are not necessarily indicative of results for the full year. The consolidated balance sheet data as of December 31, 2018 was derived from the audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. The unaudited consolidated financial information should be read in conjunction with the consolidated financial statements and notes thereto incorporated in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.
Sales, cost of sales and selling, general and administrative expenses in the selected consolidated income statement information includes immaterial revisions to amounts previously reported in the Company’s quarterly reports on Form 10-Q for each of the first three quarters of 2018. The revisions had no impact on previously reported total net sales or operating income. Except for the changes due to the adoption of the new accounting standards, the Company has consistently applied the accounting policies to all periods presented in these consolidated financial statements.
Upstream Energy Spin-off
Ecolab intends to pursue, subject to the receipt of approval by Ecolab’s Board of Directors and any regulatory approvals, a plan to separate and spin-off the Upstream businesses of Ecolab’s Global Energy segment (the Upstream Business) through a series of tax-efficient transactions (collectively, the Spin-off). Under the plan, if effectuated, Ecolab’s shareholders would own 100% of the common stock of a new corporation that owns the Upstream Business. The Spin-off is expected to be completed in 2020 and is intended to qualify as a tax-free distribution to Ecolab shareholders for U.S. federal income tax purposes.
With respect to the unaudited financial information of the Company for the first quarter ended March 31, 2019 and 2018 included in this Form 10-Q, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards for a review of such information. Their separate report dated May 2, 2019 appearing herein states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933, as amended (the "Act"), for their report on the unaudited financial information because that report is not a "report" or a "part" of a registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.
7
2. SPECIAL (GAINS) AND CHARGES
Special (gains) and charges reported on the Consolidated Statement of Income include the following:
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter Ended |
|||||
|
|
|
March 31 |
|||||
|
(millions) |
|
2019 |
|
2018 |
|||
|
Cost of sales |
|
|
|
|
|
|
|
|
Restructuring activities |
|
|
3.4 |
|
|
|
- |
|
Acquisition and integration activities |
|
|
0.2 |
|
|
|
- |
|
Subtotal |
|
|
3.6 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Special (gains) and charges |
|
|
|
|
|
|
|
|
Restructuring activities |
|
|
37.1 |
|
|
|
0.3 |
|
Upstream energy spin-off |
|
|
4.3 |
|
|
|
- |
|
Acquisition and integration activities |
|
|
2.5 |
|
|
|
0.5 |
|
Other |
|
|
(3.6) |
|
|
|
25.2 |
|
Subtotal |
|
|
40.3 |
|
|
|
26.0 |
|
|
|
|
|
|
|
|
|
|
Operating income subtotal |
|
|
43.9 |
|
|
|
26.0 |
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
0.2 |
|
|
|
- |
|
Total special (gains) and charges |
|
|
$44.1 |
|
|
|
$26.0 |
For segment reporting purposes, special (gains) and charges are not allocated to reportable segments, which is consistent with the Company’s internal management reporting.
Restructuring activities
Restructuring activities are primarily related to Accelerate 2020 (described below). These activities have been included as a component of both cost of sales and special (gains) and charges on the Consolidated Statement of Income. Restructuring liabilities have been classified as a component of both other current and other noncurrent liabilities on the Consolidated Balance Sheet.
Accelerate 2020
During the third quarter of 2018, the Company formally commenced a restructuring plan Accelerate 2020 (“the Plan”), to leverage technology and systems investments and organizational changes. During the first quarter of 2019, the Company raised its goals for the Plan to simplify and automate processes and tasks, reduce complexity and management layers, consolidate facilities and focus on key long-term growth areas by leveraging technology and structural improvements. The Company now expects that the restructuring activities will be completed by the end of 2020, with total anticipated costs of $260 million ($190 million after tax) over this period of time. The costs are expected to be primarily cash expenditures for severance costs and some facility closure costs relating to team reorganizations. Actual costs may vary from these estimates depending on actions taken.
The Company recorded restructuring charges of $40.5 million ($30.4 million after tax) in the first quarter of 2019. The liability related to this Plan was $81.4 million as of the end of the first quarter. The Company has recorded $145.1 million ($110.0 million after tax) of cumulative restructuring charges under the Plan.
Restructuring activity related to the Plan since inception of the underlying actions includes the following:
|
|
|
|
|
||||||||||||||
|
|
|
Employee |
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
Termination |
|
Asset |
|
|
|
|
|
|
|
||||||
|
(millions) |
|
Costs |
|
Disposals |
|
Other |
|
Total |
|
||||||||
|
2018 Activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded expense |
|
$ |
94.1 |
|
|
$ |
5.0 |
|
|
$ |
5.5 |
|
|
$ |
104.6 |
|
|
|
Net cash payments |
|
|
(32.8) |
|
|
|
- |
|
|
|
(2.4) |
|
|
|
(35.2) |
|
|
|
Non-cash charges |
|
|
- |
|
|
|
(5.0) |
|
|
|
- |
|
|
|
(5.0) |
|
|
|
Effect of foreign currency translation |
|
|
(0.5) |
|
|
|
- |
|
|
|
- |
|
|
|
(0.5) |
|
|
|
Restructuring liability, December 31, 2018 |
|
|
60.8 |
|
|
|
- |
|
|
|
3.1 |
|
|
|
63.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded expense |
|
|
29.4 |
|
|
|
0.3 |
|
|
|
10.8 |
|
|
|
40.5 |
|
|
|
Net cash payments |
|
|
(20.0) |
|
|
|
- |
|
|
|
(2.8) |
|
|
|
(22.8) |
|
|
|
Non-cash charges |
|
|
- |
|
|
|
(0.3) |
|
|
|
- |
|
|
|
(0.3) |
|
|
|
Effect of foreign currency translation |
|
|
0.1 |
|
|
|
- |
|
|
|
- |
|
|
|
| ||