UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One) | ||
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the quarterly period ended | ||
OR | ||
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. |
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
(Address of principal executive offices)(Zip Code)
1-
(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:
Title of each class | Trading symbol(s) | Name of each exchange on which registered | |||
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.
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).
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.
Accelerated filer ◻ | ||
Non-accelerated filer ◻ | 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
The number of shares of each of the registrant’s classes of Common Stock outstanding as of September 30, 2019:
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENT OF INCOME
(unaudited)
Third Quarter Ended | Nine Months Ended | ||||||||||||||
September 30 | September 30 | ||||||||||||||
(millions, except per share amounts) | 2019 |
| 2018 |
| 2019 |
| 2018 | ||||||||
Product and equipment sales | $ | $ | $ | $ | |||||||||||
Service and lease sales | | | | | |||||||||||
Net sales | | | | | |||||||||||
Product and equipment cost of sales | | | | | |||||||||||
Service and lease cost of sales | | | | | |||||||||||
Cost of sales (including special charges (a)) | | | | | |||||||||||
Selling, general and administrative expenses | | | | | |||||||||||
Special (gains) and charges | | | | | |||||||||||
Operating income | | |
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Other (income) expense | ( | ( | ( | ( | |||||||||||
Interest expense, net (b) | | | | | |||||||||||
Income before income taxes | | |
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Provision for income taxes | | | | | |||||||||||
Net income including noncontrolling interest | | |
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Net income attributable to noncontrolling interest | | | | | |||||||||||
Net income attributable to Ecolab | $ | $ | $ | $ | |||||||||||
Earnings attributable to Ecolab per common share | |||||||||||||||
Basic | $ | $ | $ | $ | |||||||||||
Diluted | $ | $ | $ | $ | |||||||||||
Weighted-average common shares outstanding | |||||||||||||||
Basic |
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Diluted |
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(a) | Cost of sales includes special (gains) and charges, net of $ |
(b) | Interest expense, net includes special charges of $ |
The accompanying notes are an integral part of the consolidated financial statements.
2
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(unaudited)
Third Quarter Ended | Nine Months Ended | |||||||||||||||
September 30 | September 30 | |||||||||||||||
(millions) |
| 2019 |
| 2018 | 2019 |
| 2018 |
| ||||||||
Net income including noncontrolling interest | $ | $ | $ | $ | ||||||||||||
Other comprehensive income (loss), net of tax | ||||||||||||||||
Foreign currency translation adjustments | ||||||||||||||||
Foreign currency translation |
| ( | ( | ( | ( |
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Gain (loss) on net investment hedges |
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Total foreign currency translation adjustments |
| ( | ( |
| ( |
| ( |
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Derivatives and hedging instruments |
| ( | ( |
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Pension and postretirement benefits | ||||||||||||||||
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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Postretirement benefits changes | - | - | - | | ||||||||||||
Total pension and postretirement benefits |
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Subtotal |
| ( | ( |
| ( |
| ( |
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Total comprehensive income, including noncontrolling interest |
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Comprehensive income attributable to noncontrolling interest |
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Comprehensive income attributable to Ecolab | $ | $ | $ | $ |
The accompanying notes are an integral part of the consolidated financial statements.
3
CONSOLIDATED BALANCE SHEET
(unaudited)
September 30 | December 31 | ||||||
(millions, except per share amounts) |
| 2019 | 2018 | ||||
ASSETS | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | $ | |||||
Accounts receivable, net |
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Inventories |
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Other current assets |
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Total current assets |
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Property, plant and equipment, net |
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Goodwill |
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Other intangible assets, net |
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Operating lease assets | | - | |||||
Other assets |
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Total assets | $ | $ | |||||
LIABILITIES AND EQUITY | |||||||
Current liabilities | |||||||
Short-term debt | $ | $ | |||||
Accounts payable |
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Compensation and benefits |
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Income taxes |
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Other current liabilities |
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Total current liabilities |
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Long-term debt |
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Postretirement health care and pension benefits |
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Deferred income taxes | | | |||||
Operating lease liabilities | | - | |||||
Other liabilities |
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Total liabilities |
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Commitments and contingencies (Note 17) | |||||||
Equity (a) | |||||||
Common stock |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
| ( | ( | ||||
Treasury stock |
| ( | ( | ||||
Total Ecolab shareholders’ equity |
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Noncontrolling interest |
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Total equity |
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Total liabilities and equity | $ | $ |
(a) | Common stock, |
The accompanying notes are an integral part of the consolidated financial statements.
4
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Nine Months Ended | ||||||||
September 30 | ||||||||
(millions) | 2019 | 2018 | ||||||
| ||||||||
OPERATING ACTIVITIES | ||||||||
Net income including noncontrolling interest | $ | $ | ||||||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||
Depreciation |
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Amortization |
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Deferred income taxes |
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Share-based compensation expense |
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Pension and postretirement plan contributions |
| ( | ( | |||||
Pension and postretirement plan expense |
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Restructuring charges, net of cash paid |
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Other, net |
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Changes in operating assets and liabilities, net of effect of acquisitions: | ||||||||
Accounts receivable |
| ( | ( | |||||
Inventories |
| ( | ( | |||||
Other assets |
| ( | ( | |||||
Accounts payable |
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Other liabilities |
| ( | ( | |||||
Cash provided by operating activities |
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INVESTING ACTIVITIES | ||||||||
Capital expenditures |
| ( | ( | |||||
Property and other assets sold |
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Acquisitions and investments in affiliates, net of cash acquired |
| ( | ( | |||||
Divestiture of businesses | | | ||||||
Settlement of net investment hedges | - | | ||||||
Other, net | ( | | ||||||
Cash used for investing activities |
| ( | ( | |||||
FINANCING ACTIVITIES | ||||||||
Net issuances of commercial paper and notes payable |
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Long-term debt repayments |
| ( | ( | |||||
Reacquired shares |
| ( | ( | |||||
Dividends paid |
| ( | ( | |||||
Exercise of employee stock options |
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Acquisition related liabilities and contingent consideration | ( | ( | ||||||
Acquisition of noncontrolling interests | - | ( | ||||||
Other, net | - | ( | ||||||
Cash used for financing activities |
| ( | ( | |||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
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Decrease in cash, cash equivalents and restricted cash |
| ( | ( | |||||
Cash, cash equivalents and restricted cash, beginning of period (a) |
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Cash, cash equivalents and restricted cash, end of period (b) | $ | $ | ||||||
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(a) | Restricted cash was $ |
(b) | There was |
The accompanying notes are an integral part of the consolidated financial statements.
5
CONSOLIDATED STATEMENT OF EQUITY
(unaudited)
Third Quarter Ended September 30, 2019 and 2018 |
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(millions, except shares and per share amounts) |
| Common |
| Additional |
| Retained |
| OCI |
| Treasury |
| Ecolab Shareholders' |
| Non-Controlling |
| Total |
| ||||||||
Balance, June 30, 2018 |
| $ |
| $ |
| $ |
| $( |
| $( |
| $ |
| $ |
| $ | |||||||||
Net income |
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Other comprehensive income (loss) activity | ( |
| ( |
| ( |
| ( | ||||||||||||||||||
Cash dividends declared (a) | ( |
| ( |
| ( |
| ( | ||||||||||||||||||
Changes in noncontrolling interests | ( | ( | ( | ( | |||||||||||||||||||||
Stock options and awards |
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Reacquired shares | ( |
| ( |
| ( | ||||||||||||||||||||
Balance, September 30, 2018 |
| $ |
| $ |
| $ |
| $( |
| $( |
| $ |
| $ |
| $ | |||||||||
Balance, June 30, 2019 |
| $ |
| $ |
| $ |
| $( |
| $( |
| $ |
| $ |
| $ | |||||||||
Net income | |
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Other comprehensive income (loss) activity | ( |
| ( |
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| ( | ||||||||||||||||||
Cash dividends declared (a) | ( |
| ( |
| ( |
| ( | ||||||||||||||||||
Stock options and awards |
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Reacquired shares | ( |
| ( |
| ( | ||||||||||||||||||||
Balance, September 30, 2019 |
| $ |
| $ |
| $ |
| $( |
| $( |
| $ |
| $ |
| $ | |||||||||
Nine Months Ended September 30, 2019 and 2018 | |||||||||||||||||||||||||
(millions, except shares and per share amounts) |
| Common |
| Additional |
| Retained |
| OCI |
| Treasury |
| Ecolab Shareholders' |
| Non-Controlling |
| Total |
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Balance, December 31, 2017 |
| $ |
| $ |
| $ |
| $( |
| $( |
| $ |
| $ |
| $ | |||||||||
New accounting guidance adoption (b) | ( |
| ( |
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Net income |
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Other comprehensive income (loss) activity | ( |
| ( |
| ( |
| ( | ||||||||||||||||||
Cash dividends declared (a) | ( |
| ( |
| ( |
| ( | ||||||||||||||||||
Changes in noncontrolling interests | ( | ( | ( | ( | |||||||||||||||||||||
Stock options and awards |
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Reacquired shares | ( |
| ( |
| ( | ||||||||||||||||||||
Balance, September 30, 2018 | $ | $ | $ | $( | $( | $ | $ | $ | |||||||||||||||||
Balance, December 31, 2018 |
| $ |
| $ |
| $ |
| $( |
| $( |
| $ |
| $ |
| $ | |||||||||
New accounting guidance adoption (c) | | ( |
| ( |
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| ( | ||||||||||||||||||
Net income | | | | | |||||||||||||||||||||
Other comprehensive income (loss) activity | ( |
| ( |
| |
| ( | ||||||||||||||||||
Cash dividends declared (a) | ( |
| ( |
| ( |
| ( | ||||||||||||||||||
Stock options and awards |
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Reacquired shares | ( |
| ( |
| ( | ||||||||||||||||||||
Balance, September 30, 2019 | $ | $ | $ | $( | $( | $ | $ | $ |
(a) | Dividends declared per common share were $ |
(b) | 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. |
(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 in 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 third quarter and nine months ended September 30, 2019 and 2018 reflects, in the opinion of 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.
With respect to the unaudited financial information of the Company for the third quarter and nine months ended September 30, 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 October 31, 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.
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 business 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
7
2. SPECIAL (GAINS) AND CHARGES
Special (gains) and charges reported on the Consolidated Statement of Income include the following:
Third Quarter Ended | Nine Months Ended | |||||||||||||||
September 30 | September 30 | |||||||||||||||
(millions) |
| 2019 | 2018 |
| 2019 | 2018 |
| |||||||||
Cost of sales | ||||||||||||||||
Restructuring activities | $ | $ | $ |
| $ | |||||||||||
Acquisition and integration activities | | ( | | ( | ||||||||||||
Other | - | ( | - | ( | ||||||||||||
Subtotal | | | |
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Special (gains) and charges | ||||||||||||||||
Restructuring activities | | | |
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Upstream energy spin-off | | - | | - | ||||||||||||
Acquisition and integration activities | | | | | ||||||||||||
Other | | | |
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Subtotal | | | |
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Operating income subtotal | | | | | ||||||||||||
Interest expense, net | - | - | | - | ||||||||||||
Total special (gains) and charges | $ | $ | $ | $ |
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). Restructuring 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 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 system 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 further leveraging technology and structural improvements. The Company expects that the restructuring activities will be completed by the end of 2020, with total anticipated costs of $
The Company recorded restructuring charges of $
Restructuring activity related to the Plan since inception of the underlying actions includes the following:
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Termination | Asset |
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(millions) |
| Costs |
| Disposals |
| Other |
| Total |
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2018 Activity | |||||||||||||||||
Recorded expense | $ | $ | | $ | $ | ||||||||||||
Net cash payments |
| ( |
| - |
| ( |
| ( | |||||||||
Non-cash charges |
| - |
| ( |
| - |
| ( | |||||||||
Effect of foreign currency translation |
| ( |
| - |
| - |
| ( | |||||||||
Restructuring liability, December 31, 2018 | | - | | | |||||||||||||
2019 Activity | |||||||||||||||||
Recorded expense | | | | | |||||||||||||
Net cash payments |
| ( | | ( | ( | ||||||||||||
Non-cash charges |
| - | ( | - | ( | ||||||||||||
Effect of foreign currency translation |
| ( | - | - | ( | ||||||||||||
Restructuring liability, September 30, 2019 | $ | | $ | - | $ | | $ | |
8
Other Restructuring Activities
During third quarter of 2019, the Company incurred restructuring charges of $
Prior to 2018, the Company engaged in a number of restructuring plans. During both the third quarter and first nine months of 2019, net restructuring gains related to prior year plans were $
Upstream Energy spin-off
During the first quarter of 2019, the Company announced its intention to pursue a plan to separate and spin-off the Upstream business of Ecolab’s Global Energy segment (the Upstream Business). The charges associated with the spin-off reported in special (gains) and charges on the Consolidated Statement of Income include $
Acquisition and integration related costs
Acquisition and integration costs reported in special (gains) and charges on the Consolidated Statement of Income include $
Acquisition and integration costs reported in special (gains) and charges on the Consolidated Statement of Income include $
Further information related to the Company’s acquisitions is included in Note 3.
Other
During the third quarter and first nine months of 2019, the Company recorded other special charges of $
During the third quarter and first nine months of 2018, the Company recorded other special charges of $
9
3. ACQUISITIONS AND DISPOSITIONS
Acquisitions
The Company makes business acquisitions that align with its strategic business objectives. The assets and liabilities of the acquired businesses 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 nine months of 2019 and 2018 were not significant to the Company’s consolidated financial statements; therefore, pro forma financial information is not presented.
2019 Activity
During the first quarter of 2019, the Company acquired Bioquell, a life sciences business which sells bio-decontamination products and services to the Life Sciences and Healthcare industries. This business became part of the Global Industrial reportable segment. During 2018, the Company deposited $
Also, during the first quarter of 2019, the Company acquired Lobster Ink, a leading provider of end-to-end online customer training solutions. This acquired business became part of the Global Institutional reportable segment. The purchase price included an earn-out based on certain revenue thresholds in any of the full three years following the acquisition. The acquisition date fair value of the earn-out was reflected in the overall purchase consideration exchanged for the acquisition and recorded as contingent consideration. The earn-out has not yet been paid or settled and the contingent consideration liability is recorded within other liabilities as of September 30, 2019.
During the third quarter of 2019, the Company acquired Chemstar Corporation, a leading provider of cleaning and sanitizing products for the retail industry with a focus on cleaning chemicals and food safety. This acquired business became part of the Global Institutional reportable segment.
These acquisitions have been accounted for using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed be recognized at fair value as of the acquisition date. Certain estimated values, primarily working capital adjustments, are not yet finalized and are subject to change. Annualized sales for the businesses acquired in 2019 are $
2018 Activity
During the first nine months of 2018, the Company acquired a water business which provides a range of services to Nalco Water institutional customers. This acquired business became part of the Company’s Global Industrial reportable segment. In addition, the Company acquired an institutional business which provides a range of cleaning and disinfection products for the hospitality, leisure, residential care, housekeeping and janitorial sectors. These acquisitions have been accounted for using the acquisition method of accounting. There were insignificant purchase price adjustments related to prior year acquisitions.
The components of the cash paid for acquisitions for transactions during the third quarter and first nine months of 2019 and 2018 are shown in the following table.
Third Quarter Ended | Nine Months Ended | ||||||||||||||||
September 30 | September 30 | ||||||||||||||||
(millions) |
| 2019 | 2018 |
| 2019 | 2018 | |||||||||||
Net tangible assets (liabilities) acquired and equity method investments | $ | $( | $( | $ | |||||||||||||
Identifiable intangible assets | |||||||||||||||||
Customer relationships |
| | - |
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Trademarks |
| | - |
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Other technology | | - | | | |||||||||||||
Total intangible assets |
| | - |
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Goodwill |
| | - |
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Total aggregate purchase price |
| | ( |
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Acquisition related liabilities and contingent consideration |
| ( | - |
| ( | ( | |||||||||||
Net cash paid for acquisitions, including acquisition related | |||||||||||||||||
liabilities and contingent consideration | $ | $( | $ | $ |
The 2019 and 2018 acquisition related liabilities are related to holdback liabilities and contingent consideration.
The weighted average useful life of these identifiable intangible assets acquired was
10
Dispositions
There were no significant business dispositions during the first nine months of 2019 and 2018.
Subsequent Events
In October 2019, the United Kingdom’s Competition and Markets Authority (CMA) announced the results of its review of the Company’s acquisition of Holchem Group Limited (“Holchem”), a UK based cleaning products business acquired in the fourth quarter of 2018, that requires the Company to divest Holchem. The Company disagrees with the decision and continues to believe the UK market will remain highly competitive following the acquisition. The Company is reviewing the full report in detail and is considering options and next steps, including an appeal of the decision.
11
4. BALANCE SHEET INFORMATION
September 30 | December 31 | |||||||
(millions) |
| 2019 | 2018 | |||||
Accounts receivable, net | ||||||||
Accounts receivable | $ | $ | ||||||
Allowance for doubtful accounts | ( | ( | ||||||
Total | $ | $ | ||||||
Inventories | ||||||||
Finished goods | $ | $ | ||||||
Raw materials and parts | | | ||||||
Inventories at FIFO cost | | | ||||||
FIFO cost to LIFO cost difference | | | ||||||
Total | $ | $ | ||||||
Other current assets | ||||||||
Prepaid assets | $ | $ | ||||||
Taxes receivable | | | ||||||
Derivative assets | | | ||||||
Other | | | ||||||
Total | $ | $ | ||||||
Property, plant and equipment, net | ||||||||
Land | $ | $ | ||||||
Buildings and leasehold improvements | | | ||||||
Machinery and equipment | | | ||||||
Merchandising and customer equipment | | | ||||||
Capitalized software | | | ||||||
Construction in progress | | | ||||||
| | |||||||
Accumulated depreciation | ( | ( | ||||||
Total | $ | $ | ||||||
Other intangible assets, net | ||||||||
Intangible assets not subject to amortization | ||||||||
Trade names | $ | $ | ||||||
Intangible assets subject to amortization | ||||||||
Customer relationships | | | ||||||
Trademarks | | | ||||||
Patents | | | ||||||
Other technology | | | ||||||
| | |||||||
Accumulated amortization | ||||||||
Customer relationships | ( | ( | ||||||
Trademarks | ( | ( | ||||||
Patents | ( | ( | ||||||
Other technology | ( | ( | ||||||
( | ( | |||||||
Net intangible assets subject to amortization | | | ||||||
Total | $ | $ | ||||||
Other assets | ||||||||
Deferred income taxes | $ | $ | ||||||
Pension | | | ||||||
Derivative asset | | | ||||||
Restricted cash | - | | ||||||
Other | | | ||||||
Total | $ | $ |
12
September 30 | December 31 | |||||||
(millions) |
| 2019 | 2018 | |||||
Other current liabilities | ||||||||
Discounts and rebates | $ | $ | ||||||
Dividends payable | | | ||||||
Interest payable | | | ||||||
Taxes payable, other than income | | | ||||||
Derivative liabilities | | | ||||||
Restructuring | | | ||||||
Contract liability | | | ||||||
Operating lease liabilities | | - | ||||||
Other | | | ||||||
Total | $ | $ | ||||||
Accumulated other comprehensive loss | ||||||||
Unrealized gain (loss) on derivative financial instruments, net of tax | $( | $ | ||||||
Unrecognized pension and postretirement benefit expense, net of tax | ( | ( | ||||||
Cumulative translation, net of tax | ( | ( | ||||||
Total | $( | $( |
5. DEBT AND INTEREST
Short-term Debt
The following table provides the components of the Company’s short-term debt obligations as of September 30, 2019 and December 31, 2018.
September 30 | December 31 | ||||||
(millions) |
| 2019 | 2018 | ||||
Short-term debt | |||||||
Commercial paper | $ | $ | |||||
Notes payable | | | |||||
Long-term debt, current maturities | | | |||||
Total | $ | $ |
Line of Credit
As of September 30, 2019, the Company had a $
Commercial Paper
The Company’s commercial paper program is used as a source of liquidity and consists of a $
As of September 30, 2019, the Company had $
Notes Payable
The Company’s notes payable consists of uncommitted credit lines with major international banks and financial institutions, primarily to support global cash pooling structures. As of September 30, 2019 and December 31, 2018, the Company had $
13
Long-term Debt
The following table provides the components of the Company’s long-term debt obligations, including current maturities, as of September 30, 2019 and December 31, 2018.
|
|
|
| |||||||
Maturity | September 30 | December 31 | ||||||||
(millions) | by Year | 2019 | 2018 | |||||||
Long-term debt | ||||||||||
Public notes (2019 principal amount) | ||||||||||
2019 | $- | $ | ||||||||
2020 | | | ||||||||
2021 | | | ||||||||
2022 | | | ||||||||
2023 | | | ||||||||
2024 | | | ||||||||
2025 | | | ||||||||
2026 | | | ||||||||
2027 | | | ||||||||
2041 | | | ||||||||
2046 | | | ||||||||
2047 | | | ||||||||
Private notes (2019 principal amount) | ||||||||||
Series B private placement senior notes ($ | 2023 | | | |||||||
Finance lease obligations and other | | | ||||||||
Total debt | | | ||||||||
Long-term debt, current maturities | ( | ( | ||||||||
Total long-term debt | $ | $ |
Public Notes
The Company’s public notes may be redeemed by the Company at its option at redemption prices that include accrued and unpaid interest and a make-whole premium. Upon the occurrence of a change of control accompanied by a downgrade of the public notes below investment grade rating, within a specified time period, the Company would be required to offer to repurchase the public notes at a price equal to
Private Notes
The Company’s private notes may be redeemed by the Company at its option at redemption prices that include accrued and unpaid interest and a make-whole premium. Upon the occurrence of specified changes of control involving the Company, the Company would be required to offer to repurchase the private notes at a price equal to
Covenants
The Company is in compliance with its debt covenants as of September 30, 2019.
Net Interest Expense
Interest expense and interest income recognized during the third quarter and first nine months of 2019 and 2018 were as follows:
Third Quarter Ended | Nine Months Ended | |||||||||||||
September 30 | September 30 | |||||||||||||
(millions) |
| 2019 | 2018 | 2019 | 2018 | |||||||||
Interest expense | $ | $ | $ | $ | ||||||||||
Interest income |
| ( | ( |
| ( | ( | ||||||||
Interest expense, net | $ | $ | $ | $ |
14
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination. The Company’s reporting units are its operating segments.
During the second quarter of 2019, the Company completed its annual assessment for goodwill impairment across its
If circumstances change significantly, the Company would also test a reporting unit’s goodwill for impairment during interim periods between its annual tests. There has been
The changes in the carrying amount of goodwill for each of the Company's reportable segments during the nine months ended September 30, 2019 were as follows:
Global | Global | Global | |||||||||||||||
(millions) |
| Industrial |
| Institutional |
| Energy |
| Other |
| Total |
| ||||||
December 31, 2018 | $ | $ | $ | $ | $ | ||||||||||||
Current year business combinations (a) | | | - | | | ||||||||||||
Prior year business combinations (b) | ( | - | - | - | ( | ||||||||||||
Effect of foreign currency translation | ( | ( | ( | ( | ( | ||||||||||||
September 30, 2019 | $ | $ | $ | $ | $ |
(a) | Represents goodwill associated with current year acquisitions. The Company expects $ |
(b) | Represents the purchase price allocation adjustments for acquisitions deemed preliminary as of the end of the prior year. |
Other Intangible Assets
The Nalco trade name is the Company’s principal indefinite life intangible asset. During the second quarter of 2019, the Company completed its annual test for indefinite life intangible asset impairment using a relief from royalty method of assessment, which incorporates assumptions regarding future sales projections, royalty rate and discount rates. Based on this testing, the estimated fair value of the asset exceeded its carrying value by a significant margin; therefore, no adjustment to the $
The Company’s intangible assets subject to amortization primarily include customer relationships, trademarks, patents and other technology. The fair value of identifiable intangible assets is estimated based upon discounted future cash flow projections and other acceptable valuation methods. Other intangible assets are amortized on a straight-line basis over their estimated economic lives. Total amortization expense related to other intangible assets during the third quarter of 2019 and 2018 was $
15
7. FAIR VALUE MEASUREMENTS
The Company’s financial instruments include cash and cash equivalents, restricted cash, accounts receivable, accounts payable, contingent consideration obligations, commercial paper, notes payable, foreign currency forward contracts, interest rate swap agreements and long-term debt.
Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. A hierarchy has been established for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring the most observable inputs be used when available. The hierarchy is broken down into three levels:
Level 1 - Inputs are quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.
Level 2 - Inputs include observable inputs other than quoted prices in active markets.
Level 3 - Inputs are unobservable inputs for which there is little or no market data available.
The carrying amount and the estimated fair value for assets and liabilities measured on a recurring basis were:
September 30, 2019 |
| ||||||||||||||||
(millions) | Carrying | Fair Value Measurements |
| ||||||||||||||
| Amount |
| Level 1 | Level 2 |
| Level 3 |
| ||||||||||
Assets | |||||||||||||||||
Foreign currency forward contracts |
|
| $ | $- |
| $ |
| $- | |||||||||
|
| ||||||||||||||||
Liabilities | |||||||||||||||||
Foreign currency forward contracts |
|
| | - |
| |
| - |
December 31, 2018 |
| ||||||||||||||||
(millions) | Carrying | Fair Value Measurements |
| ||||||||||||||
| Amount |
| Level 1 | Level 2 |
| Level 3 |
| ||||||||||
Assets | |||||||||||||||||
Foreign currency forward contracts |
| $ |
| $- |
| $ |
| $- | |||||||||
Liabilities | |||||||||||||||||
Foreign currency forward contracts |
| |
| - |
| |
| - | |||||||||
Interest rate swap agreements |
| |
| - |
|
| - | ||||||||||
The carrying value of foreign currency forward contracts is at fair value, which is determined based on foreign currency exchange rates as of the balance sheet date and is classified within Level 2. The carrying value of interest rate swap contracts is at fair value, which is determined based on current interest rates and forward interest rates as of the balance sheet date and is classified within Level 2. For purposes of fair value disclosure above, derivative values are presented gross. See further discussion of gross versus net presentation of the Company's derivatives within Note 8.
Contingent consideration obligations are recognized and measured at fair value at the acquisition date and thereafter until settlement. Contingent consideration is classified within level 3 as the underlying fair value is determined using income-based valuation approaches appropriate for the terms and conditions of each respective earn-out. The consideration expected to be transferred is based on the Company’s expectations of various financial measures. The ultimate payment of contingent consideration could deviate from current estimates based on the actual results of these financial measures. Contingent consideration was not material to the Company’s consolidated financial statements.
The carrying values of accounts receivable, accounts payable, cash and cash equivalents, restricted cash, commercial paper and notes payable approximate fair value because of their short maturities and as such are classified within Level 1.
The fair value of long-term debt is based on quoted market prices for the same or similar debt instruments (classified as Level 2). The carrying amount and the estimated fair value of long-term debt, including current maturities, held by the Company were:
September 30, 2019 | December 31, 2018 | |||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||
| Amount |
| Value |
| Amount |
| Value | |||||||
Long-term debt, including current maturities | $ | $ | $ | $ |
16
8. DERIVATIVES AND HEDGING TRANSACTIONS
The Company uses foreign currency forward contracts, interest rate swap agreements and foreign currency debt to manage risks associated with foreign currency exchange rates, interest rates and net investments in foreign operations. The Company does not hold derivative financial instruments of a speculative nature or for trading purposes. The Company records derivatives as assets and liabilities on the balance sheet at fair value. Changes in fair value are recognized immediately in earnings unless the derivative qualifies and is designated as a hedge. Cash flows from derivatives are classified in the statement of cash flows in the same category as the cash flows from the items subject to designated hedge or undesignated (economic) hedge relationships. The Company evaluates hedge effectiveness at inception and on an ongoing basis. If a derivative is no longer expected to be effective, hedge accounting is discontinued.
The Company is exposed to credit risk in the event of nonperformance of counterparties for foreign currency forward exchange contracts and interest rate swap agreements. The Company monitors its exposure to credit risk by using credit approvals and credit limits and by selecting major global banks and financial institutions as counterparties. The Company does not anticipate nonperformance by any of these counterparties, and therefore, recording a valuation allowance against the Company’s derivative balance is not considered necessary.
Derivative Positions Summary
Certain of the Company’s derivative transactions are subject to master netting arrangements that allow the Company to net settle contracts with the same counterparties. These arrangements generally do not call for collateral and as of the applicable dates presented in the following table,
The respective net amounts are included in other current assets, other assets, other current liabilities and other liabilities on the Consolidated Balance Sheet.
The following table summarizes the gross fair value and the net value of the Company’s outstanding derivatives.
(millions) | ||||||||||||||||
Derivatives Assets | Derivatives Liabilities | |||||||||||||||
September 30 | December 31 | September 30 | December 31 | |||||||||||||
(millions) |
| 2019 | 2018 |
| 2019 | 2018 |
| |||||||||
Derivatives designated as hedging instruments | ||||||||||||||||
Foreign currency forward contracts | $ | $ | $ | $ | ||||||||||||
Interest rate swap agreements | - | - | - | | ||||||||||||
Derivatives not designated as hedging instruments | ||||||||||||||||
Foreign currency forward contracts | | | | | ||||||||||||
Gross value of derivatives | | | | | ||||||||||||
Gross amounts offset in the Consolidated Balance Sheet | ( | ( | ( | ( | ||||||||||||
Net value of derivatives | $ | $ | $ | $ |
The following table summarizes the notional values of the Company’s outstanding derivatives.
Notional Values | ||||||||
September 30 | December 31 | |||||||
(millions) |
| 2019 |
| 2018 | ||||
Foreign currency forward contracts | $ | $ | ||||||
Interest rate agreements | - | |
17
Cash Flow Hedges
The Company utilizes foreign currency forward contracts to hedge the effect of foreign currency exchange rate fluctuations on forecasted foreign currency transactions, including inventory purchases and intercompany royalty, management fee and other payments. These forward contracts are designated as cash flow hedges. The changes in fair value of these contracts are recorded in accumulated other comprehensive income (“AOCI”) until the hedged items affect earnings, at which time the gain or loss is reclassified into the same line item in the Consolidated Statement of Income as the underlying exposure being hedged. Cash flow hedged transactions impacting AOCI are forecasted to occur within the next
The Company occasionally enters into treasury lock and forward starting interest rate swap agreements to manage interest rate exposure. During 2015 and 2016, the Company entered into and subsequently closed a series of treasury lock and forward starting interest rate swap agreements, in conjunction with its public debt issuances. The agreements were designated and effective as cash flow hedges of the expected interest payments related to the anticipated future debt issuances. Amounts recorded in AOCI are recognized as part of interest expense over the remaining life of the notes as the forecasted interest transactions occur.
Fair Value Hedges
The Company manages interest expense using a mix of fixed and floating rate debt. To help manage exposure to interest rate movements and to reduce borrowing costs, the Company may enter into interest rate swaps under which the Company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed upon notional principal amount. The mark-to-market of these fair value hedges is recorded as gains or losses in interest expense and is offset by the gain or loss of the underlying debt instrument, which also is recorded in interest expense. These fair value hedges are highly effective.
In January 2016, the Company entered into an interest rate swap agreement that converted its $
The interest rate swaps referenced above were designated as fair value hedges.
The following amounts were recorded on the Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges:
Line item in which the hedged item is included | Carrying amount of the hedged liabilities | Cumulative amount of the fair value hedging adjustment included in the carrying amount of the hedged liabilities | |||||||||||||
Third Quarter Ended | Third Quarter Ended | ||||||||||||||
September 30 | September 30 | ||||||||||||||
(millions) |
| 2019 | 2018 |
| 2019 | 2018 |
| ||||||||
Long-term debt | $- | $ | $- | $ |
Net Investment Hedges
The Company designates its outstanding $
Third Quarter Ended | Nine Months Ended | |||||||||||||||
September 30 | September 30 | |||||||||||||||
(millions) |
| 2019 | 2018 | 2019 | 2018 |
| ||||||||||
Revaluation gains (losses), net of tax | $ | $ | $ | $ |
18
Derivatives Not Designated as Hedging Instruments
The Company also uses foreign currency forward contracts to offset its exposure to the change in value of certain foreign currency denominated assets and liabilities held at foreign subsidiaries, primarily receivables and payables, which are remeasured at the end of each period. Although the contracts are effective economic hedges, they are not designated as accounting hedges. Therefore, changes in the value of these derivatives are recognized immediately in earnings, thereby offsetting the current earnings effect of the related foreign currency denominated assets and liabilities.
Effect of all Derivative Instruments on Income
The gain (loss) of all derivative instruments recognized in product and equipment cost of sales (“COS”), selling, general and administrative expenses (“SG&A”) and interest expense, net (“interest”) is summarized below:
Third Quarter Ended | |||||||||||||||
September 30 | |||||||||||||||
2019 | 2018 | ||||||||||||||
(millions) | COS | SG&A | Interest |
| COS | SG&A | Interest | ||||||||
Gain (loss) on derivatives in cash flow hedging relationship: | |||||||||||||||
Foreign currency forward contracts | |||||||||||||||
Amount of gain (loss) reclassified from AOCI to income | $ | $ | $- | $( | $ | $- | |||||||||
Amount excluded from the assessment of effectiveness recognized in earnings based on changes in fair value | - | - | ( | - | - | | |||||||||
Interest rate swap agreements | |||||||||||||||
Amount of gain (loss) reclassified from AOCI to income | - | - | ( | - | - | ( | |||||||||
Gain (loss) on derivatives in fair value hedging relationship: | |||||||||||||||
Interest rate swaps | |||||||||||||||
Hedged items | - | - | - | - | - | ( | |||||||||
Derivatives designated as hedging instruments | - | - | - | - | - | | |||||||||
Gain (loss) on derivatives not designated as hedging instruments: | |||||||||||||||
Foreign currency forward contracts | |||||||||||||||
Amount of gain (loss) recognized in income | - | | - | - | | | |||||||||
Total gain (loss) | $ | $ | $( | $( | $ | $ | |||||||||
Nine Months Ended | |||||||||||||||
September 30 | |||||||||||||||
2019 | 2018 | ||||||||||||||
(millions) | COS | SG&A | Interest |
| COS | SG&A | Interest | ||||||||
Gain (loss) on derivatives in cash flow hedging relationship: | |||||||||||||||
Foreign currency forward contracts | |||||||||||||||
Amount of gain (loss) reclassified from AOCI to income | $ | $ | $- | $( | $ | $- | |||||||||
Amount excluded from the assessment of effectiveness recognized in earnings based on changes in fair value | - | - | | - | - | | |||||||||
Interest rate swap agreements | |||||||||||||||
Amount of gain (loss) reclassified from AOCI to income | - | - | ( | - | - | ( | |||||||||
Gain (loss) on derivatives in fair value hedging relationship: | |||||||||||||||
Interest rate swaps | |||||||||||||||
Hedged items | - | - | | - | - | ( | |||||||||
Derivatives designated as hedging instruments | - | - | ( | - | - | | |||||||||
Gain (loss) on derivatives not designated as hedging instruments: | |||||||||||||||
Foreign currency forward contracts | |||||||||||||||
Amount of gain (loss) recognized in income | - | | - | - | | | |||||||||
Total gain (loss) | $ | $ | $ | $( | $ | $ |
19
9. OTHER COMPREHENSIVE INCOME (LOSS) INFORMATION
Other comprehensive income (loss) includes net income, foreign currency translation adjustments, unrecognized gains and losses on securities, defined benefit pension and postretirement plan adjustments, gains and losses on derivative instruments designated and effective as cash flow hedges and non-derivative instruments designated and effective as foreign currency net investment hedges that are charged or credited to the accumulated other comprehensive loss account in shareholders’ equity.
The following tables provide other comprehensive income information related to the Company’s derivatives and hedging instruments and pension and postretirement benefits. See Note 8 for additional information related to the Company’s derivatives and hedging transactions. Refer to Note 14 for additional information related to the Company’s pension and postretirement benefits activity.
Third Quarter Ended | Nine Months Ended | ||||||||||||||
September 30 | September 30 | ||||||||||||||
(millions) |
| 2019 | 2018 |
| 2019 | 2018 |
| ||||||||
Derivative and Hedging Instruments | |||||||||||||||
Unrealized gains (losses) on derivative & hedging instruments | |||||||||||||||
Amount recognized in AOCI | $ | $ | $ | $ | |||||||||||
(Gains) losses reclassified from AOCI into income | |||||||||||||||
COS | ( | | ( | | |||||||||||
SG&A |
| ( | ( |
| ( | ( | |||||||||
Interest (income) expense, net | | ( | ( | ( | |||||||||||
| ( | ( |
| ( | ( | ||||||||||
Other activity |
| ( | |
| ( | - | |||||||||
Tax impact |
| ( | ( |
| | ( | |||||||||
Net of tax | $( | $ | $( | $ | |||||||||||
Pension and Postretirement Benefits | |||||||||||||||
Amount reclassified from AOCI into income | |||||||||||||||
Amortization of net actuarial loss and prior service costs and benefits | - | | | | |||||||||||
Pension and postretirement benefits changes | - | - | - | | |||||||||||
| - | | | | |||||||||||
Other activity | | | | | |||||||||||
Tax impact |
| ( | ( |
| ( | ( | |||||||||
Net of tax | $ | $ | $ | $ | |||||||||||
The following table summarizes the derivative and pension and postretirement benefit amounts reclassified from AOCI into income.
Third Quarter Ended | Nine Months Ended |
| ||||||||||||||
September 30 | September 30 |
| ||||||||||||||
| 2019 | 2018 |
| 2019 | 2018 |
| ||||||||||
(millions) | ||||||||||||||||
Derivative (gains) losses reclassified from AOCI into income, net of tax | $( | $( | $( | $( | ||||||||||||
Pension and postretirement benefits net actuarial losses | ||||||||||||||||
and prior services costs reclassified from AOCI into income, net of tax | | | | |
10. SHAREHOLDERS’ EQUITY
Share Repurchase Authorization
In February 2015, the Company’s Board of Directors authorized the repurchase of up to
Share Repurchases
During the first nine months of 2019, the Company reacquired
During all of 2018, the Company reacquired
20
11. EARNINGS ATTRIBUTABLE TO ECOLAB PER COMMON SHARE (“EPS”)
The difference in the weighted average common shares outstanding for calculating basic and diluted EPS is a result of the dilution associated with the Company’s equity compensation plans. As noted in the table below, certain stock options and units outstanding under these equity compensation plans were not included in the computation of diluted EPS because they would not have had a dilutive effect.
The computations of the basic and diluted EPS amounts were as follows:
Third Quarter Ended | Nine Months Ended | |||||||||||||||
September 30 | September 30 | |||||||||||||||
(millions, except per share) |
| 2019 |
| 2018 |
| 2019 | 2018 | |||||||||
Net income attributable to Ecolab | $ | $ | $ | $ | ||||||||||||
Weighted-average common shares outstanding | ||||||||||||||||
Basic |
| | |
| | | ||||||||||
Effect of dilutive stock options and units |
| | |
| | | ||||||||||
Diluted |
| | |
| | | ||||||||||
| ||||||||||||||||
Basic EPS | $ | $ | $ | $ | ||||||||||||
Diluted EPS | $ | $ | $ | $ | ||||||||||||
Anti-dilutive securities excluded from the computation of diluted EPS |
| - | |
| - | | ||||||||||
Amounts do not necessarily sum due to rounding. |
12. INCOME TAXES
The Company’s tax rate was
The Company recognized net tax benefits related to discrete tax items of $
The Company recorded a net discrete tax benefit of $
21
13. RENTAL AND LEASES
Lessee
The Company leases sales and administrative office facilities, distribution centers, research and manufacturing facilities, as well as vehicles and other equipment under operating leases. The Company also enters into insignificant finance leases.
The Company determines whether a lease exists at the inception of the arrangement. In assessing whether a contract is or contains a lease, the Company considers a lease a contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company accounts for lease components separately from the nonlease components (e.g., common-area maintenance costs). Operating leases are recorded in operating lease assets, other current liabilities and operating lease liabilities in the Consolidated Balance Sheet.
Operating lease assets and operating lease liabilities are measured and recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The Company uses the rate implicit in the lease when available or determinable and when the rate implicit in the lease is not determinable, the Company’s incremental borrowing rate based on the information available at commencement date is used in determining the present value of future payments. The Company’s lease terms may include
The Company elected to not apply the recognition requirements of the new standard to leases with terms of twelve months or less. Those lease payments will continue to be recognized in the Consolidated Statement of Income on a straight-line basis over the lease term and are not recorded on the Consolidated Balance Sheet.
Most leases include one or more options to renew, which is at the Company’s sole discretion, with renewal terms that can extend the lease term from
The Company’s operating lease cost was as follows:
Third Quarter Ended | Nine Months Ended | ||||||||||
September 30 | September 30 | ||||||||||
(millions) | 2019 | 2019 | |||||||||
Operating lease cost* | $ | $ |
*Includes immaterial short-term and variable lease costs
Future maturity of operating lease liabilities as of September 30, 2019 is as follows:
(millions) | |||
Remainder of 2019 |
| $ | |
2020 |
| | |
2021 |
| | |
2022 |
| | |
2023 |
| | |
2024 | | ||
Thereafter |
| | |
Total lease payments | | ||
Less: imputed interest | | ||
Present value of lease liabilities | $ |
As of December 31, 2018, identifiable future minimum payments with non-cancelable terms in excess of one year were:
(millions) | |||
2019 |
| $ | |
2020 |
| | |
2021 |
| | |
2022 |
| | |
2023 |
| | |
Thereafter |
| | |
Total | $ |
22
The Company’s operating leases term and discount rate were as follows:
September 30 | |||||
2019 | |||||
Weighted-average remaining lease terms (years) | |||||
Weighted-average discount rate |
The Company’s other lease information was as follows:
Nine Months Ended | ||||||
September 30 | ||||||
(millions) | 2019 | |||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||
Operating cash flows from operating leases | $ | |||||
Leased assets obtained in exchange for new operating lease liabilities | |
Lessor
The Company leases warewashing and water treatment equipment to customers under operating leases. The Company accounts for lease and nonlease components separately. The nonlease components, such as product and service revenue, are accounted for under Topic 606 Revenue from Contracts with Customers, refer to Note 15 for more information. Revenue from leasing equipment is recognized on a straight-line basis over the life of the lease. Cost of sales includes the depreciation expense for assets under operating leases. The assets are depreciated over their estimated useful lives. Initial lease terms range from
Lease contracts convey the right for the customer to control the equipment for a period of time as defined by the contract. There are no options for the customer to purchase the equipment and therefore the equipment remains the property of the Company at the end of the lease term.
Gross assets under operating leases recorded in Property, plant and equipment, net is $
The Company’s operating lease revenue was as follows:
Third Quarter Ended | Nine Months Ended | ||||||||||
September 30 | September 30 | ||||||||||
(millions) | 2019 | 2019 | |||||||||
Operating lease revenue* | $ | $ |
*Includes immaterial variable lease revenue
Revenue from operating leases for existing contracts as of September 30, 2019 is as follows:
(millions) | |||
Remainder of 2019 |
| $ | |
2020 |
| | |
2021 |
| | |
2022 |
| | |
2023 |
| | |
2024 | | ||
Thereafter |
| | |
Total lease revenue | $ |
The Company mitigates the risk of residual value subsequent to the lease term by redeploying assets. As such, the Company expects to receive revenue from the operating lease assets through the remaining useful life and therefore subsequent to the initial contract termination date.
23
14. PENSION AND POSTRETIREMENT PLANS
The Company has a non-contributory qualified defined benefit pension plan covering the majority of its U.S. employees. The Company also has U.S. non-contributory non-qualified defined benefit plans, which provide for benefits to employees in excess of limits permitted under its U.S. pension plans. Various international subsidiaries also have defined benefit pension plans. The Company provides postretirement health care benefits to certain U.S. employees and retirees.
The components of net periodic pension and postretirement health care benefit costs for the third quarter ended September 30 are as follows:
U.S. | International | U.S. Postretirement | ||||||||||||||||||||
Pension | Pension | Health Care | ||||||||||||||||||||
(millions) |
| 2019 | 2018 |
| 2019 | 2018 |
| 2019 | 2018 |
| ||||||||||||
Service cost | $ | $ | $ | $ | $ | $ | ||||||||||||||||
Interest cost on benefit obligation |
| | | | | | | |||||||||||||||
Expected return on plan assets |
| ( | ( | ( | ( | ( | ( | |||||||||||||||
Recognition of net actuarial (gain) loss |
| | | | | ( | ( | |||||||||||||||
Amortization of prior service | ||||||||||||||||||||||
cost (benefit) | ( | ( | ( | ( | ( | ( | ||||||||||||||||
Total expense (benefit) | $ | $ | $ | $ | $( | $( |
The components of net periodic pension and postretirement health care benefit costs for the nine months ended September 30 are as follows:
U.S. | International | U.S. Postretirement | ||||||||||||||||||||
Pension | Pension | Health Care | ||||||||||||||||||||
(millions) |
| 2019 | 2018 |
| 2019 | 2018 |
| 2019 | 2018 |
| ||||||||||||
Service cost | $ | $ | $ | $ | $ | $ | ||||||||||||||||
Interest cost on benefit obligation | | | | | | | ||||||||||||||||
Expected return on plan assets | ( | ( | ( | ( | ( | ( | ||||||||||||||||
Recognition of net actuarial (gain) loss | | | | | ( | ( | ||||||||||||||||
Amortization of prior service | ||||||||||||||||||||||
cost (benefit) | ( | ( | ( | ( | ( | ( | ||||||||||||||||
Total expense (benefit) | $ | $ | $ | $ | $( | $( |
Service cost is included with employee compensation cost in cost of sales and selling, general and administrative expenses in the Consolidated Statement of Income while all other components are included in other (income) expense in the Consolidated Statement of Income.
As of September 30, 2019, the Company is in compliance with all funding requirements of its U.S. pension and postretirement health care plans. During the first nine months of 2019, the Company made contributions of $
During the first nine months of 2019, the Company made contributions of $
During the first nine months of 2019, the Company made contributions of $
24
15. REVENUES
Revenue Recognition
Product and Sold Equipment
Product revenue is generated from cleaning, sanitizing, water, energy and colloidal silica products sold to customers in the Global Industrial, Global Institutional, Global Energy segments and Other. In addition, the Company sells equipment which may be used in combination with its specialized products. Revenue recognized from product and sold equipment is recognized at the point in time when the obligations in the contract with the customer are satisfied, which generally occurs with the transfer of the product or delivery of the equipment.
Service and Lease Equipment
Service and lease equipment revenue is generated from providing services or leasing equipment to customers. Service offerings include installing or repairing certain types of equipment, activities that supplement or replace headcount at the customer location, or fulfilling deliverables included in the contract. Services provided in Other primary includes services designed to detect, eliminate and prevent pests. Global Energy services include process and water treatment offerings to the global petroleum and petrochemical industries, while services in the Global Industrial segment are associated with water treatment and paper process applications. Global Institutional services include water treatment programs and process applications, and wash process solutions. Revenue recognized from leased equipment primarily relates to warewashing and water treatment equipment. Service revenue is recognized over time utilizing an input method and aligns with when the services are provided. Typically, revenue is recognized over time using costs incurred to date because the effort provided by the field selling and service organization represents services provided, which corresponds with the transfer of control. Revenue for leased equipment is accounted for under Topic 842 Leases and recognized on a straight-line basis over the length of the lease contract. Refer to Note 13 for additional information related to lease equipment.
The following table shows principal activities, separated by reportable segments, from which the Company generates its revenue. For more information about the Company’s reportable segments, refer to Note 16.
Net sales at public exchange rates by reportable segment for the third quarter and nine months ended September 30 are as follows:
Third Quarter Ended | Nine Months Ended | |||||||||||||||
September 30 | September 30 | |||||||||||||||
(millions) |
| 2019 | 2018 |
| 2019 | 2018 |
| |||||||||
Global Industrial | ||||||||||||||||
Product and sold equipment |
| $ | $ | $ | $ |
| ||||||||||
Service and lease equipment |
| | | | |
| ||||||||||
Global Institutional |
|
| ||||||||||||||
Product and sold equipment | | | | | ||||||||||||
Service and lease equipment | | | | | ||||||||||||
Global Energy | ||||||||||||||||
Product and sold equipment | | | | | ||||||||||||
Service and lease equipment | | | | | ||||||||||||
Other | ||||||||||||||||
Product and sold equipment | | | | | ||||||||||||
Service and lease equipment | | | | | ||||||||||||
Total | ||||||||||||||||
Total product and sold equipment | $ | $ | $ | $ | ||||||||||||
Total service and lease equipment | | | | |
Net sales at public exchange rates by geographic region for the third quarter ended September 30 are as follows:
Global | Global | Global | ||||||||||||||||||||||||||||
Industrial | Institutional | Energy | Other | |||||||||||||||||||||||||||
(millions) |
| 2019 | 2018 |
| 2019 | 2018 |
| 2019 | 2018 |
| 2019 | 2018 | ||||||||||||||||||
North America | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Europe |
| | | | | | | | | |||||||||||||||||||||
Asia Pacific |
| | | | | | | | | |||||||||||||||||||||
Latin America |
| | | | | | | | | |||||||||||||||||||||
Greater China | | | | | | | | | ||||||||||||||||||||||
Middle East and Africa | | | | | | | | | ||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | $ | $ |
25
Net sales at public exchange rates by geographic region for the first nine months ended September 30 are as follows:
Global | Global | Global | ||||||||||||||||||||||||||||
Industrial | Institutional | Energy | Other | |||||||||||||||||||||||||||
(millions) |
| 2019 | 2018 |
| 2019 | 2018 |
| 2019 | 2018 |
| 2019 | 2018 | ||||||||||||||||||
North America | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Europe |
| | | | | | | | | |||||||||||||||||||||
Asia Pacific |
| | | | | | | | | |||||||||||||||||||||
Latin America |
| | | | | | | | | |||||||||||||||||||||
Greater China | | | | | | | | | ||||||||||||||||||||||
Middle East and Africa | | | | | | | | | ||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | $ | $ |
Net sales by geographic region were determined based on origin of sale. Revenues in the United States made up
Contract Liability
Payments received from customers are based on invoices or billing schedules as established in contracts with customers. Accounts receivable are recorded when the right to consideration becomes unconditional. The contract liability relates to billings in advance of performance (primarily service obligations) under the contract. Contract liabilities are recognized as revenue when the performance obligation has been performed, which primarily occurs during the subsequent quarter.
September 30 | September 30 | |||||||
(millions) |
| 2019 | 2018 |
| ||||
Contract liability as of beginning of the year |
| $ | $ |
| ||||
Revenue recognized in the period from: |
|
| ||||||
Amounts included in the contract liability at the beginning of the year |
| ( | ( |
| ||||
Increases due to billings excluding amounts recognized as revenue during the nine months ended | | | ||||||
Business combination | | | ||||||
Contract liability as of end of period | $ | $ |
26
16. OPERATING SEGMENTS
The Company’s organizational structure consists of global business unit and global regional leadership teams. The Company’s operating segments follow its commercial and product-based activities and are based on engagement in business activities, availability of discrete financial information and review of operating results by the Chief Operating Decision Maker at the identified operating segment level.
The Company’s operating segments that share similar economic characteristics and future prospects, nature of the products and production processes, end-use markets, channels of distribution and regulatory environment have been aggregated into
Comparability of Reportable Segments
The Company evaluates the performance of its non-U.S. dollar functional currency international operations based on fixed currency exchange rates, which eliminates the impact of exchange rate fluctuations on its international operations. Fixed currency amounts are updated annually at the beginning of each year based on translation into U.S. dollars at foreign currency exchange rates established by management, with all periods presented using such rates. Fixed currency rates are generally based on existing market rates at the time they are established. The “Fixed Currency Rate Change” column shown in the following table reflects the impact on previously reported values related to fixed currency exchange rates established by management at the beginning of 2019. The “Other” column shown in the table reflects immaterial changes between segments, primarily cost allocations.
The impact of the preceding changes on previously reported full year 2018 reportable segment net sales and operating income is summarized as follows:
December 31, 2018 | ||||||||||||||||
| 2018 Reported |
|
| Fixed |
| 2018 Revised | ||||||||||
| Valued at 2018 |
|
| Currency |
| Valued at 2019 | ||||||||||
(millions) |
| Management Rates |
| Other |
| Rate Change |
| Management Rates | ||||||||
Net Sales |
|
|
| |||||||||||||
Global Industrial |
| $ | $- | $( | $ | |||||||||||
Global Institutional |
| | - | ( | | |||||||||||
Global Energy |
| | - | ( | | |||||||||||
Other |
| | - | ( | | |||||||||||
Subtotal at fixed currency rates |
| | - | ( | | |||||||||||
Effect of foreign currency translation |
| ( | - | | | |||||||||||
Consolidated reported GAAP net sales |
| $ | $- | $- | $ | |||||||||||
| ||||||||||||||||
Operating Income |
| |||||||||||||||
Global Industrial |
| $ | $( | $( | $ | |||||||||||
Global Institutional |
| | - | ( | | |||||||||||
Global Energy |
| | ( | ( | | |||||||||||
Other |
| | | ( | | |||||||||||
Corporate | ( | - | | ( | ||||||||||||
Subtotal at fixed currency rates | | - | ( | | ||||||||||||
Effect of foreign currency translation | ( | - | | | ||||||||||||
Consolidated reported GAAP operating income | $ | $- | $- | $ |
27
Reportable Segment Information
Financial information for each of the Company’s reportable segments, is as follows:
Third Quarter Ended | Nine Months Ended |
| ||||||||||||||
September 30 | September 30 |
| ||||||||||||||
(millions) |
| 2019 | 2018 | 2019 | 2018 |
| ||||||||||
Net Sales | ||||||||||||||||
Global Industrial |
| $ | $ | $ | $ | |||||||||||
Global Institutional | | | | | ||||||||||||
Global Energy | | | | | ||||||||||||
Other | | | | | ||||||||||||
Subtotal at fixed currency rates | | | | | ||||||||||||
Effect of foreign currency translation | ( | | ( | | ||||||||||||
Consolidated reported GAAP net sales |
| $ |
| $ | $ | $ | ||||||||||
Operating Income | ||||||||||||||||
Global Industrial |
| $ | $ | $ | $ | |||||||||||
Global Institutional | | | | | ||||||||||||
Global Energy | | | | | ||||||||||||
Other | | | | | ||||||||||||
Corporate | ( | ( | ( | ( | ||||||||||||
Subtotal at fixed currency rates | | | | | ||||||||||||
Effect of foreign currency translation | ( | | ( | | ||||||||||||
Consolidated reported GAAP operating income |
| $ |
| $ | $ | $ | ||||||||||
The profitability of the Company’s operating segments is evaluated by management based on operating income.
Consistent with the Company’s internal management reporting, Corporate amounts in the table above include intangible asset amortization specifically from the Nalco merger and special (gains) and charges, as discussed in Note 2, that are not allocated to the Company’s reportable segments.
17. COMMITMENTS AND CONTINGENCIES
The Company is subject to various claims and contingencies related to, among other things, workers’ compensation, general liability (including product liability), automobile claims, health care claims, income taxes, environmental matters and lawsuits. The Company is also subject to various claims and contingencies related to income taxes, which are discussed in Note 12. The Company also has contractual obligations including to lease commitments, which are discussed in Note 13.
The Company records liabilities where a contingent loss is probable and can be reasonably estimated. If the reasonable estimate of a probable loss is a range, the Company records the most probable estimate of the loss or the minimum amount when no amount within the range is a better estimate than any other amount. The Company discloses a contingent liability even if the liability is not probable or the amount is not estimable, or both, if there is a reasonable possibility that a material loss may have been incurred.
Insurance
Globally, the Company has insurance policies with varying deductible levels for property and casualty losses. The Company is insured for losses in excess of these deductibles, subject to policy terms and conditions and has recorded both a liability and an offsetting receivable for amounts in excess of these deductibles. The Company is self-insured for health care claims for eligible participating employees, subject to certain deductibles and limitations. The Company determines its liabilities for claims on an actuarial basis.
Litigation and Environmental Matters
The Company and certain subsidiaries are party to various lawsuits, claims and environmental actions that have arisen in the ordinary course of business. These include from time to time antitrust, commercial, patent infringement, product liability and wage hour lawsuits, as well as possible obligations to investigate and mitigate the effects on the environment of the disposal or release of certain chemical substances at various sites, such as Superfund sites and other operating or closed facilities. The Company has established accruals for certain lawsuits, claims and environmental matters. The Company currently believes that there is not a reasonably possible risk of material loss in excess of the amounts accrued related to these legal matters. Because litigation is inherently uncertain, and unfavorable rulings or developments could occur, there can be no certainty that the Company may not ultimately incur charges in excess of recorded liabilities. A future adverse ruling, settlement or unfavorable development could result in future charges that could have a material adverse effect on the Company’s results of operations or cash flows in the period in which they are recorded. The Company currently believes that such future charges related to suits and legal claims, if any, would not have a material adverse effect on the Company’s consolidated financial position.
28
Environmental Matters
The Company is currently participating in environmental assessments and remediation at approximately
Matters Related to Deepwater Horizon Incident Response
On April 22, 2010, the deep water drilling platform, the Deepwater Horizon, operated by a subsidiary of BP plc, sank in the Gulf of Mexico after a catastrophic explosion and fire that began on April 20, 2010. A massive oil spill resulted. Approximately one week following the incident, subsidiaries of BP plc, under the authorization of the responding federal agencies, formally requested Nalco Company, now an indirect subsidiary of Ecolab, to supply large quantities of COREXIT™ 9500, a Nalco oil dispersant product listed on the U.S. EPA National Contingency Plan Product Schedule. Nalco responded immediately by providing available COREXIT and increasing production to supply the product to BP’s subsidiaries for use, as authorized and directed by agencies of the federal government throughout the incident. Prior to the incident, Nalco and its subsidiaries had not provided products or services or otherwise had any involvement with the Deepwater Horizon platform. On July 15, 2010, BP announced that it had capped the leaking well, and the application of dispersants by the responding parties ceased shortly thereafter.
On May 1, 2010, the President of the United States appointed retired U.S. Coast Guard Commandant Admiral Thad Allen to serve as the National Incident Commander in charge of the coordination of the response to the incident at the national level. The EPA directed numerous tests of all the dispersants on the National Contingency Plan Product Schedule, including those provided by Nalco, “to ensure decisions about ongoing dispersant use in the Gulf of Mexico are grounded in the best available science.” Nalco cooperated with this testing process and continued to supply COREXIT, as requested by BP and government authorities. The use of dispersants by the responding parties was one tool used by the government and BP to avoid and reduce damage to the Gulf area from the spill.
In connection with its provision of COREXIT, Nalco has been named in several lawsuits as described below.
Cases arising out of the Deepwater Horizon accident were administratively transferred for pre-trial purposes to a judge in the United States District Court for the Eastern District of Louisiana (the “Court”) with other related cases under In Re: Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of Mexico, on April 20, 2010, Case No. 10-md-02179 (E.D. La.) (“MDL 2179”). Nalco was named, along with other unaffiliated defendants, in
Pursuant to orders issued by the Court in MDL 2179, the claims were consolidated in several master complaints, including
In December 2012 and January 2013, the MDL 2179 court issued final orders approving
Nalco, the incident defendants and the other responder defendants have been named as first party defendants by Transocean Deepwater Drilling, Inc. and its affiliates (the “Transocean Entities”) (In re the Complaint and Petition of Triton Asset Leasing GmbH, et al, MDL No. 2179, Civil Action 10-2771). In April and May 2011, the Transocean Entities, Cameron International Corporation, Halliburton Energy Services, Inc., M-I L.L.C., Weatherford U.S., L.P. and Weatherford International, Inc. (collectively, the “Cross Claimants”) filed cross claims in MDL 2179 against Nalco and other unaffiliated cross defendants. The Cross Claimants generally allege, among other things, that if they are found liable for damages resulting from the Deepwater Horizon explosion, oil spill and/or spill response, they are entitled to indemnity or contribution from the cross defendants.
In April and June 2011, in support of its defense of the claims against it, Nalco filed counterclaims against the Cross Claimants. In its counterclaims, Nalco generally alleges that if it is found liable for damages resulting from the Deepwater Horizon explosion, oil spill and/or spill response, it is entitled to contribution or indemnity from the Cross Claimants.
In May 2016, Nalco was named in
29
On February 22, 2017, the Court dismissed the B3 Master Complaint and ordered that plaintiffs who had previously filed a claim that fell within the scope of the B3 Master Complaint and who had “opted out” of and not released their claims under the Medical Benefits Class Action Settlement either: (1) complete a sworn statement indicating, among other things, that they opted out of the Medical Benefits Class Action Settlement (to be completed by plaintiffs who previously filed an individual complaint); or (2) file an individual lawsuit attaching the sworn statement as an exhibit, by a deadline date set by the Court.
On July 10, 2018, the Court entered an order dismissing the “B1” claims against Nalco. In light of the Court’s orders dismissing various B3 and “B1” claims in their entirety, for most plaintiffs the Court’s November 28, 2012 grant of summary judgment for Nalco is now final and the deadline to appeal has passed. On October 23, 2018, a plaintiff filed a new B3 complaint against Nalco and other unaffiliated defendants generally alleging, among other things, negligence and gross negligence related to the use of COREXIT dispersant in connection with the Deepwater Horizon oil spill. The complaint was consolidated in MDL 2179. There currently remain
The Company believes the claims asserted against Nalco are without merit and intends to defend these lawsuits vigorously. The Company also believes that it has rights to contribution and/or indemnification (including legal expenses) from third parties. However, the Company cannot predict the outcome of these lawsuits, the involvement it might have in these matters in the future, or the potential for future litigation.
18. NEW ACCOUNTING PRONOUNCEMENTS
Standards that are not yet adopted: | |||||||||
|
|
| Required |
|
| ||||
Date of | Date of | Effect on the | |||||||
Standard |
| Issuance | Description |
| Adoption |
| Financial Statements | ||
ASU 2018-15 - Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force) | August 2018 | Aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The amendments require an entity (customer) in a hosting arrangement that is a service contract to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. | January 1, 2020 | The ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating the impact of adoption. | |||||
ASU 2018-14 - Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans | August 2018 | Modifies disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This includes, but is not limited to, the removal of the requirement to disclose the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year, and the addition of a requirement to disclose the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates. | January 1, 2020 | The new disclosure requirements are applied on a retrospective basis to all periods presented. The Company is currently evaluating the impact of adoption. | |||||
ASU 2017-04 - Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment | January 2017 | Simplifies subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. | January 1, 2020 | The ASU must be applied on a prospective basis upon adoption. Adoption of the ASU is not expected to have a material impact on the Company's financial statements. | |||||
Credit Losses ASUs: |
| Various |
| Addresses the recognition, measurement, presentation and disclosure of credit losses on trade and reinsurance receivables, loans, debt securities, net investments in leases, off-balance-sheet credit exposures and certain other instruments. Amends guidance on reporting credit losses from an incurred model to an expected model for assets held at amortized cost, such as accounts receivable, loans and held-to-maturity debt securities. Additional disclosures will also be required. | January 1, 2020 |
| The Company has identified the financial assets subject to this standard, which primarily include trade and notes receivable. In addition, the Company is updating current accounting policies to be in accordance with the new standard, and is continuing to evaluate the impact of adoption. | ||
30
Standards that were adopted: | ||||||||
| Date of |
|
| Date of |
| Effect on the | ||
Standard |
| Issuance | Description |
| Adoption |
| Financial Statements | |
ASU 2018-02 - Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income | February 2018 | Allows entities to reclassify stranded tax effects resulting from the Tax Cut and Jobs Act (“the Act”) from accumulated other comprehensive income to retained earnings. Tax effects stranded in other comprehensive income for reasons other than the impact of the Act cannot be reclassified. | January 1, 2019 | In order to improve the usefulness and transparency, the Company made the election to reclassify $ | ||||
ASU 2018-16 - Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes |
| Various |
| Amends the hedge accounting recognition and presentation requirements. Simplifies the application of hedge accounting and the requirements for hedge documentation and effectiveness testing. Requires presentation of all items that affect earnings in the same income statement line as the hedged item. Expands the benchmark interest rates that can be used for hedge accounting. | January 1, 2019 | Adoption of this guidance did not have a material impact on the results of operations, financial position or cash flows. Required disclosures under the new guidance are included in Note 8. | ||
Lease ASUs: |
| Various |
| Introduces the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. | January 1, 2019 | See additional information regarding the impact of this guidance on the Company's financial statements at the bottom of this table in note (a). | ||
No other new accounting pronouncement issued or effective has had or is expected to have a material impact on the Company’s consolidated financial statements.
(a) | Leases |
On January 1, 2019, the Company adopted Accounting Standards Codification Topic 842 Leases (“the new lease standard”) prospectively and recorded a cumulative effect adjustment to the opening balance of retained earnings of $
In addition, the Company elected the hindsight practical expedient to determine the lease term for existing leases. When applying the hindsight expedient, the Company determined that most renewal options would not be reasonably certain in determining the expected lease term. The Company made an accounting policy election to not apply the recognition requirements of the new standard to leases with terms of twelve months or less and which do not include an option to purchase the underlying assets which is reasonably certain of exercise.
Adoption of the new standard resulted in the recording of additional net operating lease assets and operating lease liabilities of $
31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Ecolab Inc.:
Results of Review of Interim Financial Statements
We have reviewed the accompanying consolidated balance sheet of Ecolab Inc. and its subsidiaries (the “Company”) as of September 30, 2019, and the related consolidated statements of income, comprehensive income, and equity for the three-month and nine-month periods ended September 30, 2019 and 2018, and the consolidated statements of cash flows for the nine-month periods ended September 30, 2019 and 2018, including the related notes (collectively referred to as the “interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2018, and the related consolidated statements of income, comprehensive income, equity, and cash flows for the year then ended (not presented herein), and in our report dated March 1, 2019, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2018, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
These interim financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ PricewaterhouseCoopers LLP | |
PricewaterhouseCoopers LLP | |
Minneapolis, Minnesota | |
October 31, 2019 |
32
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following management discussion and analysis (“MD&A”) provides information we believe is useful in understanding our operating results, cash flows and financial condition. We provide quantitative information about the material sales drivers including the impact of changes in volume and pricing and the effect of acquisitions and changes in foreign currency at the corporate and reportable segment level. We also provide quantitative information regarding special (gains) and charges, discrete tax items and other significant factors we believe are useful for understanding our results. Such quantitative drivers are supported by comments meant to be qualitative in nature. Qualitative factors are generally ordered based on estimated significance.
The MD&A should be read in conjunction with both the unaudited consolidated financial information and related notes included in this Form 10-Q, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2018. This discussion contains various Non-GAAP Financial Measures and also contains various Forward-Looking Statements within the meaning of the Private Securities Litigation Reform Act of 1995. We refer readers to the statements entitled “Non-GAAP Financial Measures” and “Forward-Looking Statements” located at the end of Part I of this report.
Comparability of Results
Fixed Currency Foreign Exchange Rates
Management evaluates the sales and operating income performance of our non-U.S. dollar functional currency international operations based on fixed currency exchange rates, which eliminate the impact of exchange rate fluctuations on our international operations. Fixed currency amounts are updated annually at the beginning of each year based on translation into U.S. dollars at foreign currency exchange rates established by management, with all periods presented using such rates. Fixed currency exchange rates are generally based on existing market rates at the time they are established. Public currency rate data provided within the “Segment Performance” section of this MD&A reflect amounts translated at actual public average rates of exchange prevailing during the corresponding period and is provided for informational purposes only.
Impact of Acquisitions and Divestitures
Acquisition adjusted growth rates exclude the results of our acquired businesses from the first twelve months post acquisition and exclude the results of our divested businesses from the twelve months prior to divestiture.
OVERVIEW OF THE THIRD QUARTER ENDED SEPTEMBER 30, 2019
Sales Performance
When comparing third quarter 2019 against third quarter 2018, sales performance was as follows:
● | Reported net sales increased 2% to $3,818 million, fixed currency sales and acquisition adjusted fixed currency sales increased 3% and 2%, respectively. |
● | Fixed currency sales for our Global Industrial segment increased 5% to $1,419 million, acquisition adjusted fixed currency sales increased 3%, led by Water and Food and Beverage. |
● | Fixed currency sales for our Global Institutional segment increased 4% to $1,357 million. Acquisition adjusted fixed currency sales increased 3%, led by Specialty and Institutional. |
● | Fixed currency sales for our Global Energy segment decreased 3% to $837 million. Acquisition adjusted fixed currency sales also decreased 3%. |
● | Fixed currency sales and acquisition adjusted fixed currency sales for Other sales increased 7% to $243 million, led by Pest Elimination. |
Financial Performance
When comparing third quarter 2019 against third quarter 2018, our financial performance was as follows:
● | Reported operating income increased 14% to $588 million. Excluding the impact of special (gains) and charges from both 2019 and 2018 reported results, adjusted operating income increased 11% and our adjusted fixed currency operating income increased 12%. |
● | Net income attributable to Ecolab increased 7% to $464 million. Excluding the impact of special (gains) and charges and discrete tax items from both 2019 and 2018 reported results, our adjusted net income attributable to Ecolab increased 12%. |
● | Reported diluted EPS of $1.59 increased 7%. Excluding the impact of special (gains) and charges and discrete tax items from both 2019 and 2018 reported results, adjusted diluted EPS increased 12% to $1.71 in the third quarter of 2019. |
● | Our reported tax rate was 16.5% during the third quarter of 2019, compared to 9.0% during the third quarter of 2018. Excluding the tax rate impact of special (gains) and charges and discrete tax items from both 2019 and 2018 results, our adjusted tax rate was 20.1% and 19.5% during the third quarter of 2019 and 2018, respectively. |
33
RESULTS OF OPERATIONS
Net Sales
Third Quarter Ended | Nine Months Ended | |||||||||||||||||||||
September 30 | September 30 | |||||||||||||||||||||
(millions) | 2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||||||
Product and equipment sales | $3,117.7 | $3,101.4 | $9,096.1 | $9,021.5 | ||||||||||||||||||
Service and lease sales | $700.2 | 645.8 | 1,986.6 | 1,886.2 | ||||||||||||||||||
Reported GAAP net sales | $3,817.9 | $3,747.2 | 2 | % | $11,082.7 | $10,907.7 | 2 | % | ||||||||||||||
Effect of foreign currency translation |
| 37.4 | (7.0) |
| 83.9 | (155.9) | ||||||||||||||||
Non-GAAP fixed currency sales | $3,855.3 | $3,740.2 | 3 | % | $11,166.6 | $10,751.8 | 4 | % | ||||||||||||||
Product and sold equipment revenue is generated from providing cleaning, sanitizing, water and energy products or selling equipment used in combination with specialized products. Service and lease equipment revenue is generated from providing services or leasing equipment to customers. All of our sales are subject to the same economic conditions.
The percentage components of the period-over-period 2019 sales change are shown below:
Third Quarter Ended | Nine Months Ended | |||
September 30 | September 30 | |||
(percent) |
| 2019 | 2019 | |
Volume |
| 0% | 1% | |
Price changes |
| 2 | 3 | |
Acquisition adjusted fixed currency sales change |
| 2 | 3 | |
Acquisitions and divestitures |
| 1 | 1 | |
Fixed currency sales change |
| 3 | 4 | |
Foreign currency translation |
| (1) | (2) | |
Reported GAAP net sales change |
| 2% | 2% |
Amounts do not necessarily sum due to rounding.
Cost of Sales (“COS”) and Gross Profit Margin
Third Quarter Ended | Nine Months Ended | |||||||||||||||||||||||||||
September 30 | September 30 | |||||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
|
|
| Gross |
|
| Gross |
|
| Gross |
|
| Gross | ||||||||||||||||
(millions/percent) | COS | Margin | COS | Margin | COS | Margin | COS | Margin | ||||||||||||||||||||
Product and equipment cost of sales | $1,792.7 | $1,809.8 | $5,308.5 | $5,257.6 | ||||||||||||||||||||||||
Service and lease cost of sales | 414.7 | 380.9 | 1,196.7 | 1,151.5 | ||||||||||||||||||||||||
Reported GAAP COS and gross margin | $2,207.4 | 42.2 | % | $2,190.7 | 41.5 | % | $6,505.2 | 41.3 | % | $6,409.1 | 41.2 | % | ||||||||||||||||
Special (gains) and charges | 11.3 |
| 3.6 |
| 22.8 |
| 3.5 |
| ||||||||||||||||||||
Non-GAAP adjusted COS and gross margin | $2,196.1 | 42.5 | % | $2,187.1 | 41.6 | % | $6,482.4 | 41.5 | % | $6,405.6 | 41.3 | % |
Our COS and corresponding gross profit margin (“gross margin”) are shown in the table above. Gross margin is defined as net sales less cost of sales divided by net sales.
Our reported gross margin was 42.2% and 41.5% for the third quarter of 2019 and 2018, respectively. Our reported gross margin for the first nine months of 2019 and 2018 was 41.3% and 41.2%, respectively. Special (gains) and charges included in items impacting COS are shown within the “Special (Gains) and Charges” table on page 35.
Excluding the impact of special (gains) and charges within COS, third quarter 2019 adjusted gross margin was 42.5% and our adjusted gross margin for the first nine months of 2019 was 41.5%. These percentages compared against a third quarter 2018 adjusted gross margin of 41.6% and an adjusted gross margin of 41.3% for the first nine months of 2018.
Our adjusted gross margin increased when comparing the third quarter and first nine months of 2019 comparable periods of 2018, which was driven primarily by improved pricing and cost efficiency initiatives.
34
Selling, General and Administrative Expense
Selling, general and administrative (“SG&A”) expenses as a percentage of sales were 25.2% and 26.8% for the third quarter and first nine months of 2019, respectively, compared to 25.7% and 27.7% for the third quarter and first nine months of 2018. The decreased SG&A ratio to sales in the third quarter of 2019 was driven primarily by sales leverage and cost efficiency initiatives which more than offset investments in the business.
Special (Gains) and Charges
Special (gains) and charges reported on the Consolidated Statement of Income include the following items:
Third Quarter Ended | Nine Months Ended | |||||||||||||||
September 30 | September 30 | |||||||||||||||
(millions) |
| 2019 | 2018 |
| 2019 | 2018 |
| |||||||||
Cost of sales | ||||||||||||||||
Restructuring activities | $6.2 | $5.9 | $16.2 |
| $6.3 | |||||||||||
Acquisition and integration activities | 5.1 | (0.1) | 6.6 | (0.6) | ||||||||||||
Other | - | (2.2) | - | (2.2) | ||||||||||||
Subtotal | 11.3 | 3.6 | 22.8 |
| 3.5 | |||||||||||
Special (gains) and charges | ||||||||||||||||
Restructuring activities | 25.0 | 73.1 | 93.0 |
| 82.3 | |||||||||||
Upstream energy spin-off | 29.7 | - | 48.5 | - | ||||||||||||
Acquisition and integration activities | 2.0 | 2.4 | 4.9 | 4.7 | ||||||||||||
Other | 3.7 | 0.1 | 4.2 |
| 26.7 | |||||||||||
Subtotal | 60.4 | 75.6 | 150.6 |
| 113.7 | |||||||||||
Operating income subtotal | 71.7 | 79.2 | 173.4 | 117.2 | ||||||||||||
Interest expense, net | - | - | 0.2 | - | ||||||||||||
Total special (gains) and charges | $71.7 | $79.2 | $173.6 | $117.2 |
For segment reporting purposes, special (gains) and charges are not allocated to reportable segments, which is consistent with our internal management reporting.
Restructuring activities
Restructuring activities are primarily related to Accelerate 2020 (described below). These activities have been included as a component of cost of sales and special (gains) and charges on the Consolidated Statement of Income. Restructuring liabilities have been classified as a component of other current and other noncurrent liabilities on the Consolidated Balance Sheet.
Accelerate 2020
During the third quarter of 2018, we formally commenced a restructuring plan Accelerate 2020 (“the Plan”), to leverage technology and system investments and organizational changes. During the first quarter of 2019, we raised our goals for the Plan to further simplify and automate processes and tasks, reduce complexity and management layers, consolidated facilitates and focus on key long-term growth areas by further leveraging technology and structural improvements. We expect that the restructuring activities will be completed by the end of 2020, with total anticipated costs of $260 million ($190 million after tax), or $0.65 per diluted share, over this period of time. 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.
We recorded restructuring charges of $28.8 million ($19.7 million after tax), or $0.07 per diluted share and $106.8 million ($79.2 million after tax), or $0.27 per diluted share in the third quarter and first nine months of 2019, respectively. The liability related to the Plan was $97.7 million as of the end of the third quarter of 2019. We have recorded $211.4 million ($158.8 million after tax), or $0.54 per diluted share, of cumulative restructuring charges under the Plan. The majority of the pretax charges represent net cash expenditures which are expected to be paid over a period of a few months to several quarters and continues to be funded from operating activities.
The Plan has delivered $80 million of cumulative cost savings with estimated annual cost savings of $325 million by 2021.
35
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 | 93.7 | 0.1 | 13.0 | 106.8 | |||||||||||||
Net cash payments |
| (61.6) | 0.4 | (10.8) | (72.0) | ||||||||||||
Non-cash charges |
| - | (0.5) | - | (0.5) | ||||||||||||
Effect of foreign currency translation |
| (0.5) | - | - | (0.5) | ||||||||||||
Restructuring liability, September 30, 2019 | $ | 92.4 | $ | - | $ | 5.3 | $ | 97.7 |
Other Restructuring Activities
During third quarter of 2019, we incurred restructuring charges of $2.7 million ($2.2 million after tax), or less than $0.01 per diluted share related to an immaterial restructuring plan. The charges are comprised of facility closure costs, including asset disposals and consulting fees.
Prior to 2018, we engaged in a number of restructuring plans. During both the third quarter and first nine months of 2019, net restructuring gains related to prior year plans were $0.3 million ($0.2 million after tax), or less than $0.01 per diluted share. During the third quarter and first nine months of 2018, net restructuring gains related to prior year plans were $0.4 million ($0.3 million after tax), or less than $0.01 and $0.9 million ($0.6 million after tax) or less than $0.01 per diluted share. The gains recorded were due to finalizing estimates upon completion of projects. The restructuring liability balance for all plans commencing prior to 2018 was $9.6 million and $14.9 million as of September 30, 2019 and December 31, 2018, respectively. The reduction in liability was driven primarily by severance payments. The remaining liability is 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 2019 related to restructuring plans commencing prior to 2018 were $4.8 million.
Upstream Energy spin-off
During the first quarter of 2019, we announced our intention to pursue a plan to separate and spin-off the Upstream business of our Global Energy segment (the Upstream Business). The charges reported in special (gains) and charges on the Consolidated Statement of Income include $29.7 million ($24.0 million after tax) or $0.08 per diluted share and $48.5 million ($39.7 million after tax) or $0.14 per diluted share in the third quarter and first nine months of 2019, respectively. The charges are primarily related to professional fees to support the separation.
Acquisition and integration related costs
Acquisition and integration costs reported in special (gains) and charges on the Consolidated Statement of Income include $2.0 million ($1.5 million after tax) or less than $0.01 per diluted share, and $4.9 million ($3.6 million after tax) or $0.01 per diluted share, in the third quarter and first nine months of 2019, respectively. Charges are related to Bioquell PLC (“Bioquell”) and the Laboratoires Anios (“Anios”) acquisitions and consist of integration costs, advisory and legal fees. Acquisition and integration costs reported in product and equipment cost of sales of $5.1 million ($3.8 million after tax) or $0.01 per diluted share and $6.6 million ($4.9 million after tax) or $0.02 per diluted share, respectively, on the Consolidated Statement of Income in the third quarter and first nine months of 2019 relate to the recognition of fair value step-up in the Bioquell inventory and severance related to the closure of a facility. We also incurred $0.2 million ($0.1 million after tax) or less than $0.01 per diluted share, of interest expense in the first nine months of 2019.
Acquisition and integration costs reported in special (gains) and charges on the Consolidated Statement of Income include $2.4 million ($1.6 million after tax) or $0.01 per diluted share and $4.7 million ($3.3 million after tax) or $0.01 per diluted share, in the third quarter and first nine months of 2018, respectively. Charges are related to Anios integration costs, advisory and legal fees. Acquisition and integration gain reported in product and equipment cost of sales on the Consolidated Statement of Income in the third quarter of 2018 relate to changes in estimates related to an early lease exit.
36
Other
During the third quarter and first nine months of 2019, we recorded other special charges of $3.7 million ($2.7 million after tax) or less than $0.01 per diluted share and $4.2 million ($1.5 million gain after tax) or less than $0.01 per diluted share, respectively, which primarily related to legal charges partially offset by a litigation settlement.
During the third quarter and first nine months of 2018, we recorded other special charges of $0.1 million and $26.7 million, respectively, which primarily consisted of a $25.0 million ($18.9 million after tax) or $0.06 per diluted share, commitment to the Ecolab Foundation in response to the new U.S. tax law. Other charges were minimal in both third quarter and first nine months of 2018. These charges have been included as a component of special (gains) and charges on the Consolidated Statement of Income. Other special gains reported in product and equipment cost of sales on the Consolidated Statement of Income in the third quarter of 2018 of $2.2 million ($1.7 million after tax) or $0.01 per diluted share, related to changes in estimates for an inventory LIFO reserve.
Operating Income and Operating Income Margin
Third Quarter Ended | Nine Months Ended | |||||||||||||||||||
September 30 | September 30 | |||||||||||||||||||
(millions) | 2019 |
| 2018 | Change | 2019 |
| 2018 | Change | ||||||||||||
Reported GAAP operating income | $587.6 | $516.2 | 14 | % | $1,453.4 | $1,365.1 | 6 | % | ||||||||||||
Special (gains) and charges |
| 71.7 |
| 79.2 |
| 173.4 |
| 117.2 | ||||||||||||
Non-GAAP adjusted operating income |
| 659.3 |
| 595.4 | 11 | % |
| 1,626.8 |
| 1,482.3 | 10 | % | ||||||||
Effect of foreign currency translation |
| 6.4 |
| (1.2) |
| 11.9 |
| (23.8) | ||||||||||||
Non-GAAP adjusted fixed currency operating income | $665.7 | $594.2 | 12 | % | $1,638.7 | $1,458.5 | 12 | % | ||||||||||||
Third Quarter Ended | Nine Months Ended | |||||||||||||||||||
September 30 | September 30 | |||||||||||||||||||
(percent) | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||
Reported GAAP operating income margin | 15.4 | % | 13.8 | % | 13.1 | % | 12.5 | % | ||||||||||||
Non-GAAP adjusted operating income margin | 17.3 | % | 15.9 | % | 14.7 | % | 13.6 | % | ||||||||||||
Non-GAAP adjusted fixed currency operating income margin | 17.3 | % | 15.9 | % | 14.7 | % | 13.6 | % |
Our operating income and corresponding operating income margin are shown in the previous tables. Operating income margin is defined as operating income divided by net sales.
Our reported operating income increased 14% and 6% in the third quarter and first nine months of 2019, respectively, versus the comparable periods of 2018. Our reported operating income for 2019 and 2018 was impacted by special (gains) and charges; excluding the impact of special (gains) and charges from 2019 and 2018 reported results, our adjusted operating income increased 11% and 10% in the third quarter and first nine months of 2019, respectively.
As shown in the previous table, foreign currency had a 1% impact on adjusted operating income growth for the third quarter and 2% impact on the first nine months of 2019.
Other (Income) Expense
Other income was $20.8 million and $21.0 million in the third quarter of 2019 and 2018, respectively. Other income was $62.9 million and $60.0 million in the first nine months of 2019 and 2018, respectively. Other income was consistent for the third quarter and the first nine months of 2019 and 2018, reflecting the return on pension assets and non-service costs of our pension obligations.
Interest Expense, Net
Third Quarter Ended | Nine Months Ended | |||||||||||||||||||
September 30 | September 30 | |||||||||||||||||||
(millions) | 2019 |
| 2018 | Change | 2019 |
| 2018 | Change | ||||||||||||
Reported GAAP interest expense, net | $46.1 | $55.7 | (17) | % | $145.0 | $168.4 | (14) | % | ||||||||||||
Special (gains) and charges | - |
| - | 0.2 |
| - | ||||||||||||||
Non-GAAP adjusted interest expense, net | $46.1 | $55.7 | (17) | % | $144.8 | $168.4 | (14) | % |
Reported net interest expense was $46.1 million and $55.7 million in the third quarter of 2019 and 2018, respectively. Reported net interest expense in the first nine months of 2019 and 2018 was $145.0 million and $168.4 million, respectively. The decrease in net interest expense when comparing 2019 against 2018 was driven primarily by higher interest income and lower outstanding debt.
37
Provision for Income Taxes
The following table provides a summary of our tax rate:
Third Quarter Ended | Nine Months Ended | |||||||||||
September 30 | September 30 | |||||||||||
(percent) |
| 2019 | 2018 |
| 2019 | 2018 | ||||||
Reported GAAP tax rate | 16.5 | % | 9.0 | % | 16.7 | % | 17.2 | % | ||||
Tax rate impact of: | ||||||||||||
The Tax Act | 0.7 | (0.9) | 0.2 | (2.5) | ||||||||
Special (gains) and charges |
| 1.0 | 2.1 | 0.9 | 0.6 |
| ||||||
Discrete tax items |
| 1.9 | 9.3 | 2.6 | 5.1 |
| ||||||
Non-GAAP adjusted tax rate |
| 20.1 | % | 19.5 | % |
| 20.4 | % | 20.4 | % |
Our reported tax rate was 16.5% and 9.0% for the third quarter of 2019 and 2018, respectively, and 16.7% and 17.2% for the first nine months of 2019 and 2018, respectively. The change in our tax rate for the third quarter and first nine months of 2019 versus the comparable periods of 2018 was driven primarily by discrete tax items, special (gains) and charges, and tax planning. The tax impact of special (gains) and charges and discrete tax items will likely continue to impact comparability of our reported tax rate in the future as amounts included in special (gains) and charges are derived from tax jurisdictions with rates that vary from our effective tax rate, and discrete tax items are not necessarily consistent across periods. Our tax rate is based on our interpretations of existing tax rules; potential future guidance including regulations not yet issued could impact the future tax rate.
We recognized total net tax benefits related to discrete tax items of $16.5 million and $43.2 million in the third quarter and first nine months of 2019, respectively. Share-based compensation excess tax benefit contributed $8.2 million and $40.0 million in the third quarter and first nine months of 2019, respectively. We also recognized benefits of $4.3 million and $3.1 million in the third quarter and first nine months of 2019, respectively, due to finalization of certain estimates due to the 2018 U.S. federal tax return, for the one-time transition tax imposed by the Tax Cuts and Jobs Act (the “Act”). Additionally, we recognized benefit of $3.6 million related to foreign audit settlements and related reserve releases during the quarter. The remaining discrete benefit was primarily due to changes in estimates in non-U.S. jurisdictions and from the 2018 U.S. federal tax return.
We recorded a net discrete tax benefit of $47.2 million and $35.2 million in the third quarter and first nine months of 2018. In the third quarter of 2018, we filed U.S. federal tax returns which resulted in favorable adjustments of $39.9 million related to changes in estimates and an IRS approved method change. We recorded discrete tax expense of $4.8 million and $34.2 million in the third quarter and first nine months of 2018, respectively, for the one-time transition tax due to issuance of technical guidance during the respective quarters. Discrete tax items include excess tax benefits related to share-based compensation of $10.7 million and $23.5 million during the third quarter and first nine months of 2018. The remaining discrete tax benefits related to changes in reserves in non-U.S. jurisdictions and international changes in estimates that were recorded in the third quarter and first nine months of 2018.
The slight increase in the 2019 third quarter adjusted tax rate compared to 2018 was primarily due to increase in tax expense due to U.S. Tax Reform and the timing of tax planning.
Net Income Attributable to Ecolab
Third Quarter Ended | Nine Months Ended | |||||||||||||||||||
September 30 | September 30 | |||||||||||||||||||
(millions) |
| 2019 |
| 2018 |
| Change |
| 2019 |
| 2018 |
| Change | ||||||||
Reported GAAP net income attributable to Ecolab | $464.2 | $435.4 | 7 | % | $1,129.3 | $1,034.0 | 9 | % | ||||||||||||
Adjustments: | ||||||||||||||||||||
Special (gains) and charges, after tax |
| 53.7 | 60.1 | 131.1 | 88.7 | |||||||||||||||
Discrete tax net expense (benefit) |
| (16.5) | (47.2) | (43.2) | (35.2) | |||||||||||||||
Non-GAAP adjusted net income attributable to Ecolab | $501.4 | $448.3 | 12 | % | $1,217.2 | $1,087.5 | 12 | % |
Diluted EPS
Third Quarter Ended | Nine Months Ended | |||||||||||||||||||
September 30 | September 30 | |||||||||||||||||||
(dollars) |
| 2019 |
| 2018 |
| Change |
| 2019 |
| 2018 |
| Change | ||||||||
Reported GAAP diluted EPS | $1.59 | $ 1.48 | 7 | % | $3.86 | $ 3.53 | 9 | % | ||||||||||||
Adjustments: | ||||||||||||||||||||
Special (gains) and charges |
| 0.18 | 0.20 | 0.45 | 0.30 | |||||||||||||||
Discrete tax net expense (benefit) |
| (0.06) | (0.16) | (0.15) | (0.12) | |||||||||||||||
Non-GAAP adjusted diluted EPS | $1.71 | $ 1.53 | 12 | % | $4.16 | $ 3.71 | 12 | % |
Per share amounts in the above tables do not necessary sum due to rounding.
Currency translation had an unfavorable impact of approximately $0.02 and $0.11 per share on diluted EPS for the third quarter and first nine months of 2019, when compared to the third quarter and first nine months of 2018, respectively.
38
SEGMENT PERFORMANCE
The non-U.S. dollar functional international amounts included within our reportable segments are based on translation into U.S. dollars at the fixed currency exchange rates used by management for 2019. The difference between the fixed currency exchange rates and the actual currency exchange rates is reported as “effect of foreign currency translation” in the following tables. All other accounting policies of the reportable segments are consistent with U.S. GAAP and the accounting policies described in Note 2 of our Annual Report on Form 10-K for the year ended December 31, 2018. Additional information about our reportable segments is included in Note 16.
Fixed currency net sales and operating income for the third quarter and first nine months of 2019 and 2018 for our reportable segments are shown in the following tables.
Net Sales | Third Quarter Ended | Nine Months Ended | ||||||||||||||||||||
September 30 | September 30 | |||||||||||||||||||||
(millions) |
| 2019 |
| 2018 | Change |
| 2019 |
| 2018 | Change | ||||||||||||
Global Industrial | $1,418.9 |
| $1,348.5 |
| 5 | % | $4,102.0 |
| $3,828.9 |
| 7 | % | ||||||||||
Global Institutional |
| 1,357.1 |
| 1,304.9 | 4 |
| 3,895.9 |
| 3,769.4 | 3 | ||||||||||||
Global Energy |
| 836.5 |
| 859.4 | (3) |
| 2,488.6 |
| 2,516.9 | (1) | ||||||||||||
Other |
| 242.8 |
| 227.4 | 7 |
| 680.1 |
| 636.6 | 7 | ||||||||||||
Subtotal at fixed currency |
| 3,855.3 |
| 3,740.2 | 3 |
| 11,166.6 |
| 10,751.8 | 4 | ||||||||||||
Effect of foreign currency translation |
| (37.4) |
| 7.0 |
| (83.9) |
| 155.9 | ||||||||||||||
Consolidated reported GAAP net sales |
| $3,817.9 | $3,747.2 | 2 | % |
| $11,082.7 | $10,907.7 | 2 | % | ||||||||||||
Operating Income | Third Quarter Ended | Nine Months Ended | ||||||||||||||||||||
September 30 | September 30 | |||||||||||||||||||||
(millions) | 2019 |
| 2018 | Change | 2019 |
| 2018 | Change | ||||||||||||||
Global Industrial |
|
| $240.1 |
| $212.8 |
| 13 | % |
| $596.3 |
| $497.6 |
| 20 | % | |||||||
Global Institutional |
| 313.0 |
| 286.6 |
| 9 | 767.8 |
| 729.3 |
| 5 | |||||||||||
Global Energy |
| 103.6 |
| 88.9 |
| 17 | 270.9 |
| 243.9 |
| 11 | |||||||||||
Other |
| 48.8 |
| 48.0 |
| 2 | 123.1 |
| 114.0 |
| 8 | |||||||||||
Corporate |
| (111.5) |
| (121.3) | (292.8) |
| (243.5) | |||||||||||||||
Subtotal at fixed currency |
| 594.0 |
| 515.0 |
| 15 | 1,465.3 |
| 1,341.3 |
| 9 | |||||||||||
Effect of foreign currency translation |
| (6.4) |
| 1.2 | (11.9) |
| 23.8 | |||||||||||||||
Consolidated reported GAAP operating income |
|
| $587.6 | $516.2 |
| 14 | % |
| $1,453.4 | $1,365.1 |
| 6 | % |
39
The following tables reconcile the impact of acquisitions and divestitures within our reportable segments.
Third Quarter Ended | ||||||||||||
September 30 | ||||||||||||
Net Sales | 2019 | 2018 | ||||||||||
(millions) |
| Fixed | Impact of Acquisitions and Divestitures | Acquisition Adjusted | Fixed | Impact of Acquisitions and Divestitures | Acquisition Adjusted | |||||
Global Industrial | $1,418.9 | $(25.9) | $1,393.0 | $1,348.5 | $(1.3) | $1,347.2 | ||||||
Global Institutional |
| 1,357.1 | (9.9) | 1,347.2 | 1,304.9 | - | 1,304.9 | |||||
Global Energy |
| 836.5 | - | 836.5 | 859.4 | - | 859.4 | |||||
Other |
| 242.8 | (0.8) | 242.0 | 227.4 | (0.2) | 227.2 | |||||
Subtotal at fixed currency |
| 3,855.3 | (36.6) | 3,818.7 | 3,740.2 | (1.5) | 3,738.7 | |||||
Effect of foreign currency translation |
| (37.4) | 7.0 | |||||||||
Total reported net sales |
| $3,817.9 | $3,747.2 | |||||||||
Operating Income | 2019 | 2018 | ||||||||||
(millions) |
| Fixed | Impact of Acquisitions and Divestitures | Acquisition Adjusted | Fixed | Impact of Acquisitions and Divestitures | Acquisition Adjusted | |||||
Global Industrial | $240.1 | $0.8 | $240.9 | $212.8 | $(0.8) | $212.0 | ||||||
Global Institutional |
| 313.0 | (4.7) | 308.3 | 286.6 | - | 286.6 | |||||
Global Energy |
| 103.6 | 0.1 | 103.7 | 88.9 | 0.2 | 89.1 | |||||
Other |
| 48.8 | (0.1) | 48.7 | 48.0 | - | 48.0 | |||||
Corporate |
| (39.8) | - | (39.8) | (42.1) | - | (42.1) | |||||
Non-GAAP adjusted fixed currency operating income |
| 665.7 | (3.9) | 661.8 | 594.2 | (0.6) | 593.6 | |||||
Special (gains) and charges |
| 71.7 | 79.2 | |||||||||
Subtotal at fixed currency |
| 594.0 | 515.0 | |||||||||
Effect of foreign currency translation |
| (6.4) | 1.2 | |||||||||
Total reported operating income |
| $587.6 | $516.2 | |||||||||
Nine Months Ended | ||||||||||||
September 30 | ||||||||||||
Net Sales | 2019 | 2018 | ||||||||||
(millions) |
| Fixed | Impact of Acquisitions and Divestitures | Acquisition Adjusted | Fixed | Impact of Acquisitions and Divestitures | Acquisition Adjusted | |||||
Global Industrial | $4,102.0 | $(75.0) | $4,027.0 | $3,828.9 | $(10.6) | $3,818.3 | ||||||
Global Institutional |
| 3,895.9 | (16.4) | 3,879.5 | 3,769.4 | - | 3,769.4 | |||||
Global Energy |
| 2,488.6 | (0.1) | 2,488.5 | 2,516.9 | (2.5) | 2,514.4 | |||||
Other |
| 680.1 | (0.9) | 679.2 | 636.6 | (0.2) | 636.4 | |||||
Subtotal at fixed currency |
| 11,166.6 | (92.4) | 11,074.2 | 10,751.8 | (13.3) | 10,738.5 | |||||
Effect of foreign currency translation |
| (83.9) | 155.9 | |||||||||
Total reported net sales |
| $11,082.7 | $10,907.7 | |||||||||
Operating Income | 2019 | 2018 | ||||||||||
(millions) |
| Fixed | Impact of Acquisitions and Divestitures | Acquisition Adjusted | Fixed | Impact of Acquisitions and Divestitures | Acquisition Adjusted | |||||
Global Industrial | $596.3 | $3.1 | $599.4 | $497.6 | $(2.4) | $495.2 | ||||||
Global Institutional |
| 767.8 | 1.8 | 769.6 | 729.3 | - | 729.3 | |||||
Global Energy |
| 270.9 | 0.1 | 271.0 | 243.9 | 2.3 | 246.2 | |||||
Other |
| 123.1 | (0.2) | 122.9 | 114.0 | (0.1) | 113.9 | |||||
Corporate |
| (119.4) | - | (119.4) | (126.3) | - | (126.3) | |||||
Non-GAAP adjusted fixed currency operating income |
| 1,638.7 | 4.8 | 1,643.5 | 1,458.5 | (0.2) | 1,458.3 | |||||
Special (gains) and charges |
| 173.4 | 117.2 | |||||||||
Subtotal at fixed currency |
| 1,465.3 | 1,341.3 | |||||||||
Effect of foreign currency translation |
| (11.9) | 23.8 | |||||||||
Total reported operating income |
| $1,453.4 | $1,365.1 |
40
Unless otherwise noted, the following segment performance commentary compares the third quarter and first nine months of 2019 against the third quarter and first nine months of 2018.
Global Industrial
Third Quarter Ended | Nine Months Ended | |||||||||||||||||
September 30 | September 30 | |||||||||||||||||
| 2019 | 2018 |
| 2019 | 2018 |
| ||||||||||||
Sales at fixed currency (millions) | $1,418.9 | $1,348.5 | $4,102.0 | $3,828.9 | ||||||||||||||
Sales at public currency (millions) | 1,399.8 | 1,352.3 | 4,061.9 | 3,905.5 | ||||||||||||||
Volume |
| 0 | % |
|
| 2 | % |
| ||||||||||
Price changes |
| 3 | % |
|
| 3 | % |
| ||||||||||
Acquisition adjusted fixed currency sales change | 3 | % | 5 | % | ||||||||||||||
Acquisitions and divestitures |
| 2 | % |
|
| 2 | % |
| ||||||||||
Fixed currency sales change |
| 5 | % |
|
| 7 | % |
| ||||||||||
Foreign currency translation | (2) | % | (3) | % | ||||||||||||||
Public currency sales change |
| 4 | % |
|
| 4 | % |
| ||||||||||
Operating income at fixed currency (millions) | $240.1 | $212.8 | $596.3 | $497.6 | ||||||||||||||
Operating income at public currency (millions) | 236.6 | 213.8 | 590.5 | 511.6 | ||||||||||||||
Fixed currency operating income change | 13 | % | 20 | % | ||||||||||||||
Fixed currency operating income margin |
| 16.9 | % |
| 15.8 | % |
| 14.5 | % |
| 13.0 | % | ||||||
Acquisition adjusted fixed currency operating income change |
| 14 | % |
|
| 21 | % |
| ||||||||||
Acquisition adjusted fixed currency operating income margin |
| 17.3 | % |
| 15.7 | % |
| 14.9 | % |
| 13.0 | % | ||||||
Public currency operating income change | 11 | % | 15 | % | ||||||||||||||
Percentages in the above table do not necessarily sum due to rounding.
Net Sales
Fixed currency sales for Global Industrial increased in both the third quarter and first nine months of 2019, benefitting from pricing and volume gains. In the third quarter and first nine months, all regions showed sales growth.
At an operating segment level, Water fixed currency sales increased 5% in the third quarter and 7% in the first nine months of 2019. Light industry sales growth was led by innovative technology and service offerings. Heavy industry sales continued to grow, showing strong international results. Mining sales gains were led by new business wins. Food & Beverage fixed currency sales increased 8% (4% acquisition adjusted) in the third quarter of 2019 and 9% (6% acquisition adjusted) in the first nine months of 2019, benefiting from new business wins and pricing, which more than offset generally flat industry trends. Growth was led by the dairy and food businesses. Paper fixed currency sales decreased 2% in the third quarter of 2019 and increased 2% in the first nine months of 2019. Textile Care fixed currency sales increased 2% in the third quarter and first nine months of 2019. Life Sciences fixed currency sales increased 32% (7% acquisition adjusted) in the third quarter of 2019 and 34% (11% acquisition adjusted) in the first nine months of 2019 as we realized good growth from business wins and pricing in the pharmaceutical and personal care markets.
Operating Income
Fixed currency operating income and fixed currency operating income margins increased for Global Industrial in the third quarter and first nine months of 2019. Acquisitions had negative impact on the fixed currency operating income and a negative impact on fixed currency operating income margins.
Acquisition adjusted fixed currency operating income margins increased 1.6 and 1.9 percentage points during the third quarter and first nine months of 2019, respectively, and were positively impacted approximately 3.5 and 3.6 percentage points by pricing and cost efficiency initiatives, which more than offset the approximately 1.7 and 1.0 percentage point margin impact of investments in the business during the third quarter and first nine months of 2019, respectively.
41
Global Institutional
Third Quarter Ended | Nine Months Ended | |||||||||||||||||
September 30 | September 30 | |||||||||||||||||
| 2019 | 2018 |
| 2019 | 2018 |
| ||||||||||||
Sales at fixed currency (millions) | $1,357.1 | $1,304.9 | $3,895.9 | $3,769.4 | ||||||||||||||
Sales at public currency (millions) | 1,344.6 | 1,305.1 | 3,864.9 | 3,808.0 | ||||||||||||||
Volume |
| 1 | % |
|
| 1 | % |
| ||||||||||
Price changes |
| 2 | % |
|
| 2 | % |
| ||||||||||
Acquisition adjusted fixed currency sales change | 3 | % | 3 | % | ||||||||||||||
Acquisitions and divestitures |
| 1 | % |
|
| 0 | % |
| ||||||||||
Fixed currency sales change |
| 4 | % |
|
| 3 | % |
| ||||||||||
Foreign currency translation | (1) | % | (2) | % | ||||||||||||||
Public currency sales change |
| 3 | % |
|
| 1 | % |
| ||||||||||
Operating income at fixed currency (millions) | $313.0 | $286.6 | $767.8 | $729.3 | ||||||||||||||
Operating income at public currency (millions) | 310.9 | 286.5 | 763.5 | 733.8 | ||||||||||||||
Fixed currency operating income change | 9 | % | 5 | % | ||||||||||||||
Fixed currency operating income margin |
| 23.1 | % |
| 22.0 | % |
| 19.7 | % |
| 19.3 | % | ||||||
Acquisition adjusted fixed currency operating income change |
| 8 | % |
|
| 6 | % |
| ||||||||||
Acquisition adjusted fixed currency operating income margin |
| 22.9 | % |
| 22.0 | % |
| 19.8 | % |
| 19.3 | % | ||||||
Public currency operating income change | 9 | % | 4 | % | ||||||||||||||
Percentages in the above table do not necessarily sum due to rounding.
Net Sales
Fixed currency sales for Global Institutional increased in the third quarter and first nine months of 2019, driven by pricing and volume gains. At a regional level, the third quarter fixed currency sales increased in all regions.
At an operating segment level, Institutional fixed currency sales increased 2% in the third quarter and first nine months of 2019, reflecting the exit of low margin business. Global lodging demand continued to show moderate growth while full service restaurant industry foot traffic remained weak. Specialty fixed currency sales increased 12% (9% acquisition adjusted) and 8% (7% acquisition adjusted) in the third quarter and first nine months of 2019, led primarily from strong ongoing business and program wins. Healthcare fixed currency sales increased 3% in both the third quarter and first nine months of 2019, as strong global program growth was partially offset by decreased sales of the less differentiated non-program sales and business exits.
Operating Income
Fixed currency operating income and fixed currency operating income margins for our Global Institutional segment increased in both the third quarter and first nine months of 2019.
Acquisition adjusted fixed currency operating income margins increased 0.9 and 0.5 percentage points during the third quarter and first nine months of 2019 and were positively impacted approximately 2.0 and 2.0 percentage points from improved pricing and cost efficiency initiatives during the third quarter and first nine months of 2019, respectively. Investments in the business negatively impacted approximately 0.9 and 0.6 percentage points during the third quarter and first nine months of 2019, respectively.
42
Global Energy
Third Quarter Ended | Nine Months Ended | |||||||||||||||||
September 30 | September 30 | |||||||||||||||||
| 2019 | 2018 |
| 2019 | 2018 |
| ||||||||||||
Sales at fixed currency (millions) | $836.5 | $859.4 | $2,488.6 | $2,516.9 | ||||||||||||||
Sales at public currency (millions) | 832.7 | 862.2 | 2,479.5 | 2,550.3 | ||||||||||||||
Volume |
| (4) | % |
|
| (3) | % |
| ||||||||||
Price changes |
| 1 | % |
|
| 2 | % |
| ||||||||||
Acquisition adjusted fixed currency sales change | (3) | % | (1) | % | ||||||||||||||
Acquisitions and divestitures |
| 0 | % |
|
| (0) | % |
| ||||||||||
Fixed currency sales change |
| (3) | % |
|
| (1) | % |
| ||||||||||
Foreign currency translation | (1) | % | (2) | % | ||||||||||||||
Public currency sales change |
| (3) | % |
|
| (3) | % |
| ||||||||||
Operating income at fixed currency (millions) | $103.6 | $88.9 | $270.9 | $243.9 | ||||||||||||||
Operating income at public currency (millions) | 102.7 | 89.2 | 268.9 | 249.5 | ||||||||||||||
Fixed currency operating income change | 17 | % | 11 | % | ||||||||||||||
Fixed currency operating income margin |
| 12.4 | % |
| 10.3 | % |
| 10.9 | % |
| 9.7 | % | ||||||
Acquisition adjusted fixed currency operating income change |
| 16 | % |
|
| 10 | % |
| ||||||||||
Acquisition adjusted fixed currency operating income margin |
| 12.4 | % |
| 10.4 | % |
| 10.9 | % |
| 9.8 | % | ||||||
Public currency operating income change | 15 | % | 8 | % | ||||||||||||||
Percentages in the above table do not necessarily sum due to rounding.
Net Sales
Fixed currency sales for Global Energy decreased in the third quarter and first nine months of 2019. Declines in the well stimulation business that were due to the reduced North America industry activity was partially offset by good growth in production sales. Downstream sales were modestly lower due to the timing of new business start-ups and customer maintenance work.
Operating Income
Fixed currency operating income for Global Energy increased during both the third quarter and first nine months of 2019. Acquisitions had a positive impact on the fixed currency operating income for the third quarter and first nine months of 2019, respectively, with minimal impact on the fixed currency operating income margins during the third quarter and first nine months of 2019.
Acquisition adjusted fixed currency operating income margins increased 2.0 and 1.1 percentage points during the third quarter and first nine months of 2019. Pricing, cost efficiency initiatives and lower delivered product costs favorably impacted margins by approximately 4.0 and 2.9 percentage points during the third quarter and first nine months of 2019, respectively. These gains more than offset a negative impact of approximately 1.6 and 1.3 percentage points related to lower sales volume leverage during the third quarter and first nine months of 2019, respectively.
43
Other
Third Quarter Ended | Nine Months Ended | |||||||||||||||||
September 30 | September 30 | |||||||||||||||||
| 2019 | 2018 |
| 2019 | 2018 |
| ||||||||||||
Sales at fixed currency (millions) | $242.8 | $227.4 | $680.1 | $636.6 | ||||||||||||||
Sales at public currency (millions) | 240.8 | 227.6 | 676.4 | 643.9 | ||||||||||||||
Volume |
| 4 | % |
|
| 5 | % |
| ||||||||||
Price changes |
| 2 | % |
|
| 2 | % |
| ||||||||||
Acquisition adjusted fixed currency sales change | 7 | % | 7 | % | ||||||||||||||
Acquisitions and divestitures |
| (0) | % |
|
| (0) | % |
| ||||||||||
Fixed currency sales change |
| 7 | % |
|
| 7 | % |
| ||||||||||
Foreign currency translation | (1) | % | (2) | % | ||||||||||||||
Public currency sales change |
| 6 | % |
|
| 5 | % |
| ||||||||||
Operating income at fixed currency (millions) | $48.8 | $48.0 | $123.1 | $114.0 | ||||||||||||||
Operating income at public currency (millions) | 48.5 | 48.0 | 122.5 | 114.9 | ||||||||||||||
Fixed currency operating income change | 2 | % | 8 | % | ||||||||||||||
Fixed currency operating income margin |
| 20.1 | % |
| 21.1 | % |
| 18.1 | % |
| 17.9 | % | ||||||
Acquisition adjusted fixed currency operating income change |
| 1 | % |
|
| 8 | % |
| ||||||||||
Acquisition adjusted fixed currency operating income margin |
| 20.1 | % |
| 21.1 | % |
| 18.1 | % |
| 17.9 | % | ||||||
Public currency operating income change | 1 | % | 7 | % | ||||||||||||||
Percentages in the above table do not necessarily sum due to rounding.
Net Sales
Fixed currency sales for Other increased in both the third quarter and first nine months of 2019 with strong gains in both Pest Elimination and Colloidal Technologies. At a regional level, the third quarter and first nine months of 2019 sales results showed good growth across all major regions.
At an operating segment level, Pest Elimination fixed currency sales increased 6% in the third quarter of 2019 and 7% (6% acquisition adjusted) in the first nine months of 2019 with sales growth in all major regions. Colloidal Technologies Group fixed currency sales increased 11% in the third quarter and 9% in the first nine months of 2019.
Operating Income
Acquisition adjusted fixed currency operating income margins for Other decreased 1.0 and increased 0.2 percentage points during the third quarter and first nine months of 2019, respectively. Pricing and sales volume favorably impacted margins by approximately 2.5 and 2.7 percentage points for the third quarter and first nine months of 2019, respectively. Field investments negatively impacted margins by approximately 2.9 and 1.8 percentage points for the third quarter and first nine months of 2019, respectively.
Corporate
Consistent with our internal management reporting, Corporate amounts in the table on page 39 include intangible asset amortization specifically from the Nalco merger and special (gains) and charges that are not allocated to our reportable segments. Items included within special (gains) and charges are shown in the table on page 35.
44
FINANCIAL POSITION, CASH FLOWS AND LIQUIDITY
Financial Position
Total assets were $20.8 billion as of September 30, 2019 compared to total assets of $20.1 billion as of December 31, 2018.
Total liabilities were $12.2 billion as of September 30, 2019 compared to total liabilities of $12.0 billion as of December 31, 2018. Total debt was $6.7 billion as of September 30, 2019 and $7.0 billion as of December 31, 2018. See further discussion of our debt activity within the “Liquidity and Capital Resources” section of this MD&A.
Our net debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) is shown in the following table. EBITDA is a non-GAAP measures discussed further in the “Non-GAAP Financial Measures” section of this MD&A.
The inputs to EBITDA reflect the trailing twelve months of activity for the period presented.
| 2019 |
| 2018 | |||||
(ratio) | ||||||||
Net debt to EBITDA |
| 2.1 |
| 2.3 | ||||
(millions) |
| |||||||
Total debt | $6,746.0 | $7,104.2 | ||||||
Cash |
| 135.9 | 203.6 | |||||
Net debt | $6,610.1 | $6,900.6 | ||||||
Net income including noncontrolling interest | $1,542.1 | $1,608.5 | ||||||
Provision for income taxes |
| 377.1 | 196.4 | |||||
Interest expense, net |
| 198.9 | 246.2 | |||||
Depreciation |
| 648.1 | 610.2 | |||||
Amortization |
| 318.3 | 318.0 | |||||
EBITDA |
| $3,084.5 | $2,979.3 | |||||
Cash Flows
Operating Activities
Nine Months Ended | ||||||||||||
September 30 | ||||||||||||
(millions) |
| 2019 | 2018 |
| Change | |||||||
Cash provided by operating activities | $1,599.7 | $1,450.4 | $149.3 |
We continue to generate strong cash flow from operations, allowing us to fund our ongoing operations, acquisitions, investments in the business and pension obligations along with returning cash to our shareholders through dividend payments and share repurchases.
Comparability of cash generated from operating activities was impacted by fluctuations in accounts receivable, inventories and accounts payable (“working capital”). The cash flow impact from working capital accounts was driven by changes in sales volumes and timing of collections; timing of purchases and production usage levels; and volume of purchases and timing of payments.
45
Investing Activities
Nine Months Ended | ||||||||||||
September 30 | ||||||||||||
(millions) |
| 2019 | 2018 |
| Change | |||||||
Cash used for investing activities | $(929.2) | $(648.9) | $(280.3) |
Cash used for investing activities is primarily impacted by the timing of business acquisitions and dispositions as well as capital investments in the business.
Total cash paid for acquisitions, net of cash acquired and net of cash received from dispositions, during the first nine months in 2019 and 2018, was $380 million and $68 million, respectively. Our acquisitions and divestitures across 2019 and 2018 are discussed further in Note 3. We continue to target strategic business acquisitions which complement our growth strategy and expect to continue to make capital investments and acquisitions in the future to support our long-term growth.
We continue to make capital investments in the business, including merchandising and customer equipment and manufacturing facilities. Total capital expenditures were $550 million and $634 million in the first nine months of 2019 and 2018, respectively.
Financing Activities
Nine Months Ended | ||||||||||||
September 30 | ||||||||||||
(millions) |
| 2019 | 2018 |
| Change | |||||||
Cash used for financing activities | $(847.5) | $(819.5) | $(28.0) |
Our cash flows from financing activities primarily reflect the issuances and repayment of debt, common stock repurchases, proceeds from common stock issuances related to our equity incentive programs, dividend payments and acquisition-related contingent considerations.
Shares are repurchased for the purpose of partially offsetting the dilutive effect of our equity compensation plans and stock issued in acquisitions, to manage our capital structure and to efficiently return capital to shareholders. We repurchased a total of $349 million and $321 million of shares in the first nine months of 2019 and 2018, respectively. Cash proceeds and tax benefits from stock option exercises provide a portion of the funding for repurchase activity.
The impact on financing cash flows of commercial paper and notes payable issuances and long-term debt borrowings and repayments are shown in the following table:
Nine Months Ended | ||||||||||||
September 30 | ||||||||||||
(millions) | 2019 | 2018 |
| Change | ||||||||
Net issuances of commercial paper and notes payable |
| $149.5 | $115.7 | $33.8 | ||||||||
Long-term debt repayments | (400.6) | (301.8) | (98.8) |
46
Liquidity and Capital Resources
We currently expect to fund the cash requirements which are reasonably foreseeable for the next twelve months, including scheduled debt repayments, new investments in the business, share repurchases, dividend payments, possible business acquisitions and pension and postretirement contributions with cash from operating activities, and as needed, additional short-term and/or long-term borrowings. We continue to expect our operating cash flow to remain strong.
As of September 30, 2019, we had $136 million of cash and cash equivalents on hand, of which $77 million was held outside of the U.S.
As of September 30, 2019, we have a $2.0 billion multi-year credit facility which expires in November 2022. The credit facility has been established with a diverse syndicate of banks and supports our U.S. and Euro commercial paper programs. The maximum aggregate amount of commercial paper that may be issued under our U.S. commercial paper program and our Euro commercial paper program may not exceed $2.0 billion. At the end of the third quarter of 2019, we had $384 million (€358 million) of commercial paper outstanding under our Euro program and $75 million outstanding under our U.S. program. There were no borrowings under our credit facility as of September 30, 2019 or 2018. As of September 30, 2019, both programs were rated A-2 by Standard & Poor’s, P-2 by Moody’s and F-2 by Fitch. In October 2019, Fitch upgraded its rating of the programs to F-1.
Our long-term debt issuance and repayment activity through the first nine months of 2019 and 2018 is discussed in the Cash Flows – Financing Activities section of this MD&A.
We are in compliance with our debt covenants and believe we have sufficient borrowing capacity to meet our foreseeable operating activities, as needed.
The schedule of contractual obligations included in the Financial Position and Liquidity section of our Form 10-K for the year ended December 31, 2018 disclosed total notes payable and long-term debt due within one year of $577 million. As of September 30, 2019, the total notes payable and long-term debt due within one year decreased to $319 million. The commercial paper outstanding as of September 30, 2019 increased to $459 million. The commercial paper outstanding as of December 31, 2018 was $165 million.
In the third quarter of 2019 and 2018 we recorded a one-time transition tax expense of $4 million and $5 million, respectively. In the first nine months of 2019 and 2018 we recorded a one-time transition tax expense of $3 million and $34 million, respectively. The one-time transition tax was primarily due to the issuance of technical guidance during the quarter.
Our gross liability for uncertain tax positions was $38 million as of September 30, 2019 and $50 million as of December 31, 2018. We are not able to reasonably estimate the amount by which the liability will increase or decrease over time; however, at this time, we do not expect significant payments related to these obligations within the next year.
GLOBAL ECONOMIC ENVIRONMENT
Energy Markets
Approximately 22% of our sales are generated from our Global Energy segment, the results of which are subject to changes in the oil and gas commodity markets.
Our global footprint and broad business portfolio within the Global Energy segment, as well as our execution capabilities, are expected to provide the required resilience to outperform in the current market. As such, we continue to remain confident in the long-term growth prospects of the segment.
Global Economies
Approximately half of our sales are outside of the U.S. Our international operations subject us to changes in economic conditions and foreign currency exchange rates as well as political uncertainty in some countries which could impact future operating results.
Argentina has continued to experience negative economic trends, evidenced by multiple periods of increasing inflation rates, devaluation of the peso, and increasing borrowing rates. Argentina is classified as a highly inflationary economy in accordance with U.S. GAAP, and the U.S. dollar is the functional currency for our subsidiaries in Argentina. During the first nine months of 2019, sales in Argentina represented less than 1% of our consolidated sales. Assets held in Argentina at the end of the third quarter represented less than 1% of our consolidated assets.
Brexit Referendum
On March 29, 2017, the United Kingdom (“U.K.”) government gave formal notice to the European Union (“EU”) to begin the process of negotiating the U.K.’s exit (“Brexit”) from the EU. The effects of Brexit will depend on any agreements the U.K. makes to retain access to the EU markets either during a transitional period or more permanently. The negotiations might also impact various tax reliefs and exemptions that apply to transactions between the U.K. and EU. In the longer term, any impact from Brexit on our U.K. operations will depend, in part, on the outcome of tariff, trade, regulatory, and other negotiations. The Brexit deadline continues to be extended and we continue to monitor the status of tax law changes and tax treaty negotiations at the U.K. and EU. For the nine months ended September 30, 2019, net sales of our U.K. operations were approximately 2% of our consolidated net sales.
47
NEW ACCOUNTING PRONOUNCEMENTS
For information on new accounting pronouncements, see Note 18 to the Consolidated Financial Statements.
SUBSEQUENT EVENTS
In October 2019, the United Kingdom’s Competition and Markets Authority (CMA) announced the results of its review of our acquisition of Holchem Group Limited (“Holchem”), a UK based cleaning products business acquired in the fourth quarter of 2018, that requires us to divest Holchem. We disagree with the decision and continue to believe the UK market will remain highly competitive following the acquisition. We are reviewing the full report in detail and are considering options and next steps, including an appeal of the decision.
NON-GAAP FINANCIAL MEASURES
This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operation” in Item 2, contains financial measures that have not been calculated in accordance with accounting principles generally accepted in the U.S. (GAAP). These non-GAAP measures include:
● | Fixed currency sales |
● | Acquisition adjusted fixed currency sales |
● | Adjusted cost of sales |
● | Adjusted gross margin |
● | Fixed currency operating income |
● | Fixed currency operating income margin |
● | Adjusted operating income |
● | Adjusted operating income margin |
● | Adjusted fixed currency operating income |
● | Adjusted fixed currency operating income margin |
● | Acquisition adjusted fixed currency operating income |
● | Acquisition adjusted fixed currency operating income margin |
● | EBITDA |
● | Adjusted interest expense, net |
● | Adjusted tax rate |
● | Adjusted net income attributable to Ecolab |
● | Adjusted diluted EPS |
We provide these measures as additional information regarding our operating results. We use these non-GAAP measures internally to evaluate our performance and in making financial and operational decisions, including with respect to incentive compensation. We believe that our presentation of these measures provides investors with greater transparency with respect to our results of operations and that these measures are useful for period-to-period comparison of results.
Our non-GAAP financial measures for cost of sales, gross margin and operating income exclude the impact of special (gains) and charges, and our non-GAAP measures for tax rate, net income attributable to Ecolab and diluted EPS further exclude the impact of discrete tax items. We include items within special (gains) and charges and discrete tax items that we believe can significantly affect the period-over-period assessment of operating results and not necessarily reflect costs and/or income associated with historical trends and future results. After tax special (gains) and charges are derived by applying the applicable local jurisdictional tax rate to the corresponding pre-tax special (gains) and charges.
EBITDA is defined as the sum of net income including noncontrolling interest, provision for income taxes, net interest expense, depreciation and amortization. EBITDA is used in our net debt to EBITDA ratio, which we view as important indicators of the operational and financial health of our organization.
We evaluate the performance of our international operations based on fixed currency rates of foreign exchange. Fixed currency amounts included in this Form 10-Q are based on translation into U.S. dollars at the fixed foreign currency exchange rates established by management at the beginning of 2019.
Acquisition adjusted growth rates exclude the results of our acquired businesses from the first twelve months post acquisition, exclude the results of our divested businesses from the twelve months prior to divestiture.
These non-GAAP measures are not in accordance with, or an alternative to U.S. GAAP, and may be different from non-GAAP measures used by other companies. Investors should not rely on any single financial measure when evaluating our business. We recommend that investors view these measures in conjunction with the U.S. GAAP measures included in this MD&A and we have provided reconciliations of reported U.S. GAAP amounts to the non-GAAP amounts.
48
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include the anticipated spin-off of our Upstream Energy business into a new stand-alone company and the expected form, timing and tax effects; expectations concerning timing, amount and type of restructuring costs and savings from restructuring activities; tax deductibility of goodwill; capital investments and acquisitions; amortization expense; non-performance of financial counterparties; payments and contributions to pension and postretirement health care benefit plans; impact of tax reform; the impact of lawsuits, claims and environmental matters; impact of new accounting pronouncements; cash flows, borrowing capacity and funding of cash requirements; payments related to uncertain tax positions; impact of oil price fluctuations, comparative performance and prospects of businesses in our Global Energy segment; implementation of ERP system upgrade; and doing business relating to Iran.
Without limiting the foregoing, words or phrases such as “will likely result,” “are expected to,” “will continue,” “is anticipated,” “we believe,” “we expect,” “estimate,” “project” (including the negative or variations thereof) or similar terminology, generally identify forward-looking statements. Forward-looking statements may also represent challenging goals for us. These statements, which represent our expectations or beliefs concerning various future events, are based on current expectations that involve a number of risks and uncertainties that could cause actual results to differ materially from those of such forward-looking statements. In particular, the proposed spin-off of the Upstream Energy business may not be consummated within the anticipated period or at all and the ultimate results of any restructuring and business improvement actions, including cost synergies, depend on a number of factors, including the development of final plans, the impact of local regulatory requirements regarding employee terminations, the time necessary to develop and implement the restructuring and other business improvement initiatives and the level of success achieved through such actions in improving competitiveness, efficiency and effectiveness. We caution that undue reliance should not be placed on such forward-looking statements, which speak only as of the date made.
Some of the factors which could cause results to differ from those expressed in any forward-looking statements are set forth under Item 1A, entitled Risk Factors, of our Form 10-K for the year ended December 31, 2018, and include the vitality of the markets we serve, including the impact of oil price fluctuations on the markets served by our Global Energy segment; the impact of economic factors such as the worldwide economy, capital flows, interest rates and foreign currency risk, including reduced sales and earnings in other countries resulting from the weakening of local currencies versus the U.S. dollar; our ability to execute key business initiatives, including upgrades to our information technology systems; potential information technology infrastructure failures and cybersecurity attacks; the possibility that the proposed spin-off of our Upstream Energy business will not be consummated within the anticipated time period or at all and the potential that the Upstream Energy business and Ecolab will not realize all of the expected benefits of the spin-off; our ability to attract and retain high caliber management talent to lead our business; our ability to develop competitive advantages through innovation and to commercialize digital solutions; exposure to global economic, political and legal risks related to our international operations including trade sanctions; difficulty in procuring raw materials or fluctuations in raw material costs; pressure on operations from consolidation of customers, vendors or competitors; the costs and effects of complying with laws and regulations, including those relating to the environment and to the manufacture, storage, distribution, sale and use of our products; the occurrence of litigation or claims, including related to the Deepwater Horizon oil spill; restraints on pricing flexibility due to contractual obligations; our ability to acquire complementary businesses and to effectively integrate such businesses; changes in tax law and unanticipated tax liabilities; potential loss of deferred tax assets or increase in deferred tax liabilities; our substantial indebtedness; public health epidemics; potential losses arising from the impairment of goodwill or other assets; potential chemical spill or release; potential class action lawsuits; the loss or insolvency of a major customer or distributor; acts of war or terrorism; natural or man-made disasters; water shortages; severe weather conditions; and other uncertainties or risks reported from time to time in our reports to the SEC. There can be no assurances that our earnings levels will meet investors’ expectations. Except as may be required under applicable law, we do not undertake, and expressly disclaim, any duty to update our Forward-Looking Statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We use foreign currency forward contracts, interest rate swap agreements and foreign currency debt to manage risks associated with foreign currency exchange rates, interest rates and net investments in our foreign operations. We do not hold derivative financial instruments of a speculative nature or for trading purposes. For a more detailed discussion of derivative instruments, refer to Note 8, entitled “Derivatives and Hedging Transactions”, of the consolidated financial statements located under Part I, Item 1 of this quarterly report on Form 10-Q.
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Item 4. Controls and Procedures
As of September 30, 2019, we carried out an evaluation, under the supervision and with the participation of our management, including the Chairman of the Board and Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chairman of the Board and Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures are effective.
During the period January 1 through September 30, 2019, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are continuing our implementation of an enterprise resource planning (“ERP”) system upgrade we began in 2018, which is occurring in phases over the next several years. This upgrade, which includes supply chain and certain finance functions, is expected to improve the efficiency of certain financial and related transactional processes. The upgrade of the ERP system will affect the processes that constitute our internal control over financial reporting and will require testing for effectiveness.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Note 17, entitled “Commitments and Contingencies” located under Part I, Item 1 of this Form 10-Q is incorporated herein by reference.
Item 1A. Risk Factors
In our report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission on March 1, 2019, we identify under Item 1A important factors which could affect our financial performance and could cause our actual results for future periods to differ materially from our anticipated results or other expectations, including those expressed in any forward-looking statements made in this Form 10-Q. See the section entitled Forward-Looking Statements located on page 49 of this Form 10-Q. We may also refer to such disclosure to identify factors that may cause results to differ from those expressed in other forward-looking statements made in oral presentations, including telephone conferences and/or webcasts open to the public.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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Number of shares | Maximum number of |
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Total | purchased as part | shares that may |
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number of | Average price | of publicly | yet be purchased |
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shares | paid per | announced plans | under the plans |
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Period | purchased | (1) | share | (2) | or programs | (3) | or programs | (3) | ||||
July 1-31, 2019 |
| - | $ - | - |
| 6,820,810 | ||||||
August 1-31, 2019 |
| 5,663 | 203.3008 | - |
| 6,820,810 | ||||||
September 1-30, 2019 |
| - | - | - |
| 6,820,810 | ||||||
Total |
| 5,663 |
| $203.3008 |
| - |
| 6,820,810 |
(1) | Includes 5,663 shares reacquired from employees and/or directors as swaps for the cost of stock options, or shares surrendered to satisfy minimum statutory tax obligations under our stock incentive plans. |
(2) | The average price paid per share includes brokerage commissions associated with publicly announced plan purchases plus the value of such other reacquired shares. |
(3) | As announced on February 24, 2015, our Board of Directors authorized the repurchase of up to 20,000,000 shares. Subject to market conditions, we expect to repurchase all shares under the open authorizations, for which no expiration date has been established, in open market or privately negotiated transactions, including pursuant to Rule 10b5-1. |
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Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Iran Threat Reduction and Syria Human Rights Act of 2012
Under the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) of the Securities Exchange Act of 1934, the Company is required to disclose in its periodic reports if it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with entities or individuals designated pursuant to certain Executive Orders. Disclosure is required even where the activities are conducted outside the U.S. by non-U.S. affiliates in compliance with applicable law, and even if the activities are not covered or prohibited by U.S. law.
As authorized by the U.S. Treasury’s Office of Foreign Assets Control (OFAC), a non-U.S. subsidiary of the Company completed sales of products used for process and water treatment applications in upstream oil and gas production related to the operation of and production from the Rhum gas field off the Scottish coast (Rhum) totaling $0.3 million during the subsidiary’s fiscal third quarter ended August 31, 2019, and additional sales of such products totaling $0.1 million during September 2019. The net profit before taxes associated with these sales for each period were $0.1 million and nominal, respectively. Rhum is jointly owned by Serica Energy plc and Iranian Oil Company (U.K.) Limited. Our non-U.S. subsidiary intends to continue the Rhum-related activities, consistent with a specific license obtained from OFAC by its customers, and such activities may require additional disclosure pursuant to the abovementioned statute.
Item 6. Exhibits
Exhibit No. | Document | Method of Filing | ||
(a) | The following documents are filed as exhibits to this report: | |||
(15.1) | Filed herewith electronically. | |||
(31.1) | Filed herewith electronically. | |||
(31.2) | Filed herewith electronically. | |||
(32.1) | Filed herewith electronically. | |||
(101.INS) (101.SCH) (101.CAL) (101.DEF) (101.LAB) (101.PRE) (104) | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. Inline XBRL Taxonomy Extension Schema. Inline XBRL Taxonomy Extension Calculation Linkbase. Inline XBRL Taxonomy Extension Definition Linkbase. Inline XBRL Taxonomy Extension Label Linkbase. Inline XBRL Taxonomy Extension Presentation Linkbase. Cover Page Interactive Data File. | Filed herewith electronically. Filed herewith electronically. Filed herewith electronically. Filed herewith electronically. Filed herewith electronically. Filed herewith electronically. Formatted as Inline XBRL and contained in Exhibit 101. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
ECOLAB INC. | |||
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Date: October 31, 2019 | By: | /s/ Scott D. Kirkland | |
Scott D. Kirkland | |||
Senior Vice President and Corporate Controller | |||
(duly authorized officer and | |||
Chief Accounting Officer) |
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