EX-13.1 2 a14-25700_1ex13d1.htm EX-13.1

Exhibit (13.1)

 

MANAGEMENT’S DISCUSSION & ANALYSIS

 

The following management discussion and analysis (“MD&A”) provides information that management believes is useful in understanding the operating results, cash flows and financial condition of Ecolab Inc. (“Ecolab”, “the company”, “we” or “our”). 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 level, and the quantitative impact of acquisitions and changes in foreign currency at the 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 information and related notes included in this Annual Report. Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). This discussion contains various “Non-GAAP Financial Measures” and 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 and Forward-Looking Statements and Risk Factors found on pages 29 and 30.

 

Comparability of Results

 

Statement of Income Data

 

Effective in the first quarter of 2014, certain employee-related costs from our recently acquired businesses that were historically presented within cost of sales (“COS”) were revised and reclassified to selling, general and administrative expenses (“SG&A”) on the Consolidated Statement of Income. These immaterial revisions were made to conform with management’s view of the respective costs within the global organizational model. Total costs reclassified were $78.9 million and $98.1 million for the years ended December 31, 2013 and 2012, respectively.

 

Results for 2013 and 2012 have been revised to conform to the current year presentation. The reclassification had no impact on earnings, financial position or cash flows.

 

Reportable Segments and Operating Units

 

Effective in the first quarter of 2014, we made immaterial changes to our reportable segments, including the movement of certain customers between reportable segments, reflecting our continued integration of businesses and consistency across our global markets and customers. In addition, we made immaterial changes to the way we measure and report segment operating income by updating the internal allocations of certain supply chain and SG&A expenses related to our centralized functions.

 

Segment results for 2013 and 2012 have been revised to conform to the current year presentation. The changes had no impact on our total reported net sales or total reported operating income.

 

Beginning in the first quarter of 2014, the term “Global” has been removed from the description of our operating units. This change had no impact on the underlying structure of the respective operating units.

 

Fixed Currency Foreign Exchange Rates

 

We evaluate the sales and operating income performance of our international operations based on fixed currency exchange rates, which eliminate the impact of exchange rate fluctuations on our international operations. Fixed currency amounts are updated annually at the beginning of each year based on translation into U.S. dollars at foreign currency exchange rates established by management, with all periods presented using such rates. Fixed currency exchange rates are generally based on existing market rates at the time they are established.

 

Impact of Acquisitions and Divestitures

 

On April 10, 2013, we completed our acquisition of privately held Champion Technologies and its related company Corsicana Technologies (collectively “Champion”). The Champion business became part of our Global Energy reportable segment in the second quarter of 2013. The pro forma impact of the Champion acquisition was not material to our consolidated financial statements; therefore, pro forma information is not presented.

 

Our historical practice for providing growth rates adjusted for immaterial acquisitions and divestitures has generally been to exclude the results of the acquired business from the first twelve months post acquisition and exclude the results of the divested business from the twelve months prior to divestiture, thus allowing for a more meaningful period-over-period comparison. Presentation of acquisition adjusted growth rates, with the exception of the Champion transaction, continues to be handled in such a way. Specific to the Champion transaction, due to the rapid pace at which the business has been integrated within our Global Energy segment, including all customer selling activity, discrete financial data specific to the legacy Champion business is no longer available for post-acquisition periods. As such, to allow for the most meaningful period-over-period comparison, specific to the Champion transaction, Champion’s results for 2012 and the period prior to acquisition in 2013 have been included for purposes of providing acquisition adjusted growth rates. Throughout this MD&A, reference to “acquisition adjusted” growth rates follows the above methodology.

 

EXECUTIVE SUMMARY

 

Ecolab delivered a strong year in 2014, as solid sales growth and adjusted operating income margin expansion produced an 18% adjusted earnings per share gain.

 

Our solid acquisition adjusted fixed currency sales growth was the result of our continued focus on innovative products and programs to help customers obtain better results with lower total costs. Through these, we drove new account gains across our segments. We also continued to implement appropriate price increases to help offset higher delivered product costs and investments in our business, and we leveraged cost efficiencies and acquisition synergies to deliver margin expansion and yield the adjusted earnings per share gain.

 

Through these focused actions, we once again delivered outstanding operating results for our shareholders in 2014 while continuing to build our future opportunities. Our performance underscored the strength and long-term potential of our business, our people and our strategies.

 

13



 

Sales: Reported sales increased 8% to $14.3 billion in 2014 from $13.3 billion in 2013. Sales were negatively impacted by unfavorable foreign currency exchange rates compared to the prior year. When measured in fixed rates of foreign currency exchange, fixed currency sales increased 9% compared to the prior year. Acquisition adjusted fixed currency sales growth for 2014 was 5%. See the section entitled Non-GAAP Financial Measures on pages 29-30 for further information on our Non-GAAP measures and the Net Sales table on page 17 and the Sales by Reportable Segment table on page 22 for reconciliation information.

 

Gross Margin: Our reported gross margin was 46.2% of sales for 2014, which compared to 2013 reported gross margin of 46.0%. Excluding the impact of special (gains) and charges included in cost of sales from both 2014 and 2013, the adjusted gross margin was 46.3% for both years. Including the net impact of acquisitions and divestitures, adjusted gross margins increased 0.4 percentage points when comparing 2014 to 2013. See the section entitled Non-GAAP Financial Measures on pages 29-30 for further information on our Non-GAAP measures and the Cost of Sales and Gross Margin table on page 18 for reconciliation information.

 

Operating Income: Reported operating income increased 25% to $2.0 billion in 2014, compared to $1.6 billion in 2013. Adjusted operating income, excluding the impact of special (gains) and charges, increased 15% in 2014. Foreign currency had a negative impact on operating income growth, as 2014 adjusted fixed currency operating income increased 17% compared to the prior year. The net impact of acquisitions and divestitures added approximately 2 percentage points to our 2014 adjusted fixed currency operating income growth rate. See the section entitled Non-GAAP Financial Measures on pages 29-30 for further information on our Non-GAAP measures and the Operating Income table on page 20 and Operating Income by Reportable Segment table on page 22 for reconciliation information.

 

Earnings Per Share: Reported diluted earnings per share increased 24% to $3.93 in 2014 compared to $3.16 in 2013. Special (gains) and charges had an impact on both years, driven primarily by restructuring charges, Champion acquisition and integration costs and Nalco Holding Company (“Nalco”) integration costs incurred in both 2014 and 2013, settlements and other gains in 2014 and Venezuela currency devaluation charges in 2013. Adjusted diluted earnings per share, which exclude the impact of special (gains) and charges and discrete tax items from both 2014 and 2013 increased 18% to $4.18 in 2014 compared to $3.54 in 2013. See the section entitled Non-GAAP Financial Measures on pages 29-30 for further information on our Non-GAAP measures, and the Diluted Earnings Per Common Share table on page 21 for reconciliation information.

 

Cash Flow: Cash flow from operating activities was $1.8 billion in 2014 compared to $1.6 billion in 2013. We continued to generate strong cash flow from operations, allowing us to fund our ongoing operations, acquisitions, investments in the business, debt repayments, pension obligations and return cash to our shareholders through share repurchases and dividend payments. See the section entitled Cash Flows on pages 25-26 for further information.

 

Balance Sheet: We remain committed to our stated objective of having an investment grade balance sheet, supported by our current rating of BBB+/Baa1 by the major ratings agencies, and to achieving “A” range ratings metrics. We believe that our strong balance sheet has allowed us continued access to capital at attractive rates.

 

Dividends: We increased our quarterly cash dividend 20% in December 2014 to an indicated annual rate of $1.32 per share. The increase represents our 23rd consecutive annual dividend rate increase and the 78th 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.

 

Restructuring Initiatives: During 2014 we continued to undergo activities under our two active restructuring plans; the Energy Restructuring Plan and the Combined Restructuring Plan as defined and discussed within the section entitled Restructuring Charges on page 19. The individual plans remain focused on the original initiatives of strengthening our position in the fast growing global energy market, reducing our global workforce, and optimizing and simplifying our supply chain, distribution center locations and other facilities. Both plans are expected to be substantially completed by the end of 2015, although certain actions will likely continue into 2016.

 

Champion Acquisition Integration: The integration of the Champion business into our Global Energy segment has continued to progress well, with synergy targets in line with expectations, as indicated by the strong acquisition adjusted fixed currency sales growth, acquisition adjusted operating income growth and expanded acquisition adjusted operating income margins within our Global Energy segment.

 

CRITICAL ACCOUNTING ESTIMATES

 

Our consolidated financial statements are prepared in accordance with U.S. GAAP. We have adopted various accounting policies to prepare the consolidated financial statements in accordance with U.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 with U.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 the company 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 the company’s 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

 

We recognize revenue on product sales at the time evidence of an arrangement exists, title to the product and risk of loss transfers to the customer, the price is fixed and determinable and collection is reasonably assured. We recognize revenue on services as they are performed. While we employ a sales and service team to ensure our customers’ needs are best met in a high quality way, the vast majority of our revenue is generated from product sales. Outside of the service businesses and service offerings discussed in Note 17, any other services are either incidental to a product sale and not sold separately or are insignificant.

 

14



 

Our sales 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 at the time the sale is recorded. We also record estimated reserves for anticipated uncollectible accounts and for product returns and credits at the time of sale, as discussed below. Depending on market conditions, we may increase customer incentive offerings, which could reduce gross profit margins at the time the incentive is offered.

 

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 balances based on specific circumstances and credit conditions, and when it is deemed probable that 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 under different assumptions.

 

Our allowance for doubtful accounts balance was $77 million and $81 million, as of December 31, 2014 and 2013, respectively. These amounts include our allowance for sales returns and credits of $15 million and $14 million as of December 31, 2014 and 2013, respectively. Our bad debt expense as a percent of reported net sales was 0.2% in both 2014 and 2013, and 0.3% in 2012. We believe that 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.

 

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. As with other companies engaged in similar manufacturing activities and providing similar services, 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 probable. 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 effect 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 the U.S. plans are assessed using a yield curve constructed from a subset of bonds yielding greater than the median return from a population of non-callable, corporate bond issues rated Aa by Moody’s Investor Services or AA by Standard & Poors. The discount rate is calculated by matching the plans’ projected cash flows to the bond yield curve. In determining our U.S. pension obligations for 2014, our discount rate decreased to 4.14% from 4.92% at year-end 2013. In determining our U.S. postretirement health care obligation for 2014, our discount rate decreased to 4.08% from 4.77% at year-end 2013.

 

·        The expected 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 U.S. plan assets used for determining both the 2014 and 2015 U.S. pension and U.S. postretirement health care expenses was 7.75%.

 

·        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 was 4.32% as of both December 31, 2014 and 2013.

 

·        The mortality tables were updated to the RP-2014 tables, with new mortality projection scale MP-2014, in determining our U.S. pension and U.S. postretirement health care obligation for 2014.

 

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 our U.S. qualified and non-qualified pension plans increased to $556 million as of December 31, 2014 from $258 million as of December 31, 2013 (both before tax), primarily due to a decrease in our discount rate and adoption of an updated mortality table.

 

The effect of a decrease in the discount rate or decrease in the expected return on assets assumption as of December 31, 2014, on the December 31, 2014 funded status and 2015 expense is shown below, assuming no changes in benefit levels and no amortization of gains or losses for our significant U.S. plans:

 

MILLIONS

 

EFFECT ON U.S. PENSION PLANS

 

 

 

 

 

INCREASE IN

 

HIGHER

 

 

ASSUMPTION

 

RECORDED

 

2015

ASSUMPTION

 

CHANGE

 

OBLIGATION

 

EXPENSE

Discount rate

 

-0.25 pts

 

$71.5

 

$4.7

Expected return on assets

 

-0.25 pts

 

N/A

 

$4.3

 

 

 

EFFECT ON U.S. POSTRETIREMENT

MILLIONS

 

HEALTH CARE BENEFITS PLANS

 

 

 

 

 

INCREASE IN

 

HIGHER

 

 

ASSUMPTION

 

RECORDED

 

2015

ASSUMPTION

 

CHANGE

 

OBLIGATION

 

EXPENSE

Discount rate

 

-0.25 pts

 

$7.8

 

$1.6

Expected return on assets

 

-0.25 pts

 

N/A

 

$0.1

 

15



 

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 the U.K. and Eurozone countries. We use assumptions similar to our U.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, planned contributions and overall financial positions of our pension and postretirement plan obligations.

 

Self Insurance

 

Globally we have high deductible insurance policies for property and casualty losses. We are insured for losses in excess of these deductibles 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. A change in these actuarial assumptions would cause reported results to differ.

 

Restructuring

 

Our restructuring activities are associated with plans to enhance our efficiency, effectiveness and sharpen the competitiveness of our businesses. These restructuring plans include 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 is generally 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 both 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 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. During 2014, we incurred $83 million under our two active restructuring plans (Combined and Energy). Our restructuring liability balance was $76 million and $81 million as of December 31, 2014 and 2013, respectively. For additional information on our current restructuring activities, see Note 3.

 

Income Taxes

 

Judgment is required to determine the annual effective income tax rate, deferred tax assets and liabilities, any valuation allowances recorded against net deferred tax assets and uncertain tax positions.

 

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. During interim periods, this expected annual rate is then applied to our year-to-date operating results. In the event that 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. We anticipate that approximately one-half of our December 31, 2014 valuation allowance balance may be released during 2015 based on income trends in the underlying foreign entities. 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.

 

U.S. deferred income taxes are not provided on certain unremitted foreign earnings that are considered permanently reinvested. Undistributed earnings of foreign subsidiaries are considered to have been reinvested indefinitely or are available for distribution with foreign tax credits available to offset the amount of applicable income tax and foreign withholding taxes that might be payable on earnings. It is impractical to determine the amount of incremental taxes on an ongoing basis that might arise if all undistributed earnings were distributed.

 

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 federal income tax returns through 2010. Our Ecolab U.S. (including Nalco) income tax returns for the years 2011 and 2012 are currently under audit. The audit of the legacy Champion U.S. income tax return for the year 2012 has not yet begun. 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 that our tax returns properly reflect the tax consequences of our operations, and that 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

 

16



 

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. The majority of our tax reserves are presented in the balance sheet within other non-current liabilities. Our gross liability for uncertain tax positions was $79 million and $99 million as of December 31, 2014 and 2013, respectively. For additional information on income taxes, see Note 12.

 

Long-Lived Assets, Intangible Assets and Goodwill

 

Long-Lived and Intangible Assets

 

We periodically review our long-lived and amortizable intangible assets, the net value of which was $6.6 billion and $6.8 billion as of December 31, 2014 and 2013, respectively, for impairment and to assess whether 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. In addition, we periodically reassess the estimated remaining useful lives of our long-lived 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.

 

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 of December 31, 2014 and 2013. The carrying value of the indefinite life trade name was subject to annual impairment testing, using the qualitative assessment method, during the second quarter of 2014. Based on this testing, no adjustment to the carrying value was necessary. Additionally, based on the current and expected performance of our operating units, updating the impairment testing during the second half of 2014 was not deemed necessary.

 

Goodwill

 

We had total goodwill of $6.7 billion and $6.9 billion as of December 31, 2014 and 2013, 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 ten operating segments.

 

We used a “step zero” qualitative test to assess all ten of our reporting units given the substantial levels of headroom and other strong qualitative factors. Qualitative testing evaluated factors including, but not limited to, economic, market and industry conditions, cost factors and the overall financial performance of the reporting unit. Based on the “step zero” testing performed, no adjustment to the carrying value of goodwill was necessary. In addition, we noted no changes in events or circumstances which would have required us to complete the two-step quantitative goodwill impairment analysis for any of the assessed reporting units.

 

If circumstances change significantly, we would also test a reporting unit for impairment during interim periods between the annual tests. Based on the current and expected performance of our reporting units, updating the impairment testing during the second half of 2014 was not deemed necessary.

 

The Nalco and Champion transactions resulted in the addition of $4.5 billion and $1.0 billion of goodwill, respectively, within the Energy, Water and Paper reporting units. Subsequent performance of these reporting units relative to projections used in our purchase price allocation could result in impairment if there is either underperformance by the reporting unit or if the carrying value of the reporting unit were to fluctuate significantly due to reasons that did not proportionately increase fair value.

 

RESULTS OF OPERATIONS

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

PERCENT CHANGE

 

 

MILLIONS

 

 

 

2014

 

 

 

2013

 

 

2012

 

 

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported GAAP net sales

 

 

$

14,280.5

 

 

$

13,253.4

 

$

11,838.7

 

 

 

8

%

 

12

%

 

Effect of foreign currency translation

 

 

(45.7)

 

 

(221.5)

 

(253.0)

 

 

 

 

 

 

 

 

 

Non-GAAP fixed currency sales

 

 

$

14,234.8

 

 

$

13,031.9

 

$

11,585.7

 

 

 

9

%

 

13

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported net sales for 2014 increased 8%, as growth continued to be impacted by the Champion acquisition. Foreign currency negatively impacted sales growth in 2014 as fixed currency sales increased 9%. Acquisition adjusted fixed currency sales increased 5% in 2014.

 

Reported net sales for 2013 increased 12%, with growth benefiting from the inclusion of the Champion business in our results beginning in the second quarter of 2013. Foreign currency negatively impacted sales growth in 2013 as fixed currency sales increased 13%. Acquisition adjusted fixed currency sales increased 5% in 2013.

 

The percentage change components of the year-over-year sales increase are as follows:

 

PERCENT

 

2014

2013

Volume

 

4

%

4

%

Price changes

 

1

 

1

 

Acquisition adjusted fixed currency sales increase

 

5

 

5

 

 

 

 

 

 

 

Acquisitions & divestitures

 

4

 

8

 

Fixed currency sales increase

 

9

 

13

 

 

 

 

 

 

 

Foreign currency translation

 

(1

)

(1

)

 

 

 

 

 

 

Reported GAAP net sales increase

 

8

%

12

%

 

 

 

 

 

 

 

17



 

Cost of Sales and Gross Margin

 

 

 

2014

 

2013

 

2012

 

 

 

 

 

GROSS

 

 

 

GROSS

 

 

 

GROSS

 

MILLIONS/PERCENT

 

COS

 

MARGIN

 

COS

 

MARGIN

 

COS

 

MARGIN

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported GAAP COS and gross margin

 

 

$

7,679.1

 

46.2%

 

 

$

7,161.2

 

46.0%

 

$

6,385.4

 

46.1%

 

Special (gains) and charges

 

 

14.3

 

0.1

 

 

43.2

 

0.3 

 

93.9

 

0.8 

 

Non-GAAP adjusted COS and gross margin

 

 

$

7,664.8

 

46.3%

 

 

$

7,118.0

 

46.3%

 

$

6,291.5

 

46.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Our COS values and corresponding gross profit margin (“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 46.2%, 46.0% and 46.1% for 2014, 2013 and 2012, respectively. Our 2014, 2013 and 2012 reported gross margins across 2013 and 2014 were negatively impacted by special (gains) and charges of $14.3 million, $43.2 million and $93.9 million, respectively. Special (gains) and charges items impacting COS are shown within the special (gains) and charges table below.

 

Excluding the impact of special (gains) and charges, our adjusted gross margin was 46.3% for both 2014 and 2013. The adjusted gross margin across 2014 and 2013 was impacted by continued growth within Global Energy, including the impact of the Champion acquisition, which generally has a lower gross margin compared to our other segments, which offset pricing gains. Including the net impact of acquisitions and divestitures, our adjusted gross margin increased 0.4 percentage points in 2014.

 

Excluding the impact of special (gains) and charges, our 2013 adjusted gross margin of 46.3% compared against a 2012 adjusted gross margin of 46.9%. The decrease was due primarily to growth within Global Energy, including the impact of the Champion acquisition. These negative impacts were partially offset by pricing gains, synergies and cost savings. Including the net impact of acquisitions and divestitures, our adjusted gross margin was flat comparing 2013 to 2012.

 

Selling, General and Administrative Expenses

 

PERCENT

 

 

 

2014

 

 

 

2013

 

 

2012

 

 

 

 

 

 

 

 

 

 

SG&A Ratio

 

 

32.1%

 

 

32.9%

 

33.9%

 

 

 

 

 

 

 

 

 

 

The decrease in SG&A ratio (SG&A expenses as a percentage of reported net sales) across the periods was driven by leverage from increased sales, net synergies and cost savings. Including the net impact of acquisitions and divestitures, our SG&A ratio decreased 0.8 percentage points and 1.1 percentage points when comparing 2014 against 2013 and 2013 against 2012, respectively, which is generally consistent with the trend in the table above.

 

Special (Gains) and Charges

 

Special (gains) and charges reported on the Consolidated Statement of Income included the following items:

 

MILLIONS

 

2014

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

 

 

 

 

 

 

 

Restructuring charges

 

 

$

13.9

 

 

$

6.6

 

$

22.7

 

Recognition of inventory fair value step-up

 

 

0.4

 

 

36.6

 

71.2

 

Subtotal

 

 

 

14.3

 

 

43.2

 

93.9

 

Special (gains) and charges

 

 

 

 

 

 

 

 

 

Restructuring charges

 

 

69.2

 

 

83.4

 

116.6

 

Champion acquisition and integration costs

 

 

19.9

 

 

49.7

 

18.3

 

Nalco merger and integration costs

 

 

8.5

 

 

18.6

 

70.9

 

Venezuela currency devaluation

 

 

 

 

23.2

 

 

Gain on sale of businesses, litigation activity, settlements and other gains

 

 

(28.8

)

 

(3.6

)

(60.1

)

Subtotal

 

 

 

68.8

 

 

 

171.3

 

 

145.7

 

 

Operating income subtotal

 

 

83.1

 

 

214.5

 

239.6

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

 

 

 

 

 

 

 

Acquisition debt costs

 

 

 

 

2.5

 

1.1

 

Debt extinguishment costs

 

 

 

 

 

18.2

 

Subtotal

 

 

 

 

 

2.5

 

19.3

 

Net income attributable to noncontrolling interest

 

 

 

 

 

 

 

 

 

Venezuela currency devaluation

 

 

 

 

(0.5

)

 

Recognition of Nalco inventory fair value step-up

 

 

 

 

 

(4.5

)

Subtotal

 

 

 

 

(0.5

)

(4.5

)

 

 

 

 

 

 

 

 

 

 

Total special (gains) and charges

 

 

$

83.1

 

 

$

216.5

 

$

254.4

 

 

 

 

 

 

 

 

 

 

 

 

18



 

For segment reporting purposes, special (gains) and charges have been included in our corporate segment, which is consistent with our internal management reporting.

 

Restructuring Charges

 

Energy Restructuring Plan

 

In April 2013, following the completion of the Champion acquisition, we commenced plans to undertake restructuring and other cost-saving actions to realize our acquisition-related cost synergies as well as streamline and strengthen our position in the fast growing global energy market (the “Energy Restructuring Plan”). Actions associated with the acquisition to improve the effectiveness and efficiency of the business continue to include a reduction of the combined business’s current global workforce. Actions also include leveraging and simplifying our global supply chain, including the reduction of plant, distribution center and redundant facility locations and product line optimization.

 

The total pre-tax restructuring charges under the Energy Restructuring Plan are expected to be approximately $80 million ($55 million after tax). The restructuring charges are expected to be substantially complete by the end of 2015, although certain actions will likely continue into 2016. We anticipate that approximately $60 million of the $80 million pre-tax charges will represent cash expenditures. The remaining pre-tax charges represent estimated asset write-downs and disposals. No decisions have been made regarding any additional asset disposals and estimates could vary depending on the actual actions taken.

 

As a result of activities under the Energy Restructuring Plan, we recorded restructuring charges of $9.5 million ($6.4 million after tax) or $0.02 per diluted share and $27.4 million ($19.4 million after tax) or $0.06 per diluted share during 2014 and 2013, respectively.

 

Cash payments under the Energy Restructuring Plan during 2014 and 2013 were $13.9 million and $17.5 million, respectively. The majority of cash payments under this plan are related to severance, with the current accrual expected to be paid over a period of a few months to several quarters. Cash payments in 2015 are expected to remain at a consistent level with 2014. We anticipate the remaining cash expenditures will be funded from operating activities.

 

During 2014 the Energy Restructuring Plan achieved approximately $55 million of incremental savings as compared to 2013. We anticipate cumulative cost savings from this plan, along with synergies achieved in connection with the acquisition, of $125 million in 2015 with annualized cost savings and synergies of $150 million by the end of 2015.

 

Combined Restructuring Plan

 

In February 2011, we commenced a comprehensive plan to substantially improve the efficiency and effectiveness of our European business, as well as undertake certain restructuring activities outside of Europe, historically referred to as the 2011 Restructuring Plan.

 

Additionally in January 2012, following the merger with Nalco, we formally commenced plans to undertake restructuring actions related to the reduction of our global workforce and optimization of our supply chain and office facilities, including planned reductions of plant and distribution center locations, historically referred to as the Merger Restructuring Plan.

 

During the first quarter of 2013, we determined that because the objectives of the plans discussed above were aligned, the previously separate restructuring plans should be combined into one plan.

 

The combined restructuring plan (the “Combined Plan”) combines opportunities and initiatives from both plans and continues to follow the original format of the Merger Restructuring Plan by focusing on global actions related to optimization of our supply chain and office facilities, including reductions of the global work force and plant and distribution center locations. During the fourth quarter of 2014, we identified additional opportunities to optimize our supply chain, increase efficiency and effectiveness and reduce workforce, which increased total planned charges under the Combined Plan from $330 million ($245 million after tax) to $390 million ($295 million after tax). As a result of activities under the Combined Plan, we recorded restructuring charges of $73.5 million ($58.5 million after tax) or $0.19 per diluted share and $63.6 million ($48.3 million after tax) or $0.16 per diluted share during 2014 and 2013, respectively. The remaining restructuring charges are expected to be substantially complete by the end of 2015, although certain actions will likely continue into 2016.

 

We anticipate that approximately two-thirds of the remaining Combined Plan pre-tax charges will represent net cash expenditures. No decisions have been made regarding any non-cash expenses and estimates could vary depending on the actual actions taken.

 

Net cash payments under the Combined Plan were $68.8 million during 2014 and $192.2 million across 2011 to 2013. The majority of cash payments under the Combined Plan are related to severance, with the current accrual expected to be paid over a period of a few months to several quarters. Cash payments in 2015 are expected to remain consistent with 2014. We anticipate the remaining cash expenditures will continue to be funded from operating activities.

 

During 2014, the Combined Plan achieved approximately $80 million of incremental savings as compared to 2013. Cumulative cost savings and synergies from the Combined Plan of $335 million in 2014 are consistent with expectations. We anticipate an increase in the annualized cost savings through 2016 from $395 million to $420 million based on the additional restructuring activities identified during the fourth quarter of 2014.

 

Restructuring charges have been included as a component of both cost of sales and special (gains) and charges on the Consolidated Statement of Income. Further details related to our restructuring charges are included in Note 3.

 

Non-Restructuring Special (Gains) and Charges

 

Champion acquisition and integration costs

 

As a result of the Champion acquisition completed in 2013, we incurred charges of $19.9 million ($12.8 million after tax) or $0.04 per diluted share, $88.8 million ($61.4 million after tax) or $0.20 per diluted share and $19.4 million ($16.7 million) or $0.06 per diluted share, during 2014, 2013 and 2012, respectively.

 

Champion acquisition and integration related costs have been included as a component of cost of sales, special (gains) and charges and net interest expense on the Consolidated Statement of Income. Amounts within cost of sales include the recognition of fair value step-up in Champion international inventory, which is maintained on a FIFO basis, and Champion U.S. inventory which was associated with the adoption of LIFO and integration into an existing LIFO pool. Amounts within special (gains) and charges include acquisition costs, advisory and legal fees and integration charges. Amounts within net interest expense include the interest expense through the April 2013 close date of the Champion transaction of the company’s $500 million public debt issuance in December 2012 as well as amortizable fees to secure term loans and short-term debt, all of which were initiated to fund the Champion acquisition.

 

19



 

Nalco merger and integration costs

 

As a result of the Nalco merger completed in 2011, we incurred charges of $8.5 million ($7.0 million after tax), or $0.02 per diluted share, $18.6 million ($14.2 million after tax), or $0.05 per diluted share and $155.8 million ($113.7 million after tax), or $0.38 per diluted share during 2014, 2013 and 2012, respectively.

 

Nalco merger and integration charges have been included as a component of cost of sales, special (gains) and charges, net interest expense and net income (loss) attributable to noncontrolling interest on the Consolidated Statement of Income. Amounts within cost of sales and net income (loss) attributable to noncontrolling interest include recognition of fair value step-up in Nalco international inventory which is maintained on a FIFO basis. Amounts within special (gains) and charges include merger and integration charges. Amounts within net interest expense include a loss on the extinguishment of Nalco’s senior notes.

 

Venezuelan currency devaluation

 

On February 8, 2013, the Venezuelan government devalued its currency, the Bolivar Fuerte. As a result of the devaluation, in 2013, we recorded a charge of $22.7 million ($16.1 million after tax) or $0.05 per diluted share, due to the remeasurement of the local balance sheet. As a result of the ownership structure of our operations in Venezuela, we also reflected the impact of the devaluation as a component of net income (loss) attributable to noncontrolling interest on the Consolidated Statement of Income.

 

Other special (gains) and charges

 

During 2014, we recorded a special gain of $28.4 million ($23.3 million after tax), or $0.08 per diluted share, as a result of a favorable licensing settlement and other settlement gains, the consolidation of the Emirates National Chemicals Company LLC (“Emochem”) entity and removal of the corresponding equity method investment and the disposition of a business.

 

During 2012, we recorded a net special gain of $60.1 million ($35.7 million after tax), or $0.12 per diluted share, related to the sale of our Vehicle Care division, the receipt of additional payments related to the sale of an investment in a U.S. business originally sold prior to 2012 and litigation-related charges.

 

Further details related to our non-restructuring special (gains) and charges are included in Note 3.

 

Operating Income and Operating Income Margin

 

 

 

 

 

 

 

 

 

 

 

PERCENT CHANGE

 

MILLIONS

 

2014

 

 

2013

 

2012

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported GAAP operating income

 

 

$

1,955.0

 

 

$

1,560.6

 

$

1,289.3

 

 

 

25%

 

21%

 

Special (gains) and charges

 

 

83.1

 

 

214.5

 

239.6

 

 

 

 

 

 

 

Non-GAAP adjusted operating income

 

 

2,038.1

 

 

1,775.1

 

1,528.9

 

 

 

15

 

16

 

Effect of foreign currency translation

 

 

(3.2

)

 

(35.5

)

(42.0

)

 

 

 

 

 

 

Non-GAAP adjusted fixed currency operating income

 

 

$

2,034.9

 

 

$

1,739.6

 

$

1,486.9

 

 

 

17%

 

17%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PERCENT

 

2014

 

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported GAAP operating income margin

 

13.7%

 

 

11.8%

 

10.9%

 

 

 

 

 

 

Non-GAAP adjusted operating income margin

 

14.3%

 

 

13.4%

 

12.9%

 

 

 

 

 

 

Non-GAAP adjusted fixed currency operating income margin

 

14.3%

 

 

13.3%

 

12.8%

 

 

 

 

 

 

 

Reported operating income increased 25% when comparing 2014 to 2013 and increased 21% when comparing 2013 to 2012. Our reported operating income for 2014, 2013 and 2012 was impacted by special (gains) and charges. Excluding the impact of special (gains) and charges from all three years, 2014 adjusted operating income increased 15% when compared to 2013 adjusted operating income and 2013 adjusted operating income increased 16% when compared to 2012 adjusted operating income. As shown in the previous table, foreign currency translation had a negative impact on operating income growth for both 2014 and 2013, as adjusted fixed currency operating income increased 17% for both comparable periods.

 

The 2014 and 2013 adjusted fixed currency operating income increase of 17% for both comparable periods and the improving trend in our adjusted fixed currency operating income margin, were driven primarily by sales volume increases, pricing gains, net cost savings and synergies.

 

The net impact of acquisitions and divestitures added approximately 2 percentage points to both our 2014 and 2013 adjusted fixed currency operating income growth rates.

 

Interest Expense, Net

 

 

 

 

 

 

 

 

 

 

 

PERCENT CHANGE

 

MILLIONS

 

2014

 

 

2013

 

2012

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported GAAP interest expense, net

 

 

$

256.6

 

 

$

262.3

 

$

276.7

 

 

(2)%

 

(5)%

 

Special (gains) and charges

 

 

 

 

2.5

 

19.3

 

 

 

 

 

 

Non-GAAP adjusted interest expense, net

 

 

$

256.6

 

 

$

259.8

 

$

257.4

 

 

(1)%

 

1%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported net interest expense totaled $256.6 million, $262.3 million and $276.7 million during 2014, 2013 and 2012, respectively.

 

Special (gains) and charges reported within net interest expense impacted 2013 and 2012, and included the interest expense through the April 2013 close date of the Champion acquisition of our $500 million public debt issuance in December 2012, as well as amortizable fees to secure term loans and short-term debt, all of which were initiated to fund the Champion acquisition. Special (gains) and charges within net interest

 

20



 

during 2012 also included a net loss on the extinguishment of Nalco’s senior notes, which were assumed as part of the merger.

 

The decrease in 2014 adjusted net interest expense compared to 2013 adjusted net interest expense was due primarily to lower comparable outstanding debt, offset partially by increased net expense related to our hedging program and other interest-related fees.

 

The small increase in 2013 adjusted net interest expense compared to 2012 adjusted net interest expense was due primarily to interest associated with debt issued in connection with the Champion acquisition, offset by decreased borrowings across our international operations, lower U.S. commercial paper borrowings and legacy Nalco debt extinguishments in early 2012.

 

Provision for Income Taxes

 

The following table provides a summary of our tax rate:

 

PERCENT

 

2014

 

2013

 

2012

 

Reported GAAP tax rate

 

28.0

%

 

25.0

%

30.7

%

Tax rate impact of:

 

 

 

 

 

 

 

 

Special gains and charges

 

(0.1

)

 

0.4

 

(1.5

)

Discrete tax items

 

(0.7

)

 

2.7

 

0.7

 

Non-GAAP adjusted tax rate

 

27.2

%

 

28.1

%

29.9

%

 

 

 

 

 

 

 

 

 

 

Our reported tax rate for 2014, 2013 and 2012 includes the tax impact of special gains and charges and discrete tax items. Depending on the nature of our special gains and charges and discrete tax items, our reported tax rate may not be consistent on a period to period basis, as amounts included in our special gains and charges are derived from tax jurisdictions with rates that vary from our overall non-GAAP adjusted tax rate.

 

Our 2014 reported tax rate includes $21.6 million of net tax benefits on special gains and charges and $13.2 million of discrete tax items net expense. Our 2013 reported tax rate includes $60.1 million of net tax benefits on special gains and charges and $41.7 million of discrete tax items net benefits. Our 2012 reported tax rate includes $59.4 million of net tax benefits on special gains and charges and $9.2 million of discrete tax items net benefits. The corresponding impact of these items to the reported tax rate is shown in the table above.

 

Discrete tax items net expense in 2014 was driven primarily by an update to non-current tax liabilities for certain global tax audits, an adjustment related to the re-characterization of intercompany payments between our U.S. and foreign affiliates, the remeasurement of certain deferred tax assets and liabilities resulting from changes in our deferred state tax rate, recognizing adjustments from filing our 2013 U.S. federal and state tax returns, net changes of valuation allowances based on the realizability of foreign deferred tax assets and the impact from other foreign country audit settlements.

 

Discrete tax items net benefits in 2013 were driven primarily by the net release of valuation allowances related to the realizability of foreign deferred tax assets of $11.5 million, the remeasurement of certain deferred tax assets and liabilities of $11.3 million and recognizing adjustments from filing our 2012 U.S. federal and state tax returns of $11.0 million. The remaining net discrete tax items relate primarily to recognizing settlements related to prior year income tax audits, law changes within a foreign jurisdiction, the retroactive extension during first quarter 2013 of the U.S. R&D credit for 2012, foreign audit adjustments and other adjustments to deferred tax assets and liabilities.

 

Discrete tax items net benefits in 2012 were based largely on benefits related to remeasurement of certain deferred tax assets and liabilities resulting from changing tax jurisdictions, recognizing adjustments from filing our 2011 U.S. federal tax return as well as a release of a valuation allowance related to a capital loss carryforward. Discrete tax items benefits were partially offset by the remeasurement of certain deferred tax assets and liabilities resulting from changes in local country tax rates and state and foreign country audit settlements and adjustments.

 

The decrease in the 2014 adjusted tax rate compared to 2013 was due primarily to global tax planning actions and favorable geographic income mix. The decrease in the 2013 adjusted tax rate compared to 2012 was due primarily to global tax planning actions, extension of the R&D credit and favorable geographic income mix.

 

Net Income Attributable to Ecolab

 

 

 

 

 

 

 

 

 

 

 

PERCENT CHANGE

 

MILLIONS

 

2014

 

 

2013

 

2012

 

2014

 

2013

 

Reported GAAP net income

 

$

1,202.8

 

 

$

967.8

 

$

703.6

 

24

%

 

38

%

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special (gains) and charges, after tax

 

61.5

 

 

156.4

 

195.0

 

 

 

 

 

 

 

Discrete tax net expense (benefit)

 

13.2

 

 

(41.7

)

(9.2

)

 

 

 

 

 

 

Non-GAAP adjusted net income

 

$

1,277.5

 

 

$

1,082.5

 

$

889.4

 

18

%

 

22

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Attributable to Ecolab Per Common Share (EPS)

 

 

 

 

 

 

 

 

 

 

PERCENT CHANGE

 

DOLLARS

 

2014

 

 

2013

 

2012

 

2014

 

2013

 

Reported GAAP diluted EPS

 

$

3.93

 

 

$

3.16

 

$

2.35

 

24

%

 

34

%

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special (gains) and charges

 

0.20

 

 

0.51

 

0.65

 

 

 

 

 

 

 

Discrete tax net expense (benefit)

 

0.04

 

 

(0.14

)

(0.03

)

 

 

 

 

 

 

Non-GAAP adjusted diluted EPS

 

$

4.18

 

 

$

3.54

 

$

2.98

 

18

%

 

19

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note: Per share amounts do not necessarily sum due to rounding.

 

Reported net income attributable to Ecolab totaled $1,202.8 million, $967.8 million and $703.6 million during 2014, 2013 and 2012, respectively, which resulted in reported diluted earnings per share of $3.93, $3.16 and $2.35 for the corresponding periods.

 

Amounts for 2014, 2013 and 2012 include special (gains) and charges and discrete tax items. Excluding special (gains) and charges and the impact of discrete tax items from 2014, 2013 and 2012, adjusted net income and adjusted diluted earnings per share both increased 18% when comparing 2014 to 2013 and increased 22% and 19%, respectively, when comparing 2013 to 2012.

 

Currency translation had an unfavorable impact of approximately $0.07 per share on reported and adjusted diluted earnings per share for 2014 compared to 2013. Currency translation had an unfavorable impact of approximately $0.04 per share on reported and adjusted diluted earnings per share for 2013 compared to 2012. The unfavorable currency translation excludes the impact of the Venezuela devaluation in 2013 as the U.S. dollar is used as the functional currency for our subsidiaries in Venezuela. See the section entitled Global Economic and Political Environment on pages 28 and 29 for further discussion regarding Venezuela.

 

Segment Performance

 

As discussed at the beginning of this MD&A, effective in the first quarter of 2014, we made immaterial changes to our reportable segments, including the movement of certain customers between reportable segments, to reflect our continued integration of businesses and consistency across our global markets and customers. In addition, we made immaterial changes to the way we measure and report segment operating income by updating the internal allocations of certain supply chain and SG&A expenses related to our centralized functions.

 

21



 

Segment results for 2013 and 2012 have been revised to conform to the current year presentation. The changes had no impact on our consolidated sales or operating income. For additional information on the revisions to our segments, see Note 17.

 

Beginning in the first quarter of 2014, the term “Global” has been removed from the description of our ten operating units. This change had no impact on the underlying structure of the respective operating units.

 

The 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 2014. 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 of the company described in Note 2. Additional information about our reportable segments is included in Note 17.

 

Fixed currency net sales and operating income for 2014, 2013 and 2012 for our reportable segments are shown in the tables below.

 

NET SALES

 

 

 

 

 

 

 

 

 

 

 

PERCENT CHANGE

MILLIONS

 

2014

 

 

2013

 

2012

 

 

2014

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Global Industrial

 

 $

4,886.7

 

 

$

4,742.8

 

$

4,614.1

 

 

3

%

3

%

Global Institutional

 

4,314.5

 

 

4,152.5

 

4,017.5

 

 

4

 

3

 

Global Energy

 

4,283.3

 

 

3,427.3

 

2,223.5

 

 

25

 

54

 

Other

 

750.3

 

 

709.3

 

730.6

 

 

6

 

(3

)

Subtotal at fixed currency

 

14,234.8

 

 

13,031.9

 

11,585.7

 

 

9

 

13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of foreign currency translation

 

45.7

 

 

221.5

 

253.0

 

 

 

 

 

 

Total reported net sales

 

 $

14,280.5

 

 

$

13,253.4

 

$

11,838.7

 

 

8

%

12

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

 

 

 

 

 

 

 

 

 

 

PERCENT CHANGE

MILLIONS

 

2014

 

 

2013

 

2012

 

 

2014

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Global Industrial

 

 $

642.6

 

 

$

603.0

 

$

542.2

 

 

7

%

11

%

Global Institutional

 

821.2

 

 

768.2

 

703.0

 

 

7

 

9

 

Global Energy

 

634.9

 

 

458.9

 

336.9

 

 

38

 

36

 

Other

 

116.5

 

 

104.1

 

107.5

 

 

12

 

(3

)

Corporate

 

(263.4

)

 

(409.1

)

(442.3

)

 

 

 

 

 

Subtotal at fixed currency

 

1,951.8

 

 

1,525.1

 

1,247.3

 

 

28

 

22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of foreign currency translation

 

3.2

 

 

35.5

 

42.0

 

 

 

 

 

 

Total reported operating income

 

 $

1,955.0

 

 

$

1,560.6

 

$

1,289.3

 

 

25

%

21

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GLOBAL INDUSTRIAL

 

 

 

2014

 

 

2013

 

2012

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

Sales at fixed currency (millions)

 

 $

4,886.7

 

 

$

4,742.8

 

$

4,614.1

Percentage change at fixed currency

 

3%

 

 

3%

 

 

Acquisition adjusted percentage change at fixed currency

 

3%

 

 

2%

 

 

Percentage change at public currency

 

1%

 

 

2%

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

 

 

 

 

 

Operating income at fixed currency (millions)

 

 $

642.6

 

 

$

603.0

 

$

542.2

Percentage change at fixed currency

 

7%

 

 

11%

 

 

Acquisition adjusted percentage change at fixed currency

 

6%

 

 

11%

 

 

Percentage change at public currency

 

3%

 

 

10%

 

 

Operating income margin at fixed currency

 

13.1%

 

 

12.7%

 

11.8%

 

 

 

 

 

 

 

 

 

 

Net Sales

 

Fixed currency sales for our Global Industrial segment increased 3% in 2014, with the increase driven by both volume increases and pricing gains. At a regional level, the 2014 sales increase was impacted by double-digit growth in Latin America, with modest gains in Asia Pacific, North America and Europe, Middle East, Africa (“EMEA”). Fixed currency sales increased 3% in 2013. As shown in the previous table, acquisitions had a small impact on sales growth, with the increase driven by both pricing gains and volume increases. At a regional level, the 2013 sales increase was impacted by good growth in Latin America and Asia Pacific and modest gains in North America and EMEA.

 

22



 

At an operating unit level, Water fixed currency sales increased 5% in 2014 (increase of 4% acquisition adjusted), led by gains in the heavy, light and mining industries. Fixed currency sales increased 2% in 2013, led by growth in heavy industries, offset partially by declines in mining and a de-emphasis of equipment sales, impacting the comparison against 2012. Food & Beverage fixed currency sales increased 4% in 2014 (increase of 3% acquisition adjusted), driven by gains in the agri, dairy and beverage & brewing markets. Fixed currency sales increased 7% in 2013, (increase of 4% acquisition adjusted) driven by gains in the beverage & brewing, dairy and agri markets. Paper fixed currency sales were flat in 2014 (decrease of 1% acquisition adjusted) with continued unfavorable volume impact from below capacity plant utilization at customer locations and customer plant closures. Fixed currency sales increased 2% in 2013, impacted by increased product penetration, partially offset by lower plant utilization at customer locations. Textile Care fixed currency sales decreased 1% in 2014, impacted by continued lower sales in EMEA. Fixed currency sales decreased 2% in 2013 as pricing gains and new product penetration in North America were more than offset by lower sales in EMEA.

 

Operating Income

 

Fixed currency operating income for our Global Industrial segment increased 7% in 2014. As shown in the previous table, acquisitions had a small impact on operating income growth. The operating income margin increased 0.4 percentage points. The fixed currency operating income growth and improved operating income margins benefited from sales volume increases, pricing gains and net cost savings. Fixed currency operating income for our Global Industrial segment increased 11% in 2013. The operating income margin increased 0.9 percentage points. The fixed currency operating income growth and improved operating income margin were driven primarily from pricing gains, sales volume increases and cost savings actions.

 

GLOBAL INSTITUTIONAL

 

 

 

2014

 

 

2013

 

2012

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

Sales at fixed currency (millions)

 

 $

4,314.5

 

 

$

4,152.5

 

$

4,017.5

Percentage change at fixed currency

 

4%

 

 

3%

 

 

Acquisition adjusted percentage change at fixed currency

 

4%

 

 

3%

 

 

Percentage change at public currency

 

3%

 

 

3%

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

 

 

 

 

 

Operating income at fixed currency (millions)

 

 $

821.2

 

 

$

768.2

 

$

703.0

Percentage change at fixed currency

 

7%

 

 

9%

 

 

Acquisition adjusted percentage change at fixed currency

 

7%

 

 

9%

 

 

Percentage change at public currency

 

6%

 

 

9%

 

 

Operating income margin at fixed currency

 

19.0%

 

 

18.5%

 

17.5%

 

 

 

 

 

 

 

 

 

 

Net Sales

 

Fixed currency sales for our Global Institutional segment increased 4% in 2014 and 3% in 2013, with the increase in both years driven by volume increases and pricing gains. At a regional level, the 2014 sales increase was led by strong growth in Latin America, and good gains in Asia Pacific and North America, which collectively offset slightly lower sales in EMEA. The 2013 sales increase was impacted by double-digit growth in Latin America and good gains in both North America and Asia Pacific, which collectively offset lower sales in EMEA.

 

At an operating unit level, Institutional fixed currency sales increased 3% in 2014 (increase of 4% acquisition adjusted including the impact of a small divestiture during 2014), as sales initiatives, targeting new accounts and effective product programs continued to drive the sales gains. Lodging room demand increased moderately, while foodservice foot traffic remained soft. Fixed currency sales increased 2% in 2013, benefiting from new accounts and sales initiatives. Specialty fixed currency sales increased 8% in 2014, driven by continued solid results from our quick service and food retail businesses, benefiting from new accounts and increased product penetration. Fixed currency sales increased 12% in 2013, as both our quick service and food retail businesses had double-digit sales growth. Healthcare fixed currency sales increased 1% in 2014, driven by new account growth and product introductions. Fixed currency sales increased 2% in 2013 as growth in surgical drapes and contamination control were slowed by weakness in the overall U.S. and EMEA healthcare markets.

 

Operating Income

 

Fixed currency operating income for our Global Institutional segment increased 7% in 2014 and the operating income margin increased 0.5 percentage points. Fixed currency operating income for our Global Institutional segment increased 9% in 2013 and the operating income margin increased 1.0 percentage points. The fixed currency operating income growth and improved operating income margin across both 2014 and 2013 were driven primarily by the net impact of pricing gains, sales volume increases and net cost savings.

 

23



 

GLOBAL ENERGY

 

 

 

2014

 

 

2013

 

2012

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

Sales at fixed currency (millions)

 

 $

4,283.3

 

 

$

3,427.3

 

$

2,223.5

Percentage change at fixed currency

 

25%

 

 

54%

 

 

Acquisition adjusted percentage change at fixed currency

 

10%

 

 

11%

 

 

Percentage change at public currency

 

23%

 

 

53%

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

 

 

 

 

 

Operating income at fixed currency (millions)

 

 $

634.9

 

 

$

458.9

 

$

336.9

Percentage change at fixed currency

 

38%

 

 

36%

 

 

Acquisition adjusted percentage change at fixed currency

 

31%

 

 

23%

 

 

Percentage change at public currency

 

35%

 

 

37%

 

 

Operating income margin at fixed currency

 

14.8%

 

 

13.4%

 

15.2%

 

 

 

 

 

 

 

 

 

 

Net Sales

 

Fixed currency sales for our Global Energy segment increased 25% in 2014 and 54% in 2013, with sales growth comparability impacted by the Champion acquisition. Acquisition adjusted fixed currency sales increased 10% in 2014 and 11% in 2013.

 

The increase in 2014 acquisition adjusted fixed currency sales reflected double-digit growth in our upstream business, led by strong international performance and good growth in North America. Deepwater and on-shore conventional sources continued to produce solid results. Sales growth in our downstream business resulted from improved international performance and continued market share gains in North America. The increase in 2013 acquisition adjusted fixed currency sales reflected double-digit growth in our upstream business resulting from strong performance in high growth energy sources including deepwater, shale and oil sands accounts as well as strong results from on-shore conventional sources. Sales for our downstream business had good gains, resulting from market share gains and increased North America refining.

 

Operating Income

 

Fixed currency operating income for our Global Energy segment increased 38% in 2014 and 36% in 2013. Our operating income margin increased 1.4 percentage points in 2014 and decreased 1.8 percentage points in 2013. Our operating income growth comparability and corresponding operating income margins were impacted by the Champion acquisition including the corresponding intangible asset amortization. Acquisition adjusted fixed currency operating income increased 31% in 2014 and 23% in 2013. Our operating income margin adjusted for acquisitions increased 2.3 percentage points in 2014 and increased 1.2 percentage points in 2013.

 

The increase in full year 2014 acquisition adjusted fixed currency operating income and gains in operating income margin adjusted for acquisitions were largely driven by sales volume increases and business mix changes, with the corresponding benefit to operating income. The remainder of the increase can largely be attributed to the net impact of pricing gains, synergies, investments in the business and other costs. The increase in 2013 acquisition adjusted fixed currency operating income and gains in operating income margin adjusted for acquisitions were the result of sales volume increases and business mix changes, pricing gains and synergies.

 

OTHER

 

 

 

2014

 

 

2013

 

2012

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

Sales at fixed currency (millions)

 

 $

750.3

 

 

$

709.3

 

$

730.6

Percentage change at fixed currency

 

6%

 

 

(3)%

 

 

Acquisition adjusted percentage change at fixed currency

 

5%

 

 

6%

 

 

Percentage change at public currency

 

6%

 

 

(3)%

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

 

 

 

 

 

Operating income at fixed currency (millions)

 

 $

116.5

 

 

$

104.1

 

$

107.5

Percentage change at fixed currency

 

12%

 

 

(3)%

 

 

Acquisition adjusted percentage change at fixed currency

 

12%

 

 

8%

 

 

Percentage change at public currency

 

12%

 

 

(4)%

 

 

Operating income margin at fixed currency

 

15.5%

 

 

14.7%

 

14.7%

 

 

 

 

 

 

 

 

 

 

24



 

Net Sales

 

Fixed currency sales for our Other segment increased 6% in 2014. As shown in the previous table, acquisitions and divestitures had a small impact on sales growth, with the increase driven primarily by pricing and volume increases. At a regional level, the 2014 sales increase was led by double-digit gains in Latin America and strong growth in Asia Pacific. North America and EMEA had good sales gains. Fixed currency sales decreased 3% in 2013. Acquisition adjusted fixed currency sales growth, including the impact of the Vehicle Care divestiture in late 2012, was 6% for 2013, driven by pricing and volume increases. At a regional level, the 2013 acquisition adjusted sales increase was impacted by strong growth in Asia Pacific, good gains in both Latin America and North America and moderate growth in EMEA.

 

At an operating unit level, Pest Elimination fixed currency sales increased 6% in 2014 (increase of 5% acquisition adjusted) benefiting from gains in the food and beverage and foodservice markets. Fixed currency sales increased 5% in 2013, with sales gains in the food and beverage, healthcare and foodservice markets leading the growth. Market penetration and sales of innovative service offerings and technologies benefited results across the comparable periods. Equipment Care fixed currency sales increased 7% in 2014 and 8% in 2013, with service and installed parts sales increases benefiting growth in both years.

 

Operating Income

 

Fixed currency operating income for our Other segment increased 12% in 2014. The operating income margin increased 0.8 percentage points. The increase in fixed currency operating income and improved operating income margin were impacted largely by pricing and sales volume growth, which more than offset other costs. Fixed currency operating income for our Other segment decreased 3% in 2013. The operating income margin was consistent across 2013 and 2012. Acquisition adjusted fixed currency operating income, including the impact of the Vehicle Care divestiture, increased 8%. Our operating income margin adjusted for acquisitions increased 0.3 percentage points in 2013. The increase in acquisition adjusted fixed currency operating income and gains in operating income margin adjusted for acquisitions were driven by pricing and sales volume increases, which more than offset other costs.

 

CORPORATE

 

Consistent with the company’s internal management reporting, the Corporate segment includes intangible asset amortization specifically from the Nalco merger and in 2013 and 2012 certain integration costs for both the Nalco and Champion transactions. The Corporate segment also includes special (gains) and charges reported on the Consolidated Statement of Income. Items included within special (gains) and charges are shown in the table on page 18.

 

FINANCIAL POSITION & LIQUIDITY

 

Financial Position

 

Total assets were $19.5 billion as of December 31, 2014, compared to total assets of $19.6 billion as of December 31, 2013. The increase in assets from acquisitions and ongoing business activities was offset by intangible asset amortization and the negative impact of foreign currency exchange rates on the value of our foreign assets translated into U.S. dollars as of year end 2014.

 

Total liabilities were $12.1 billion as of December 31, 2014, compared to total liabilities of $12.2 billion as of December 31, 2013. Total debt was $6.6 billion as of December 31, 2014 and $6.9 billion as of December 31, 2013. 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”) and net debt to adjusted EBIDTA are shown in the following table. We view our net debt to EBITDA and net debt to adjusted EBITDA ratios as important indicators of our creditworthiness.

 

EBITDA and adjusted EBITDA are non-GAAP measures. As shown below, EBITDA is defined as net income including non-controlling interest plus provision for income taxes, net interest expense, depreciation and amortization. Adjusted EBITDA is defined as EBITDA plus special (gains) and charges impacting EBITDA.

 

 

 

 

2014

 

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

RATIO

 

 

 

 

 

 

 

 

 

Net debt to EBITDA

 

 

2.2

 

 

2.8

 

2.7

 

Net debt to adjusted EBITDA

 

 

2.2

 

 

2.5

 

2.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MILLIONS

 

 

2014

 

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net Debt

 

 

 

 

 

 

 

 

 

Total debt

 

 

$

6,569.4

 

 

$

6,904.5

 

$

6,541.9

 

Cash

 

 

209.6

 

 

339.2

 

1,157.8

 

Net debt

 

 

$

6,359.8

 

 

$

6,565.3

 

$

5,384.1

 

 

 

 

 

 

 

 

 

 

 

EBITDA

 

 

 

 

 

 

 

 

 

Net income including non-controlling interest

 

 

$

1,222.2

 

 

$

973.6

 

$

701.3

 

Provision for income taxes

 

 

476.2

 

 

324.7

 

311.3

 

Interest expense, net

 

 

256.6

 

 

262.3

 

276.7

 

Depreciation

 

 

558.1

 

 

514.2

 

468.2

 

Amortization

 

 

313.9

 

 

302.0

 

246.3

 

EBITDA

 

 

2,827.0

 

 

2,376.8

 

2,003.8

 

 

 

 

 

 

 

 

 

 

 

Special (gains) and charges impacting EBITDA

 

 

83.1

 

 

214.5

 

239.6

 

Adjusted EBITDA

 

 

$

2,910.1

 

 

$

2,591.3

 

$

2,243.4

 

 

 

 

 

 

 

 

 

 

 

 

Cash Flows

 

Operating Activities

 

 

 

 

 

 

 

 

 

DOLLAR CHANGE

 

MILLIONS

 

2014

 

2013

 

2012

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash provided by operating activities

 

 

$

1,815.6

 

 

$

1,559.8

 

$

1,203.0

 

 

$

255.8

 

 

$

356.8

 

 

We continue to generate strong cash flow from operations, allowing us to fund our ongoing operations, acquisitions, investments in the business, debt repayments, pension obligations and return cash to our shareholders through dividend payments and share repurchases.

 

Comparability of cash generated from operating activities across 2012 to 2014 was impacted by numerous factors, including the following:

 

·        Increased income, primarily driven by the impact of the Champion acquisition as well as lower comparable special (gains) and charges.

 

·        Fluctuations in accounts receivable, inventories and accounts payable (“working capital”), the combination of which increased $212 million, $127 million and $113 million in 2014, 2013 and 2012 respectively. The cash flow impact across the three years from accounts receivable was driven by increased sales volumes and timing of collections. The cash flow impact across the three years from inventories was impacted by timing of purchases and production and usage levels, and from accounts payable was impacted by volume of purchases and timing of payments.

 

·        We had certain non-recurring payments in 2013 related to liabilities assumed with the Champion acquisition.

 

25



 

·        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

 

2014

 

2013

 

2012

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Pensions and postretirement plan contributions

 

 

$

76.7

 

 

$

80.0

 

$

254.9

 

 

$

(3.3

)

 

$

(174.9

)

Restructuring payments

 

 

82.7

 

 

120.6

 

72.7

 

 

(37.9

)

 

47.9

 

Income tax payments

 

 

522.0

 

 

434.2

 

222.6

 

 

87.8

 

 

211.6

 

Interest payments

 

 

255.5

 

 

258.9

 

279.0

 

 

(3.4

)

 

(20.1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Of the pension and postretirement plan contributions shown in the previous table, $150 million in 2012 represented voluntary contributions to our U.S. pension plans. We made no voluntary contributions in 2014 or 2013.

 

Investing Activities

 

 

 

 

 

 

 

 

 

DOLLAR CHANGE

 

MILLIONS

 

2014

 

2013

 

2012

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash used for investing activities

 

 

$

(848.3

)

 

$

(2,087.7

)

$

(487.9

)

 

$

1,239.4

 

 

$

(1,599.8

)

 

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 2014 and 2013 was $72 million and $1.4 billion, respectively. Total cash received from dispositions, net of acquisitions during 2012, was $88 million.

 

The Champion acquisition accounted for $1.3 billion of the net cash paid for acquisitions in 2013. The net cash received from dispositions in 2012 was driven primarily by the sale of our Vehicle Care division. Other immaterial acquisitions and divestitures across 2014, 2013 and 2012 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 process control and monitoring equipment, equipment used by our customers to dispense our products and manufacturing facilities. Total capital expenditures, including software, were $794 million, $662 million and $608 million in 2014, 2013 and 2012, respectively.

 

Financing Activities

 

 

 

 

 

 

 

 

 

DOLLAR CHANGE

 

MILLIONS

 

2014

 

2013

 

2012

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash used for financing activities

 

 

$

(1,071.0

)

 

$

(292.6

)

$

(1,393.6

)

 

$

(778.4

)

 

$

1,101.0

 

 

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 consideration.

 

Our 2014 financing activities included the repayment of $400 million of term loan borrowings, over the course of 2014, and the scheduled repayment of our $500 million Senior Notes in December 2014, originally issued in December 2011. Net borrowings of commercial paper and notes payable led to a net cash inflow of $600 million during 2014.

 

Our 2013 financing activities included $900 million of term loan borrowings initiated in connection with the Champion transaction, the repayment of our 125 million Series A euro notes ($170 million) in December 2013, the redemption of debt acquired through the Champion transaction and repayment of $100 million of term loan borrowings. Net repayments of commercial paper and notes payable led to a net cash outflow of $278 million during 2013.

 

Our 2012 financing activities included $1,695 million of long-term debt repayments, primarily related to the redemption of Nalco’s senior notes in January 2012. Partially offsetting the debt repayment, we separately issued $500 million of senior notes in public debt offerings in August 2012 and December 2012. Net repayments of commercial paper and notes payable led to a net cash outflow of $387 million during 2012.

 

Shares are repurchased for the purpose of partially offsetting the dilutive effect of our equity compensation plans and stock issued in acquisitions and to efficiently return capital to shareholders.

 

During 2014, 2013 and 2012, we had $429 million, $308 million and $210 million of share repurchases, respectively. Cash proceeds and tax benefits from stock option exercises provide a portion of the funding for repurchase activity.

 

In December 2014, we increased our indicated annual dividend rate by 20%. This represents the 23rd consecutive year we have increased our dividend. We have paid dividends on our common stock for 78 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

 

 

 

 

 

 

 

 

 

 

 

2014

 

$

0.2750

 

$

0.2750

 

$

0.2750

 

 

$

0.3300

 

$

1.1550

2013

 

 

0.2300

 

 

0.2300

 

 

0.2300

 

 

 

0.2750

 

 

0.9650

2012

 

 

0.2000

 

 

0.2000

 

 

0.2000

 

 

 

0.2300

 

 

0.8300

 

 

 

 

 

 

 

 

 

 

 

 

Comparability of dividends paid across 2012 to 2014 was impacted by the dividend rate increase noted in the above table, as well as the payment timing of dividends declared in the fourth quarter of 2012 and 2013.

 

Financing activities for 2014 also included an acquisition-related contingent consideration payment of $86 million made to Champion’s former shareholders.

 

Liquidity and Capital Resources

 

We currently expect to fund all of our cash requirements which are reasonably foreseeable for 2015, including scheduled debt repayments, new investments in the business, share repurchases, dividend payments, possible business acquisitions and pension contributions, with cash from operating activities, cash reserves available in certain foreign jurisdictions and additional short-term and/or long-term borrowings. We continue to expect our operating cash flow to remain strong.

 

As of December 31, 2014, we had $209.6 million of cash and cash equivalents on hand, of which $192.6 million was held outside of the U.S. Cash and cash equivalents held in Venezuela as of December 31, 2014 make up approximately one-third of the amount held outside of the U.S. See the section entitled Global Economic and Political Environment on pages 28-29 for further discussion regarding Venezuela.

 

We have recorded deferred tax liabilities of $37.4 million and $94.5 million as of December 31, 2014 and 2013, respectively, for pre-acquisition foreign earnings associated with the Nalco merger and Champion acquisition that we intend to repatriate. These liabilities

 

26



 

were recorded as part of the respective purchase price accounting of each transaction. We consider the remaining portion of our foreign earnings to be indefinitely reinvested in foreign jurisdictions and we have no intention to repatriate such funds. We continue to be focused on building our business in high growth global markets and these funds are available for use by our international operations. To the extent the remaining portion of the foreign earnings would be repatriated, such amounts would be subject to income tax or foreign withholding tax liabilities that may be fully or partially offset by foreign tax credits, both in the U. S. and in various applicable foreign jurisdictions.

 

In December 2014, we increased our multi-year credit facility from $1.5 billion to $2.0 billion and extended the maturity date from September 2016 to December 2019. Our credit facility has been established with a diverse syndicate of banks. There were no borrowings under our credit facilities as of December 31, 2014 or 2013.

 

The credit facility supports our $2.0 billion U.S. commercial paper program, which was increased to $2.0 billion from $1.5 billion following the increase of our multi-year credit facility, and our $200 million European commercial paper program. Combined borrowing under these two commercial paper programs may not exceed $2.0 billion. As of December 31, 2014, we had $888 million in outstanding U.S. commercial paper, with an average annual interest rate of 0.5%, and no amounts outstanding under our European commercial paper program. As of December 31, 2014, both programs were rated A-2 by Standard & Poor’s and P-2 by Moody’s.

 

Additionally, we have other committed and uncommitted credit lines of $697 million with major international banks and financial institutions to support our general global funding needs, including with respect to bank supported letters of credit, performance bonds and guarantees. Approximately $446 million of these credit lines was unutilized and available for use as of year-end 2014.

 

We repaid $400 million of term loan borrowing over the course of 2014 and in December 2014, we repaid our $500 million senior notes, originally issued in December 2011.

 

As of December 31, 2014, Standard & Poor’s and Moody’s rated our long-term credit at BBB+ (positive outlook) and Baa1 (negative outlook), respectively. In January 2015, Moody’s changed its outlook from negative to stable. A reduction in our long-term credit ratings could limit or preclude our ability to issue commercial paper under our current programs. A credit rating reduction 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. Should this occur, we could seek additional sources of funding, including issuing additional term notes or bonds. In addition, we have the ability, at our option, to draw upon our $2.0 billion of committed credit facility prior to termination.

 

We are in compliance with our debt covenants and other requirements of our credit agreements and indentures.

 

A schedule of our obligations as of December 31, 2014 under various notes payable, long-term debt agreements, operating leases with noncancelable terms in excess of one year and interest obligations are summarized in the following table:

 

MILLIONS

 

 

 

PAYMENTS DUE BY PERIOD

CONTRACTUAL
OBLIGATIONS

 

TOTAL

 

LESS
THAN
1 YEAR

 

2-3
YEARS

 

4-5
YEARS

 

MORE
THAN
5 YEARS

Notes payable

 

$

62

 

$

62

 

$

 

$

 

$

Commercial paper

 

888

 

888

 

 

 

Long-term debt

 

5,611

 

752

 

2,367

 

250

 

2,242

Capital lease obligations

 

9

 

4

 

1

 

1

 

3

Operating leases

 

663

 

133

 

219

 

153

 

158

Interest*

 

1,735

 

178

 

286

 

221

 

1,050

Total contractual cash obligations

 

$

8,968

 

$

2,017

 

$

2,873

 

$

625

 

$

3,453

 

* Interest on variable rate debt was calculated using the interest rate at year-end 2014.

 

As of December 31, 2014, our gross liability for uncertain tax positions was $79 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 are not required to make any contributions to our U.S. pension and postretirement healthcare benefit plans in 2015, based on plan asset values as of December 31, 2014. 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 $45 million in 2015. 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 guaranteed residual value requirements that have historically been satisfied primarily by the proceeds on the sale of the vehicles.

 

Except for the approximately $251 million utilized under the bank lines noted previously supporting domestic and international commercial relationships and transactions, we do not have significant unconditional purchase obligations or significant other commercial commitments.

 

Off-Balance Sheet Arrangements

 

Other than operating leases, we do not have any off-balance sheet financing arrangements. See Note 13 for information on our operating leases. Through the normal course of business, we have established various joint ventures that have not been consolidated within our financial statements as we are not 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 any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

 

New Accounting Pronouncements

 

Information regarding new accounting pronouncements is included in Note 2.

 

27



 

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 than U.S. dollars. We use net investment hedges, including our €175 million debt, as hedging instruments to manage risks associated with our investments in foreign operations.

 

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 of December 31, 2014, we had interest rate swaps outstanding with notional values of $725 million and €400 million. As of December 31, 2013, we did not have any interest rate swaps outstanding.

 

See Note 8 for further information on our hedging activity.

 

Based on a sensitivity analysis (assuming a 10% adverse change in market rates) of our foreign exchange and interest rate derivatives and other financial instruments, changes in exchange rates or interest rates would not materially affect our financial position and liquidity. The effect on our results of operations would be substantially offset by the impact of the hedged items.

 

Global Economic and Political Environment

 

Oil Markets and Global Energy Investments

 

During 2014, approximately 30% of our sales were generated from our Global Energy segment, the results of which, as noted further below, are subject to volatility in the oil and gas commodity markets.

 

Energy Markets

 

Oil prices have decreased during the fourth quarter of 2014 due to increased supply from North America and the OPEC countries, as oil producing countries have shifted focus from protecting prices to protecting market share. In response to the falling oil prices, the industry is reducing exploration and production investments. However, demand for oil and energy consumption has remained stable.

 

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 outperform in the current market. Though lower oil prices will slow our Global Energy segment results, the underlying operations are heavily weighted to the recurring revenue production and refining businesses. As such, we do not currently expect lower oil prices to have a significant impact on the long-term performance of our Global Energy segment.

 

Additionally, as petroleum based materials are key inputs to many of our chemical products, lower oil prices will provide benefits across our segments in the form of lower raw material costs. In addition, it is likely we would experience improved Institutional markets as consumers have more discretionary income due to lower energy prices.

 

Energy Investments

 

We have a joint venture in Kazakhstan, which we acquired as part of the Champion transaction that holds a contract to supply production chemicals for use in the Kashagan oil project, a Caspian Sea shallow-water oil field. The startup of production at the Kashagan project has been significantly delayed and output was indefinitely halted after pipeline failures were discovered in October 2013. We have approximately $25 million invested in this joint venture, related to inventory, imported in anticipation of production. We anticipate that the pipelines will be repaired and production restarted; however, if this does not occur, or does not occur in a timely manner, we believe the impact of such events would not have a material adverse effect on our consolidated financial position or results of operations.

 

Global Economies

 

Approximately half of our sales are outside of the 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 all could impact future operating results.

 

Global Foreign Currency Markets

 

During 2014, the U.S. dollar strengthened against most global currencies, impacting our comparative results for 2014. We expect this trend to continue into 2015, leading to a significantly challenging comparison for 2015 against prior years. As previously noted within the section entitled Market Risk, we utilize our derivative program to mitigate risks associated with foreign currency exposure and our investments in foreign operations.

 

European Environment

 

Economic conditions in Europe have remained challenging, with sovereign debt issues, high levels of unemployment and large trade deficits leading to currency fluctuations and diminished credit availability. While such factors could negatively impact our customers located both within Europe and other geographic areas, we currently do not foresee any specific credit or market risks that would have a significant impact to our future results of operations.

 

Russia and Ukraine

 

The recent political turmoil, economic sanctions, as well as the depressed oil markets, have led to foreign currency pressure as well as higher localized interest rates within Russia and Ukraine. We have experienced no significant impact from these trends, and will continue to monitor the economic and political trends within the region. Net sales within Russia and Ukraine are approximately 1% of our reported net sales.

 

Venezuela Foreign Currency Translation

 

Venezuela is a country experiencing a highly inflationary economy as defined under U.S. GAAP. As a result, the U.S. dollar is the functional currency for our subsidiaries in Venezuela. Any currency remeasurement adjustments for non-dollar denominated monetary assets and liabilities held by our subsidiaries and other transactional foreign exchange gains and losses are reflected in earnings.

 

On February 8, 2013, the Venezuelan government devalued its currency, the Bolivar Fuerte (“bolivar”) from 4.30 bolivars to 1 U.S. dollar to 6.30 bolivars to 1 U.S. dollar, resulting in a charge during 2013 of $22.7 million ($16.1 million after tax), recorded within special (gains) and charges.

 

In 2013, the Venezuelan government created a new foreign exchange mechanism known as the “Complementary System of Foreign Currency Acquirement” (“SICAD 1”). It operates similar to an auction system and allows entities to exchange a limited number of bolivars

 

28



 

for U.S. dollars at a bid rate established via weekly auctions under SICAD 1. As of November 30, 2014, the fiscal year end for our international operations, the SICAD 1 exchange rate closed at 12.0 bolivars to 1 U.S. dollar. We do not use the SICAD 1 rate or expect to use the SICAD 1 currency exchange mechanism.

 

In January 2014, the Venezuelan government announced the replacement of the Commission for the Administration of Foreign Exchange (“CADIVI”) with a new foreign currency administration, the National Center for Foreign Commerce (“CENCOEX”). During the year ended November 30, 2014, we continued to obtain approvals and authorization to pay amounts at the CENCOEX fixed currency exchange rate of 6.30 bolivars to 1 U.S. dollar, however at a slightly lower rate. As the fixed currency exchange rate of 6.30 bolivars to 1 U.S. dollar remained legally available to us and we continued to transact at this rate, we continued to remeasure the net monetary assets of our Venezuela subsidiaries at this rate.

 

In March 2014, the Venezuelan government introduced an additional currency exchange auction mechanism (“SICAD 2”). At November 30, 2014, the SICAD 2 exchange rate closed at 49.98 bolivars to 1 U.S. dollar. In February 2015, SICAD 2 was replaced by a free-floating rate, the Marginal Currency System (“SIMADI”) with an exchange rate upon introduction of approximately 170 bolivars to 1 U.S. dollar.

 

Depending on the ultimate transparency, liquidity and availability of the various Venezuelan exchange markets, it is possible that in future periods, we may need to remeasure a portion or substantially all of our net monetary balances at a rate other than the official rate of 6.30 bolivars to 1 U.S. dollar currently being used. Assuming these rates are higher than the official exchange rate at the time our net monetary assets are remeasured, this could result in an additional devaluation charge. In addition, operating results translated using a higher rate than the official rate could result in a reduction in earnings.

 

As of November 30, 2014, we have $104 million of net monetary assets denominated in bolivars that were required to be remeasured to U.S. dollars. If we determine our net monetary assets should be remeasured in a subsequent period, we could recognize a currency devaluation pre-tax loss of up to $104 million based on the November 30, 2014 net monetary assets. This loss would be a component of special (gains) and charges within our Consolidated Statement of Income.

 

Net sales within Venezuela are approximately 1% of our reported net sales. Assets held in Venezuela at November 30, 2014 represented less than 2% of our reported total assets.

 

Subsequent Events

 

In December 2014, subsequent to our fiscal year end for international operations, we entered into a licensing agreement and business acquisition with Aseptix Health Sciences NV. Pre-acquisition sales of the business are less than $1 million.

 

Also in December 2014, subsequent to our fiscal year end for international operations, we acquired Commercial Pest Control Pty Ltd, an Australian commercial pest control company. Pre-acquisition sales of the business are less than $1 million.

 

In January 2015, we issued $600 million of debt securities in a public offering, consisting of $300 million that mature in 2018 at a rate of 1.55% and $300 million that mature in 2020 at a rate 2.25%. The proceeds were used to repay a portion of our outstanding commercial paper and for general corporate purposes.

 

In January 2015, we entered into interest rate swap agreements that converted our $300 million 1.55% debt discussed above, our $250 million 3.69% debt and a portion of our $1.25 billion 3.00% debt from fixed rates to floating or variable interest rates. Also in January 2015, we entered into forward contracts with notional values of €360 million to hedge an additional portion of our new investments in euro funcional currency subsidiaries.

 

We repaid our $250 million 4.88% notes at maturity in February 2015.

 

In February 2015, our Board of Directors authorized the repurchase of up to 20 million additional shares of our common stock, including shares to be repurchased under Rule 10b5-1. In February 2015 we entered into an accelerated stock repurchase with a financial institution to repurchase $300 million of our common stock.

 

Non-GAAP Financial Measures

 

This MD&A includes financial measures that have not been calculated in accordance with U.S. GAAP. These non-GAAP measures include:

 

·  Fixed currency sales

·  Acquisition adjusted fixed currency sales

·  Adjusted cost of sales

·  Adjusted gross margin

·  Fixed currency operating income

·  Adjusted operating income

·  Adjusted operating income margin

·  Adjusted fixed currency operating income

·  Adjusted fixed currency operating income margin

·  EBITDA

·  Adjusted EBITDA

·  Adjusted net interest expense

·  Adjusted tax rate

·  Adjusted net income

·  Adjusted diluted earnings per share

 

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.

 

We include in special (gains) and charges items that are unusual in nature and significant in amount. In order to better allow investors to compare underlying business performance period-to-period, we provide adjusted cost of sales, adjusted gross margin, adjusted operating income, adjusted operating income margin, adjusted fixed currency operating income, adjusted fixed currency operating income margin, adjusted net interest expense, adjusted net income and adjusted diluted earnings per share, which exclude special (gains) and charges and discrete tax items. The exclusion of special (gains) and charges and discrete tax items in such adjusted amounts help provide a better understanding of underlying business performance.

 

EBITDA is defined as net income including non-controlling interest plus provision for income taxes, net interest expense, depreciation and amortization. Adjusted EBITDA is defined as EBITDA plus special (gains) and charges impacting operating income. EBITDA and adjusted EBITDA are used as inputs to our net debt to EBITDA and net debt to adjusted EBITDA ratios, which we view as important indicators of our creditworthiness.

 

The adjusted tax rate measure promotes period-to-period comparability of the underlying effective tax rate because it excludes the tax rate impact of special (gains) and charges and discrete tax items which do not necessarily reflect costs associated with historical trends or expected future results.

 

29



 

We evaluate the performance of our international operations based on fixed currency rates of foreign exchange. Fixed currency sales, acquisition adjusted fixed currency sales, fixed currency operating income and adjusted fixed currency operating income measures eliminate the impact of exchange rate fluctuations on our sales, acquisition adjusted sales, operating income and adjusted operating income, respectively, and promote a better understanding of our underlying sales and operating income trends. Fixed currency amounts are based on translation into U.S. dollars at fixed foreign currency exchange rates established by management at the beginning of 2014.

 

Acquisition adjusted growth rates generally exclude the results of any acquired business from the first twelve months post acquisition and exclude the results of divested businesses from the twelve months prior to divestiture. Champion is an exception. Due to the rapid pace at which the business has been integrated within our Global Energy segment, including all customer selling activity, discrete financial data specific to the legacy Champion business is no longer available for post-acquisition periods. As such, to allow for the most meaningful period-over-period comparison, specific to the Champion transaction, Champion’s results for 2012 and the period prior to acquisition in 2013 have been included for purposes of providing acquisition adjusted growth rates.

 

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 and Risk Factors

 

This MD&A and other portions of this Annual Report to Shareholders contain various “Forward-Looking Statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include expectations concerning items such as:

 

·       amount, funding and timing of cash expenditures, scope, timing, costs, benefits, synergies and headcount impact of our restructuring initiatives

·  utilization of recorded restructuring liabilities

·  capital investments and strategic business acquisitions

·  share repurchases

·  impact of Venezuela currency remeasurement

·  payments under operating leases

·  borrowing capacity

·  global market risk

·  impact of oil price fluctuations and expectations concerning production at certain projects

·  targeted credit rating metrics

·  long-term potential of our business

·  impact of changes in exchange rates and interest rates

·  leveraging and simplifying global supply chain

·  losses due to concentration of credit risk

·  recognition of share-based compensation expense

·  future benefit plan payments

·  amortization expense

·  benefits of and synergies from the Champion transaction

·  bad debt experiences and customer credit worthiness

·  disputes, claims and litigation

·  environmental contingencies

·  returns on pension plan assets

·  future cash flow and uses for cash

·  dividends

·  debt repayments

·  contributions to pension and postretirement healthcare plans

·  liquidity requirements and borrowing methods

·  impact of credit rating downgrade

·  impact of new accounting pronouncements

·  tax deductibility of goodwill

·  non performance of counterparties

·  income taxes, including valuation allowances, loss carryforwards, unrecognized tax benefits and uncertain tax positions

 

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 the company’s 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.

 

Some of the factors which could cause results to differ from those expressed in any forward-looking statements are set forth under Item 1A of our Form 10-K for the year ended December 31, 2014, entitled Risk Factors, and include the vitality of the markets we serve including the impact of oil price fluctuations on the markets served by our Global Energy segment; the impact of economic factors such as the worldwide economy, capital flows, interest rates and foreign currency risk including a potential currency devaluation in Venezuela and reduced sales and earnings in other countries resulting from the weakening of local currencies versus the U.S. dollar; our ability to attract and retain high caliber management talent to lead our business; our ability to execute key business initiatives; potential information technology infrastructure failures; exposure to global economic, political and legal risks related to our international operations including with respect to our operations in Russia; the costs and effects of complying with laws and regulations, including those relating to the environment and to the manufacture, storage, distribution, sale and use of our products; the occurrence of litigation or claims, including related to the Deepwater Horizon oil spill; our ability to develop competitive advantages through innovation; difficulty in procuring raw materials or fluctuations in raw material costs; our substantial indebtedness; our ability to acquire complementary businesses and to effectively integrate such businesses; restraints on pricing flexibility due to contractual obligations; pressure on operations from consolidation of customers, vendors or competitors; public health epidemics; potential losses arising from the impairment of goodwill or other assets; potential loss of deferred tax assets; potential chemical spill or release; potential class action lawsuits; the loss or insolvency of a major customer or distributor; acts of war or terrorism; natural or man-made disasters; water shortages; severe weather conditions; and other uncertainties or risks reported from time to time in our reports to the SEC.

 

In light of these risks, uncertainties, assumptions and factors, the forward-looking events discussed in this communication may not occur. We caution that undue reliance should not be placed on forward-looking statements, which speak only as of the date made. In addition, we note that our stock price can be affected by fluctuations in quarterly earnings. 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.

 

30



 

CONSOLIDATED STATEMENT OF INCOME

 

YEAR ENDED DECEMBER 31 (MILLIONS, EXCEPT PER SHARE AMOUNTS)

 

 

2014

 

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

$

14,280.5

 

 

$

13,253.4

 

$

11,838.7

 

Operating expenses

 

 

 

 

 

 

 

 

 

Cost of sales (including special charges of $14.3, $43.2 and $93.9 in 2014, 2013 and 2012, respectively)

 

 

7,679.1

 

 

7,161.2

 

6,385.4

 

Selling, general and administrative expenses

 

 

4,577.6

 

 

4,360.3

 

4,018.3

 

Special (gains) and charges

 

 

68.8

 

 

171.3

 

145.7

 

Operating income

 

 

1,955.0

 

 

1,560.6