Edgar Filing: ECOLAB INC.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 1-9328

ECOLAB INC.

(Exact name of registrant as specified in its charter)


Delaware		41-0231510
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		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)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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.


Large accelerated filer ☒		Accelerated filer ☐

Non-accelerated filer ☐ (Do not check if a smaller reporting company)		Smaller reporting company ☐

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 ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of March 31, 2018.

288,520,477 shares of common stock, par value $1.00 per share.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED STATEMENT OF INCOME

(unaudited)



	First Quarter Ended
	March 31
(millions, except per share amounts)	2018		2017

Product and equipment sales		$2,847.2		$2,604.4
Service and lease sales		623.7		558.0
Net sales		3,470.9		3,162.4
Product and equipment cost of sales		1,696.6		1,500.7
Service and lease cost of sales		385.5		351.1
Cost of sales (including special charges (a))		2,082.1		1,851.8
Selling, general and administrative expenses		1,008.5		947.2
Special (gains) and charges		26.0		6.2
Operating income		354.3		357.2
Other (income) expense		(19.4)		(16.8)
Interest expense, net		56.4		62.5
Income before income taxes		317.3		311.5
Provision for income taxes		69.1		54.2
Net income including noncontrolling interest		248.2		257.3
Net income attributable to noncontrolling interest		0.9		3.3
Net income attributable to Ecolab		$247.3		$254.0

Earnings attributable to Ecolab per common share
Basic		$ 0.86		$ 0.87
Diluted		$ 0.84		$ 0.86

Dividends declared per common share		$0.410		$0.370

Weighted-average common shares outstanding
Basic		288.6		290.6
Diluted		292.7		295.0

(a)

Cost of sales includes special charges of $1.5 million in the first quarter of 2017, which is recorded in product and equipment cost of sales.

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(unaudited)


	First Quarter Ended
	March 31
(millions)	2018		2017

Net income including noncontrolling interest		$248.2		$257.3

Other comprehensive income (loss), net of tax

Foreign currency translation adjustments
Foreign currency translation		115.6		81.0
Gain (loss) on net investment hedges		(26.2)		2.8
		89.4		83.8

Derivatives and hedging instruments		(2.1)		(9.2)

Pension and postretirement benefits
Amortization of net actuarial loss and prior service costs included in
net periodic pension and postretirement costs		0.3		3.3
		0.3		3.3

Subtotal		87.6		77.9

Total comprehensive income, including noncontrolling interest		335.8		335.2
Comprehensive income attributable to noncontrolling interest		3.4		4.5
Comprehensive income attributable to Ecolab		$332.4		$330.7

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED BALANCE SHEET

(unaudited)



	March 31		December 31
(millions, except shares and per share amounts)	2018		2017

ASSETS
Current assets
Cash and cash equivalents		$175.5		$211.4
Accounts receivable, net		2,574.3		2,571.4
Inventories		1,541.8		1,446.5
Other current assets		305.2		365.0
Total current assets		4,596.8		4,594.3
Property, plant and equipment, net		3,779.9		3,707.1
Goodwill		7,303.0		7,167.1
Other intangible assets, net		4,012.2		4,017.6
Other assets		492.4		477.4
Total assets		$20,184.3		$19,963.5

LIABILITIES AND EQUITY
Current liabilities
Short-term debt		$1,017.8		$564.4
Accounts payable		1,229.1		1,177.1
Compensation and benefits		497.0		549.4
Income taxes		170.0		183.6
Other current liabilities		1,068.9		1,000.7
Total current liabilities		3,982.8		3,475.2
Long-term debt		6,397.7		6,758.3
Postretirement health care and pension benefits		1,027.7		1,025.5
Deferred income taxes		652.8		635.4
Other liabilities		453.4		415.3
Total liabilities		12,514.4		12,309.7

Equity (a)
Common stock		355.5		354.7
Additional paid-in capital		5,496.5		5,435.7
Retained earnings		8,097.0		8,011.6
Accumulated other comprehensive loss		(1,558.3)		(1,643.4)
Treasury stock		(4,789.7)		(4,575.0)
Total Ecolab shareholders’ equity		7,601.0		7,583.6
Noncontrolling interest		68.9		70.2
Total equity		7,669.9		7,653.8
Total liabilities and equity		$20,184.3		$19,963.5

(a)

Common stock, 800.0 million shares authorized, $1.00 par value per share, 288.5 million shares outstanding at March 31, 2018 and 289.3 million shares outstanding at December 31, 2017. Shares outstanding are net of treasury stock.

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED STATEMENT OF CASH FLOWS

(unaudited)


	First Quarter Ended
	March 31
(millions)	2018		2017

OPERATING ACTIVITIES
Net income including noncontrolling interest		$248.2		$257.3
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		150.9		142.2
Amortization		80.2		73.8
Deferred income taxes		13.3		3.3
Share-based compensation expense		33.7		30.9
Pension and postretirement plan contributions		(23.0)		(23.0)
Pension and postretirement plan expense		8.6		8.8
Restructuring charges, net of cash paid		(7.7)		(6.2)
Other, net		4.9		4.7
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable		33.9		76.4
Inventories		(77.2)		(67.5)
Other assets		(1.0)		(13.7)
Accounts payable		40.4		12.9
Other liabilities		(18.0)		(74.2)
Cash provided by operating activities		487.2		425.7

INVESTING ACTIVITIES
Capital expenditures		(203.3)		(167.5)
Property and other assets sold		0.5		0.5
Acquisitions and investments in affiliates, net of cash acquired		(76.5)		(826.6)
Divestiture of businesses		9.4		-
Settlement of net investment hedges		14.1		-
Other, net		-		(1.7)
Cash used for investing activities		(255.8)		(995.3)

FINANCING ACTIVITIES
Net issuances of commercial paper and notes payable		354.3		858.8
Long-term debt repayments		(300.6)		(0.4)
Reacquired shares		(215.1)		(374.5)
Dividends paid		(123.4)		(113.2)
Exercise of employee stock options		28.4		25.7
Acquisition related liabilities and contingent consideration		(8.6)		-
Other, net		-		(0.9)
Cash (used for) provided by financing activities		(265.0)		395.5

Effect of exchange rate changes on cash, cash equivalents and restricted cash		(2.3)		5.8

Decrease in cash, cash equivalents and restricted cash		(35.9)		(168.3)
Cash, cash equivalents and restricted cash, beginning of period (a)		211.4		380.4
Cash, cash equivalents and restricted cash, end of period (b)		$175.5		$212.1

(a)

2017 includes $53.0 million of restricted cash related to the Anios transaction, which was included in other assets on the Consolidated Balance Sheet as of December 31, 2016.

(b)

There was no restricted cash as of March 31, 2018 or 2017.

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED STATEMENT OF EQUITY

(unaudited)


	Ecolab Shareholders
			Additional								Ecolab		Non-
	Common		Paid-in		Retained		OCI		Treasury		Shareholders'		Controlling		Total
(millions)	Stock		Capital		Earnings		(Loss)		Stock		Equity		Interest		Equity
Balance, December 31, 2015		$350.3		$5,086.1		$6,160.3		$(1,423.3)		$(3,263.5)		$6,909.9		$70.5		$6,980.4

New accounting guidance adoption (a)						(29.3)						(29.3)				(29.3)
Net income						1,229.0						1,229.0		17.5		1,246.5
Comprehensive income (loss) activity								(289.6)				(289.6)		(1.3)		(290.9)
Cash dividends declared						(414.9)						(414.9)		(16.9)		(431.8)
Stock options and awards		2.3		200.2						3.2		205.7				205.7
Reacquired shares				(15.5)						(724.1)		(739.6)				(739.6)
Balance, December 31, 2016		352.6		5,270.8		6,945.1		(1,712.9)		(3,984.4)		6,871.2		69.8		6,941.0

New accounting guidance adoption (b)						1.9						1.9				1.9
Net income						1,504.6						1,504.6		14.0		1,518.6
Comprehensive income (loss) activity								69.5				69.5		1.7		71.2
Cash dividends declared						(440.0)						(440.0)		(19.3)		(459.3)
Acquisition of noncontrolling interests														4.0		4.0
Stock options and awards		2.1		170.3						4.3		176.7				176.7
Reacquired shares				(5.4)						(594.9)		(600.3)				(600.3)
Balance, December 31, 2017		354.7		5,435.7		8,011.6		(1,643.4)		(4,575.0)		7,583.6		70.2		7,653.8

New accounting guidance adoption (c)						(43.6)						(43.6)				(43.6)
Net income						247.3						247.3		0.9		248.2
Comprehensive income (loss) activity								85.1				85.1		2.5		87.6
Cash dividends declared						(118.3)						(118.3)		(4.7)		(123.0)
Stock options and awards		0.8		60.8						0.4		62.0				62.0
Reacquired shares				-						(215.1)		(215.1)				(215.1)
Balance, March 31, 2018		$355.5		$5,496.5		$8,097.0		$(1,558.3)		$(4,789.7)		$7,601.0		$68.9		$7,669.9

(a)

Upon adoption of Topic 606, Revenue from Contracts with Customers and the related amendments (“the new revenue standard”), the Company changed its accounting policy for revenue recognition and has established deferred revenue for service revenues with the cumulative effect reflected as an adjustment to retained earnings.

(b)

In 2017, upon adoption of ASU 2016-09, Compensation – Stock Compensation, the Company released a valuation allowance for previously unrecognized excess tax benefits resulting in an adjustment to retained earnings.

(c)

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.

See Note 17 for additional information regarding adoption of new accounting standards.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. CONSOLIDATED FINANCIAL INFORMATION

The unaudited consolidated financial information for the first quarter ended March 31, 2018 and 2017 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, 2017 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, 2017.

Certain amounts in prior periods have been reclassified to conform to the current period presentation. The reclassifications are primarily related to the adoption of new accounting standards as described further in Note 17. 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.

With respect to the unaudited financial information of the Company for the first quarter ended March 31, 2018 and 2017 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 3, 2018 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.

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)	2018		2017
Cost of sales
Acquisition and integration costs		-		1.5

Special (gains) and charges
Restructuring activities		0.3		(0.3)
Acquisition and integration costs		0.5		6.3
Other		25.2		0.2
Subtotal		26.0		6.2

Total special (gains) and charges		$26.0		$7.7

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

During the second quarter of 2017, the Company commenced restructuring and other cost-saving actions in order to streamline operations. These actions include a reduction of the Company’s global workforce by approximately 570 positions, as well as asset disposals and lease terminations. Actions were substantially completed in 2017. The Company also has restructuring plans that commenced prior to 2015. Net restructuring charges were $0.3 million ($0.3 million after tax) and net restructuring gains were $0.3 million ($0.2 million after tax) in the first quarter of 2018 and 2017, respectively. The restructuring liability balance for all plans was $34.0 million and $41.5 million as of March 31, 2018 and December 31, 2017, respectively. The reduction in liability was driven primarily by severance and other cash payments. The majority of pretax charges represent net cash expenditures which are expected to be paid over a period of a few months to several quarters and will continue to be funded from operating activities. Cash payments during 2018 related to restructuring plans were $7.9 million.

Restructuring activities have been included as a component of 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.

Acquisition and integration related costs

Acquisition and integration costs reported in special (gains) and charges on the Consolidated Statement of Income include $0.5 million ($0.3 million after tax) and $6.3 million ($4.2 million after tax) in the first quarter of 2018 and 2017, respectively. Charges are related to acquisition costs, advisory and legal fees, and integration charges for acquisitions. Acquisition and integration costs reported in product and equipment cost of sales on the Consolidated Statement of Income in the first quarter of 2017 relate to recognition of fair value step-up in the Anios inventory.

Further information related to the Company’s acquisitions is included in Note 3.

Other

During the first quarter of 2018, the Company recorded other special charges of $25.2 million, which primarily consisted of a $25.0 million ($18.9 million after tax) commitment to the Ecolab Foundation in response to the new U.S. tax law. Other charges were minimal in both the first quarter of 2018 and 2017.

3. ACQUISITIONS AND DISPOSITIONS

Acquisitions

The Company makes acquisitions that align with its strategic business objectives. The assets and liabilities of the acquired entities have been recorded as of the acquisition date, at their respective fair values, and are included in the Consolidated Balance Sheet. The purchase price allocation is based on estimates of the fair value of assets acquired and liabilities assumed. The aggregate purchase price of acquisitions has been reduced for any cash or cash equivalents acquired with the acquisition. Acquisitions during the first three months of 2018 and 2017 were not significant to the Company’s consolidated financial statements; therefore, pro forma financial information is not presented.

Anios Acquisition

On February 1, 2017, the Company acquired Anios for total consideration of $798.3 million, including satisfaction of outstanding debt. Anios had annualized pre-acquisition sales of approximately $245 million and is a leading European manufacturer and marketer of hygiene and disinfection products for the healthcare, food service, and food and beverage processing industries. Anios provides an innovative product line that expands the solutions the Company is able to offer, while also providing a complementary geographic footprint within the healthcare market. During 2016, the Company deposited €50 million in an escrow account that was released back to the Company upon closing of the transaction in February 2017.

The Company incurred certain acquisition and integration costs associated with the transaction that were expensed and are reflected in the Consolidated Statement of Income. See Note 2 for additional information related to the Company’s special (gains) and charges related to such activities.

The components of the cash paid for Anios are shown in the following table.



(millions)	2017
Tangible assets		$139.8
Identifiable intangible assets
Customer relationships		252.0
Trademarks		65.7
Other technology		16.1
Total assets acquired		473.6

Goodwill		511.7

Total liabilities		187.0
Total consideration transferred		798.3

Long-term debt repaid upon close		192.8