ECOLAB INC.
The following management discussion and analysis ("MD&A") provides information
that 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 discussion should be read in conjunction with the consolidated financial
statements and related notes included in this Form 10-K. Our consolidated
financial statements are prepared in accordance with U.S. GAAP. 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 and
information set forth in the sections entitled "Non-GAAP Financial Measures" at
the end of this MD&A, and "Forward-Looking Statements" and "Risk Factors" within
Items 1 and 1A of this Form 10-K. We also refer readers to the tables within the
section entitled "Results of Operations" of this MD&A for reconciliation
information of Non-GAAP measures to U.S. GAAP.
Comparability of Results
Fixed Currency Foreign Exchange Rates
Management evaluates the sales and operating income performance of our non-U.S. dollar functional currency international operations based on fixed currency exchange rates, which eliminate the impact of exchange rate fluctuations on our international operations. Fixed currency amounts are updated annually at the beginning of each year based on translation intoU.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.
Comparability of Reportable Segments
We made immaterial changes to our reportable segments, including the movement of certain customers and cost allocations between reportable segments. All comparisons and discussion throughout the MD&A reflect these changes.
Impact of Acquisitions and Divestitures
Acquisition adjusted growth rates exclude the results of our acquired businesses
from the first twelve months post acquisition and exclude the results of our
divested businesses from the twelve months prior to divestiture.
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EXECUTIVE SUMMARY
We achieved improved sales and strong earnings growth in 2019 as we drove new
product introductions, new business wins and improved operating efficiency in a
generally steady market environment. Increased pricing was achieved to more than
offset unfavorable sales mix. Along with higher other income and lower interest
expense, adjusted diluted earnings per share leveraged the good operating income
growth and delivered the year's double-digit adjusted diluted EPS growth.
Sales
Reported sales increased 2% to$14.9 billion in 2019 from$14.7 billion in 2018. Sales were positively impacted by pricing. When measured in fixed rates of foreign currency exchange, fixed currency sales increased 4% compared to the prior year. Acquisition adjusted fixed currency sales increased 3% compared
to the prior year. Gross Margin
Our reported gross margin was 41.5% of sales for 2019, compared to our 2018 reported gross margin of 41.2%. Excluding the impact of special (gains) and charges included in cost of sales from both 2019 and 2018, our adjusted gross margin was 41.7% in 2019 and 41.3% in 2018.
Operating Income Reported operating income increased 3% to$2.01 billion in 2019, compared to$1.95 billion in 2018. Adjusted operating income, excluding the impact of special (gains) and charges, increased 9% in 2019. When measured in fixed rates of foreign currency exchange, adjusted fixed currency operating income increased 11% in 2019.
Earnings Attributable to Ecolab Per Common Share ("EPS")
Reported diluted EPS increased 9% to$5.33 in 2019 compared to$4.88 in 2018. Special (gains) and charges had an impact on both years. Special (gains) and charges in 2019 were driven primarily by the impact of restructuring charges, the ChampionX separation charges, discrete tax items, acquisition and integration charges, litigation and other charges. Special (gains) and charges in 2018 were driven primarily by the impact of restructuring charges and our commitment to theEcolab Foundation . Special (gains) and charges in 2017 were driven primarily by the impact of income tax reform, restructuring charges, other discrete taxes, acquisition and integration charges and the gain on sale of Equipment Care. Adjusted diluted EPS, which exclude the impact of special (gains) and charges and discrete tax items increased 11% to$5.82 in 2019 compared to$5.25 in 2018. Balance Sheet
We remain committed to maintaining "A" range ratings metrics, supported by our current credit ratings of A-/Baa1/A- byStandard & Poor's ,Moody's Investor Services and Fitch. Our strong balance sheet has allowed us continued access to capital at attractive rates. Net Debt to EBITDA Our net debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") was 2.0 and 2.3 for 2019 and 2018, respectively. We view these ratios as important indicators of the operational and financial health of our organization. See the "Net Debt to EBITDA" table on page 43 for reconciliation information. Cash Flow Cash flow from operating activities was$2.4 billion in 2019 compared to$2.3 billion in 2018. We continued to generate strong cash flow from operations, allowing us to fund our ongoing operations, acquisitions, investments in our business, debt repayments, pension obligations and return cash to our shareholders through share repurchases and dividend payments. Dividends We increased our quarterly cash dividend 2% inDecember 2019 to an indicated annual rate of$1.88 per share. The increase represents our 28th consecutive annual dividend rate increase and the 83rd consecutive year we have paid cash dividends. Our outstanding dividend history reflects our continued growth and development, strong cash flows, solid financial position and confidence in our business prospects for the years ahead. 26 Table of Contents CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements are prepared in accordance withU.S. GAAP. We have adopted various accounting policies to prepare the consolidated financial statements in accordance withU.S. GAAP. Our significant accounting policies are disclosed in Note 2 of the Notes to the Consolidated Financial Statements ("Notes"). Preparation of our consolidated financial statements, in conformity withU.S. GAAP, requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions to be made about matters that are highly uncertain at the time the accounting estimate is made, and (2) different estimates that we reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, have a material impact on the presentation of our financial condition or results of operations. Besides estimates that meet the "critical" estimate criteria, we make many other accounting estimates in preparing our financial statements and related disclosures. All estimates, whether or not deemed critical, affect reported amounts of assets, liabilities, revenues or expenses as well as disclosures of contingent assets and liabilities. Estimates are based on experience and other information available prior to the issuance of the financial statements. Materially different results can occur as circumstances change and additional information becomes known, even from estimates not deemed critical. Our critical accounting estimates include the following: Revenue Recognition
Revenue is measured as the amount of consideration expected to be received in exchange for transferring goods or providing service. Revenue from product and sold equipment is recognized when obligations under the terms of a contract with the customer are satisfied, which generally occurs with the transfer of the product or delivery of the equipment. Revenue from service and leased equipment is recognized when the services are provided, or the customer receives the benefit from the leased equipment, which is over time. Service revenue is recognized over time utilizing an input method and aligns with when the services are provided. Typically, revenue is recognized over time using costs incurred to date because the effort provided by the field selling and service organization represents services provided, which corresponds with the transfer of control. Revenue for leased equipment is accounted for under Topic 842 Leases and recognized on a straight-line basis over the length of the lease contract. Our revenue policies do not provide for general rights of return. We record estimated reductions to revenue for customer programs and incentive offerings including pricing arrangements, promotions and other volume-based incentives based primarily on historical experience and anticipated performance over the contract period. Depending on market conditions, we may increase customer incentive offerings, which could reduce gross profit margins over the term of the incentive. We also record estimated reserves for product returns and credits based on specific circumstances and credit conditions, and when it is deemed probable that the balance is uncollectible. For additional information on our allowance for doubtful accounts, see discussion below. The revenue standard can be applied to a portfolio of contracts with similar characteristics if it is reasonable that the effects of applying the standard at the portfolio would not be significantly different than applying the standard at the individual contract level. We apply the portfolio approach primarily within each operating segment by geographical region. Application of the portfolio approach was focused on those characteristics that have the most significant accounting consequences in terms of their effect on the timing of revenue recognition or the amount of revenue recognized. We determined the key criteria to assess with respect to the portfolio approach, including the related deliverables, the characteristics of the customers and the timing and transfer of goods and services, which most closely aligned within the operating segments. In addition, the accountability for the business operations, as well as the operational decisions on how to go to market and the product offerings, are performed at the operating segment level. For additional information on revenue recognition, see Note 17.
Valuation Allowances and Accrued Liabilities
Allowances for Doubtful Accounts
We estimate our allowance for doubtful accounts by analyzing accounts receivable balances by age and applying historical write-off and collection trend rates. In addition, our estimates also include separately providing for customer receivables based on specific circumstances and credit conditions, and when it is deemed probable the balance is uncollectible. We estimate our sales returns and allowances by analyzing historical returns and credits and apply these trend rates to calculate estimated reserves for future credits. Actual results could differ from these estimates. Our allowance for doubtful accounts balance was$62 million and$61 million , as ofDecember 31, 2019 and 2018, respectively. These amounts include our allowance for sales returns and credits of$18 million and$17 million as ofDecember 31, 2019 and 2018, respectively. Our bad debt expense as a percent of reported net sales was 0.1% in each of the years 2019, 2018 and 2017. We believe it is reasonably likely that future results will be consistent with historical trends and experience. However, if the financial condition of our customers were to deteriorate, resulting in an inability to make payments, or if unexpected events, economic downturns, or significant changes in future trends were to occur, additional allowances may be required. For additional information on our allowance for doubtful accounts, see Note 2. 27 Table of Contents Accrued Liabilities
Our business and operations are subject to extensive environmental laws and regulations governing, among other things, air emissions, wastewater discharges, the use and handling of hazardous substances, waste disposal and the investigation and remediation of soil and groundwater contamination. Some risk of environmental liability is inherent in our operations. We record liabilities related to pending litigation, environmental claims and other contingencies when a loss is probable and can be reasonably estimated. Estimates used to record such liabilities are based on our best estimate of probable future costs. We record the amounts that represent the points in the range of estimates that we believe are most probable or the minimum amount when no amount within the range is a better estimate than any other amount. Potential insurance reimbursements generally are not anticipated in our accruals for environmental liabilities or other insured losses. Expected insurance proceeds are recorded as receivables when recovery is deemed certain. While the final resolution of litigation and environmental contingencies could result in amounts different than current accruals, and therefore have an impact on our consolidated financial results in a future reporting period, we believe the ultimate outcome will not have a significant impact on our consolidated financial position. For additional information on our commitments and contingencies, see Note 15.
Actuarially Determined Liabilities
Pension and Postretirement Healthcare Benefit Plans
The measurement of our pension and postretirement benefit obligations are dependent on a variety of assumptions determined by management and used by our actuaries. These assumptions affect the amount and timing of future contributions and expenses.
The significant assumptions used in developing the required estimates are the discount rate, expected return on assets, projected salary and health care cost increases and mortality table.
The discount rate assumptions for our
curve constructed from a subset of bonds yielding greater than the median
return from a population of non-callable, corporate bond issues that have an
average rating of AA when averaging available
matching the plans' projected cash flows to the bond yield curve. For 2019 and
2018, we elected to measure service and interest costs by applying the specific ? spot rates along that yield curve to the plans' liability cash flows. We
believe this approach provides a more precise measurement of service and
interest costs by aligning the timing of the plans' liability cash flows to the
corresponding spot rates on the yield curve. In determining our
obligations for 2019, our weighted-average discount rate decreased to 3.20%
from 4.34% at year-end 2018. In determining our
obligation for 2019, our weighted-average discount rate decreased to 3.16% from
4.29% at year-end 2018. The expected rate of return on plan assets reflects asset allocations,
investment strategies and views of investment advisors, and represents our ? expected long-term return on plan assets. Our weighted-average expected return
on
postretirement health care expenses was 7.25% for 2020 and 2019 and 7.75% for
2018.
Projected salary and health care cost increases are based on our long-term ? actual experience, the near-term outlook and assumed inflation. Our
weighted-average projected salary increase used in determining the
expenses was 4.03% for 2019, 2018 and 2017.
For postretirement benefit measurement purposes as of
annual rates of increase in the per capita cost of covered health care were ? assumed to be 8.00% for pre-65 costs and 10.75% for post-65 costs. The rates
are assumed to decrease each year until they reach 5% in 2028 and remain at
those levels thereafter.
In determining our
(applied to the Pri-2012 mortality table). The effects of actual results differing from our assumptions, as well as changes in assumptions, are reflected in the unrecognized actuarial loss and amortized over future periods and, therefore, will generally affect our recognized expense in future periods. Significant differences in actual experience or significant changes in assumptions may materially affect future pension and other postretirement obligations. The unrecognized net actuarial loss on ourU.S. qualified and non-qualified pension plans increased to$632 million as ofDecember 31, 2019 from$539 million as ofDecember 31, 2018 (both before tax), primarily due to current year net actuarial losses. 28 Table of Contents The effect of a decrease in the discount rate or decrease in the expected return on assets assumption as ofDecember 31, 2019 , on theDecember 31, 2019 defined benefit obligation and 2020 expense is shown below, assuming no changes in benefit levels and no amortization of gains or losses for our significantU.S. plans. Expense amounts reflect the accounting for actuarial gains as a component of other comprehensive income and recognition of the impacts into income over the remaining service period: Effect on U.S. Pension Plans Increase in Higher Assumption Recorded 2020 (millions) Change Obligation Expense Discount rate -0.25 pts$74.1 $5.3 Expected return on assets -0.25 pts N/A 5.3 Effect on U.S. Postretirement Health Care Benefits Plans Increase in Higher Assumption Recorded 2020 (millions) Change Obligation Expense Discount rate -0.25 pts$4.1 $0.2 Expected return on assets -0.25 pts N/A -
Our international pension obligations and underlying plan assets represent approximately one third of our global pension plans, with the majority of the amounts held in theU.K. andEurozone countries. We use assumptions similar to ourU.S. plan assumptions to measure our international pension obligations, however, the assumptions used vary by country based on specific local country requirements and information.
See Note 16 for further discussion concerning our accounting policies, estimates, funded status, contributions and overall financial positions of our pension and postretirement plan obligations.
Self-Insurance Globally we have insurance policies with varying deductible levels for property and casualty losses. We are insured for losses in excess of these deductibles, subject to policy terms and conditions and have recorded both a liability and an offsetting receivable for amounts in excess of these deductibles. We are self-insured for health care claims for eligible participating employees, subject to certain deductibles and limitations. We determine our liabilities for claims on an actuarial basis. Restructuring Our restructuring activities are associated with plans to enhance our efficiency, effectiveness and sharpen the competitiveness of our businesses. These restructuring plans include net costs associated with significant actions involving employee-related severance charges, contract termination costs and asset write-downs and disposals. Employee termination costs are largely based on policies and severance plans, and include personnel reductions and related costs for severance, benefits and outplacement services. These charges are reflected in the quarter in which the actions are probable and the amounts are estimable, which typically is when management approves the associated actions. Contract termination costs include charges to terminate leases prior to the end of their respective terms and other contract termination costs. Asset write-downs and disposals include leasehold improvement write-downs, other asset write-downs associated with combining operations and disposal of assets. Restructuring charges have been included as a component of cost of sales and special (gains) and charges on the Consolidated Statement of Income. Amounts included as a component of cost of sales include supply chain related severance and other asset write-downs associated with combining operations. Restructuring liabilities have been classified as a component of both other current and other noncurrent liabilities on the Consolidated Balance Sheet. Our restructuring liability balance was$112 million and$79 million as ofDecember 31, 2019 and 2018, respectively. For additional information on our restructuring activities, see Note 3. 29 Table of Contents Income Taxes Judgment is required to determine the annual effective income tax rate, deferred tax assets and liabilities, valuation allowances recorded against net deferred tax assets and uncertain tax positions. OnDecember 22, 2017 , the Tax Cuts and Jobs Act (the "Tax Act") was enacted, which reduces theU.S. federal corporate tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and created new taxes on certain foreign sourced earnings. The Tax Act added many new provisions including changes to bonus depreciation, the deduction for executive compensation and interest expense, a tax on global intangible low taxed income (GILTI), the base erosion anti abuse tax (BEAT) and a deduction for foreign derived intangible income (FDII). We recorded an estimate of the one-time transition tax in the fourth quarter of 2017 of$160 million and in 2018 and 2019 we recorded additional discrete expense of$66 million and benefit of$3.1 million , respectively, primarily due to the issuance of technical guidance in both years, the finalization of certain estimates as a result of filing the 2017 and 2018 U.S. federal tax return and the finalization of the balance sheet positions used in the calculation of the transition tax. We have completed our accounting for the effects of the Tax Act as they relate to the repricing of deferred tax balances and the one-time transition tax. Additionally, proposed regulations were released during 2019. Certain of the proposed regulations may be subject to challenge; therefore, we recorded tax expense based on our interpretation of the changes in law affected by the Tax Act and not the proposed regulations. If the proposed regulations become final, we will record the impact at that time. Effective Income Tax Rate Our effective income tax rate is based on annual income, statutory tax rates and tax planning available in the various jurisdictions in which we operate. Our annual effective income tax rate includes the impact of reserve provisions. We recognize the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with a taxing authority. We adjust these reserves in light of changing facts and circumstances. This expected annual rate is then applied to our year-to-date operating results. In the event there is a significant discrete item recognized in our interim operating results, the tax attributable to that item would be separately calculated and recorded in the same period. Tax regulations require items to be included in our tax returns at different times than the items are reflected in our financial statements. As a result, the effective income tax rate reflected in our financial statements differs from that reported in our tax returns. Some of these differences are permanent, such as expenses that are not deductible on our tax return, and some are temporary differences, such as depreciation expense.
Deferred Tax Assets and Liabilities and Valuation Allowances
Temporary differences create deferred tax assets and liabilities. Deferred tax
assets generally represent items that can be used as a tax deduction or credit
in our tax return in future years for which we have already recorded the tax
benefit in our income statement. We establish valuation allowances for our
deferred tax assets when the amount of expected future taxable income is not
likely to support the utilization of the entire deduction or credit. Relevant
factors in determining the realizability of deferred tax assets include
historical results, future taxable income, the expected timing of the reversal
of temporary differences, tax planning strategies and the expiration dates of
the various tax attributes. Deferred tax liabilities generally represent items
for which we have already taken a deduction in our tax return but have not yet
recognized that tax benefit in our financial statements.
During 2019, due to the adoption of the new lease standard and the recording of
operating lease assets and operating lease liabilities on the Consolidated
Balance Sheet, we recorded related deferred tax liabilities and deferred tax
assets, respectively.
Uncertain Tax Positions
A number of years may elapse before a particular tax matter, for which we have
established a reserve, is audited and finally resolved. The number of tax years
with open tax audits varies depending on the tax jurisdiction. The Internal
Revenue Service ("IRS") has completed its examinations of our U.S. federal
income tax returns through 2016 and the years 2017 and 2018 are currently under
audit. In addition to the U.S. federal examinations, we have ongoing audit
activity in several U.S. state and foreign jurisdictions.
The tax positions we take are based on our interpretations of tax laws and
regulations in the applicable federal, state and international jurisdictions. We
believe our tax returns properly reflect the tax consequences of our operations,
and our reserves for tax contingencies are appropriate and sufficient for the
positions taken. Because of the uncertainty of the final outcome of these
examinations, we have reserved for potential reductions of tax benefits
(including related interest and penalties) for amounts that do not meet the
more-likely-than-not thresholds for recognition and measurement as required by
authoritative guidance. The tax reserves are reviewed throughout the year,
taking into account new legislation, regulations, case law and audit results.
Settlement of any particular issue could result in offsets to other balance
sheet accounts, cash payments or receipts and/or adjustments to tax expense. Tax
reserves are presented in the Consolidated Balance Sheet within other
non-current liabilities. Our gross liability for uncertain tax positions was $28
million and $50 million as of December 31, 2019 and 2018, respectively. For
additional information on income taxes see Note 12.
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Long-Lived Assets, Intangible Assets and
Long-Lived and Amortizable Intangible Assets
We review our long-lived and amortizable intangible assets, the net value of which was$7.0 billion and$7.1 billion as ofDecember 31, 2019 and 2018, respectively, for impairment and when significant events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. Such circumstances may include a significant decrease in the market price of an asset, a significant adverse change in the manner in which the asset is being used or in its physical condition or history of operating or cash flow losses associated with the use of the asset. Impairment losses could occur when the carrying amount of an asset exceeds the anticipated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded, if any, is calculated as the excess of the asset's carrying value over its estimated fair value. We use the straight-line method to recognize amortization expense related to our amortizable intangible assets, including our customer relationships. We consider various factors when determining the appropriate method of amortization for our customer relationships, including projected sales data, customer attrition rates and length of key customer relationships. Globally, we have a broad customer base. Our retention rate of significant customers has aligned with our acquisition assumptions, including the customer bases acquired from our Nalco and Champion transactions, which make up the majority of our unamortized customer relationships. Our historical retention rate, coupled with our consistent track record of keeping long-term relationships with our customers, supports our expectation of consistent sales generation for the foreseeable future from the acquired customer base. If our customer retention rate or other post-acquisition operational activities changed materially, we would evaluate the financial impact and any corresponding triggers which could result in an acceleration of amortization or impairment of our customer relationship intangible assets. In addition, we periodically reassess the estimated remaining useful lives of our long-lived and amortizable intangible assets. Changes to estimated useful lives would impact the amount of depreciation and amortization expense recorded in earnings. We have experienced no significant changes in the carrying value or estimated remaining useful lives of our long-lived or amortizable intangible assets.
We had total goodwill of$7.3 billion and$7.1 billion as ofDecember 31, 2019 and 2018, respectively. We test our goodwill for impairment at the reporting unit level on an annual basis during the second quarter. Our reporting units are aligned with our eleven operating segments. For our 2019 impairment assessment, we completed our assessment for goodwill impairment across our reporting units using a two-step quantitative analysis, utilizing a discounted cash flow approach. The first step of the analysis involved determining the estimated fair value of each reporting unit and comparing them to the respective carrying values, including goodwill. If the fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is considered not to be impaired, and the second step of the impairment test is unnecessary. If the carrying amount of the reporting unit exceeds its fair value, the second step of the goodwill impairment test would be performed to measure the amount of impairment loss to be recorded, if any. Our goodwill impairment assessment for 2019 indicated the estimated fair value of each of our reporting units exceeded the unit's carrying amount by a significant margin. We assess the need to test our reporting units for impairment during interim periods between our scheduled annual assessments when significant events or changes in business circumstances indicate that the carrying value of the reporting unit may not be recoverable. There has been no impairment of goodwill in any of the years presented. As part of the Nalco merger, we added the "Nalco" trade name as an indefinite life intangible asset, the total value of which was$1.2 billion as ofDecember 31, 2019 and 2018. The carrying value of the indefinite life trade name was subject to annual impairment testing, using a relief from royalty assessment method, during the second quarter of 2019. Our Nalco trade name assessment for 2019 indicated the estimated fair value of the asset exceeded its carrying amount by a significant margin. We assess the need to test the Nalco trade name for impairment during interim periods between our scheduled annual assessments when significant events or changes in business circumstances indicate that the carrying value of the asset may not be recoverable. There has been no impairment of the Nalco trade name in any of the years presented. 31 Table of Contents RESULTS OF OPERATIONS Net Sales Percent Change (millions) 2019 2018 2017 2019 2018
Product and equipment sales$12,238.9 $12,128.6 $11,431.8 Service and lease sales 2,667.4 2,539.6 2,404.1 Reported GAAP net sales$14,906.3 $14,668.2 $13,835.9 2 % 6 % Effect of foreign currency translation 140.6 (137.5) (37.8) Non-GAAP fixed currency sales$15,046.9 $14,530.7 $13,798.1 4 % 5 % The percentage components of the year-over-year sales change are shown below: (percent) 2019 2018 Volume 0% 4% Price changes 2 2
Acquisition adjusted fixed currency sales change 3 6 Acquisitions & divestitures
1 0
Fixed currency sales change 4 6
Foreign currency translation (2) 0
Reported GAAP net sales change 2% 6%
Amounts do not necessarily sum due to rounding.
Cost of Sales ("COS") and Gross Profit Margin ("Gross Margin")
2019 2018 2017
Gross Gross Gross
(millions/percent) COS Margin COS Margin COS MarginProduct and equipment cost of sales$7,106.4 $7,078.5 $6,576.9 Service and lease cost of sales 1,617.0 1,547.4 1,487.3 Reported GAAP COS and gross margin$8,723.4 41.5 %$8,625.9 41.2 %$8,064.2 41.7 % Special (gains) and charges 38.5 0.2 9.3 0.1 44.0 0.3
Non-GAAP adjusted COS and gross margin
41.3 % $8,020.2 42.0 %
Our COS values and corresponding gross margin are shown in the previous table. Our gross margin is defined as sales less cost of sales divided by sales.
Our reported gross margin was 41.5%, 41.2%, and 41.7% for 2019, 2018, and 2017, respectively. Our 2019, 2018 and 2017 reported gross margins were negatively impacted by special (gains) and charges of$38.5 million ,$9.3 million , and$44.0 million , respectively. Special (gains) and charges items impacting COS are shown within the "Special (Gains) and Charges" table on page 33. Excluding the impact of special (gains) and charges, our 2019 adjusted gross margin was 41.7% compared against a 2018 adjusted gross margin of 41.3%. The increase was driven primarily by pricing, which more than offset unfavorable sales mix. Excluding the impact of special (gains) and charges, our adjusted gross margin was 41.3% and 42.0% for 2018 and 2017, respectively. The decrease was driven primarily by higher delivered product costs more than offsetting the impact from increased pricing and cost savings.
Selling, General and Administrative Expenses ("SG&A")
(percent) 2019 2018 2017
SG&A Ratio 26.5 % 27.1 % 27.6 %
The decreased SG&A ratio (SG&A expenses as a percentage of reported net sales)
comparing 2019 against 2018 and comparing 2018 against 2017 were driven
primarily by sales leverage, restructuring efforts and cost savings, which more
than offset investments in the business.
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Special (Gains) and Charges
Special (gains) and charges reported on the Consolidated Statement of Income
included the following items:
(millions) 2019 2018 2017
Cost of sales
Restructuring activities $20.4 $12.1 $4.6
Acquisition and integration activities 7.6 (0.6) 13.2
Other 10.5 (2.2) 26.2
Cost of sales subtotal 38.5 9.3 44.0
Special (gains) and charges
Restructuring activities 116.8 89.4 39.9
ChampionX separation 77.3 - -
Acquisition and integration activities 5.6 8.8 15.4
Gain on sale of business - - (46.1)
Venezuela related gain - - (11.5)
Other 11.9 28.5 (1.4)
Special (gains) and charges subtotal 211.6 126.7 (3.7)
Operating income subtotal 250.1 136.0 40.3
Interest expense, net 0.2 0.3 21.9
Other (income) expense 9.5 - -
Total special (gains) and charges $259.8 $136.3 $62.2 For segment reporting purposes, special (gains) and charges are not allocated to reportable segments, which is consistent with our internal management reporting.
Restructuring Activities
Restructuring activities are primarily related to Accelerate 2020 (described below). These activities have been included as a component of cost of sales, special (gains) and charges, and other (income) expense on the Consolidated Statement of Income. Restructuring liabilities have been classified as a component of other current and other noncurrent liabilities on the Consolidated Balance Sheet.
Further details related to our restructuring charges are included in Note 3.
Accelerate 2020
During the third quarter of 2018, we formally commenced a restructuring plan
Accelerate 2020 ("the Plan"), to leverage technology and system investments and
organizational changes. In 2019, we raised our goals for the Plan to further
simplify and automate processes and tasks, reduce complexity and management
layers, consolidated facilitates and focus on key long-term growth areas by
further leveraging technology and structural improvements. We expect that the
restructuring activities will be completed by the end of 2020, with total
anticipated costs of $260 million ($200 million after tax), or an estimated
$0.68 per diluted share, over this period of time. Costs are expected to be
primarily cash expenditures for severance costs and some facility closure costs
relating to team reorganizations. Actual costs may vary from these estimates
depending on actions taken.
We recorded restructuring charges of $136.6 million ($104.4 million after tax)
or $0.36 per diluted share in 2019. Of these expenses, $2.0 million ($1.5
million after tax) or less than $0.01 per diluted share is recorded in other
(income) expense. The liability related to the Plan was $104.0 million as of the
end of the year. We have recorded $241.2 million ($184.0 million after tax), or
$0.63 per diluted share, of cumulative restructuring charges under the Plan. The
majority of the pretax charges represent net cash expenditures which are
expected to be paid over a period of a few months to several quarters which
continue to be funded from operating activities.
The Plan has delivered
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Other Restructuring Activities
During 2019, we incurred restructuring charges of$4.1 million ($3.3 million after tax), or$0.01 per diluted share, related to an immaterial restructuring plan. The charges are comprised of severance, facility closure costs, including asset disposals, and consulting fees. Prior to 2018, we engaged in a number of restructuring plans. During 2017, we commenced restructuring and other cost-saving actions in order to streamline operations. These actions include a reduction of our global workforce, as well as asset disposals and lease terminations. Actions were substantially completed in 2017. We also have restructuring plans that commenced prior to 2016. During 2019, net restructuring gains related to prior year plans were$1.5 million ($1.1 million after tax) or less than$0.01 per diluted share. During 2018, net restructuring gains related to prior year plans were$3.1 million ($2.4 million after tax) or$0.01 per diluted share. The gains recorded were due to finalizing estimates upon completion of projects. During 2017, we recorded restructuring charges of$44.5 million ($32.3 million after tax) or$0.11 per diluted share. The restructuring liability balance for all plans excluding Accelerate 2020 was$7.7 million and$14.9 million as ofDecember 31, 2019 and 2018, respectively. The reduction in liability was driven primarily by severance payments. The remaining liability is expected to be paid over a period of a few months to several quarters and will continue to be funded from operating activities. Cash payments during 2019 related to these plans were$8.3 million . ChampionX Separation
OnDecember 18, 2019 , we entered into definitive agreements with ChampionX and Apergy pursuant to which we will separate the Upstream Energy business of our Global Energy segment and combine it with Apergy in a tax-efficient reverseMorris Trust transaction. During 2019, the charges associated with the separation reported in special (gains) and charges on the Consolidated Statement of Income include$77.3 million ($65.8 million after tax) or$0.22 per diluted share. The charges are primarily related to professional fees to support the separation. ChampionX separation costs reported in other (income) expense on the Consolidated Statement of Income in 2019 include$7.5 million ($5.7 million after tax) or$0.02 per diluted share related to pension curtailments and settlements due to the separation.
Acquisition and integration related costs
Acquisition and integration costs reported in special (gains) and charges on the Consolidated Statement of Income in 2019 include$5.6 million ($4.1 million after tax) or$0.01 per diluted share. Charges are primarily related toBioquell PLC ("Bioquell") andLaboratoires Anios ("Anios") acquisitions and consist of integration costs, advisory and legal fees. Acquisition and integration costs reported in product and equipment cost of sales on the Consolidated Statement of Income in 2019 include$7.6 million ($5.6 million after tax) or$0.02 per diluted share and are related to recognition of fair value step-up in theBioquell inventory and facility closure costs. In conjunction with our acquisitions, we incurred$0.2 million ($0.1 million after tax), or less than$0.01 per diluted share, of interest expense in 2019. During 2018, acquisition and integration costs reported in special (gains) and charges on the Consolidated Statement of Income included$8.8 million ($6.1 million after tax), or$0.02 per diluted share, of charges primarily related to Anios integration costs, advisory and legal fees. The acquisition and integration gains reported in cost of sales on the Consolidated Statement of Income in 2018 related to changes in estimates related to an early lease exist. In conjunction with our acquisitions, we incurred$0.3 million ($0.2 million after tax), or less than$0.01 per diluted share, of interest expense in 2018. During 2017, acquisition and integration costs reported in special (gains) and charges on the Consolidated Statement of Income included$15.4 million ($9.9 million after tax), or$0.03 per diluted share, of acquisition costs, advisory and legal fees, and integration charges for the Anios and Swisher acquisitions. Acquisition and integration costs reported in cost of sales on the Consolidated Statement of Income in 2017 included$13.2 million ($8.6 million after tax), or$0.03 per diluted share, which related primarily to disposal of excess inventory upon the closure of Swisher plants, accelerated rent expense, and amounts related to recognition of fair value step-up in the Anios inventory. Further information related to our acquisitions is included in Note 4. Gain on sale of business
During 2017, we disposed of the Equipment Care business and recorded a gain of$46.1 million ($12.4 million after tax primarily due to non-deductible goodwill), or$0.04 per diluted share, net of working capital adjustments, costs to sell and other transaction expenses. The gain was included as a component of special (gains) and charges on the Consolidated Statement of Income.Venezuela related activities Effective as of the end of the fourth quarter of 2015, we deconsolidated our Venezuelan subsidiaries. We recorded gains due toU.S. dollar cash recoveries of intercompany receivables written off at the time of deconsolidation of$11.5 million ($7.2 million after tax) or$0.02 per diluted share in 2017. No such gains occurred in 2018 and 2019. 34 Table of Contents Other During 2019, we recorded other special charges of$11.9 million ($7.5 million after tax), or$0.03 per diluted share, which primarily related to legal charges partially offset by a litigation settlement. Other special charges reported in product and equipment cost of sales on the Consolidated Statement of Income in 2019 of$10.5 million ($7.1 million after tax), or$0.02 per diluted share, relate to a Healthcare product recall inEurope . During 2018, we recorded other special charges of$28.5 million ($21.5 million after tax), or$0.07 per diluted share, which primarily consisted of a$25.0 million ($18.9 million after tax), or$0.06 per diluted share, commitment to theEcolab Foundation . Other charges, primarily litigation related charges, were minimal and have been included as a component of special (gains) and charges on the Consolidated Statement of Income. Other special gains reported in product and equipment cost of sales on the Consolidated Statement of Income in 2018 of$2.2 million ($1.7 million after tax), or$0.01 per diluted share, relate to changes in estimates for an inventory LIFO reserve. During 2017, we recorded other charges of$24.8 million ($19.0 million after tax), or$0.06 per diluted share, primarily related to fixed asset impairments, a Global Energy vendor contract termination and litigation related charges. These charges have been included as a component of both cost of sales and special (gains) and charges on the Consolidated Statement of Income. Other (Income) Expense
During 2019, the Company recorded other expense of
Interest expense, net
During 2019 and 2018, an immaterial amount of interest expense was recorded due to acquisition and integration costs.
During 2017, in anticipation ofU.S. tax reform and a potential limit on interest deductibility in future years, we entered into transactions to exchange or retire certain long-term debt, and incurred debt exchange and extinguishment charges of$21.9 million ($13.6 million after tax) or$0.05 per diluted share. This charge has been included as a component of interest expense, net on the Consolidated Statement of Income.
Operating Income and Operating Income Margin
Percent Change
(millions) 2019 2018 2017 2019 2018
Reported GAAP operating income
3 % (0) %
Special (gains) and charges 250.1 136.0 40.3
Non-GAAP adjusted operating income 2,263.9 2,083.0 1,990.4 9 5 Effect of foreign currency translation 20.4 (20.4)
(12.1)
Non-GAAP adjusted fixed currency operating income$2,284.3 $2,062.6 $1,978.3 11 % 4 % (percent) 2019 2018
2017
Reported GAAP operating income margin 13.5 % 13.3 % 14.1 % Non-GAAP adjusted operating income margin 15.2 % 14.2 % 14.4 % Non-GAAP adjusted fixed currency operating income margin 15.2 % 14.2 % 14.3 %
Our operating income and corresponding operating income margin are shown in the previous tables. Operating income margin is defined as operating income divided by sales.
Our reported operating income increased 3% when comparing 2019 to 2018 and was flat when comparing 2018 to 2017. Our reported operating income for 2019, 2018 and 2017 was impacted by special (gains) and charges. Excluding the impact of special (gains) and charges from all three years, 2019 adjusted operating income increased 9% when compared to 2018 adjusted operating income and 2018 adjusted operating income increased 5% when compared to 2017 adjusted operating income.
As shown in the previous table, foreign currency translation had a minimal impact on adjusted operating income growth for 2019 and 2018.
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Other (Income) Expense
(millions) 2019 2018 2017
Reported GAAP other (income) expense
9.5 - -
Non-GAAP adjusted other (income) expense
Our reported other income was$76.3 million ,$79.9 million and$67.3 million in 2019, 2018, and 2017, respectively. Excluding the impact of pension curtailments and settlements in 2019, our adjusted other income was$85.8 million reflecting the return on pension assets and non-service costs of our pension obligations. Interest Expense, Net (millions) 2019 2018 2017
Reported GAAP interest expense, net
0.2 0.3 21.9
Non-GAAP adjusted interest expense, net
Our reported net interest expense totaled
We incurred$0.2 million ($0.1 million after tax), or less than$0.01 per diluted share and$0.3 million ($0.2 million after tax), or less than$0.01 per diluted share, of interest expense in conjunction with our acquisitions during 2019 and 2018, respectively. During 2017, in anticipation ofU.S. tax reform and a potential limit on interest deductibility in future years, we entered into transactions to exchange or retire certain long-term debt, and incurred debt exchange and extinguishment charges of$21.9 million ($13.6 million after tax) or$0.05 per diluted share.
The decrease in our 2019 adjusted net interest expense compared to 2018 was driven primarily by lower outstanding debt and higher interest income. The decrease in our 2018 adjusted net interest expense compared to 2017 was driven primarily by lower interest rates on debt.
Provision for Income Taxes
The following table provides a summary of our tax rate:
(percent) 2019 2018 2017 Reported GAAP tax rate 17.0 % 20.2 % 13.8 % Tax rate impact of: The Tax Act 0.1 (3.4) 8.7
Special (gains) and charges 0.6 0.3 (0.1) Discrete tax items
2.6 3.2 1.4
Non-GAAP adjusted tax rate 20.3 % 20.3 % 23.8 %
Our reported tax rate was 17.0%, 20.2%, and 13.8% for 2019, 2018 and 2017, respectively. 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. The enactment of the Tax Act also significantly impacted the comparability of our reported tax rate. We recognized total net benefit related to discrete tax items of$58.4 million during 2019. Share-based compensation excess tax benefit contributed$43.1 million in 2019. The extent of excess tax benefits is subject to variation in stock price and stock option exercises. We recognized$15.6 million tax benefit related to changes in local tax law, which primarily includes$30.4 million benefit due to the passage of the Swiss Tax Reform and AHV Financing Act, a Swiss federal tax law, offset by a tax expense of$10.2 million due to the release of the final Treasury Regulation governing taxation of foreign dividends. We recorded changes in reserves in non-U.S. andU.S. jurisdictions due to audit settlements and statutes of limitations which resulted in a$16.8 million tax benefit. We finalized the 2015 and 2016IRS audit, which also resulted in discrete tax expense of$11.0 million . The remaining discrete tax expense was primarily related to changes in estimates in non-U.S. jurisdictions. We recognized total net expense related to discrete tax items of$4.7 million during 2018. In the third quarter of 2018, we filedU.S. federal tax returns which resulted in favorable adjustments of$39.9 million related to changes in estimates and anIRS approved method change.U.S. tax reform (as described further below) resulted in$66.0 million expense for 2018. Share-based compensation excess tax benefit contributed$28.1 million in 2018. The extent of excess tax benefits is subject to variation in stock price and stock option exercises. Included within the 2018 provision for income taxes in$44.2 million of discrete charges recorded in the fourth quarter to correct immaterial errors in prior years. The remaining discrete tax expense was primarily related to changes in reserves in non-U.S. jurisdictions, audit settlements and both international andU.S. changes in estimates. 36
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OnDecember 22, 2017 , the Tax Cuts and Jobs Act (the "Tax Act") was enacted, which reduced theU.S. federal corporate tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and created new taxes on certain foreign sourced earnings. The Tax Act added many new provisions including changes to bonus depreciation, the deduction for executive compensation and interest expense, a tax on global intangible low taxed income (GILTI), the base erosion anti abuse tax (BEAT) and a deduction for foreign derived intangible income (FDII). InJanuary 2018 , accounting guidance was issued requiring a company to make an accounting policy election to either treat taxes due on futureU.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the "period cost method") or factor such amounts into a company's measurement of our deferred taxes (the "deferred method"). We have elected the period cost method and included the GILTI impact in our tax expense. We initially recorded an estimate of the one-time transition tax in the fourth quarter of 2017 of$160.1 million and in 2018 we recorded additional discrete expense of$66.0 million associated with finalizing our accounting for the Tax Act, primarily due to the issuance of technical guidance during the year and finalization of estimates related to asset balances and calculation of foreign earnings and profits. Our 2017 reported rate also includes a$319.0 million tax benefit for recording deferred tax assets and liabilities at theU.S. enacted tax rate of 21%. Our 2017 reported tax rate also includes the tax impact of special (gains) and charges, as well as additional tax benefits utilized in anticipation ofU.S. tax reform of$7.8 million . During 2017, we also recorded a discrete tax benefit of$39.7 million related to excess tax benefits. In addition, we recorded net discrete expenses of$14.4 million related to recognizing adjustments from filing our 2016 U.S. federal income tax return and international adjustments due to changes in estimates, partially offset by the release of reserves for uncertain tax positions due to the expiration of statute of limitations in state tax matters. The adjusted rate was 20.3% for both 2019 and 2018. The change in our adjusted tax rate from 2018 to 2017 was primarily driven by enactment of the Tax Act, global tax planning projects and geographic income mix. Future comparability of our adjusted tax rate may be impacted by various factors, including but not limited to, the Tax Act, other changes in global tax rules, further tax planning projects and geographic income mix.
Net Income Attributable to Ecolab
Percent Change
(millions) 2019 2018 2017 2019 2018
Reported GAAP net income attributable
to Ecolab $1,558.9 $1,429.1 $1,504.6 9 % (5) %
Adjustments:
Special (gains) and charges, after tax 202.6 102.8 56.0
Discrete tax net expense (benefit) (58.4) 4.7
(184.2) Non-GAAP adjusted net income$1,703.1 $1,536.6 $1,376.4 11 % % attributable to Ecolab 12 Diluted EPS Percent Change (dollars) 2019 2018 2017 2019 2018 Reported GAAP diluted EPS$ 5.33 $ 4.88 $ 5.12 9 % (5) % Adjustments: Special (gains) and charges 0.69 0.35 0.19
Discrete tax net expense (benefit) (0.20) 0.02 (0.63) Non-GAAP adjusted diluted EPS
$ 5.82 $ 5.25 $ 4.68 11 % 12 %
Per share amounts do not necessarily sum due to rounding.
Currency translation had an unfavorable$0.13 impact on reported and adjusted diluted EPS when comparing 2019 to 2018 and minimal impact when comparing 2018 to 2017. 37 Table of Contents SEGMENT PERFORMANCE The non-U.S. dollar functional currency international amounts included within our reportable segments are based on translation intoU.S. dollars at the fixed currency exchange rates established by management for 2019. The difference between the fixed currency exchange rates and the actual currency exchange rates is reported as "effect of foreign currency translation" in the following tables. All other accounting policies of the reportable segments are consistent withU.S. GAAP and the accounting policies described in Note 2. Additional information about our reportable segments is included in Note 18.
Fixed currency net sales and operating income for 2019, 2018 and 2017 for our reportable segments are shown in the following tables.
Net Sales Percent Change (millions) 2019 2018 2017 2019 2018 Global Industrial$5,569.9 $5,220.2 $4,895.8 7 % 7 % Global Institutional 5,235.5 5,066.0 4,785.8 3 6 Global Energy 3,334.0 3,388.8 3,205.8 (2) 6 Other 907.5 855.7 910.7 6 (6) Subtotal at fixed currency 15,046.9 14,530.7 13,798.1 4 5 Effect of foreign currency translation (140.6) 137.5
37.8
Total reported net sales$14,906.3 $14,668.2
Operating Income
Percent Change
(millions) 2019 2018 2017 2019 2018 Global Industrial$854.7 $724.4 $722.0 18 % 0 % Global Institutional 1,042.2 1,007.3 962.7 3 5 Global Energy 379.1 338.5 322.9 12 5 Other 167.3 160.0 140.7 5 14 Corporate (409.1) (303.6) (210.3) Subtotal at fixed currency 2,034.2 1,926.6 1,938.0 6 (1) Effect of foreign currency translation (20.4) 20.4
12.1
Total reported operating income
The following tables reconcile the impact of acquisitions and divestitures within our reportable segments.
Year ended
December 31
Net Sales 2019 2018
Impact of Impact of
Acquisitions Acquisitions
Fixed and Acquisition Fixed and Acquisition
(millions) Currency Divestitures Adjusted Currency Divestitures Adjusted
Global Industrial $5,569.9 $(103.3) $5,466.6 $5,220.2 $(11.9) $5,208.3
Global Institutional 5,235.5 (35.4) 5,200.1 5,066.0 - 5,066.0
Global Energy 3,334.0 (0.1) 3,333.9 3,388.8 (2.5) 3,386.3
Other 907.5 (1.6) 905.9 855.7 (0.3) 855.4
Subtotal at fixed currency 15,046.9 (140.4) 14,906.5 14,530.7 (14.7) 14,516.0
Effect of foreign currency
translation (140.6) 137.5
Total reported net sales $14,906.3 $14,668.2
Operating Income 2019 2018
Impact of Impact of
Acquisitions Acquisitions
Fixed and Acquisition Fixed and Acquisition
(millions) Currency Divestitures Adjusted Currency Divestitures Adjusted
Global Industrial $854.7 $1.3 $856.0 $724.4 $(3.0) $721.4
Global Institutional 1,042.2 4.3 1,046.5 1,007.3 - 1,007.3
Global Energy 379.1 0.3 379.4 338.5 2.6 341.1
Other 167.3 (0.4) 166.9 160.0 - 160.0
Corporate (159.0) - (159.0) (167.6) - (167.6)
Non-GAAP adjusted fixed
currency operating income 2,284.3 5.5 2,289.8 2,062.6 (0.4) 2,062.2Special (gains) and charges 250.1 136.0 Subtotal at fixed currency 2,034.2 1,926.6 Effect of foreign currency translation (20.4) 20.4 Total reported operating income$2,013.8 $1,947.0 38 Table of Contents Global Industrial 2019 2018 2017
Sales at fixed currency (millions)$5,569.9 $5,220.2
Sales at public currency (millions) 5,500.7 5,286.5
4,918.0
Volume 2 % 4 %
Price changes 3 % 2 %
Acquisition adjusted fixed currency
sales change 5 % 6 %
Acquisitions and divestitures 2 % 1 %
Fixed currency sales change 7 % 7 %
Foreign currency translation (3) % 1 %
Public currency sales change 4 % 7 %
Operating income at fixed currency
(millions) $854.7 $724.4 Operating income at public currency (millions) 844.5 735.6 727.1 Fixed currency operating income change 18 % 0 % Fixed currency operating income margin 15.3 % 13.9 % 14.7 % Acquisition adjusted fixed currency operating income change 19 % 1 % Acquisition adjusted fixed currency operating income margin 15.7 % 13.9 % * Public currency operating income change 15 % 1
% * Not meaningful
Amounts do not necessarily sum due to rounding.
Net Sales
Fixed currency sales growth for
At an operating segment level, Water fixed currency sales increased 6% and 7% in 2019 and 2018, respectively. In both 2019 and 2018, Light industry sales growth was led by innovative technology and service offerings. Heavy industry sales benefitted from sales force investments and improved market conditions while mining sales were led by new business wins. Food & Beverage fixed currency sales increased 9% (6% acquisition adjusted) in 2019 as share gains and pricing more than offset generally flat industry trends. Globally, we saw strong growth in our dairy, food, beverage and brewing segments, with moderate growth in the protein business. Fixed currency sales growth was strong across major regions. Fixed currency sales increased 6% in 2018, benefiting from corporate account wins, share gains and pricing, which more than offset generally flat industry trends. Growth was led by the beverage and brewing, dairy and protein businesses. Paper fixed currency sales increased 1% in 2019 despite softer containerboard market conditions which reduced volumes in major regions. Fixed currency sales increased 11% (6% acquisition adjusted) in 2018 driven by business wins and pricing. Textile Care fixed currency sales increased 2% and 1% in 2019 and 2018, respectively. Life Sciences fixed currency sales increased 37% in 2019 (12% acquisition adjusted). Results were led by business wins and pricing in our cleaning and disinfection programs for both the pharmaceutical and personal care markets, with strong growth inEurope and moderateNorth America gains. Fixed currency sales increased 14% in 2018 driven by good growth from business wins and pricing execution in both the pharmaceutical and personal care markets. Operating Income Fixed currency operating income forGlobal Industrial increased in 2019 while 2018 was flat when compared to prior periods. Fixed currency operating income margins increased in 2019 and decreased in 2018. Acquisition adjusted fixed currency operating income margins increased 1.8 percentage points in 2019. The favorable impact of pricing added approximately 2.7 percentage points during 2019. Investments in the business negatively impacted margins by approximately 1.1 percentage points. Acquisition adjusted fixed currency operating income margins decreased in 2018 compared to 2017, negatively impacted by higher delivered product costs and investments in the business, partially offset by favorable impact of pricing and volume gains.
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Global Institutional
2019 2018 2017Sales at fixed currency (millions)$5,235.5 $5,066.0
Sales at public currency (millions) 5,187.0 5,098.5
4,776.2
Volume 1 % 3 %
Price changes 2 % 2 %
Acquisition adjusted fixed currency
sales change 3 % 5 %
Acquisitions and divestitures 1 % 1 %
Fixed currency sales change 3 % 6 %
Foreign currency translation (2) % 1 %
Public currency sales change 2 % 7 %
Operating income at fixed currency
(millions) $1,042.2 $1,007.3 Operating income at public currency (millions) 1,035.7 1,010.6 963.9 Fixed currency operating income change 3 % 5 % Fixed currency operating income margin 19.9 % 19.9 % 20.1 % Acquisition adjusted fixed currency operating income change 4 % 4 % Acquisition adjusted fixed currency operating income margin 20.1 % 19.9 % * Public currency operating income change 2 % 5
% * Not meaningful
Amounts do not necessarily sum due to rounding.
Net Sales
Fixed currency sales growth for Global Institutional in both 2019 and 2018
benefited from pricing, volume growth and acquisitions. At a regional level, the
2019 sales increases were led by good growth in
At an operating segment level, Institutional fixed currency sales increased 2% in 2019, reflecting the benefits of new products and business wins. Fixed currency sales increased 5% in 2018. Global lodging demand continued to show moderate growth while global full-service restaurant industry foot traffic remained soft. Specialty fixed currency sales increased 9% in 2019, reflecting strong ongoing business and program wins. Fixed currency sales increased 8% in 2018, led primarily from strong ongoing business and new account wins. Healthcare fixed currency sales increased 1% in 2019. At a regional level, good growth inEurope was offset by a product recall whileNorth America sales were flat with good differentiated product and program growth which was partially offset by lower sales of deemphasized non-core products. Fixed currency sales increased 7% (2% acquisition adjusted) in 2018, with strong sales of environmental hygiene programs partially offset by lower sales of non-core
products. Operating Income Fixed currency operating income for our Global Institutional segment increased in both 2019 and 2018 when compared to prior periods. Fixed currency operating income margins remained flat in 2019 and declined slightly in 2018. Acquisition adjusted fixed currency operating income margins increased 0.2 percentage points during 2019. The favorable impact of pricing and volume added approximately 1.9 percentage points during 2019. Investments in the business and selling related expenses negatively impacted margins by approximately 1.7 percentage points. Acquisition adjusted fixed currency operating income margins decreased in 2018, negatively impacted by investments in the business, including innovative digital technologies, and higher delivered product costs, partially offset by favorable impact of sales volume gains, pricing and cost savings.
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Global Energy
2019 2018 2017Sales at fixed currency (millions)$3,334.0 $3,388.8
Sales at public currency (millions) 3,317.7 3,421.1
3,230.0
Volume (3) % 5 %
Price changes 2 % 2 %
Acquisition adjusted fixed currency
sales change (2) % 7 %
Acquisitions and divestitures (0) % (1) %
Fixed currency sales change (2) % 6 %
Foreign currency translation (1) % 0 %
Public currency sales change (3) % 6 %
Operating income at fixed currency
(millions) $379.1 $338.5 Operating income at public currency (millions) 375.3 344.7 327.7 Fixed currency operating income change 12 % 5 % Fixed currency operating income margin 11.4 % 10.0 % 10.1 % Acquisition adjusted fixed currency operating income change 11 % 7 % Acquisition adjusted fixed currency operating income margin 11.4 % 10.1 % * Public currency operating income change 9 % 5
% * Not meaningful
Amounts do not necessarily sum due to rounding.
Net Sales Fixed currency sales for Global Energy decreased 2% in 2019. Upstream (being renamed ChampionX) sales declined 3% as a significant decline in the well stimulation business (reflecting the reduced North American industry drilling and completion activity) was partially offset by good growth in production sales. Downstream fixed currency sales increased 1% driven by pricing and new business wins inEurope andAsia Pacific . Fixed currency sales for Global Energy in 2018 had strong growth in the well stimulation business and moderate growth in the production business driven by increasedNorth America activity. Downstream fixed currency sales increased driven by pricing and new business wins inNorth America ,Asia Pacific , andMiddle East . Operating Income
Fixed currency operating income for Global Energy increased during 2019 and 2018
as compared to the prior year. Fixed currency operating income margins increased
in 2019 and decreased in 2018.
Acquisition adjusted fixed currency operating income margins improved in 2019
and were flat in 2018. Pricing and cost savings favorably impacted margins by
approximately 2.5 percentage points during 2019. These gains more than offset
the 0.9 percentage point unfavorable impact of lower sales volume. Sales volume
gains and pricing favorably impacted 2018, equally offset by higher delivered
product costs and investments in the business.
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Other
2019 2018 2017Sales at fixed currency (millions)$907.5 $855.7
Sales at public currency (millions) 900.9 862.1
911.7
Volume 4 % 6 % Price changes 2 % 2 % Acquisition adjusted fixed currency sales change 6 % 7 % Acquisitions and divestitures 0 % (13) % Fixed currency sales change 6 % (6) % Foreign currency translation (2) % 1 % Public currency sales change 5 % (5) % Operating income at fixed currency (millions)$167.3 $160.0
Operating income at public currency (millions) 166.2 160.7
141.5
Fixed currency operating income change 5 % 14 % Fixed currency operating income margin 18.4 % 18.7 % 15.4 % Acquisition adjusted fixed currency operating income change 4 % 17 % Acquisition adjusted fixed currency operating income margin 18.4 % 18.7 %
*
Public currency operating income change 3 % 14 % * Not meaningful
Amounts do not necessarily sum due to rounding.
Net Sales Fixed currency sales for Other increased in 2019 with growth in all regions. Fixed currency sales decreased in 2018 driven by the divestiture of Equipment Care in the fourth quarter of 2017. At an operating segment level, Pest Elimination fixed currency sales increased 6% in 2019 with good growth across all major regions and markets. Fixed currency sales increased 13% (7% acquisition adjusted) in 2018 led by sales to food, beverage and hospitality markets. CTG fixed currency sales increased 5% in
2019 and 10% in 2018. Operating Income
Fixed currency operating income in Other increased during 2019 and 2018 as compared to the prior year. Fixed currency operating income margins decreased in 2019 and increased in 2018.
Acquisition adjusted fixed currency operating income margins in Other decreased 0.3 percentage points in 2019. Field investments negatively impacted margins by approximately 2.2 percentage points, which more than offset the 1.7 percentage points of favorable pricing increases. Acquisition adjusted fixed currency operating income margins increased in 2018, positively impacted by sales volume and pricing increases, partially offset by field investments. Corporate Consistent with our internal management reporting, Corporate expense amounts in the table on page 38 include intangible asset amortization specifically from the Nalco merger and special (gains) and charges that are not allocated to our reportable segments. Items included within special (gains) and charges are
shown
in the table on page 33.
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FINANCIAL POSITION, CASH FLOW AND LIQUIDITY
Financial Position
Total assets were
Total liabilities were$12.1 billion as ofDecember 31, 2019 , compared to total liabilities of$12.0 billion as ofDecember 31, 2018 . Total debt was$6.4 billion as ofDecember 31, 2019 and$7.0 billion as ofDecember 31, 2018 . See further discussion of our debt activity within the "Liquidity and Capital Resources" section of this MD&A. Our net debt to 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. 2019 2018 2017 (ratio) Net debt to EBITDA 2.0 2.3 2.4 (millions) Total debt$6,354.1 $7,045.2 $7,322.7 Cash 186.4 114.7 211.4 Net debt$6,167.7 $6,930.5 $7,111.3 Net income including noncontrolling interest$1,576.2 $1,440.3 $1,518.6 Provision for income taxes 322.7 364.3 243.8 Interest expense, net 191.2 222.3 255.0 Depreciation 654.1 621.3 585.7 Amortization 319.2 317.0 307.6 EBITDA$3,063.4 $2,965.2 $2,910.7 Cash Flows Operating Activities Dollar Change (millions) 2019 2018 2017 2019 2018 Cash provided by operating activities$2,420.7 $2,277.7 $2,091.3 $143.0 $186.4 We continue to generate strong cash flow from operations, allowing us to fund our ongoing operations, acquisitions, investments in the business and pension obligations along with returning cash to our shareholders through dividend payments and share repurchases. Comparability of cash generated from operating activities across 2019 to 2017 was impacted by fluctuations in accounts receivable, inventories and accounts payable ("working capital"), the combination of which increased$74 million ,$192 million and$56 million in 2019, 2018 and 2017 respectively. The cash flow impact across the three years from working capital accounts was driven by changes in sales volumes and timing of collections; timing of purchases and production and usage levels; and volume of purchases and timing of payments.
The impact on operating cash flows of pension and postretirement plan contributions, cash activity related to restructuring, cash paid for income taxes and cash paid for interest, are shown in the following table:
Dollar Change
(millions) 2019 2018 2017 2019 2018
Pensions and postretirement
plan contributions $186.0 $60.0 $144.1 $126.0 $(84.1)
Restructuring payments 100.9 57.9 39.2 43.0 18.7
Income tax payments 356.3 395.2 402.8 (38.9) (7.6)
Interest payments 189.4 206.4 239.3 (17.0) (32.9)
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Investing Activities
Dollar Change
(millions) 2019 2018 2017 2019 2018
Cash used for investing activities $(1,199.1) $(1,030.0) $(1,727.0) $(169.1) $697.0
Cash used for investing activities is primarily impacted by the timing of business acquisitions and dispositions as well as from capital investments in the business.
Total cash paid for acquisitions, net of cash acquired and net of cash received from dispositions, in 2019, 2018 and 2017 was$385 million ,$221 million and$870 million , respectively. Our acquisitions and divestitures are discussed further in Note 4. We continue to target strategic business acquisitions which complement our growth strategy and expect to continue to make capital investments and acquisitions in the future to support our long-term growth. We continue to make capital investments in the business, including merchandising and customer equipment and manufacturing facilities. Total capital expenditures were$801 million ,$847 million and$869 million in 2019, 2018 and 2017, respectively. Financing Activities Dollar Change (millions) 2019 2018 2017 2019 2018
Cash used for financing activities$(1,349.6) $(1,172.7)
$(522.7) $(176.9) $(650.0)
Our cash flows from financing activities primarily reflect the issuances and repayment of debt, common stock repurchases, proceeds from common stock issuances related to our equity incentive programs, dividend payments and acquisition-related contingent considerations.
Shares are repurchased for the purpose of partially offsetting the dilutive effect of our equity compensation plans and stock issued in acquisitions, to manage our capital structure and to efficiently return capital to shareholders. We repurchased a total of$354 million ,$562 million , and$600 million of shares in 2019, 2018 and 2017, respectively. 2017 amount includes$300 million of shares repurchased through an Accelerated Stock Repurchase ("ASR") agreement. See Note 10 for further information regarding the ASR agreement.
The impact on financing cash flows of commercial paper and notes payable repayments, long-term debt borrowings and long-term debt repayments, are shown in the following table:
Dollar Change
(millions) 2019 2018 2017 2019 2018
Net issuances (repayments) of
commercial paper and notes
payable $(252.0) $341.8 $(43.7) $(593.8) $385.5
Long-term debt borrowings - - 1,309.4 - (1,309.4)
Long-term debt repayments (400.6) (551.6) (799.0) 151.0 247.4
In December 2019 , we increased our indicated annual dividend rate by 2%. This
represents the 28th consecutive year we have increased our dividend. We have
paid dividends on our common stock for 83 consecutive years. Cash dividends
declared per share of common stock, by quarter, for each of the last three
years
were as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
2019 $0.46 $0.46 $0.46 $0.47 $1.85
2018 $0.41 $0.41 $0.41 $0.46 $1.69
2017 $0.37 $0.37 $0.37 $0.41 $1.52
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Liquidity and Capital Resources
We currently expect to fund all of our 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 ofDecember 31, 2019 , we had$186 million of cash and cash equivalents on hand, of which$159 million was held outside of theU.S. As ofDecember 31, 2018 , we had$115 million of cash and cash equivalents on hand, substantially all of which was held outside of theU.S. As ofDecember 31, 2019 , we had a$2.0 billion multi-year credit facility, which expires inNovember 2022 . The credit facility has been established with a diverse syndicate of banks and supports ourU.S. and Euro commercial paper programs. The maximum aggregate amount of commercial paper that may be issued under ourU.S. commercial paper program and our Euro commercial paper program may not exceed$2.0 billion . At year-end, we had$55.1 million (€50.0 million) of commercial paper outstanding under the Euro commercial paper program and no borrowings under theU.S. commercial paper program. There were no borrowings under our credit facility as ofDecember 31, 2019 or 2018. As ofDecember 31, 2019 , both programs were rated A-2 byStandard & Poor's , P-2 by Moody's and
F-1 by Fitch. Additionally, we have uncommitted credit lines with major international banks and financial institutions. These credit lines support our daily global funding needs, primarily our global cash pooling structures. We have$165 million of bank supported letters of credit, surety bonds and guarantees outstanding in support of our commercial business transactions. We do not have any other significant unconditional purchase obligations or commercial commitments. As ofDecember 31, 2019 ,Standard & Poor's and Fitch both rated our long-term credit at A- (stable outlook) and Moody's rated our long-term credit at Baa1 (positive outlook). A reduction in our credit ratings could limit or preclude our ability to issue commercial paper under our current programs or could also adversely affect our ability to renew existing, or negotiate new, credit facilities in the future and could increase the cost of these facilities.
We are in compliance with our debt covenants and other requirements of our credit agreements and indentures.
A schedule of our various obligations as ofDecember 31, 2019 are summarized in the following table: Payments Due by Period Less More Than 2-3 4-5 Than (millions) Total 1 Year Years Years 5 Years Notes payable$ 25 $ 25 $ - $ - $ - One-time transition tax 106 7 - 27 72 Long-term debt 6,271 300 1,516 1,276 3,179 Operating leases 659 174 259 105 121 Interest* 2,240 212 370 260 1,398 Total$ 9,301 $ 718 $ 2,145 $ 1,668 $ 4,770
* Interest on variable rate debt was calculated using the interest rate at
year-end 2019. As ofDecember 31, 2019 , our gross liability for uncertain tax positions was$28 million . We are not able to reasonably estimate the amount by which the liability will increase or decrease over an extended period of time or whether a cash settlement of the liability will be required. Therefore, these amounts have been excluded from the schedule of contractual obligations. We do not have required minimum cash contribution obligations for our qualified pension plans in 2020. We are required to fund certain international pension benefit plans in accordance with local legal requirements. We estimate contributions to be made to our international plans will approximate$46 million in 2020. These amounts have been excluded from the schedule of contractual obligations.
We lease certain sales and administrative office facilities, distribution centers, research and manufacturing facilities and other equipment under longer-term operating leases. Vehicle leases are generally shorter in duration. Vehicle leases have residual value requirements that have historically been satisfied primarily by the proceeds on the sale of the vehicles.
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Off-Balance Sheet Arrangements
We do not participate in off-balance sheet financing arrangements. Operating leases were not recorded on the Consolidated Balance Sheet in 2018 or 2017. Through the normal course of business, we have established various joint ventures, some of which have not been consolidated within our financial statements as we neither control, nor are the primary beneficiary. The joint ventures help us meet local ownership requirements, achieve quicker operational scale, expand our ability to provide customers a more fully integrated offering or provide other benefits to our business or customers. These entities have not been utilized as special purposes entities, which are sometimes established for the purpose of facilitating off-balance sheet financial arrangements or other contractually narrow or limited purposes. As such, we are not exposed to financing, liquidity, market or credit risk that could arise if we had engaged in such relationships. Market Risk
We enter into contractual arrangements (derivatives) in the ordinary course of business to manage foreign currency exposure and interest rate risks. We do not enter into derivatives for speculative or trading purposes. Our use of derivatives is subject to internal policies that provide guidelines for control, counterparty risk, and ongoing monitoring and reporting, and is designed to reduce the volatility associated with movements in foreign exchange and interest rates on our income statement and cash flows. We enter into foreign currency forward contracts to hedge certain intercompany financial arrangements, and to hedge against the effect of exchange rate fluctuations on transactions related to cash flows denominated in currencies other thanU.S. dollars. We use net investment hedges as hedging instruments to manage risks associated with our investments in foreign operations. As ofDecember 31, 2019 , we had a total of €1,150 million senior notes designated as net investment hedges.
We manage interest expense using a mix of fixed and floating rate debt. To help manage borrowing costs, we may enter into interest rate swap agreements. Under these arrangements, we agree to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. As ofDecember 31, 2019 , we had no interest rate swaps outstanding.
See Note 8 for further information on our hedging activity.
Based on a sensitivity analysis (assuming a 10% change in market rates) of our foreign exchange and interest rate derivatives and other financial instruments, changes in exchange rates or interest rates would increase/decrease our financial position and liquidity by approximately$257 million . The effect on our results of operations would be substantially offset by the impact of the hedged items.
GLOBAL ECONOMIC AND POLITICAL ENVIRONMENT
Energy Markets Approximately 22% of our sales are generated from our Global Energy segment, the results of which are subject to volatility in the oil and gas commodity markets. During 2019, the North American oil industry drilling and production activity slowed from 2018 levels, while international activity showed modest improvement. Demand for oil and overall energy consumption has shown modest growth with oil prices well above their lows in early 2016.
Our global footprint and broad business portfolio within the Global Energy segment, as well as our strong execution capabilities are expected to provide the required resilience to perform well in the current market. As such, we continue to remain confident in the long-term growth prospects of the segment.
Global Economies Almost half of our sales are outside ofthe United States . Our international operations subject us to changes in economic conditions and foreign currency exchange rates as well as political uncertainty in some countries which could impact future operating results.Argentina has continued to experience negative economic trends, evidenced by multiple periods of increasing inflation rates, devaluation of the Argentine Peso, and increasing borrowing rates.Argentina is classified as a highly inflationary economy in accordance withU.S. GAAP, and theU.S. dollar is the functional currency for our subsidiaries inArgentina . During 2019, sales inArgentina represented less than 1% of our consolidated sales. Assets held inArgentina at the end of 2019 represented less than 1% of our consolidated assets.
The coronavirus has had a negative impact on market conditions and customer
demand, starting in
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Brexit Referendum
Effective on January 31, 2020 , the U.K. has formally left the European Union .
The U.K.'s relationship with the EU will no longer be governed by the EU
Treaties, but instead by the terms of the Withdrawal Agreement agreed between
the U.K. and the EU in late 2019. The Withdrawal Agreement provides for a
"transition" period, which commenced the moment the U.K. leaves the EU and is
currently set to end on December 31, 2020 . At the end of the transition period,
there may be significant changes to the U.K.'s business environment. While the
effects of Brexit will depend on any agreements the U.K. makes to retain access
to EU markets or the failure to reach such agreements, the uncertainties created
by Brexit, any resolution between the U.K. and EU countries or the failure to
reach any such resolutions, could adversely affect our relationships with
customers, suppliers and employees and could adversely affect our business.
During 2019, net sales of our
NEW ACCOUNTING PRONOUNCEMENTS
Information regarding new accounting pronouncements is included in Note 2.
SUBSEQUENT EVENTS
Subsequent to year-end, we reached an agreement to purchase CID Lines, a leading
global provider of livestock biosecurity and hygiene solutions. The acquisition
is expected to close in the second quarter of 2020 subject to various regulatory
clearances.
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NON-GAAP FINANCIAL MEASURES
This MD&A includes financial measures that have not been calculated in
accordance with
? Fixed currency sales
? Acquisition adjusted fixed currency sales
? Adjusted cost of sales
? Adjusted gross margin
? Fixed currency operating income
? Fixed currency operating income margin
? Adjusted operating income
? Adjusted operating income margin
? Adjusted fixed currency operating income
? Adjusted fixed currency operating income margin
? Acquisition adjusted fixed currency operating income
? Acquisition adjusted fixed currency operating income margin
? Adjusted other (income) expense
? Adjusted interest expense, net
? 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 cost of sales, gross margin, interest expense and operating income exclude the impact of special (gains) and charges, and our non-GAAP measures for tax rate, net income attributable to Ecolab and diluted EPS further exclude the impact of discrete tax items. We include items within special (gains) and charges and discrete tax items that we believe can significantly affect the period-over-period assessment of operating results and not necessarily reflect costs and/or income associated with historical trends and future results. After tax special (gains) and charges are derived by applying the applicable local jurisdictional tax rate to the corresponding pre-tax special (gains) and charges. EBITDA is defined as the sum of net income including non-controlling 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-K are based on translation intoU.S. dollars at the fixed foreign currency exchange rates established by management at the beginning of 2019. Fixed currency amounts during 2018 forArgentina operations are reflected at the Argentine Peso rate established by management at the beginning of the year.
Acquisition adjusted growth rates exclude the results of our acquired businesses from the first twelve months post acquisition, exclude the results of our divested businesses from the twelve months prior to divestiture.
These non-GAAP measures are not in accordance with, or an alternative toU.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 theU.S. GAAP measures included in this MD&A and we have provided reconciliations of reportedU.S. GAAP amounts to the non-GAAP amounts.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The discussion under the heading entitled "Market Risk" and "Global Economic and Political Environment" is incorporated by reference from Part II, Item 7 of
this
Form 10-K.
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