UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ECOLAB INC.
(Exact name of registrant as specified in its charter)
Delaware | 41-0231510 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
1 Ecolab Place, St. Paul, Minnesota 55102
(Address of principal executive offices)(Zip Code)
1-800-232-6522
(Registrant’s telephone number, including area code)
(Not applicable)
(Former name, former address and former fiscal year,
if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ⌧ | 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 ☐ No ⌧
The number of shares of each of the registrant’s classes of Common Stock outstanding as of June 30, 2023: 285,033,916 shares, par value $1.00 per share.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Second Quarter Ended | Six Months Ended | |||||||||||||
June 30 | June 30 | |||||||||||||
(millions, except per share amounts) | 2023 |
| 2022 |
| 2023 |
| 2022 | |||||||
Product and equipment sales | $3,104.8 | $2,886.8 | $5,981.1 | $5,510.9 | ||||||||||
Service and lease sales | 747.3 | 693.8 | 1,442.6 | 1,336.4 | ||||||||||
Net sales | 3,852.1 | 3,580.6 | 7,423.7 | 6,847.3 | ||||||||||
Product and equipment cost of sales | 1,895.3 | 1,799.0 | 3,693.6 | 3,494.6 | ||||||||||
Service and lease cost of sales | 439.5 | 412.1 | 846.4 | 789.9 | ||||||||||
Cost of sales (including special charges (a)) | 2,334.8 | 2,211.1 | 4,540.0 | 4,284.5 | ||||||||||
Selling, general and administrative expenses | 1,011.6 | 940.1 | 2,001.9 | 1,854.8 | ||||||||||
Special (gains) and charges | 21.0 | 3.6 | 45.5 | 27.7 | ||||||||||
Operating income | 484.7 | 425.8 |
| 836.3 | 680.3 | |||||||||
Other (income) expense | (14.4) | (19.5) | (27.5) | (38.3) | ||||||||||
Interest expense, net | 77.8 | 56.0 | 152.0 | 109.0 | ||||||||||
Income before income taxes | 421.3 | 389.3 |
| 711.8 | 609.6 | |||||||||
Provision for income taxes | 86.6 | 76.6 | 139.0 | 122.2 | ||||||||||
Net income including noncontrolling interest | 334.7 | 312.7 | 572.8 | 487.4 | ||||||||||
Net income attributable to noncontrolling interest | 5.0 | 4.4 | 9.7 | 7.2 | ||||||||||
Net income attributable to Ecolab | $329.7 | $308.3 | $563.1 | $480.2 | ||||||||||
Earnings attributable to Ecolab per common share | ||||||||||||||
Basic | $ 1.16 | $ 1.08 | $ 1.98 | $ 1.68 | ||||||||||
Diluted | $ 1.15 | $ 1.08 | $ 1.97 | $ 1.67 | ||||||||||
Weighted-average common shares outstanding | ||||||||||||||
Basic |
| 284.9 | 285.1 |
|
| 284.8 | 285.7 | |||||||
Diluted |
| 286.3 |
| 286.6 |
|
| 286.1 |
| 287.4 | |||||
| (a) | Cost of sales includes special (gains) and charges of $8.1 and $1.7 in the second quarter of 2023 and 2022, respectively, and $11.3 and $54.6 in the first six months of 2023 and 2022, respectively, which is recorded in product and equipment cost of sales and service and lease cost of sales. |
The accompanying notes are an integral part of the consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
The accompanying notes are an integral part of the consolidated financial statements.
3
CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30 | December 31 | ||||||
(millions, except per share amounts) |
| 2023 | 2022 | ||||
ASSETS | |||||||
Current assets | |||||||
Cash and cash equivalents | $554.2 | $598.6 | |||||
Accounts receivable, net |
| 2,780.1 | 2,698.1 | ||||
Inventories |
| 1,646.2 | 1,792.8 | ||||
Other current assets | 456.0 | 404.7 | |||||
Total current assets |
| 5,436.5 | 5,494.2 | ||||
Property, plant and equipment, net |
| 3,326.5 | 3,293.4 | ||||
Goodwill |
| 8,101.3 | 8,012.7 | ||||
Other intangible assets, net |
| 3,603.6 | 3,680.7 | ||||
Operating lease assets | 446.8 | 448.2 | |||||
Other assets | 541.5 | 535.1 | |||||
Total assets | $21,456.2 | $21,464.3 | |||||
LIABILITIES AND EQUITY | |||||||
Current liabilities | |||||||
Short-term debt | $1,121.9 | $505.1 | |||||
Accounts payable |
| 1,476.8 | 1,728.2 | ||||
Compensation and benefits |
| 469.1 | 493.6 | ||||
Income taxes |
| 117.3 | 197.6 | ||||
Other current liabilities | 1,282.4 | 1,285.9 | |||||
Total current liabilities |
| 4,467.5 | 4,210.4 | ||||
Long-term debt |
| 7,499.6 | 8,075.3 | ||||
Pension and postretirement benefits |
| 660.8 | 670.3 | ||||
Deferred income taxes | 474.1 | 505.6 | |||||
Operating lease liabilities | 335.4 | 337.8 | |||||
Other liabilities | 438.3 | 406.3 | |||||
Total liabilities |
| 13,875.7 | 14,205.7 | ||||
Commitments and contingencies (Note 16) | |||||||
Equity (a) | |||||||
Common stock |
| 365.3 | 364.7 | ||||
Additional paid-in capital |
| 6,684.1 | 6,580.2 | ||||
Retained earnings |
| 9,580.0 | 9,318.8 | ||||
Accumulated other comprehensive loss |
| (1,761.8) | (1,726.6) | ||||
Treasury stock |
| (7,310.9) | (7,301.0) | ||||
Total Ecolab shareholders’ equity |
| 7,556.7 | 7,236.1 | ||||
Noncontrolling interest |
| 23.8 | 22.5 | ||||
Total equity |
| 7,580.5 | 7,258.6 | ||||
Total liabilities and equity | $21,456.2 | $21,464.3 | |||||
| (a) | Common stock, 800.0 shares authorized, $1.00 par value per share, 285.0 shares outstanding as of June 30, 2023 and 284.5 shares outstanding as of December 31, 2022. Shares outstanding are net of treasury stock. |
The accompanying notes are an integral part of the consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended | |||||||
June 30 | |||||||
(millions) | 2023 | 2022 | |||||
OPERATING ACTIVITIES | |||||||
Net income including noncontrolling interest | $572.8 | $487.4 | |||||
Adjustments to reconcile net income to cash provided by operating activities: | |||||||
Depreciation | 311.3 | 311.2 | |||||
Amortization | 152.4 | 158.2 | |||||
Deferred income taxes | (36.8) | (57.6) | |||||
Share-based compensation expense | 58.7 | 52.8 | |||||
Pension and postretirement plan contributions | (29.0) | (35.1) | |||||
Pension and postretirement plan expense (income), net | 4.3 | (2.7) | |||||
Restructuring charges, net of cash paid | (26.3) | (13.4) | |||||
Other, net | 13.2 | 10.1 | |||||
Changes in operating assets and liabilities, net of effect of acquisitions: | |||||||
Accounts receivable | (52.8) | (234.0) | |||||
Inventories | 150.9 | (250.8) | |||||
Other assets | 19.2 | (43.2) | |||||
Accounts payable | (264.7) | 163.8 | |||||
Other liabilities | (101.6) | (54.2) | |||||
Cash provided by operating activities | 771.6 | 492.5 | |||||
INVESTING ACTIVITIES | |||||||
Capital expenditures | (345.7) | (317.5) | |||||
Property and other assets sold | 8.6 | 0.7 | |||||
Acquisitions and investments in affiliates, net of cash acquired | (105.0) | (7.2) | |||||
Other, net | (21.4) | 13.2 | |||||
Cash used for investing activities | (463.5) | (310.8) | |||||
FINANCING ACTIVITIES | |||||||
Net issuances of commercial paper and notes payable | 1.7 | 208.0 | |||||
Reacquired shares | (10.9) | (402.8) | |||||
Dividends paid | (308.6) | (300.1) | |||||
Exercise of employee stock options | 50.6 | 12.7 | |||||
Hedge settlements | (53.5) | 55.4 | |||||
Other, net | (1.5) | (1.4) | |||||
Cash used for financing activities | (322.2) | (428.2) | |||||
Effect of exchange rate changes on cash and cash equivalents | (30.3) | 11.5 | |||||
Decrease in cash and cash equivalents | (44.4) | (235.0) | |||||
Cash and cash equivalents, beginning of period | 598.6 | 359.9 | |||||
Cash and cash equivalents, end of period | $554.2 | $124.9 | |||||
The accompanying notes are an integral part of the consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
Second Quarter Ended June 30, 2023 and 2022 | ||||||||||||||||||||||||
(millions, except per share amounts) |
| Common |
| Additional |
| Retained |
| AOCI |
| Treasury |
| Ecolab Shareholders' |
| Non-Controlling |
| Total | ||||||||
Balance, March 31, 2022 |
| $364.5 | $6,501.5 | $8,840.4 | ($1,563.6) | ($7,061.2) |
| $7,081.6 |
| $23.5 |
| $7,105.1 | ||||||||||||
Net income | 308.3 |
| 308.3 |
| 4.4 |
| 312.7 | |||||||||||||||||
Other comprehensive income (loss) activity | (54.3) |
| (54.3) |
| (2.9) |
| (57.2) | |||||||||||||||||
Cash dividends declared (a) | (145.4) |
| (145.4) |
|
| (145.4) | ||||||||||||||||||
Stock options and awards |
| - | 28.3 | 0.6 |
| 28.9 |
| 28.9 | ||||||||||||||||
Reacquired shares | (125.7) |
| (125.7) |
| (125.7) | |||||||||||||||||||
Balance, June 30, 2022 |
| $364.5 |
| $6,529.8 |
| $9,003.3 |
| ($1,617.9) |
| ($7,186.3) |
| $7,093.4 |
| $25.0 |
| $7,118.4 | ||||||||
Balance, March 31, 2023 |
| $365.0 | $6,626.5 | $9,401.3 | ($1,737.2) | ($7,311.4) |
| $7,344.2 |
| $20.8 |
| $7,365.0 | ||||||||||||
Net income | 329.7 |
| 329.7 |
| 5.0 |
| 334.7 | |||||||||||||||||
Other comprehensive income (loss) activity | (24.6) |
| (24.6) |
| (2.0) |
| (26.6) | |||||||||||||||||
Cash dividends declared (a) | (151.0) |
| (151.0) |
|
| (151.0) | ||||||||||||||||||
Changes in noncontrolling interests | (4.5) | (4.5) | (4.5) | |||||||||||||||||||||
Stock options and awards |
| 0.3 | 62.1 | 0.8 |
| 63.2 |
| 63.2 | ||||||||||||||||
Reacquired shares | (0.3) |
| (0.3) |
| (0.3) | |||||||||||||||||||
Balance, June 30, 2023 |
| $365.3 |
| $6,684.1 |
| $9,580.0 |
| ($1,761.8) |
| ($7,310.9) |
| $7,556.7 |
| $23.8 |
| $7,580.5 | ||||||||
Six Months Ended June 30, 2023 and 2022 | ||||||||||||||||||||||||
(millions, except per share amounts) |
| Common |
| Additional |
| Retained |
| OCI |
| Treasury |
| Ecolab Shareholders' |
| Non-Controlling |
| Total | ||||||||
Balance, December 31, 2021 |
| $364.1 | $6,464.6 | $8,814.5 | ($1,634.8) | ($6,784.2) |
| $7,224.2 |
| $28.9 |
| $7,253.1 | ||||||||||||
Net income | 480.2 |
| 480.2 |
| 7.2 |
| 487.4 | |||||||||||||||||
Other comprehensive income (loss) activity | 16.9 |
| 16.9 |
| (3.9) |
| 13.0 | |||||||||||||||||
Cash dividends declared (a) | (291.4) |
| (291.4) |
| (7.8) |
| (299.2) | |||||||||||||||||
Fair value adjustment of prior acquisition | - | 0.6 | 0.6 | |||||||||||||||||||||
Stock options and awards |
|
| 0.4 | 65.2 | 0.7 |
| 66.3 |
| 66.3 | |||||||||||||||
Reacquired shares | (402.8) |
| (402.8) |
| (402.8) | |||||||||||||||||||
Balance, June 30, 2022 | $364.5 | $6,529.8 | $9,003.3 | ($1,617.9) | ($7,186.3) | $7,093.4 | $25.0 | $7,118.4 | ||||||||||||||||
Balance, December 31, 2022 |
| $364.7 | $6,580.2 | $9,318.8 | ($1,726.6) | ($7,301.0) |
| $7,236.1 |
| $22.5 |
| $7,258.6 | ||||||||||||
Net income | 563.1 | 563.1 | 9.7 | 572.8 | ||||||||||||||||||||
Other comprehensive income (loss) activity | (35.2) |
| (35.2) |
| (1.5) |
| (36.7) | |||||||||||||||||
Cash dividends declared (a) | (301.9) |
| (301.9) |
| (6.9) |
| (308.8) | |||||||||||||||||
Changes in noncontrolling interests | (4.5) | (4.5) | (4.5) | |||||||||||||||||||||
Stock options and awards |
|
| 0.6 | 108.4 | 1.0 |
| 110.0 |
| 110.0 | |||||||||||||||
Reacquired shares | (10.9) |
| (10.9) |
| (10.9) | |||||||||||||||||||
Balance, June 30, 2023 | $365.3 | $6,684.1 | $9,580.0 | ($1,761.8) | ($7,310.9) | $7,556.7 | $23.8 | $7,580.5 | ||||||||||||||||
| (a) | Dividends declared per common share were $0.53 and $0.51 in the second quarter of 2023 and 2022, respectively, and $1.06 and $1.02 in the first six months of 2023 and 2022, respectively. |
The accompanying notes are an integral part of the consolidated financial statements.
6
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. CONSOLIDATED FINANCIAL INFORMATION
The unaudited consolidated financial information for the second quarter ended June 30, 2023 and 2022 reflects, in the opinion of management, all adjustments necessary for a fair statement of the financial position, results of operations, comprehensive income, 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, 2022 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, 2022 filed with the Securities and Exchange Commission (“SEC”) on February 24, 2023.
With respect to the unaudited financial information of the Company for the second quarter ended June 30, 2023 and 2022 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 August 3, 2023 appearing herein states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933, as amended (the "Act"), for their report on the unaudited financial information because that report is not a "report" or a "part" of a registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.
2. SPECIAL (GAINS) AND CHARGES
Special (gains) and charges reported on the Consolidated Statements of Income include the following:
Second Quarter Ended | Six Months Ended | ||||||||||||||
June 30 | June 30 | ||||||||||||||
(millions) |
| 2023 | 2022 |
| 2023 | 2022 | |||||||||
Cost of sales | |||||||||||||||
Restructuring activities | $8.1 | $0.8 | $11.3 |
| $3.4 | ||||||||||
Acquisition and integration activities | - | 0.9 | - | 28.5 | |||||||||||
Russia/Ukraine | - | - | - | 6.4 | |||||||||||
Other | - | - | - | 16.3 | |||||||||||
Cost of sales subtotal | 8.1 | 1.7 | 11.3 |
| 54.6 | ||||||||||
Special (gains) and charges | |||||||||||||||
Restructuring activities | 13.7 | 0.3 | 26.3 |
| 1.1 | ||||||||||
Acquisition and integration activities | 3.5 | 3.4 | 8.5 | 10.9 | |||||||||||
Russia/Ukraine | 0.3 | (5.7) | 0.6 | 5.9 | |||||||||||
Other | 3.5 | 5.6 | 10.1 |
| 9.8 | ||||||||||
Special (gains) and charges subtotal | 21.0 | 3.6 | 45.5 |
| 27.7 | ||||||||||
Total special (gains) and charges | $29.1 | $5.3 | $56.8 | $82.3 | |||||||||||
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 the Combined Program which is described below. These activities have been included as a component of cost of sales and special (gains) and charges on the Consolidated Statements of Income. Restructuring liabilities have been classified as a component of other current and other noncurrent liabilities on the Consolidated Balance Sheets.
Combined Program
In November 2022 the Company approved a Europe cost savings program. In connection with these actions, the Company expected to incur pre-tax charges of $130 million ($110 million after tax). In February 2023, the Company expanded its previously announced Europe cost savings program to focus on its Institutional and Healthcare businesses in other regions. In connection with the expanded program (“Combined Program”), the Company expects to incur total pre-tax charges of $195 million ($150 million after tax). The Company expects that these restructuring charges will be completed by 2024. Program actions include headcount reductions from terminations, not filling
7
certain open positions, and facility closures. The Combined Program charges are expected to be primarily cash expenditures related to severance and asset disposals.
In anticipation of this Combined Program, a limited number of actions were taken in the fourth quarter of 2022. As a result, the Company reclassified $19.3 million ($14.5 million after tax) from other restructuring to the Combined Program in the first quarter of 2023.
During the second quarter and first six months of 2023 the Company recorded total Combined Program restructuring charges of $19.7 million ($16.2 million after tax) and $33.1 million ($26.4 million after tax), respectively, primarily related to severance. The net liability related to the Combined Program was $57.2 million and $62.0 million as of June 30, 2023 and December 31, 2022, respectively. 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.
Restructuring activity related to the Combined Program since inception of the underlying actions includes the following items:
Institutional Advancement Program
The Company approved a restructuring plan in 2020 focused on the Institutional business (“the Institutional Plan”) which is intended to enhance the Company’s Institutional sales and service structure and allow the sales team to capture share and penetration while maximizing service effectiveness by leveraging the Company’s ongoing investments in digital technology. In February 2021, the Company expanded the Institutional Plan, and expect that these restructuring charges will be completed by 2023, with total anticipated costs of $70 million ($55 million after tax). The remaining costs are expected to be primarily non-cash costs related to equipment disposals. Actual costs may vary from these estimates depending on actions taken.
During the second quarter of 2023 and 2022, the Company recorded restructuring charges of $2.1 million ($1.6 million after tax) and $0.7 million ($0.6 million after tax), respectively, and $4.5 million ($3.4 million after tax) and $2.1 million ($1.6 million after tax) in the first six months of 2023 and 2022, respectively, primarily related to disposals of equipment. The Company has recorded $58.6 million ($44.8 million after tax) of cumulative restructuring charges under the Institutional Plan. Net cash payments were $0.7 million and non-cash net charges were $1.6 million for the second quarter of 2023. Net cash payments were $3.1 million and non-cash net charges were $3.3 million for the first six months of 2023.The liability related to the Institutional Plan was $0 million and $1.9 million as of June 30, 2023 and December 31, 2022, respectively.
Accelerate 2020
During 2018, the Company formally commenced a restructuring plan Accelerate 2020 (“the A2020 Plan”), to leverage technology and system investments and organizational changes. The goals of the Plan were to further 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 restructuring activities were completed at the end of 2022, with total costs of $254.4 million ($198.4 million after tax).
Net cash payments were $5.4 million and $9.5 million for the second quarter and first six months of 2023, respectively. The liability related to the Plan was $8.6 million and $18.1 million as of the June 30, 2023 and December 31, 2022, respectively. The remaining liability is expected to be paid over a period of several quarters and will continue to be funded from operating activities.
8
Other Restructuring Activities
During the second quarter and first six months of 2022, the Company recorded restructuring charges of $0.3 million ($0.2 million after tax) and $2.0 million ($1.5 million after tax), respectively, related to other immaterial restructuring activity. The charges are primarily related to severance and asset write-offs.
The restructuring liability balance for all other restructuring plans excluding Combined Program, the A2020 Plan and the Institutional Plan was $3.7 million and $23.2 million as of June 30, 2023 and December 31, 2022, respectively. The decrease in liability was driven primarily by the reclass of $19.3 million from other restructuring to the Combined Program in the first six months of 2023. Cash payments during the second quarter and first six months of 2023 related to all other restructuring plans excluding the Combined Program, the A2020 Plan and the Institutional Plan were $0 million and $0.2 million, respectively.
Acquisition and integration related costs
Acquisition and integration related costs reported in product and equipment cost of sales on the Consolidated Statements of Income in the second quarter and first six months of 2022 include $0.9 million ($0.6 million after tax) and $28.5 million ($21.6 million after tax) related primarily to the recognition of fair value step-up in the Purolite Corporation (“Purolite”) inventory.
Acquisition and integration related costs reported in special (gains) and charges on the Consolidated Statements of Income include $3.5 million ($2.7 million after tax) and $3.4 million ($2.4 million after tax) during the second quarter of 2023 and 2022, respectively and $8.5 million ($6.4 million after tax) and $10.9 million ($8.3 million after tax) during the first six months of 2023 and 2022, respectively. Charges are integration related costs primarily related to the Purolite acquisition.
Further information related to the Company’s acquisitions is included in Note 3.
Russia/Ukraine
In light of Russia’s invasion of Ukraine and the sanctions against Russia by the United States and other countries, the Company has made the determination that it will limit its Russian business to operations that are essential to life, providing minimal support for its healthcare, life sciences, food and beverage and certain water businesses. The Company recorded charges of $0.3 million ($0.2 million after tax) and $0.6 million ($0.5 million after tax) in the second quarter and first six months of 2023, respectively, and recorded recoveries of ($5.7) million (($5.7) million after tax) and charges of $12.3 million ($13.3 million after tax) in the second quarter and first six months of 2022, respectively, primarily related to recoverability risk of certain assets in both Russia and Ukraine.
Other operating activities
Other special charges of $3.5 million ($2.6 million after tax) and $10.1 million ($7.7 million after tax) recorded in the second quarter and first six months of 2023, respectively, relate primarily to certain legal charges, which are recorded in special (gains) and charges on the Consolidated Statements of Income.
Other special charges of $5.6 million ($4.4 million after tax) and $26.1 million ($19.7 million after tax) recorded in the second quarter and first six months of 2022, respectively relate primarily to COVID-19 related inventory charges and certain legal charges, which are recorded in product and equipment cost of sales and special (gains) and charges on the Consolidated Statements of Income.
9
3. ACQUISITIONS
Acquisitions
The Company makes business acquisitions that align with its strategic business objectives. The assets and liabilities of acquired businesses are recorded in the Consolidated Balance Sheets based on estimates of the fair value of assets acquired, liabilities assumed and noncontrolling interests acquired as of the acquisition date. Goodwill is recognized in the amount that the purchase consideration paid exceeds the fair value of the net assets acquired. Purchase consideration includes both cash paid and the fair value of noncash consideration exchanged, including stock and/or contingent consideration exchanged, and is reduced by the amount of cash or cash equivalents acquired.
In May 2023, the Company acquired Chemlink Laboratories LLC, a U.S.-based producer of small format cleaning solutions. The Company made two other immaterial acquisitions during the second quarter of 2023. All three acquisitions became part of the Global Institutional & Specialty reporting segment.
The purchase accounting for these acquisitions are preliminary and subject to change as the Company finalizes the valuation of intangible assets, income tax balances and working capital. The Company expects the goodwill arising from the acquisition of Chemlink Laboratories LLC to be tax deductible.
No acquisitions occurred during the first quarter of 2023 or first six months of 2022. The following table summarizes the acquisition date fair value of net assets acquired from the Company’s acquisitions during the second quarter of 2023:
During the first six months of 2022, the Company recorded purchase accounting adjustments associated with the finalization of the purchase accounting for its 2022 and 2021 acquisitions. As a result of these purchase accounting adjustments, the Company made $7.2 million of acquisition-related payments, acquisition related net liabilities increased by $7.1 million, definite-lived intangible assets decreased by $5.6 million, and goodwill increased by $19.9 million.
The weighted average useful life of identifiable intangible assets acquired during the first six months of 2023 was 12 years. No intangible assets were acquired during the first six months of 2022.
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4. BALANCE SHEETS INFORMATION
June 30 | December 31 | |||||||
(millions) |
| 2023 | 2022 | |||||
Accounts receivable, net | ||||||||
Accounts receivable | $2,929.9 | $2,829.0 | ||||||
Allowance for expected credit losses and other accruals | (149.8) | (130.9) | ||||||
Total | $2,780.1 | $2,698.1 | ||||||
Inventories | ||||||||
Finished goods | $1,041.8 | $1,122.7 | ||||||
Raw materials and parts | 834.6 | 849.2 | ||||||
Inventories at FIFO cost | 1,876.4 | 1,971.9 | ||||||
FIFO cost to LIFO cost difference | (230.2) | (179.1) | ||||||
Total | $1,646.2 | $1,792.8 | ||||||
Other current assets | ||||||||
Prepaid assets | $137.6 | $123.9 | ||||||
Taxes receivable | 215.3 | 184.1 | ||||||
Derivative assets | 62.2 | 57.5 | ||||||
Other | 40.9 | 39.2 | ||||||
Total | $456.0 | $404.7 | ||||||
Property, plant and equipment, net | ||||||||
Land | $155.0 | $161.3 | ||||||
Buildings and leasehold improvements | 1,145.0 | 1,126.9 | ||||||
Machinery and equipment | 2,037.3 | 1,966.3 | ||||||
Merchandising and customer equipment | 2,709.2 | 2,635.5 | ||||||
Capitalized software | 941.6 | 962.1 | ||||||
Construction in progress | 357.4 | 403.8 | ||||||
7,345.5 | 7,255.9 | |||||||
Accumulated depreciation | (4,019.0) | (3,962.5) | ||||||
Total | $3,326.5 | $3,293.4 | ||||||
Other intangible assets, net | ||||||||
Intangible assets not subject to amortization | ||||||||
Trade names | $1,230.0 | $1,230.0 | ||||||
Intangible assets subject to amortization | ||||||||
Customer relationships | 3,353.4 | 3,292.8 | ||||||
Patents | 501.6 | 497.0 | ||||||
Trademarks | 406.3 | 404.0 | ||||||
Other technologies | 541.0 | 518.8 | ||||||
4,802.3 | 4,712.6 | |||||||
Accumulated amortization | ||||||||
Customer relationships | (1,697.8) | (1,581.7) | ||||||
Patents | (307.9) | (292.3) | ||||||
Trademarks | (219.6) | (202.5) | ||||||
Other technologies | (203.4) | (185.4) | ||||||
(2,428.7) | (2,261.9) | |||||||
Net intangible assets subject to amortization | 2,373.6 | 2,450.7 | ||||||
Total | $3,603.6 | $3,680.7 | ||||||
Other assets | ||||||||
Deferred income taxes | $110.2 | $108.1 | ||||||
Pension | 129.6 | 118.4 | ||||||
Derivative asset | 33.2 | 44.5 | ||||||
Other | 268.5 | 264.1 | ||||||
Total | $541.5 | $535.1 | ||||||
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5. DEBT AND INTEREST
Short-term Debt
The following table provides the components of the Company’s short-term debt obligations as of June 30, 2023 and December 31, 2022.
June 30 | December 31 | |||||||
(millions) |
| 2023 | 2022 | |||||
Short-term debt | ||||||||
Commercial paper | $- | $- | ||||||
Notes payable | 5.4 | 3.7 | ||||||
Long-term debt, current maturities | 1,116.5 | 501.4 | ||||||
Total | $1,121.9 | $505.1 | ||||||
Lines of Credit
As of June 30, 2023, the Company has a $2.0 billion multi-year revolving credit facility which expires in April 2026. The credit facility has been established with a diverse syndicate of banks and supports the Company’s U.S. and Euro commercial paper programs. There were no borrowings under the Company’s credit facility as of either June 30, 2023 or December 31, 2022.
Commercial Paper
The Company’s commercial paper program is used as a potential source of liquidity and consists of a $2.0 billion U.S. commercial paper program and a $2.0 billion Euro commercial paper program. The maximum aggregate amount of commercial paper that may be issued by the Company under its commercial paper programs may not exceed $2.0 billion.
The Company had no outstanding commercial paper under its U.S. and Euro commercial paper programs as of June 30, 2023 and as of December 31, 2022.
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 June 30, 2023 and December 31, 2022, the Company had $5.4 million and $3.7 million, respectively, outstanding under these credit lines.
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Long-term Debt
The following table provides the components of the Company’s long-term debt obligations, including current maturities, as of June 30, 2023 and December 31, 2022.
|
|
|
| |||||||
Maturity | June 30 | December 31 | ||||||||
(millions) | by Year | 2023 | 2022 | |||||||
Long-term debt | ||||||||||
Public notes (2023 principal amount) | ||||||||||
Two year 2021 senior notes ($500 million) | 2023 | $499.4 | $498.7 | |||||||
Seven year 2016 senior notes (€575 million) | 2024 | 614.0 | 596.9 | |||||||
Ten year 2015 senior notes (€575 million) | 2025 | 613.3 | 596.7 | |||||||
Ten year 2016 senior notes ($750 million) | 2026 | 721.3 | 721.1 | |||||||
Ten year 2017 senior notes ($500 million) | 2027 | 434.5 | 433.9 | |||||||
Six Year 2021 senior notes ($500 million) | 2027 | 496.9 | 496.5 | |||||||
Five Year 2022 senior notes ($500 million) | 2028 | 493.4 | 492.7 | |||||||
Ten year 2020 senior notes ($698 million) | 2030 | 652.8 | 653.5 | |||||||
Ten year 2020 senior notes ($600 million) | 2031 | 555.7 | 555.2 | |||||||
Eleven year 2021 senior notes ($650 million) | 2032 | 644.9 | 644.6 | |||||||
Thirty year 2011 senior notes ($389 million) | 2041 | 384.6 | 384.5 | |||||||
Thirty year 2016 senior notes ($200 million) | 2046 | 197.3 | 197.3 | |||||||
Thirty year 2017 senior notes ($484 million) | 2047 | 426.1 | 425.5 | |||||||
Thirty year 2020 senior notes ($500 million) | 2050 | 490.9 | 490.7 | |||||||
Thirty year 2021 senior notes ($850 million) | 2051 | 839.1 | 838.9 | |||||||
Thirty-four year 2021 senior notes ($685 million) | 2055 | 538.2 | 537.2 | |||||||
Finance lease obligations and other | 13.7 | 12.8 | ||||||||
Total debt | 8,616.1 | 8,576.7 | ||||||||
Long-term debt, current maturities | (1,116.5) | (501.4) | ||||||||
Total long-term debt | $7,499.6 | $8,075.3 | ||||||||
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 101% of the aggregate principal amount thereof, plus any accrued and unpaid interest to the date of repurchase. The public notes are senior unsecured and unsubordinated obligations of the Company and rank equally with all other senior and unsubordinated indebtedness of the Company.
Covenants
The Company is in compliance with all covenants under the Company’s outstanding indebtedness as of June 30, 2023.
Net Interest Expense
Interest expense and interest income recognized during the second quarter and first six months of 2023 and 2022 were as follows:
Second Quarter Ended | Six Months Ended | ||||||||||||||
June 30 | June 30 | ||||||||||||||
(millions) |
| 2023 | 2022 | 2023 | 2022 | ||||||||||
Interest expense | $82.7 | $57.3 | $162.8 | $112.4 | |||||||||||
Interest income |
| (4.9) | (1.3) |
| (10.8) | (3.4) |
| ||||||||
Interest expense, net | $77.8 | $56.0 | $152.0 | $109.0 | |||||||||||
Interest expense generally includes the expense associated with the interest on the Company’s outstanding borrowings, including the impact of the Company’s interest rate swap agreements. Interest expense also includes the amortization of debt issuance costs and debt discounts, which are both recognized over the term of the related debt.
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6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Goodwill arises from the Company’s acquisitions and represents the excess of the fair value of the purchase consideration exchanged over the fair value of net assets acquired. The Company’s reporting units are its ten operating segments. The Company assesses goodwill for impairment on an annual basis during the second quarter. If circumstances change or events occur that demonstrate it is more likely than not that the carrying amount of a reporting unit exceeds its fair value, the Company completes an interim goodwill assessment of that reporting unit prior to the next annual assessment. If the results of an annual or interim goodwill assessment demonstrate the carrying amount of a reporting unit is greater than its fair value, the Company will recognize an impairment loss for the amount by which the reporting unit’s carrying amount exceeds its fair value, but not to exceed the carrying amount of goodwill assigned to that reporting unit.
During the second quarter of 2023, the Company completed its annual goodwill impairment assessment for its reporting units using discounted cash flow analyses that incorporated assumptions regarding future growth rates, terminal values and discount rates. The Company’s goodwill impairment assessments for 2023 indicated the estimated fair values of each of these ten reporting units exceeded the carrying amounts of the respective reporting unit by a significant margin. There has been no impairment of goodwill in any of the periods presented.
The changes in the carrying amount of goodwill for each of the Company's reportable segments during the second quarter ended June 30, 2023 were as follows:
Other Intangible Assets
The Nalco trade name is the Company’s only indefinite life intangible asset, which is tested for impairment on an annual basis during the second quarter. During the second quarter of 2023, the Company completed its annual impairment assessment of the Nalco trade name using the relief from royalty discounted cash flow method, which incorporates assumptions regarding future sales projections, royalty rates and discount rates. The Company’s Nalco tradename impairment assessment for 2023 indicated the estimated fair value of the Nalco trade name exceeded its $1.2 billion carrying amount by a significant margin. There has been no impairment of the Nalco trade name intangible since it was acquired.
The Company’s intangible assets subject to amortization include customer relationships, trademarks, patents and other technologies primarily acquired through business acquisitions. The fair value of intangible assets acquired in business acquisitions are estimated primarily using discounted cash flow valuation methods at the time of acquisition. Intangible assets are amortized on a straight-line basis over their estimated lives. Total amortization expense related to intangible assets during the second quarter of 2023 and 2022 was $76.8 million and $78.7 million, respectively, and during the first six months of 2023 and 2022 was $152.4 million and $158.2 million, respectively. Amortization expense related to intangible assets for the remaining six-month period of 2023 is expected to be approximately $151 million.
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7. FAIR VALUE MEASUREMENTS
The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, contingent consideration obligations, commercial paper, notes payable, foreign currency forward contracts, interest rate swap agreements, cross-currency swap derivative contracts 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:
December 31, 2022 | ||||||||||||||||
(millions) | Carrying | Fair Value Measurements | ||||||||||||||
| Amount |
| Level 1 | Level 2 |
| Level 3 | ||||||||||
Assets | ||||||||||||||||
Foreign currency forward contracts |
|
| $118.9 | $- |
| $118.9 |
| $- | ||||||||
Cross-currency swap derivative contracts | 58.7 | - | 58.7 | - | ||||||||||||
|
| |||||||||||||||
Liabilities | ||||||||||||||||
Foreign currency forward contracts | 83.3 | - | 83.3 | - | ||||||||||||
Interest rate swap agreements | 181.4 | - | 181.4 | - | ||||||||||||
Cross-currency swap derivative contracts | 14.5 | - | 14.5 | - | ||||||||||||
The carrying value of foreign currency forward contracts is at fair value, which are determined based on foreign currency exchange rates as of the balance sheet date and are classified within Level 2. The carrying value of interest rate swap agreements are at fair value, which are determined based on current forward interest rates as of the balance sheet date and are classified within Level 2. The cross-currency swap derivative contracts are used to partially hedge the Company’s net investments in foreign operations against adverse movements in exchange rates between the U.S. dollar and the Euro. The carrying value of the cross-currency swap derivative contracts are at fair value, which are determined based on the income approach with the relevant interest rates and foreign currency current exchange rates and forward curves as inputs as of the balance sheet date and are classified within Level 2. For purposes of fair value disclosure above, derivative values are presented gross. Further discussion of gross versus net presentation of the Company's derivatives is included within Note 8.
Contingent consideration obligations are recognized and measured at fair value at the acquisition date and thereafter until settlement or expiration. 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 contingent consideration. 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, 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, which includes adjustments related to the impact of interest rate swap agreements, premiums and discounts, and deferred debt issuance costs, and the estimated fair value of long-term debt, including current maturities, held by the Company were:
June 30, 2023 | December 31, 2022 | ||||||||||||||
Carrying | Fair | Carrying | Fair | ||||||||||||
| Amount |
| Value |
| Amount |
| Value | ||||||||
Long-term debt, including current maturities | $8,616.1 | $7,806.2 | $8,576.7 | $7,643.6 | |||||||||||
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8. DERIVATIVES AND HEDGING TRANSACTIONS
The Company uses foreign currency forward contracts, interest rate swap agreements, cross-currency swap derivative contracts 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 in the Consolidated Balance Sheets 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, no cash collateral had been received or related to the underlying derivatives.
The respective net amounts are included in other current assets, other assets, other current liabilities and other liabilities on the Consolidated Balance Sheets.
The following table summarizes the gross fair value and the net value of the Company’s outstanding derivatives:
The following table summarizes the notional values of the Company’s outstanding derivatives:
Notional Values | ||||||||
June 30 | December 31 | |||||||
(millions) |
| 2023 |
| 2022 | ||||
Foreign currency forward contracts | $3,687 | $5,745 | ||||||
Interest rate swap agreements | 1,500 | 1,500 | ||||||
Cross-currency swap derivative contracts | 682 | 650 | ||||||
16
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, intercompany loans, 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 (loss) (“AOCI”) until the hedged items affect earnings, at which time the gain or loss is reclassified into the same line item on the Consolidated Statements of Income as the underlying exposure being hedged. Cash flow hedged transactions impacting AOCI are forecasted to occur within the next . For forward contracts designated as hedges of foreign currency exchange rate risk associated with forecasted foreign currency transactions, the Company excludes the changes in fair value attributable to time value from the assessment of hedge effectiveness. The initial value of the excluded component (i.e., the forward points) is amortized on a straight-line basis over the life of the hedging instrument and recognized in the same line item on the Consolidated Statements of Income as the underlying exposure being hedged for intercompany loans. For all other cash flow hedge types, the forward points are marked-to-market monthly and recognized in the same line item on the Consolidated Statements of Income as the underlying exposure being hedged. The difference between fair value changes of the excluded component and the amount amortized on the Consolidated Statements of Income is recorded in AOCI.
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 swap agreements 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 (income) expense and is offset by the gain or loss of the underlying debt instrument, which also is recorded in interest (income) expense. These fair value hedges are highly effective and thus, there is no impact on earnings due to hedge ineffectiveness.
In aggregate, the Company has entered into a series of interest rate swap agreements to convert $1.5 billion of its debt from a fixed interest rate to a floating interest rate. These interest rate swap agreements are designated as fair value hedges.
The following amounts were recorded in the Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges:
Net Investment Hedges
The Company designates its outstanding €1,150 million ($1,229 million at the end of the second quarter of 2023) senior notes (“Euronotes”) and related accrued interest as hedges of its Euro denominated exposures from the Company’s investments in certain of its Euro denominated functional currency subsidiaries.
The Company entered into a series of cross-currency swap derivative contracts maturing in 2026 and 2030. The cross-currency swap derivative contracts are designated as net investment hedge of its Euro denominated exposures from the Company’s investments in certain of its Euro denominated functional currency subsidiaries. The cross-currency swap derivative contracts exchange fixed-rate payments in one currency for fixed-rate payments in another currency. As of June 30, 2023, the Company had €625 million ($682 million) cross-currency swap derivative contracts outstanding as hedges of the Company’s net investment in foreign operations. The changes in the spot rate of these instruments are recorded in AOCI in stockholders’ equity, partially offsetting the foreign currency translation adjustment of the Company’s related net investment that is also recorded in AOCI. Any ineffective portions of net investment hedges are reclassified from AOCI into earnings during the period of change. The interest income or expense from these swaps are recorded in interest expense on the accompanying Consolidated Statements of Income consistent with the classification of interest expense attributable to the underlying debt.
17
The revaluation gains and losses on the Euronotes and cross-currency swap derivative contracts, which are designated and effective as hedges of the Company’s net investments, have been included as a component of the cumulative translation adjustment account, and were as follows:
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:
Second Quarter Ended | ||||||||||||||||
June 30 | ||||||||||||||||
2023 | 2022 | |||||||||||||||
(millions) | COS | SG&A | Interest |
| COS | SG&A | Interest | |||||||||
Gain (loss) on derivatives in cash flow hedging relationship: | ||||||||||||||||
Foreign currency forward contracts | ||||||||||||||||
$2.8 | ($4.4) | $- | $0.8 | $38.2 | $- | |||||||||||
Amount excluded from the assessment of effectiveness recognized in earnings based on changes in fair value | - | - | 2.1 | - | - | 3.9 | ||||||||||
Interest rate swap agreements | ||||||||||||||||
- | - | (0.4) | - | - | (0.6) | |||||||||||
(Loss) gain on derivatives not designated as hedging instruments: | ||||||||||||||||
Foreign currency forward contracts | ||||||||||||||||
- | (3.5) | - | - | 34.2 | - | |||||||||||
Total gain (loss) of all derivative instruments | $2.8 | ($7.9) | $1.7 | $0.8 | $72.4 | $3.3 | ||||||||||
Six Months Ended | ||||||||||||||||
June 30 | ||||||||||||||||
2023 | 2022 | |||||||||||||||
(millions) | COS | SG&A | Interest |
| COS | SG&A | Interest | |||||||||
Gain (loss) on derivatives in cash flow hedging relationship: | ||||||||||||||||
Foreign currency forward contracts | ||||||||||||||||
$8.1 | ($10.4) | $- | $0.8 | $52.1 | $- | |||||||||||
Amount excluded from the assessment of effectiveness recognized in earnings based on changes in fair value | - | - | 4.1 | - | - | 7.7 | ||||||||||
Interest rate swap agreements | ||||||||||||||||
- | - | (0.9) | - | - | (1.2) | |||||||||||
(Loss) gain on derivatives not designated as hedging instruments: | ||||||||||||||||
Foreign currency forward contracts | ||||||||||||||||
- | (28.1) | - | - | 48.4 | - | |||||||||||
Total gain (loss) of all derivative instruments | $8.1 | ($38.5) | $3.2 | $0.8 | $100.5 | $6.5 | ||||||||||
18
9. OTHER COMPREHENSIVE INCOME (LOSS) INFORMATION
Other comprehensive income (loss) includes net income, foreign currency translation adjustments, 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. Refer to Note 8 for additional information related to the Company’s derivatives and hedging transactions. Refer to Note 13 for additional information related to the Company’s pension and postretirement benefits activity.
The following tables provide other comprehensive income information related to the Company’s derivatives and hedging instruments and pension and postretirement benefits:
The following table summarizes the derivative and pension and postretirement benefit amounts reclassified from AOCI into income:
10. SHAREHOLDERS’ EQUITY
Share Repurchase Authorization
In February 2015 and November 2022, the Company’s Board of Directors authorized the repurchase of up to 20,000,000 and 10,000,000, respectively, additional shares of its common stock, including shares to be repurchased under Rule 10b5–1. As of June 30, 2023, 12,917,097 shares remained to be repurchased under the Company’s repurchase authorization. The Company intends to repurchase all shares under its authorization, for which no expiration date has been established, in open market or privately negotiated transactions, subject to market conditions.
Share Repurchases
During the first six months of 2023, the Company reacquired 68,712 shares of its common stock related to shares withheld for taxes on the exercise of stock options and the vesting of stock awards and units.
During the first six months of 2022, the Company reacquired 2,284,094 shares of its common stock, of which 2,186,990 related to share repurchases through open market and 97,104 related to shares withheld for taxes on the exercise of stock options and the vesting of stock awards and units.
19
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:
12. INCOME TAXES
The Company’s tax rate was 20.6% and 19.7% for the second quarter of 2023 and 2022, respectively, and 19.5% and 20.0% for the first six months of 2023 and 2022, respectively. The change in the Company’s tax rate for the second quarter and first six months of 2023 compared to the second quarter and first six months of 2022 was driven primarily by the impact of discrete tax items and special (gains) and charges. Further information related to special (gains) and charges is included in Note 2.
The Company recognized net tax expense related to discrete tax items of $2.8 million and a net tax benefit of $1.2 million in the second quarter and first six months of 2023, respectively. This included share-based compensation excess tax benefits of $1.8 million and $1.9 million in the second quarter and first six months of 2023, respectively. Additionally, the Company recognized discrete tax expense of $4.6 million and $0.7 million during the second quarter and first six months of 2023, respectively, primarily due to audit settlements, uncertain tax positions, prior year return adjustments, repricing of deferred tax balances, and other changes in estimates.
The Company recognized net tax expense related to discrete tax items of $3.7 million and $4.7 million in the second quarter and first six months of 2022, respectively. This included share-based compensation excess tax benefits of $0.7 million and $3.6 million in the second quarter and first six months of 2022, respectively. Additionally, the Company recognized discrete tax expense of $4.4 million and $8.3 million during the second quarter and first six months of 2022, respectively, primarily due to audit settlements, uncertain tax positions, prior year return adjustments, repricing of deferred tax balances, and other changes in estimates.
The Inflation Reduction Act (IRA), which became effective January 1, 2023, includes a corporate alternative minimum tax on certain large corporations and climate change mitigation incentives. In addition, there are other non-income tax provisions, including an excise tax on the repurchase of corporate stock. The Company continues to assess the impact of the IRA but does not anticipate any material impacts on the Company’s financial statements.
20
13. 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 non-contributory, non-qualified, defined benefit pension 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 also provides postretirement health care and life insurance benefits to certain U.S. employees and retirees.
The components of net periodic pension and postretirement health care benefit expense for the second quarter ended June 30 are as follows:
The components of net periodic pension and postretirement health care benefit expense for the six months ended June 30 are as follows:
Service cost is included as employee compensation cost in either cost of sales or selling, general and administrative expenses on the Consolidated Statements of Income based on employee roles, while non-service components are included in other (income) expense in the Consolidated Statements of Income.
As of June 30, 2023, the Company is in compliance with all funding requirements of each of its defined benefit plans.
During the first six months of 2023, the Company made contributions of $4 million to its U.S. non-contributory non-qualified defined benefit plans and estimates it will contribute an additional $5 million to such plans during the remainder of 2023.
During the first six months of 2023, the Company made contributions of $20 million to its international pension plans and estimates it will contribute an additional $22 million to such plans during the remainder of 2023.
During the first six months of 2023, the Company made contributions of $5 million to its U.S. postretirement health care plans and estimates it will contribute an additional $6 million to such plans during the remainder of 2023.
21
14. REVENUES
Revenue Recognition
Product and Sold Equipment
Product revenue is generated from sales of cleaning, sanitizing, water treatment, process treatment and colloidal silica products. In addition, the Company sells equipment which may be used in combination with its specialized products. Revenue recognized from product and equipment sales 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.
On June 3, 2020, the Company completed the separation of its Upstream Energy business (“ChampionX”). The Company entered into a Master Cross Supply and Product Transfer agreement with ChampionX to provide, receive or transfer certain products for a period up to 36 months and for a smaller set of products with limited suppliers over the next few years. Sales of product to ChampionX under this agreement are recorded in product and equipment sales in the Corporate segment along with the related cost of sales, while purchases from ChampionX are recorded in inventory. Sales of product to ChampionX post-separation for the second quarter of 2023 and 2022 were $16.7 million and $33.9 million, respectively, and for the first six months of 2023 and 2022 were $40.4 million and $68.6 million, respectively. As of June 30, 2023 and December 31, 2022, the Company had an outstanding accounts receivable balance for sales of product to ChampionX of $12.0 million and $12.9 million, respectively.
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. Global Industrial segment services are associated with water treatment and paper process applications. Global Institutional & Specialty segment services include cleaning and sanitizing programs and wash process solutions. Global Healthcare & Life Sciences segment services include pharmaceutical, personal care, infection and containment control solutions. Revenues included in Other primarily relate to services designed to detect, eliminate and prevent pests. 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 recognized from leased equipment primarily relates to warewashing and water treatment equipment recognized on a straight-line basis over the length of the lease contract pursuant to Topic 842 Leases.
The Company’s operating lease revenue was as follows:
Second Quarter Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
(millions) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
Operating lease revenue* | $128.7 | $115.2 | $255.1 | $227.3 | ||||||||||||
*Includes immaterial variable lease revenue
The following table shows principal activities, separated by reportable segments, from which the Company generates its revenue. Corporate segment includes sales to ChampionX under the Master Cross Supply and Product Transfer agreements entered into as part of the ChampionX Separation. For more information about the Company’s reportable segments, refer to Note 15.
22
Net sales at public exchange rates by reportable segment are as follows:
Net sales at public exchange rates by geographic region for the second quarter ended June 30 are as follows:
Net sales at public exchange rates by geographic region for the six months ended June 30 are as follows:
Net sales by geographic region were determined based on origin of sale. The United States made up 53% and 53% of total revenues during the six months ended June 30, 2023 and 2022, respectively.
23
Accounts Receivable and Allowance for Expected Credit Losses
Accounts receivable are carried at the invoiced amounts, less an allowance for expected credit losses, and generally do not bear interest. The Company’s allowance for expected credit losses estimates the amount of expected future credit losses by analyzing accounts receivable balances by age and applying historical write-off and collection experience. The Company’s estimates separately consider macroeconomic trends, specific circumstances and credit conditions of customer receivables. Account balances are written off against the allowance when it is determined the receivable will not be recovered.
The Company’s allowance for expected return of products shipped and credits related to pricing or quantities shipped was $66.0 million and $24.9 million as of June 30, 2023 and 2022, respectively. Returns and credit activity is recorded directly as a reduction to revenue.
The following table summarizes the activity in the allowance for expected credit losses:
Six Months Ended | ||||||||
June 30 | ||||||||
(millions) | 2023 |
| 2022 | |||||
Beginning balance | $71.9 | $52.8 | ||||||
Bad debt expense |
| 32.5 |
| 24.8 | ||||
Write-offs |
| (18.6) |
| (8.5) | ||||
Other (a) |
| (2.0) |
| 3.8 | ||||
Ending balance | $83.8 | $72.9 | ||||||
| (a) | Other amounts are primarily the effects of changes in currency translations. |
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.
The following table summarizes the contract liability activity:
Six Months Ended | ||||||||
June 30 | ||||||||
(millions) |
| 2023 | 2022 |
| ||||
Contract liability as of beginning of the year |
| $116.5 | $91.7 |
| ||||
Revenue recognized in the period from: |
|
| ||||||
Amounts included in the contract liability at the beginning of the year |
| (116.5) | (91.7) |
| ||||
Increases due to billings excluding amounts recognized as revenue during the period ended | 107.4 | 99.1 | ||||||
Contract liability as of end of period | $107.4 | $99.1 | ||||||
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15. OPERATING SEGMENTS
The Company’s organizational structure consists of global business unit and global regional leadership teams. The Company’s ten 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 three reportable segments: Global Industrial, Global Institutional & Specialty and Global Healthcare & Life Sciences. The Company’s operating segments that do not meet the quantitative criteria to be separately reported have been combined into Other. The Company provides similar information for Other as the Company considers the information regarding its underlying operating segments as useful in understanding its consolidated results.
Comparability of Reportable Segments
Effective January 1, 2023, the Company’s former Downstream operating segment is now part of the Water operating segment. This change did not have any impact on the Global Industrial reportable segment.
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. The “Fixed Currency Rate Change” column shown in the following table reflects international operations at fixed currency exchange rates established by management at the beginning of 2023, rather than the 2022 established rates. The difference between the fixed currency exchange rates and the actual currency exchange rates is reported within the “Effect of foreign currency translation” row in the following table. The “Other” column shown in the following table reflects immaterial changes between reportable segments, including the movement of certain customers and cost allocations.
The impact of the preceding changes on previously reported full year 2022 reportable segment net sales and operating income is summarized as follows:
25
Reportable Segment Information
Financial information for the Company’s reportable segments, is as follows:
Second Quarter Ended | Six Months Ended | ||||||||||||||
June 30 | June 30 | ||||||||||||||
(millions) |
| 2023 | 2022 | 2023 | 2022 | ||||||||||
Net Sales | |||||||||||||||
Global Industrial |
| $1,795.6 | $1,653.3 | $3,494.9 | $3,164.7 | ||||||||||
Global Institutional & Specialty | 1,268.6 | 1,118.2 | 2,395.2 | 2,109.5 | |||||||||||
Global Healthcare & Life Sciences | 387.5 | 384.4 | 766.1 | 732.6 | |||||||||||
Other | 362.6 | 332.5 | 691.9 | 619.3 | |||||||||||
Corporate | 16.7 | 33.8 | 40.3 | 68.4 | |||||||||||
Subtotal at fixed currency rates | 3,831.0 | 3,522.2 | 7,388.4 | 6,694.5 | |||||||||||
Effect of foreign currency translation | 21.1 | 58.4 | 35.3 | 152.8 | |||||||||||
Consolidated reported GAAP net sales |
| $3,852.1 |
| $3,580.6 | $7,423.7 | $6,847.3 | |||||||||
Operating Income | |||||||||||||||
Global Industrial |
| $255.4 | $216.8 | $471.0 | $396.7 | ||||||||||
Global Institutional & Specialty | 208.7 | 148.6 | 334.4 | 257.2 | |||||||||||
Global Healthcare & Life Sciences | 32.7 | 55.2 | 67.7 | 97.1 | |||||||||||
Other | 63.4 | 51.6 | 113.5 | 88.7 | |||||||||||
Corporate | (78.8) | (57.4) | (156.2) | (186.4) | |||||||||||
Subtotal at fixed currency rates | 481.4 | 414.8 | 830.4 | 653.3 | |||||||||||
Effect of foreign currency translation | 3.3 | 11.0 | 5.9 | 27.0 | |||||||||||
Consolidated reported GAAP operating income |
| $484.7 |
| $425.8 | $836.3 | $680.3 | |||||||||
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 sales to ChampionX in accordance with the long-term supply agreement entered into with the Transaction, as discussed in Note 14. Corporate also includes intangible asset amortization specifically from the Nalco and Purolite acquisitions and special (gains) and charges, as discussed in Note 2, that are not allocated to the Company’s reportable segments.
16. 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, environmental matters and lawsuits. The Company is also subject to various claims and contingencies related to income taxes. The Company also has contractual obligations including lease commitments.
The Company records liabilities when 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, employment, commercial, patent infringement, tort, 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.
26
TPC Group Litigation
On November 27, 2019, a Butadiene production plant owned and operated by TPC Group, Inc. in Port Neches, Texas, experienced an explosion and fire that resulted in personal injuries, the release of chemical fumes and extensive property damage to the plant and surrounding areas in and near Port Neches, Texas.
Nalco Company LLC, a subsidiary of Ecolab, supplied process chemicals to TPC used in TPC’s production processes. Nalco did not operate, manage, maintain or control any aspect of TPC’s plant operations.
In connection with its provision of process chemicals to TPC, Nalco has been named in numerous lawsuits stemming from the plant explosion. Nalco has been named a defendant, along with TPC and other defendants, in multi-district litigation (“MDL”) proceedings pending in Orange County, Texas, alleging among other things claims for personal injury, property damage and business losses (In re TPC Group Litigation – A2020-0236-MDL, Orange County, Texas). In addition, numerous other lawsuits have been filed against Nalco, including TPC Group v. Nalco, E0208239, Jefferson County, Texas, a subrogation claim by TPC’s insurers seeking reimbursement for property damage losses. Over 5,000 plaintiffs (including the subrogation matter) currently have asserted claims against Nalco.
All of these cases make similar allegations and seek damages for personal injury, property damage, business losses and other damages, including exemplary damages. The Company expects all these cases will be consolidated for pretrial purposes into the Orange County MDL referenced above. Due to the large number of plaintiffs, the early stage of the litigation and the fact that many of the claims do not specify an amount of damages, any estimate of any loss or range of losses cannot be made at this time.
On June 1, 2022, TPC and seven of its affiliated companies filed for bankruptcy under Chapter 11 (Case No. 22-10493-CTG, United States Bankruptcy Court for the District of Delaware). In connection with the bankruptcy cases, TPC disclosed an estimated range of its liability related to the Port Neches incident to individuals and homeowners (including subrogation claims) of approximately $152 million to $520 million. As part of their bankruptcy plan, TPC and its affiliates announced a settlement which allows the MDL plaintiffs a $500 million claim solely for purposes of claim allowance in the chapter 11 case and distribution of value pursuant to TPC’s bankruptcy plan. Other key terms of the settlement between TPC and the MDL plaintiffs include the establishment of a settlement trust for the benefit of certain general unsecured creditors, which is funded with $30 million and the assignment of TPC’s claims and causes of action, if any, against certain third parties, including Nalco, related to the TPC plant explosion. As part of the bankruptcy process, TPC and its debtor affiliates received a discharge of all MDL related claims, as did certain non-debtor affiliates to the extent third parties did not opt out of the non-debtor releases. Nalco opted out of these releases, preserving any direct causes of action it may have against non-debtors. Furthermore, the allowance of the $500 million claim should have no effect on any claims or defenses asserted against or by Nalco in the MDL litigation. On December 1, 2022, the bankruptcy court confirmed the TPC bankruptcy plan, including the approval of the settlement and establishment of the aforementioned settlement trust. On December 16, 2022, the TPC bankruptcy plan went effective.
The Company believes the claims asserted against Nalco in the lawsuits stemming from the TPC plant explosion are without merit and intends to defend the claims vigorously. The Company also believes any potential loss should be covered by insurance subject to deductibles. However, the Company cannot predict the outcome of these lawsuits, the involvement the Company might have in these matters in the future or the potential for future litigation.
Environmental Matters
The Company is currently participating in environmental assessments and remediation at approximately 25 locations, the majority of which are in the U.S., and environmental liabilities have been accrued reflecting management’s best estimate of future costs. Potential insurance reimbursements are not anticipated in the Company’s accruals for environmental liabilities.
17. NEW ACCOUNTING PRONOUNCEMENTS
Standards That Were Adopted: | ||||||||
| Date of |
|
| Date of |
| Effect on the | ||
Standard |
| Issuance | Description |
| Adoption |
| Financial Statements | |
ASU 2021-08 - Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers | October 2021 | Update to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to the recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer. | January 1, 2023 | The adoption of this standard did not have a significant impact on the Company's financial statements. | ||||
No other new accounting pronouncements issued or effective have had or are expected to have a material impact on the Company’s consolidated financial statements.
27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders 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 June 30, 2023, and the related consolidated statements of income, comprehensive income, and equity for the three-month and six-month periods ended June 30, 2023 and 2022, and the consolidated statements of cash flows for the six-month periods ended June 30, 2023 and 2022, 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, 2022, and the related consolidated statements of income, comprehensive income, equity and of cash flow for the year then ended (not presented herein), and in our report dated February 24, 2023, 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, 2022, 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 | |
August 3, 2023 |
28
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, 2022. 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
Impact of Acquisitions and Divestitures
Our non-GAAP financial measures for organic sales, organic operating income and organic operating income margin are at fixed currency and exclude the impact of special (gains) and charges, the results of our acquired businesses from the first twelve months post acquisition and the results of divested businesses from the twelve months prior to divestiture. As part of the separation of ChampionX in 2020, we entered into a Master Cross Supply and Product Transfer agreement with ChampionX to provide, receive or transfer certain products for a period of 36 months and for a small set of products with limited suppliers over the next few years. Sales of product to ChampionX under this agreement are recorded in product and equipment sales in the Corporate segment along with the related cost of sales. These transactions are removed from the consolidated results as part of the calculation of the impact of acquisitions and divestitures.
Comparability of Reportable Segments
Effective January 1, 2023, our former Downstream operating segment is now part of the Water operating segment. This change did not have any impact on the Global Industrial reportable segment.
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. 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.
OVERVIEW OF THE SECOND QUARTER ENDED JUNE 30, 2023
Sales Performance
When comparing second quarter 2023 against second quarter 2022, sales performance was as follows:
| ● | Reported net sales increased 8% to $3,852.1 million and organic sales increased 9%. |
| ● | Organic sales for our Global Industrial segment increased 9% to $1,795.6 million, led by double-digit growth in Water and Food & Beverage. |
| ● | Organic sales for our Global Institutional & Specialty segment increased 13% to $1,262.2 million with double-digit growth in both Institutional and Specialty. |
| ● | Organic sales for our Global Healthcare & Life Sciences segment increased 1% to $387.5 million driven by modest growth in Healthcare sales offset by soft near-term life sciences industry demand. |
| ● | Organic sales for Other increased 9% to $362.6 million led by double-digit growth in Pest Elimination. |
29
Financial Performance
When comparing second quarter 2023 against second quarter 2022, our financial performance was as follows:
| ● | Reported operating income increased 14% to $484.7 million. Organic operating income increased 21%. |
| ● | Net income attributable to Ecolab increased 7% to $329.7 million. Excluding the impact of special (gains) and charges and discrete tax items from both 2023 and 2022 reported results, our adjusted net income attributable to Ecolab increased 13%. |
| ● | Reported diluted EPS increased 6% to $1.15. Excluding the impact of special (gains) and charges and discrete tax items from both 2023 and 2022 reported results, adjusted diluted EPS increased 13% to $1.24 in the second quarter of 2023. |
| ● | Our reported tax rate was 20.6% during the second quarter of 2023, compared to 19.7% during the second quarter of 2022. Excluding the tax rate impact of special (gains) and charges and discrete tax items from both 2023 and 2022 results, our adjusted tax rate was 19.9% during the second quarter of 2023, compared to 19.2% during the second quarter of 2022. |
RESULTS OF OPERATIONS
Net Sales
Second Quarter Ended | Six Months Ended | ||||||||||||||||||||
June 30 | June 30 | ||||||||||||||||||||
(millions) | 2023 | 2022 | Change | 2023 | 2022 | Change | |||||||||||||||
Product and equipment sales | $3,104.8 | $2,886.8 | $5,981.1 | $5,510.9 | |||||||||||||||||
Service and lease sales | 747.3 | 693.8 | 1,442.6 | 1,336.4 | |||||||||||||||||
Reported GAAP net sales | $3,852.1 | $3,580.6 | 8 | % | $7,423.7 | $6,847.3 | 8 | % | |||||||||||||
Effect of foreign currency translation |
| (21.1) | (58.4) |
| (35.3) | (152.8) | |||||||||||||||
Non-GAAP fixed currency sales | $3,831.0 | $3,522.2 | 9 | % | $7,388.4 | $6,694.5 | 10 | % | |||||||||||||
Effect of acquisitions and divestitures | (23.1) | (33.8) | (46.7) | (68.4) | |||||||||||||||||
Non-GAAP organic sales | $3,807.9 | $3,488.4 | 9 | % | $7,341.7 | $6,626.1 | 11 | % | |||||||||||||
Product and sold equipment revenue is generated from providing cleaning, sanitizing and water treatment 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 2023 sales change are shown below:
Amounts do not necessarily sum due to rounding.
Cost of Sales (“COS”) and Gross Profit Margin
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.
30
Our reported gross margin was 39.4% and 38.2% for the second quarter of 2023 and 2022, respectively. Our reported gross margin was 38.8% and 37.4% for the first six months of 2023 and 2022, respectively. Special (gains) and charges included in items impacting cost of sales are shown within the “Special (Gains) and Charges” table below.
Excluding the impact of special (gains) and charges within COS, second quarter 2023 and 2022 adjusted gross margin was 39.6% and 38.3%, respectively, and for the first six months of 2023 and 2022 was 39.0% and 38.2%, respectively.
Our adjusted gross margin increased when comparing the second quarter of 2023 against the second quarter of 2022, as strong pricing overcame continued increases in delivered product costs and unfavorable mix.
Selling, General and Administrative Expense
Selling, general and administrative (“SG&A”) expenses as a percentage of sales were 26.3% and 27.0% for the second quarter and first six months of 2023, respectively, compared to 26.3% and 27.1% for the second quarter and first six months of 2022, respectively. The SG&A ratio to sales in the second quarter of 2023 remained flat driven by sales leverage and cost savings that were offset by higher incentive compensation and investments in the business.
Special (Gains) and Charges
Special (gains) and charges reported on the Consolidated Statements of Income include the following items:
Second Quarter Ended | Six Months Ended | ||||||||||||||
June 30 | June 30 | ||||||||||||||
(millions) |
| 2023 | 2022 |
| 2023 | 2022 | |||||||||
Cost of sales | |||||||||||||||
Restructuring activities | $8.1 | $0.8 | $11.3 |
| $3.4 | ||||||||||
Acquisition and integration activities | - | 0.9 | - | 28.5 | |||||||||||
Russia/Ukraine | - | - | - | 6.4 | |||||||||||
Other | - | - | - | 16.3 | |||||||||||
Cost of sales subtotal | 8.1 | 1.7 | 11.3 |
| 54.6 | ||||||||||
Special (gains) and charges | |||||||||||||||
Restructuring activities | 13.7 | 0.3 | 26.3 |
| 1.1 | ||||||||||
Acquisition and integration activities | 3.5 | 3.4 | 8.5 | 10.9 | |||||||||||
Russia/Ukraine | 0.3 | (5.7) | 0.6 | 5.9 | |||||||||||
Other | 3.5 | 5.6 | 10.1 |
| 9.8 | ||||||||||
Special (gains) and charges subtotal | 21.0 | 3.6 | 45.5 |
| 27.7 | ||||||||||
Total special (gains) and charges | $29.1 | $5.3 | $56.8 | $82.3 | |||||||||||
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 the Combined Program which are described below. These activities have been included as a component of cost of sales and special (gains) and charges on the Consolidated Statements of Income. Restructuring liabilities have been classified as a component of other current and other noncurrent liabilities on the Consolidated Balance Sheets.
Further details related to our restructuring charges are included in Note 2.
Combined Program
In November 2022 we approved a Europe cost savings program. In connection with these actions, we expected to incur pre-tax charges of $130 million ($110 million after tax) or $0.38 per diluted share. In February 2023, we expanded our previously announced Europe cost savings program to focus on its Institutional and Healthcare businesses in other regions. In connection with the expanded program (“Combined Program”), we expect to incur total pre-tax charges of $195 million ($150 million after tax) or $0.52 per diluted share. We expect that these restructuring charges will be completed by 2024. Program actions include headcount reductions from terminations, not filling certain open positions, and facility closures. The Combined Program charges are expected to be primarily cash expenditures related to severance and asset disposals.
In anticipation of this Combined Program, a limited number of actions were taken in the fourth quarter of 2022. As a result, we reclassified $19.3 million ($14.5 million after tax) or $0.05 per diluted share from other restructuring to the Combined Program in the first quarter of 2023.
31
During the second quarter and first six months of 2023 we recorded total Combined Program restructuring charges of $19.7 million ($16.2 million after tax) or $0.06 per diluted share and $33.1 million ($26.4 million after tax) or $0.09 per diluted share, respectively, primarily related to severance. The net liability related to the Combined Program was $57.2 million and $62.0 million as of June 30, 2023 and December 31, 2022, respectively. 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.
The Combined Program has delivered $67 million of cumulative cost savings with estimated annualized cost savings of $175 million in continuing operations by 2024.
Institutional Advancement Program
We approved a restructuring plan in 2020 focused on the Institutional business (“the Institutional Plan”) which is intended to enhance our Institutional sales and service structure and allow the sales team to capture share and penetration while maximizing service effectiveness by leveraging our ongoing investments in digital technology. In February 2021, we expanded the Institutional Plan, and we expect that these restructuring charges will be completed in 2023, with total anticipated costs of $70 million ($55 million after tax) or $0.19 per diluted share. The remaining costs are expected to be primarily non-cash charges related to equipment disposals. Actual costs may vary from these estimates depending on actions taken.
In the second quarter and first six months of 2023, we recorded restructuring charges of $2.1 million ($1.6 million after tax) or less than $0.01 per diluted share and $4.5 million ($3.4 million after tax) or $0.01 per diluted share, respectively, primarily related to disposals of equipment. We have recorded $58.6 million ($44.8 million after tax), or $0.16 per diluted share of cumulative restructuring charges under the Institutional Plan. Net cash payments were $0.7 million and $3.1 million and non-cash net charges were $1.6 million and $3.3 million for the second quarter and first six months of 2023, respectively. The liability related to the Institutional Plan was $0 million and $1.9 million as of June 30, 2023 and December 31, 2022, respectively.
The Institutional Plan has delivered $52 million of annual cost savings.
Accelerate 2020
During 2018, we formally commenced a restructuring plan Accelerate 2020 (“the A2020 Plan”), to leverage technology and system investments and organizational changes. The goals of the Plan were to further 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 restructuring activities were completed at the end of 2022, with total costs of $254 million ($198 million after tax), or $0.69 per diluted share.
Net cash payments were $5.4 million and $9.5 million for the second quarter and first six months of 2023, respectively. The liability related to the Plan was $8.6 million and $18.1 million as of June 30, 2023 and December 31, 2022, respectively. The remaining liability is expected to be paid over a period of a few months to several quarters which continue to be funded from operating activities.
The A2020 Plan has delivered $315 million of cumulative cost savings.
Other Restructuring Activities
During the second quarter and first six months of 2022, we incurred restructuring charges of $0.3 million ($0.2 million after tax), or less than $0.01 per diluted share and $2.0 million ($1.5 million after tax), or less than $0.01 per diluted share, respectively, related to other immaterial restructuring activity.
The restructuring liability balance for all other restructuring plans excluding the Combined Program, the A2020 Plan and the Institutional Plan was $3.7 million and $23.2 million as of June 30, 2023 and December 31, 2022, respectively. The decrease in liability was driven primarily by the reclass of $19.3 million from other restructuring to the Combined Program in the first six months of 2023. Cash payments during the second quarter and first six months of 2023 related to all other restructuring plans excluding the Combined Program, the A2020 Plan and the Institutional Plan were $0 million and $0.2 million, respectively.
Acquisition and integration related costs
Acquisition and integration costs reported in product and equipment cost of sales on the Consolidated Statements of Income in the second quarter and first six months of 2022 include $0.9 million ($0.6 million after tax) or less than $0.01 per diluted share and $28.5 million ($21.6 million after tax) or $0.08 per diluted share, respectively, related primarily to the recognition of fair value step-up in the Purolite Corporation (“Purolite”) inventory.
Acquisition and integration related costs reported in special (gains) and charges on the Consolidated Statements of Income include $3.5 million ($2.7 million after tax) or $0.01 per diluted share and $8.5 million ($6.4 million after tax) or $0.02 per diluted share in the second quarter and first six months of 2023, respectively. Charges are integration related costs primarily related to the Purolite acquisition.
32
Russia/Ukraine activities
In light of Russia’s invasion of Ukraine and the sanctions against Russia by the United States and other countries, we have made the determination that we will limit our Russian business to operations that are essential to life, providing minimal support for our healthcare, life sciences, food and beverage and certain water businesses. We incurred charges of $0.3 million ($0.2 million after tax) or less than $0.01 per diluted share and recoveries of ($5.7) million (($5.7) million after tax) or $0.02 per diluted share in the second quarter of 2023 and 2022, respectively, and charges of $0.6 million ($0.5 million after tax) or less than $0.01 per diluted share and charges of $12.3 million ($13.3 million after tax) or $0.05 per diluted share in the first six months of 2023 and 2022, respectively, primarily related to recoverability risk of certain assets in both Russia and Ukraine.
Other operating activities
Other special charges recorded in product and equipment cost of sales and special (gains) and charges on the Consolidated Statements of Income in the second quarter of 2023 and 2022 were $3.5 million ($2.6 million after tax) or $0.01 per diluted share and $5.6 million ($4.4 million after tax) or $0.02 per diluted share, respectively, and in the first six months of 2023 and 2022 were $10.1 million ($7.7 million after tax) or $0.03 per diluted share and $26.1 million ($19.7 million after tax) or $0.07 per diluted share, respectively, primarily related to certain legal charges and 2022 COVID-19 related inventory charges.
Operating Income and Operating Income Margin
Second Quarter Ended | Six Months Ended | |||||||||||||||||||
June 30 | June 30 | |||||||||||||||||||
(millions) | 2023 |
| 2022 | 2023 |
| 2022 | ||||||||||||||
Reported GAAP operating income | $484.7 | $425.8 | 14 | % | $836.3 | $680.3 | 23 | % | ||||||||||||
Special (gains) and charges |
| 29.1 |
| 5.3 |
| 56.8 |
| 82.3 | ||||||||||||
Non-GAAP adjusted operating income |
| 513.8 |
| 431.1 | 19 | % |
| 893.1 |
| 762.6 | 17 | % | ||||||||
Effect of foreign currency translation |
| (3.6) |
| (9.8) |
| (6.3) |
| (25.8) | ||||||||||||
Non-GAAP adjusted fixed currency operating income | 510.2 | 421.3 | 21 | % | 886.8 | 736.8 | 20 | % | ||||||||||||
Effect of acquisitions and divestitures | (1.5) | - | (2.0) | - | ||||||||||||||||
Non-GAAP organic operating income | $508.7 | $421.3 | 21 | % | $884.8 | $736.8 | 20 | % | ||||||||||||
Second Quarter Ended | Six Months Ended | |||||||||||||||||||
June 30 | June 30 | |||||||||||||||||||
(percent) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||
Reported GAAP operating income margin | 12.6 | % | 11.9 | % | 11.3 | % | 9.9 | % | ||||||||||||
Non-GAAP adjusted operating income margin | 13.3 | % | 12.0 | % | 12.0 | % | 11.1 | % | ||||||||||||
Non-GAAP adjusted fixed currency operating income margin | 13.3 | % | 12.0 | % | 12.0 | % | 11.0 | % | ||||||||||||
Non-GAAP organic operating income margin | 13.4 | % | 12.1 | % | 12.1 | % | 11.1 | % | ||||||||||||
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 23% in the second quarter and first six months of 2023, respectively, versus the comparable periods of 2022. Our reported operating income for 2023 and 2022 was impacted by special (gains) and charges; excluding the impact of special (gains) and charges from 2023 and 2022 reported results, our adjusted operating income increased 19% and 17% in the second quarter and first six months of 2023.
As shown in the previous table, foreign currency had a 2 and 3 percentage point impact on adjusted operating income growth for the second quarter and first six months of 2023, respectively. Foreign currency had a 4 percentage points impact on adjusted operating income growth for both the second quarter and first six months of 2022.
Other (Income) Expense
Second Quarter Ended | Six Months Ended | ||||||||||||||||||||
June 30 | June 30 | ||||||||||||||||||||
(millions) | 2023 |
| 2022 | Change | 2023 |
| 2022 | Change | |||||||||||||
Reported GAAP other (income) expense | ($14.4) | ($19.5) | (26) | % | ($27.5) | ($38.3) | (28) | % | |||||||||||||
Other income decreased to $14.4 million from $19.5 million in the second quarter of 2023 compared to the second quarter of 2022, respectively, and decreased to $27.5 million from $38.3 million in the first six months of 2023 compared to the first six months of 2022, respectively, driven by higher pension costs.
33
Interest Expense, Net
Second Quarter Ended | Six Months Ended | |||||||||||||||||||
June 30 | June 30 | |||||||||||||||||||
(millions) | 2023 |
| 2022 | Change | 2023 |
| 2022 | Change | ||||||||||||
Reported GAAP interest expense, net | $77.8 | $56.0 | 39 | % | $152.0 | $109.0 | 39 | % | ||||||||||||
Reported net interest expense was $77.8 million and $56.0 million in the second quarter of 2023 and 2022, respectively, and $152.0 million and $109.0 million in the first six months of 2023 and 2022, respectively. The increase in interest expense reflected the impact from higher average interest rates on outstanding debt.
Provision for Income Taxes
The following table provides a summary of our tax rate:
Second Quarter Ended | Six Months Ended | |||||||||||
June 30 | June 30 | |||||||||||
(percent) |
| 2023 | 2022 |
| 2023 | 2022 | ||||||
Reported GAAP tax rate | 20.6 | % | 19.7 | % | 19.5 | % | 20.0 | % | ||||
Tax rate impact of: | ||||||||||||
Special (gains) and charges |
| (0.1) | 0.4 | 0.2 | - |
| ||||||
Discrete tax items |
| (0.6) | (0.9) | 0.2 | (0.7) |
| ||||||
Non-GAAP adjusted tax rate |
| 19.9 | % | 19.2 | % |
| 19.9 | % | 19.3 | % | ||
Our reported tax rate was 20.6% and 19.7% for the second quarter of 2023 and 2022, respectively and 19.5% and 20.0% for the first six months of 2023 and 2022, respectively. The change in our tax rate for the second quarter and first six months of 2023 versus the comparable periods of 2022 was driven primarily by discrete tax items and special (gains) and charges. The change in our tax rate includes the tax impact of special (gains) and charges and discrete tax items, which have impacted the comparability of our historical reported tax rates, as amounts included in our special (gains) and charges are derived from tax jurisdictions with rates that vary from our tax rate, and discrete tax items are not necessarily consistent across periods. 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.
We recognized net tax expense related to discrete tax items of $2.8 million and a net tax benefit of $1.2 million in the second quarter and first six months of 2023, respectively. This included share-based compensation excess tax benefits of $1.8 million and $1.9 million in the second quarter and first six months of 2023, respectively. Additionally, we recognized net tax expense related to discrete tax items of $4.6 million and $0.7 million in the second quarter and first six months of 2023, respectively, primarily due to audit settlements, uncertain tax positions, prior year return adjustments, repricing of deferred tax balances, and other changes in estimates.
We recognized net tax expense related to discrete tax items of $3.7 million and $4.7 million in the second quarter and first six months of 2022, respectively. This included share-based compensation excess tax benefits of $0.7 million and $3.6 million in the second quarter and first six months of 2022, respectively. Additionally, we recognized discrete tax expense of $4.4 million and $8.3 million in the second quarter and first six months of 2022, respectively, primarily due to audit settlements, uncertain tax positions, prior year return adjustments, repricing of deferred tax balances, and other changes in estimates.
34
Net Income Attributable to Ecolab
Second Quarter Ended | Six Months Ended | |||||||||||||||||||||||
June 30 | June 30 | |||||||||||||||||||||||
(millions) |
| 2023 |
| 2022 |
| Change |
| 2023 |
| 2022 |
| Change | ||||||||||||
Reported GAAP net income attributable to Ecolab | $329.7 | $308.3 | 7 | % | $563.1 | $480.2 | 17 | % | ||||||||||||||||
Adjustments: | ||||||||||||||||||||||||
Special (gains) and charges, after tax |
| 23.3 | 2.6 | 44.4 | 66.2 | |||||||||||||||||||
Discrete tax net expense |
| 2.8 | 3.7 | (1.2) | 4.7 | |||||||||||||||||||
Non-GAAP adjusted net income attributable to Ecolab | $355.8 | $314.6 | 13 | % | $606.3 | $551.1 | 10 | % | ||||||||||||||||
Diluted EPS
Second Quarter Ended | Six Months Ended | |||||||||||||||||||||||
June 30 | June 30 | |||||||||||||||||||||||
(dollars) |
| 2023 |
| 2022 |
| Change |
| 2023 |
| 2022 |
| Change | ||||||||||||
Reported GAAP diluted EPS | $1.15 | $ 1.08 | 6 | % | $1.97 | $ 1.67 | 18 | % | ||||||||||||||||
Adjustments: | ||||||||||||||||||||||||
Special (gains) and charges, after tax |
| 0.08 | 0.01 | 0.15 | 0.23 | |||||||||||||||||||
Discrete tax net expense |
| 0.01 | 0.01 | - | 0.02 | |||||||||||||||||||
Non-GAAP adjusted diluted EPS | $1.24 | $ 1.10 | 13 | % | $2.12 | $ 1.92 | 10 | % | ||||||||||||||||
Per share amounts in the above tables do not necessary sum due to rounding.
Currency translation had an unfavorable impact of approximately ($0.03) and ($0.08) per share on diluted EPS for the second quarter and first six months of 2023, when compared to the comparable periods of 2022.
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 2023. 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, 2022. Additional information about our reportable segments is included in Note 15.
Fixed currency net sales and operating income for the second quarter and first six months of 2023 and 2022 for our reportable segments are shown in the following tables:
35
The following tables reconcile the impact of acquisitions and divestitures within our reportable segments:
36
Unless otherwise noted, the following segment performance commentary compares the second quarter and first six months of 2023 against the second quarter and first six months of 2022.
Global Industrial
Second Quarter Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
| 2023 | 2022 |
| 2023 | 2022 | |||||||||||
Sales at fixed currency (millions) | $1,795.6 | $1,653.3 | $3,494.9 | $3,164.7 | ||||||||||||
Sales at public currency (millions) | 1,808.5 | 1,689.9 | 3,517.9 | 3,255.6 | ||||||||||||
Volume |
| (2) | % |
|
| (2) | % |
| ||||||||
Price changes |
| 11 | % |
|
| 13 | % |
| ||||||||
Organic sales change | 9 | % | 10 | % | ||||||||||||
Acquisitions and divestitures |
| - | % |
|
| - | % |
| ||||||||
Fixed currency sales change |
| 9 | % |
|
| 10 | % |
| ||||||||
Foreign currency translation | (1) | % | (2) | % | ||||||||||||
Public currency sales change |
| 7 | % |
|
| 8 | % |
| ||||||||
Operating income at fixed currency (millions) | $255.4 | $216.8 | $471.0 | $396.7 | ||||||||||||
Operating income at public currency (millions) | 257.6 | 224.1 | 475.3 | 415.2 | ||||||||||||
Fixed currency operating income change | 18 | % | 19 | % | ||||||||||||
Fixed currency operating income margin |
| 14.2 | % |
| 13.1 | % |
| 13.5 | % |
| 12.5 | % | ||||
Organic operating income change |
| 18 | % |
|
| 19 | % |
| ||||||||
Organic operating income margin |
| 14.2 | % |
| 13.1 | % |
| 13.5 | % |
| 12.5 | % | ||||
Public currency operating income change | 15 | % | 14 | % | ||||||||||||
Percentages in the above table do not necessarily sum due to rounding.
Net Sales
Organic sales for Global Industrial increased in the second quarter and first six months of 2023, led by double-digit growth in Water and Food & Beverage.
Water organic sales increased 10% and 12% in the second quarter and first six months of 2023, respectively, driven by robust pricing and new business wins. Light industry reported robust sales growth driven by continued strong performance across data centers, microelectronics, and institutional. Heavy industry recorded strong sales growth led by primary metals and chemicals sales. Downstream industry reported strong sales growth driven by water treatment. Food & Beverage organic sales increased 11% and 12% in the second quarter and first six months of 2023, respectively, reflecting strong sales growth driven by continued pricing. Paper organic sales increased 1% and 4% in the second quarter and first six months of 2023, respectively, driven by modest sales growth as strong pricing and new business wins offset continued easing in customer production rates.
Operating Income
Organic operating income and organic operating income margins increased for Global Industrial in both the second quarter and first six months of 2023, respectively.
Organic operating income margins increased 1.1 percentage points during the second quarter of 2023, as the 8.4 percentage point positive impact of strong pricing overcame the 7.0 percentage point negative impacts of lower volume, higher delivered product costs, and investments in the business including incentive compensation. Organic operating income margins increased 1.0 percentage point during the first six months of 2023, as the 9.9 percentage point positive impact of strong pricing overcame the 9.0 percentage point negative impacts of higher delivered product costs, lower volume, and investments in the business.
37
Global Institutional & Specialty
Second Quarter Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
| 2023 | 2022 |
| 2023 | 2022 | |||||||||||
Sales at fixed currency (millions) | $1,268.6 | $1,118.2 | $2,395.2 | $2,109.5 | ||||||||||||
Sales at public currency (millions) | 1,272.2 | 1,129.3 | 2,401.0 | 2,138.7 | ||||||||||||
Volume |
| 2 | % |
|
| 2 | % |
| ||||||||
Price changes |
| 11 | % |
|
| 12 | % |
| ||||||||
Organic sales change | 13 | % | 13 | % | ||||||||||||
Acquisitions and divestitures |
| 1 | % |
|
| - | % |
| ||||||||
Fixed currency sales change |
| 13 | % |
|
| 14 | % |
| ||||||||
Foreign currency translation | (1) | % | (1) | % | ||||||||||||
Public currency sales change |
| 13 | % |
|
| 12 | % |
| ||||||||
Operating income at fixed currency (millions) | $208.7 | $148.6 | $334.4 | $257.2 | ||||||||||||
Operating income at public currency (millions) | 209.2 | 150.6 | 335.1 | 261.5 | ||||||||||||
Fixed currency operating income change | 40 | % | 30 | % | ||||||||||||
Fixed currency operating income margin |
| 16.5 | % |
| 13.3 | % |
| 14.0 | % |
| 12.2 | % | ||||
Organic operating income change |
| 40 | % |
|
| 30 | % |
| ||||||||
Organic operating income margin |
| 16.5 | % |
| 13.3 | % |
| 14.0 | % |
| 12.2 | % | ||||
Public currency operating income change | 39 | % | 28 | % | ||||||||||||
Percentages in the above table do not necessarily sum due to rounding.
Net Sales
Organic sales for Global Institutional & Specialty increased in the second quarter and first six months of 2023, with double-digit growth in both the Institutional and Specialty divisions.
At an operating segment level, Institutional organic sales increased 12% and 13% in the second quarter and first six months of 2023, respectively, driven by strong sales growth driven by robust pricing and new business wins. Specialty organic sales increased 15% and 14% in the second quarter and first six months of 2023, respectively, driven by robust sales growth driven by strong quick service sales and good growth in food retail.
Operating Income
Organic operating income and organic operating income margin increased in both the second quarter and first six months of 2023 for our Global Institutional & Specialty segment.
Organic operating income margins increased 3.2 percentage points during the second quarter of 2023, as the 7.8 percentage point positive impact from strong pricing overcame 3.8 percentage point negative impacts from investments in the business including incentive compensation, and higher delivered product cost. Organic operating income margins increased 1.8 percentage points during the first six months of 2023, as the 8.0 percentage point positive impact from strong pricing overcame 5.8 percentage point negative impacts from investments in the business and higher supply chain costs.
38
Global Healthcare & Life Sciences
Second Quarter Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||
Sales at fixed currency (millions) | $387.5 | $384.4 | $766.1 | $732.6 | ||||||||||||
Sales at public currency (millions) | 390.8 | 390.9 | 770.5 | 753.7 | ||||||||||||
Volume |
| (5) | % |
|
| (3) | % |
| ||||||||
Price changes |
| 6 | % |
|
| 8 | % |
| ||||||||
Organic sales change | 1 | % | 5 | % | ||||||||||||
Acquisitions and divestitures |
| - | % |
|
| - | % |
| ||||||||
Fixed currency sales change |
| 1 | % |
|
| 5 | % |
| ||||||||
Foreign currency translation | (1) | % | (2) | % | ||||||||||||
Public currency sales change |
| - | % |
|
| 2 | % |
| ||||||||
Operating income at fixed currency (millions) | $32.7 | $55.2 | $67.7 | $97.1 | ||||||||||||
Operating income at public currency (millions) | 33.3 | 56.6 | 68.5 | 100.9 | ||||||||||||
Fixed currency operating income change | (41) | % | (30) | % | ||||||||||||
Fixed currency operating income margin |
| 8.4 | % |
| 14.4 | % |
| 8.8 | % |
| 13.3 | % | ||||
Organic operating income change |
| (41) | % |
|
| (30) | % |
| ||||||||
Organic operating income margin |
| 8.4 | % |
| 14.4 | % |
| 8.8 | % |
| 13.3 | % | ||||
Public currency operating income change | (41) | % | (32) | % | ||||||||||||
Percentages in the above table do not necessarily sum due to rounding.
Net Sales
Organic sales for Global Healthcare & Life Sciences increased in both the second quarter and first six months of 2023 driven by modest growth in Healthcare sales offset by soft near-term life sciences industry demand.
At an operating segment level, Healthcare organic sales increased 2% and 4% in the second quarter and first six months of 2023, respectively, as good growth in North America more than offset softness in Europe. Life Sciences organic sales decreased -1% in the second quarter and increased 4% in the first six months of 2023 driven by good pricing offset by soft near-term industry demand.
Operating Income
Organic operating income and organic operating income margins decreased for our Global Healthcare & Life Sciences segment in both the second quarter and first six months of 2023.
Organic operating income margins decreased 6.0 percentage points during the second quarter of 2023, as the 4.5 percentage point positive impact from strong pricing was more than offset by the 11.3 percentage point negative impacts from lower volume, targeted investments in the business, and higher supply chain costs. Organic operating income margins decreased 4.5 percentage points during the first six months of 2023, as the 5.9 percentage point positive impact from strong pricing was more than offset by the 9.8 percentage point negative impacts from lower volume, targeted investments in the business, and higher delivered product costs.
39
Other
Second Quarter Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
| 2023 | 2022 |
| 2023 | 2022 | |||||||||||
Sales at fixed currency (millions) | $362.6 | $332.5 | $691.9 | $619.3 | ||||||||||||
Sales at public currency (millions) | 363.9 | 336.6 | 693.9 | 630.6 | ||||||||||||
Volume |
| 1 | % |
|
| 3 | % |
| ||||||||
Price changes |
| 8 | % |
|
| 9 | % |
| ||||||||
Organic sales change | 9 | % | 12 | % | ||||||||||||
Acquisitions and divestitures |
| - | % |
|
| - | % |
| ||||||||
Fixed currency sales change |
| 9 | % |
|
| 12 | % |
| ||||||||
Foreign currency translation | (1) | % | (1) | % | ||||||||||||
Public currency sales change |
| 8 | % |
|
| 10 | % |
| ||||||||
Operating income at fixed currency (millions) | $63.4 | $51.6 | $113.5 | $88.7 | ||||||||||||
Operating income at public currency (millions) | 63.5 | 52.2 | 113.7 | 90.1 | ||||||||||||
Fixed currency operating income change | 23 | % | 28 | % | ||||||||||||
Fixed currency operating income margin |
| 17.5 | % |
| 15.5 | % |
| 16.4 | % |
| 14.3 | % | ||||
Organic operating income change |
| 23 | % |
|
| 28 | % |
| ||||||||
Organic operating income margin |
| 17.5 | % |
| 15.5 | % |
| 16.4 | % |
| 14.3 | % | ||||
Public currency operating income change | 22 | % | 26 | % | ||||||||||||
Percentages in the above table do not necessarily sum due to rounding.
Net Sales
Organic sales for Other increased in both the second quarter and first six months of 2023 led by double-digit growth in Pest Elimination.
At an operating segment level, Pest Elimination organic sales increased 11% and 12% in the second quarter and first six months of 2023, respectively, reflecting strong sales growth led by double-digit gains in restaurants, food & beverage, food retail, and hospitality. Textile Care organic sales increased 8% and 12% in the second quarter and first six months of 2023, respectively. Colloidal Technologies Group organic sales increased 1% and 10% in the second quarter and first six months of 2023, respectively.
Operating Income
Organic operating income and organic operating income margins increased for Other in both the second quarter and first six months of 2023.
Organic operating income margins increased 2.0 percentage points during the second quarter of 2023, as the 6.0 percentage point positive impact from strong pricing overcame the 4.1 percentage point negative impacts of investments in the business including incentive compensation, and unfavorable mix. Organic operating income margins increased 2.1 percentage points during the first six months of 2023, as the 7.2 percentage point positive impact from strong pricing overcame the 4.9 percentage point negative impacts of investments in the business and unfavorable mix.
Corporate
Consistent with our internal management reporting, Corporate amounts in the table on page 35 include sales to ChampionX in accordance with the long-term supply agreement entered into with the Transaction post-separation, as discussed in Note 14, intangible asset amortization specifically from the Nalco and Purolite transactions 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 31.
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FINANCIAL POSITION, CASH FLOWS AND LIQUIDITY
Financial Position
Total assets were $21.5 billion as of June 30, 2023, compared to total assets of $21.5 billion as of December 31, 2022.
Total liabilities were $13.9 billion as of June 30, 2023, compared to total liabilities of $14.2 billion as of December 31, 2022. Total debt was $8.6 billion as of June 30, 2023 and $8.6 billion as of December 31, 2022. 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 measure 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:
Cash Flows
Operating Activities
Six Months Ended | ||||||||||||
June 30 | ||||||||||||
(millions) |
| 2023 | 2022 |
| Change | |||||||
Cash provided by operating activities | $771.6 | $492.5 | $279.1 | |||||||||
We continue to generate 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. Cash provided by operating activities increased $279 million in the first six months of 2023 compared to the first six months of 2022, driven primarily by a $154 million net favorable change in working capital and $85 million increase in net income. The cash flow impact from working capital was primarily driven by improvement in inventory and receivables offset by a decrease in accounts payable.
Investing Activities
Six Months Ended | ||||||||||||
June 30 | ||||||||||||
(millions) |
| 2023 | 2022 |
| Change | |||||||
Cash used for investing activities | ($463.5) | ($310.8) | ($152.7) | |||||||||
Cash used for investing activities is primarily impacted by capital investments in the business.
We continue to make capital investments in the business, including merchandising equipment, manufacturing equipment and facilities. Total capital expenditures were $346 million and $318 million in the first six months of 2023 and 2022, respectively.
Total cash paid for acquisitions, net of cash acquired along with net cash received from dispositions, during the first six months of 2023 and 2022, was $105 million and $7 million, respectively. Our acquisitions 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.
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Financing Activities
Six Months Ended | ||||||||||||
June 30 | ||||||||||||
(millions) |
| 2023 | 2022 |
| Change | |||||||
Cash used for financing activities | ($322.2) | ($428.2) | $106.0 | |||||||||
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 and dividend payments.
We had net issuances of commercial paper and notes payable of $2 million and $208 million in the first six months of 2023 and 2022, respectively.
Shares are repurchased for the purpose of partially offsetting the dilutive effect of our equity compensation plans, to manage our capital structure and to efficiently return capital to shareholders. We reacquired a total of $11 million and $403 million of shares in the first six months of 2023 and 2022, respectively. Cash proceeds and tax benefits from stock option exercises provide a portion of the funding for repurchase activity.
There was no long-term debt issuance or repayment activity through the first six months of 2023 or 2022.
We paid dividends of $309 million and $300 million in the first six months of 2023 and 2022, respectively.
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 June 30, 2023, we had $554 million of cash and cash equivalents on hand, of which $43 million was held outside of the U.S. We will continue to evaluate our cash position in light of future developments.
As of June 30, 2023, we have a $2.0 billion multi-year credit facility which expires in April 2026. 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 second quarter of 2023, we had no outstanding commercial paper under our U.S. program nor our Euro program. At the end of the second quarter of 2022, we had $604 million outstanding commercial paper under our U.S. program and no outstanding commercial paper under our Euro program. There were no borrowings under our credit facility as of June 30, 2023 or 2022. As of June 30, 2023, both programs were rated A-2 by Standard & Poor’s, P-2 by Moody’s and F-1 by Fitch.
There was no long-term debt issuance or repayment activity through the first six months of 2023.
We are in compliance with our debt covenants and other requirements of our credit agreements and indentures. We 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, 2022 disclosed total notes payable and long-term debt due within one year of $505 million. As of June 30, 2023, the total notes payable and long-term debt due within one year was $1.1 billion. We had no outstanding commercial paper under our U.S. program as of June 30, 2023 and as of December 31, 2022.
Our gross liability for uncertain tax positions was $21 million as of June 30, 2023 and $25 million as of December 31, 2022. 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
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. We expect a more challenging macroeconomic environment, especially in Europe, as the war and weak economic growth are having a significant impact on costs and demand. We also assume easing but ongoing delivered product cost inflation and for interest rates to remain high through 2023.
Argentina and Turkey are classified as highly inflationary economies in accordance with U.S. GAAP, and the U.S. dollar is the functional currency for our subsidiaries in Argentina and Turkey. During the first six months of 2023, sales in Argentina represented less than 1% of our consolidated sales. Assets held in Argentina at the end of the first six months of 2023 represented less than 1% of our consolidated
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assets. During the first six months of 2023, sales in Turkey represented less than 1% of our consolidated sales. Assets held in Turkey at the end of the first six months of 2023 represented less than 1% of our consolidated assets.
In light of Russia’s invasion of Ukraine and the sanctions against Russia by the United States and other countries, we have made the determination that we will limit our Russian business to operations that are essential to life, providing minimal support for our healthcare, life sciences, food and beverage and certain water businesses. We may further narrow our presence in Russia depending on future developments. During the first six months of 2023, our Russian and Ukraine operations represented approximately 1% of our 2023 consolidated net sales.
NEW ACCOUNTING PRONOUNCEMENTS
For information on new accounting pronouncements, refer to Note 17 to the Consolidated Financial Statements.
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 |
| ● | Organic sales, formerly known as 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 |
| ● | Organic operating income, formerly known as acquisition adjusted fixed currency operating income |
| ● | Organic operating income margin, formerly known as acquisition adjusted fixed currency operating income margin |
| ● | EBITDA |
| ● | 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 adjusted cost of sales, adjusted gross margin and adjusted operating income exclude the impact of special (gains) and charges and our non-GAAP financial measures for adjusted tax rate, adjusted net income attributable to Ecolab and adjusted diluted earnings per share 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 2023. We also provide our segment results based on public currency rates for informational purposes.
Our reportable segments do not include the impact of intangible asset amortization from the Nalco and Purolite transactions or the impact of special (gains) and charges as these are not allocated to our reportable segments.
Our non-GAAP financial measures for organic sales, organic operating income and organic operating income margin are at fixed currency and exclude the impact of special (gains) and charges, the results of our acquired businesses from the first twelve months post acquisition and the results of divested businesses from the twelve months prior to divestiture. As part of the separation of ChampionX in 2020, we entered into a Master Cross Supply and Product Transfer agreement with ChampionX to provide, receive or transfer certain products for a period up to 36 months and for a small set of products with limited suppliers over the next few years. Sales of product to
43
ChampionX under this agreement are recorded in product and equipment sales in the Corporate segment along with the related cost of sales. These transactions are removed from the consolidated results as part of the calculation of the impact of acquisitions and divestitures.
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.
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 our business performance and prospects; expectations concerning timing, amount and type of restructuring costs and savings from restructuring activities; macroeconomic environment, delivered product cost inflation, currency translation, and interest rates; Russian operations; working capital; capital investments, acquisitions and share repurchases; amortization expense; non-performance of financial counterparties; payments and contributions to pension and postretirement health care benefit plans; the impact of lawsuits, claims and environmental matters; impact of new accounting pronouncements and tax laws; cash flows, borrowing capacity and funding of cash requirements; payments related to uncertain tax positions; and implementation of ERP system upgrade.
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 ultimate results of any restructuring or efficiency initiative, integration 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 or efficiency initiative 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 materially from those expressed in any forward-looking statements are set forth under Item 1A of our most recent Form 10-K and our other public filings with the Securities and Exchange Commission (the "SEC"), and include the impact of economic factors such as the worldwide economy, capital flows, interest rates, foreign currency risk, reduced sales and earnings in our international operations resulting from the weakening of local currencies versus the U.S. dollar, demand uncertainty, supply chain challenges and inflation; the vitality of the markets we serve; exposure to global economic, political and legal risks related to our international operations, including geopolitical instability, the impact of sanctions or other actions taken by the U.S. or other countries, and retaliatory measures taken by Russia in response, in connection with the conflict in Ukraine; difficulty in procuring raw materials or fluctuations in raw material costs; our ability to attract, retain and develop high caliber management talent to lead our business and successfully execute organizational change and changing labor market dynamics; information technology infrastructure failures or breaches in data security; the effects and duration of the COVID-19 pandemic or other public health outbreaks, epidemics or pandemics; our ability to acquire complementary businesses and to effectively integrate such businesses, including Purolite; our ability to execute key business initiatives, including restructurings and our Enterprise Resource Planning system upgrades; our ability to successfully compete with respect to value, innovation and customer support; pressure on operations from consolidation of customers or vendors; restraints on pricing flexibility due to contractual obligations and our ability to meet our contractual commitments; the costs and effects of complying with laws and regulations, including those relating to the environment, climate change standards, and to the manufacture, storage, distribution, sale and use of our products, as well as to the conduct of our business generally, including labor and employment and anti-corruption; potential chemical spill or release; our commitments, goals, targets, objectives and initiatives related to sustainability; potential to incur significant tax liabilities or indemnification liabilities relating to the separation and split-off of our ChampionX business; the occurrence of litigation or claims, including class action lawsuits; the loss or insolvency of a major customer or distributor; repeated or prolonged government and/or business shutdowns or similar events; acts of war or terrorism; natural or man-made disasters; water shortages; severe weather conditions; changes in tax laws and unanticipated tax liabilities; potential loss of deferred tax assets; our indebtedness, and any failure to comply with covenants that apply to our indebtedness; potential losses arising from the impairment of goodwill or other assets; 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.
44
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.
Item 4. Controls and Procedures
As of June 30, 2023, we carried out an evaluation, under the supervision and with the participation of our management, including our Chairman and Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chairman and Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective.
During the period April 1, 2023 through June 30, 2023 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 our enterprise resource planning (“ERP”) system upgrades, which are expected to occur in phases over the next several years. These upgrades, which include supply chain and certain finance functions, are expected to improve the efficiency of certain financial and related transactional processes. These upgrades of the ERP systems will affect the processes that constitute our internal control over financial reporting and will require testing for effectiveness.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Note 16, 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, 2022, filed with the Securities and Exchange Commission on February 24, 2023, 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 44 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
| (1) | Includes 1,850 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 common shares. As announced on November 3, 2022, our Board of Directors authorized the repurchase of up to an additional 10,000,000 shares. Subject to market conditions, we expect to repurchase all shares under these authorizations, for which no expiration date has been established, in open market or privately negotiated transactions, including pursuant to Rule 10b5-1 and accelerated share repurchase program. |
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Rule 10b5-1 Plan Adoptions and Modifications
None.
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Item 6. Exhibits
Exhibit No. | Document | Method of Filing | ||
(a) | The following documents are filed as exhibits to this report: | |||
(3.2) | Incorporated by reference to Exhibit (3.1) of our Form 8-K, dated May 4, 2023. (File No. 001-9328) | |||
(10.1) | Ecolab Inc. 2023 Stock Incentive Plan, effective May 4, 2023. | Filed herewith electronically. | ||
(10.2) | Filed herewith electronically. | |||
(10.3) | Filed herewith electronically. | |||
(10.4) | Filed herewith electronically. | |||
(15.1) | Filed herewith electronically. | |||
(31.1) | Filed herewith electronically. | |||
(31.2) | Filed herewith electronically. | |||
(32.1) | Filed herewith electronically. | |||
(101.INS) | 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. | Filed herewith electronically. | ||
(101.SCH) | Inline XBRL Taxonomy Extension Schema. | Filed herewith electronically. | ||
(101.CAL) | Inline XBRL Taxonomy Extension Calculation Linkbase. | Filed herewith electronically. | ||
(101.DEF) | Inline XBRL Taxonomy Extension Definition Linkbase. | Filed herewith electronically. | ||
(101.LAB) | Inline XBRL Taxonomy Extension Label Linkbase. | Filed herewith electronically. | ||
(101.PRE) | Inline XBRL Taxonomy Extension Presentation Linkbase. | Filed herewith electronically. | ||
(104) | Cover Page Interactive Data File. | 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. | |||
| |||
Date: August 3, 2023 | By: | /s/ Jennifer J. Bradway | |
Jennifer J. Bradway | |||
Senior Vice President and Corporate Controller | |||
(duly authorized officer and | |||
Chief Accounting Officer) | |||
48
Exhibit (10.1)
ECOLAB INC.
2023 STOCK INCENTIVE PLAN
(Effective May 4, 2023)
The purpose of the Ecolab Inc. 2023 Stock Incentive Plan (the “Plan”) is to advance the interests of Ecolab Inc. (the “Company”) and its stockholders by enabling the Company and its Subsidiaries to attract and retain qualified individuals through opportunities for equity participation in the Company, and to reward those individuals who contribute to the achievement of the Company's economic objectives.
The following terms will have the meanings set forth below, unless the context clearly otherwise requires:
2
Before a termination by the Participant under this Section 2.13 will constitute termination for Good Reason, the Participant must give the Company a notice of termination within 30 calendar days of the occurrence of the event that constitutes Good Reason. The notice must set forth in reasonable detail the specific reason for the termination and the facts and circumstances claimed to provide a basis for termination of employment under the provision indicated. Failure to provide such notice within such 30-day period shall be conclusive proof that the Participant does not have Good Reason to terminate employment.
For purposes of this Section 2.13, Good Reason shall exist only if the Company or applicable Subsidiary fails to remedy the event or events constituting Good Reason within 30 calendar days after receipt of the notice of termination from the Participant. If the Participant determines Good Reason for termination exists and timely files a notice of termination, such determination shall be presumed to be true and the Company will have the burden of proving that Good Reason does not exist.
3
4
5
6
7
8
9
Participants in the Plan will be those Eligible Recipients who, in the judgment of the Committee, have contributed, are contributing or are expected to contribute to the achievement of economic objectives of the Company or its Subsidiaries. Eligible Recipients may be granted from time to time one or more Incentive Awards, singly or in combination or in tandem with other Incentive Awards, as may be determined by the Committee in its sole discretion. Incentive Awards will be deemed to be granted as of the date specified in the grant resolution of the Committee, which date will not be earlier than the date the Committee approved the grant resolution and will be indicated as the grant date of any related agreement with the Participant.
10
11
An Eligible Recipient may be granted one or more Stock Unit Awards under the Plan, and such Stock Unit Awards will be subject to such terms and conditions, consistent with the other
12
provisions of the Plan, as may be determined by the Committee in its sole discretion. The Committee may impose such restrictions or conditions, not inconsistent with the provisions of the Plan, to the payment, issuance, retention and/or vesting of such Stock Unit Awards as it deems appropriate, including, without limitation, (i) the achievement of one or more of the Performance Criteria; and/or that (ii) the Participant remain in the continuous employ or service of the Company or a Subsidiary for a certain period. The agreement evidencing a Stock Unit Award shall either (i) provide that in all cases payment of the Stock Unit Award will be made within two and one-half months following the end of the Eligible Recipient’s tax year during which receipt of the Stock Unit Award is no longer subject to a “substantial risk of forfeiture” within the meaning of Section 409A of the Code, or (ii) contain terms and conditions necessary to avoid adverse tax consequences specified in Section 409A of the Code.
An Eligible Recipient may be granted one or more Performance Awards under the Plan, and such Performance Awards will be subject to such terms and conditions, if any, consistent with the other provisions of the Plan, as may be determined by the Committee in its sole discretion, including, but not limited to, the achievement of one or more of the Performance Criteria. The agreement evidencing a Performance Award shall either (i) provide that in all cases payment of the Performance Award will be made within two and one-half months following the end of the Eligible Recipient’s tax year during which receipt of the Performance Award is no longer subject to a “substantial risk of forfeiture” within the meaning of Section 409A of the Code, or (ii) contain terms and conditions necessary to avoid adverse tax consequences specified in Section 409A of the Code.
The Committee shall determine and set forth in each award agreement whether (i) any Options or Stock Appreciation Rights granted in such award agreement will become or continue to become exercisable and/or remain exercisable and (ii) any Restricted Stock Awards, Stock Unit Awards or Performance Awards granted in such award agreement vest and/or continue to vest or become free of restrictions and conditions to payment, as the case may be, on and after the date that a Participant ceases to be employed by or to provide services to the Company or any Subsidiary (including as a Non-Employee Director), whether by reason of death, Disability, Retirement, voluntary or involuntary termination of employment or services, or otherwise. The date of termination of a Participant’s employment or services will be determined in accordance with Section 12.3(c).
13
14
15
14.2Effect of a Change in Control. Unless otherwise provided in an agreement evidencing an Incentive Award, the following provisions shall apply to outstanding Incentive Awards in the event of a Change in Control.
(a)Continuation, Assumption or Replacement of Incentive Awards. In the event of a Change in Control, the surviving or successor entity (or its parent corporation) may continue, assume or replace Incentive Awards outstanding as of the date of the Change in Control (with such adjustments as may be required or permitted by Section 4.3), and such Incentive Awards or replacements therefore shall remain outstanding and be governed by their respective terms, subject to Section 14.2(d) below. A surviving or successor entity may elect to continue, assume or replace only some Incentive Awards or portions of Incentive Awards. For purposes of this Section 14.2(a), an Incentive Award shall be considered assumed or replaced if, in connection with the Change in Control and in a manner consistent with Sections 409A and 424 of the Code, either (i) the contractual obligations represented by the Incentive Award are expressly assumed by the surviving or successor entity (or its parent corporation) with appropriate adjustments to the number and type of securities subject to the Incentive Award and the exercise price thereof that preserves the intrinsic value of the Incentive Award existing at the time of the Change in Control, or (ii) the Participant has received a comparable equity-based award that preserves the intrinsic value of the Incentive Award existing at the time of the Change in Control and
16
provides for a vesting or exercisability schedule that is the same as or more favorable to the Participant.
(b)Acceleration of Incentive Awards. If and to the extent that outstanding Incentive Awards under the Plan are not continued, assumed or replaced in connection with a Change in Control, then (i) outstanding Options and Stock Appreciation Rights issued to the Participant that are not yet fully exercisable shall immediately become exercisable in full (immediately prior to and contingent upon the Change in Control) and shall remain exercisable in accordance with their terms, (ii) all unvested Restricted Stock Awards, Stock Unit Awards and Performance Awards will become immediately fully vested and non-forfeitable; and (iii) any Performance Criteria applicable to Restricted Stock Awards, Stock Unit Awards and Performance Awards will be deemed to have been satisfied at the target level of performance specified in connection with the applicable Incentive Award.
(c)Payment for Incentive Awards. If and to the extent that outstanding Incentive Awards under the Plan are not continued, assumed or replaced in connection with a Change in Control, then the Committee may terminate some or all of such outstanding Incentive Awards, in whole or in part, as of the effective time of the Change in Control in exchange for payments to the holders as provided in this Section 14.2(c). The Committee will not be required to treat all Incentive Awards similarly for purposes of this Section 14.2(c). The payment for any Incentive Award or portion thereof terminated shall be in an amount equal to the excess, if any, of (i) the fair market value (as determined in good faith by the Committee) of the consideration that would otherwise be received in the Change in Control for the number of shares of Common Stock subject to the Incentive Award or portion thereof being terminated, or, if no consideration is to be received by the Company’s stockholders in the Change in Control, the Fair Market Value of such number of shares immediately prior to the effective date of the Change in Control, over (ii) the aggregate exercise price (if any) for the shares of Common Stock subject to the Incentive Award or portion thereof being terminated. If there is no excess, the Incentive Award may be terminated without payment. Any payment shall be made in such form, on such terms and subject to such conditions as the Committee determines in its discretion, which may or may not be the same as the form, terms and conditions applicable to payments to the Company’s stockholders in connection with the Change in Control, and may include subjecting such payments to vesting conditions comparable to those of the Incentive Award surrendered.
(d)Termination After a Change in Control. If and to the extent that Incentive Awards are continued, assumed or replaced under the circumstances described in Section 14.2(a), and if within two years after the Change in Control a Participant experiences an involuntary termination of employment or other service for reasons other than Cause, or terminates his or her employment or other service for Good Reason, then (i) outstanding Options and Stock Appreciation Rights issued to the Participant that are not yet fully exercisable shall immediately become exercisable in full and shall remain exercisable in accordance with their terms, (ii) all unvested Restricted Stock Awards, Stock Unit Awards and Performance Awards will become immediately fully vested and non-forfeitable; and (iii) any Performance Criteria applicable to Restricted Stock Awards, Stock Unit Awards and Performance Awards will be deemed to have been satisfied at the target level of performance specified in connection with the applicable Incentive Award.
17
18
Notwithstanding any other provision of the Plan or any agreements entered into pursuant to the Plan, the Company will not be required to issue any shares of Common Stock under this Plan, and a Participant may not sell, assign, transfer or otherwise dispose of shares of Common Stock issued pursuant to Incentive Awards granted under the Plan, unless (a) there is in effect with respect to such shares a registration statement under the Securities Act and any applicable securities laws of a state or foreign jurisdiction or an exemption from such registration under the Securities Act and applicable state or foreign securities laws, and (b) there has been obtained any other consent, approval or permit from any other U.S. or foreign regulatory body which the Committee, in its sole discretion, deems necessary or advisable. The Company may condition such issuance, sale or transfer upon the receipt of any representations or agreements from the parties involved, and the placement of any legends on certificates representing shares of Common Stock, as may be deemed necessary or advisable by the Company in order to comply with such securities law or other restrictions.
19
It is intended that the Plan and all Incentive Awards hereunder be administered in a manner that will comply with Section 409A of the Code, including the final regulations and other guidance issued by the Secretary of the Treasury and the Internal Revenue Service with respect thereto. The Committee is authorized to adopt rules or regulations deemed necessary or appropriate to qualify for an exception from or to comply with the requirements of Section 409A of the Code (including any transition or grandfather rules relating thereto). Notwithstanding anything in this Section 18 to the contrary, with respect to any Incentive Award subject to Section 409A of the Code, no amendment to or payment under such Incentive Award will be made unless permitted under Section 409A of the Code and the regulations or rulings issued thereunder. Without limiting the generality of the foregoing, if any amount shall be payable with respect to any Incentive Award hereunder as a result of a Participant’s “separation from service” at such time as the Participant is a “specified employee” (as those terms are defined for purposes of Section 409A of the Code) and such amount is subject to the provisions of Section 409A of the Code, then no payment shall be made, except as permitted under Section 409A of the Code, prior to the first day of the seventh calendar month beginning after the Participant’s separation from service (or the date of his or her earlier death). The Company may adopt a specified employee policy that will apply to identify the specified employees for all deferred compensation plans subject to Section 409A of the Code; otherwise, specified employees will be identified using the default standards contained in the regulations under Section 409A of the Code.
Notwithstanding anything to the contrary in this Plan, none of the Company, the Committee nor any other person involved with the administration of this Plan shall in any way be responsible for ensuring the exemption of any Incentive Award from, or compliance by any Incentive Award with, the requirements of Section 409A of the Code. By accepting an Incentive Award under this Plan, each Participant acknowledges that neither the Company, the Committee nor any other person involved with the administration of this Plan has any duty or obligation to design or administer the Plan or Incentive Awards granted thereunder in a manner that minimizes a Participant’s tax liabilities, including the avoidance of any additional tax liabilities under Section 409A of the Code.
The Board may suspend or terminate the Plan or any portion thereof at any time. In addition to the authority of the Committee to amend the Plan under Section 3.2(e), the Board may amend the Plan from time to time in such respects as the Board may deem advisable in order that Incentive Awards under the Plan will conform to any change in applicable laws or regulations or in any other respect the Board may deem to be in the best interests of the Company; provided, however, that no such amendments to the Plan will be effective without approval of the Company’s stockholders if: (i) stockholder approval of the amendment is then required pursuant to Section 422 of the Code or the rules of the New York Stock Exchange; or (ii) such amendment seeks to modify Section 3.2(d) hereof. No termination, suspension or amendment of the Plan may adversely affect any outstanding Incentive Award without the consent of the affected Participant; provided, however, that (i) this sentence will not impair the right of the Committee to take whatever action it deems appropriate under Sections 3.2(c), 4.3 and 14 of the Plan, and (ii) no consent of any affected Participant shall be required if such amendment is necessary to comply with
20
applicable law or stock exchange rules.
The Plan shall became effective as of the date on which it was approved by the Company’s stockholders (the “Effective Date”). The Plan will terminate at midnight on the tenth (10th) anniversary of the Effective Date and may be terminated prior to such time by Board action. No Incentive Award will be granted after termination of the Plan. Incentive Awards outstanding upon termination of the Plan may continue to be exercised, earned or become free of restrictions, according to their terms.
(a)Incentive Awards granted hereunder shall be subject to the Company’s Policy on Reimbursement of Incentive Payments, as may be amended from time to time, and any other future clawback policy that may be approved by the Company. In addition, the Committee may specify in an agreement evidencing an Incentive Award that the Participant’s rights, payments, and benefits with respect to such Award will be subject to reduction, cancellation, forfeiture or recovery by the Company upon the occurrence of certain specified events, in addition to any otherwise applicable vesting or performance conditions of an Incentive Award. Such events may include termination of employment or other service for Cause; violation of any material Company or Subsidiary policy; breach of noncompetition, non-solicitation or confidentiality provisions that apply to the Participant; a determination that the payment of the Incentive Award was based on an incorrect determination that financial or other Performance Criteria were met or other conduct by the Participant that is detrimental to the business or reputation of the Company or its Subsidiaries.
21
(b)Incentive Awards and any compensation associated therewith may be made subject to forfeiture, recovery by the Company or other action pursuant to any compensation recovery policy adopted by the Board or the Committee at any time, including in response to the requirements of Section 10D of the Exchange Act and any implementing rules and regulations thereunder, or as otherwise required by law. Any agreement evidencing an Incentive Award may be unilaterally amended by the Committee to comply with any such compensation recovery policy.
22
Exhibit (10.2)
ECOLAB INC. (the "Company")
NON-STATUTORY STOCK OPTION AGREEMENT
The Company has adopted the Ecolab Inc. 2023 Stock Incentive Plan (the "Plan") to grant non-statutory stock options to employees, consultants, advisors and independent contractors of the Company and its Subsidiaries. The Company hereby grants to you (the "Optionee") on the date set forth in your grant notice (the "Date of Grant") a non-statutory stock option (the "Option") to purchase the number of shares set forth in the Optionee's grant notice (the "Option Shares") of the Company's common stock, $1.00 par value (the "Common Stock"). The Option and Option Shares are subject to the terms, conditions, restrictions and risk of forfeiture set forth in this agreement (the "Agreement") and in the Plan. The Option is not intended to be an "incentive stock option" as that term is used in Section 422 of the Code.
The per share price to be paid by Optionee in the event of an exercise of the Option is set forth in the Optionee's grant notice.
2
Neither this Option nor the Option Shares acquired upon exercise may be transferred by the Optionee, either voluntarily or involuntarily, or subjected to any lien, directly or indirectly, by operation of law or otherwise, except as provided in the Plan. Any attempt to transfer or encumber this Option or the Option Shares other than in accordance with this Agreement and the Plan will be null and void and will void this Option.
Nothing in this Agreement will be construed to (a) limit in any way the right of the Company to terminate the employment or service of the Optionee at any time, or (b) be evidence of any agreement or understanding, express or implied, that the Company will retain the Optionee in any particular position, at any particular rate of compensation or for any particular period of time.
By accepting this Award, the Optionee (i) acknowledges his or her obligation to make arrangements acceptable to the Company for payment of any federal, state, local or foreign withholding or employment-related taxes that may be due as a result of the grant or exercise of this Option, (ii) authorizes the Company (or any Subsidiary) to withhold from payroll or other amounts payable to the Optionee any sums required to satisfy such tax obligations, and (iii) otherwise agrees to satisfy such obligations in accordance with the provisions of Section 13 of the Plan. If the Optionee desires to satisfy some or all of such tax obligations by delivering (actually or through attestation of ownership) Previously Acquired
3
Shares or by having the Company retain a portion of the Shares otherwise issuable upon exercise of the Option, the Optionee must make such a request which shall be subject to approval by the Company. For purposes of satisfying the Optionee's withholding and employment-related tax obligations, Previously Acquired Shares or Shares retained by the Company will be valued at their Fair Market Value on the date of exercise of the Option. Delivery of Shares upon exercise of this Option is subject to the satisfaction of applicable withholding and employment-related tax obligations.
The number and kind of securities subject to this Option and the exercise price of this Option will be subject to adjustment under the circumstances and to the extent specified in Section 4.3 of the Plan.
The Optionee hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of the Optionee's personal data by and among, as applicable, the Company for the exclusive purpose of implementing, administering and managing the Optionee's participation in the Plan. The Optionee understands that the Company may hold certain personal information about the Optionee, including, but not limited to, the Optionee's name, home address and telephone number, date of birth, social security number (or any other social or national identification number), salary, nationality, job title, number of Options and/or shares of Common Stock held and the details of all Options or any other entitlement to shares of Common Stock awarded, cancelled, vested, unvested or outstanding for the purpose of implementing, administering and managing the Optionee's participation in the Plan (the "Data"). The Optionee understands that the Data may be transferred to the Company or to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in the Optionee's country or elsewhere, and that any recipient's country (e.g., the United States) may have different data privacy laws and protections than the Optionee's country. The Optionee understands that he or she may request a list with the names and addresses of any potential recipients of the Data by contacting his or her local human resources representative or the Company's stock plan administrator. The Optionee authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the sole purpose of implementing, administering and managing the Optionee's participation in the Plan, including any requisite transfer of such Data to a broker or other third party assisting with the administration of Options under the Plan or with whom shares of Common Stock acquired pursuant to the exercise of the Options or cash from the sale of such shares may be deposited. Furthermore, the Optionee acknowledges and understands that the transfer of the Data to the Company or to any third parties is necessary for the Optionee's participation in the Plan. The Optionee understands that the Optionee may, at any time, view the Data, request additional information about the storage and processing of the Data, require any necessary amendments to the Data or refuse or withdraw the consents herein by contacting the Optionee's local human resources representative or the Company's stock plan administrator in writing. The Optionee further acknowledges that withdrawal of consent may affect his or her ability to vest in or realize benefits from the Option, and the Optionee's ability to participate in the Plan. For more information on the consequences of refusal to consent or withdrawal of consent, the Optionee understands that he or she may contact his or her local human resources representative or the Company's stock plan administrator.
4
entirety, and the Optionee, by execution of this Agreement, acknowledges having received a copy of the Plan. The provisions of this Agreement will be interpreted as to be consistent with the Plan, and any ambiguities in this Agreement will be interpreted by reference to the Plan. In the event that any provision of this Agreement is inconsistent with the terms of the Plan, the terms of the Plan will prevail. References in this Agreement to specific Sections of the Plan refer to those Sections of the Plan as in effect on the Date of Grant.
Neither the Optionee nor any other person entitled to exercise the Option will have any rights as a stockholder with respect to any of the Option Shares until the Option has been exercised in accordance with this Agreement and the Optionee or such other person becomes the holder of record of the resulting shares of Common Stock as provided in Section 4.1 above.
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the Company pursuant to the Plan, this consent will be effective for the duration of the Agreement. The Optionee also understands that the Optionee will have the right at any time to request that the Company deliver written copies of any and all materials referred to above. The Optionee hereby consents to any and all procedures the Company has established or may establish for an electronic signature system for delivery and acceptance of any such documents that the Company may elect to deliver, and agrees that the Optionee's electronic signature is the same as, and will have the same force and effect as, the Optionee's manual signature. The Optionee consents and agrees that any such procedures and delivery may be effected by a third party engaged by the Company to provide administrative services related to the Plan.
6
Exhibit A
The following provision will be applicable instead of the definition set forth in Section 2.13 of the Plan:
2.13 “Good Reason” means, unless otherwise set forth in an agreement between the Company and the Participant, without the express written consent of the affected Participant, any of the following events involving the Company or Subsidiary that employs or receives services from the Participant:
(a) the assignment to the Participant of any duties inconsistent in any substantial respect with the Participant’s position, authority or responsibilities as in effect during the 90-day period immediately preceding the Change in Control which assignment results in a substantial diminution in such position, authority or responsibilities or any other substantial adverse change in such position (including titles), authority or responsibilities, excluding an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company or applicable Subsidiary as set forth below;
(b)any failure by the Company or applicable Subsidiary to furnish the Participant with compensation and benefits at a level substantially equal to or exceeding those received by the Participant from the Company or applicable Subsidiary during the 90-day period preceding the Change in Control, other than (i) an insubstantial and inadvertent failure remedied by the Company or applicable Subsidiary as set forth below, (ii) a reduction in compensation which is applied to all non-union employees of the Company or applicable Subsidiary in the same dollar amount or percentage, or (iii) a reduction or modification of any employee benefit program covering substantially all of the employees of the Company or applicable Subsidiary, which reduction or modification generally applies to all employees covered under such program; or
(c)the Company or applicable Subsidiary requiring the Participant to be based or to perform services at any office or location that is in excess of 50 miles from the principal location of the Participant’s work during the 90-day period immediately preceding the Change in Control, except for travel reasonably required in the performance of the Participant’s responsibilities.
Before a termination by the Participant under this Section 2.13 will constitute termination for Good Reason, the Participant must give the Company a notice of termination within 30 calendar days of the occurrence of the event that constitutes Good Reason. The notice must set forth in reasonable detail the specific reason for the termination and the facts and circumstances claimed to provide a basis for termination of employment under the provision indicated. Failure to provide such notice within such 30-day period shall be conclusive proof that the Participant does not have Good Reason to terminate employment.
For purposes of this Section 2.13, Good Reason shall exist only if the Company or applicable Subsidiary fails to remedy the event or events constituting Good Reason within 30 calendar days after receipt of the notice of termination from the Participant. If the Participant determines Good Reason for termination exists and timely files a notice of termination, such determination shall be presumed to be true and the Company will have the burden of proving that Good Reason does not exist.
7
Exhibit (10.3)
ECOLAB INC. (the "Company")
PERFORMANCE-BASED
RESTRICTED STOCK UNIT AWARD AGREEMENT
The Company has adopted the Ecolab Inc. 2023 Stock Incentive Plan (the "Plan") to grant a performance-based restricted Stock Unit Awards to certain employees of the Company and its Subsidiaries. The Company hereby grants to you (the "Grantee") on the date set forth in your grant notice (the "Date of Grant") a restricted Stock Unit Award (the "Award") consisting of the number of units set forth in the Grantee's grant notice (the "Award Units"), each of which is a bookkeeping entry representing the right to receive one share of the Company's common stock, par value $1.00 per share (the "Common Stock"). The Award and Award Units are subject to the terms, conditions, restrictions and risk of forfeiture set forth in this agreement (the "Agreement") and in the Plan.
Except as may otherwise be provided in Section 5.2 below, Vested Award Units will be paid to the Grantee by no later than March 15 of the year following the end of the Performance Period. Each Vested Award Unit will be paid to the Grantee in one share of Common Stock, provided that the Company will have no obligation to issue shares of Common Stock pursuant to this Agreement unless and until the Grantee has satisfied any applicable tax obligations pursuant to Article 9 below and such issuance otherwise complies with all applicable law. Prior to the time the Vested Award Units are settled, the Grantee will have no rights other than those of a general creditor of the Company. The Award Units represent an unfunded and unsecured obligation of the Company.
2
If the Grantee's employment by or other service with the Company and all Subsidiaries is terminated by the Company or any Subsidiary without Cause prior to the Vesting Date, then (i) for purposes of Section 2.1(b) of this Agreement, the Grantee will be deemed to have been in the continuous employ of or service with the Company or any Subsidiary until the Vesting Date with respect to one-third of the Award Units if such termination occurs during the second year of the Performance Period and with respect to two-thirds of the Award Units if the such termination occurs during the third year of the Performance Period, and (ii) for purposes of determining the number of Vested Award Units on the Vesting Date under Section 2.2 of this Agreement, the Vested Award Unit Percentage
3
determined in accordance with Section 2.2 will be applied to the number of Award Units as to which the service-based vesting condition is deemed satisfied in accordance with clause (i) of this sentence, rather than to the total number of Award Units.
The number and kind of securities subject to this Award will be subject to adjustment under the circumstances and to the extent specified in Section 4.3 of the Plan.
The Grantee will have no rights as a stockholder with respect to any of the Award Units until the Award Units are settled following vesting and the Grantee becomes the holder of record of shares of Common Stock.
Nothing in this Agreement will be construed to (a) limit in any way the right of the Company to terminate the employment or service of the Grantee at any time, or (b) be evidence of any agreement or understanding, express or implied, that the Company will retain the Grantee in any particular position at any particular rate of compensation or for any particular period of time.
By accepting this Award, the Grantee (i) acknowledges his or her obligation to pay any federal, foreign, state and local withholding or employment-related taxes attributable to this Award as provided in Section 13 of the Plan, and (ii) consents and directs the Company or its third party administrator to withhold the number of shares of Common Stock issuable upon the vesting of some or all of the Award Units as the Company, in its sole discretion, deems necessary to satisfy such withholding obligations. For purposes of satisfying the Grantee's withholding and employment-related tax obligations, shares withheld by the Company will be valued at their Fair Market Value on the date of settlement.
The Grantee hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of the Grantee's personal data by and among, as applicable, the Company and its Subsidiaries for the exclusive purpose of implementing, administering and managing the Grantee's participation in the Plan. The Grantee understands that the Company may hold certain personal information about the Grantee, including, but not limited to, the Grantee's name, home address and telephone number, date of birth, social security number (or any other social or national identification
4
number), salary, nationality, job title, number of Award Units and/or shares of Common Stock held and the details of all Award Units or any other entitlement to shares of Common Stock awarded, cancelled, vested, unvested or outstanding for the purpose of implementing, administering and managing the Grantee's participation in the Plan (the "Data"). The Grantee understands that the Data may be transferred to the Company or to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in the Grantee's country or elsewhere, and that any recipient's country (e.g., the United States) may have different data privacy laws and protections than the Grantee's country. The Grantee understands that he or she may request a list with the names and addresses of any potential recipients of the Data by contacting his or her local human resources representative or the Company's stock plan administrator. The Grantee authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the sole purpose of implementing, administering and managing the Grantee's participation in the Plan, including any requisite transfer of such Data to a broker or other third party assisting with the administration of Award Units under the Plan or with whom shares of Common Stock acquired pursuant to the vesting of the Award Units or cash from the sale of such shares may be deposited. Furthermore, the Grantee acknowledges and understands that the transfer of the Data to the Company or to any third parties is necessary for the Grantee's participation in the Plan. The Grantee understands that the Grantee may, at any time, view the Data, request additional information about the storage and processing of the Data, require any necessary amendments to the Data or refuse or withdraw the consents herein by contacting the Grantee's local human resources representative or the Company's stock plan administrator in writing. The Grantee further acknowledges that withdrawal of consent may affect his or her ability to vest in or realize benefits from the Award Units, and the Grantee's ability to participate in the Plan. For more information on the consequences of refusal to consent or withdrawal of consent, the Grantee understands that he or she may contact his or her local human resources representative or the Company's stock plan administrator.
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this Agreement will be brought in an appropriate Minnesota court, and the parties to this Agreement consent to the exclusive jurisdiction of the court for this purpose.
6
Exhibit A
The following provision will be applicable instead of the definition set forth in Section 2.13 of the Plan:
2.13"Good Reason" means, unless otherwise set forth in an agreement between the Company and the Participant, without the express written consent of the affected Participant, any of the following events involving the Company or Subsidiary that employs or receives services from the Participant:
Before a termination by the Participant under this Section 2.13 will constitute termination for Good Reason, the Participant must give the Company a notice of termination within 30 calendar days of the occurrence of the event that constitutes Good Reason. The notice must set forth in reasonable detail the specific reason for the termination and the facts and circumstances claimed to provide a basis for termination of employment under the provision indicated. Failure to provide such notice within such 30-day period shall be conclusive proof that the Participant does not have Good Reason to terminate employment.
For purposes of this Section 2.13, Good Reason shall exist only if the Company or applicable Subsidiary fails to remedy the event or events constituting Good Reason within 30 calendar days after receipt of the notice of termination from the Participant. If the Participant determines Good Reason for termination exists and timely files a notice of termination, such determination shall be presumed to be true and the Company will have the burden of proving that Good Reason does not exist.
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Exhibit (10.4)
ECOLAB INC. (the "Company")
RESTRICTED STOCK UNIT AWARD AGREEMENT
The Company has adopted the Ecolab Inc. 2023 Stock Incentive Plan (the "Plan") to grant restricted Stock Unit Awards to certain employees of the Company and its Subsidiaries. The Company hereby grants to you (the "Grantee") on the date set forth in your grant notice (the "Date of Grant") a restricted Stock Unit Award (the "Award") consisting of the number of units set forth in the Grantee's grant notice (the "Award Units"), each of which is a bookkeeping entry representing the right to receive one share of the Company's common stock, par value $1.00 per share (the "Common Stock"). The Award and Award Units are subject to the terms, conditions, restrictions and risk of forfeiture set forth in this agreement (the "Agreement") and in the Plan.
| (a) | Termination of Employment Due to Death or Disability. In the event a Grantee’s employment or other service with the Company and all Subsidiaries is terminated by reason of death or Disability, all unvested Award Units then held by the Grantee will become fully vested. |
| (b) | Termination of Employment Due to Retirement. In the event a Grantee’s employment or other service with the Company and all Subsidiaries is terminated by reason of Retirement, all unvested Award Units then held by the Grantee will terminate and be forfeited. |
| (c) | Termination of Employment for Reasons Other than Death, Disability or Retirement. In the event a Grantee’s employment or other service with the Company and all Subsidiaries is terminated for any reason other than death, Disability, Retirement, or other than a termination following a Change in Control (that is addressed in Section 2.5 |
| below), or a Grantee is in the employ or service of a Subsidiary and the Subsidiary ceases to be a Subsidiary of the Company (unless the Grantee continues in the employ or service of the Company or another Subsidiary), all unvested Award Units then held by the Grantee will terminate and be forfeited. |
Vested Award Units will be settled and paid to the Grantee no later than two and one-half months after the end of the Grantee's taxable year in which the applicable vesting date occurred with respect to the Award Units. Each vested Award Unit will be paid to the Grantee in one share of Common Stock, provided that the Company will have no obligation to issue shares of Common Stock pursuant to this Agreement unless and until the Grantee has satisfied any applicable tax obligations pursuant to Article 7 below and such issuance otherwise complies with all applicable law. Prior to the time the vested Award Units are settled, the Grantee will have no rights other than those of a general creditor of the Company. The Award Units represent an unfunded and unsecured obligation of the Company.
The number and kind of securities subject to this Award will be subject to adjustment under the circumstances and to the extent specified in Section 4.3 of the Plan.
The Grantee will have no rights as a stockholder with respect to any of the Award Units until the Award Units are settled following vesting and the Grantee becomes the holder of record of shares of Common Stock.
Nothing in this Agreement will be construed to (a) limit in any way the right of the Company to terminate the employment or service of the Grantee at any time, or (b) be evidence of any agreement or understanding, express or implied, that the Company will retain the Grantee in any particular position at any particular rate of compensation or for any particular period of time.
By accepting this Award, the Grantee (i) acknowledges his or her obligation to pay any federal, foreign, state and local withholding or employment-related taxes attributable to this Award as provided in Section 13 of the Plan, and (ii) consents and directs the Company or its third party administrator to withhold the number of shares of Common Stock issuable upon the vesting of some or all of the Award Units as the Company, in its sole discretion, deems necessary to satisfy such withholding obligations. For purposes of satisfying the Grantee's withholding and employment-related tax obligations, shares withheld by the Company will be valued at their Fair Market Value on the date of settlement.
2
The Grantee hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of the Grantee's personal data by and among, as applicable, the Company and its Subsidiaries for the exclusive purpose of implementing, administering and managing the Grantee's participation in the Plan. The Grantee understands that the Company may hold certain personal information about the Grantee, including, but not limited to, the Grantee's name, home address and telephone number, date of birth, social security number (or any other social or national identification number), salary, nationality, job title, number of Award Units and/or shares of Common Stock held and the details of all Award Units or any other entitlement to shares of Common Stock awarded, cancelled, vested, unvested or outstanding for the purpose of implementing, administering and managing the Grantee's participation in the Plan (the "Data"). The Grantee understands that the Data may be transferred to the Company or to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in the Grantee's country or elsewhere, and that any recipient's country (e.g., the United States) may have different data privacy laws and protections than the Grantee's country. The Grantee understands that he or she may request a list with the names and addresses of any potential recipients of the Data by contacting his or her local human resources representative or the Company's stock plan administrator. The Grantee authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the sole purpose of implementing, administering and managing the Grantee's participation in the Plan, including any requisite transfer of such Data to a broker or other third party assisting with the administration of Award Units under the Plan or with whom shares of Common Stock acquired pursuant to the vesting of the Award Units or cash from the sale of such shares may be deposited. Furthermore, the Grantee acknowledges and understands that the transfer of the Data to the Company or to any third parties is necessary for the Grantee's participation in the Plan. The Grantee understands that the Grantee may, at any time, view the Data, request additional information about the storage and processing of the Data, require any necessary amendments to the Data or refuse or withdraw the consents herein by contacting the Grantee's local human resources representative or the Company's stock plan administrator in writing. The Grantee further acknowledges that withdrawal of consent may affect his or her ability to vest in or realize benefits from the Award Units, and the Grantee's ability to participate in the Plan. For more information on the consequences of refusal to consent or withdrawal of consent, the Grantee understands that he or she may contact his or her local human resources representative or the Company's stock plan administrator.
3
4
Exhibit A
The following provision will be applicable instead of the definition set forth in Section 2.13 of the Plan:
2.13“Good Reason” means, unless otherwise set forth in an agreement between the Company and the Participant, without the express written consent of the affected Participant, any of the following events involving the Company or Subsidiary that employs or receives services from the Participant:
(a)the assignment to the Participant of any duties inconsistent in any substantial respect with the Participant’s position, authority or responsibilities as in effect during the 90-day period immediately preceding the Change in Control which assignment results in a substantial diminution in such position, authority or responsibilities or any other substantial adverse change in such position (including titles), authority or responsibilities, excluding an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company or applicable Subsidiary as set forth below;
(b)any failure by the Company or applicable Subsidiary to furnish the Participant with compensation and benefits at a level substantially equal to or exceeding those received by the Participant from the Company or applicable Subsidiary during the 90-day period preceding the Change in Control, other than (i) an insubstantial and inadvertent failure remedied by the Company or applicable Subsidiary as set forth below, (ii) a reduction in compensation which is applied to all non-union employees of the Company or applicable Subsidiary in the same dollar amount or percentage, or (iii) a reduction or modification of any employee benefit program covering substantially all of the employees of the Company or applicable Subsidiary, which reduction or modification generally applies to all employees covered under such program; or
Before a termination by the Participant under this Section 2.13 will constitute termination for Good Reason, the Participant must give the Company a notice of termination within 30 calendar days of the occurrence of the event that constitutes Good Reason. The notice must set forth in reasonable detail the specific reason for the termination and the facts and circumstances claimed to provide a basis for termination of employment under the provision indicated. Failure to provide such notice within such 30-day period shall be conclusive proof that the Participant does not have Good Reason to terminate employment.
For purposes of this Section 2.13, Good Reason shall exist only if the Company or applicable Subsidiary fails to remedy the event or events constituting Good Reason within 30 calendar days after receipt of the notice of termination from the Participant. If the Participant determines Good Reason for termination exists and timely files a notice of termination, such determination shall be presumed to be true and the Company will have the burden of proving that Good Reason does not exist.
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Exhibit (15.1)
August 3, 2023
Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549
Commissioners:
We are aware that our report dated August 3, 2023 on our review of interim financial statements of Ecolab Inc., which appears in this Quarterly Report on Form 10-Q, is incorporated by reference in the Registration Statements on Form S-8 (Registration Nos. 2-90702; 33-18202; 33-55986; 33-56101; 333-95043; 333-109890; 33-34000; 33-56151; 333-18627; 333-109891; 33-56125; 333-70835; 33-60266; 333-95041; 333-40239; 333-95037; 333-50969; 333-58360; 333-97927; 333-115567; 333-129427; 333-129428; 333-140988; 333-115568; 333-132139; 333-147148; 333-163837; 333-163838; 333-165130; 333-165132; 333-166646; 333-174028; 333-178300; 333-178302; 333-190317; 333-199730; 333-199732; 333-226534; 333-250090; 333-271653; and 333-271654) and Form S-3 (Registration No. 333-249740) of Ecolab Inc.
Very truly yours, | | |
| | |
| | |
/s/ PricewaterhouseCoopers LLP | | |
PricewaterhouseCoopers LLP | | |
Minneapolis, Minnesota | | |
Exhibit (31.1)
CERTIFICATION
I, Christophe Beck, certify that:
1. | I have reviewed this quarterly report on Form 10-Q for the quarter ended June 30, 2023 of Ecolab Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: August 3, 2023 | | | |
| | | |
| | | |
/s/ Christophe Beck | | | |
Christophe Beck | | | |
Chief Executive Officer | | | |
| | |
Exhibit (31.2)
CERTIFICATION
I, Scott D. Kirkland, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q for the quarter ended June 30, 2023 of Ecolab Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: August 3, 2023 | | | |
| | | |
| | | |
/s/ Scott D. Kirkland | | | |
Scott D. Kirkland | | | |
Chief Financial Officer | | | |
Exhibit (32.1)
Section 1350 Certifications
Pursuant to 18 U.S.C. Section 1350, each of the undersigned officers of Ecolab Inc. does hereby certify that:
| (a) | the Quarterly Report on Form 10-Q of Ecolab Inc. for the quarter ended June 30, 2023 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (b) | information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Ecolab Inc. |
Dated: August 3, 2023 | | | /s/ Christophe Beck |
| | | Christophe Beck |
| | | Chief Executive Officer |
| | | |
| | | |
Dated: August 3, 2023 | | | |
| | | /s/ Scott D. Kirkland |
| | | Scott D. Kirkland |
| | | Chief Financial Officer |