UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held May 2, 2024, and to be filed within 120 days after the registrant’s fiscal year ended December 31, 2023 (hereinafter referred to as “Proxy Statement”), are incorporated by reference into Part III.
ECOLAB INC.
FORM 10-K
For the Year Ended December 31, 2023
TABLE OF CONTENTS
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PART I
Except where the context otherwise requires, references in this Form 10-K to (i) “Ecolab,” “Company,” “we” and “our” are to Ecolab Inc. and its subsidiaries, collectively; (ii) “Nalco” are to Nalco Company LLC, a wholly-owned subsidiary of the Company; (iii) “Nalco transaction” and “Nalco merger” are to the merger of Ecolab and Nalco Holding Company completed in December 2011; (iv) “Purolite” are to Purolite LLC, a wholly-owned subsidiary of the Company and its subsidiaries, collectively; and (v) “Purolite transaction” are to the Company’s acquisition of the shares of the subsidiaries and certain other affiliated entities of Purolite Corporation and substantially all of the assets of Purolite Corporation used or held for use in connection with its filtration and purification resins business in December 2021.
Item 1. Business.
General Development of Business.
Ecolab was incorporated as a Delaware corporation in 1924. Our fiscal year is the calendar year ending December 31. International subsidiaries are included in the consolidated financial statements on the basis of their U.S. GAAP (accounting principles generally accepted in the United States of America) November 30 fiscal year ends to facilitate the timely inclusion of such entities in our consolidated financial reporting.
On December 1, 2021, we acquired Purolite for total consideration of $3.7 billion in cash, net of cash acquired. Purolite is a leading and fast-growing global provider of high-end ion exchange resins for the separation and purification of solutions that is highly complementary to our current offering and critical to safe, high quality drug production and biopharma product purification in the life sciences industries. It also provides purification and separation solutions for critical industrial markets like microelectronics, nuclear power and food and beverage. Headquartered in King of Prussia, Pennsylvania, Purolite operates in more than 30 countries. Purolite is reported within our Life Sciences operating segment.
Narrative Description of Business.
General
A trusted partner for millions of customers, we are a global sustainability leader offering water, hygiene and infection prevention solutions and services that protect people and the resources vital to life. Building on a century of innovation, we have annual sales of $15 billion, employ more than 48,000 associates and sell to customers in more than 170 countries around the world. We deliver comprehensive science-based solutions, data-driven insights and world-class service to advance food safety, maintain clean and safe environments, and optimize water and energy use. Our innovative solutions improve operational efficiencies and sustainability for customers in the food, healthcare, life sciences, hospitality and industrial markets.
We pursue a “Circle the Customer – Circle the Globe” strategy by providing an array of innovative programs, products and services designed to meet the specific operational and sustainability needs of our customers throughout the world. Through this strategy and our varied product and service mix, one customer may utilize the offerings of several of our operating segments. Important in our business proposition for customers is our ability to produce improved results while reducing their water and energy use. With that in mind, we focus on continually innovating to optimize both our own operations and the solutions we provide to customers, aligning with our corporate strategy to address some of the world’s most pressing and complex sustainability challenges such as water scarcity and climate change. The work we do matters, and the way we do it matters to our employees, customers, investors and the communities in which we and our customers operate.
Sustainability is core to our business strategy. We deliver sustainable solutions that help companies around the world achieve their business goals while reducing environmental impacts. We partner with customers around the world to reduce water and energy use as well as greenhouse gas emissions through our high-efficiency solutions. By partnering with our customers to help them do more with less through the use of our innovative and differentiated solutions, we aim to help our customers conserve more than 300 billion gallons of water annually by 2030. In 2022, we helped our customers conserve more than 219 billion gallons of water and avoid more than 3.6 million metric tons of greenhouse gas emissions.
The following description of our business is based upon our reportable segments as reported in our consolidated financial statements for the year ended December 31, 2023, which are located in Item 8 of Part II of this Form 10-K. Operating segments that share similar economic characteristics and future prospects, including the nature of the products and production processes, end-use markets, channels of distribution and regulatory environment, have been aggregated into three reportable segments: Global Industrial, Global Institutional & Specialty and Global Healthcare & Life Sciences. Operating segments that were not aggregated and do not exceed the quantitative criteria to be separately reported have been combined into Other. We provide similar information for Other as compared to our three reportable segments as we consider the information regarding its underlying operating segments useful in understanding our consolidated results.
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Global Industrial
This reportable segment consists of the Water, Food & Beverage and Paper operating segments, which provide water treatment and process applications, and cleaning and sanitizing solutions, primarily to large industrial customers within the manufacturing, food and beverage processing, transportation, chemical, primary metals and mining, power generation, global refining, petrochemical, pulp and paper industries. The underlying operating segments exhibit similar manufacturing processes, distribution methods and economic characteristics. Descriptions of the three operating segments which comprise our Global Industrial reportable segment follow below.
Water
Water serves customers across industrial and institutional markets. Within Water, our light industry markets include food and beverage, manufacturing and transportation, institutional clients including commercial buildings, hospitals, universities and hotels, and global high technology serving customers including data centers and microelectronics. Heavy industries served include power, chemicals and primary metals, mining and petroleum refining and fuels industry.
Water provides water treatment products and technology programs for cooling water, wastewater, boiler water and process water applications. In addition to these solutions, we offer specialty programs to the petroleum and fuels industry – refining process applications, fuels and feedstocks additives. Our cooling water treatment programs are designed to control challenges associated with cooling water systems — corrosion, scale and microbial fouling and contamination — in open recirculating, once-through and closed systems. Our wastewater products and programs focus on improving overall plant economics, addressing compliance issues, optimizing equipment efficiency and improving operator capabilities and effectiveness. We provide integrated chemical and digitally-based solutions, process improvements and mechanical component modifications to optimize boiler performance and control corrosion and scale build-up. Our programs assist in more effectively managing water use for plant processes by optimizing the performance of treatment chemicals and equipment in order to minimize costs and maximize returns on investment.
Our offerings include specialty products such as scale and corrosion inhibitors, antifoulants, pre-treatment solutions, membrane treatments, coagulants and flocculants, anti-foamers, hydrogen sulfide removal, cold flow improvers, lubricity inhibitors, crude desalting and reactive monomer inhibitors, as well as our 3D TRASARTM technologies, which combine chemistry, remote services and monitoring and control. We provide products and programs for water treatment and process applications aimed at combining environmental benefits with economic gains for our customers. Typically, water savings, energy savings and operating efficiency are among our primary sources of value creation for our customers, with product quality and production enhancement improvements also providing key differentiating features for many of our offerings. Our offerings are sold primarily by our corporate account and field sales employees.
We believe we are one of the leading global suppliers of products and programs for chemical applications within the industrial water treatment and petroleum refining industries.
Food & Beverage
Food & Beverage provides cleaning and sanitation products and programs to facilitate the processing of products for human consumption. Food & Beverage provides detergents, cleaners, sanitizers, lubricants and animal health products, as well as cleaning systems, digitally-based dispensers, monitors and chemical injectors for the application of chemical products, primarily to dairy plants; dairy, swine and poultry farms; breweries and soft-drink bottling plants as well as meat, poultry and other food processors. Food & Beverage is also a leading developer and marketer of antimicrobial products used in direct contact with meat, poultry, seafood and produce during processing in order to reduce microbial contamination. Food & Beverage also designs, engineers and installs CIP (“clean-in-place”) process control systems and facility cleaning systems for its customer base. Water savings, energy savings, and operating efficiency are among our sources of value creation for our customers. Products for use in processing facilities are sold primarily by our corporate account and field sales employees, while products for use on farms are sold through dealers and independent, third-party distributors.
We believe we are one of the leading global suppliers of cleaning and sanitizing products to the dairy plant, dairy, swine and poultry farm, beverage/brewery, food, meat and poultry, and beverage/brewery processing industries.
Paper
Paper provides water and process applications for the pulp and paper industries, offering a comprehensive portfolio of programs that are used in all principal steps of the papermaking process and across all grades of paper, including graphic grades, board and packaging, and tissue and towel. While Paper provides its customers similar types of products and programs for water treatment and wastewater treatment as those offered by Water, Paper also offers two specialty programs that differentiate its offerings from Water—pulp applications and paper applications. Our pulp applications maximize process efficiency and increase pulp cleanliness and brightness in bleaching operations, as well as predict and monitor scaling potential utilizing on-line monitoring to design effective treatment programs and avoid costly failures. Our paper process applications focus on improving our customers’ operational efficiency, in part through water savings, energy savings and operating efficiency. Advanced digital sensing, monitoring and automation combine with innovative chemistries and detailed process knowledge to provide a broad range of customer solutions. Specialty products include flocculants, coagulants, dewatering aids and digester yield additives. Our offerings are sold primarily by our corporate account and field sales employees.
We believe we are one of the leading global suppliers of water treatment products and process aids to the pulp and papermaking industry.
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Global Institutional & Specialty
This reportable segment consists of the Institutional and Specialty operating segments, which provide specialized cleaning and sanitizing products to the foodservice, hospitality, lodging, government, education and retail industries. The underlying operating segments exhibit similar manufacturing processes, distribution methods and economic characteristics. Descriptions of the two operating segments which comprise our Global Institutional & Specialty reportable segment follow below.
Institutional
Institutional sells specialized cleaners and sanitizers for washing dishes, glassware, flatware, foodservice utensils and kitchen equipment (“warewashing”), plus specialized cleaners for various applications throughout food service operations, on-premise laundries (typically used by hotel and healthcare customers) and general housekeeping functions. We also sell food safety products and equipment, water filters, dishwasher racks and related kitchen sundries to the foodservice, lodging, educational and healthcare industries. Institutional also provides pool and spa treatment programs for hospitality and other commercial customers, as well as a broad range of janitorial cleaning and floor care products and programs to customers in hospitality, healthcare and commercial facilities. Institutional develops various digital monitoring and chemical dispensing systems which are used by our customers to efficiently and safely dispense our cleaners and sanitizers, and through these products, systems and our on-site sales and service expertise, develop better results for our customers including water savings, energy savings and operating efficiency. In addition, Institutional markets a lease program comprised of energy-efficient dishwashing machines, detergents, rinse additives and sanitizers, including full machine maintenance. Through our EcoSure Food Safety Management business, Institutional also provides customized on-site evaluations, training and quality assurance services to foodservice operations. With the Lobster Ink business, Institutional provides our customers with end-to-end digital training solutions designed to drive corrective actions and optimal frontline execution.
Institutional sells its products and programs primarily through its direct field sales and corporate account sales personnel. Corporate account sales personnel establish relationships and negotiate contracts with larger multi-unit or “chain” customers. We also utilize independent, third-party foodservice, broad-line and janitorial distributors to provide logistics to end customers that prefer to work through these distributors. Many of these distributors also participate in marketing our product and service offerings to the end customers. Through our field sales personnel, we generally provide the same customer support to end-use customers supplied by these distributors as we do to direct customers.
We believe we are one of the leading global suppliers of warewashing and laundry products and programs to the food service, hospitality and lodging markets.
Specialty
Specialty supplies cleaning and sanitizing products and related items primarily to regional, national and international quick service restaurant (“QSR”) chains and food retailers (i.e., supermarkets and grocery stores). Its products include specialty and general purpose hard surface cleaners, degreasers, sanitizers, polishes, hand care products and assorted cleaning tools and equipment which are primarily sold under the “Ecolab” and “Kay” brand names. QSR’s program also includes a lease program comprised of energy-efficient dishwashing machines, detergents, rinse additives and sanitizers, including full machine maintenance. Specialty’s cleaning and sanitation programs are customized to meet the needs of the market segments it serves and are designed to provide highly effective cleaning performance, promote food safety, reduce labor, water and energy costs and enhance user and guest safety. A number of dispensing options are available for products in the core product range. Specialty supports its product sales with training programs and technical support designed to meet the special needs of its customers.
Both Specialty’s QSR business and its food retail business utilize their corporate account sales force which manages relationships with customers at the corporate and regional office levels (and, in the QSR market segment, at the franchisee level) and their field sales force which provides program support at the individual restaurant or store level. QSR customers are primarily supplied through third party distributors while most food retail customers utilize their own distribution networks. While Specialty’s customer base has broadened significantly over the years, Specialty’s business remains largely dependent upon a limited number of major QSR chains and franchisees and large food retail customers.
Food Safety Solutions supplies a digital platform that combines software, hardware and multiple services to automate kitchen procedures for efficiency and compliance. It also offers a unique variety of products, tools and equipment for food preparation, food rotation labeling, temperature management, cleaning and employee safety across all food service customers.
We believe we are one of the leading suppliers of cleaning and sanitizing products to the global QSR market and a leading supplier of cleaning and sanitizing products to the global food retail market.
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Global Healthcare & Life Sciences
This reportable segment consists of the Healthcare and Life Sciences operating segments, which provide specialized cleaning and sanitizing products to the healthcare, personal care and pharmaceutical industries. The underlying operating segments exhibit similar manufacturing processes, distribution methods and economic characteristics. Descriptions of the two operating segments which comprise our Global Healthcare & Life Sciences reportable segment follow below.
Healthcare
Healthcare provides infection prevention and surgical solutions to acute care hospitals, surgery centers and medical device Original Equipment Manufacturers (“OEM”). Healthcare’s proprietary infection prevention and surgical solutions (hand hygiene, hard surface disinfection, digital monitoring systems, instrument cleaning, patient drapes, equipment drapes and surgical fluid warming and cooling systems) are sold primarily under the "Ecolab," "Microtek," and “Anios” brand names to various departments within the acute care environment (Infection Control, Environmental Services, Central Sterile and Operating Room). Healthcare sells its products and programs principally through its field sales personnel and corporate account personnel but also sells through healthcare distributors.
We believe we are one of the leading suppliers of infection prevention and surgical solutions in the United States and Europe.
Life Sciences
Life Sciences provides end-to-end cleaning and contamination control solutions to pharmaceutical and personal care manufacturers. These products are primarily sold under the “Ecolab” brand name, and include detergents, cleaners, sanitizers, disinfectants, surface wipes, as well as cleaning systems, electronic dispensers and chemical injectors for the application of chemical products. With the acquisition of Purolite, the portfolio now includes premium fluid treatment and purification solutions with a broad range of unique products sold under the “Purolite” brand name, particularly focusing on biopharma purification solutions, active pharmaceutical ingredients (“API’s”) and high value industrial applications. The Life Sciences portfolio also includes decontamination systems and services utilizing hydrogen peroxide vapor, which are sold under the “Bioquell” brand name. The pharmaceutical clean room environment is the primary area that Ecolab and Bioquell products are utilized. Purolite products are primarily used in the purification of biologic therapeutics, API’s and high value industrial applications. Products and programs are sold primarily through our field sales and corporate account personnel, and to a lesser extent through distributors.
Life Sciences is comprised of customers and accounts related to manufacturing in the following industries: pharmaceutical, animal health and medicine, blood purification and dialysis, biologic products, cosmetics and medical devices. Our tailored, comprehensive solutions and technical know-how focus on ensuring product quality, safety and compliance standards are met while improving operational efficiency in customers’ cleaning, sanitation and disinfection processes. We believe we are one of the leading suppliers of process purification solutions in Europe and North America and of contamination control solutions in Europe, with a growing presence in North America and other regions.
Other
Other consists of the Pest Elimination, Textile Care and Colloidal Technologies Group operating segments. These operating segments do not meet the quantitative criteria to be separately reported. We disclose these operating segments within Other as we consider the information useful in understanding our consolidated results.
Pest Elimination
Pest Elimination provides services designed to detect, prevent, and eliminate pests such as rodents and insects in full-service and quick-service restaurants, food and beverage processors, hotels, grocery operations and other commercial segments including education, life sciences and healthcare.
In addition to the United States, which constitutes our largest operation, we operate in various countries in Asia Pacific, Greater China, Western Europe, Latin America, and Africa.
We believe Pest Elimination is a leading service provider of effective, high-quality pest elimination programs that deliver high quality outcomes to commercial segments in the geographies it serves.
Textile Care
Textile Care provides products and services that manage the entire wash process through custom designed programs, premium products, dispensing equipment, water and energy management and reduction, and real time data management for large scale, complex commercial laundry operations including uniform rental, hospitality, linen rental and healthcare laundries. Textile Care’s programs are designed to meet our customers’ needs for exceptional cleaning, while extending the useful life of linen and reducing our customers’ overall operating costs. Products and programs are marketed primarily through our field sales employees and, to a lesser extent, through distributors. We believe we are one of the leading global suppliers in the laundry markets in which we compete.
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Colloidal Technologies Group
The Colloidal Technologies Group (“CTG”) produces and sells colloidal silica, which is comprised of nano-sized particles of silica in water. These products and associated programs are used primarily for binding and polishing applications. CTG serves customers across various industries, including semiconductor manufacturing, catalyst manufacturing, chemicals and aerospace component manufacturing.
CTG incorporates strong collaboration with customers to develop customized solutions that meet the technical demands of their operations. Our silica-based applications are widely used for polishing of silicon wafers, semiconductor substrates and the precision surface finishing of optics, watch crystals and other glass components. We offer a variety of silica-based particles that can be used as binders in heterogeneous catalyst systems and as silica nutrients for manufacturing specialty zeolites. Our silica products are used worldwide as a binder for precision investment casting slurries, which ultimately facilitate the manufacture of near net-shape metal parts such as turbine blades and golf club heads.
Our products are sold primarily by our corporate account employees. We believe we are one of the leading global suppliers of colloidal silica.
Additional Information
International Operations
We directly operate in approximately 100 countries outside of the United States through wholly-owned subsidiaries or, in some cases, through a joint venture with a local partner. In certain countries, selected products are sold by our export operations to distributors, agents or licensees, although the volume of those sales is not significant in terms of our overall revenues. In general, our businesses conducted outside the United States are similar to those conducted in the United States.
Our business operations outside the United States are subject to the usual risks of foreign operations, including possible changes in trade and foreign investment laws, international business laws and regulations, tax laws, currency exchange rates and economic and political conditions. The profitability of our international operations is generally lower than the profitability of our businesses in the United States, due to (i) the additional cost of operating in numerous and diverse foreign jurisdictions with varying laws and regulations, (ii) higher costs of importing certain raw materials and finished goods in some regions, (iii) the smaller scale of international operations where certain operating locations are smaller in size, and (iv) the additional reliance on distributors and agents in certain countries which can negatively impact our margins. Proportionately larger investments in sales and technical support are also necessary in certain geographies in order to facilitate the growth of our international operations.
Competition
In general, the markets in which the businesses in our Global Industrial reportable segment compete are led by a few large companies, with the rest of the market served by smaller entities focusing on more limited geographic regions or a smaller subset of products and services. Our businesses in this segment compete on the basis of their demonstrated value, technical expertise, innovation, digital technology, chemical formulations, global customer support, detection equipment, monitoring capabilities, and dosing and metering equipment. Through the combination of our digitally enabled end-to-end water management and hygiene solutions, data-driven insights and personalized service, our Global Industrial businesses deliver outcomes that help our customers optimize water and energy use, improve productivity, advance food safety, and achieve sustainability and net zero goals, while optimizing total cost of operations.
The businesses in our Global Institutional & Specialty reportable segment and Other have two significant classes of competitors. First, we compete with a small number of large companies selling directly or through distributors on a national or international scale. Second, we have numerous smaller regional or local competitors which focus on more limited geographies, product lines and/or end-use customer segments. We believe we compete principally by providing superior value, premium customer support, training, service, and innovative and differentiated products to help our customers protect their brand reputation and improve their operational efficiency.
Within the Global Healthcare & Life Sciences reportable segment, the Healthcare business competes geographically with companies primarily focused on a smaller range of product categories, with few globally scaled competitors. The Life Sciences business competes in the European market versus several mid-size and regional competitors and competes against two large and other mid-size or regional competitors in North America. Outside of North America and Europe competitors are much more fragmented and do not offer the same level of service or coverage as Ecolab. Our businesses in this segment compete by enabling our customers success through improved hygiene, digitally enabled programs in operating room and patient room space as well as a tailored approach to delivering key inputs that directly impact our customers patients globally.
Sales
Our products, systems and services are primarily marketed in domestic and international markets by our Company-trained direct field sales personnel who also advise and assist our customers in the proper and most efficient use of the products and systems in order to meet a full range of cleaning and sanitation, water treatment and process chemistry needs. Independent, third-party distributors and, to a lesser extent, sales agents, are utilized in several markets, as described in the segment descriptions found above.
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Customers and Classes of Products
We believe our business is not materially dependent upon a single customer. Additionally, although we have a diverse customer base and no customer or distributor constituted 10 percent or more of our consolidated revenues in 2023, 2022 or 2021, we do have customers and independent third-party distributors, the loss of which could have a material adverse effect on results of operations for the affected earnings periods; however, we consider it unlikely that such an event would have a material adverse impact on our financial position. No material part of our business is subject to renegotiation or termination at the election of a governmental unit.
We sold one class of products within the Global Institutional & Specialty reportable segment which comprised 10% or more of consolidated net sales in the last three years. Sales of warewashing products were approximately 12%, 12%, and 10% of consolidated net sales in 2023, 2022 and 2021, respectively.
Human Capital
As of December 31, 2023, Ecolab employed approximately 48,000 employees, including approximately 26,000 sales and service and 1,100 research, development, and engineering employees. Approximately 42% of the employees are employed in North America, 20% in Europe, 7% in Asia Pacific, 17% in Latin America, 7% in India, Middle East and Africa, and 7% in Greater China.
We believe that doing the right thing, the right way, is good for business. We believe that driving performance and growing fast, we can deliver a net positive impact in our own operations and what we deliver for our customers. We are committed to developing a culture that is diverse, equitable, inclusive, and leverages our employees’ talents as we work together to serve the needs of our customers. We believe that our culture is more creative and helps deliver the innovation needed to grow our business. We believe in providing training and career development opportunities to all employees and in compensating and rewarding our employees equitably.
Our commitment to the safety of our employees, contractors, and customers is evident in the way we operate, the products we develop, and the customers we serve. In addition, we are committed to promoting the health and well-being of our employees, our customers, and their customers by contributing to programs and initiatives that enhance the quality of life in the communities where they work and live. In support of these overall objectives, key areas of focus include:
Diversity, Equity, and Inclusion: We have a long-standing belief that a diverse, equitable, and inclusive workforce is a strong foundation for the shared success of our employees, our company, our customers, and our communities. To build that strong foundation, we have worked to embed diversity and inclusion throughout our people processes, including in the areas of recruitment, retention, and development. To help guide our work and support our broad commitment to progress, Ecolab has a Diversity Council made up of senior leaders throughout our company and chaired by our CEO. We review with the Council, senior executives and business leads key metrics and practices, including diverse representation of backgrounds and experiences, along with many aspects of our recruiting and retention practices. These programs are designed to facilitate equitable employment opportunities, while promoting an inclusive workforce.
We also have a vibrant and growing community of 11 Employee Resource Groups (“ERGs”) that are open to all, to help employees connect with colleagues, take part in career and leadership development experiences, and provide important insights in support of advancing our work in diversity, equity, and inclusion. These employee-led ERGs create community and focus on several dimensions of diversity, including gender, race/ethnicity, gender identity, sexual orientation, ability/disability, military service, generational, global, and career skill development. All employees are welcome and encouraged to join, participate, or become leaders and allies within any of our ERGs.
Employee Training and Development: Ecolab’s growth has been characterized by a century of supporting customers by combining science, technology and innovation with the expertise of our associates. Beyond rigorous technical, functional, and business-specific training courses, our Global Corporate Flagship Development Programs for supervisors, managers and leaders are designed to deepen leadership capability and prepare potential successors for key leadership roles.
Compensation and Benefits: Ecolab has a market-competitive and performance-based pay philosophy, and we believe in compensating our employees fairly and equitably. We are committed to rewarding and recognizing employees for their contributions to the success of the organization. This includes our global merit increase program and our short- and long-term variable pay programs, which include goals and targets that are tied to the success of the business. We test our pay and wage data against compensation surveys to align our pay with the competitive external market. In the U.S., we conduct pay equity studies, and we are in the process of expanding pay equity studies outside the U.S.
Ecolab also provides market-competitive benefits based on country-specific needs and government requirements. While our benefits packages vary by market, they are designed to attract top talent and build long-term connections with our associates. Aligned to the applicable market and local regulations, elements of our benefits programs may include medical and dental insurance, retirement savings, employee stock purchase plan, paid time off, parental leave and adoption assistance, life and disability insurance, and employee assistance plans.
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Safety, Health, and Wellness: At Ecolab, the safety of our employees and contractors is a top priority and is embedded into our company values. Our safety goals are simple: zero accidents, zero injuries, and zero violations. We communicate that this is a collective goal all employees commit to, own, and deliver on every day. Our leadership teams and a network of Safety, Health, and Environment professionals around the world support employees with robust safety programs, processes, and platforms. Understanding underlying and potential risks is a critical component to improving safety outcomes. Our Global Safety Dashboard tracks our performance on a range of leading and lagging safety indicators and helps us measure the effectiveness of our safety programs.
Additionally, a Be Well Program is available to U.S. employees and their families to empower, educate and support their personal journey to overall well-being by making positive lifestyle choices while creating a culture of wellness throughout Ecolab. Over the last few years, we’ve expanded our offerings to include comprehensive child and elder caregiver resources to help employees balance the demands of work and personal responsibilities. Wellness initiatives are also underway outside the U.S. aligned to country-specific needs and market practices.
Patents and Trademarks
We own and license a number of patents, trademarks and other intellectual property, including intellectual property from our recent acquisition of Purolite. While we have an active program to protect our intellectual property by filing for patents or trademarks and pursuing legal action, when appropriate, to prevent infringement, except for the items listed below, we do not believe our overall business is materially dependent on any individual patent or trademark.
| ● | Patents related to our TRASAR and 3D TRASAR technology, which are material to our Global Industrial reportable segment. U.S. and foreign patents protect aspects of our key TRASAR and 3D TRASAR technology until at least 2024. |
| ● | Trademarks related to Ecolab, Nalco and 3D TRASAR, which collectively are material to all of our reportable segments. The Ecolab, Nalco and 3D TRASAR trademarks are registered or applied for in all of our key markets and we anticipate maintaining them indefinitely. |
Seasonality
We experience variability in our quarterly operating results due to seasonal sales volume and business mix fluctuations in our operating segments. Part II, Item 8, Note 20, entitled “Quarterly Financial Data” of this Form 10-K is incorporated herein by reference.
Investments in Equipment
We have invested, and plan to continue to invest, in process control and monitoring equipment consisting primarily of systems used by customers to dispense our products as well as to monitor water systems. The investment in such equipment is discussed under the heading "Investing Activities" in Management's Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K.
Manufacturing and Distribution
We manufacture most of our products and related equipment in Company-operated manufacturing facilities. Some products are also produced for us by third-party contract manufacturers. Other products and equipment are purchased from third-party suppliers. Additional information on product/equipment sourcing is found in the segment discussions above and additional information on our manufacturing facilities is located under Part I, Item 2. “Properties,” of this Form 10-K.
Deliveries to customers are made from our manufacturing plants and a network of distribution centers and third-party logistics service providers. We use common carriers, our own delivery vehicles, and distributors for transport. Additional information on our plant and distribution facilities is located under Part I, Item 2. “Properties,” of this Form 10-K.
Raw Materials
Raw materials purchased for use in manufacturing our products are inorganic chemicals, including alkalis, acids, biocides, phosphonates, phosphorous materials, silicates and salts; and organic chemicals, including acids, alcohols, amines, fatty acids, surfactants, solvents, monomers and polymers. Healthcare purchases plastic films and parts to manufacture medical devices that serve the surgical and infection prevention markets. Pesticides used by Pest Elimination are purchased as finished products under contract or purchase order from the producers or their distributors. We also purchase packaging materials for our manufactured products and components for our specialized cleaning equipment and systems. We purchase more than 10,000 raw materials, with the largest single raw material representing approximately four percent of raw material purchases. Our raw materials, with the exception of a few specialized chemicals which we manufacture, are generally purchased on an annual contract basis and are ordinarily available in adequate quantities from a diverse group of suppliers globally. When practical, global sourcing is used so that purchasing or production locations can be shifted to control product costs.
Research and Development
Our research and development program consists principally of developing and validating the performance of new products, processes, techniques and equipment, improving the efficiency of those already existing, improving service program content, evaluating the environmental compatibility of products and technical support. Key disciplines include analytical and formulation chemistry, microbiology,
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data science and predictive analytics, process and packaging engineering, digital and remote monitoring engineering and product dispensing technology. Substantially all of our principal products have been developed by our research, development and engineering personnel.
We believe continued research and development activities are critical to maintaining our leadership position within the industry and will provide us with a competitive advantage as we seek additional business with new and existing customers.
Joint Ventures
Over time, we have entered into partnerships or joint ventures in order to meet local ownership requirements, to achieve quicker operational scale, to expand our ability to provide our customers a more fully integrated offering or to provide other benefits to our business or customers. During 2023, the impact on our consolidated net income of our joint ventures, in the aggregate, was approximately three percent. We will continue to evaluate the potential for partnerships and joint ventures that can assist us in increasing our geographic, technological and product reach.
Environmental and Regulatory Considerations
Our businesses are subject to various legislative enactments and regulations relating to the protection of the environment and public health. While we cooperate with governmental authorities and take commercially practicable measures to meet regulatory requirements and avoid or limit environmental effects, some risks are inherent in our businesses. Among the risks are costs associated with transporting and managing hazardous materials and waste disposal and plant site clean-up, fines and penalties if we are found to be in violation of law, as well as modifications, disruptions or discontinuation of certain operations or types of operations including product recalls and reformulations. Similarly, the need for certain of our products and services is dependent upon or might be limited by governmental laws and regulations. Changes in such laws and regulations, including among others, air, water, chemical and product regulations, could impact the sales of some of our products or services. In addition to an increase in costs of manufacturing and delivering products, a change in production regulations or product regulations could result in interruptions to our business and potentially cause economic or consequential losses should we be unable to meet the demands of our customers for products.
Additionally, although we are not currently aware of any such circumstances, there can be no assurance that future legislation or enforcement policies will not have a material adverse effect on our consolidated results of operations, financial position or cash flows. Environmental and regulatory matters most significant to us are discussed below.
Ingredient Legislation: Various laws and regulations have been enacted by state, local and foreign jurisdictions pertaining to the sale of products which contain phosphorous, volatile organic compounds, per- and polyfluoroalkyl substances (“PFAS”) or other ingredients that may impact human health or the environment. Under California Proposition 65, for example, label disclosures are required for certain products containing chemicals listed by California. Chemical management initiatives that promote pollution prevention through research and development of safer chemicals and safer chemical processes are being advanced by several states.
Environmentally preferable purchasing programs for cleaning products have been enacted in a number of states to date, and in recent years have been considered by several other state legislatures. Cleaning product ingredient disclosure legislation has been introduced in the U.S. Congress in each of the past few years but has not passed, and several states are considering further regulations in this area. In 2017, California passed the Cleaning Product Right to Know Act of 2017, that required ingredient transparency on-line and on-label by 2020 and 2021, respectively. New York has proposed similar ingredient disclosure regulation. The U.S. Government is monitoring “green chemistry” initiatives through a variety of initiatives, including its “Design for the Environment” (“DfE”)/“Safer Choice” program. DfE/Safer Choice has three broad areas of work (recognition of safer products on a DfE/Safer Choice label, development of best practices for industrial processes and evaluation of safer chemicals), and we are involved in these to varying degrees. Our Global Institutional and Global Industrial cleaning products are subject to the regulations and may incur additional stay-in-market expenses associated with conducting the required alternatives analyses for chemicals of concern. To date, we generally have been able to comply with such legislative requirements by reformulation or labeling modifications. Such legislation has not had a material adverse effect on our consolidated results of operations, financial position or cash flows to date.
TSCA: The nation’s primary chemicals management law, the Toxic Substances Control Act (“TSCA”), was updated for the first time in 40 years with the passage of the Frank R. Lautenberg Chemical Safety for the 21st Century Act (“LCSA”) in 2016. The LCSA modernizes the original 1976 legislation, aiming to establish greater public confidence in the safety of chemical substances in commerce and improve the U.S. Environmental Protection Agency’s (“EPA”) capability and authority to regulate existing and new chemical substances. For Ecolab, the TSCA changes mainly impact testing and submission costs for new and existing chemical substances in the United States. As a result of reform and administration changes, EPA reviews are resulting in the majority of new substances being regulated in some manner by the agency. Compliance with new requirements under TSCA are similar to the costs associated with REACH in the European Union, which is discussed below.
REACH: The European Union has enacted a regulatory framework for the Registration, Evaluation and Authorization of Chemicals (“REACH”), which aims to manage chemical safety risks. REACH established a European Chemicals Agency (“ECHA”) in Helsinki, Finland, which is responsible for evaluating data to determine hazards and risks and to manage this program for authorizing chemicals for sale and distribution in Europe. We met all REACH registration requirements. To help manage this program, we have been simplifying our product lines and working with chemical suppliers to comply with registration requirements. In addition, Korea, Taiwan, Turkey, India, Chile and Colombia and other countries have implemented or are implementing similar requirements. In addition, the European Green Deal will include the revision of chemical
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management regulation to achieve a circular economy and toxic-free environment (Chemical Strategy for Sustainability) which may impact sales in Ecolab’s raw material portfolio. Potential costs to us are not yet fully quantifiable but are not expected to have a material adverse effect on our consolidated results of operations or cash flows in any one reporting period or on our financial position.
GHS: In 2003, the United Nations adopted a standard on hazard communication and labeling of chemical products known as the Globally Harmonized System of Classification and Labeling of Chemicals (“GHS”). GHS is designed to facilitate international trade and increase safe handling and use of hazardous chemicals through a worldwide system that classifies chemicals based on their intrinsic hazards and communicates information about those hazards through standardized product labels and safety data sheets (“SDSs”). As of 2023, most countries in which we operate have adopted or are expected to adopt GHS-related legislation. The primary cost of compliance revolves around reclassifying products and revising SDSs and product labels. We have met applicable deadlines and are working toward a phased-in approach to mitigate the costs of GHS implementation in remaining countries (e.g., Peru, Chile, India). Potential costs to us are not expected to have a material adverse effect on our consolidated results of operations or cash flows in any one reporting period or on our financial position.
Pesticide and Biocide Legislation: Various international, federal and state environmental laws and regulations govern the manufacture and/or use of pesticides. We manufacture and sell certain disinfecting, sanitizing and material preservation products that kill or reduce microorganisms (bacteria, viruses, fungi) on hard environmental surfaces, in process fluids and on certain food products. Such products constitute “pesticides” or “antimicrobial pesticides” under the current definitions of the Federal Insecticide, Fungicide, and Rodenticide Act (“FIFRA”), as amended by the Food Quality Protection Act of 1996, the principal federal statute governing the manufacture, labeling, handling and use of pesticides. We maintain several hundred product registrations with the U.S. Environmental Protection Agency (“EPA”). Registration entails the necessity to meet certain efficacy, toxicity and labeling requirements and to pay on-going registration fees. In addition, each state in which these products are sold requires registration and payment of a fee. In general, the states impose no substantive requirements different from those required by FIFRA. However, California and certain other states have adopted additional regulatory programs, and California imposes a tax on total pesticide sales in that state. While the cost of complying with rules as to pesticides has not had a material adverse effect on our consolidated results of operations, financial condition, or cash flows to date, the costs and delays in receiving necessary approvals for these products continue to increase. Total fees paid to the EPA and the states to obtain or maintain pesticide registrations are not expected to significantly affect our consolidated results of operations or cash flows in any one reporting period or our financial position.
In Europe, the Biocidal Products Regulation established a program to evaluate and authorize marketing of biocidal active substances and products. We are working with suppliers and industry groups to manage these requirements and have met all relevant deadlines of the program by the timely submission of dossiers for active substances and biocide products. Anticipated registration costs, which will be incurred through the multi-year phase-in period, will be significant; however, these costs are not expected to significantly affect our consolidated results of operations or cash flows in any one reporting period or our financial position. The same is true for emerging biocide regulations in Asia.
In addition, Pest Elimination applies restricted-use pesticides that it generally purchases from third parties. That business must comply with certain standards pertaining to the use of such pesticides and to the licensing of employees who apply such pesticides. Such regulations are enforced primarily by the states or local jurisdictions in conformity with federal regulations. We have not experienced material difficulties in complying with these requirements.
FDA Antimicrobial Product Requirements: Various laws and regulations have been enacted by federal, state, local and foreign jurisdictions regulating certain products manufactured and sold by us for controlling microbial growth on humans, animals and foods. In the United States, these requirements generally are administered by the U.S. Food and Drug Administration ("FDA"). However, the U.S. Department of Agriculture and EPA also may share in regulatory jurisdiction of antimicrobials applied to food. The FDA codifies regulations for these product categories in order to ensure product quality, safety and effectiveness. The FDA also has been expanding requirements applicable to such products, including proposing regulations for over-the-counter antiseptic drug products, which may impose additional requirements associated with antimicrobial hand care products and associated costs when finalized by the FDA. FDA regulations associated with the Food Safety Modernization Act may impose additional requirements related to safety product lines. To date, such requirements have not had a material adverse effect on our consolidated results of operations, financial position or cash flows.
Medical Device and Drug Product Requirements: As a manufacturer, distributor and marketer of medical devices and human drugs, we also are subject to regulation by the FDA and corresponding regulatory agencies of the state, local and foreign governments in which we sell our products. These regulations govern the development, testing, manufacturing, packaging, labeling, distribution and marketing of medical devices and medicinal products, including Advanced Pharmaceutical Ingredients (“API”), excipients and resins for biopharmaceutical processing. We also are required to register with the FDA as a medical device and drug manufacturer, comply with post-market reporting (e.g., Adverse Event Reporting, MDR and Recall) requirements, and to comply with the FDA’s current Good Manufacturing Practices and Quality System Regulations which require that we have a quality system for the design and production of our products intended for commercial distribution in the United States and satisfy recordkeeping requirements with respect to our manufacturing, testing and control activities. Countries in the European Union require that certain products being sold within their jurisdictions obtain a “CE mark,” an international symbol of adherence to quality assurance standards, and be manufactured in compliance with certain requirements (e.g., Medical Device Directive 93/42/EEC, Medical Device Regulation (EU) 2017/745 (“MDR”), and ISO 13485). We have CE mark approval to sell various medical device and medicinal products in Europe. Implementation of the MDR will require additional certifications and investments, including system, product and process upgrades. Our other international non-
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European operations also are subject to government regulation and country-specific rules and regulations. Regulators at the federal, state and local level have imposed, are currently considering and are expected to continue to impose regulations on medical devices and drug products. No prediction can be made of the potential effect of any such future regulations, and there can be no assurance that future legislation or regulations will not increase the costs of our products or prohibit the sale or use of certain products.
Equipment: Ecolab’s products are dispensed by equipment that is subject to state and local regulatory requirements, as well as being subject to UL, NSF, and other approval requirements. For certain digitally connected product offerings, Federal Communication Commission (“FCC”) and corresponding international requirements are applicable. We have both dedicated manufacturing facilities and third-party production of our equipment. We are developing processes to monitor and manage changing regulatory regimes and assist with equipment systems compliance. To date, such requirements have not had a material adverse effect on our consolidated results of operations, financial position or cash flows.
Other Environmental Legislation: Our manufacturing plants are subject to federal, state, local or foreign jurisdiction laws and regulations relating to discharge of hazardous substances into the environment and to the transportation, handling and disposal of such substances. The primary federal statutes that apply to our activities in the United States are the Clean Air Act, the Clean Water Act and the Resource Conservation and Recovery Act. We are also subject to the Superfund Amendments and Reauthorization Act of 1986, which imposes certain reporting requirements as to emissions of hazardous substances into the air, land and water. The products we produce and distribute into Europe are also subject to directives governing electrical waste (WEEE Directive 2012/19/EU) and restrictive substances (RoHS Directive 2011/65/EU). Similar legal requirements apply to Ecolab’s facilities globally. We make capital investments and expenditures to comply with environmental laws and regulations, to promote employee safety and to carry out our announced environmental sustainability principles. To date, such expenditures have not had a significant adverse effect on our consolidated results of operations, financial position or cash flows. Our capital expenditures for environmental, health and safety projects worldwide were approximately $46 million in 2023, $35 million in 2022 and $28 million in 2021. Approximately $51 million has been budgeted globally for projects in 2024.
Climate Change: Various laws and regulations pertaining to climate change have been implemented or are being considered for implementation at the international, national, regional and state levels, particularly as they relate to the reduction of greenhouse gas (“GHG”) emissions. These include regulations passed by the State of California in 2023 relating to GHG emissions, climate-related risk, and emissions reduction claims, proposed regulations introduced by the SEC in March 2022 relating to climate change disclosure, and the European Commission’s Corporate Sustainability Reporting Directive, which came into force on January 2024 and applies to both EU and certain non-EU companies with a phased introduction. We are or may become subject to many of these laws. We continue to monitor the development and implementation of such laws and regulations, and are preemptively evaluating and, where appropriate, including reporting and disclosure obligations.
Ecolab recognizes that climate change poses potential risks to and creates potential opportunities for our organization. Climate-related risks are assessed within our Enterprise Risk Management process and Annual Business Significance Risks Assessment, which is aligned with recommendations of the Financial Stability Board (“FSB”) Task Force on Climate-related Financial Disclosures (“TCFD”). We report TCFD disclosures in our annual CDP Climate report located on our website. Ecolab continues to focus on climate-related risks since our first TCFD-aligned climate risk assessment conducted in 2021 – we plan to regularly review the results of our analysis and consider adaptation and management plans for any relevant climate change risks and to further benefit from identified opportunities for customer impact. Ecolab also evaluates potential water-related risks in our direct operations that may be exacerbated by climate change and discloses the results in our Corporate Responsibility Report. We plan to explore additional analyses of potential nature-related risks that may link to climate- and water-related risks in the future, aligned with the emerging recommendations of the Task Force on Nature-Related Financial Disclosures (“TNFD”).
As a matter of corporate policy, we support a balanced approach to reducing GHG emissions while sustaining economic growth. To further our climate commitment, in 2019 we announced new goals to reduce our operational GHG emissions by half by 2030 and achieve net zero by 2050, in alignment with the United Nations Global Compact’s Business Ambition for 1.5⁰C. In 2020, we further committed to attempt to move to 100% renewable energy by 2030 and set a science-based target (“SBT”) addressing our Scope 1, 2 and 3 GHG emissions, and in 2022 we committed to submitting our net zero target to the Science Based Targets initiative (“SBTi”) for formal validation. With the increasing complexity of supply chain emissions, in 2023 we decided to develop a revised Scope 3 target that prioritizes absolute emissions reduction. We plan to continue our supplier engagement practices to advance climate action outside of our operations. We submitted our new Scope 3 target along with our net zero target in early 2024 for validation by the SBTi. Our near-term SBT continues to target reduction of absolute Scope 1 and 2 emissions by 50% by 2030 from a 2018 base year and we report our progress in our annual Corporate Responsibility Report.
In 2022, we invested $65 million in capital and $6 million in operating expenses to implement continuous improvement projects positively impacting our environmental performance. In 2022, we completed process improvement projects that reduced total energy consumption by almost 21.4 billion BTUs, emissions by 11,000 metric tons CO2e and 12.7 million gallons (~48,000 cubic meters) of water savings. The reduction in energy consumption is calculated using a combination of direct measurements and estimations using best-practice methodologies. The scope of reduction in GHG emissions consumption data is an estimated annual impact and includes both Scope 1 and 2 emissions. Water data from meter readings and utilities reports is used to quantify the water savings with 2018 as our baseline year.
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In addition to managing our operational and supply chain sustainability performance, we help our customers in more than 170 countries to reduce their energy and GHG emissions through our high-efficiency solutions in cleaning and sanitation, water, paper, and energy services. Showcasing our global team’s dedication to helping our customers thrive and make a positive impact in the world, we have set a 2030 goal to help our customers reduce their GHG emissions by 6.0 million metric tons. Ecolab recognizes the climate-water nexus. As part of our 2030 Impact Goals, we have planned to restore greater than 50% of our water withdrawal and achieve Alliance for Water Stewardship Standard certification in high-risk watersheds. In addition, we aim to reduce net water withdrawals by 40% per unit of production across our enterprise. We also magnify our impact through the water-saving solutions we deliver to our customers and have set a goal to help our customers conserve more than 300 billion gallons of water annually by 2030.
The science of sustainability is an evolving one. For a discussion of the factors that may cause our sustainability initiatives, goals and targets to differ from those expressed above, see Item 1A of this Form 10-K, entitled “Risk Factors.”
Environmental Remediation and Proceedings: Along with numerous other potentially responsible parties (“PRP”), we are currently involved with waste disposal site clean-up activities imposed by the federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) or state equivalents at 16 sites in the United States. Additionally, we have similar liability at six sites outside the United States. In general, under CERCLA, we and each other PRP that actually contributed hazardous substances to a Superfund site are jointly and severally liable for the costs associated with cleaning up the site. Customarily, the PRPs will work with the EPA to agree and implement a plan for site remediation.
Based on an analysis of our experience with such environmental proceedings, our estimated share of all hazardous materials deposited on the sites referred to in the preceding paragraph, and our estimate of the contribution to be made by other PRPs which we believe have the financial ability to pay their shares, we have accrued our best estimate of our probable future costs relating to such known sites. In establishing accruals, potential insurance reimbursements are not included. The accrual is not discounted. It is not feasible to predict when the amounts accrued will be paid due to the uncertainties inherent in the environmental remediation and associated regulatory processes.
We have also been named as a defendant in a number of lawsuits alleging personal injury due to exposure to hazardous substances, including multi-party lawsuits alleging personal injury in connection with our products and services. While we do not believe that any of these suits will be material to us based upon present information, there can be no assurance that these environmental matters could not have, either individually or in the aggregate, a material adverse effect on our consolidated results of operations, financial position or cash flows.
We have also been named as a defendant in lawsuits where our products have not caused injuries, but the claimants wish to be monitored for potential future injuries. We cannot predict with certainty the outcome of any such tort claims or the involvement we or our products might have in such matters in the future, and there can be no assurance that the discovery of previously unknown conditions will not require significant expenditures. In each of these chemical exposure cases, our insurance carriers have accepted the claims on our behalf (with or without reservation) and our financial exposure should be limited to the amount of our deductible; however, we cannot predict the number of claims that we may have to defend in the future and we may not be able to continue to maintain such insurance.
Our worldwide net expenditures for contamination remediation were approximately $0.3 million in 2023, $1.4 million in 2022 and $0.5 million in 2021. Our worldwide accruals at December 31, 2023 for probable future remediation expenditures, excluding potential insurance reimbursements, totaled approximately $9.3 million. We review our exposure for contamination remediation costs periodically and our accruals are adjusted as considered appropriate. While the final resolution of these issues could result in costs below or above current accruals and, therefore, have an impact on our consolidated financial results in a future reporting period, we believe the ultimate resolution of these matters will not have a material effect on our consolidated results of operations, financial position or cash flows.
Available Information.
We file annual, quarterly and current reports, proxy statements and other information with the SEC. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC at https://www.sec.gov.
General information about us, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as any amendments and exhibits to those reports, are available free of charge through our website at https://investor.ecolab.com as soon as reasonably practicable after we file them with, or furnish them to, the SEC.
In addition, the following governance materials are available on our web site at https://investor.ecolab.com/corporate-governance: (i) charters of the Audit, Compensation, Finance, Governance and Safety, Health and Environment Committees of our Board of Directors; (ii) our Board's Corporate Governance Principles; and (iii) our Code of Conduct.
We include our website addresses throughout this report for reference only. The information contained on our websites, including the corporate responsibility, and climate reports identified in this report, is not incorporated by reference into this report.
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Information about our Executive Officers.
The persons listed in the following table are our current executive officers. Officers are elected annually. There is no family relationship among any of the directors or executive officers and no executive officer has been involved during the past ten years in any legal proceedings described in applicable Securities and Exchange Commission regulations.
Name |
| Age |
| Office |
| Positions Held Since Jan. 1, 2019 |
|---|---|---|---|---|---|---|
Nicholas J. Alfano | 62 | Executive Vice President and President – Global Industrial Group | Apr. 2023 – Present | |||
Executive Vice President and General Manager – Global Light Sector | Jan. 2021 – Mar. 2023 | |||||
Executive Vice President and General Manager – Global Food & Beverage | Jan. 2019 – Dec. 2020 | |||||
Christophe Beck | 56 | Chairman and Chief Executive Officer | Oct. 2022 – Present | |||
Chairman, Chief Executive Officer and President | May 2022 – Oct. 2022 | |||||
President and Chief Executive Officer | Jan. 2021 – May 2022 | |||||
President and Chief Operating Officer | Apr. 2019 – Dec. 2020 | |||||
Executive Vice President and President – Industrial | Jan. 2019 – Mar. 2019 | |||||
Larry L. Berger | 63 | Executive Vice President and Chief Technical Officer | Jan. 2019 – Present | |||
Jennifer J. Bradway | 47 | Senior Vice President and Corporate Controller | Jan. 2022 – Present | |||
Senior Vice President Finance - Global Institutional | Jan. 2020 – Dec. 2021 | |||||
Vice President Finance - Institutional North America | Jan. 2019 – Dec. 2019 | |||||
Darrell R. Brown | 60 | President and Chief Operating Officer | Oct. 2022 – Present | |||
Executive Vice President and President – Global Industrial | Apr. 2019 – Sept. 2022 | |||||
Executive Vice President and President – Energy Services | Jan. 2019 – Mar. 2019 | |||||
Angela M. Busch | 57 | Executive Vice President – Corporate Strategy & Business Development | Jan. 2019 – Present | |||
Gregory B. Cook | 55 | Executive Vice President and President – Institutional Group | Aug. 2023 – Present | |||
Executive Vice President and General Manager – Global Institutional | June 2021 – July 2023 | |||||
Senior Vice President and General Manager – Global Pest | Jan. 2020 – May 2021 | |||||
Senior Vice President and General Manager – Institutional Latin America | Jan. 2019 – Dec. 2019 | |||||
Alexander A. De Boo | 56 | Executive Vice President and President – Global Markets | Feb. 2021 – Present | |||
Executive Vice President and President – Western Europe | Apr. 2020 – Jan. 2021 | |||||
Senior Vice President and General Manager – Industrial, Europe | Jan. 2019 – Apr. 2020 | |||||
Machiel Duijser (1) | 52 | Executive Vice President and Chief Supply Chain Officer | Feb. 2020 – Present | |||
Nicolas A. Granucci | 49 | Executive Vice President and President - Global Pest | Aug. 2023 – Present | |||
Senior Vice President and General Manager – Global Pest | June 2021 – July 2023 | |||||
Senior Vice President and General Manager – Institutional & Specialty Greater China | Jan. 2019 – May 2021 | |||||
Scott D. Kirkland | 50 | Chief Financial Officer | Jan. 2022 – Present | |||
Senior Vice President and Corporate Controller | June 2019 – Dec. 2021 | |||||
Senior Vice President – Finance, Global Energy Services | Jan. 2019 – May 2019 | |||||
Laurie M. Marsh | 60 | Executive Vice President – Human Resources | Jan. 2019 – Present | |||
Lanesha T. Minnix (2) | 48 | Executive Vice President, General Counsel and Secretary | June 2022 – Present | |||
Gail Peterson | 45 | Executive Vice President – Global Marketing & Communications | Apr. 2022 – Present | |||
Senior Vice President – Global Marketing & Communications | Jan. 2021 – Mar. 2022 | |||||
Vice President – Marketing Global Healthcare | Jan. 2019 – Dec. 2020 | |||||
Gergely Sved | 50 | Executive Vice President and President – Global Healthcare and Life Sciences | Apr. 2022 – Present | |||
Senior Vice President and General Manager - Global Healthcare | Jan. 2019 – Mar. 2022 | |||||
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(1) Prior to joining Ecolab in February 2020, Mr. Duijser was employed by Reckitt Benckiser Group plc (RB), a global provider of health, hygiene and home products, as Chief Supply Officer from 2018 until 2020.
(2) Prior to joining Ecolab in June 2022, Ms. Minnix was employed by Flowserve Corporation, a global industrial manufacturer of engineered flow control systems, as Senior Vice President, Chief Legal Officer and Corporate Secretary from 2018 until 2022.
Forward-Looking Statements
This Form 10-K, including Part I, Item 1, entitled “Business,” and the MD&A within Part II, Item 7, contains 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 relating to our restructuring and other initiatives, as well as savings from such initiatives |
| ● | future cash flows, access to capital, targeted credit rating metrics and impact of credit rating downgrade |
| ● | adequacy of cash reserves |
| ● | uses for cash, including dividends, share repurchases, debt repayments, capital investments and strategic business acquisitions |
| ● | global economic and political environment |
| ● | long-term potential of our business |
| ● | impact of changes in exchange rates and interest rates |
| ● | customer retention rate |
| ● | bad debt experience, non-performance of counterparties and losses due to concentration of credit risk |
| ● | disputes, claims and litigation |
| ● | environmental contingencies |
| ● | impact and cost of complying with laws and regulations |
| ● | sustainability targets |
| ● | returns on pension plan assets |
| ● | contributions to pension and postretirement healthcare plans |
| ● | amortization expense |
| ● | impact of new accounting pronouncements |
| ● | income taxes, including tax attributes, valuation allowances, unrecognized tax benefits, permanent reinvestment assertions and goodwill deductibility |
| ● | recognition of share-based compensation expense |
| ● | payments under operating leases |
| ● | future benefit plan payments |
| ● | market position |
Without limiting the foregoing, words or phrases such as “will likely result,” “are expected to,” “will be,” “will continue,” “is anticipated,” “we believe,” “we expect,” “estimate,” “project” (including the negative or variations thereof), “intends,” “could,” or similar terminology, generally identify forward-looking statements. Forward-looking statements may also represent challenging goals for us. These statements, which represent our expectations or beliefs concerning various future events, are based on current expectations that involve a number of risks and uncertainties that could cause actual results to differ materially from those of such forward-looking statements. We caution that undue reliance should not be placed on such forward-looking statements, which speak only as of the date made. For a further discussion of these and other factors which could cause results to differ from those expressed in any forward-looking statement, see Item 1A of this Form 10-K, entitled “Risk Factors.” Except as may be required under applicable law, we undertake no duty to update our forward-looking statements.
Forward-looking and other statements in this document may also address our sustainability initiatives, goals, targets and progress, and the inclusion of such statements is not an indication that these contents are necessarily material to investors or required to be disclosed in our filings with the SEC. In addition, historical, current, and forward-looking sustainability-related statements may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions that are subject to change in the future and performance against our goals and targets may differ from such forward-looking statements in such event.
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Item 1A. Risk Factors.
The following are important factors which could affect our financial performance and could cause our actual results for future periods to differ materially from our anticipated results or other expectations, including those expressed in any forward-looking statements made in this Form 10-K. See the section entitled “Forward-Looking Statements” set forth above.
We may also refer to this disclosure to identify factors that may cause results to differ materially from those expressed in other forward-looking statements including those made in oral presentations, including telephone conferences and/or webcasts open to the public.
Economic & Operational Risks
Our results are impacted by general worldwide economic factors.
Over the past year, global interest rates aimed at curbing inflation, as well as implications of geopolitical situations in Europe, the Middle East and China, have resulted in economic and demand uncertainty. Previously, the COVID pandemic, geopolitical instability and other global events have resulted in supply chain challenges, inflation, high interest rates, foreign currency exchange volatility, and volatility in global capital markets, which have affected our business and could have a material adverse impact on our business in the future. Countries such as Argentina and Turkey have experienced economic upheaval and similar upheaval in other countries with Ecolab operations could have a material adverse impact on our consolidated results of operations, financial position and cash flows by negatively impacting economic activity, including in our key end-markets, and by further weakening the local currency versus the U.S. dollar, resulting in reduced sales and earnings from our foreign operations, which are generated in the local currency, and then translated to U.S. dollars.
Our results depend upon the continued vitality of the markets we serve.
Economic downturns, and in particular downturns in our larger markets including the foodservice, hospitality, travel, health care, food processing, refining, pulp and paper, mining and steel industries, can adversely impact our customers, and we may find it difficult to restore margins by maintaining pricing due to easing inflation from slowing economic growth. Recently, the war and energy crisis in Europe have resulted in a more challenging macroeconomic environment with significantly impacted costs and demand. Previously, the COVID-19 pandemic negatively impacted the demand for our products and services provided to customers in the full-service restaurant, hospitality, lodging and entertainment industries. In prior years, a weaker global economic environment has also negatively impacted certain of our other end-markets. During these periods of weaker economic activity, our customers and potential customers may reduce or discontinue their volume of purchases of cleaning and sanitizing products and water treatment and process chemicals, which has had, and may continue to have, a material adverse effect on our business, financial condition, results of operation or cash flows.
Our significant non-U.S. operations expose us to global economic, political and legal risks that could impact our profitability.
We have significant operations outside the United States, including joint ventures and other alliances. We conduct business in more than 170 countries and, in 2023, approximately 47% of our net sales originated outside the United States. There are inherent risks in our international operations, including:
| ● | exchange controls and currency restrictions; |
| ● | currency fluctuations and devaluations; |
| ● | tariffs and trade barriers; |
| ● | export duties and quotas; |
| ● | changes in the availability and pricing of raw materials, energy and utilities; |
| ● | changes in local economic conditions; |
| ● | changes in laws and regulations, including the imposition of economic or trade sanctions affecting international commercial transactions; |
| ● | difficulties in managing international operations and the burden of complying with international and foreign laws; |
| ● | requirements to include local ownership or management in our business; |
| ● | economic and business objectives that differ from those of our joint venture partners; |
| ● | exposure to possible expropriation, nationalization or other government actions; |
| ● | restrictions on our ability to repatriate dividends from our subsidiaries; |
| ● | unsettled political conditions, military action, civil unrest, acts of terrorism, force majeure, war or other armed conflict, including the Russian invasion of Ukraine, the Israel-Hamas conflict and other hostilities in the Middle East; and |
| ● | countries whose governments have been hostile to U.S.-based businesses. |
Following Russia’s invasion of Ukraine and the United States’ and other countries’ sanctions against Russia, we have limited our Russian business to operations that are essential to life, providing minimal support for our healthcare, life sciences, food and beverage and certain water businesses, and we may further narrow our presence in Russia depending on developments in the conflict or otherwise. While our operations in Russia and areas experiencing conflict are not material to our business and financial results, the escalation of these conflicts may also heighten many other risks disclosed in our report on Form 10-K, any of which could materially and adversely affect our business and financial results. Such risks include, but are not limited to, adverse effects on macroeconomic conditions, including increased inflation, constraints on the availability of commodities, supply chain disruption and decreased business spending; disruptions to our or our business partners’ global technology infrastructure, including through cyber-attack or cyber-intrusion; adverse changes in international trade policies and relations; claims, litigation and regulatory enforcement; our ability to implement and execute
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our business strategy; terrorist activities; our exposure to foreign currency fluctuations; reputational risk; and constraints, volatility, or disruption in the capital markets.
Additionally, changes in U.S. or foreign government policy on international trade, including the imposition or continuation of tariffs, could materially and adversely affect our business. In 2018, the U.S. imposed tariffs on certain imports from China and other countries, resulting in retaliatory tariffs by China and other countries. While the U.S. and China signed a Phase One trade agreement in January 2020, which included the suspension and rollback of tariffs, the CHIPS and Science Act of 2022 with objectives including countering China’s technical ambitions was signed into law in August 2022. Any new tariffs or policies imposed by the U.S., China or other countries or any additional retaliatory measures by any of these countries, could increase our costs, reduce our sales and earnings or otherwise have an adverse effect on our operations.
Further, our operations outside the United States require us to comply with a number of United States and non-U.S. laws and regulations, including anti-corruption laws such as the United States Foreign Corrupt Practices Act and the United Kingdom Bribery Act, as well as U.S. and non-U.S. economic sanctions regulations. We have internal policies and procedures relating to such laws and regulations; however, there is risk that such policies and procedures will not always protect us from the misconduct or reckless acts of employees or representatives, particularly in the case of recently acquired operations that may not have significant training in applicable compliance policies and procedures. Violations of such laws and regulations could result in disruptive investigations, significant fines and sanctions, which could have a material adverse effect on our consolidated results of operations, financial position or cash flows.
Also, because of uncertainties regarding the interpretation and application of laws and regulations and the enforceability of intellectual property and contract rights, we face risks in some countries that our intellectual property rights and contract rights would not be enforced by local governments. We are also periodically faced with the risk of economic uncertainty, which has impacted our business in some countries. Other risks in international business also include difficulties in staffing and managing local operations, including managing credit risk to local customers and distributors.
Our overall success as a global business depends, in part, upon our ability to succeed in differing economic, social, legal and political conditions. We may not continue to succeed in developing and implementing policies and strategies that are effective in each location where we do business, which could have a material adverse effect on our consolidated results of operations, financial position or cash flows.
We may experience business disruption if we fail to execute organizational change and management transitions.
Our continued success will depend on the efforts and abilities of our executive officers and certain other key employees, particularly those with sales and sales management responsibilities, to drive business growth, development and profitability. Our operations could be materially and adversely affected if for any reason we are unable to successfully execute organizational change and management transitions at leadership levels.
We are subject to information technology system failures, network disruptions and breaches in data security.
We rely to a large extent upon information technology systems and infrastructure to operate our business. The size and complexity of our information technology systems and those of strategic vendors make them vulnerable to failure, malicious intrusion and random attack. Acquisitions have resulted in further de-centralization of systems and additional complexity in our systems infrastructure. Likewise, data security breaches by employees or others with permitted access to our systems or to the systems of strategic vendors pose a risk that sensitive data may be exposed to unauthorized persons or to the public. Geopolitical tensions or conflicts, such as Russia’s invasion of Ukraine, may further heighten the risk of cybersecurity attacks. While we have continually matured our security program and capabilities and have had no material incidents to date, cyber threats continue to evolve and there can be no assurance that our efforts will prevent cybersecurity attacks or breaches in our systems or in the systems of strategic vendors, including cloud providers, that could cause reputational damage, business disruption or legal and regulatory costs; could result in third-party claims; could result in compromise or misappropriation of our intellectual property, trade secrets or sensitive information; or could otherwise materially adversely affect our business, including our business strategy, results of operations, or financial condition. Certain of our customer offerings include digital components, such as remote monitoring of certain customer operations. A breach of those remote monitoring systems could expose customer data giving rise to potential third-party claims and reputational damage. There may be other related challenges and risks as we complete implementation of our ERP system upgrade.
Our results could be materially and adversely affected by difficulties in securing the supply of certain raw materials or by fluctuations in the cost of raw materials.
The prices of raw materials used in our business fluctuate, and in recent years we have experienced periods of significant increased raw material costs. Changes in raw material prices, unavailability of adequate and reasonably priced raw materials or substitutes for those raw materials, or the inability to obtain or renew supply agreements on favorable terms has materially and adversely affected our business and can in the future materially and adversely affect our consolidated results of operations, financial position or cash flows. In addition, volatility and disruption in economic activity and conditions could disrupt or delay the performance of our suppliers and thus impact our ability to obtain raw materials at favorable prices or on favorable terms, which may materially and adversely affect our business.
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Severe public health outbreaks not limited to COVID-19 may adversely impact our business.
The COVID-19 pandemic had a rapid and significant negative impact on the global economy, including a significant downturn in the foodservice, hospitality and travel industries. Measures taken to alleviate the pandemic (such as stay-at-home orders and other responsive measures) significantly impacted our restaurant and hospitality customers and negatively affected demand for our products and services in these segments, resulting in a material adverse effect on our business and results of operations. Besides the COVID-19 pandemic, the United States and other countries have experienced, and may experience in the future, public health outbreaks such as Zika virus, Avian Flu, SARS and H1N1 influenza. A prolonged occurrence of a contagious disease such as these could result in a significant downturn in the foodservice, hospitality and travel industries and also may result in health or other government authorities imposing restrictions on travel further impacting our end markets. Any of these events could result in a significant drop in demand for some of our products and services and materially and adversely affect our business.
Strategic Risks
If we are unsuccessful in integrating acquisitions our business could be materially and adversely affected.
We seek to acquire complementary businesses as part of our long-term strategy. There can be no assurance that we will find attractive acquisition candidates or succeed at effectively managing the integration of acquired businesses, including Purolite, which operates in the highly regulated life sciences, pharma and biopharma industries and has extensive international operations which complicate integration execution. If the underlying business performance of such acquired businesses deteriorates, the expected synergies from such transactions do not materialize or we fail to successfully integrate new businesses into our existing businesses, our consolidated results of operations, financial position or cash flows could be materially and adversely affected.
If we are unsuccessful in executing on key business initiatives, our business could be materially and adversely affected.
We continue to execute key business initiatives as part of our ongoing efforts to improve our efficiency and returns. In particular, we are making supply chain investments to secure supply and add new capacity in our Life Sciences business. Additionally, we are continuing implementation of our ERP system upgrades, which are expected to continue in phases over the next several years. These upgrades, which include sales, supply chain and certain finance functions, are expected to improve the efficiency of certain financial and related transactional processes. These upgrades involve complex business process design and a failure of certain of these processes could result in business disruption. We are also undertaking the Combined Program focused on optimizing the cost structure of our business in Europe and our Institutional and Healthcare businesses, which is discussed along with other restructuring activities under Note 3 of this Form 10-K. If the projects in which we are investing or the initiatives which we are pursuing are not successfully executed, our consolidated results of operations, financial position or cash flows could materially and adversely be affected.
Our growth depends upon our ability to compete successfully with respect to value, innovation and customer support.
We have numerous global, national, regional and local competitors. Our ability to compete depends in part on providing high quality and high value-added products, technology and service. We must also continue to identify, develop and commercialize innovative, profitable and high value-added products for niche applications and commercial digital applications. We have made significant investments in commercial digital product offerings, and our culture and expertise must continue to evolve to develop, support and profitably deploy commercial digital offerings, which are becoming an increasingly important part of our business. There can be no assurance that we will be able to accomplish our technology development goals or that technological developments by our competitors, including in the area of artificial intelligence, will not place certain of our products, technology or services at a competitive disadvantage in the future. In addition, certain of the new products that we have under development will be offered in markets in which we do not currently compete, and there can be no assurance that we will be able to compete successfully in those new markets. If we fail to introduce new technologies or commercialize our digital offerings on a timely and profitable basis, we may lose market share and our consolidated results of operations, financial position or cash flows could be materially and adversely affected.
Consolidation of our customers and vendors could materially and adversely affect our results.
Customers and vendors in the foodservice, hospitality, travel, healthcare, energy, life sciences, food processing and pulp and paper industries, as well as other industries we serve, have consolidated in recent years and that trend may continue. This consolidation could have a material adverse impact on our ability to retain customers and on our pricing, margins and consolidated results of operations.
We enter into multi-year contracts with customers that could impact our results.
Our multi-year contracts with some of our customers include terms affecting our pricing flexibility. There can be no assurance that these restraints will not have a material adverse impact on our margins and consolidated results of operations.
Legal, Regulatory & Compliance Risks
Our business depends on our ability to comply with laws and governmental regulations and meet our contractual commitments and failure to do so could materially and adversely impact our business; and we may be materially and adversely affected by changes in laws and regulations.
Our business is subject to numerous laws and regulations relating to the environment, including evolving climate change standards, and to the manufacture, storage, distribution, sale and use of our products as well as to the conduct of our business generally, including
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employment and labor laws and anti-corruption laws. Furthermore, increasing public and governmental awareness and concern regarding the effects of climate change has led to significant legislative and regulatory efforts to limit greenhouse gas emissions and will likely result in further environmental and climate change laws and regulations. Compliance with these laws and regulations exposes us to potential financial liability and increases our operating costs. A violation of these laws and regulations could expose us to financial liability that may have a material adverse effect on our results of operations and cash flows. Regulation of our products and operations continues to increase with more stringent standards, causing increased costs of operations and potential for liability if a violation occurs. The potential cost to us relating to environmental and product registration laws and regulations is uncertain due to factors such as the unknown magnitude and type of possible contamination and clean-up costs, the complexity and evolving nature of laws and regulations, and the timing and expense of compliance. Changes to current laws (including tax laws), regulations and policies could impose new restrictions, costs or prohibitions on our current practices which would have a material adverse effect on our consolidated results of operations, financial position or cash flows. Changes to labor and employment laws and regulations, as well as related rulings by courts and administrative bodies, could materially and adversely affect our operations and expose us to potential financial liability.
Defense of litigation, particularly certain types of actions such as antitrust, patent infringement, personal injury, product liability, breach of contract, wage hour and class action lawsuits, can be costly and time consuming even if ultimately successful, and if not successful could have a material adverse effect on our consolidated results of operations, financial position or cash flows.
A chemical spill or release could materially and adversely impact our business.
As a manufacturer and supplier of chemical products, there is a potential for chemicals to be accidentally spilled, released or discharged, either in liquid or gaseous form, during production, transportation, storage or use. Such a release could result in environmental contamination as well as a human or animal health hazard. Accordingly, such a release could have a material adverse effect on our consolidated results of operations, financial position or cash flows.
Potential indemnification liabilities pursuant to the separation and split-off of our Upstream Energy business could materially and adversely affect our business and financial statements.
With respect to the separation and subsequent split-off of our Upstream Energy business, we entered into a separation and distribution agreement with ChampionX Holding Inc. and ChampionX Corporation (f/k/a Apergy Corporation and taken together with ChampionX Holding Inc., “ChampionX”) as well as certain other agreements to govern the separation and related transactions and our relationship with ChampionX going forward. These agreements provide for specific indemnity and certain other obligations of each party and could lead to disputes between ChampionX and us. If we are required to indemnify ChampionX under the circumstances set forth in these agreements, we may be subject to substantial related liabilities. In addition, with respect to the liabilities for which ChampionX has agreed to indemnify us under these agreements, there can be no assurance that the indemnity rights we have against ChampionX will be sufficient to protect us against the full amount of such liabilities, or that ChampionX will be able to fully satisfy its indemnification obligations. Each of these risks could negatively affect our business and our consolidated results of operations, financial position or cash flows could be materially and adversely affected.
Extraordinary events may significantly impact our business.
The occurrence of (a) litigation or claims, (b) the loss or insolvency of a major customer or distributor, (c) repeated or prolonged federal government shutdowns or similar events, (d) war (including acts of terrorism or hostilities which impact our markets), (e) natural or manmade disasters, (f) water shortages or (g) severe weather conditions affecting our operations or the energy, foodservice, hospitality and travel industries may have a material adverse effect on our business.
While we have a diverse customer base and no customer or distributor constitutes 10 percent or more of our consolidated revenues, we do have customers and independent, third-party distributors, the loss of which could have a material adverse effect on our consolidated results of operations or cash flows for the affected earnings periods.
Government shutdowns can have a material adverse effect on our consolidated results of operations or cash flows by disrupting or delaying new product launches, renewals of registrations for existing products and receipt of import or export licenses for raw materials or products.
War (including acts of terrorism or hostilities), natural or manmade disasters, water shortages or severe weather conditions, including the effects of climate change, affecting the energy, foodservice, hospitality, travel, health care, food processing, pulp and paper, mining, steel and other industries can cause a downturn in the business of our customers, which in turn can have a material adverse effect on our consolidated results of operations, financial position or cash flows. In particular, the U.S. Gulf Coast is a region with significant refining, petrochemicals and chemicals operations which provide us raw materials, as well as being an important customer base for our Water operating segment. Hurricanes or other severe weather events impacting the Gulf Coast, such as the winter freeze in Texas and the Gulf Coast in February 2021, can materially and adversely affect our ability to obtain raw materials at reasonable cost, or at all, and could adversely affect our business with our customers in the region.
Our commitments, goals, targets, objectives and initiatives related to sustainability, and our public statements and disclosures regarding them, expose us to numerous risks.
We have developed, and will continue to establish, goals, targets, and other objectives related to sustainability matters, including our sustainability goals in alignment with the United Nations Global Compact’s Business Ambition for 1.5⁰C and our commitments to science-based targets addressing Scope 1, 2 and 3 GHG emissions, discussed in Item 1 of Part I of this Form 10-K, entitled “Business.”
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Achieving these goals and commitments will require evolving our business, capital investment and the development of technology that might not currently exist. We might incur additional expense or be required to recognize impairment charges in connection with our efforts. These commitments, goals, targets and other objectives reflect our current plans and there is no guarantee that they will be achieved. Our efforts to research, establish, accomplish, and accurately report on these commitments, goals, targets, and objectives expose us to operational, reputational, financial, legal, and other risks. Our ability to achieve any stated commitment, goal, target, or objective is subject to factors and conditions, many of which are outside of our control, including the pace of changes in technology, the availability of requisite financing, and the availability of suppliers that can meet our sustainability and other standards.
Our business may face increased scrutiny from the investment community, other stakeholders, regulators, and the media related to our sustainability activities, including our commitments, goals, targets, and objectives, and our methodologies and timelines for pursuing them. If our sustainability practices do not meet investor or other stakeholder expectations and standards, which continue to evolve, our reputation, our ability to attract or retain employees, and our attractiveness as an investment, business partner, or as an acquiror could be negatively impacted. Similarly, our failure or perceived failure to pursue or fulfill our commitments, goals, targets, and objectives, to comply with ethical, environmental, or other standards, regulations, or expectations, or to satisfy reporting standards with respect to these matters, within the timelines we announce, or at all, could have operational, reputational, financial and legal impacts.
Financial Risks
If the separation and split-off of our Upstream Energy business or certain internal transactions undertaken in anticipation of the divestiture are determined to be taxable in whole or in part, we and our stockholders may incur significant tax liabilities.
In connection with the separation and split-off of our Upstream Energy business that was consummated on June 3, 2020, we obtained opinions of outside tax counsel that the related merger and exchange offer will qualify as tax-free transactions to us and our stockholders, except to the extent that cash was paid to Ecolab stockholders in lieu of fractional shares. We have not sought or obtained a ruling from the Internal Revenue Service (“IRS”) on the tax consequences of these transactions. An opinion of counsel is not binding on the IRS or the courts, which may disagree with the opinion. Even if the merger and exchange offer otherwise qualified as tax-free transactions, they may become taxable to us if certain events occur that affect either Ecolab or ChampionX Corporation. While ChampionX Corporation has agreed not to take certain actions that could cause the transactions not to qualify as tax-free transactions and is generally obligated to indemnify us against any tax consequences if it breaches this agreement, the potential tax liabilities could have a material adverse effect on us if we were not entitled to indemnification or if the indemnification obligations were not fulfilled. If the merger or exchange offer were determined to be taxable, we could be subject to a substantial tax liability, and each U.S. holder of our common stock who participated in the exchange offer could be treated as exchanging the Ecolab shares surrendered for ChampionX Corporation shares in a taxable transaction.
Changes in tax laws and unanticipated tax liabilities could materially and adversely affect the taxes we pay and our profitability.
We are subject to income and other taxes in the United States and foreign jurisdictions, and our operations, plans and results are affected by tax and other initiatives around the world. We are also impacted by actions taken to tax-related matters by associations such as the Organization for Economic Co-operation and Development (“OECD”), which represents a coalition of member countries, and the European Commission which influence tax policies in countries where we operate. In particular, the OECD is coordinating negotiations among more than 140 jurisdictions with the goal of achieving consensus on various substantial changes to the international tax framework, including a 15% global minimum taxation regime (“Pillar Two”). Pillar Two takes effect in several jurisdictions in which we operate starting in 2024 and will increase the burden and costs of our tax compliance. The company continues to monitor these legislative developments, but based on information available does not anticipate material impacts to the 2024 financial statements. In addition, we are impacted by settlements of pending or any future adjustments proposed by the IRS or other taxing authorities in connection with our tax audits, all of which will depend on their timing, nature and scope. Increases in income tax rates, changes in income tax laws or unfavorable resolution of tax matters could have a material adverse impact on our financial results.
Future events may impact our deferred tax position, including the utilization of foreign tax credits and undistributed earnings of international affiliates that are considered to be reinvested indefinitely.
We evaluate the recoverability of deferred tax assets and the need for deferred tax liabilities based on available evidence. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws or variances between future projected operating performance and actual results. We are required to establish a valuation allowance for deferred tax assets if we determine, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. In making this determination, we evaluate all positive and negative evidence as of the end of each reporting period. Future adjustments (either increases or decreases), to the deferred tax asset valuation allowance are determined based upon changes in the expected realization of the net deferred tax assets. The realization of the deferred tax assets ultimately depends on the existence of sufficient taxable income in either the carry-back or carry-forward periods under the tax law. Due to significant estimates used to establish the valuation allowance and the potential for changes in facts and circumstances, it is reasonably possible that we will be required to record adjustments to the valuation allowance in future reporting periods. Changes to the valuation allowance or the amount of deferred tax liabilities could have a material adverse effect on our consolidated results of operations or financial position. Further, should we change our assertion regarding the permanent reinvestment of the undistributed earnings of international affiliates, a deferred tax liability may need to be established.
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Our indebtedness may limit our operations and our use of our cash flow, and any failure to comply with the covenants that apply to our indebtedness could materially and adversely affect our liquidity and financial statements.
As of December 31, 2023, we had approximately $8.2 billion in outstanding indebtedness, with approximately $1.5 billion in the form of floating rate debt. Our debt level and related debt service obligations may have negative consequences, including:
| ● | requiring us to dedicate significant cash flow from operations to the payment of principal and interest on our debt, which reduces the funds we have available for other purposes such as acquisitions and capital investment; |
| ● | reducing our flexibility in planning for or reacting to changes in our business and market conditions; |
| ● | exposing us to interest rate risk since a portion of our debt obligations are at variable rates. For example, a one percentage point increase in the average interest rate on our floating rate debt at December 31, 2023 would increase future interest expense by approximately $15 million per year; and |
| ● | increasing our cost of funds and materially and adversely affecting our liquidity and access to the capital markets should we fail to maintain the credit ratings assigned to us by independent rating agencies. |
If we add new debt, the risks described above could increase.
We incur significant expenses related to the amortization of intangible assets and may be required to report losses resulting from the impairment of goodwill or other assets recorded in connection with the Nalco and Purolite transactions and other acquisitions.
We expect to continue to complete selected acquisitions and joint venture transactions in the future. In connection with acquisition and joint venture transactions, applicable accounting rules generally require the tangible and intangible assets of the acquired business to be recorded on the balance sheet of the acquiring company at their fair values. Intangible assets other than goodwill are required to be amortized over their estimated useful lives and this expense may be significant. Any excess in the purchase price paid by the acquiring company over the fair value of tangible and intangible assets of the acquired business is recorded as goodwill. If it is later determined that the anticipated future cash flows from the acquired business may be less than the carrying values of the assets and goodwill of the acquired business, the assets or goodwill may be deemed to be impaired. In this case, the acquiring company may be required under applicable accounting rules to write down the value of the assets or goodwill on its balance sheet to reflect the extent of the impairment. This write-down of assets or goodwill is generally recognized as a non-cash expense in the statement of operations of the acquiring company for the accounting period during which the write down occurs. As of December 31, 2023, we had goodwill of $8.1 billion which is maintained in various reporting units, including goodwill from the Nalco and Purolite transactions. If we determine that any of the assets or goodwill recorded in connection with the Nalco and Purolite transactions or any other prior or future acquisitions or joint venture transactions have become impaired, we will be required to record a loss resulting from the impairment. Impairment losses could be significant and could have a material adverse effect on our consolidated results of operations and financial position.
Item 1B. Unresolved Staff Comments.
We have no unresolved comments from the staff of the Securities and Exchange Commission.
Item 1C. Cybersecurity.
Since 2014, when the Ecolab Cybersecurity program was established, we have continuously matured our cybersecurity program to proactively address evolving cybersecurity trends and risks. Ecolab has an Information Security Steering Committee (“ISSC”), a cross-functional team chaired by our Chief Information Security Officer (“CISO”) that is described more fully below.
Senior management provides in-depth reviews of cybersecurity matters to the Board and the Audit Committee. Cybersecurity is also considered in the annual enterprise risk assessment presented to the Board by management as part of the Board’s oversight of our enterprise risk management (“ERM”) program.
Ecolab’s cybersecurity policies, standards, processes, and practices are integrated into our ERM program and are based on recognized frameworks established by the National Institute of Standards and Technology (“NIST”) Cybersecurity Framework (“CSF”), the International Organization for Standardization and other applicable industry standards. We are formally assessed by an independent third party against NIST CSF and industry standards, including peer benchmarking.
Risk Management and Strategy
Cybersecurity presents strategic and operating risks and is an area of continued focus for our Board and management under its ERM program. Ecolab’s cybersecurity program addresses the following key areas:
| ● | Governance: As discussed in more detail under the heading “Cybersecurity Governance,” the Audit Committee and the Board of Directors provide oversight of cybersecurity risk management. |
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| ● | Technical Safeguards: We have implemented multi-layer controls designed to protect our information systems from cybersecurity threats, including general, backup, recovery, resiliency, processing, access, change and risk controls. These controls are evaluated by Ecolab’s cybersecurity team and enhanced through controls audits and assessments, internal testing, and third-party cybersecurity threat intelligence. |
| ● | Incident Response and Recovery Planning: We have established and maintain comprehensive cybersecurity incident response and recovery plans that coordinate multidisciplinary internal teams and cybersecurity partners to assess, triage, escalate, contain, mitigate, investigate, remediate, and recover from a potential cybersecurity incident. Through ongoing communications with these teams, management monitors the incidents and reports incidents to the Audit Committee when appropriate. Management is responsible for timely disclosure of cybersecurity incidents as required by law. |
| ● | Third-Party Risk Management: We maintain a risk-based approach to identify, monitor, and manage third-party cybersecurity risks associated with our use of third-party service providers who have access to our systems, data or are critical to our continued business operations. Additionally, cybersecurity considerations affect the selection and oversight of our third-party service providers. We require certain third-party vendors to agree to manage their cybersecurity risks in specified ways, and to agree to be subject to cybersecurity audits, which we conduct as appropriate. |
| ● | Education and Awareness: We provide training for personnel regarding cybersecurity trends and threats to equip them with the knowledge to recognize and tools to report suspected cybersecurity threats. We also conduct simulations for employees and contractors to enhance awareness and responsiveness to such possible threats. In addition, we send global cybersecurity awareness communications to our personnel. |
| ● | Assessment: We engage in the periodic assessment, testing and updating of our policies, standards, processes, and practices that are designed to address cybersecurity threats and incidents. These efforts include a wide range of activities, including audits, assessments, tabletop exercises, threat modeling, vulnerability testing and other exercises focused on evaluating the effectiveness of our cybersecurity measures, and planning. We engage third parties to perform assessments on our cybersecurity measures, including information security maturity assessments, audits and independent reviews of our information security control environment and operating effectiveness. Additionally, we leverage third party cybersecurity rating agency data to inform our assessment of risk. The results of such assessments, audits and reviews are reported to the Audit Committee and the Board. |
While we have continually matured our security program and capabilities and have had no material incidents to date, cyber threats continue to evolve and there can be no assurance that our efforts will prevent cybersecurity attacks or breaches in our systems such as those described in the risk factor entitled, “We are subject to information technology system failures, network disruptions and breaches in data security” under “Item 1A. Risk Factors” of this Form 10-K.
Cybersecurity Governance
Ecolab’s ISSC, chaired by our CISO meets as needed. The Committee is comprised of executive leaders including the Chief Information Officer (“CIO”), Chief Digital Officer, Chief Operating Officer, Chief Financial Officer, Chief Technology Officer, the General Counsel, the Executive Vice Presidents of our commercial divisions, the Executive Vice President Global Supply Chain, the Executive Vice President Human Resources, the Vice President of Enterprise Business Solutions, and the Vice President Internal Audit.
The ISSC assists the CISO in fulfilling our responsibilities regarding our information security program to protect the confidentiality, integrity and availability of our information assets, financial assets, and information systems. ISSC responsibilities include, but are not limited to, evaluation of relevant information security risks, prioritization of information security initiatives, determination of, and advocacy for, appropriate investments, review of related legal and regulatory compliance initiatives, review of effective security communication initiatives, establishing specific requirements of the program in documented policies which all Ecolab associates, customers, and partners are obligated to follow, partner with Ecolab’s business, functional and regional leaders to ensure effective, risk-based security controls and practices are in place to achieve the program’s intent, and assist in monitoring the integrity and evaluating the effectiveness of the program.
The Board, in coordination with the Audit Committee, provides oversight of our ERM program, including the management of risks arising from cybersecurity threats. The Board and the Audit Committee each receive an overview from our CIO and CISO regarding our cybersecurity threat risk management and strategy processes. These reports cover a wide range of topics, and may include current and emerging cybersecurity threat risks, third-party assessments, risk-mitigation tactics and programs, information security considerations arising with respect to our peers and third parties, and our incident response plan.
Through a risk-based approach consistent with Ecolab’s ERM framework, the CISO identifies cyber incidents that are brought forward to a cross-functional cyber-incident response team including our CEO, CFO, CIO, General Counsel, CISO and Executive Vice President Supply Chain. This cyber incident response team, or, in the event of more minor incidents, the CISO and her team, takes steps to promptly assess and address the incident, including engaging third parties according to pre-established guidelines. The Board and the Audit Committee also receive prompt and timely information regarding any cybersecurity incident that meets established reporting thresholds, including ongoing updates regarding any such incident until it has been addressed.
Ecolab’s cybersecurity program is led by our CISO, who holds a CISO certification. She has been our CISO since 2020 and has more than 35 years of information systems experience in total.
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Item 2. Properties.
We operate 32 manufacturing facilities in 14 states in the U.S. Internationally, we operate 68 manufacturing facilities in 38 countries. We own most of our manufacturing locations. Our manufacturing philosophy is to manufacture products wherever an economic, process or quality assurance advantage exists or where proprietary manufacturing techniques dictate in-house production. Currently, most products that we sell are manufactured at our facilities. We position our manufacturing locations and warehouses in a manner to permit ready access to our customers. In general, manufacturing facilities located in the United States serve our U.S. markets and facilities located outside of the United States serve our international markets. However, most of the United States facilities do manufacture products for export. Many of our properties are used by multiple segments.
Our manufacturing facilities produce chemical products as well as medical devices and equipment for all our operating segments, although Pest Elimination purchases the majority of their products and equipment from outside suppliers. Our chemical production process consists of blending purchased raw materials into finished products in powder, liquid, and solid form. Additionally, intermediates from reaction chemistries are used in some of the blends and are also packaged directly into finished goods. Our devices and equipment manufacturing operations consist of producing chemical product dispensers and injectors and other mechanical equipment, medical devices, dishwasher racks, related sundries, dish machine refurbishment and water monitoring and maintenance equipment system from purchased components and subassemblies.
Generally, our manufacturing facilities are adequate to meet our existing in-house production needs. We continue to invest in our plant sites to maintain viable operations and to add capacity as necessary to meet business imperatives.
Most of our manufacturing plants also serve as distribution centers. In addition, we operate distribution centers around the world, most of which are leased, and utilize third party logistics service providers to facilitate the distribution of our products and services.
Our corporate headquarters is comprised of a 17-story building that we own in St. Paul, Minnesota. We also own a 115-acre campus in Eagan, Minnesota that houses a significant research and development center and training facilities as well as several of our administrative functions. We also have a significant business presence in Naperville, Illinois, where our Water and Paper operating segments maintain their principal administrative offices and research center, as well as in Greensboro, North Carolina, where our Specialty operating segment maintains its principal administrative offices and a research center. Our Water operating segment leases administrative and research facilities in Houston, Texas. Our Purolite business maintains leased and owned facilities in the greater King of Prussia, PA area for administrative functions, and research and development.
Significant regional administrative and/or research facilities are located in Campinas, Brazil; Leiden, Netherlands, which we own; and in Bangalore, India; Dubai, UAE; Monheim, Germany; Pune, India; Singapore; Shanghai, China; and Zurich, Switzerland, which we lease. We also have a network of small leased sales offices in the United States and, to a lesser extent, in other parts of the world.
Item 3. Legal Proceedings.
Discussion of legal proceedings is incorporated by reference from Part II, Item 8, Note 15, “Commitments and Contingencies,” of this Form 10-K and should be considered an integral part of Part I, Item 3, “Legal Proceedings.”
Discussion of other environmental-related legal proceedings is incorporated by reference from Part I, Item 1 above, under the heading “Environmental and Regulatory Considerations.”
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is listed on the New York Stock Exchange under the symbol “ECL.” Our common stock is also traded on an unlisted basis on certain other United States exchanges.
Holders
On January 31, 2024, we had 4,797 holders of record of our Common Stock.
Issuer Purchases of Equity Securities
Total number of shares | Maximum number of |
| ||||||||
purchased as part of | shares that may yet be |
| ||||||||
Total number of | Average price paid | publicly announced | purchased under the |
| ||||||
Period | shares purchased (1) | per share (2) | plans or programs (3) | plans or programs (3) |
| |||||
October 1-31, 2023 |
| 1,352 | ($158.0400) | - |
| 12,917,097 | ||||
November 1-30, 2023 |
| 1,601 | (174.2750) | - |
| 12,917,097 | ||||
December 1-31, 2023 |
| 7,821 | (192.1285) | - |
| 12,917,097 | ||||
Total |
| 10,774 | ($185.1978) |
| - |
| 12,917,097 | |||
| (1) | Includes 10,774 shares reacquired from employees and/or directors to satisfy the exercise price of stock options or shares surrendered to satisfy statutory tax obligations under our stock incentive plans. |
| (2) | The average price paid per share includes brokerage commissions associated with publicly announced plan purchases plus the value of such other reacquired shares. |
| (3) | As announced on February 24, 2015, our Board of Directors authorized the repurchase of up to 20,000,000 common shares. As announced on November 3, 2022, our Board of Directors authorized the repurchase of up to an additional 10,000,000 shares. Subject to market conditions, we expect to repurchase all shares under these authorizations, for which no expiration date has been established, in open market or privately negotiated transactions, including pursuant to Rule 10b5-1 and accelerated share repurchase program. |
Item 6. [Reserved].
24
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following management discussion and analysis (“MD&A”) provides information that we believe is useful in understanding our operating results, cash flows and financial condition. We provide quantitative information about the material sales drivers including the impact of changes in volume and pricing and the effect of acquisitions and changes in foreign currency at the corporate and reportable segment level. We also provide quantitative information regarding special (gains) and charges, discrete tax items and other significant factors we believe are useful for understanding our results. Such quantitative drivers are supported by comments meant to be qualitative in nature. Qualitative factors are generally ordered based on estimated significance.
The discussion should be read in conjunction with the consolidated financial statements and related notes included in this Form 10-K. Our consolidated financial statements are prepared in accordance with U.S. GAAP. This discussion contains various Non-GAAP Financial Measures and also contains various forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We refer readers to the statements and information set forth in the sections entitled “Non-GAAP Financial Measures” at the end of this MD&A, and “Forward-Looking Statements” and “Risk Factors” within Items 1 and 1A of this Form 10-K. We also refer readers to the tables within the section entitled “Results of Operations” of this MD&A for reconciliation information of Non-GAAP measures to U.S. GAAP.
Comparability of Results
Purolite acquisition
In December 2021, we acquired Purolite for total consideration of $3.7 billion in cash, net of cash acquired. Purolite is a leading and fast-growing global provider of high-end ion exchange resins for the separation and purification of solutions for pharmaceutical and industrial applications. Headquartered in King of Prussia, Pennsylvania, Purolite operates in more than 30 countries. Purolite is reported within our Life Sciences operating segment. Acquisition and integration charges are recorded within special (gains) and charges. The 2021 impacts of the Purolite acquisition including operating results, acquisition-related amortization and interest expense related to the transaction were also excluded from 2021 adjusted results.
Impact of Acquisitions and Divestitures
Our non-GAAP financial measures for organic sales, organic operating income and organic operating income margin are at fixed currency and exclude the impact of special (gains) and charges, the results of our acquired businesses from the first twelve months post acquisition and the results of divested businesses from the twelve months prior to divestiture. As part of the separation of ChampionX in 2020, we entered into a Master Cross Supply and Product Transfer agreement with ChampionX to provide, receive or transfer certain products for a period of 36 months and for a small set of products with limited suppliers over the next few years. Sales of product to ChampionX under this agreement are recorded in product and equipment sales in the Corporate segment along with the related cost of sales. These transactions are removed from the consolidated results as part of the calculation of the impact of acquisitions and divestitures.
Comparability of Reportable Segments
Effective January 1, 2023, our former Downstream operating segment is now part of the Water operating segment. This change did not have any impact on the Global Industrial reportable segment.
Fixed Currency Foreign Exchange Rates
Management evaluates the sales and operating income performance of our non-U.S. dollar functional currency international operations based on fixed currency exchange rates, which eliminate the impact of exchange rate fluctuations on our international operations. Fixed currency amounts are updated annually at the beginning of each year based on translation into U.S. dollars at foreign currency exchange rates established by management, with all periods presented using such rates. Public currency rate data provided within the “Segment Performance” section of this MD&A reflect amounts translated at actual public average rates of exchange prevailing during the corresponding period and is provided for informational purposes only.
25
EXECUTIVE SUMMARY
In 2023, we delivered high single digit sales growth as we continued strong pricing. Our strong pricing offset continued delivered product cost increases. Our team generated double-digit sales growth in Institutional & Specialty, high single digit sales growth in Industrial, and Other segments while Healthcare and Life Sciences generated good sales growth. Operating income grew by strong double digits, as strong pricing and cost savings initiatives overcame investments in the business and higher supply chain costs.
Sales
Reported sales increased 8% to $15.3 billion in 2023 from $14.2 billion in 2022. When measured in fixed rates of foreign currency exchange, fixed currency sales increased 8% compared to the prior year. Organic sales increased 9% compared to the prior year.
Gross Margin
Our reported gross margin was 40.2% of sales for 2023, compared to our 2022 reported gross margin of 37.8%. Excluding the impact of special (gains) and charges included in cost of sales, our adjusted gross margin was 40.4% in 2023 and 38.2% in 2022. Our gross profit increased as our strong pricing exceeded delivered product cost inflation.
Operating Income
Reported operating income increased 28% to $2.0 billion in 2023, compared to $1.6 billion in 2022. Adjusted operating income, excluding the impact of special (gains) and charges increased 20% in 2023 as strong pricing overcame investments in the business including incentive compensation, unfavorable mix and higher supply chain costs. Organic operating income increased 20% in 2023.
Earnings from Continuing Operations Attributable to Ecolab Per Common Share (“EPS”)
Reported diluted EPS increased 26% to $4.79 in 2023 compared to $3.81 in 2022. Special (gains) and charges had an impact on both years. Special (gains) and charges in 2023 were driven primarily by restructuring expense and 2022 was driven primarily by restructuring and pension settlement expense. Adjusted diluted EPS, which excludes the impact of special (gains) and charges and discrete tax items increased 16% to $5.21 in 2023 compared to $4.49 in 2022 as our strong operating income performance was partially offset by foreign currency translation and increases in interest expense.
Balance Sheet
We remain committed to maintaining “A” range ratings metrics over the long-term, supported by our current credit ratings of A-/A3/A- by Standard & Poor’s, Moody’s Investor Services and Fitch, respectively. Our strong balance sheet has allowed us continued access to capital at attractive rates.
Cash Flow
Cash flow from operating activities was $2.4 billion in 2023 compared to $1.8 billion in 2022. We continued to generate strong cash flow from operations, allowing us to fund our ongoing operations, investments in our business, acquisitions, debt repayments, pension obligations and return cash to our shareholders through share repurchases and dividend payments.
Dividends
Dividends declared per common share in 2023 was $2.16 per share. In December 2023 we increased our quarterly cash dividend by 8% to $0.57 per share, representing our 32nd consecutive annual dividend rate increase. We have paid cash dividends on our common shares for 87 consecutive years. Our outstanding dividend history reflects our long-term growth and development, strong cash flows, solid financial position and confidence in our business prospects for the years ahead.
26
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 we reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, have a material impact on the presentation of our financial condition or results of operations.
Besides estimates that meet the “critical” estimate criteria, we make many other accounting estimates in preparing our financial statements and related disclosures. All estimates, whether or not deemed critical, affect reported amounts of assets, liabilities, revenues or expenses as well as disclosures of contingent assets and liabilities. Estimates are based on experience and other information available prior to the issuance of the financial statements. Materially different results can occur as circumstances change and additional information becomes known, even from estimates not deemed critical. Our critical accounting estimates include the following:
Revenue Recognition
Revenue is measured as the amount of consideration expected to be received in exchange for transferring goods or providing service. Revenue from product and sold equipment is recognized when obligations under the terms of a contract with the customer are satisfied, which generally occurs with the transfer of the product or delivery of the equipment. Revenue from service and leased equipment is recognized when the services are provided, or the customer receives the benefit from the leased equipment, which is over time. Service revenue is recognized over time utilizing an input method and aligns with when the services are provided. Typically, revenue is recognized over time using costs incurred to date because the effort provided by the field selling and service organization represents services provided, which corresponds with the transfer of control. Revenue for leased equipment is accounted for under Topic 842 Leases and recognized on a straight-line basis over the length of the lease contract.
Our revenue policies do not provide for general rights of return. We record estimated reductions to revenue for customer programs and incentive offerings including pricing arrangements, promotions and other volume-based incentives based primarily on historical experience and anticipated performance over the contract period. Depending on market conditions, we may increase customer incentive offerings, which could reduce gross profit margins over the term of the incentive. We also record estimated reserves for product returns and credits based on specific circumstances and credit conditions. We record an allowance for uncollectible accounts based on our estimates of expected future credit losses.
The revenue standard can be applied to a portfolio of contracts with similar characteristics if it is reasonable that the effects of applying the standard at the portfolio would not be significantly different than applying the standard at the individual contract level. We apply the portfolio approach primarily within each operating segment by geographical region. Application of the portfolio approach was focused on those characteristics that have the most significant accounting consequences in terms of their effect on the timing of revenue recognition or the amount of revenue recognized. We determined the key criteria to assess with respect to the portfolio approach, including the related deliverables, the characteristics of the customers and the timing and transfer of goods and services, which most closely aligned within the operating segments. In addition, the accountability for the business operations, as well as the operational decisions on how to go to market and the product offerings, are performed at the operating segment level. For additional information on revenue recognition, refer to Note 17.
Litigation and Environmental Liabilities
Our business and operations are subject to extensive environmental laws and regulations governing, among other things, air emissions, wastewater discharges, the use and handling of hazardous substances, waste disposal and the investigation and remediation of soil and groundwater contamination. Some risk of environmental liability is inherent in our operations.
We record liabilities related to pending litigation, environmental claims and other contingencies when a loss is probable and can be reasonably estimated. Estimates used to record such liabilities are based on our best estimate of probable future costs. We record the amounts that represent the points in the range of estimates that we believe are most probable or the minimum amount when no amount within the range is a better estimate than any other amount. Potential insurance reimbursements generally are not anticipated in our accruals for environmental liabilities or other insured losses. Expected insurance proceeds are recorded as receivables when recovery is deemed certain. While the final resolution of litigation and environmental contingencies could result in amounts different than current accruals, and therefore have an impact on our consolidated financial results in a future reporting period, we believe the ultimate outcome will not have a significant impact on our consolidated financial position. For additional information on our commitments and contingencies, refer to Note 15.
27
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 in their valuations and calculations. These assumptions affect the amount and timing of future pension contributions, benefit payments and expense or income recognized.
The significant assumptions used in developing the required estimates are the discount rates, expected returns on assets, projected salary and health care cost increases and mortality tables.
| ● | The discount rate assumptions for our 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 bonds that have an average rating of AA when averaging available Moody’s Investor Services, Standard & Poor’s and Fitch ratings. The discount rates are calculated by matching each plans’ projected cash flows to the bond yield curve. For 2023 and 2022, we measured service and interest costs by applying the specific spot rates along that yield curve to the plans’ liability cash flows. We believe this approach provides a more precise measurement of service and interest costs by aligning the timing of the plans’ liability cash flows to the corresponding spot rates on the yield curve. In determining our U.S. pension obligations for 2023, our weighted-average discount rate decreased to 4.95% from 5.17% at year-end 2022. In determining our U.S. postretirement health care obligation for 2023, our weighted-average discount rate decreased to 4.95% from 5.14% at year-end 2022. |
| ● | The expected rate of return on plan assets reflects asset allocations, investment strategies and views of investment advisors, and represents our expected long-term return on plan assets. Our weighted-average expected returns on U.S. plan assets used in determining the U.S. pension and U.S. postretirement health care expenses was 7.75% for 2023 and 7.00% for 2022 and 2021. |
| ● | Projected salary is based on our long-term actual experience, the near-term outlook and assumed inflation. Our weighted-average projected salary increase used in determining the U.S. pension expenses was 4.03% for 2023, 2022 and 2021. |
| ● | For postretirement benefit measurement purposes as of December 31, 2023, the annual rates of increase in the per capita cost of covered health care were assumed to be 7.46% for pre-65 costs. Post-65 costs are no longer used. The rates are assumed to decrease each year until they reach 4.5% in 2034 and remain at those levels thereafter. |
| ● | We use mortality tables appropriate in the circumstances, which generally are the recently available mortality tables as of the respective U.S. and international measurement dates. Our year-end U.S. valuations reflect mortality tables that estimate the impacts of COVID in an endemic state. This represents a change from prior year when the impact of COVID on future mortality could not be reasonably estimated. |
The effects of actual results differing from our assumptions, as well as changes in assumptions, are reflected in the unrecognized gains or losses and amortized into earnings in the future. Significant differences in actual experience or significant changes in assumptions may materially affect future pension and other postretirement obligations and income or expense. The unrecognized net losses on our U.S. qualified and non-qualified pension plans increased to $495 million as of December 31, 2023 from $412 million as of December 31, 2022 (both before tax), primarily due to lower actual return on assets partially offset by current year net actuarial gains.
The effect of a decrease in the discount rate or decrease in the expected return on assets assumption as of December 31, 2023, on the December 31, 2023 defined benefit obligation and 2024 expense is shown below, assuming no changes in benefit levels. Expense amounts reflect the accounting for gains or losses as a component of other comprehensive income or expense and recognition of the impacts into earnings over time:
Effect on U.S. Pension Plans | ||||||||||
Increase in | Higher | |||||||||
Assumption | Recorded | 2024 | ||||||||
(millions) | Change | Obligation | Expense | |||||||
Discount rate |
| -.25 pts | $37.7 | $2.9 | ||||||
Expected return on assets |
| -.25 pts | N/A | (4.7) | ||||||
Effect on U.S. Postretirement | ||||||||||
Health Care Benefits Plans | ||||||||||
Increase in | Higher | |||||||||
Assumption | Recorded | 2024 | ||||||||
(millions) | Change | Obligation | Expense | |||||||
Discount rate |
| -.25 pts |
| $2.3 |
| $- | ||||
Expected return on assets |
| -.25 pts |
| N/A | - | |||||
28
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.
Refer to Note 16 for further discussion concerning our accounting policies, estimates, funded status, contributions and overall financial positions of our pension and postretirement plan obligations.
Self-Insurance
Globally we have insurance policies with varying deductible levels for property and casualty losses. We are insured for losses in excess of these deductibles, subject to policy terms and conditions and have recorded both a liability and an offsetting receivable for amounts in excess of these deductibles. We are self-insured for health care claims for eligible participating employees, subject to certain deductibles and limitations. We determine our liabilities for claims on an actuarial basis.
Income Taxes
Judgment is required to determine the annual effective income tax rate, deferred tax assets and liabilities, valuation allowances recorded against net deferred tax assets and unrecognized tax benefits.
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 unrecognized tax benefits. We recognize the amount of tax benefit that is greater than 50% likely of being realized upon settlement with a taxing authority. We adjust these liabilities for unrecognized tax benefits in light of changing facts and circumstances.
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
Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. Based on the evaluation of available evidence, both positive and negative, we recognize tax assets, such as net operating loss carryforwards and tax credit carryforwards, to the extent that realizing these benefits is considered to be more likely than not. Relevant factors in determining the realizability of deferred tax assets include historical results, sources of future taxable income, the expected timing of the reversal of temporary differences, tax planning strategies and the expiration dates of the various tax attributes.
Unrecognized Tax Benefits
A number of years may elapse before a particular tax matter, for which we have established a liability for unrecognized tax benefits, 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 examinations of our U.S. federal income tax returns through 2016 and the years 2017 through 2020 are currently under audit. In addition to the U.S. federal examinations, we have ongoing audit activity in several U.S. state and foreign jurisdictions.
The tax positions we take are based on our interpretations of tax laws and regulations in the applicable federal, state and international jurisdictions. We believe our tax returns properly reflect the tax consequences of our operations, and our liabilities for unrecognized tax benefits are appropriate and sufficient for the positions taken. Because of the uncertainty of the final outcome of these examinations, we have established a liability 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 liability for unrecognized tax benefits is reviewed throughout the year, taking into account new legislation, regulations, case law and audit results. Settlement of any particular issue could result in offsets to other balance sheet accounts, cash payments or receipts and/or adjustments to tax expense. Liabilities for unrecognized tax benefits are presented in the Consolidated Balance Sheets within other non-current liabilities. Our gross liability for unrecognized tax benefits was $24.2 million and $24.9 million as of December 31, 2023 and 2022, respectively. For additional information on income taxes refer to Note 12.
29
Long-Lived Assets, Intangible Assets and Goodwill
Long-Lived and Amortizable Intangible Assets
Purchased long-lived and amortizable intangible assets not acquired as part of a business combination are recorded as of their acquisition date at cost, whereas long-lived and amortizable assets acquired as part of a business combination are recorded as of their acquisition date at their fair values based on the fair value requirements defined in U.S. GAAP. This requires us to make significant estimates and assumptions relating to the present value of its future cash flows, such as growth rates, royalty rates or discount rates.
We review our long-lived and amortizable intangible assets, the net value of which was $6.3 billion as of December 31, 2023 and 2022, for impairment when significant events or changes in business circumstances indicate that the carrying amount of the assets may not be recoverable. Such circumstances may include a significant decrease in the market price of an asset or asset group, a significant adverse change in the manner in which asset or asset groups are being used or history of operating or cash flow losses associated with the use of the asset or asset group. Impairment losses could occur when the carrying amount of an asset or asset group exceeds the anticipated future undiscounted cash flows expected to result from the use of the asset or asset group and its eventual disposition. The amount of the impairment loss to be recorded, if any, is calculated as the excess of the asset’s or assets group’s carrying amount over its estimated fair value.
We use the straight-line method to recognize amortization expense related to our amortizable intangible assets, including our customer relationships. We consider various factors when determining the appropriate method of amortization for our customer relationships, including projected sales data, customer attrition rates and length of key customer relationships.
Globally, we have a broad customer base. Our retention rate of significant customers has aligned with our acquisition assumptions, including the customer bases acquired from our Nalco, Laboratoires Anios (“Anios”), Copal Invest NV, including its primary operating entity CID Lines (collectively, “CID Lines”) and Purolite transactions, which make up the majority of our unamortized customer relationships. Our historical retention rates, coupled with our consistent track record of keeping long-term relationships with our customers, supports our expectation of consistent sales generation for the foreseeable future from the acquired customer bases. If our customer retention rates or other post-acquisition operational activities change materially, we would evaluate the financial impacts and significance of the events given rise to the change which could result in impairment of our customer relationship intangible assets, or absent an impairment, an acceleration of amortization expense.
In addition, we periodically reassess the estimated remaining useful lives of our long-lived and amortizable intangible assets. Changes to estimated useful lives would impact the amount of depreciation and amortization expense recorded in earnings. We have experienced no significant changes in the carrying amount or estimated remaining useful lives of our long-lived or amortizable intangible assets.
Goodwill and Indefinite Life Intangible Assets
Goodwill arises from our acquisitions and represents the excess of the fair value of the purchase consideration exchanged over the fair value of net assets acquired. We had total goodwill of $8.1 billion and $8.0 billion as of December 31, 2023 and 2022, respectively. We test our goodwill for impairment at the reporting unit level. Our reporting units are our ten operating segments. We assess goodwill for impairment on an annual basis during the second quarter. If circumstances change or events occur that demonstrate it is more likely than not that the carrying amount of a reporting unit exceeds its fair value, we complete an interim goodwill impairment assessment of that reporting unit prior to the next annual assessment. If the results of an annual or interim goodwill impairment assessment demonstrate the carrying amount of a reporting unit is greater than its fair value, we will recognize an impairment loss for the amount by which the reporting unit’s carrying amount exceeds its fair value, but not to exceed the carrying amount of goodwill assigned to that reporting unit.
For our annual 2023 goodwill impairment assessment, we completed our impairment assessment for our ten reporting units using discounted cash flow analyses that incorporated assumptions regarding future growth rates, terminal values and discount rates. Our goodwill impairment assessments for 2023 indicated the estimated fair values of each of these ten reporting units exceeded the carrying amounts of the respective reporting units by a significant margin. We evaluate the need to complete interim goodwill impairment assessments when significant events or changes in business circumstances indicate that it is more likely than not that the carrying amount of a reporting unit may be higher than its fair value. No events were noted during the second half of 2023 that required completion of an interim goodwill impairment assessment in the second half of 2023 for any of our ten reporting units. There has been no impairment of goodwill in any of the periods presented.
The Nalco trade name is our only indefinite life intangible asset, which is tested for impairment on an annual basis during the second quarter. For our annual 2023 indefinite life intangible asset impairment assessment, we completed our impairment assessment of the Nalco trade name using the relief from royalty discounted cash flow method, which incorporates assumptions regarding future sales projections, royalty rates and discount rates. Our Nalco tradename impairment assessment for 2023 indicated the estimated fair value of the Nalco trade name exceeded its $1.2 billion carrying amount by a significant margin. No events were noted during the second half of 2023 that required completion of an interim impairment assessment of our Nalco trade name in the second half of 2023. There has been no impairment of the Nalco trade name intangible since it was acquired.
30
RESULTS OF OPERATIONS
Net Sales
| Percent Change | |||||||||||||||||
(millions) | 2023 | 2022 | 2021 | 2023 | 2022 | |||||||||||||
Product and equipment sales | $12,316.8 |
| $11,446.2 |
| $10,153.3 |
| ||||||||||||
Service and lease sales | 3,003.4 | 2,741.6 | 2,579.8 | |||||||||||||||
Reported GAAP net sales | 15,320.2 | 14,187.8 | 12,733.1 | 8 | % | 11 | % | |||||||||||
2021 impact of Purolite on net sales | - | - | 12.0 | |||||||||||||||
Non-GAAP adjusted net sales | 15,320.2 | 14,187.8 | 12,721.1 | 8 | % | 12 | % | |||||||||||
Effect of foreign currency translation |
| (44.8) |
|
| (94.4) |
| (566.9) | |||||||||||
Non-GAAP adjusted fixed currency sales | 15,275.4 | 14,093.4 | 12,154.2 | 8 | % | 16 | % | |||||||||||
Effect of acquisitions and divestitures | (113.4) | (123.7) | * | |||||||||||||||
Non-GAAP organic sales | $15,162.0 | $13,969.7 | * | 9 | % | * | ||||||||||||
* Not meaningful |
| |||||||||||||||||
The percentage components of the year-over-year sales change are shown below:
(percent) | 2023 | 2022 | |||||||
Volume |
| - | % |
| 2 | % | |||
Price changes |
| 8 |
| 10 | |||||
Organic sales change |
| 9 |
| 13 | |||||
Acquisitions and divestitures |
| - |
| 3 | |||||
Fixed currency sales change |
| 8 |
| 16 | |||||
Foreign currency translation |
| - |
| (4) | |||||
Reported GAAP net sales change |
| 8 | % |
| 11 | % | |||
Amounts do not necessarily sum due to rounding.
Cost of Sales (“COS”) and Gross Profit Margin (“Gross Margin”)
2023 | 2022 | 2021 | ||||||||||||||||||
| Gross |
| Gross |
| Gross | |||||||||||||||
(millions/percent) | COS | Margin | COS | Margin | COS | Margin | ||||||||||||||
Product and equipment cost of sales | $7,389.2 | $7,212.8 | $6,100.9 | |||||||||||||||||
Service and lease cost of sales | 1,765.7 | 1,618.2 | 1,514.9 | |||||||||||||||||
Reported GAAP COS and gross margin | 9,154.9 | 40.2 | % | 8,831.0 | 37.8 | % | 7,615.8 | 40.2 | % | |||||||||||
Special (gains) and charges | 22.5 | 69.9 | 93.9 |
| ||||||||||||||||
2021 impact of Purolite on COS | - | - | 7.6 | |||||||||||||||||
Non-GAAP adjusted COS and gross margin | $9,132.4 | 40.4 | % | $8,761.1 | 38.2 | % | $7,514.3 | 40.9 | % | |||||||||||
Our COS values and corresponding gross margin are shown above. Our gross margin is defined as sales less cost of sales divided by sales.
Our reported gross margin was 40.2%, 37.8%, and 40.2% for 2023, 2022 and 2021, respectively. Our 2023, 2022 and 2021 reported gross margins were negatively impacted by special (gains) and charges of $22.5 million, $69.9 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 2023 adjusted gross margin was 40.4% compared against a 2022 adjusted gross margin of 38.2%. The increase primarily reflected accelerating pricing that overcame higher supply chain costs.
Excluding the impact of special (gains) and charges and the 2021 impacts of the Purolite transaction, our adjusted gross margin was 38.2% and 40.9% for 2022 and 2021, respectively. The decrease primarily reflected accelerating pricing that was more than offset by higher delivered product cost and unfavorable mix.
31
Selling, General and Administrative Expenses (“SG&A”)
(percent) |
| 2023 | 2022 | 2021 | |||||
SG&A Ratio |
| 26.5 | % | 25.8 | % | 26.8 | % | ||
The increased SG&A ratio (SG&A expenses as a percentage of reported net sales) comparing 2023 against 2022 was driven by higher incentive compensation compared to last year which was partially offset by strong productivity including cost savings initiatives. The decreased SG&A ratio (SG&A expenses as a percentage of reported net sales) comparing 2022 against 2021 was driven primarily by strong productivity including cost savings initiatives, partially offset by higher cost of compensation compared to last year.
Special (Gains) and Charges
Special (gains) and charges reported on the Consolidated Statements of Income included the following items:
(millions) | 2023 | 2022 | 2021 | |||||||||
Cost of sales | ||||||||||||
Restructuring activities |
| $22.5 |
| $21.4 | $24.7 | |||||||
Acquisition and integration activities | - | 25.0 | 4.2 | |||||||||
Russia/Ukraine | - | 7.2 | - | |||||||||
Other | - | 16.3 | 65.0 | |||||||||
Cost of sales subtotal |
| 22.5 |
| 69.9 |
|
| 93.9 | |||||
Special (gains) and charges | ||||||||||||
Restructuring activities |
| 63.2 |
| 85.8 | 11.9 | |||||||
Acquisition and integration activities | 16.1 | 14.5 | 29.9 | |||||||||
Russia/Ukraine | 1.4 | 5.9 | - | |||||||||
Other |
| 30.7 |
| 34.3 | 60.8 | |||||||
Special (gains) and charges subtotal |
| 111.4 |
| 140.5 |
|
| 102.6 | |||||
Operating income subtotal | 133.9 | 210.4 | 196.5 | |||||||||
Other (income) expense | - | 50.6 | 37.2 | |||||||||
Interest expense, net | - | - | 33.1 | |||||||||
Total special (gains) and charges | $133.9 | $261.0 | $266.8 | |||||||||
For segment reporting purposes, special (gains) and charges are not allocated to reportable segments, which is consistent with our internal management reporting.
Restructuring Activities
Restructuring activities are primarily related to the Combined Program which is described below. These activities have been included as a component of cost of sales, special (gains) and charges, and other (income) expense on the Consolidated Statements of Income. Restructuring liabilities have been classified as a component of other current and other noncurrent liabilities on the Consolidated Balance Sheets.
Further details related to our restructuring charges are included in Note 3.
Combined Program
In November 2022, we approved a Europe cost savings program. In connection with these actions, we expected to incur pre-tax charges of $130 million ($110 million after tax) or $0.38 per diluted share. In February 2023, we expanded our previously announced Europe cost savings program to focus on its Institutional and Healthcare businesses in other regions. In connection with the expanded program (“Combined Program”), we expect to incur total pre-tax charges of $195 million ($150 million after tax) or $0.52 per diluted share. We expect that these restructuring charges will be completed by the end of 2024. Program actions include headcount reductions from terminations, not filling certain open positions, and facility closures. The Combined Program charges are expected to be primarily cash expenditures related to severance and asset disposals.
In anticipation of this Combined Program, a limited number of actions were taken in the fourth quarter of 2022. As a result, we reclassified $19.3 million ($14.5 million after tax) or $0.05 per diluted share from other restructuring to the Combined Program in the first quarter of 2023.
In 2023 and 2022 we recorded total Combined Program restructuring charges of $77.7 million ($66.4 million after tax) or $0.23 per diluted share and $67.2 million ($56.0 million after tax) or $0.20 per diluted share, respectively. We have recorded $164.2 million ($136.9 million after tax), or $0.48 per diluted share of cumulative charges under the Combined Plan. The net liability related to the Combined Program was $43.1 million and $62.0 million as of December 31, 2023 and 2022, respectively. The remaining liability is expected to be paid over a period of a few months to several quarters and will continue to be funded from operating activities.
32
The Combined Program has delivered $131 million of cumulative cost savings with estimated annualized cost savings of $175 million in continuing operations by 2024.
Institutional Advancement Program
We approved a restructuring plan in 2020 focused on the Institutional business (“the Institutional Plan”) which is intended to enhance our Institutional sales and service structure and allow the sales team to capture share and penetration while maximizing service effectiveness by leveraging our ongoing investments in digital technology.
In 2023, 2022 and 2021, we recorded total restructuring charges of $8.0 million ($6.0 million after tax) or $0.03 per diluted share, $6.3 million ($4.8 million after tax) or $0.02 per diluted share and $12.6 million ($10.2 million after tax) or $0.04 per diluted share, respectively, primarily related to severance, disposals of equipment and office closures. The Restructuring activities were completed at the end of 2023, with total costs of $62.1 million ($47.4 million after tax), or $0.17 per diluted share. Net cash payments were $2.6 million and non-cash net charges were $6.8 million in 2023. There was no remaining liability related to the Institutional Plan as of December 31, 2023. There was $1.9 million of liability related to the Institutional Plan of December 31, 2022.
The Institutional Plan has delivered $55 million of annual cost savings.
Accelerate 2020
During 2018, we formally commenced a restructuring plan Accelerate 2020 (“the A2020 Plan”), to leverage technology and system investments and organizational changes. The goals of the A2020 Plan were to further simplify and automate processes and tasks, reduce complexity and management layers, consolidate facilities and focus on key long-term growth areas by further leveraging technology and structural improvements. We recorded restructuring charges of $9.9 million ($8.4 million after tax) or $0.03 per diluted share and $5.3 million ($6.2 million after tax) or $0.02 per diluted share in 2022 and 2021, respectively. The restructuring activities were completed at the end of 2022, with total costs of $254.4 million ($198.4 million after tax), or $0.69 per diluted share.
Net cash payments were $13.2 million during 2023. The liability related to the A2020 Plan was $4.9 million and $18.1 million as of December 31, 2023 and 2022, respectively. The remaining liability is expected to be paid over a period of a few months to several quarters which continue to be funded from operating activities.
The A2020 Plan has delivered $315 million of annual cost savings.
Other Restructuring Activities
During 2022 and 2021, we incurred restructuring charges of $23.8 million ($17.9 million after tax), or $0.06 per diluted share and $18.7 million ($17.0 million after tax), or $0.06 per diluted share, respectively, related to other immaterial restructuring activity. The charges primarily related to severance and asset write-offs.
The restructuring liability balance for all other restructuring plans excluding the Combined Program, A2020 Plan and the Institutional Plan were $3.3 million and $23.2 million as of December 31, 2023 and 2022, respectively. The decrease in liability was driven primarily by the reclass of $19.3 million from other restructuring to the Combined Program in the first quarter of 2023. The remaining liability is expected to be paid over a period of a few months to several quarters and will continue to be funded from operating activities. Cash payments during 2023 related to all other restructuring plans excluding the Combined Program, A2020 and Institutional Plan were $0.6 million.
Acquisition and integration related costs
Acquisition and integration related costs reported in special (gains) and charges on the Consolidated Statements of Income in 2023 include $16.1 million ($12.0 million after tax) or $0.04 per diluted share. Charges are integration related costs primarily related to the Purolite Corporation (“Purolite”) acquisition.
Acquisition and integration related costs reported in special (gains) and charges on the Consolidated Statements of Income in 2022 include $14.5 million ($11.4 million after tax) or $0.04 per diluted share. Charges are related primarily to the Purolite acquisition and consist of integration related costs, advisory and legal fees. Acquisition and integration related costs reported in product and equipment cost of sales on the Consolidated Statements of Income in 2022 include $25.0 million ($19.6 million after tax) or $0.07 per diluted share. Charges are related primarily to the recognition of fair value step-up in the Purolite inventory and other integration costs.
Acquisition and integration related costs reported in special (gains) and charges on the Consolidated Statements of Income in 2021 include $29.9 million ($23.5 million after tax) or $0.08 per diluted share. Charges are primarily related to the Purolite acquisition and consisted of deal costs, integration costs and advisory and legal fees. Acquisition and integration related costs reported in product and equipment cost of sales on the Consolidated Statements of Income in 2021 include $4.2 million ($3.3 million after tax) or $0.01 per diluted share and are related to the recognition of fair value step-up in the Purolite inventory. In conjunction with its acquisitions, we incurred $0.8 million ($0.6 million after tax), or less than $0.01 per diluted share, of special (gains) and charges reported in interest expense in 2021.
33
Russia/Ukraine
In light of Russia’s invasion of Ukraine and the sanctions against Russia by the United States and other countries, we have made the determination that we will limit our Russian business to operations that are essential to life, providing minimal support for our healthcare, life sciences, food and beverage and certain water businesses. We incurred charges of $1.4 million ($1.1 million after tax) or less than $0.01 per diluted share and $13.1 million ($12.6 million after tax) or $0.04 per diluted share during 2023 and 2022, respectively, primarily related to recoverability risk of certain assets in both Russia and Ukraine.
Other operating activities
Other operating activities recorded in cost of sales on the Consolidated Statements of Income of $16.3 million ($12.7 million after tax), or $0.04 per diluted share in 2022, and $65.0 million ($49.2 million after tax), or $0.17 per diluted share in 2021 relate primarily to COVID-19 activities.
Other operating activities recorded in special (gains) and charges on the Consolidated Statements of Income of $30.7 million ($23.3 million after tax), or $0.08 per diluted share in 2023 relate primarily to certain legal charges. Other operating activities recorded in special (gains) and charges on the Consolidated Statements of Income of $34.3 million ($25.7 million after tax), or $0.09 per diluted share in 2022 and $60.8 million ($46.4 million after tax), or $0.16 per diluted share in 2021 relate primarily to COVID-19 activities and certain legal charges.
Other (income) expense
During 2022 and 2021, we incurred settlement expense recorded in other (income) expense on the Consolidated Statements of Income of $50.6 million ($38.2 million after tax) or $0.13 per diluted share and $37.2 million ($28.7 million after tax) or $0.10 per diluted share, respectively, related to U.S. pension plan lump-sum payments to retirees.
Interest expense, net
During 2021 we recorded special charges of $32.3 million ($28.4 million after tax) or $0.10 per diluted share in interest expense on the Consolidated Statements of Income related to debt issuance and refinancing charges.
Operating Income and Operating Income Margin
|
| Percent Change | |||||||||||||||||||
(millions) |
| 2023 |
| 2022 |
| 2021 | 2023 | 2022 | |||||||||||||
Reported GAAP operating income | $1,992.3 | $1,562.5 | $1,598.6 | 28 | % | (2) | % | ||||||||||||||
Special (gains) and charges |
| 133.9 | 210.4 | 196.5 |
|
| |||||||||||||||
2021 impact of Purolite on operating income | - | - | 3.8 | ||||||||||||||||||
Non-GAAP adjusted operating income |
| 2,126.2 | 1,772.9 | 1,798.9 |
| 20 |
| (1) | |||||||||||||
Effect of foreign currency translation |
| (5.8) | (13.1) | (110.5) |
|
| |||||||||||||||
Non-GAAP adjusted fixed currency operating income | 2,120.4 | 1,759.8 | 1,688.4 | ||||||||||||||||||
Effect of acquisitions and divestitures | (2.9) | (0.4) | * | ||||||||||||||||||
Non-GAAP organic operating income | $2,117.5 | $1,759.4 | * | 20 | % | * | |||||||||||||||
* Not meaningful | |||||||||||||||||||||
(percent) |
| 2023 | 2022 | 2021 | |||||||||||||||||
Reported GAAP operating income margin | 13.0 | % | 11.0 | % | 12.6 | % | |||||||||||||||
Non-GAAP adjusted operating income margin | 13.9 | % | 12.5 | % | 14.1 | % | |||||||||||||||
Non-GAAP adjusted fixed currency operating income margin | 13.9 | % | 12.5 | % | 13.9 | % | |||||||||||||||
Non-GAAP organic operating income margin | 14.0 | % | 12.6 | % | * | ||||||||||||||||
* Not meaningful | |||||||||||||||||||||
Our operating income and corresponding operating income margin are shown in the previous tables. Operating income margin is defined as operating income divided by sales.
Our reported operating income was $1,992.3 million, $1,562.5 million and $1,598.6 for 2023, 2022 and 2021, respectively. Our 2023, 2022 and 2021 operating incomes were negatively impacted by special (gains) and charges and the 2021 impact of Purolite on operating income of $133.9 million, $210.4 million, and $200.3 million, respectively.
Excluding the impacts of special (gains) and charges 2023 adjusted operating income increased 20% as strong pricing overcame investments in the business including incentive compensation, higher supply chain costs and unfavorable mix. Excluding the impacts of special (gains) and the 2021 impact of Purolite on operating income 2022 adjusted operating income decreased 1% driven by accelerating pricing covering substantially higher delivered product costs, which was offset by investments in the business.
34
Other (Income) Expense
(millions) |
| 2023 |
| 2022 |
| 2021 | |||||
Reported GAAP other (income) expense | ($59.9) | ($24.5) | ($33.9) | ||||||||
Special (gains) and charges | - |
| 50.6 |
| 37.2 | ||||||
Non-GAAP adjusted other (income) expense | ($59.9) | ($75.1) | ($71.1) | ||||||||
Our reported other income was $59.9 million, $24.5 million and $33.9 million in 2023, 2022 and 2021, respectively. Other (income) expense increased when comparing 2023 against 2022 as higher pension costs were more than offset by the comparison to last year’s $50.6 million settlement expense related to U.S. pension plan lump-sum payments to retirees. Other (income) expense decreased when comparing 2022 against 2021 primarily due to increased pension settlement charges in 2022 as a result of a higher volume of pension settlement activity and higher interest costs associated with rising interest rates throughout 2022. Excluding the impact of settlements and curtailments recorded in special (gains) and charges during 2023, 2022 and 2021, our adjusted other income was $59.9 million, $75.1 million and $71.1 million, respectively.
Interest Expense, Net
(millions) |
| 2023 |
| 2022 |
| 2021 | |||||
Reported GAAP interest expense, net | $296.7 | $243.6 | $218.3 | ||||||||
Special (gains) and charges | - |
| - |
| 33.1 | ||||||
2021 impact of Purolite on interest expense | - | - | 3.5 | ||||||||
Non-GAAP adjusted interest expense, net | $296.7 | $243.6 | $181.7 | ||||||||
Our reported net interest expense totaled $296.7 million, $243.6 million and $218.3 million during 2023, 2022 and 2021, respectively.
We incurred $33.1 million ($29.0 million after tax) or $0.10 per diluted share of interest expense special charges in conjunction with our debt issuances and refinancing activities during 2021.
Adjusted for special (gains) and charges, the increase in interest expense when comparing 2023 against 2022 was driven primarily by the higher average interest rates on outstanding debt. Adjusted for special (gains) and charges, the increase in interest expense when comparing 2022 against 2021 was driven primarily by the interest on debt issued to fund the Purolite acquisition and the impact from higher average interest rates on floating rate debt.
Provision for Income Taxes
The following table provides a summary of our tax rate:
(percent) |
| 2023 | 2022 |
| 2021 | ||||
Reported GAAP tax rate | 20.6 | % | 17.5 | % | 19.1 | % | |||
Tax rate impact of: | |||||||||
Special (gains) and charges |
| (0.1) | 0.5 |
|
| 0.1 |
| ||
Discrete tax items | (0.6) | 0.7 | (0.3) | ||||||
Non-GAAP adjusted tax rate |
| 19.9 | % | 18.7 | % |
| 18.9 | % | |
Our reported tax rate was 20.6%, 17.5%, and 19.1%, for 2023, 2022 and 2021, respectively. The change in our tax rate includes the tax impact of special (gains) and charges and discrete tax items, which have impacted the comparability of our historical reported tax rates, as amounts included in our special (gains) and charges are derived from tax jurisdictions with rates that vary from our tax rate, and discrete tax items are not necessarily consistent across periods. The tax impact of special (gains) and charges and discrete tax items will likely continue to impact comparability of our reported tax rate in the future.
We recognized a net tax expense related to discrete tax items of $11.2 million during 2023. The net discrete tax expense was primarily related to the filing of federal, state and foreign tax returns and other income tax adjustments including the impact of changes in tax laws, audit settlements, share-based compensation excess tax benefits and other changes in estimates.
We recognized a net tax benefit related to discrete tax items of $11.8 million during 2022. This included a deferred tax benefit of $14.6 million associated with utilization of tax attributes as a result of legal entity rationalization and share-based compensation excess tax benefits of $6.0 million. The remaining discrete tax expense of $8.8 million was primarily related to the filing of federal, state and foreign tax returns and other income tax adjustments including the impact of changes in tax laws, audit settlements and other changes in estimates.
We recognized net tax expense of $5.8 million related to discrete tax items during 2021. This included a non-cash deferred tax expense of $25.1 million associated with transferring certain intangible property between affiliates. Share-based compensation excess tax benefit was $29.1 million. The remaining discrete tax expense of $9.8 million was primarily related to the filing of federal, state, and foreign tax returns and other income tax adjustments including the impact of changes in tax law, audit settlements and other changes in estimates.
35
The change in our adjusted tax rates from 2022 to 2023 was primarily driven by geographic income mix. Future comparability of our adjusted tax rate may be impacted by various factors, including but not limited to other changes in global tax rules, further tax planning projects and geographic income mix.
Net Income Attributable to Ecolab
Percent Change |
| |||||||||||||||
(millions) |
| 2023 |
| 2022 |
| 2021 |
| 2023 | 2022 | |||||||
Reported GAAP net income attributable to Ecolab | $1,372.3 | $1,091.7 | $1,129.9 | 26 | % | (3) | % | |||||||||
Adjustments: | ||||||||||||||||
Special (gains) and charges, after tax |
| 109.2 | 207.3 | 213.5 | ||||||||||||
Discrete tax net (benefit) expense | 11.2 | (11.8) | 5.8 | |||||||||||||
2021 impact of Purolite on net income |
| - | - | 5.6 | ||||||||||||
Non-GAAP adjusted net income attributable to Ecolab | $1,492.7 | $1,287.2 | $1,354.8 | 16 | % | (5) | % | |||||||||
Diluted EPS
Percent Change |
| |||||||||||||||
(dollars) |
| 2023 |
| 2022 |
| 2021 |
| 2023 | 2022 | |||||||
Reported GAAP diluted EPS | $4.79 | $3.81 | $3.91 | 26 | % | (3) | % | |||||||||
Adjustments: | ||||||||||||||||
Special (gains) and charges, after tax |
| 0.38 |
| 0.72 |
| 0.74 | ||||||||||
Discrete tax net (benefit) expense |
| 0.04 |
| (0.04) |
| 0.02 | ||||||||||
2021 impact of Purolite on diluted EPS | - | - | 0.02 | |||||||||||||
Non-GAAP adjusted diluted EPS | $5.21 | $4.49 | $4.69 | 16 | % | (4) | % | |||||||||
Per share amounts do not necessarily sum due to rounding.
Currency translation had an unfavorable $(0.05) impact on reported and adjusted diluted EPS when comparing 2023 to 2022 and unfavorable $(0.26) impact when comparing 2022 to 2021.
36
SEGMENT PERFORMANCE
The non-U.S. dollar functional currency international amounts included within our reportable segments are based on translation into U.S. dollars at the fixed currency exchange rates established by management for 2023. The difference between the fixed currency exchange rates and the actual currency exchange rates is reported as “effect of foreign currency translation” in the following tables. All other accounting policies of the reportable segments are consistent with U.S. GAAP and the accounting policies described in Note 2. Additional information about our reportable segments is included in Note 18.
Fixed currency net sales and operating income for 2023, 2022 and 2021 for our reportable segments are shown in the following tables.
Net Sales |
| Percent Change |
| |||||||||||||
(millions) |
| 2023 |
| 2022 |
| 2021 |
| 2023 | 2022 | |||||||
Global Industrial | $7,193.1 |
| $6,736.3 |
| $5,908.5 | 7 | % | 14 | % | |||||||
Global Institutional & Specialty |
| 4,994.0 |
| 4,414.3 |
| 3,856.7 |
| 13 | 14 | |||||||
Global Healthcare & Life Sciences | 1,576.9 | 1,505.8 | 1,101.1 | 5 | 37 | |||||||||||
Other |
| 1,442.3 |
| 1,313.3 |
| 1,162.5 |
| 10 | 13 | |||||||
Corporate | 69.1 | 123.7 | 137.4 | (44) | (10) | |||||||||||
Subtotal at fixed currency |
| 15,275.4 |
| 14,093.4 |
| 12,166.2 |
| 8 | 16 | |||||||
Effect of foreign currency translation |
| 44.8 |
| 94.4 |
| 566.9 |
| |||||||||
Consolidated reported GAAP net sales |
| $15,320.2 | $14,187.8 | $12,733.1 |
| 8 | % | 11 | % | |||||||
Operating Income |
| Percent Change |
| |||||||||||||
(millions) |
| 2023 |
| 2022 |
| 2021 |
| 2023 | 2022 | |||||||
Global Industrial | $1,080.7 |
| $935.8 |
| $943.4 | 15 | % | (1) | % | |||||||
Global Institutional & Specialty |
| 823.0 |
| 621.7 |
| 536.7 |
| 32 | 16 | |||||||
Global Healthcare & Life Sciences | 160.0 | 193.3 | 141.0 | (17) | 37 | |||||||||||
Other |
| 255.0 |
| 209.9 |
| 181.3 |
| 21 | 16 | |||||||
Corporate |
| (331.7) |
| (414.4) |
| (314.3) |
| (20) | 32 | |||||||
Subtotal at fixed currency |
| 1,987.0 |
| 1,546.3 |
| 1,488.1 |
| 29 | 4 | |||||||
Effect of foreign currency translation |
| 5.3 |
| 16.2 |
| 110.5 |
| |||||||||
Consolidated reported GAAP operating income |
| $1,992.3 | $1,562.5 | $1,598.6 |
| 28 | % | (2) | % | |||||||
The following tables reconcile the impact of acquisitions and divestitures within our reportable segments.
Year ended | ||||||||||||
December 31 | ||||||||||||
Net Sales | 2023 | 2022 | ||||||||||
(millions) |
| Fixed | Impact of Acquisitions and Divestitures | Organic | Fixed | Impact of Acquisitions and Divestitures | Organic | |||||
Global Industrial | $7,193.1 | ($4.5) | $7,188.6 | $6,736.3 | $- | $6,736.3 | ||||||
Global Institutional & Specialty |
| 4,994.0 | (39.8) | 4,954.2 | 4,414.3 | - | 4,414.3 | |||||
Global Healthcare & Life Sciences | 1,576.9 | - | 1,576.9 | 1,505.8 | - | 1,505.8 | ||||||
Other |
| 1,442.3 | - | 1,442.3 | 1,313.3 | - | 1,313.3 | |||||
Corporate | 69.1 | (69.1) | - | 123.7 | (123.7) | - | ||||||
Subtotal at fixed currency |
| 15,275.4 | (113.4) | 15,162.0 | 14,093.4 | (123.7) | 13,969.7 | |||||
Effect of foreign currency translation |
| 44.8 | 94.4 | |||||||||
Consolidated reported GAAP net sales |
| $15,320.2 | $14,187.8 | |||||||||
Operating Income | 2023 | 2022 | ||||||||||
(millions) |
| Fixed | Impact of Acquisitions and Divestitures | Organic | Fixed | Impact of Acquisitions and Divestitures | Organic | |||||
Global Industrial | $1,080.7 | $0.2 | $1,080.9 | $935.8 | $- | $935.8 | ||||||
Global Institutional & Specialty |
| 823.0 | (0.5) | 822.5 | 621.7 | - | 621.7 | |||||
Global Healthcare & Life Sciences |
| 160.0 | - | 160.0 | 193.3 | - | 193.3 | |||||
Other | 255.0 | - | 255.0 | 209.9 | - | 209.9 | ||||||
Corporate |
| (198.3) | (2.6) | (200.9) | (200.9) | (0.4) | (201.3) | |||||
Non-GAAP adjusted fixed currency operating income |
| 2,120.4 | (2.9) | 2,117.5 | 1,759.8 | (0.4) | 1,759.4 | |||||
Special (gains) and charges |
| 133.4 | 213.5 | |||||||||
Subtotal at fixed currency |
| 1,987.0 | 1,546.3 | |||||||||
Effect of foreign currency translation |
| 5.3 | 16.2 | |||||||||
Consolidated reported GAAP operating income |
| $1,992.3 | $1,562.5 | |||||||||
37
Global Industrial
| 2023 | 2022 | 2021 | |||||||||
Sales at fixed currency (millions) | $7,193.1 | $6,736.3 | $5,908.5 | |||||||||
Sales at public currency (millions) | 7,221.8 | 6,805.0 | 6,237.9 | |||||||||
Volume |
| (2) | % | 1 | % | |||||||
Price changes |
| 9 | % | 13 | % | |||||||
Organic sales change | 7 | % | 14 | % | ||||||||
Acquisitions and divestitures |
| - | % | - | % | |||||||
Fixed currency sales change |
| 7 | % | 14 | % | |||||||
Foreign currency translation | (1) | % | (5) | % | ||||||||
Public currency sales change |
| 6 | % | 9 | % | |||||||
Operating income at fixed currency (millions) | $1,080.7 | $935.8 | $943.4 | |||||||||
Operating income at public currency (millions) | 1,084.7 | 950.0 | 1,019.5 | |||||||||
Fixed currency operating income change | 15 | % | (1) | % | ||||||||
Fixed currency operating income margin |
| 15.0 | % |
| 13.9 | % |
| 16.0 | % | |||
Organic operating income change |
| 16 | % |
| * | |||||||
Organic operating income margin |
| 15.0 | % |
| 13.9 | % | * | |||||
Public currency operating income change | 14 | % | (7) | % | ||||||||
* Not meaningful
Percentages in the above table do not necessarily sum due to rounding.
Net Sales
Organic sales for Global Industrial increased in 2023 driven by strong pricing and new business wins partially offset by weaker markets. The 2022 sales increase was impacted by as strong double-digit growth across all divisions was driven by accelerating pricing and new business wins.
At an operating segment level, Water organic sales increased 8% in 2023 driven by strong pricing and new business wins. Water organic sales increased 13% in 2022 driven by strong pricing and new business wins. Light industry reported good sales growth driven by strong performance across data centers, microelectronics and institutional. Heavy industry in 2023 reported good sales growth driven by strong pricing, gains in primary metals and growth in chemicals and strong sales in 2022 led by double-digit growth in power and chemicals. Downstream reported strong sales growth in 2023 driven by innovative water treatment programs. Food & Beverage organic sales increased 9% in 2023 reflecting continued pricing, strong performance in dairy, and solid growth in beverage & brewing and animal health. Organic increased 14% in 2022 primarily reflecting accelerating pricing. Paper organic sales decreased 1% in 2023 as pricing and new business wins were offset by easing customer production rates. Organic sales increased 16% in 2022 driven by accelerating pricing, new business wins and continued growth in ecommerce markets.
Operating Income
Organic operating income and organic operating income margins for Global Industrial increased in 2023 and decreased 2022 when compared to prior periods.
Organic operating income margins increased 1.1 percentage points during 2023 compared to 2022, as the 6.8 percentage point positive impacts of strong pricing overcame the 5.5 percentage point negative impacts of investments in the business including incentive compensation, lower volume, and higher supply chain costs. Organic operating income margins decreased in 2022 compared to 2021, as the positive impact from accelerating pricing was more than offset by the negative impacts of higher delivered product costs, unfavorable mix and investment in the business.
38
Global Institutional & Specialty
| 2023 | 2022 | 2021 | |||||||||
Sales at fixed currency (millions) | $4,994.0 | $4,414.3 | $3,856.7 | |||||||||
Sales at public currency (millions) | 4,999.2 | 4,432.1 | 3,966.8 | |||||||||
Volume |
| 3 | % | 6 | % | |||||||
Price changes |
| 10 | % | 8 | % | |||||||
Organic sales change | 12 | % | 15 | % | ||||||||
Acquisitions and divestitures |
| 1 | % | - | % | |||||||
Fixed currency sales change |
| 13 | % | 14 | % | |||||||
Foreign currency translation | - | % | (3) | % | ||||||||
Public currency sales change |
| 13 | % | 12 | % | |||||||
Operating income at fixed currency (millions) | $823.0 | $621.7 | $536.7 | |||||||||
Operating income at public currency (millions) | 823.4 | 624.3 | 550.6 | |||||||||
Fixed currency operating income change | 32 | % | 16 | % | ||||||||
Fixed currency operating income margin |
| 16.5 | % |
| 14.1 | % |
| 13.9 | % | |||
Organic operating income change |
| 32 | % |
| * | |||||||
Organic operating income margin |
| 16.6 | % |
| 14.1 | % | * | |||||
Public currency operating income change | 32 | % | 13 | % | ||||||||
* Not meaningful
Percentages in the above table do not necessarily sum due to rounding.
Net Sales
Organic sales for Global Institutional & Specialty increased in 2023 driven by strong pricing and new business wins. The 2022 sales increased driven by accelerating pricing and new business wins.
At an operating segment level, Institutional organic sales increased 12% in 2023, driven by strong pricing and new business wins. Organic sales increased 18% in 2022, driven by accelerating pricing and new business wins. Specialty organic sales increased 13% in 2023 driven by growth in quick service and food retail. Organic sales increased 7% in 2022 driven by strong quick service sales and modest growth in food retail sales.
Operating Income
Organic operating income for our Global Institutional & Specialty segment increased in both 2023 and 2022 when compared to prior periods. Organic operating income margins increased in 2023 but decreased 2022 when compared to prior periods.
Organic operating income margins increased 2.5 percentage points during 2023, as the 7.9 percentage point positive impacts from strong pricing and cost savings initiatives overcame the 4.9 percentage point negative impacts of investments in the business including incentive compensation and higher supply chain costs. Organic operating income margins increased during 2022, as the positive impact from accelerating pricing and volume growth overcame the negative impacts of higher delivered product costs and investments in the business.
39
Global Healthcare & Life Sciences
| 2023 | 2022 | 2021 | |||||||||
Sales at fixed currency (millions) | $1,576.9 | $1,505.8 | $1,101.1 | |||||||||
Sales at public currency (millions) | 1,586.0 | 1,510.5 | 1,181.6 | |||||||||
Volume |
| (1) | % | (7) | % | |||||||
Price changes |
| 6 | % | 7 | % | |||||||
Organic sales change | 5 | % | - | % | ||||||||
Acquisitions and divestitures |
| - | % | 37 | % | |||||||
Fixed currency sales change |
| 5 | % | 37 | % | |||||||
Foreign currency translation | - | % | (8) | % | ||||||||
Public currency sales change |
| 5 | % | (28) | % | |||||||
Operating income at fixed currency (millions) | $160.0 | $193.3 | $141.0 | |||||||||
Operating income at public currency (millions) | 161.5 | 193.5 | 158.1 | |||||||||
Fixed currency operating income change | (17) | % | 37 | % | ||||||||
Fixed currency operating income margin |
| 10.1 | % |
| 12.8 | % |
| 12.8 | % | |||
Organic operating income change |
| (17) | % |
| * | |||||||
Organic operating income margin |
| 10.1 | % |
| 12.8 | % | * | |||||
Public currency operating income change | (17) | % | 22 | % | ||||||||
* Not meaningful
Percentages in the above table do not necessarily sum due to rounding.
Net Sales
Organic sales for Global Healthcare & Life Sciences increased in 2023 as compared to 2022 driven by strong pricing and new business wins.
At an operating segment level, Healthcare organic sales increased 7% in 2023 driven by pricing and strong growth in North America. Organic sales decreased 1% in 2022 reflecting lower procedural and hand hygiene volumes, partially offset by increased pricing. Life Sciences organic sales increased 1% 2023 as pricing was more than offset soft near-term industry demand. Organic sales increased 9% in 2022 as accelerating pricing and growth in consumable pharmaceutical and personal care products, partially offset by normalizing demand for Bioquell’s biocontamination systems.
Operating Income
Organic operating income for our Global Healthcare & Life Sciences segment decreased in both 2023 and 2022 when compared to prior periods. Organic operating income margins decreased in both 2023 and 2022 when compared to prior periods.
Organic operating income margins decreased 2.7 percentage points in 2023, as the 4.5 percentage point positive impact from strong pricing was more than offset by the 7.5 percentage point negative impacts from targeted investments in the business, unfavorable mix and higher supply chain costs. Organic operating income margins decreased in 2022, as positive impact from accelerating pricing was more than offset by the negative impacts from higher delivered product costs, unfavorable mix, lower Healthcare volumes and targeted investments in the business.
40
Other
| 2023 | 2022 | 2021 | |||||||||
Sales at fixed currency (millions) | $1,442.3 | $1,313.3 | $1,162.5 | |||||||||
Sales at public currency (millions) | 1,444.2 | 1,316.4 | 1,207.7 | |||||||||
Volume |
| 3 | % | 6 | % | |||||||
Price changes |
| 7 | % | 7 | % | |||||||
Organic sales change | 10 | % | 13 | % | ||||||||
Acquisitions and divestitures |
| - | % | - | % | |||||||
Fixed currency sales change |
| 10 | % | 13 | % | |||||||
Foreign currency translation | - | % | (4) | % | ||||||||
Public currency sales change |
| 10 | % | 9 | % | |||||||
Operating income at fixed currency (millions) | $255.0 | $209.9 | $181.3 | |||||||||
Operating income at public currency (millions) | 254.4 | 209.5 | 188.2 | |||||||||
Fixed currency operating income change | 21 | % | 16 | % | ||||||||
Fixed currency operating income margin |
| 17.7 | % |
| 16.0 | % |
| 15.6 | % | |||
Organic operating income change |
| 21 | % |
| 16 | % | ||||||
Organic operating income margin |
| 17.7 | % |
| 16.0 | % | * | |||||
Public currency operating income change | 21 | % | 11 | % | ||||||||
* Not meaningful
Percentages in the above table do not necessarily sum due to rounding.
Net Sales
Organic sales for Other increased in 2023 led by double-digit growth in Pest Elimination. Organic sales increased in 2022 led by strong growth in Pest Elimination, Textile Care and Colloidal Technologies.
At an operating segment level, Pest Elimination organic sales increased 11% in 2023 reflecting strong growth in restaurants, food & beverage, and food retail. Organic sales increased 11% in 2022 reflecting strong growth across food retail, food & beverage, hospitality and restaurants from accelerating pricing and new business wins. Textile Care organic sales increased 7% and 19% in 2023 and 2022, respectively. Colloidal Technologies Group organic sales increased 4% and 14% in 2023 and 2022, respectively.
Operating Income
Organic operating income in Other increased in both 2023 and 2022 when compared to prior periods. Organic operating income margins increased in both 2022 and 2022 when compared to prior periods.
Organic operating income margins in Other increased 1.7 percentage points in 2023, as the 5.6 percentage point positive impacts from strong pricing overcame the 4.3 percentage point negative impacts of investments in business. Organic operating income margins increased in 2022, as the positive impacts from accelerating pricing overcame the negative impacts of higher delivered product costs and investments in business.
Corporate
Consistent with our internal management reporting, Corporate amounts in the table on page 37 include sales to ChampionX in accordance with the long-term supply agreement entered into with the Transaction post-separation. As discussed in Note 17, intangible asset amortization specifically from the Nalco and Purolite transactions and special (gains) and charges that are not allocated to our reportable segments. Items included within special (gains) and charges are shown in the table on page 32.
41
FINANCIAL POSITION, CASH FLOW AND LIQUIDITY
Financial Position
Total assets were $21.8 billion as of December 31, 2023, compared to total assets of $21.5 billion as of December 31, 2022.
Total liabilities were $13.8 billion as of December 31, 2023, compared to total liabilities of $14.2 billion as of December 31, 2022. Total debt was $8.2 billion as of December 31, 2023 and $8.6 billion as of December 31, 2022. See further discussion of our debt activity within the “Liquidity and Capital Resources” section of this MD&A.
Our net debt to EBITDA is shown in the following table. EBITDA is a non-GAAP measure discussed further in the “Non-GAAP Financial Measures” section of this MD&A.
2023 | 2022 | 2021 | ||||||||||
(ratio) | ||||||||||||
Net debt to EBITDA |
| 2.4 |
| 3.2 |
| 3.4 | ||||||
(millions) |
| |||||||||||
Total debt | $8,181.8 | $8,580.4 | $8,758.2 | |||||||||
Cash |
| 919.5 | 598.6 | 359.9 | ||||||||
Net debt | $7,262.3 | $7,981.8 | $8,398.3 | |||||||||
Net income including noncontrolling interest | $1,393.0 | $1,108.9 | $1,144.0 | |||||||||
Provision for income taxes |
| 362.5 | 234.5 | 270.2 | ||||||||
Interest expense, net |
| 296.7 | 243.6 | 218.3 | ||||||||
Depreciation |
| 616.7 | 618.5 | 604.4 | ||||||||
Amortization |
| 306.9 | 320.2 | 238.7 | ||||||||
EBITDA |
| $2,975.8 | $2,525.7 | $2,475.6 | ||||||||
Cash Flows
Operating Activities
Dollar Change |
| |||||||||||||||||||
(millions) |
| 2023 | 2022 |
| 2021 |
| 2023 |
| 2022 | |||||||||||
Cash provided by operating activities | $2,411.8 | $1,788.4 | $2,061.9 | $623.4 | ($273.5) | |||||||||||||||
We continue to generate cash flow from operations allowing us to fund our ongoing operations, acquisitions, investments in the business and pension obligations along with returning cash to our shareholders through dividend payments and share repurchases.
Cash provided by operating activities increased $623 million in 2023 compared to 2022, driven primarily by a $332 million net favorable change in working capital and $284 million increase in net income. The cash flow impact from working capital was primarily driven by improvement in inventory due to management efforts following easing global supply chain constraints and an improvement in receivables offset by a decrease in accounts payable primarily associated with our inventory reduction efforts.
Cash provided by operating activities decreased $274 million in 2022 compared to 2021, driven primarily by $277 million increase in working capital. The increase in working capital is primarily driven by past due receivables higher than last year due to pricing and energy surcharge rollout. Additionally, inventory impacted by inflationary environment and higher stock holding to mitigate supply disruption.
The impact on operating cash flows of pension and postretirement plan contributions, cash activity related to restructuring, cash paid for income taxes and cash paid for interest, are shown in the following table:
Dollar Change |
| |||||||||||||||||||
(millions) | 2023 | 2022 |
| 2021 |
| 2023 |
| 2022 | ||||||||||||
Pensions and postretirement plan contributions |
|
| $109.3 | $64.3 |
| $60.2 |
| $45.0 |
| $4.1 | ||||||||||
Restructuring payments |
| 118.3 |
| 41.0 |
| 78.3 |
| 77.3 |
| (37.3) | ||||||||||
Income tax payments |
| 469.2 |
| 308.9 |
| 275.7 |
| 160.3 |
| 33.2 | ||||||||||
Interest payments |
| 324.8 |
| 222.4 |
| 208.7 |
| 102.4 |
| 13.7 | ||||||||||
42
Investing Activities
Dollar Change |
| |||||||||||||||||||
(millions) |
| 2023 | 2022 |
| 2021 |
| 2023 |
| 2022 | |||||||||||
Cash used for investing activities | ($990.5) | ($716.8) | ($4,579.7) | ($273.7) | $3,862.9 | |||||||||||||||
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.
We continue to make capital investments in the business, including merchandising and customer equipment and manufacturing facilities. Total capital expenditures were $775 million, $713 million and $643 million in 2023, 2022 and 2021, respectively.
Total cash paid for acquisitions, net of cash acquired and net of cash received from dispositions, in 2023, 2022 and 2021 was $180 million, $7 million and $3,924 million, respectively. Our acquisitions and divestitures are discussed further in Note 4. We continue to target strategic business acquisitions which complement our growth strategy and expect to continue to make capital investments and acquisitions in the future to support our long-term growth.
Financing Activities
Dollar Change |
| |||||||||||||||||||
(millions) |
| 2023 | 2022 |
| 2021 |
| 2023 |
| 2022 | |||||||||||
Cash provided by (used for) financing activities | ($1,054.7) | ($837.3) | $1,603.2 | ($217.4) | ($2,440.5) | |||||||||||||||
Our cash flows from financing activities primarily reflect the issuances and repayment of debt, common stock repurchases, proceeds from common stock issuances related to our equity incentive programs and dividend payments.
There were no long-term debt issuances in 2023. We repaid $500 million of long-term debt in 2023. We issued $500 million par value and received $494 million in proceeds of long-term debt in 2022. We issued $2,800 million par value and received $2,775 million in proceeds of long-term debt and repaid $900 million of long-term debt in 2021.The proceeds received from the debt issuances were used for the Purolite acquisition, repayment of outstanding debt, repayment of commercial paper and general corporate purposes. In addition, we had net repayments of $2 million and $404 million of commercial paper and notes payable in 2023 and 2022, respectively, and net issuances of $394 million in 2021.
Shares are repurchased for the purpose of partially offsetting the dilutive effect of our equity compensation plans, to manage our capital structure and to efficiently return capital to shareholders. We repurchased a total of $14 million, $518 million, and $107 million of shares in 2023, 2022 and 2021, respectively.
The impact on financing cash flows of commercial paper and notes payable repayments, long-term debt borrowings and long-term debt repayments, are shown in the following table:
Dollar Change |
| |||||||||||||||||||
(millions) | 2023 | 2022 |
| 2021 |
| 2023 |
| 2022 | ||||||||||||
Net (repayments) issuances of commercial paper and notes payable |
| ($1.9) | ($404.3) |
| $393.6 |
| $402.4 |
| ($797.9) | |||||||||||
Long-term debt borrowings |
| - |
| 494.0 |
| 2,775.0 |
| (494.0) |
| (2,281.0) | ||||||||||
Long-term debt repayments |
| (500.0) |
| - |
| (1,017.9) |
| (500.0) |
| 1,017.9 | ||||||||||
In December 2023, we increased our quarterly dividend rate by 8%. This represents the 32nd consecutive year we have increased our dividend. We have paid dividends on our common stock for 87 consecutive years. We paid dividends of $617 million, $603 million and $566 million in 2023, 2022 and 2021, respectively. 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 | ||||||||||||||||
2023 | $0.53 | $0.53 | $0.53 | $0.57 | $2.16 | |||||||||||||||
2022 |
| $0.51 | $0.51 | $0.51 | $0.53 | $2.06 | ||||||||||||||
2021 |
| $0.48 | $0.48 | $0.48 | $0.51 | $1.95 | ||||||||||||||
43
Liquidity and Capital Resources
We currently expect to fund all of our cash requirements which are reasonably foreseeable for the next twelve months, including scheduled debt repayments, new investments in the business, share repurchases, dividend payments, possible business acquisitions and pension and postretirement contributions with cash from operating activities, and as needed, additional short-term and/or long-term borrowings. We continue to expect our operating cash flow to remain strong.
As of December 31, 2023, we had $920 million of cash and cash equivalents on hand, of which $880 million was held outside of the U.S. As of December 31, 2022, we had $599 million of cash and cash equivalents on hand, of which $122 million was held outside of the U.S. Our cash balance is intended to fund current maturities of long-term debt. We will continue to evaluate our cash position in light of future developments.
In January 2024, we repaid €575 million ($630 million) of long-term debt.
As of December 31, 2023, we had a $2.0 billion multi-year credit facility, which expires in April 2026. The credit facility has been established with a diverse syndicate of banks and supports our U.S. and Euro commercial paper programs. The maximum aggregate amount of commercial paper that may be issued under our U.S. commercial paper program and our Euro commercial paper program may not exceed $2.0 billion. At year end, we had no commercial paper outstanding under our U.S. program nor our Euro program. There were no borrowings under our credit facility as of December 31, 2023 or 2022. As of December 31, 2023, both programs were rated A-2 by Standard & Poor’s, P-2 by Moody’s and F-1 by Fitch.
Additionally, we have uncommitted credit lines with major international banks and financial institutions. These credit lines support our daily global funding needs, primarily our global cash pooling structures. As of December 31, 2023 we had $155 million of bank supported letters of credit, surety bonds and guarantees outstanding in support of our commercial business transactions. We do not have any other significant unconditional purchase obligations or commercial commitments.
As of December 31, 2023, Standard & Poor’s, Fitch and Moody’s rated our long-term credit at A- (negative outlook), A- (stable outlook) and A3 (negative outlook), respectively. A reduction in our credit ratings could limit or preclude our ability to issue commercial paper under our current programs or could also adversely affect our ability to renew existing, or negotiate new, credit facilities in the future and could increase the cost of these facilities.
As of December 31, 2023, we were in compliance with our debt covenants and other requirements of our credit agreements and indentures.
A schedule of our various obligations as of December 31, 2023 are summarized in the following table:
Payments Due by Period |
| |||||||||||||||
Less | More |
| ||||||||||||||
Than | 2-3 | 4-5 | Than |
| ||||||||||||
(millions) | Total | 1 Year | Years | Years | 5 Years |
| ||||||||||
Notes payable | $2 | $2 |
| $- | $- | $- | ||||||||||
One-time transition tax |
| 67 |
| 7 |
| 60 | - |
| - | |||||||
Long-term debt |
| 8,180 |
| 629 |
| 1,363 |
| 1,441 |
| 4,747 | ||||||
Operating leases |
| 632 |
| 147 |
| 229 | 108 |
| 148 | |||||||
Interest* |
| 3,953 |
| 321 | 609 |
| 454 |
| 2,569 | |||||||
Total | $12,834 | $1,106 | $2,261 | $2,003 | $7,464 | |||||||||||
*Interest on variable rate debt was calculated using the interest rate at year end 2023.
As of December 31, 2023, our gross liability for unrecognized tax benefits was $24 million. We are not able to reasonably estimate the amount by which the liability will increase or decrease over an extended period of time or whether a cash settlement of the liability will be required. Therefore, these amounts have been excluded from the schedule of contractual obligations.
We do not have required minimum cash contribution obligations for our qualified pension plans in 2023. 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 $47 million in 2024. These amounts have been excluded from the schedule of contractual obligations.
We lease certain sales and administrative office facilities, distribution centers, research and manufacturing facilities and other equipment under longer-term operating leases. Vehicle leases are generally shorter in duration. Vehicle leases have residual value requirements that have historically been satisfied primarily by the proceeds on the sale of the vehicles.
44
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 as hedging instruments to manage risks associated with our investments in foreign operations. As of December 31, 2023, we had a total of €834 million senior notes designated as net investment hedges.
We enter into cross-currency swap derivative contracts to hedge certain Euro denominated exposures from our investments in certain of its Euro denominated functional currency subsidiaries. We use net investment hedges as hedging instruments to manage risks associated with our investments in foreign operations. As of December 31, 2023, we had €625 million of cross-currency swap derivative contracts outstanding designated as a net investment hedge.
We enter into cross-currency swap derivative contracts to hedge certain Chinese Yen (“CNY”) denominated exposures from our investments in certain CNY denominated functional currency subsidiaries. We use net investment hedges as hedging instruments to manage risks associated with our investments in foreign operations. As of December 31, 2023, we had CNH 2,192 million (CNH is the CNY traded in the offshore market) of cross-currency swap derivative contracts outstanding designated as a net investment hedge.
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, 2023, we had $1,500 million of interest rate swaps outstanding.
Refer to Note 8 for further information on our hedging activity.
Based on a sensitivity analysis (assuming a 10% change in market rates) of our foreign exchange and interest rate derivatives and other financial instruments, changes in exchange rates or interest rates would increase/decrease our financial position and liquidity by approximately $169 million. The effect on our results of operations would be substantially offset by the impact of the hedged items.
GLOBAL ECONOMIC AND POLITICAL ENVIRONMENT
Global Economies
Approximately half of our sales are outside of the U.S. Our international operations subject us to changes in economic conditions and foreign currency exchange rates as well as political uncertainty in some countries which could impact future operating results.
Argentina and Turkey are classified as highly inflationary economies in accordance with U.S. GAAP, and the U.S. dollar is the functional currency for our subsidiaries in Argentina and Turkey. During 2023, sales in Argentina and Turkey represented less than 1% of our consolidated sales. Assets held in Argentina and Turkey at the end of 2023 represented less than 1% of our consolidated assets.
In light of Russia’s invasion of Ukraine and the sanctions against Russia by the United States and other countries, we have made the determination that we will limit our Russian business to operations that are essential to life, providing minimal support for our healthcare, life sciences, food and beverage and certain water businesses. We may further narrow our presence in Russia depending on future developments. Our Russian and Ukraine operations represented approximately 1% of our 2023 consolidated net sales. We recorded charges of $1.4 million and $13.1 million in 2023 and 2022, respectively, primarily related to recoverability risk of certain assets in both Russia and Ukraine.
NEW ACCOUNTING PRONOUNCEMENTS
Information regarding new accounting pronouncements is included in Note 2.
45
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
● Adjusted net sales
● Adjusted fixed currency sales
● Organic sales, formerly known as acquisition adjusted fixed currency sales
● Adjusted cost of sales
● Adjusted gross margin
● Fixed currency operating income
● Fixed currency operating income margin
● Adjusted operating income
● Adjusted operating income margin
● Adjusted fixed currency operating income
● Adjusted fixed currency operating income margin
● Organic operating income, formerly known as acquisition adjusted fixed currency operating income
● Organic operating income margin, formerly known as acquisition adjusted fixed currency operating income margin
● Adjusted other (income) expense
● Adjusted interest expense, net
● EBITDA
● Adjusted tax rate
● Adjusted net income attributable to Ecolab
● Adjusted diluted EPS
We provide these measures as additional information regarding our operating results. We use these non-GAAP measures internally to evaluate our performance and in making financial and operational decisions, including with respect to incentive compensation. We believe that our presentation of these measures provides investors with greater transparency with respect to our results of operations and that these measures are useful for period-to-period comparison of results.
Our non-GAAP adjusted financial measure for net sales excludes 2021 Purolite sales. Our non-GAAP adjusted financial measures for cost of sales, gross margin, operating income, other (income) expense and interest expense exclude the impact of special (gains) and charges and (with the exception of other (income) expense) the 2021 impact of the Purolite transaction, and our non-GAAP measures for tax rate, net income attributable to Ecolab and diluted EPS further exclude the impact of discrete tax items. We include items within special (gains) and charges and discrete tax items that we believe can significantly affect the period-over-period assessment of operating results and not necessarily reflect costs and/or income associated with historical trends and future results. After tax special (gains) and charges are derived by applying the applicable local jurisdictional tax rate to the corresponding pre-tax special (gains) and charges.
EBITDA is defined as the sum of net income including non-controlling interest, provision for income taxes, net interest expense, depreciation and amortization. EBITDA is used in our net debt to EBITDA ratio, which we view as important indicators of the operational and financial health of our organization.
We evaluate the performance of our international operations based on fixed currency rates of foreign exchange. Fixed currency amounts included in this Form 10-K are based on translation into U.S. dollars at the fixed foreign currency exchange rates established by management at the beginning of 2023. We also provide our segment results based on public currency rates for informational purposes.
Our reportable segments do not include the impact of intangible asset amortization from the Nalco and Purolite transactions or the impact of special (gains) and charges as these are not allocated to our reportable segments.
Our non-GAAP financial measures for organic sales, organic operating income and organic operating income margin are at fixed currency and exclude the impact of special (gains) and charges, the results of our acquired businesses from the first twelve months post acquisition and the results of divested businesses from the twelve months prior to divestiture. As part of the separation of ChampionX in 2020, we entered into a Master Cross Supply and Product Transfer agreement with ChampionX to provide, receive or transfer certain products for a period up to 36 months and for a small set of products with limited suppliers over the next few years. Sales of product to ChampionX under this agreement are recorded in product and equipment sales in the Corporate segment along with the related cost of sales. These transactions are removed from the consolidated results as part of the calculation of the impact of acquisitions and divestitures.
These non-GAAP measures are not in accordance with, or an alternative to U.S. GAAP and may be different from non-GAAP measures used by other companies. Investors should not rely on any single financial measure when evaluating our business. We recommend that investors view these measures in conjunction with the U.S. GAAP measures included in this MD&A and we have provided reconciliations of reported U.S. GAAP amounts to the non-GAAP amounts in this MD&A.
46
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The discussion under the heading entitled "Market Risk" and “Global Economic and Political Environment” is incorporated by reference from Part II, Item 7 of this Form 10-K.
Item 8. Financial Statements and Supplementary Data.
REPORTS OF MANAGEMENT
To our Shareholders:
Management’s Responsibility for Financial Statements
Management is responsible for the integrity and objectivity of the consolidated financial statements. The statements have been prepared in accordance with accounting principles generally accepted in the United States of America and, accordingly, include certain amounts based on management’s best estimates and judgments.
The Board of Directors, acting through its Audit Committee composed solely of independent directors, is responsible for determining that management fulfills its responsibilities in the preparation of financial statements and maintains internal control over financial reporting. The Audit Committee recommends to the Board of Directors the appointment of the Company’s independent registered public accounting firm, subject to ratification by the shareholders. It meets regularly with management, the internal auditors and the independent registered public accounting firm.
The independent registered public accounting firm has audited the consolidated financial statements included in this annual report and have expressed their opinion regarding whether these consolidated financial statements present fairly in all material respects our financial position and results of operation and cash flows as stated in their report presented separately herein.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, an evaluation of the design and operating effectiveness of internal control over financial reporting was conducted based on the 2013 framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the evaluation under the framework in Internal Control — Integrated Framework, management concluded that internal control over financial reporting was effective as of December 31, 2023.
The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2023 as stated in their report which is included herein.
|
|
Christophe Beck | Scott D. Kirkland |
Chairman and Chief Executive Officer | Chief Financial Officer |
47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Ecolab Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Ecolab Inc. and its subsidiaries (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of income, of comprehensive income, of equity and of cash flows for each of the three years in the period ended December 31, 2023, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
48
Valuation of Certain U.S. Defined Benefit Pension Plan Obligations
As described in Note 16 to the consolidated financial statements, the Company’s projected benefit obligations for U.S. pension plans was $1,859.5 million as of December 31, 2023, of which a majority relates to certain U.S. pension plans. The measurement of the Company’s pension benefit obligations are dependent on a variety of assumptions determined by management and used actuaries in their valuation method and calculations. The significant assumptions used in developing the required estimates of the projected benefit obligations are the discount rates, expected returns on assets, projected salary increases, and mortality tables.
The principal considerations for our determination that performing procedures relating to the valuation of certain U.S. defined benefit pension plan obligations is a critical audit matter are (i) the significant judgment by management when developing the estimate of certain U.S. defined benefit pension plan obligations; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to the discount rates and expected return on assets; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s valuation of the defined benefit pension plan obligations, including controls over the valuation of the U.S. defined benefit pension plan obligations. These procedures also included, among others (i) testing management’s process for developing the estimate of certain U.S. defined benefit pension plan obligations; (ii) evaluating the appropriateness of the actuarial valuation method and calculations used by management; (iii) testing the completeness and accuracy of underlying data used in the actuarial valuation method and calculations; and (iv) evaluating the reasonableness of the significant assumptions used by management related to the discount rates and expected return on assets. Professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of the actuarial valuation method and calculations and (ii) the reasonableness of the discount rates and expected return on assets assumptions.
/s/
February 23, 2024
We have served as the Company’s auditor since 1970.
49
CONSOLIDATED STATEMENTS OF INCOME
(millions, except per share amounts) | 2023 | 2022 | 2021 | |||||||
Product and equipment sales | $ | $ | $ | |||||||
Service and lease sales | | | | |||||||
Net sales | | | | |||||||
Product and equipment cost of sales | | | | |||||||
Service and lease cost of sales | | | | |||||||
Cost of sales (including special charges (a)) | | | | |||||||
Selling, general and administrative expenses | |
| |
| | |||||
Special (gains) and charges | |
| |
| | |||||
Operating income | |
| |
| | |||||
Other (income) expense (b) | ( | ( | ( | |||||||
Interest expense, net (c) | | | | |||||||
Income before income taxes | |
| |
| | |||||
Provision for income taxes | |
| |
| | |||||
Net income including noncontrolling interest | | | | |||||||
Net income attributable to noncontrolling interest | | | | |||||||
Net income attributable to Ecolab | $ | $ | $ | |||||||
Earnings attributable to Ecolab per common share | ||||||||||
Basic | $ | $ | $ | |||||||
Diluted | $ | $ | $ | |||||||
Weighted-average common shares outstanding | ||||||||||
Basic | |
| |
| | |||||
Diluted | |
| |
| | |||||
| (a) | Cost of sales includes special (gains) and charges of $ |
| (b) | Other (income) expense includes special charges of $ |
| (c) | Interest expense, net includes special charges of $ |
The accompanying notes are an integral part of the consolidated financial statements.
50
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(millions) |
| 2023 | 2022 | 2021 | ||||||||
| ||||||||||||
Net income including noncontrolling interest | $ | $ | $ | |||||||||
| ||||||||||||
Other comprehensive income (loss), net of tax |
| |||||||||||
| ||||||||||||
Foreign currency translation adjustments |
| |||||||||||
Foreign currency translation |
|
|
| |
| ( |
| ( | ||||
(Loss) gain on net investment hedges |
|
|
| ( |
| |
| | ||||
Total foreign currency translation adjustments |
|
|
| ( |
| ( |
| | ||||
| ||||||||||||
Derivatives and hedging instruments |
|
|
| ( |
| ( |
| | ||||
| ||||||||||||
Pension and postretirement benefits |
|
|
| ( |
| |
| | ||||
| ||||||||||||
Subtotal |
|
|
| ( |
| ( |
| | ||||
| ||||||||||||
Total comprehensive income, including noncontrolling interest |
|
|
| |
| |
| | ||||
Comprehensive income attributable to noncontrolling interest |
|
|
| |
| |
| | ||||
Comprehensive income attributable to Ecolab |
| $ | $ | $ | ||||||||
The accompanying notes are an integral part of the consolidated financial statements.
51
CONSOLIDATED BALANCE SHEETS
(millions, except per share amounts) | 2023 | 2022 | |||||
ASSETS | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | $ | |||||
Accounts receivable, net |
| |
| | |||
Inventories |
| |
| | |||
Other current assets | | | |||||
Total current assets |
| |
| | |||
Property, plant and equipment, net |
| |
| | |||
Goodwill |
| |
| | |||
Other intangible assets, net |
| |
| | |||
Operating lease assets | | | |||||
Other assets | | | |||||
Total assets | $ | $ | |||||
LIABILITIES AND EQUITY | |||||||
Current liabilities | |||||||
Short-term debt | $ | $ | |||||
Accounts payable | | | |||||
Compensation and benefits | | | |||||
Income taxes | | | |||||
Other current liabilities | | | |||||
Total current liabilities | | | |||||
Long-term debt | | | |||||
Pension and postretirement benefits | | | |||||
Deferred income taxes | | | |||||
Operating lease liabilities | | | |||||
Other liabilities | | | |||||
Total liabilities | | | |||||
Commitments and contingencies (Note 15) | |||||||
Equity (a) | |||||||
Common stock | | | |||||
Additional paid-in capital | | | |||||
Retained earnings | | | |||||
Accumulated other comprehensive loss | ( | ( | |||||
Treasury stock | ( | ( | |||||
Total Ecolab shareholders’ equity | | | |||||
Noncontrolling interest | | | |||||
Total equity | | | |||||
Total liabilities and equity | $ | $ | |||||
| (a) | Common stock, |
The accompanying notes are an integral part of the consolidated financial statements.
52
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions) | 2023 |
| 2022 |
| 2021 | ||||||
OPERATING ACTIVITIES | |||||||||||
Net income including noncontrolling interest | $ | $ | $ | ||||||||
Adjustments to reconcile net income to cash provided by operating activities: | |||||||||||
Depreciation |
|
| | | | ||||||
Amortization |
|
| | | | ||||||
Deferred income taxes |
|
| ( | ( | ( | ||||||
Share-based compensation expense |
|
| | | | ||||||
Pension and postretirement plan contributions |
|
| ( | ( | ( | ||||||
Pension and postretirement plan expense (income), net |
|
| | | | ||||||
Restructuring charges, net of cash paid |
|
| ( | | ( | ||||||
Debt refinancing | - | - | | ||||||||
Other, net |
|
| | | | ||||||
Changes in operating assets and liabilities, net of effect of acquisitions: | |||||||||||
Accounts receivable |
|
| ( | ( | ( | ||||||
Inventories |
|
| | ( | ( | ||||||
Other assets |
|
| | ( | ( | ||||||
Accounts payable |
|
| ( | | | ||||||
Other liabilities |
|
| | | | ||||||
Cash provided by operating activities | | | | ||||||||
INVESTING ACTIVITIES | |||||||||||
Capital expenditures |
|
| ( | ( | ( | ||||||
Property and other assets sold |
|
| | | | ||||||
Acquisitions and investments in affiliates, net of cash acquired |
|
| ( | ( | ( | ||||||
Other, net | ( | | ( | ||||||||
Cash used for investing activities | ( | ( | ( | ||||||||
FINANCING ACTIVITIES | |||||||||||
Net (repayments) issuances of commercial paper and notes payable |
|
| ( | ( | | ||||||
Long-term debt borrowings |
|
| - | | | ||||||
Long-term debt repayments |
|
| ( | - | ( | ||||||
Reacquired shares |
|
| ( | ( | ( | ||||||
Dividends paid |
|
| ( | ( | ( | ||||||
Exercise of employee stock options |
|
| | | | ||||||
Debt refinancing | - | - | ( | ||||||||
Hedge settlements | ( | | | ||||||||
Other, net | ( | ( | ( | ||||||||
Cash (used for) provided by financing activities | ( | ( | | ||||||||
Effect of exchange rate changes on cash and cash equivalents |
|
| ( |
| |
| | ||||
Increase (decrease) in cash and cash equivalents |
|
| | | ( | ||||||
Cash and cash equivalents, beginning of period |
|
| | | | ||||||
Cash and cash equivalents, end of period | $ | $ | $ | ||||||||
SUPPLEMENTAL CASH FLOW INFORMATION | |||||||||||
Income taxes paid | $ | $ | $ | ||||||||
Net interest paid |
|
| |
| |
| | ||||
The accompanying notes are an integral part of the consolidated financial statements.
53
CONSOLIDATED STATEMENTS OF EQUITY
Year ended December 31, 2023, 2022 and 2021 | ||||||||||||||||||||||||
(millions, except per share amounts) |
| Common |
| Additional |
| Retained |
| AOCI |
| Treasury |
| Ecolab Shareholders' |
| Non-Controlling |
| Total | ||||||||
Balance, December 31, 2020 | $ |
| $ |
| $ |
| ($ |
| ($ |
| $ |
| $ |
| $ | |||||||||
Net income |
|
|
| |||||||||||||||||||||
Other comprehensive income (loss) activity |
|
| ( |
| ||||||||||||||||||||
Cash dividends declared (a) | ( |
| ( |
| ( |
| ( | |||||||||||||||||
Stock options and awards |
|
|
| |||||||||||||||||||||
Reacquired shares | ( |
| ( |
| ( | |||||||||||||||||||
Balance, December 31, 2021 |
|
|
|
| ( |
| ( |
|
|
| ||||||||||||||
Net income |
|
|
| |||||||||||||||||||||
Other comprehensive income (loss) activity | ( |
| ( |
| ( |
| ( | |||||||||||||||||
Cash dividends declared (a) | ( |
| ( |
| ( |
| ( | |||||||||||||||||
Fair value adjustment of prior acquisition | - | |||||||||||||||||||||||
Stock options and awards |
|
|
| |||||||||||||||||||||
Reacquired shares | ( |
| ( |
| ( | |||||||||||||||||||
Balance, December 31, 2022 |
|
|
|
| ( |
| ( |
|
|
| ||||||||||||||
Net income | | | | | ||||||||||||||||||||
Other comprehensive income (loss) activity | ( |
| ( |
| ( |
| ( | |||||||||||||||||
Cash dividends declared (a) | ( |
| ( |
| ( |
| ( | |||||||||||||||||
Changes in noncontrolling interests | ( | ( | ( | |||||||||||||||||||||
Stock options and awards |
|
| | | |
| |
| | |||||||||||||||
Reacquired shares | ( |
| ( |
| ( | |||||||||||||||||||
Balance, December 31, 2023 | $ | $ | $ | ($ | ($ | $ | $ | $ | ||||||||||||||||
| (a) | Dividends declared per common share were $ |
COMMON STOCK ACTIVITY
2023 | 2022 | 2021 |
| |||||||||||
Common | Treasury | Common | Treasury | Common | Treasury |
| ||||||||
Year ended December 31 |
| Stock |
| Stock | Stock |
| Stock |
| Stock |
| Stock |
| ||
Shares, beginning of year |
| |
| ( |
| | ( |
| | ( | ||||
Stock options |
| | |
| | |
| | | |||||
Stock awards |
| | |
| | | | | ||||||
Reacquired shares | - | ( | - | ( | - | ( | ||||||||
Shares, end of year |
| |
| ( |
| |
| ( |
| |
| ( | ||
The accompanying notes are an integral part of the consolidated financial statements.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Ecolab is a global leader in water, hygiene and infection prevention solutions and services that protect people and vital resources. The Company delivers comprehensive solutions, data-driven insights and personalized service to advance food safety, maintain clean and safe environments, optimize water and energy use and improve operational efficiencies and sustainability for customers in the food, healthcare, hospitality and industrial markets in more than
The Company’s cleaning and sanitizing programs and products and pest elimination services support customers in the foodservice, food and beverage processing, hospitality, healthcare, government and education, retail, textile care and commercial facilities management sectors. The Company’s products and technologies are also used in water treatment, pollution control, energy conservation, refining, primary metals manufacturing, papermaking, mining and other industrial processes.
In December 2021, the Company acquired Purolite for total consideration of $
The Company is aligned into
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all subsidiaries in which the Company has a controlling financial interest. Investments in companies, joint ventures or partnerships in which the Company does not have control but has the ability to exercise significant influence over operating and financial decisions, are reported using the equity method of accounting. The alternative method of accounting is used in circumstance where the Company’s investments in companies, joint ventures and partnerships neither provide it control or significant influence over the investee and for investments that do not have readily identifiable fair values. Investments accounted for under the alternative method are recorded at cost and adjusted for impairments, if any, or observable price changes of the same or similar securities issued by the investee. International subsidiaries are included in the financial statements on the basis of their U.S. GAAP November 30 fiscal year ends to facilitate the timely inclusion of such entities in the Company’s consolidated financial reporting. All intercompany transactions and profits are eliminated in consolidation.
Use of Estimates
The preparation of the Company’s financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. The Company’s critical accounting estimates include revenue recognition, litigation and environmental reserves, actuarially determined liabilities, income taxes, long-lived assets, intangible assets and goodwill.
Foreign Currency Translation
Financial position and reported results of operations of the Company’s non-U.S. dollar functional currency international subsidiaries are measured using local currencies as the functional currency. Assets and liabilities of these operations are translated at the exchange rates in effect at each fiscal year end. The translation adjustments related to assets and liabilities that arise from changes in exchange rates from period to period are included in accumulated other comprehensive income (loss) in shareholders’ equity. Income statement accounts are translated at average rates of exchange prevailing during the year. As discussed in Note 18 Operating Segments and Geographic Information, the Company evaluates its international operations based on fixed rates of exchange; however, changes in exchange rates from period to period impact the amount of reported income from consolidated operations.
Concentration of Credit Risk
Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed to perform as contracted. The Company believes the likelihood of incurring material losses due to concentration of credit risk is minimal. The principal financial instruments subject to credit risk are as follows:
55
Cash and Cash Equivalents - The Company maintains cash deposits with major banks, which from time to time may exceed insured limits. The possibility of loss related to financial condition of major banks has been deemed minimal. Additionally, the Company’s investment policy limits exposure to concentrations of credit risk and changes in market conditions.
Accounts Receivable - A large number of customers in diverse industries and geographies, as well as the practice of establishing reasonable credit lines, limits credit risk. Based on historical trends and experiences, the allowance for expected credit losses is adequate to cover expected credit risk losses.
Foreign Currency and Interest Rate Contracts and Derivatives - Exposure to credit risk is limited by internal policies and active monitoring of counterparty risks. In addition, the Company uses a diversified group of major international banks and financial institutions as counterparties. The Company does not anticipate nonperformance by any of these counterparties.
Cash and Cash Equivalents
Cash equivalents include highly-liquid investments with a maturity of three months or less when purchased.
Accounts Receivable and Allowance for Expected Credit Losses
Accounts receivable are carried at the invoiced amounts, less an allowance for expected credit losses, and generally do not bear interest. The Company’s allowance for expected credit losses estimates the amount of expected future credit losses by analyzing accounts receivable balances by age and applying historical write-off and collection experience. The Company’s estimates separately consider macroeconomic trends, specific circumstances and credit conditions of customer receivables. Account balances are written off against the allowance when it is determined the receivable will not be recovered.
The Company’s allowance for the expected return of products shipped and credits related to pricing or quantities shipped was $
The following table summarizes the activity in the allowance for expected credit losses:
(millions) | 2023 |
| 2022 |
| 2021 | ||||||
Beginning balance | $ | $ | $ | ||||||||
Bad debt expense |
| |
| |
| | |||||
Write-offs |
| ( |
| ( |
| ( | |||||
Other (a) |
| ( |
| |
| ( | |||||
Ending balance | $ | $ | $ | ||||||||
| (a) | Other amounts are primarily the effects of changes in currency translations and acquired balances. |
Inventory Valuations
Inventories are valued at the lower of cost or net realizable value. Certain U.S. inventory costs are determined on a last-in, first-out (“LIFO”) basis. LIFO inventories represented
Property, Plant and Equipment
Property, plant and equipment assets are stated at cost. Merchandising and customer equipment consists principally of various dispensing systems for the Company’s cleaning and sanitizing products, warewashing machines and process control and monitoring equipment. Certain dispensing systems capitalized by the Company are accounted for on a mass asset basis, whereby equipment is capitalized and depreciated as a group and written off when fully depreciated. The Company capitalizes both internal and external costs to develop or purchase computer software. Costs incurred for data conversion, training and maintenance associated with capitalized software are expensed as incurred. Expenditures for major renewals and improvements, which significantly extend the useful lives of existing plant and equipment, are capitalized and depreciated. Expenditures for repairs and maintenance are charged to expense as incurred. Upon retirement or disposition of plant and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in income.
Depreciation is charged to operations using the straight-line method over the assets’ estimated useful lives ranging from
56
Goodwill and Other Intangible Assets
Goodwill
Goodwill arises from the Company’s acquisitions and represents the excess of the fair value of the purchase consideration exchanged over the fair value of net assets acquired. The Company’s reporting units are its
During the second quarter of 2023, the Company completed its annual goodwill impairment assessment for its
The changes in the carrying amount of goodwill for each of the Company’s reportable segments were as follows:
Global | Global | ||||||||||||||||
Global | Institutional | Healthcare & | |||||||||||||||
(millions) |
| Industrial |
| & Specialty |
| Life Sciences | Other |
| Total |
| |||||||
December 31, 2021 | $ | $ | $ | $ | $ | ||||||||||||
Prior year business combinations (a) | | - | | - | | ||||||||||||
Effect of foreign currency translation |
| ( | ( | ( | ( | ( | |||||||||||
December 31, 2022 | $ | $ | $ | $ | $ | ||||||||||||
Current year business combinations (b) | | | - | - | | ||||||||||||
Effect of foreign currency translation | | | | | | ||||||||||||
December 31, 2023 | $ | $ | $ | $ | $ | ||||||||||||
| (a) | Represents purchase price allocation adjustments for acquisitions deemed preliminary as of the end of the prior year. |
| (b) | Represents goodwill associated with current year acquisitions. For 2023, approximately $ |
Other Intangible Assets
The Nalco trade name is the Company’s only indefinite life intangible asset, which is tested for impairment on an annual basis during the second quarter. During the second quarter of 2023, the Company completed its annual impairment assessment of the Nalco trade name using the relief from royalty discounted cash flow method, which incorporates assumptions regarding future sales projections, royalty rate and discount rates. The Company’s Nalco trade name impairment assessment for 2023 indicated the estimated fair value of the Nalco trade name exceeded its $
The Company’s intangible assets subject to amortization include customer relationships, trademarks, patents and other technology primarily acquired through business acquisitions. The fair value of intangible assets acquired in business acquisitions are estimated primarily using discounted cash flow valuation methods at the time of acquisition. Intangible assets are amortized on a straight-line basis over their estimated lives. The weighted-average useful life of amortizable intangible assets was
The weighted-average useful life by type of amortizable asset at December 31, 2023 were as follows:
(years)
Customer relationships |
| |
Patents |
| |
Trademarks |
| |
Other technology |
|
57
The straight-line method of amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits obtained by the Company in each reporting period. The Company evaluates the remaining useful life of its intangible assets subject to amortization each reporting period to determine whether events and circumstances warrant a change to the estimated remaining period of amortization. If the estimate of an intangible asset’s remaining useful life is changed, the remaining carrying amount of the intangible asset will be amortized prospectively over the updated remaining useful life. Amortization expense related to other intangible assets during the last three years and future estimated amortization were as follows:
(millions) | |||
2021 | $ | ||
2022 |
| | |
2023 |
| |
|
2024 |
| | |
2025 |
| | |
2026 |
| | |
2027 |
| | |
2028 |
| |
Long-Lived Assets
The Company reviews its long-lived and amortizable intangible assets for impairment when significant events or changes in business circumstances indicate that the carrying amount of the assets, or asset group to which it is assigned, may not be recoverable. Such circumstances may include a significant decrease in the market price of an asset or asset group, a significant adverse change in the manner in which the asset or asset group is being used or history of cash flow losses associated with the use of an asset or asset group. Impairment losses could occur when the carrying amount of an asset or asset group exceeds the anticipated future undiscounted cash flows expected to result from the use of the asset or asset group and its eventual disposition. The amount of the impairment loss to be recorded, if any, is calculated by the excess of the asset’s or asset group’s carrying value over its fair value.
In addition, the Company periodically reassesses the estimated remaining useful lives of its long-lived assets. Changes to estimated useful lives would impact the amount of depreciation and amortization recorded in earnings. The Company has not experienced significant changes in the carrying amount or estimated remaining useful lives of its long-lived or amortizable intangible assets.
Rental and Leases
Lessee
The Company determines whether a lease exists at the inception of the arrangement. In assessing whether a contract is or contains a lease, the Company evaluates whether the arrangement conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company accounts for lease components separately from the nonlease components (e.g., common-area maintenance costs, property taxes, parking, etc.). Operating leases are recorded in operating lease assets, other current liabilities and operating lease liabilities in the Consolidated Balance Sheets.
Operating lease assets and operating lease liabilities are measured and recognized based on the present value of the future minimum lease payments over the estimated lease term at the lease commencement date. The Company uses the rate implicit in the lease when available or determinable. When the rate implicit in the lease is not determinable, the Company uses its incremental borrowing rate based on the information available at the lease commencement date to determine the present value of future payments. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Variable lease payments are not included in the lease liability and are recognized as incurred. The Company identified real estate, vehicles and other equipment as the primary classes of its leases. Certain leases with a similar class of underlying assets are accounted for as a portfolio of leases.
The Company does not record operating lease assets or liabilities for leases with terms of twelve months or less. Those lease payments are recognized in the Consolidated Statements of Income over the lease term as incurred.
Many of the Company’s leases include options to renew or cancel, which are at the Company’s sole discretion. Renewal terms can extend the lease term from
Lessor
The Company accounts for lease and nonlease components separately. The nonlease components, such as product and service revenue, are accounted for under Topic 606 Revenue from Contracts with Customers, refer to Note 17 for more information. Revenue from leasing equipment is recognized on a straight-line basis over the life of the lease. Cost of sales includes the depreciation expense for assets under operating leases. The assets are depreciated over their estimated useful lives. Initial lease terms range from
Lease contracts convey the right for the customer to control the equipment for a period of time as defined by the contract. There are
58
Income Taxes
Income taxes are recognized during the period in which transactions enter into the determination of financial statement income, with deferred income taxes provided for the tax effect of temporary differences between the carrying amount of assets and liabilities and their tax bases. The Company records a valuation allowance to reduce its deferred tax assets when uncertainty regarding their realizability exists. Relevant factors in determining the realizability of deferred tax assets include historical results, sources of future taxable income, the expected timing of the reversal of temporary differences, tax planning strategies and the expiration dates of the various tax attributes. The Company records liabilities for unrecognized tax benefits in accordance with the U.S. GAAP recognition and measurement criteria guidance. The Company has elected the period cost method and considers the estimated global intangible low taxed income (“GILTI”) impact in tax expense. The Company recognizes interest and penalties related to unrecognized tax benefits in the income tax provision.
Refer to Note 12 for additional information regarding income taxes.
Share-Based Compensation
The Company measures compensation expense for share-based awards at fair value at the date of grant and recognizes compensation expense over the service period for awards expected to vest. The majority of grants to retirement eligible recipients (age 55 with required years of service) are recorded to expense using the non-substantive vesting method and are fully expensed over a six-month period following the date of grant. In addition, the Company includes a forfeiture estimate in the amount of compensation expense being recognized based on an estimate of the number of outstanding awards expected to vest.
All excess tax benefits or deficiencies are recognized as discrete income tax items on the Consolidated Statements of Income. The extent of excess tax benefits is subject to variation in stock price and stock option exercises. Refer to Note 11 for additional information regarding equity compensation plans.
Restructuring Activities
The Company’s restructuring activities are associated with plans to enhance its efficiency, effectiveness and sharpen its competitiveness. These restructuring plans include net costs associated with significant actions involving employee-related severance charges, contract termination costs and asset write-downs and disposals. Employee termination costs are largely based on policies and severance plans, and include personnel reductions and related costs for severance, benefits and outplacement services. These charges are reflected in the quarter in which the actions are probable and the amounts are estimable, which typically is when management approves the associated actions. Contract termination costs include charges to terminate leases prior to the end of their respective terms and other contract termination costs. Asset write-downs and disposals include leasehold improvement write-downs, other asset write-downs associated with combining operations and disposal of assets. Refer to Note 3 for additional information regarding restructuring activities.
Revenue Recognition
Revenue is measured as the amount of consideration expected to be received in exchange for transferring goods or providing service.
Product and Sold Equipment
Revenue from product and sold equipment is recognized when obligations under the terms of a contract with the customer are satisfied, which generally occurs with the transfer of the product or delivery of the equipment.
Service and Lease Equipment
Revenue from service and leased equipment is recognized when the services are provided, or the customer receives the benefit from the leased equipment, which is over time. Service revenue is recognized over time utilizing an input method and aligns with when the services are provided. Typically, revenue is recognized using costs incurred to date because the effort provided by the field selling and service organization represents services provided, which corresponds with the transfer of control. Revenue for leased equipment is accounted for under Topic 842 Leases and recognized on a straight-line basis over the length of the lease contract.
59
Other Considerations
Contracts with customers may include multiple performance obligations. For contracts with multiple performance obligations, the consideration is allocated between products and services based on their stand-alone selling prices. Stand-alone selling prices are generally based on the prices charged to customers when the good or service is not bundled with other product or services or using an expected cost plus margin. Judgment is used in determining the amount of service that is embedded within the Company’s contracts, which is based on the amount of time spent on the performance obligation activities. The level of effort, including the estimated margin that would be charged, is used to determine the amount of service revenue. Depending on the terms of the contract, the Company may defer the recognition of revenue when a future performance obligation has not yet occurred.
Taxes assessed by a governmental authority that are both imposed on, and concurrent with, a specific revenue-producing transaction, which are collected by the Company from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight are recognized in cost of sales when control over the product has transferred to the customer.
Other estimates used in recognizing revenue include allocating variable consideration to customer programs and incentive offerings, including pricing arrangements, promotions and other volume-based incentives at the time the sale is recorded. These estimates are based primarily on historical experience and anticipated performance over the contract period. Based on the certainty in estimating these amounts, they are included in the transaction price of the contracts and the associated remaining performance obligations. The Company recognizes revenue when collection of the consideration expected to be received in exchange for transferring goods or providing services is probable.
The Company’s revenue policies do not provide for general rights of return. Estimates used in recognizing revenue include the delay between the time that products are shipped and when they are received by customers, when title transfers and the amount of credit memos issued in subsequent periods. Depending on market conditions, the Company may increase customer incentive offerings, which could reduce gross profit margins over the term of the incentive.
Earnings Per Common Share
The difference in the weighted average common shares outstanding for calculating basic and diluted earnings attributable to Ecolab per common share is a result of the dilution associated with the Company’s equity compensation plans. As noted in the table below, certain stock options and units outstanding under these equity compensation plans were not included in the computation of diluted earnings attributable to Ecolab per common share because they would not have had a dilutive effect.
The computations of the basic and diluted earnings attributable to Ecolab per share amounts were as follows:
(millions, except per share) | 2023 | 2022 | 2021 | ||||||||
Net income attributable to Ecolab | $ | $ | $ | ||||||||
Weighted-average common shares outstanding | |||||||||||
Basic |
|
| |
| |
| | ||||
Effect of dilutive stock options and units |
|
| |
| | | |||||
Diluted |
|
| |
| |
| | ||||
Earnings attributable to Ecolab per common share | |||||||||||
Basic EPS | $ | $ | $ | ||||||||
Diluted EPS | $ | $ | $ | ||||||||
Anti-dilutive securities excluded from the computation of diluted EPS |
|
| |
| |
| | ||||
Amounts do not necessarily sum due to rounding. | |||||||||||
Other Significant Accounting Policies
The following table includes a reference to additional significant accounting policies that are described in other notes to the financial statements, including the note number:
Policy | Note | |
Fair value measurements |
| 7 |
Derivatives and hedging transactions |
| 8 |
Share-based compensation |
| 10 |
Research and development expenditures | 14 | |
Legal contingencies |
| 15 |
Pension and post-retirement benefit plans | 16 | |
Reportable segments | 18 |
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New Accounting Pronouncements
Standards That Are Not Yet Adopted: | |||||||||
|
|
| Required |
|
| ||||
Date of | Date of | Effect on the | |||||||
Standard |
| Issuance | Description |
| Adoption |
| Financial Statements | ||
ASU 2023-09 Income taxes (Topic 740): Improvements to Income Tax Disclosures | December 2023 | The amendments in this Update require that public business entities on an annual basis (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold. | January 1, 2025 | The Company is currently evaluating the impact of adoption and additional disclosure requirements. | |||||
ASU 2023-07 - Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures | November 2023 | The amendments in this ASU are to improve the disclosures about reportable segments and add more detailed information about a reportable segment’s expenses. The amendments in the ASU require public entities to disclose on an annual and interim basis significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”) and included within each reported measure of segment profit or loss, other segment items by reportable segment, the title and position of the CODM, and an explanation of how the CODM uses the reported measures of segment profit or loss in assessing segment performance and deciding how to allocate resources. The ASU does not change the definition of a segment, the method for determining segments, the criteria for aggregating operating segments into reportable segments, or the current specifically enumerated segment expenses that are required to be disclosed. | Effective for annual periods beginning after December 15, 2023 | Entities are required to apply the disclosure amendments on a retrospective basis to all periods presented. The Company is currently evaluating the impact of adoption. | |||||
Standards That Were Adopted: | ||||||||
| Date of |
|
| Date of |
| Effect on the | ||
Standard |
| Issuance | Description |
| Adoption |
| Financial Statements | |
ASU 2021-08 - Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers | October 2021 | Update to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to the recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer. | January 1, 2023 | The adoption of this standard did not have a significant impact on the Company's financial statements. | ||||
No other new accounting pronouncement issued or effective has had or is expected to have a material impact on the Company’s consolidated financial statements.
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3. SPECIAL (GAINS) AND CHARGES
Special (gains) and charges reported on the Consolidated Statements of Income included the following:
(millions) | 2023 | 2022 | 2021 | |||||||||
Cost of sales | ||||||||||||
| $ |
| $ | $ | ||||||||
Acquisition and integration activities | - | | | |||||||||
Russia/Ukraine | - | | - | |||||||||
Other | - | | | |||||||||
Cost of sales subtotal |
| |
| |
|
| | |||||
Special (gains) and charges | ||||||||||||
| |
| | | ||||||||
Acquisition and integration activities | | | | |||||||||
Russia/Ukraine | | | - | |||||||||
Other |
| |
| | | |||||||
Special (gains) and charges subtotal |
| |
| |
|
| | |||||
Operating income subtotal | | | | |||||||||
Other (income) expense | - | | | |||||||||
Interest expense, net | - | - | | |||||||||
Total special (gains) and charges | $ | $ | $ | |||||||||
For segment reporting purposes, special (gains) and charges are not allocated to reportable segments, which is consistent with the Company’s internal management reporting.
Restructuring Activities
Restructuring activities are primarily related to the Combined Program which is described below. These activities have been included as a component of cost of sales, special (gains) and charges, other (income) expense and interest expense, net on the Consolidated Statements of Income. Restructuring liabilities have been classified as a component of other current and other noncurrent liabilities on the Consolidated Balance Sheets.
Combined Program
In November 2022 the Company approved a Europe cost savings program. In connection with these actions, the Company expected to incur pre-tax charges of $
In anticipation of this Combined Program, a limited number of actions were taken in the fourth quarter of 2022. As a result, the Company reclassified $
In 2023 and 2022, the Company recorded total Combined Program restructuring charges of $
Restructuring activity related to the Combined Program since inception of the underlying actions includes the following:
|
|
|
|
| ||||||||||||
Employee | Asset | |||||||||||||||
(millions) |
| Costs |
| Disposals |
| Other |
| Total | ||||||||
2022 Activity | ||||||||||||||||
Recorded expense and accrual | $ | $- | $- | $ | ||||||||||||
Net cash payments |
| ( | - | - |
| ( | ||||||||||
Net restructuring liability, December 31, 2022 | | - | - | |||||||||||||
2023 Activity | ||||||||||||||||
Recorded expense and accrual | | | | | ||||||||||||
Net cash payments | ( | - | ( | ( | ||||||||||||
Non-cash charges |
| - | ( | - | ( | |||||||||||
Reclassification |
| | - | | ||||||||||||
Net restructuring liability, December 31, 2023 | $ | $- | $- | $ | ||||||||||||
62
Institutional Advancement Program
The Company approved a restructuring plan in 2020 focused on the Institutional business (“the Institutional Plan”) which is intended to enhance the Company’s Institutional sales and service structure and allow the sales team to capture share and penetration while maximizing service effectiveness by leveraging the Company’s ongoing investments in digital technology.
Certain activities contemplated in this Institutional Plan were previously approved in 2020 and included as part of Accelerate 2020. These activities were reclassified to the Institutional Plan. During 2023, 2022 and 2021, the Company recorded restructuring charges of $
Accelerate 2020
During 2018, the Company formally commenced a restructuring plan, Accelerate 2020 (“the A2020 Plan”), to leverage technology and systems investments and organizational changes. The goals of the A2020 Plan were to further simplify and automate processes and tasks, reduce complexity and management layers, consolidate facilities and focus on key long-term growth areas by further leveraging technology and structural improvements. The Company recorded restructuring charges of $
Net cash payments were $
Other Restructuring Activities
During 2022, and 2021, the Company recorded other restructuring charges of $
The restructuring liability balance for all other restructuring plans excluding Combined Program, the A2020 Plan and the Institutional Plan was $
Acquisition and integration related costs
Acquisition and integration related costs reported in special (gains) and charges on the Consolidated Statements of Income in 2023 include $
Acquisition and integration related costs reported in special (gains) and charges on the Consolidated Statements of Income in 2022 include $
Acquisition and integration related costs reported in special (gains) and charges on the Consolidated Statements of Income include $
Russia/Ukraine
In light of Russia’s invasion of Ukraine and the sanctions against Russia by the United States and other countries, the Company has made the determination that it will limit the Company’s Russian business to operations that are essential to life, providing minimal support for the Company’s healthcare, life sciences, food and beverage and certain water businesses. The Company incurred charges of $
63
Other operating activities
Other operating activities recorded to cost of sales on the Consolidated Statements of Income of $
Other operating activities recorded in special (gains) and charges on the Consolidated Statements of Income of $
Other (income) expense
During 2022 and 2021, the Company incurred pension settlement expense recorded in other (income) expense on the Consolidated Statements of Income of $
Interest expense, net
During 2021, the Company recorded special charges of $
4. ACQUISITIONS AND DISPOSITIONS
Acquisitions
The Company makes business acquisitions that align with its strategic business objectives. The assets and liabilities of acquired businesses are recorded in the Consolidated Balance Sheets based on estimates of the fair value of assets acquired, liabilities assumed and noncontrolling interests acquired as of the acquisition date. Goodwill is recognized in the amount that the purchase consideration paid exceeds the fair value of the net assets acquired. Purchase consideration includes both cash paid and the fair value of noncash consideration exchanged, including stock and/or contingent consideration exchanged, and is reduced by the amount of cash or cash equivalents acquired. Acquisitions during 2023, 2022 and 2021 were not significant to the Company’s consolidated financial statements; therefore, pro forma financial information is not presented.
2023 Activity
In November 2023, the Company acquired Flottec, LLC, a U.S.-based provider of flotation products and services for the mineral processing industry. The move will expand Nalco Water’s flotation offerings and its work to serve the industry from mine to metal. The acquisition became part of the Global Industrial reporting segment. The purchase accounting for this acquisition is preliminary and subject to change as the Company finalizes the valuation of intangible assets, income tax balances and working capital. The goodwill arising from the acquisition of Flottec, LLC is tax deductible.
In May 2023, the Company acquired Chemlink Laboratories LLC, a U.S.-based producer of small format cleaning solutions. The Company made two other immaterial acquisitions during the second quarter of 2023. All
2022 Activity
2021 Activity
Purolite Acquisition
On December 1, 2021, the Company acquired Purolite for total consideration of $
The Purolite acquisition has been accounted for as a business combination with the assets acquired and liabilities assumed recognized at fair value as of the acquisition date. The fair values of intangible assets acquired were estimated using discounted cash flow analyses appropriate in the circumstances for the nature of the assets being valued. The valuation models incorporated projections of future cash flows and other valuation assumptions. Significant inputs and assumptions used in the Company’s customer relationship intangible asset valuations include projected revenues, contributory asset charges, tax savings due to amortization, income tax rates, customer attrition rates and discount rates. Significant inputs and assumptions used in the Company’s tradename and acquired technology intangible asset valuations include projected revenues, future asset utilities, royalty rates, tax saving due to amortization, income tax rates and discount rates.
64
The Company incurred certain transaction and integration costs associated with the acquisition that were expensed and were recorded in the Consolidated Statements of Income. Further information related to the Company’s special (gains) and charges is included in Note 3.
Purolite purchase accounting was finalized in the fourth quarter of 2022. The following table summarizes the final value of Purolite assets acquired and liabilities assumed, net of cash acquired, as of the acquisition date:
(millions) | December 1, 2021 | |||
Tangible assets | $ | |||
Identifiable intangible assets | ||||
Customer relationships | | |||
Other technologies |
| | ||
Trademarks | | |||
Total assets acquired |
| | ||
| ||||
Goodwill | | |||
Total liabilities | | |||
Total consideration transferred to sellers, net of cash acquired |
| $ | ||
During 2022, the Company recorded purchase accounting adjustments associated with the finalization of the purchase accounting for its acquisition of Purolite. As a result of these purchase accounting adjustments, the Company made $
Tangible assets acquired primarily consist of accounts receivable of $
Goodwill of $
Other Acquisitions
In February 2021, the Company acquired TechTex Holdings Limited (“TechTex”), a U.K.-based business which sells wet and dry wipes and other nonwovens products primarily for life sciences and healthcare applications. TechTex became part of the Global Healthcare & Life Sciences reporting segment. The purchase price included an immaterial holdback amount that was settled prior to December 31, 2021. Purchase accounting was finalized in the first quarter of 2022.
In July 2021, the Company acquired National Wiper Alliance, Inc. (“NWA”), a U.S.-based business which sells wipes for healthcare and institutional applications. NWA became part of the Global Healthcare & Life Sciences reporting segment. Purchase accounting was finalized in the third quarter of 2022.
In September 2021, the Company acquired EPN Water Col, Ltd. (“EPN”), a South Korean-based business which sells chemical products and manages installations at water treatment chemical injection facilities. EPN became part of the Global Industrial reporting segment. Purchase accounting was finalized in the fourth quarter of 2022.
The goodwill related to the acquisitions of TechTex or EPN is not tax deductible, whereas the goodwill arising from the acquisition of NWA is tax deductible.
65
Acquisitions
The components of the cash paid for other acquisitions, excluding the Purolite acquisition (as further disclosed above), for 2023, 2022 and 2021, are shown in the following table:
(millions) | 2023 |
| 2022 |
| 2021 | |||||||
Net tangible assets acquired | $ | $- | $ | |||||||||
Identifiable intangible assets | ||||||||||||
Customer relationships |
|
| | - | | |||||||
Trademarks |
|
| - | - | | |||||||
Non-compete agreements |
|
| | - | | |||||||
Other technologies | | - | | |||||||||
Total intangible assets |
|
| | - | | |||||||
Goodwill |
|
| |
| - | | ||||||
Total aggregate purchase price |
|
| |
| - |
| | |||||
Acquisition-related liabilities and contingent consideration (a) |
|
| ( |
| - |
| ( | |||||
Total cash paid for acquisitions, including acquisition-related | ||||||||||||
liabilities and contingent consideration, net of cash acquired | $ | $- | $ | |||||||||
During 2023, the Company recorded purchase accounting adjustments. As a result of these purchase accounting adjustments, the Company made $
During 2022, the Company recorded purchase accounting adjustments associated with the finalization of the purchase accounting for its acquisitions of TechTex, NWA and EPN. As a result of these purchase accounting adjustments, acquisition related net tangible assets decreased by $
The weighted average useful lives of identifiable intangible assets acquired during 2023 and 2021 were
Dispositions
No dispositions were significant to the Company’s consolidated financial statements for 2023, 2022 or 2021.
66
5. BALANCE SHEET INFORMATION
December 31 | December 31 | |||||||
(millions) |
| 2023 | 2022 | |||||
Accounts receivable, net | ||||||||
Accounts receivable | $ | $ | ||||||
Allowance for expected credit losses and other accruals | ( | ( | ||||||
Total | $ | $ | ||||||
Inventories | ||||||||
Finished goods | $ | $ | ||||||
Raw materials and parts | | | ||||||
Inventories at FIFO cost | | | ||||||
FIFO cost to LIFO cost difference | ( | ( | ||||||
Total | $ | $ | ||||||
Other current assets | ||||||||
Prepaid assets | $ | $ | ||||||
Taxes receivable | | | ||||||
Derivative assets | | | ||||||
Other | | | ||||||
Total | $ | $ | ||||||
Property, plant and equipment, net | ||||||||
Land | $ | $ | ||||||
Buildings and leasehold improvements | | | ||||||
Machinery and equipment | | | ||||||
Merchandising and customer equipment | | | ||||||
Capitalized software | | | ||||||
Construction in progress | | | ||||||
| | |||||||
Accumulated depreciation | ( | ( | ||||||
Total | $ | $ | ||||||
Other intangible assets, net | ||||||||
Intangible assets not subject to amortization | ||||||||
Trade names | $ | $ | ||||||
Intangible assets subject to amortization | ||||||||
Customer relationships | | | ||||||
Patents | | | ||||||
Trademarks | | | ||||||
Other technologies | | | ||||||
| | |||||||
Accumulated amortization | ||||||||
Customer relationships | ( | ( | ||||||
Patents | ( | ( | ||||||
Trademarks | ( | ( | ||||||
Other technologies | ( | ( | ||||||
( | ( | |||||||
Net intangible assets subject to amortization | | | ||||||
Total | $ | $ | ||||||
Other assets | ||||||||
Deferred income taxes | $ | $ | ||||||
Pension | | | ||||||
Derivative asset | | | ||||||
Other | | | ||||||
Total | $ | $ | ||||||
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December 31 | December 31 | |||||||
(millions) |
| 2023 | 2022 | |||||
Other current liabilities | ||||||||
Discounts and rebates | $ | $ | ||||||
Dividends payable | | | ||||||
Interest payable | | | ||||||
Taxes payable, other than income | | | ||||||
Derivative liability | | | ||||||
Restructuring | | | ||||||
Contract liability | | | ||||||
| | |||||||
Other | | | ||||||
Total | $ | $ | ||||||
Accumulated other comprehensive income (loss) | ||||||||
Unrealized (loss) gain on derivative financial instruments, net of tax | ($ | $ | ||||||
Unrecognized pension and postretirement benefit expense, net of tax | ( | ( | ||||||
Cumulative translation, net of tax | ( | ( | ||||||
Total | ($ | ($ | ||||||
6. DEBT AND INTEREST
Short-term Debt
The following table provides the components of the Company’s short-term debt obligations, along with applicable interest rates as of December 31, 2023 and 2022:
2023 | 2022 | ||||||||||||||
|
| Average |
|
|
| Average | |||||||||
Carrying | Interest | Carrying | Interest | ||||||||||||
(millions) |
| Value | Rate | Value | Rate | ||||||||||
Short-term debt | |||||||||||||||
Commercial paper | $- | - | % | $- | - | % | |||||||||
Notes payable |
| | | % |
| | | % | |||||||
Long-term debt, current maturities |
| |
| | |||||||||||
Total | $ | $ | |||||||||||||
Line of Credit
As of December 31, 2023, the Company had in place a $
The Company has $
Commercial Paper
The Company’s commercial paper program is used as a potential source of liquidity and consists of a $
The Company had
As of December 31, 2023, the Company’s short-term borrowing program was rated A-2 by Standard & Poor’s, P-2 by Moody’s and F-1 by Fitch.
Notes Payable
The Company’s notes payable consists of uncommitted credit lines with major international banks and financial institutions, primarily to support global cash pooling structures. As of December 31, 2023 and 2022, the Company had $
68
Long-term Debt
The following table provides the components of the Company’s long-term debt obligations, along with applicable interest rates as of December 31, 2023 and 2022:
|
| 2023 |
|
| 2022 |
|
|
| ||||||||||||
Stated | Effective | Stated | Effective | |||||||||||||||||
Maturity | Carrying | Interest | Interest | Carrying | Interest | Interest | ||||||||||||||
(millions) | by Year | Value | Rate | Rate | Value | Rate | Rate | |||||||||||||
Long-term debt | ||||||||||||||||||||
Public notes (2023 principal amount) | ||||||||||||||||||||
2023 | $- | - | % | - | % | $ | | % | | % | ||||||||||
2024 | | | % | | % | | | % | | % | ||||||||||
2025 |
| |
| | % | | % |
| |
| | % | | % | ||||||
2026 | | | % | | % | | | % | | % | ||||||||||
2027 | | | % | | % | | | % | | % | ||||||||||
2027 | | | % | | % | | | % | | % | ||||||||||
2028 | | | % | | % | | | % | | % | ||||||||||
2030 | | | % | | % | | | % | | % | ||||||||||
2031 | | | % | | % | | | % | | % | ||||||||||
2032 | | | % | | % | | | % | | % | ||||||||||
2041 | |
| | % | | % | |
| | % | | % | ||||||||
2046 | |
| | % | | % | |
| | % | | % | ||||||||
2047 | | | % | | % | | | % | | % | ||||||||||
2050 | | | % | | % | | | % | | % | ||||||||||
2051 | | | % | | % | | | % | | % | ||||||||||
2021 senior notes ($ | 2055 | | | % | | % | | | % | | % | |||||||||
Finance lease obligations and other |
| |
| | ||||||||||||||||
Total debt |
| |
| | ||||||||||||||||
Long-term debt, current maturities |
| ( |
| ( | ||||||||||||||||
Total long-term debt | $ | $ | ||||||||||||||||||
Public Notes
In November 2022, the Company issued $
The Company’s public notes may be redeemed by the Company at its option at redemption prices that include accrued and unpaid interest and a make-whole premium. Upon the occurrence of a change of control accompanied by a downgrade of the public notes below investment grade rating, within a specified time period, the Company would be required to offer to repurchase the public notes at a price equal to
In January 2024, the Company repaid €
Covenants and Future Maturities
The Company is in compliance with all covenants under the Company’s outstanding indebtedness at December 31, 2023.
As of December 31, 2023, the aggregate annual maturities of long-term debt for the next five years were:
(millions) |
|
| |
2024 | $ | ||
2025 |
| | |
2026 |
| | |
2027 |
| | |
2028 |
| |
69
Net Interest Expense
Interest expense and interest income incurred during 2023, 2022 and 2021 were as follows:
(millions) | 2023 |
| 2022 |
| 2021 | |||||||
Interest expense | $ | $ | $ | |||||||||
Interest income |
|
| ( |
| ( |
| ( | |||||
Interest expense, net | $ | $ | $ | |||||||||
Interest expense generally includes the expense associated with the interest on the Company’s outstanding borrowings. Interest expense also includes the amortization of debt issuance costs and debt discounts, which are both recognized over the term of the related debt.
During 2021, the Company issued, exchanged and retired certain long-term debt, incurring debt refinancing charges of $
7. FAIR VALUE MEASUREMENTS
The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, contingent consideration obligations, commercial paper, notes payable, foreign currency forward contracts, interest rate swap agreements, cross-currency swap derivative contracts and long-term debt.
Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. A hierarchy has been established for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring the most observable inputs be used when available. The hierarchy is broken down into three levels:
Level 1 - Inputs are quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.
Level 2 - Inputs include observable inputs other than quoted prices in active markets.
Level 3 - Inputs are unobservable inputs for which there is little or no market data available.
The carrying amount and the estimated fair value for assets and liabilities measured on a recurring basis were:
December 31, 2023 | ||||||||||||||||
(millions) | Carrying | Fair Value Measurements | ||||||||||||||
| Amount |
| Level 1 | Level 2 |
| Level 3 | ||||||||||
Assets | ||||||||||||||||
Foreign currency forward contracts |
|
| $ | $- |
| $ |
| $- | ||||||||
Cross-currency swap derivative contracts | | - | | - | ||||||||||||
|
| |||||||||||||||
Liabilities | ||||||||||||||||
Foreign currency forward contracts | | - | | - | ||||||||||||
Interest rate swap agreements | | - | | - | ||||||||||||
Cross-currency swap derivative contracts | | - | | - | ||||||||||||
December 31, 2022 | ||||||||||||||||
(millions) | Carrying | Fair Value Measurements | ||||||||||||||
| Amount |
| Level 1 | Level 2 |
| Level 3 | ||||||||||
Assets | ||||||||||||||||
Foreign currency forward contracts |
| $ | $- |
| $ |
| $- | |||||||||
Cross-currency swap derivative contracts | | - | | - | ||||||||||||
Liabilities | ||||||||||||||||
Foreign currency forward contracts |
| | - | | - | |||||||||||
Interest rate swap agreements | | - | | - | ||||||||||||
Cross-currency swap derivative contracts | | - | | - | ||||||||||||
The carrying value of foreign currency forward contracts is at fair value, which is determined based on foreign currency exchange rates as of the balance sheet date and classified within Level 2. The carrying value of interest rate swap agreements is at fair value, which is determined based on current forward interest rates as of the balance sheet date and are classified within Level 2. The cross-currency swap derivative contracts are used to partially hedge the Company’s net investments in foreign operations against adverse movements in exchange rates between the U.S. dollar and the Euro and the U.S. dollar and CNH (CNH is the Chinese Yuan traded in the offshore market). The carrying value of the cross-currency swap derivative contracts is at fair value, which is determined based on the income approach with the relevant interest rates and foreign currency current exchange rates and forward curves as inputs as of the balance sheet date and are classified within Level 2. For purposes of fair value disclosure above, derivative values are presented gross. Further discussion of gross versus net presentation of the Company's derivatives within Note 8.
70
Contingent consideration obligations are recognized and measured at fair value at the acquisition date and thereafter until settlement or expiration. Contingent consideration is classified within Level 3 as the underlying fair value is determined using income-based valuation approaches appropriate for the terms and conditions of each respective contingent consideration. The consideration expected to be transferred is based on the Company’s expectations of various financial measures. The ultimate payment of contingent consideration could deviate from current estimates based on the actual results of these financial measures. Contingent consideration during 2023, 2022 and 2021 were not significant to the Company’s consolidated financial statements.
The carrying values of accounts receivable, accounts payable, cash and cash equivalents, commercial paper and notes payable approximate fair value because of their short maturities, and as such are classified within Level 1.
The fair value of long-term debt is based on quoted market prices for the same or similar debt instruments (classified as Level 2). The carrying amount, which includes adjustments related to the impact of interest rate swap agreements, premiums and discounts, and deferred debt issuance costs, and the estimated fair value of long-term debt, including current maturities, held by the Company was:
December 31, 2023 | December 31, 2022 | |||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||
| Amount |
| Value |
| Amount |
| Value | |||||||
Long-term debt, including current maturities | $ | $ | $ | $ | ||||||||||
8. DERIVATIVES AND HEDGING TRANSACTIONS
The Company uses foreign currency forward contracts, interest rate swap agreements, cross-currency swap derivative contracts and foreign currency debt to manage risks associated with foreign currency exchange rates, interest rates and net investments in foreign operations. The Company does not hold derivative financial instruments of a speculative nature or for trading purposes. The Company records derivatives as assets and liabilities in the Consolidated Balance Sheets at fair value. Changes in fair value are recognized immediately in earnings unless the derivative qualifies and is designated as a hedge. Cash flows from derivatives are classified in the Consolidated Statements of Cash Flows in the same category as the cash flows from the items subject to designated hedge or undesignated (economic) hedge relationships. The Company evaluates hedge effectiveness at inception and on an ongoing basis. If a derivative is no longer expected to be effective, hedge accounting is discontinued.
The Company is exposed to credit risk in the event of nonperformance of counterparties for foreign currency forward exchange contracts and interest rate swap agreements. The Company monitors its exposure to credit risk by using credit approvals and credit limits and by selecting major global banks and financial institutions as counterparties. The Company does not anticipate nonperformance by any of these counterparties, and therefore, recording a valuation allowance against the Company’s derivative balance is not considered necessary.
Derivative Positions Summary
Certain of the Company’s derivative transactions are subject to master netting arrangements that allow the Company to net settle contracts with the same counterparties. These arrangements generally do not call for collateral and as of the applicable dates presented in the following table,
The respective net amounts are included in other current assets, other assets, other current liabilities and other liabilities on the Consolidated Balance Sheets.
The following table summarizes the gross fair value and the net value of the Company’s outstanding derivatives:
Derivative Assets | Derivative Liabilities | |||||||||||||||
December 31 | December 31 | December 31 | December 31 | |||||||||||||
(millions) |
| 2023 | 2022 |
| 2023 | 2022 |
| |||||||||
Derivatives designated as hedging instruments | ||||||||||||||||
Foreign currency forward contracts | $ | $ | $ | $ | ||||||||||||
Interest rate swap agreements | - | - | | | ||||||||||||
Cross-currency swap derivative contracts | | | | | ||||||||||||
Derivatives not designated as hedging instruments | ||||||||||||||||
Foreign currency forward contracts | | | | | ||||||||||||
Gross value of derivatives | | | | | ||||||||||||
Gross amounts offset in the Consolidated Balance Sheets | ( | ( | ( | ( | ||||||||||||
Net value of derivatives | $ | $ | $ | $ | ||||||||||||
71
The following table summarizes the notional values of the Company’s outstanding derivatives:
Notional Values | ||||||||
December 31 | December 31 | |||||||
(millions) |
| 2023 |
| 2022 | ||||
Foreign currency forward contracts | $ | $ | ||||||
Interest rate swap agreements | | | ||||||
Cross-currency swap derivative contracts | | | ||||||
Cash Flow Hedges
The Company utilizes foreign currency forward contracts to hedge the effect of foreign currency exchange rate fluctuations on forecasted foreign currency transactions, including inventory purchases and intercompany royalty, intercompany loans, management fee and other payments. These forward contracts are designated as cash flow hedges. The changes in fair value of these contracts are recorded in accumulated other comprehensive income (loss) (“AOCI”) until the hedged items affect earnings, at which time the gain or loss is reclassified into the same line item in the Consolidated Statements of Income as the underlying exposure being hedged. Cash flow hedged transactions impacting AOCI are forecasted to occur within the next year. For forward contracts designated as hedges of foreign currency exchange rate risk associated with forecasted foreign currency transactions, the Company excludes the changes in fair value attributable to time value from the assessment of hedge effectiveness. The initial value of the excluded component (i.e., the forward points) is amortized on a straight-line basis over the life of the hedging instrument and recognized in the same line item in the Consolidated Statements of Income as the underlying exposure being hedged for intercompany loans. For all other cash flow hedge types, the forward points are mark-to-market monthly and recognized in the same line item in the Consolidated Statements of Income as the underlying exposure being hedged. The difference between fair value changes of the excluded component and the amount amortized in the Consolidated Statements of Income is recorded in AOCI.
Fair Value Hedges
The Company manages interest expense using a mix of fixed and floating rate debt. To help manage exposure to interest rate movements and to reduce borrowing costs, the Company may enter into interest rate swaps under which the Company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed upon notional principal amount. The mark-to-market of these fair value hedges is recorded as gains or losses in interest (income) expense and is offset by the gain or loss of the underlying debt instrument, which also is recorded in interest (income) expense. These fair value hedges are highly effective and thus, there is no impact on earnings due to hedge ineffectiveness.
In aggregate, the Company has entered into a series of interest rate swap agreements to convert $
The following amounts were recorded in the Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges as of December 31 2023 and 2022:
Line item in which the hedged item is included | Carrying amount of the hedged liabilities | Cumulative amount of the fair value hedging adjustment included in the carrying amount of the hedged liabilities | ||||||||||||
(millions) | 2023 |
| 2022 | 2023 |
| 2022 | ||||||||
Long-term debt | $ | $ | ($ | ($ | ||||||||||
Net Investment Hedges
In November 2023, the Company elected to de-designate as a net investment hedge €
The Company entered into a series of Euro cross-currency swap derivative contracts maturing in 2026 and 2030. These cross-currency swap derivative contracts are designated as net investment hedges of the Company’s Euro denominated exposures from the Company’s investments in certain of its Euro denominated functional currency subsidiaries. The cross-currency swap derivative contracts exchange fixed-rate payments in one currency for fixed-rate payments in another currency. As of December 31, 2023, the Company had a €
72
In August and October of 2023, the Company entered into CNH cross-currency swap derivative contracts with a notional amount of CNH
The revaluation gains and losses on the Euronotes and cross-currency swap derivative contracts, which are designated and effective as hedges of the Company’s net investments, have been included as a component of the cumulative translation adjustment account, and were as follows:
(millions) | 2023 |
| 2022 |
| 2021 | |||||||
Revaluation (loss) gain, net of tax: | ||||||||||||
Euronotes | ($ | $ | $ | |||||||||
Cross-currency swap derivative contracts | ( | | | |||||||||
Total revaluation (loss) gain, net of tax | ($ | $ | $ | |||||||||
Derivatives Not Designated as Hedging Instruments
The Company also uses foreign currency forward contracts to offset its exposure to the change in value of certain foreign currency denominated assets and liabilities held at foreign subsidiaries, primarily receivables and payables, which are remeasured at the end of each period. Although the contracts are effective economic hedges, they are not designated as accounting hedges. Therefore, changes in the value of these derivatives are recognized immediately in earnings, thereby offsetting the current earnings effect of the related foreign currency denominated assets and liabilities.
Effect of all Derivative Instruments on Income
The gain (loss) of all derivative instruments recognized in product and equipment cost of sales (“COS”), selling, general and administrative expenses (“SG&A”) and interest expense, net (“interest”) is summarized below:
2023 | 2022 | 2021 | |||||||||||||||||||
(millions) | COS | SG&A | Interest |
| COS | SG&A | Interest | COS | SG&A | Interest | |||||||||||
Gain (loss) on derivatives in cash flow hedging relationship: | |||||||||||||||||||||
Foreign currency forward contracts | |||||||||||||||||||||
Amount of gain (loss) reclassified from AOCI to income | $ | ($ | $- | $ | $ | $- | ($ | $ | $- | ||||||||||||
Amount excluded from the assessment of effectiveness recognized in earnings based on changes in fair value | - | - | | - | - | | - | - | | ||||||||||||
Interest rate swap agreements | |||||||||||||||||||||
Amount of (loss) gain reclassified from AOCI to income | - | - | ( | - | - | ( | - | - | ( | ||||||||||||
Gain (loss) on derivatives not designated as hedging instruments: | |||||||||||||||||||||
Foreign currency forward contracts | |||||||||||||||||||||
Amount of (loss) gain recognized in income | - | ( | - | - | | - | - | | - | ||||||||||||
Total gain (loss) of all derivative instruments | $ | ($ | $ | $ | $ | $ | ($ | $ | $ | ||||||||||||
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9. OTHER COMPREHENSIVE INCOME (LOSS) INFORMATION
Other comprehensive income (loss) includes net income, foreign currency translation adjustments, defined benefit pension and postretirement plan adjustments, gains and losses on derivative instruments designated and effective as cash flow hedges and non-derivative instruments designated and effective as foreign currency net investment hedges that are charged or credited to the AOCI account in shareholders’ equity.
The following table provides other comprehensive income (loss) information related to the Company’s derivatives and hedging instruments and pension and postretirement benefits. Refer to Note 8 for additional information related to the Company’s derivatives and hedging transactions. Refer to Note 16 for additional information related to the Company’s pension and postretirement benefits activity.
(millions) | 2023 |
| 2022 |
| 2021 | |||||||
Derivative and Hedging Instruments | ||||||||||||
Unrealized (loss) gain on derivative & hedging instruments | ||||||||||||
Amount recognized in AOCI | ($ | $ | $ | |||||||||
(Gain) loss reclassified from AOCI into income | ||||||||||||
COS | ( | ( | | |||||||||
SG&A |
| | ( | ( | ||||||||
Interest (income) expense, net | ( | ( | ( | |||||||||
| | ( | ( | |||||||||
Other activity |
| - | | ( | ||||||||
Tax impact |
| | ( | ( | ||||||||
Net of tax | ($ | ($ | $ | |||||||||
Pension and Postretirement Benefits | ||||||||||||
Amount recognized in AOCI | ||||||||||||
Current period net (loss) gain | ($ | $ | $ | |||||||||
Amount reclassified from AOCI into income | ||||||||||||
Settlement (income) charge | ( | | | |||||||||
Amortization of losses and prior period service credits, net | | | | |||||||||
| | | | |||||||||
Tax impact |
| | ( | ( | ||||||||
Net of tax | ($ | $ | $ | |||||||||
10. SHAREHOLDERS’ EQUITY
Authorized common stock, par value $
The Company has
Share Repurchase Authorization
In February 2015 and November 2022, the Company’s Board of Directors authorized the repurchase of up to
Share Repurchases
During 2023, 2022 and 2021, the Company reacquired
The Inflation Reduction Act (“IRA”) was signed into U.S. law on August 16, 2022 and is effective January 1, 2023. The IRA includes an excise tax on the repurchase of corporate stock. The Company does not anticipate the excise tax to have a material impact on the Company’s financial statements.
74
11. EQUITY COMPENSATION PLANS
The Company’s equity compensation plans provide for grants of stock options, performance-based restricted stock units (“PBRSUs”) and non-performance-based restricted stock units (“RSUs”) and restricted stock awards (“RSAs”). Common shares available for grant as of December 31, 2023, 2022 and 2021 were
The Company’s annual long-term incentive share-based compensation program is made up of
Stock Options
Stock options are granted to purchase shares of the Company’s stock at the average daily share price on the date of grant. These options generally expire within
A summary of stock option activity and average exercise prices is as follows:
| 2023 | 2022 |
| 2021 |
| ||||||||||||
| Number of |
| Exercise | Number of | Exercise | Number of | Exercise |
| |||||||||
Options | Price (a) |
| Options | Price (a) | Options | Price (a) |
| ||||||||||
Outstanding, beginning of year |
| | $ | | $ |
| | $ | |||||||||
Granted |
| | | | |
| | | |||||||||
Exercised |
| ( | | ( | |
| ( | | |||||||||
Canceled |
| ( | | ( | |
| ( | | |||||||||
Outstanding, end of year |
| | $ | | $ |
| | $ | |||||||||
Exercisable, end of year |
| | $ | | $ |
| | $ | |||||||||
Vested and expected to vest, end of year |
| | $ | ||||||||||||||
| (a) | Represents weighted average price per share. |
The total aggregate intrinsic value of options (the amount by which the stock price exceeded the exercise price of the option on the date of exercise) that were exercised during 2023, 2022 and 2021 was $
The total aggregate intrinsic value of options outstanding as of December 31, 2023 was $
The lattice (binomial) option-pricing model is used to estimate the fair value of options at grant date. The Company’s primary employee option grant occurs during the fourth quarter. The weighted-average grant-date fair value of options granted and the significant assumptions used in determining the underlying fair value of each option grant, on the date of grant were as follows:
| 2023 |
| 2022 | 2021 | ||||||||
Weighted-average grant-date fair value of options | ||||||||||||
granted at market prices | $ | $ | $ | |||||||||
Assumptions | ||||||||||||
Risk-free rate of return | | % | | % |
| | % | |||||
Expected life |
|
| years |
| years |
| years | |||||
Expected volatility | | % | | % |
| | % | |||||
Expected dividend yield | | % | | % |
| | % | |||||
The risk-free rate of return is determined based on a yield curve of U.S. treasury rates from
75
PBRSUs, RSUs and RSAs
The expense associated with PBRSUs is based on the average of the high and low share price of the Company’s common stock on the date of grant, adjusted for the absence of future dividends. The awards vest based on the Company achieving a defined performance target and with continued service for a
The expense associated with shares of non-performance based RSUs and RSAs is based on the average of the high and low share price of the Company’s common stock on the date of grant, adjusted for the absence of future dividends and is amortized on a straight-line basis over the periods during which the restrictions lapse. The Company currently has RSUs that vest over periods between
A summary of non-vested PBRSUs and restricted stock activity is as follows:
PBRSU | Grant Date | RSAs and | Grant Date | |||||||||||
Awards | Fair Value (a) | RSUs | Fair Value (a) | |||||||||||
December 31, 2020 |
| | $ |
| | $ | ||||||||
Granted |
| | | | | |||||||||
Vested / Earned |
| ( | | ( | | |||||||||
Canceled | ( | | ( | | ||||||||||
December 31, 2021 |
| | $ |
| | $ | ||||||||
Granted |
| | | | | |||||||||
Vested / Earned |
| ( | | ( | | |||||||||
Canceled | ( | | ( | | ||||||||||
December 31, 2022 |
| | $ |
| | $ | ||||||||
Granted | | | | | ||||||||||
Vested / Earned | ( | | ( | | ||||||||||
Canceled | ( | | ( | | ||||||||||
December 31, 2023 | | $ |
| | $ | |||||||||
| (a) | Represents weighted average price per share. |
12. INCOME TAXES
Income before income taxes consisted of:
(millions) |
| 2023 |
| 2022 |
| 2021 | ||||||
United States (U.S.) |
| $ |
|
| $ |
|
| $ |
| |||
International |
| | | | ||||||||
Total | $ | $ | $ | |||||||||
The provision (benefit) for income taxes consisted of:
(millions) |
| 2023 |
| 2022 |
| 2021 | ||||||
U.S. federal and state |
| $ | $ | $ |
| |||||||
International |
| | | | ||||||||
Total current |
| | | | ||||||||
U.S. federal and state |
| ( | ( | | ||||||||
International |
| ( | ( | ( | ||||||||
Total deferred |
| ( | ( | ( | ||||||||
Provision for income taxes | $ | $ | $ | |||||||||
76
The Company’s overall net deferred tax assets and deferred tax liabilities were comprised of the following:
December 31 (millions) |
| 2023 |
| 2022 | ||||
Deferred tax assets |
|
|
|
| ||||
Pension and post-retirement benefits | $ | $ | ||||||
Other accrued liabilities | | | ||||||
Lease liability |
|
| |
| | |||
Credit carryforwards | | | ||||||
Capitalization of R&D costs | | | ||||||
Loss carryforwards |
|
| |
| | |||
Share-based compensation |
|
| |
| | |||
Deferred income | | | ||||||
Other, net |
|
| |
| | |||
Valuation allowance |
|
| ( |
| ( | |||
Total deferred tax assets |
|
| |
| | |||
Deferred tax liabilities | ||||||||
Goodwill | ( | ( | ||||||
Intangible assets |
|
| ( |
| ( | |||
Property, plant and equipment |
|
| ( |
| ( | |||
Lease asset | ( | ( | ||||||
Financing | ( | ( | ||||||
Other, net |
|
| ( |
| ( | |||
Total deferred tax liabilities |
|
| ( | ( | ||||
Net deferred tax liabilities balance | ($ | ($ | ||||||
Presentation of prior year amounts relating to goodwill and intangible assets are now presented separately and have been reclassified to conform with the current year presentation. These reclassifications had no effect on the reported results of operations.
As of December 31, 2023 the Company has tax effected federal, state and international net operating loss carryforwards of $
Additionally, the Company has $
The Company has valuation allowances on certain deferred tax assets of $
In connection with the implementation of Organization for Economic Co-operation and Development (“OECD”) global minimum tax initiative known as Pillar Two, any existing deferred taxes not disclosed in the Company’s 2023 financial statements will not be available in the future to reduce tax otherwise due under Pillar Two. Accordingly, the Company is disclosing the existence of gross tax loss carryforwards in Luxembourg of $
The Company obtained tax benefits from a tax holiday in the Dominican Republic. The Company received a permit of operation, which expires in April 2036, from the National Council of Free Zones of Exportation for the Dominican Republic. Companies operating under the Free Zones are not subject to income tax in the Dominican Republic on export income. The tax reduction as the result of the tax holiday for 2023 was $
77
A reconciliation of the statutory U.S. federal income tax rate to the Company’s effective income tax rate is as follows:
| 2023 | 2022 | 2021 | ||||||
Statutory U.S. rate | | % | | % | | % | |||
State income taxes, net of federal benefit | |
| |
| | ||||
Foreign operations | ( |
| ( |
| ( | ||||
Excess stock benefits | ( | ( | ( | ||||||
R&D credit | ( |
| ( |
| ( | ||||
Foreign derived intangible income | ( | ( | ( | ||||||
Change in valuation allowance | |
| |
| | ||||
Legal entity rationalization | | ( | - | ||||||
One-time transfer of intangibles | - | - | | ||||||
Other, net | |
| |
| | ||||
Effective income tax rate | | % | | % | | % | |||
The change in the Company’s effective income tax rate includes the tax impact of special (gains) and charges and discrete tax items, which have impacted the comparability of the Company’s historical effective income tax rates, as amounts included in special (gains) and charges are derived from tax jurisdictions with rates that vary from the statutory U.S. rate, and discrete tax items are not necessarily consistent across periods. The tax impact of special (gains) and charges and discrete tax items will likely continue to impact comparability of the Company’s effective income tax rate in the future.
The Company’s 2023 effective tax rate of
The Company’s 2022 effective tax rate of
The Company’s 2021 effective tax rate of
A deferred tax liability of $
A reconciliation of the beginning and ending amount of gross liability for unrecognized tax benefits is as follows:
(millions) |
| 2023 |
| 2022 | 2021 | |||||||
Balance at beginning of year | $ | $ | $ | |||||||||
Additions based on tax positions related to the current year |
| |
| |
| | ||||||
Additions for tax positions of prior years |
|
| |
| |
| | |||||
Current year acquisitions | - | - | | |||||||||
Reductions for tax positions of prior years |
|
| - |
| ( |
| - | |||||
Reductions for tax positions due to statute of limitations |
|
| ( |
| ( |
| ( | |||||
Settlements |
|
| ( |
| ( |
| ( | |||||
Foreign currency translation |
|
| - |
| ( |
| ( | |||||
Balance at end of year | $ | $ | $ | |||||||||
The total amount of unrecognized tax benefits, if recognized would affect the effective tax rate by $
The Company files U.S. federal income tax returns and income tax returns in various U.S. state and non- U.S. jurisdictions. With few exceptions, the Company is no longer subject to state and foreign income tax examinations by tax authorities for years before 2017. The IRS has completed examinations of the Company’s U.S. federal income tax returns through 2016, and the years 2017 through 2020 are currently under audit. In addition to the U.S. federal examination, there is ongoing audit activity in several U.S. state and foreign
78
jurisdictions. The Company anticipates changes to unrecognized tax benefits due to closing of various audits and statutes closing on years mentioned above. The Company does not believe these changes will result in a material impact during the next twelve months. Decreases in the Company’s gross liability could result in offsets to other balance sheet accounts, cash payments, and adjustments to tax expense. The occurrence of these events and/or other events not included above within the next twelve months could change depending on a variety of factors.
The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. The Company had $
13. RENTALS AND LEASES
Lessee
The Company leases sales and administrative office facilities, distribution centers, research and manufacturing facilities, as well as vehicles and other equipment under operating leases. Certain of the Company’s lease arrangements are finance leases, which are immaterial individually and in the aggregate.
The Company’s operating lease cost was as follows:
(millions) | 2023 | 2022 | 2021 | |||||||||
Operating lease cost* | $ | $ | $ | |||||||||
*Includes immaterial short-term and variable lease costs
Future maturity of operating lease liabilities as of December 31, 2023 were as follows:
(millions) | |||
2024 |
| $ | |
2025 |
| | |
2026 |
| | |
2027 |
| | |
2028 | | ||
Thereafter |
| | |
Total lease payments | | ||
Less: imputed interest | | ||
$ |
The Company’s operating leases term and discount rate were as follows:
December 31 | December 31 | December 31 | ||||||||||
2023 | 2022 | 2021 | ||||||||||
Weighted-average remaining lease terms (years) | ||||||||||||
Weighted-average discount rate | | % | | % | | % | ||||||
The Company’s other lease information was as follows:
December 31 | December 31 | December 31 | ||||||||||
(millions) | 2023 | 2022 | 2021 | |||||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||
Operating cash flows from operating leases | $ | $ | $ | |||||||||
Leased assets obtained in exchange for new operating lease liabilities | | | | |||||||||
79
Lessor
The Company leases warewashing and water treatment equipment to customers under operating leases.
Gross assets under operating leases recorded in Property, plant and equipment, net is $
The Company’s operating lease revenue was as follows:
(millions) | 2023 | 2022 | 2021 | |||||||||
$ | $ | $ | ||||||||||
*Includes immaterial variable lease revenue
Future revenue from operating leases for existing contracts as of December 31, 2023 were as follows:
(millions) | |||
2024 |
| $ | |
2025 |
| | |
2026 |
| | |
2027 |
| | |
2028 | | ||
Thereafter |
| | |
Total lease revenue | $ |
The Company mitigates the risk of residual value subsequent to the lease term by redeploying assets. As such, the Company expects to receive revenue from the operating lease assets through the remaining useful life and therefore subsequent to the initial contract termination date.
14. RESEARCH AND DEVELOPMENT EXPENDITURES
15. COMMITMENTS AND CONTINGENCIES
The Company is subject to various claims and contingencies related to, among other things, workers’ compensation, general liability (including product liability), automobile claims, health care claims, environmental matters and lawsuits. The Company is also subject to various claims and contingencies related to income taxes, which are discussed in Note 12. The Company also has contractual obligations including lease commitments, which are discussed in Note 13.
The Company records liabilities when a contingent loss is probable and can be reasonably estimated. If the reasonable estimate of a probable loss is a range, the Company records the most probable estimate of the loss or the minimum amount when no amount within the range is a better estimate than any other amount. The Company discloses a contingent liability even if the liability is not probable or the amount is not estimable, or both, if there is a reasonable possibility that a material loss may have been incurred.
Insurance
Globally, the Company has insurance policies with varying deductible levels for property and casualty losses. The Company is insured for losses in excess of these deductibles, subject to policy terms and conditions and has recorded both a liability and an offsetting receivable for amounts in excess of these deductibles. The Company is self-insured for health care claims for eligible participating employees, subject to certain deductibles and limitations. The Company determines its liabilities for claims on an actuarial basis.
Litigation and Environmental Matters
The Company and certain subsidiaries are party to various lawsuits, claims and environmental actions that have arisen in the ordinary course of business. These include from time to time antitrust, employment, commercial, patent infringement, tort, product liability and wage hour lawsuits, as well as possible obligations to investigate and mitigate the effects on the environment of the disposal or release of certain chemical substances at various sites, such as Superfund sites and other operating or closed facilities. The Company has established accruals for certain lawsuits, claims and environmental matters. The Company currently believes that there is not a reasonably possible risk of material loss in excess of the amounts accrued related to these legal matters. Because litigation is inherently uncertain, and unfavorable rulings or developments could occur, there can be no certainty that the Company may not ultimately incur charges in excess of recorded liabilities. A future adverse ruling, settlement or unfavorable development could result in future charges that could have a material adverse effect on the Company’s results of operations or cash flows in the period in which they are recorded.
80
The Company currently believes that such future charges related to suits and legal claims, if any, would not have a material adverse effect on the Company’s consolidated financial position.
TPC Group Litigation
On November 27, 2019, a Butadiene production plant owned and operated by TPC Group, Inc. (“TPC”) in Port Neches, Texas, experienced an explosion and fire that resulted in personal injuries, the release of chemical fumes and extensive property damage to the plant and surrounding areas in and near Port Neches, Texas.
Nalco Company LLC, a subsidiary of Ecolab, supplied process chemicals to TPC used in TPC’s production processes. Nalco did not operate, manage, maintain or control any aspect of TPC’s plant operations.
In connection with its provision of process chemicals to TPC, Nalco has been named in numerous lawsuits stemming from the plant explosion. Nalco has been named a defendant, along with TPC and other defendants, in multi-district litigation (“MDL”) proceedings pending in Orange County, Texas, alleging among other things claims for personal injury, property damage and business losses (In re TPC Group Litigation – A2020-0236-MDL, Orange County, Texas). In addition, numerous other lawsuits have been filed against Nalco, including TPC Group v. Nalco, E0208239, Jefferson County, Texas, a subrogation claim by TPC’s insurers seeking reimbursement for property damage losses. Over
All of these cases make similar allegations and seek damages for personal injury, property damage, business losses and other damages, including exemplary damages. The Company expects all these cases will be consolidated for pretrial purposes into the Orange County MDL referenced above. Due to the large number of plaintiffs, the early stage of the litigation and the fact that many of the claims do not specify an amount of damages, any estimate of any loss or range of losses cannot be made at this time.
On June 1, 2022, TPC and seven of its affiliated companies filed for bankruptcy under Chapter 11 (Case No. 22-10493-CTG, United States Bankruptcy Court for the District of Delaware). In connection with the bankruptcy cases, TPC disclosed an estimated range of its liability related to the Port Neches incident to individuals and homeowners (including subrogation claims) of approximately $
The Company believes the claims asserted against Nalco in the lawsuits stemming from the TPC plant explosion are without merit and intends to defend the claims vigorously. The Company also believes any potential loss should be covered by insurance subject to deductibles. However, the Company cannot predict the outcome of these lawsuits, the involvement the Company might have in these matters in the future or the potential for future litigation.
Environmental Matters
The Company is currently participating in environmental assessments and remediation at approximately
16. RETIREMENT PLANS
Pension and Postretirement Health Care Benefits Plans
The Company has a non-contributory, qualified, defined benefit pension plan covering the majority of its U.S. employees. The Company also has U.S. non-contributory, non-qualified, defined benefit pension plans, which provide for benefits to employees in excess of limits permitted under its pension plans. The U.S. non-qualified plans are not funded and the recorded benefit obligations for the non-qualified plans were $
Various international subsidiaries have defined benefit pension plans. International plans are funded based on local country requirements. The measurement date used for determining the international pension plan assets and obligations is November 30, the fiscal year end of the Company’s international subsidiaries.
The Company provides postretirement health care and life insurance benefits to certain U.S. employees and retirees. The U.S. postretirement health care plans are contributory based on years of service and choice of coverage (family or single), with retiree contributions adjusted annually. The Company also maintains several U.S. postretirement life insurance plans. The measurement date used to determine the U.S. postretirement health care and life insurance plan assets and obligations is December 31. Certain employees
81
outside the U.S. are covered under government-sponsored programs, which are not required to be fully funded. The expense and obligation for providing international postretirement health care benefits are not significant.
The following table sets forth financial information related to the Company’s pension and postretirement benefit plans:
U.S. | International | U.S. Postretirement |
| |||||||||||||||||||
Pensions | Pensions | Benefits |
| |||||||||||||||||||
(millions) | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 |
| |||||||||||||||
Accumulated benefit obligation, end of year | $ | $ | $ | $ | $ | $ | ||||||||||||||||
Projected benefit obligation | ||||||||||||||||||||||
Projected benefit obligation, beginning of year |
| $ | $ | $ | $ | $ | $ | |||||||||||||||
Service cost |
| | | | | | | |||||||||||||||
Interest cost |
| | | | | | | |||||||||||||||
Participant contributions |
| - | - | | | | | |||||||||||||||
Plan amendments |
| - | - | ( | - | - | - | |||||||||||||||
Actuarial (gain) loss |
| | ( | ( | ( | ( | ( | |||||||||||||||
Assumed through acquisitions | - | - | - | | - | - | ||||||||||||||||
Other events | - | - | | - | - | - | ||||||||||||||||
Benefits paid |
| ( | ( | ( | ( | ( | ( | |||||||||||||||
Foreign currency translation |
| - | - | | ( | - | - | |||||||||||||||
Projected benefit obligation, end of year |
| $ | $ | $ | $ | $ | $ | |||||||||||||||
Plan assets | ||||||||||||||||||||||
Fair value of plan assets, beginning of year | $ | $ | $ | $ | $ | $ | ||||||||||||||||
Actual returns on plan assets | | ( | ( | ( | | ( | ||||||||||||||||
Company contributions | | | | | | | ||||||||||||||||
Participant contributions | - | - | | | - | - | ||||||||||||||||
Acquired through acquisitions | - | - | | | - | - | ||||||||||||||||
Benefits paid | ( | ( | ( | ( | ( | ( | ||||||||||||||||
Foreign currency translation | - | - | | ( | - | - | ||||||||||||||||
Fair value of plan assets, end of year | $ | $ | $ | $ | $ | $ | ||||||||||||||||
Funded Status, end of year | ($ | ($ | ($ | ($ | ($ | ($ | ||||||||||||||||
Amounts recognized in the Consolidated Balance Sheets: | ||||||||||||||||||||||
Other assets | $- | $- | $ | $ | $- | $- | ||||||||||||||||
Other current liabilities | ($ | ( | ( | ( | ( | ( | ||||||||||||||||
Postretirement healthcare and pension benefits | ($ | ( | ( | ( | ( | ( | ||||||||||||||||
Net liability | ($ | ($ | ($ | ($ | ($ | ($ | ||||||||||||||||
Amounts recognized in accumulated other comprehensive loss (income): | ||||||||||||||||||||||
Unrecognized net actuarial loss (gain) | $ | $ | $ | $ | ($ | ($ | ||||||||||||||||
Unrecognized net prior service (benefits) costs | ( | ( | ( | | - | - | ||||||||||||||||
Tax (benefit) expense | ( | ( | ( | ( | | | ||||||||||||||||
Accumulated other comprehensive loss (income), net of tax | $ | $ | $ | $ | ($ | ($ | ||||||||||||||||
Change in accumulated other comprehensive loss (income): | ||||||||||||||||||||||
Amortization of net actuarial gain (loss) | ($ | ($ | ($ | ($ | $ | $ | ||||||||||||||||
Amortization of prior service credits | | | | | - | - | ||||||||||||||||
Current period net actuarial loss (gain) | | | ( | ( | ( | ( | ||||||||||||||||
Current period prior service costs | - | - | ( | - | - | - | ||||||||||||||||
Curtailments and settlements | - | ( | | - | - | - | ||||||||||||||||
Tax (benefit) expense | ( | ( | | | ( | | ||||||||||||||||
Foreign currency translation | - | - | | ( | - | - | ||||||||||||||||
Other comprehensive loss (income) | $ | $ | $ | ($ | $ | ($ | ||||||||||||||||
Estimate amounts in accumulated other comprehensive loss expected to be reclassified to net period cost during 2024 were as follows:
U.S. Post- |
| ||||||||||||
U.S. | International | Retirement | |||||||||||
(millions) | Pensions | Pensions | Benefits |
| |||||||||
Net actuarial loss (gain) | $ | $ | ($ | ||||||||||
Net prior service benefits | ( | ( | - | ||||||||||
Total | $ | $ | ($ | ||||||||||
Service cost is included with employee compensation cost in either cost of sales and selling, general and administrative expenses in the Consolidated Statements of Income based on employee roles in the Company while all non-service components are included in other (income) expense in the Consolidated Statements of Income.
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The aggregate projected benefit obligation, accumulated benefit obligation and fair value of pension plan assets for plans with accumulated benefit obligations in excess of plan assets were as follows:
December 31, (millions) |
| 2023 |
| 2022 | ||||
Aggregate projected benefit obligation | $ | $ | ||||||
Accumulated benefit obligation |
| |
| | ||||
Fair value of plan assets |
| |
| | ||||
These plans include the U.S. non-qualified pension plans which are not funded as well as various international pension plans which are funded consistent with local practices and requirements.
For the year ended December 31, 2023, the year-over-year decrease in the Company's consolidated net benefit obligations was due to an increase in pension plan assets, partially offset by a smaller increase in pension plan liabilities. Pension liabilities increased on a global basis primarily due to decreases in pension discount rates for U.S. plans, partially offset by increases in pension discount rates for international plans. The Company's pension discount rates are largely determined based on observable yields of investment grade corporate bonds or government issued debt-securities. The Company's pension plan assets are reported at fair value. The fair value of the Company's pension assets increased on a global basis primarily due to higher returns on the Company's equity and fixed income investments compared to prior year.
For the year ended December 31, 2022, the year-over-year decrease in the Company’s consolidated net benefit obligations was due to decreases in both pension liabilities and pension plan assets. Pension liabilities decreased on a global basis primarily due to increases in pension discount rates used to discount projected pension benefit payments. The Company’s pension discount rates are largely determined based on observable yields of investment grade corporate bonds or government issued debt-securities. Yields on these securities increased sharply in 2022 due, in part, to actions taken by many central banks to curb global inflation. The Company’s pension plan assets are reported at fair value. The fair value of the Company’s pension assets decreased on a global basis primarily due to unfavorable returns on the Company’s equity and fixed income investments.
Net Periodic Benefit Costs and Plan Assumptions
Pension and postretirement benefits expense for the Company’s operations were as follows:
U.S. | International | U.S. Postretirement | ||||||||||||||||||||||||||||||||||||||||||||||
Pensions | Pensions | Benefits | ||||||||||||||||||||||||||||||||||||||||||||||
(millions) |
| 2023 |
| 2022 |
| 2021 |
| 2023 |
| 2022 |
| 2021 |
| 2023 |
| 2022 |
| 2021 | ||||||||||||||||||||||||||||||
Service cost | $ | $40.8 | $43.9 | $21.7 | $28.4 | $ | $0.4 | $0.8 | $1.0 | |||||||||||||||||||||||||||||||||||||||
Interest cost on benefit obligation |
| |
| 65.3 | 51.4 |
| 45.9 |
| 22.0 |
| |
| 5.6 |
| 3.3 |
| 2.9 | |||||||||||||||||||||||||||||||
Expected return on plan assets |
| ( |
| (144.4) | (152.3) |
| (56.1) |
| (69.8) |
| ( |
| (0.2) |
| (0.3) |
| (0.4) | |||||||||||||||||||||||||||||||
Recognition of net actuarial loss (gain) | |
| 30.2 | 56.7 |
| 12.5 |
| 22.8 |
| |
| (3.1) |
| (0.6) |
| 0.7 | ||||||||||||||||||||||||||||||||
Amortization of prior service benefit | ( | (4.5) | (6.9) | (0.5) | (0.1) | ( | - | - | - | |||||||||||||||||||||||||||||||||||||||
Curtailments and settlements (a) | - | 51.6 | 35.3 | (2.7) | - | | - | - | - | |||||||||||||||||||||||||||||||||||||||
Total expense (benefit) | ($ | $39.0 | $28.1 | $20.8 | $3.3 | $ | $2.7 | $3.2 | $4.2 | |||||||||||||||||||||||||||||||||||||||
| (a) | $ |
During 2022 and 2021, the Company incurred settlement expense in the U.S. of $
83
The measurement of the Company’s pension and postretirement benefit obligations are dependent on a variety of assumptions determined by management and used by actuaries in their valuation method and calculations. The significant assumptions used in developing the required estimates of the projected benefit obligations are the discount rates, expected returns on assets, projected salary increases, and mortality tables. Assumptions for the Company were as follows:
Plan Assumptions | U.S. | International | U.S. Postretirement | |||||||||||||||||||||||||
Pensions | Pensions | Benefits | ||||||||||||||||||||||||||
(percent) |
| 2023 | 2022 | 2021 |
| 2023 | 2022 | 2021 | 2023 | 2022 | 2021 | |||||||||||||||||
Weighted-average actuarial assumptions | ||||||||||||||||||||||||||||
used to determine benefit obligations | ||||||||||||||||||||||||||||
as of year end: | ||||||||||||||||||||||||||||
Discount rate | | % | | % | | % | | % | | % | | % | | % | | % | | % | ||||||||||
Projected salary increase | |
| |
| |
| |
| |
| | |||||||||||||||||
Weighted-average actuarial assumptions | ||||||||||||||||||||||||||||
used to determine net cost: | ||||||||||||||||||||||||||||
Interest credit rate for cash balance plans | | | | N/A | N/A | N/A | N/A | N/A | N/A | |||||||||||||||||||
Discount rate | |
| |
| |
| |
| |
| |
| |
| |
| | |||||||||||
Expected return on plan assets | |
| |
| |
| |
| |
| |
| |
| |
| | |||||||||||
Projected salary increase | |
| |
| |
| |
| |
| | |||||||||||||||||
Discount rate assumptions for the U.S. plans are developed using a bond yield curve constructed from a population of high-quality, non-callable, corporate bonds with maturities ranging from
The Company measures service and interest costs by applying the specific spot rates along that yield curve to the plans’ liability cash flows. The Company believes this approach provides a more precise measurement of service and interest costs by aligning the timing of the plans’ liability cash flows to the corresponding spot rates on the yield curve.
The expected long-term rate of return used for the U.S. plans is based on the respective pension plan’s asset mix. The Company considers expected long-term real returns on asset categories, expectations for inflation, and estimates of the impact of active management of the assets in determining the expected long-term rate of return to use. The Company also considers historical returns.
The expected long-term rate of return used for the Company’s international plans is determined in each local jurisdiction and is based on the assets held in that jurisdiction, the expected rate of returns for the type of assets held and any guaranteed rate of return provided by the investment. The other assumptions used to measure the international pension obligations, including discount rate, vary by country based on specific local requirements and information.
The Company uses mortality tables appropriate in the circumstances, which generally are the recent available mortality tables as of the respective U.S. and international measurement dates. The Company’s 2023 and 2022 year-end U.S. valuations reflect mortality tables that estimate the impacts of COVID in an endemic state. This represents a change from 2021 when the impact of COVID on future mortality could not be reasonably estimated.
For postretirement benefit measurement purposes as of December 31, 2023, the annual rates of increase in the per capita cost of covered health care were assumed to be
Plan Asset Management
The Company’s U.S. investment strategy and policies are designed to maximize the possibility of having sufficient funds to meet the long-term liabilities of the qualified pension plan, while achieving a balance between the goals of asset growth of the qualified pension plan and keeping risk at a reasonable level. Investment income is not a primary goal of the policy.
The asset allocation position reflects the Company’s ability and willingness to accept relatively more short-term variability in the performance of the qualified pension plan asset portfolio in exchange for the expectation of better long-term returns, lower pension costs and better funded status in the long run. The U.S. qualified pension plan’s asset are diversified across a number of asset classes and securities. Selected individual portfolios within the asset classes may be undiversified while maintaining the diversified nature of total plan assets. The Company has no significant concentration of risk in its U.S. qualified pension plan assets.
Assets of funded international retirement plans are managed in each local jurisdiction and asset allocation strategy is set in accordance with local rules, regulations and practices; therefore, no overall target asset allocation is presented. Although foreign equity securities are all considered international for the Company, some equity securities are considered domestic for the local plan. The funds are invested in a variety of equities, bonds and real estate investments and, in some cases, the assets are managed by insurance companies which may offer a guaranteed rate of return. The Company has no significant concentration of risk in the assets of its international pension plans.
84
The fair value hierarchy is used to categorize investments measured at fair value in one of three levels in the fair value hierarchy. This categorization is based on the observability of the inputs used in valuing the investments. Refer to Note 7 for definitions of these levels.
The fair value of the Company’s U.S. qualified pension plan assets were as follows:
Fair Value as of | Fair Value as of | |||||||||||||||||
(millions) | December 31, 2023 | December 31, 2022 | ||||||||||||||||
| Level 1 |
| Level 2 |
| Total | Level 1 |
| Level 2 |
| Total | ||||||||
Cash | $ | $- | $ | $ | $- | $ | ||||||||||||
Equity securities: |
|
| ||||||||||||||||
Large cap equity |
|
| | - | |
| | - | | |||||||||
Small cap equity |
|
| | | |
| | | | |||||||||
International equity |
|
| | | |
| | | | |||||||||
Fixed income: | ||||||||||||||||||
Core fixed income |
|
| | | |
| | | | |||||||||
High-yield bonds |
|
| | - | |
| | - | | |||||||||
Emerging markets |
|
| - | | |
| - | | | |||||||||
Total investments at fair value |
| | |
| |
| | |
| | ||||||||
Investments measured at net asset value |
|
| | | ||||||||||||||
Total | $ | $ | $ | $ | $ | $ | ||||||||||||
The Company had
The allocation of the Company’s U.S. qualified pension plan assets plans were as follows:
Target Asset |
| |||||||||||||||||
Asset Category | Allocation | Percentage | ||||||||||||||||
Percentage | of Plan Assets | |||||||||||||||||
December 31 |
| 2023 | 2022 |
| 2023 | 2022 | ||||||||||||
Cash | - | % | - | % | 2 | % | 3 | % | ||||||||||
Equity securities: | ||||||||||||||||||
Large cap equity | | | 16 | 14 | ||||||||||||||
Small cap equity | |
| |
| 3 |
| 2 | |||||||||||
International equity | |
| |
| 9 |
| 9 | |||||||||||
Fixed income: | ||||||||||||||||||
Core fixed income | |
| |
| 48 |
| 47 | |||||||||||
High-yield bonds | |
| |
| 2 |
| 2 | |||||||||||
Emerging markets | |
| |
| 1 |
| 2 | |||||||||||
Other: | ||||||||||||||||||
Real estate | |
| |
| 3 |
| 4 | |||||||||||
Private equity | |
| |
| 14 |
| 15 | |||||||||||
Distressed debt | | | 2 | 2 | ||||||||||||||
Total | | % | | % | 100 | % | 100 | % | ||||||||||
The fair value of the Company’s international plan assets for its defined benefit pension plans were as follows:
Fair Value as of |
| Fair Value as of | |||||||||||
(millions) | December 31, 2023 |
| December 31, 2022 | ||||||||||
| Level 1 |
| Level 2 |
| Total |
| Level 1 |
| Level 2 |
| Total | ||
Cash | $ | $- | $ | $ | $- | $ | |||||||
Equity securities: | |||||||||||||
International equity | - | | | - | | | |||||||
Fixed income: | |||||||||||||
Corporate bonds |
| - | | | - | | | ||||||
Government bonds |
| - | | | - | | | ||||||
Insurance company accounts | - | | | - | | | |||||||
Total investments at fair value | | | | | | | |||||||
Investments measured at net asset value | | | |||||||||||
Total | $ | $ | $ | $ | $ | $ | |||||||
85
The Company had
The allocation of plan assets of the Company’s international plan assets for its defined benefit pension plans were as follows:
Percentage | ||||||
Asset Category | of Plan Assets | |||||
December 31 | 2023 | 2022 | ||||
Cash | | % | | % | ||
Equity securities: | ||||||
International equity | |
| | |||
Fixed income: | ||||||
Corporate bonds | |
| | |||
Government bonds | |
| | |||
Total fixed income | |
| | |||
Other: | ||||||
Insurance contracts | |
| | |||
Real estate | | | ||||
Total | | % | | % | ||
Cash Flows
As of year-end 2023, the Company’s estimate of pension and postretirement benefits expected to be paid in each of the next five fiscal years and in the aggregate for the five fiscal years thereafter are as follows:
(millions) | All Plans | ||||
2024 | $ | ||||
2025 |
| | |||
2026 |
| | |||
2027 |
| | |||
2028 |
| | |||
2029 - 2033 |
| | |||
Depending on plan funding levels, the U.S. qualified pension plan provides certain terminating participants with an option to receive their pension benefits in the form of a lump sum payout.
The Company is currently in compliance with all funding requirements of its U.S. pension and postretirement benefit plans. A $
The Company seeks to maintain balance in its U.S. assets that meet the long-term funding requirements identified by the projections of the pension plans’ actuaries while simultaneously satisfying the fiduciary responsibilities prescribed in ERISA. The Company also takes into consideration the tax deductibility of contributions to the benefit plans.
Savings Plan and ESOP
The Company provides a 401(k) savings plan for the majority of its U.S. employees under the Company’s 401(k) savings plans, the Ecolab Savings Plan and ESOP (the “Ecolab Savings Plan”).
Under the Ecolab Savings Plan, Employee before-tax contributions of up to
The Company’s matching contributions are
86
17. REVENUES
Revenue Recognition
Product and Sold Equipment
Product revenue is generated from sales of cleaning, sanitizing, water treatment, process treatment and colloidal silica products. In addition, the Company sells equipment which may be used in combination with its specialized products. Revenue recognized from product and sold equipment is recognized at the point in time when the obligations in the contract with the customer are satisfied, which generally occurs with the transfer of the product or delivery of the equipment.
On June 3, 2020, the Company completed the separation of its Upstream Energy business (“ChampionX”). The Company entered into a Master Cross Supply and Product Transfer agreement with ChampionX to provide, receive or transfer certain products for a period up to
Service and Lease Equipment
Service and lease equipment revenue is generated from providing services or leasing equipment to customers. Service offerings include installing or repairing certain types of equipment, activities that supplement or replace headcount at the customer location, or fulfilling deliverables included in the contract. Global Industrial segment services are associated with water treatment and paper process applications. Global Institutional & Specialty services include cleaning and sanitizing programs and wash process solutions. Global Healthcare & Life Sciences segment services include pharmaceutical, personal care, infection and containment control solutions. Revenues included in Other primarily related to services designed to detect, eliminate and prevent pests. Service revenue is recognized over time utilizing an input method and aligns with when the services are provided. Typically, revenue is recognized over time using costs incurred to date because the effort provided by the field selling and service organization represents services provided, which corresponds with the transfer of control. Revenue recognized from leased equipment primarily relates to warewashing and water treatment equipment recognized on a straight-line basis over the length of the lease contract pursuant to Topic 842 Leases. Refer to Note 13 for additional information related to lease equipment.
Practical Expedients and Exemptions
The revenue standard can be applied to a portfolio of contracts with similar characteristics if it is reasonable that the effects of applying the standard at the portfolio level would not be significantly different than applying the standard at the individual contract level. The Company applies the portfolio approach primarily within each operating segment by geographical region. Application of the portfolio approach was focused on those characteristics that have the most significant accounting consequences in terms of their effect on the timing of revenue recognition or the amount of revenue recognized. The Company determined the key criteria to assess with respect to the portfolio approach, including the related deliverables, the characteristics of the customers and the timing and transfer of goods and services, which most closely aligned within the operating segments. In addition, the accountability for the business operations, as well as the operational decisions on how to go to market and the product offerings, are performed at the operating segment level.
The following table shows principal activities, separated by reportable segments, from which the Company generates its revenue. The reportable segments have been revised to align with the Company’s reportable segments in the current year. Corporate segment includes sales to ChampionX under the Master Cross Supply and Product Transfer agreements entered into as part of the ChampionX Separation. For more information about the Company’s reportable segments, refer to Note 18.
87
Net sales at public exchange rates by reportable segment were as follows:
(millions) |
| 2023 | 2022 |
| 2021 |
| |||||
Global Industrial | |||||||||||
Product and sold equipment |
| $ | $ | $ |
| ||||||
Service and lease equipment |
| | | |
| ||||||
Global Institutional & Specialty |
|
| |||||||||
Product and sold equipment | | | | ||||||||
Service and lease equipment | | | | ||||||||
Global Healthcare & Life Sciences | |||||||||||
Product and sold equipment | | | | ||||||||
Service and lease equipment | | | | ||||||||
Other | |||||||||||
Product and sold equipment | | | | ||||||||
Service and lease equipment | | | | ||||||||
Corporate | |||||||||||
Product and sold equipment | | | | ||||||||
Service and lease equipment | - | | | ||||||||
Total | |||||||||||
Total product and sold equipment | $ | $ | $ | ||||||||
Total service and lease equipment | | | | ||||||||
Net sales at public exchange rates by geographic region were as follows:
Global Industrial | Global Institutional & Specialty | |||||||||||||||||||||
(millions) |
| 2023 | 2022 |
| 2021 |
| 2023 | 2022 |
| 2021 |
| |||||||||||
United States | $ | $ | $ | $ | $ | $ |
| |||||||||||||||
Europe |
| | | | | | |
| ||||||||||||||
Asia Pacific |
| | | | | | |
| ||||||||||||||
Latin America |
| | | | | | |
| ||||||||||||||
Greater China | | | | | | | ||||||||||||||||
India, Middle East and Africa | | | | | | | ||||||||||||||||
Canada | | | | | | | ||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||
Global Healthcare & Life Sciences | Other | |||||||||||||||||||||
(millions) | 2023 | 2022 |
| 2021 |
| 2023 | 2022 |
| 2021 |
| ||||||||||||
United States | $ | $ | $ | $ | $ | $ |
| |||||||||||||||
Europe | | | | | | |
| |||||||||||||||
Asia Pacific | | | | | | |
| |||||||||||||||
Latin America | | | | | | |
| |||||||||||||||
Greater China | | | | | | | ||||||||||||||||
India, Middle East and Africa | | | | | | | ||||||||||||||||
Canada | | | | | | | ||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||
Corporate | ||||||||||||||||||||||
(millions) | 2023 | 2022 |
| 2021 |
| |||||||||||||||||
United States | $ | $ | $ | |||||||||||||||||||
Europe | | | | |||||||||||||||||||
Asia Pacific | | | | |||||||||||||||||||
Latin America | | | | |||||||||||||||||||
Greater China | - | | | |||||||||||||||||||
India, Middle East and Africa | - | | | |||||||||||||||||||
Canada | | | | |||||||||||||||||||
Total | $ | $ | $ | |||||||||||||||||||
Net sales by geographic region were determined based on origin of sale. There were no sales from a single foreign country or individual customer that were material to the Company’s consolidated net sales. Sales of warewashing products were approximately
88
Contract Liability
Payments received from customers are based on invoices or billing schedules as established in contracts with customers. Accounts receivable are recorded when the right to consideration becomes unconditional. The contract liability relates to billings in advance of performance (primarily service obligations) under the contract. Contract liabilities are recognized as revenue when the performance obligation has been performed, which primarily occurs during the subsequent quarter.
December 31 | December 31 | ||||||
(millions) |
| 2023 | 2022 | ||||
Contract liability as of beginning of the year |
| $ | $ | ||||
Revenue recognized in the year from: |
| ||||||
Amounts included in the contract liability at the beginning of the year |
| ( | ( | ||||
Increases due to billings excluding amounts recognized as revenue during the year ended | | | |||||
Contract liability as of end of year | $ | $ | |||||
18. OPERATING SEGMENTS AND GEOGRAPHIC INFORMATION
The Company’s organizational structure consists of global business unit and global regional leadership teams. The Company’s
The Company’s operating segments that share similar economic characteristics and future prospects, nature of the products and production processes, end-use markets, channels of distribution and regulatory environment have been aggregated into
The Company’s operating segments are aggregated as follows:
Global Industrial
Includes the Water, Food & Beverage and Paper operating segments. It provides water treatment and process applications, and cleaning and sanitizing solutions primarily to large industrial customers within the manufacturing, food and beverage processing, transportation, chemical, primary metals and mining, power generation, pulp and paper, commercial laundry, global petroleum and petrochemical industries. The underlying operating segments exhibit similar manufacturing processes, distribution methods and economic characteristics.
Global Institutional & Specialty
Includes the Institutional and Specialty operating segments. It provides specialized cleaning and sanitizing products to the foodservice, hospitality, lodging, government and education and retail industries. The underlying operating segments exhibit similar manufacturing processes, distribution methods and economic characteristics.
Global Healthcare & Life Sciences
Includes the Healthcare and Life Sciences operating segments. It provides specialized cleaning and sanitizing products to the healthcare, personal care and pharmaceutical industries. The underlying operating segments exhibit similar manufacturing processes, distribution methods and economic characteristics.
Other
Includes the Pest Elimination operating segment which provides services to detect, eliminate and prevent pests, such as rodents and insects, the CTG operating segment which produces and sells colloidal silica, which is comprised of nano-sized particles of silica in water used primarily for binding and polishing applications and the Textile Care operating segment which provides products and services that manage the entire wash process through custom designed programs, premium products, dispensing equipment, water and energy management and reduction, and real time data management.
Corporate
Consistent with the Company’s internal management reporting, Corporate amounts in the table below include sales to ChampionX under the Master Cross Supply and Product Transfer agreements entered into as part of the ChampionX Separation, as discussed in Note 4. Corporate also includes intangible asset amortization specifically from the Nalco and Purolite acquisitions and special (gains) and charges, as discussed in Note 3, that are not allocated to the Company’s reportable segments.
89
Comparability of Reportable Segments
Effective January 1, 2023, the Company’s former Downstream operating segment is now part of the Water operating segment. This change did not have any impact on the Global Industrial reportable segment.
The Company evaluates the performance of its non-U.S. dollar functional currency international operations based on fixed currency exchange rates, which eliminate the impact of exchange rate fluctuations on its international operations. Fixed currency amounts are updated annually at the beginning of each year based on translation into U.S. dollars at foreign currency exchange rates established by management, with all periods presented using such rates. The “Fixed Currency Rate Change” column shown in the following table reflects international operations at fixed currency exchange rates established by management at the beginning of 2023, rather than the 2022 established rates. The difference between the fixed currency exchange rates and the actual currency exchange rates is reported within the “Effect of foreign currency translation” row in the following table. The “Other” column shown in the following table reflects immaterial changes between reportable segments, including the movement of certain customers and cost allocations.
The impact of the preceding changes on previously reported full year 2022 and 2021 reportable segment net sales and operating income is summarized as follows:
December 31, 2022 | |||||||||||||||||
|
|
|
| ||||||||||||||
2022 Reported | Fixed | 2022 Reported | |||||||||||||||
Valued at 2022 |
|
| Currency |
| Valued at 2023 | ||||||||||||
(millions) | Fixed Currency Rates |
| Other |
| Rate Change |
| Fixed Currency Rates | ||||||||||
Net Sales |
|
|
| ||||||||||||||
Global Industrial | $ | $- | ($ | $ | |||||||||||||
Global Institutional & Specialty | | | ( | | |||||||||||||
Global Healthcare & Life Sciences | | - | ( | | |||||||||||||
Other | | ( | ( | | |||||||||||||
Corporate | | - | ( | | |||||||||||||
Subtotal at fixed currency rates | | - | ( | | |||||||||||||
Effect of foreign currency translation | ( | - | | | |||||||||||||
Consolidated reported GAAP net sales | $ | $- | $- | $ | |||||||||||||
Operating Income | |||||||||||||||||
Global Industrial | $ | $ | ($ | $ | |||||||||||||
Global Institutional & Specialty | | ( | ( | | |||||||||||||
Global Healthcare & Life Sciences | | ( | ( | | |||||||||||||
Other | | | ( | | |||||||||||||
Corporate | ( | - | | ( | |||||||||||||
Subtotal at fixed currency rates | | - | ( | | |||||||||||||
Effect of foreign currency translation | ( | - | | | |||||||||||||
Consolidated reported GAAP operating income | $ | $- | $- | $ | |||||||||||||
December 31, 2021 | |||||||||||||||||
| 2021 Reported |
|
| Fixed |
| 2021 Reported | |||||||||||
Valued at 2022 |
| Segment |
| Currency |
| Valued at 2023 | |||||||||||
(millions) | Fixed Currency Rates |
| Change |
| Rate Change |
| Fixed Currency Rates | ||||||||||
Net Sales |
|
|
| ||||||||||||||
Global Industrial | $ | $- | ($ | $ | |||||||||||||
Global Institutional & Specialty | | | ( | | |||||||||||||
Global Healthcare & Life Sciences | | - | ( | | |||||||||||||
Other | | ( | ( | | |||||||||||||
Corporate | | - | - | | |||||||||||||
Subtotal at fixed currency rates | | - | ( | | |||||||||||||
Effect of foreign currency translation | | - | | | |||||||||||||
Consolidated reported GAAP net sales | $ | $- | $- | $ | |||||||||||||
Operating Income | |||||||||||||||||
Global Industrial | $ | $ | ($ | $ | |||||||||||||
Global Institutional & Specialty | | ( | ( | | |||||||||||||
Global Healthcare & Life Sciences | | ( | ( | | |||||||||||||
Other | | | ( | | |||||||||||||
Corporate | ( | - | | ( | |||||||||||||
Subtotal at fixed currency rates | | - | ( | | |||||||||||||
Effect of foreign currency translation | | - | | | |||||||||||||
Consolidated reported GAAP operating income | $ | $- | $- | $ | |||||||||||||
90
Reportable Segment Information
Financial information for each of the Company’s reportable segments were as follows:
Net Sales | Operating Income (Loss) | |||||||||||||||||||||
(millions) | 2023 | 2022 | 2021 | 2023 | 2022 | 2021 | ||||||||||||||||
Global Industrial | $ | $ | $ | $ | $ | $ | ||||||||||||||||
Global Institutional & Specialty | | | | | | | ||||||||||||||||
Global Healthcare & Life Sciences | | | | | | | ||||||||||||||||
Other | | | | | | | ||||||||||||||||
Corporate | | | | ( | ( | ( | ||||||||||||||||
Subtotal at fixed currency | | | | | | | ||||||||||||||||
Effect of foreign currency translation | | | | | | | ||||||||||||||||
Consolidated reported GAAP | $ | $ | $ | $ | $ | $ | ||||||||||||||||
The profitability of the Company’s operating segments is evaluated by management based on operating income.
Consistent with the Company’s internal management reporting, Corporate amounts in the table above include sales to ChampionX in accordance with the long-term supply agreement entered into with the Transaction, as discussed in Note 17. Corporate also includes intangible asset amortization specifically from the Nalco and Purolite acquisitions and special (gains) and charges, as discussed in Note 3, that are not allocated to the Company’s reportable segments.
The Company has an integrated supply chain function that serves all of its reportable segments. As such, asset and capital expenditure information by reportable segment has not been provided and is not available, since the Company does not produce or utilize such information internally. In addition, although depreciation and amortization expense is a component of each reportable segment’s operating results, it is not discretely identifiable.
Geographic Information
Long-lived assets, which includes property, plant and equipment and right of use assets, at public exchange rates by geographic region were as follows:
Long-Lived Assets, net | ||||||||
(millions) | 2023 |
| 2022 |
| ||||
United States | $ | $ | ||||||
Europe |
| | | |||||
Asia Pacific | | | ||||||
Latin America |
| | | |||||
Greater China |
| | | |||||
India, Middle East and Africa | | | ||||||
Canada |
| | | |||||
Total | $ | $ | ||||||
|
|
|
|
| ||||
Geographic data for long-lived assets is based on physical location of those assets. Refer to Note 17 for net sales by geographic region.
91
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
| First |
| Second |
| Third |
| Fourth |
|
| |||||||
(millions, except per share) | Quarter | Quarter | Quarter | Quarter | Year | |||||||||||
2023 |
|
|
|
|
|
|
| |||||||||
Net sales | $ | $ | $ | $ | $ | |||||||||||
Operating expenses | ||||||||||||||||
Cost of sales (a) | | | | | | |||||||||||
Selling, general and administrative expenses | | | | | | |||||||||||
Special (gains) and charges | | | | | | |||||||||||
Operating income | | | | | | |||||||||||
Other (income) expense (b) | ( | ( | ( | ( | ( | |||||||||||
Interest expense, net | | | | | | |||||||||||
Income before income taxes | | | | | | |||||||||||
Provision for income taxes | | | | | | |||||||||||
Net income including noncontrolling interest | | | | | | |||||||||||
Net income attributable to noncontrolling interest | | | | | | |||||||||||
Net income attributable to Ecolab | $ | $ | $ | $ | $ | |||||||||||
Earnings attributable to Ecolab per common share | ||||||||||||||||
Basic | $ | $ | $ | $ | $ | |||||||||||
Diluted | $ | $ | $ | $ | $ | |||||||||||
Weighted-average common shares outstanding | ||||||||||||||||
Basic | | | | | | |||||||||||
Diluted | | | | | | |||||||||||
2022 | ||||||||||||||||
Net sales | $ | $ | $ | $ | $ | |||||||||||
Operating expenses | ||||||||||||||||
Cost of sales (a) | | | | | | |||||||||||
Selling, general and administrative expenses | | | | | | |||||||||||
Special (gains) and charges | | | | | | |||||||||||
Operating income | | | | | | |||||||||||
Other (income) expense (b) | ( | ( | | | ( | |||||||||||
Interest expense, net | | | | | | |||||||||||
Income before income taxes | | | | | | |||||||||||
Provision for income taxes | | | | | | |||||||||||
Net income including noncontrolling interest | | | | | | |||||||||||
Net income attributable to noncontrolling interest | | | | | | |||||||||||
Net income attributable to Ecolab | $ | $ | $ | $ | $ | |||||||||||
Earnings attributable to Ecolab per common share | ||||||||||||||||
Basic | $ | $ | $ | $ | $ | |||||||||||
Diluted | $ | $ | $ | $ | $ | |||||||||||
Weighted-average common shares outstanding | ||||||||||||||||
Basic | | | | | | |||||||||||
Diluted | | | | | | |||||||||||
Per share amounts do not necessarily sum due to changes in the calculation of shares outstanding for each discrete period and rounding. Gross profit is calculated as net sales minus cost of sales.
| (a) | Cost of sales includes special charges of $ |
| (b) | Other (income) expense includes special charges of $ |
92
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
As of December 31, 2023, we carried out an evaluation, under the supervision and with the participation of our management, including our Chairman and Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 as amended). Based upon that evaluation, our Chairman and Chief Executive Officer and our Chief Financial Officer concluded that, as of December 31, 2023, our disclosure controls and procedures were effective.
Management’s Report on Internal Control Over Financial Reporting
Refer to page 47 of this Annual Report for “Management’s Report on Internal Control Over Financial Reporting.”
Report of Registered Public Accounting Firm
Refer to page 48 of this Annual Report for the “Report of Independent Registered Public Accounting Firm.”
Changes in Internal Control Over Financial Reporting.
During the period October 1, 2023 through December 31, 2023 there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are continuing our implementation of our enterprise resource planning (“ERP”) system upgrades, which are expected to occur in phases over the next several years. These upgrades, which include supply chain and certain finance functions, are expected to improve the efficiency of certain financial and related transactional processes. These upgrades of the ERP systems will affect the processes that constitute our internal control over financial reporting and will require testing for effectiveness.
Item 9B. Other Information.
Rule 10b5-1 Plan
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
93
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Information about our directors is incorporated by reference from the discussion under the heading “Proposal 1: Election of Directors” located in the Proxy Statement. Information about our Audit Committee, including the members of the Committee, and our Audit Committee financial experts, is incorporated by reference from the discussion under the heading “Corporate Governance,” and sub-headings “Board Committees” and “Audit Committee,” located in the Proxy Statement. Information about our Code of Conduct is incorporated by reference from the discussion under the heading “Corporate Governance” located in the Proxy Statement. Information regarding our executive officers is presented under the heading “Information about our Executive Officers” in Part I, Item 1 of this Form 10-K, and is incorporated herein by reference.
Item 11. Executive Compensation.
Information appearing under the following headings of the Proxy Statement is incorporated herein by reference:
| ● | Director Compensation for 2023 |
| ● | Compensation Risk Analysis |
| ● | Compensation & Human Capital Management Committee Interlocks and Insider Participation |
| ● | Compensation & Human Capital Management Committee Report |
| ● | Compensation Discussion and Analysis |
| ● | Summary Compensation Table for 2023 |
| ● | Grants of Plan-Based Awards for 2023 |
| ● | Outstanding Equity Awards at Fiscal Year End for 2023 |
| ● | Option Exercises and Stock Vested for 2023 |
| ● | Pension Benefits for 2023 |
| ● | Non-Qualified Deferred Compensation for 2023 |
| ● | Potential Payments Upon Termination or Change in Control |
| ● | Pay Ratio Disclosure |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information appearing under the heading entitled “Security Ownership” located in the Proxy Statement is incorporated herein by reference. Information appearing under the heading entitled “Equity Compensation Plan Information” located in the Proxy Statement is incorporated herein by reference.
A total of 201,743 shares of Common Stock held by our directors and executive officers, some of whom may be deemed to be “affiliates” of the Company, have been excluded from the computation of market value of our Common Stock on the cover page of this Form 10-K. This total represents that portion of the shares reported as beneficially owned by our directors and executive officers as of June 30, 2023 which are actually issued and outstanding.
Equity Compensation Plan Information
| (a) |
|
|
| ||||
Number of securities to be | (b) | (c) |
| |||||
issued upon exercise of | Weighted average exercise | Number of securities remaining |
| |||||
outstanding options, | price of outstanding options, | available for future issuance under |
| |||||
warrants | warrants | equity compensation plans (excluding |
| |||||
Plan Category | and rights | and rights | securities reflected in column (a)) |
| ||||
Equity compensation plans approved |
| |||||||
by security holders | 8,525,989 | (1) | $ 168.65 | (1) | 18,840,264 | |||
Total |
| 8,525,989 | $ 168.65 | 18,840,264 | ||||
(1) Includes 204,317 Common Stock equivalents representing deferred compensation stock units earned by non-employee directors under our 2001 Non-Employee Director Stock Option and Deferred Compensation Plan, 944,826 Common Stock equivalents under our 2010 and 2023 Stock Incentive Plans representing performance-based restricted stock units payable to employees, and 455,490 Common Stock equivalents under our 2010 and 2023 Stock Incentive Plans representing restricted stock units payable to employees. All of the Common Stock equivalents described in this footnote (1) are not included in the calculation of weighted average exercise price of outstanding options, warrants and rights in column (b) of this table.
94
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information appearing under the headings entitled “Director Independence Standards and Determinations” and “Related Person Transactions” located in the Proxy Statement is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
Information appearing under the heading entitled “Audit Fees” located in the Proxy Statement is incorporated herein by reference.
95
PART IV
Item 15. Exhibit and Financial Statement Schedules.
The following information required under this item is filed as part of this report: | |||
(a)(1) | Financial Statements. | ||
Document: | Page: | ||
(i) | Report of Independent Registered Public Accounting Firm. (PCAOB ID | 48 | |
(ii) | Consolidated Statements of Income for the years ended December 31, 2023, 2022 and 2021. | 50 | |
(iii) | 51 | ||
(iv) | 52 | ||
(v) | Consolidated Statements of Cash Flows for the years ended December 31, 2023, 2022 and 2021. | 53 | |
(vi) | Consolidated Statements of Equity for the years ended December 31, 2023, 2022 and 2021. | 54 | |
(vii) | 55 | ||
Exhibit No.: |
| Document: |
| Method of Filing: | ||
|---|---|---|---|---|---|---|
(a)(2) | Financial Statement Schedules. | |||||
All financial statement schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or the accompanying notes to the consolidated financial statements. The separate financial statements and summarized financial information of subsidiaries not consolidated and of fifty percent or less owned persons have been omitted because they do not satisfy the requirements for inclusion in this Form 10-K. | ||||||
(a)(3) | The documents below are filed as exhibits to this Report. We will, upon request and payment of a fee not exceeding the rate at which copies are available from the Securities and Exchange Commission, furnish copies of any of the following exhibits to stockholders. | |||||
(2.1) | Incorporated by reference to Exhibit (2.1) of our Form 8-K, dated December 18, 2019. | |||||
(2.2) | Incorporated by reference to Exhibit (2.2) of our Form 8-K, dated December 18, 2019. | |||||
(2.3) | Incorporated by reference to Exhibit (2.1) of our Form 8-K, dated December 1, 2021. | |||||
(3.1) | Restated Certificate of Incorporation of Ecolab Inc., dated January 2, 2013. | Incorporated by reference to Exhibit (3.2) of our Form 8-K, dated January 2, 2013. | ||||
(3.2) | Incorporated by reference to Exhibit (3.1) of our Form 8-K, dated May 4, 2023. | |||||
(4.1) | Common Stock. | See Exhibits (3.1) and (3.2) | ||||
96
Exhibit No.: |
| Document: |
| Method of Filing: | ||
|---|---|---|---|---|---|---|
(4.2) | Incorporated by reference to Exhibit (4)(A) of our Form 8-K, dated January 23, 2001. | |||||
(4.3) | Incorporated by reference to Exhibit (4.2) of our Form 8-K, dated December 5, 2011. | |||||
(4.4) | Form of 5.500% Notes due 2041. | Included in Exhibit (4.3) above. | ||||
(4.5) | Incorporated by reference to Exhibit 4.1 of our Form 8-K, dated January 15, 2015. | |||||
(4.6) | Incorporated by reference to Exhibit (4.2) of our Form 8-K, dated July 8, 2015. | |||||
(4.7) | Form of 2.625% Euro Notes due 2025. | Included in Exhibit (4.6) above. | ||||
(4.8) | Incorporated by reference to Exhibit (4.2) of our Form 8-K, dated October 13, 2016. | |||||
(4.9) | Forms of 2.700% Notes due 2026 and 3.700% Notes due 2046. | Included in Exhibit (4.8) above. | ||||
(4.10) | Incorporated by reference to Exhibit (4.2) of our Form 8-K, dated November 30, 2017. | |||||
(4.11) | Form of 3.250% Notes due 2027. | Included in Exhibit (4.10) above. | ||||
(4.12) | Form of 3.950% Notes due 2047. | Included in Exhibit (4.10) above. | ||||
(4.13) | Incorporated by reference to Exhibit (4.2) of our Form 8-K filed on March 24, 2020. | |||||
(4.14) | Form of 4.800% Notes due 2030. | Included in Exhibit (4.13) above. | ||||
(4.15) | Incorporated by reference to Exhibit (4.2) of our Form 8-K filed on August 13, 2020. | |||||
(4.16) | Form of 1.300% Notes due 2031. | Included in Exhibit (4.15) above. | ||||
(4.17) | Form of 2.125% Notes due 2050. | Included in Exhibit (4.15) above. | ||||
97
Exhibit No.: |
| Document: |
| Method of Filing: | ||
|---|---|---|---|---|---|---|
(4.18) | Incorporated by reference to Exhibit (4.2) of our Form 8-K filed on August 19, 2021. | |||||
(4.19) | Form of 2.750% Notes due 2055. | Included in Exhibit (4.18) above. | ||||
(4.20) | Incorporated by reference to Exhibit (4.2) of our Form 8-K filed on December 15, 2021. | |||||
(4.21) | Form of 1.650% Notes due 2027. | Included in Exhibit (4.20) above. | ||||
(4.22) | Form of 2.125% Notes due 2032. | Included in Exhibit (4.20) above. | ||||
(4.23) | Form of 2.700% Notes due 2051. | Included in Exhibit (4.20) above. | ||||
(4.24) | Incorporated by reference to Exhibit (4.2) of our Form 8-K filed on November 17, 2022. | |||||
(4.25) | Form of 5.250% Notes due 2028. | Included in Exhibit (4.24) above. | ||||
(4.27) | Filed herewith electronically. | |||||
Copies of other constituent instruments defining the rights of holders of our long-term debt are not filed herewith, pursuant to Section (b)(4)(iii) of Item 601 of Regulation S-K, because the aggregate amount of securities authorized under each of such instruments is less than 10% of our total assets on a consolidated basis. We will, upon request by the Securities and Exchange Commission, furnish to the Commission a copy of each such instrument. | ||||||
(10.1) | (i) | Incorporated by reference to Exhibit (10.1) of our Form 8-K, dated April 20, 2021. | ||||
(ii) | Incorporated by reference to Exhibit (10.1) of our Form 10-Q, for the quarter ended March 31, 2023. | |||||
(10.2) | Documents comprising global Commercial Paper Programs. | |||||
(i) | U.S. $2,000,000,000 Euro-Commercial Paper Programme. | |||||
(a) | Filed herewith electronically. | |||||
98
Exhibit No.: |
| Document: |
| Method of Filing: | ||
|---|---|---|---|---|---|---|
(b) | Filed herewith electronically. | |||||
(c) | Filed herewith electronically. | |||||
(d) | Filed herewith electronically. | |||||
(ii) | U.S. $2,000,000,000 U.S. Commercial Paper Program. | |||||
(a) | Incorporated by reference to Exhibit (10.1)(a) of our Form 10-Q for the quarter ended September 30, 2014. | |||||
(b) | Incorporated by reference to Exhibit (10.1)(a) of our Form 10 Q for the quarter ended September 30, 2017. | |||||
(c) | Corporate Commercial Paper – Master Note, dated June 7, 2021, together with annex thereto. | Incorporated by reference to Exhibit (10.3)(ii) of our Form 10 Q for the quarter ended June 30, 2021. | ||||
(10.3) | † | (i) | Incorporated by reference to Exhibit (10.6) of our Form 10-K Annual Report for the year ended December 31, 2013. | |||
† | (ii) | Incorporated by reference to Exhibit (10.1) of our Form 10-Q for the quarter ended June 30, 2016. | ||||
† | (iii) | Master Agreement Relating to Periodic Options, as amended, effective as of May 1, 2004. | Incorporated by reference to Exhibit (10)D(ii) of our Form 10-Q for the quarter ended June 30, 2004. | |||
† | (iv) | Incorporated by reference to Exhibit (10)B of our Form 10-Q for the quarter ended September 30, 2008. | ||||
(10.4) | † | Filed herewith electronically. | ||||
(10.5) | † | (i) | Ecolab Executive Death Benefits Plan, as amended and restated, effective as of March 1, 1994. | Incorporated by reference to Exhibit (10)H(i) of our Form 10-K Annual Report for the year ended December 31, 2006. See also Exhibit (10.12) hereof. | ||
99
Exhibit No.: |
| Document: |
| Method of Filing: | ||
|---|---|---|---|---|---|---|
† | (ii) | Amendment No. 1 to Ecolab Executive Death Benefits Plan, effective as of July 1, 1997. | Incorporated by reference to Exhibit (10)H(ii) of our Form 10-K Annual Report for the year ended December 31, 1998. | |||
† | (iii) | Incorporated by reference to Exhibit (10)H(iii) of our Form 10-K Annual Report for the year ended December 31, 1998. | ||||
† | (iv) | Amendment No. 3 to the Ecolab Executive Death Benefits Plan, effective as of August 12, 2005. | Incorporated by reference to Exhibit (10)B of our Form 8-K, dated December 13, 2005. | |||
† | (v) | Amendment No. 4 to the Ecolab Executive Death Benefits Plan, effective as of January 1, 2005. | Incorporated by reference to Exhibit (10)H(v) of our Form 10-K Annual Report for the year ended December 31, 2009. | |||
† | (vi) | Amendment No. 5 to the Ecolab Executive Death Benefits Plan, effective as of May 6, 2015. | Incorporated by reference to Exhibit 10.2 of our Form 10-Q for the quarter ended June 30, 2015. | |||
† | (vii) | Amendment No. 6 to the Ecolab Executive Death Benefits Plan, effective as of June 23, 2017. | Incorporated by reference to Exhibit 10.1(vii) of Ecolab’s Form 8-K dated June 23, 2017. | |||
(10.6) | † | (i) | Incorporated by reference to Exhibit (10)I of our Form 10-K Annual Report for the year ended December 31, 2004. See also Exhibit (10.12) hereof.. | |||
† | (ii) | Amendment No. 1 to the Ecolab Executive Long-Term Disability Plan, effective as of August 21, 2015. | Incorporated by reference to Exhibit 10.1 of our Form 10-Q for the quarter ended September 30, 2015. | |||
(10.7) | † | (i) | Incorporated by reference to Exhibit (10.7)(i) of our Form 10-K Annual Report for the year ended December 31, 2021.. | |||
(10.8) | † | (i) | Ecolab Mirror Savings Plan, as amended and restated, effective as of January 1, 2022. | Incorporated by reference to Exhibit (10.8)(i) of our Form 10-K Annual Report for the year ended December 31, 2021.. | ||
(10.9) | † | (i) | Ecolab Mirror Pension Plan, as amended and restated, effective as of January 1, 2022. | Incorporated by reference to Exhibit (10.9)(i) of our Form 10-K Annual Report for the year ended December 31, 2021.. | ||
(10.10) | † | (i) | Incorporated by reference to Exhibit (10.10)(i) of our Form 10-K Annual Report for the year ended December 31, 2021.. | |||
(10.11) | † | (i) | Incorporated by reference to Exhibit (10) of our Form 8-K, dated February 26, 2010. | |||
† | (ii) | Incorporated by reference to Exhibit (10.18)(ii) of our Form 10-K Annual Report for the year ended December 31, 2011. | ||||
(10.12) | † | Filed herewith electronically. | ||||
(10.13) | † | (i) | Ecolab Inc. 2010 Stock Incentive Plan, as amended and restated, effective as of May 2, 2013. | Incorporated by reference to Exhibit (10.1) of our Form 8-K, dated May 2, 2013. | ||
† | (ii) | Incorporated by reference to Exhibit (10.3) of our Form 10-Q, for the quarter ended March 31, 2019. | ||||
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Exhibit No.: |
| Document: |
| Method of Filing: | ||
|---|---|---|---|---|---|---|
† | (iii) | Incorporated by reference to Exhibit (10)B of our Form 8-K, dated May 6, 2010. | ||||
† | (iv) | Incorporated by reference to Exhibit (10)A of our Form 10-Q, for the quarter ended September 30, 2010. | ||||
† | (v) | Incorporated by reference to Exhibit (10.13)(ix) of our Form 10-K Annual Report for the year ended December 31, 2020. | ||||
† | (vi) | Incorporated by reference to Exhibit (10.13)(ix) of our Form 10-K Annual Report for the year ended December 31, 2021.. | ||||
(10.14) | † | (i) | Ecolab Inc. 2023 Stock Incentive Plan, as amended and restated, effective as of May 4, 2023. | Incorporated by reference to Exhibit (10.1) of our Form 10-Q, for the quarter ended June 30, 2023. | ||
† | (ii) | Incorporated by reference to Exhibit (10.2) of our Form 10-Q, for the quarter ended June 30, 2023. | ||||
† | (iii) | Incorporated by reference to Exhibit (10.4) of our Form 10-Q, for the quarter ended June 30, 2023. | ||||
† | (iv) | Filed herewith electronically. | ||||
(10.15) | † | Incorporated by reference to Exhibit (10.3) of our Form 10-Q, for the quarter ended March 31, 2023. | ||||
(10.16) | † | Incorporated by reference to Exhibit (10.4) of our Form 10-Q, for the quarter ended March 31, 2023. | ||||
(10.17) | † | Form of Nalco Company Death Benefit Agreement and Addendum to Death Benefit Agreement. | Incorporated by reference from Exhibit (99.2) on Form 8-K of Nalco Holding Company filed on May 11, 2005. (File No. 001-32342) | |||
(10.18) | † | Death Benefit Agreement between Nalco Company and Laurie M. Marsh effective as of December 17, 2009. | Incorporated by reference to Exhibit (10.5) of our Form 10-Q, for the quarter ended March 31, 2023. | |||
(10.19) | † | Incorporated by reference to Exhibit (10.2) of our Form 10-Q, for the quarter ended March 31, 2023. | ||||
(21.1) | Filed herewith electronically. | |||||
(23.1) | Filed herewith electronically. | |||||
(24.1) | Filed herewith electronically. | |||||
(31.1) | Filed herewith electronically. | |||||
(31.2) | Filed herewith electronically. | |||||
(32.1) | Filed herewith electronically. | |||||
(97.1) | Ecolab Inc. Rule 10D-1 Clawback Policy, adopted November 2, 2023. | Filed herewith electronically. | ||||
101
Exhibit No.: |
| Document: |
| Method of Filing: | ||
|---|---|---|---|---|---|---|
(101.INS) | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | Filed herewith electronically. | ||||
(101.SCH) | Inline XBRL Taxonomy Extension Schema. | Filed herewith electronically. | ||||
(101.CAL) | Inline XBRL Taxonomy Extension Calculation Linkbase. | Filed herewith electronically. | ||||
(101.DEF) | Inline XBRL Taxonomy Extension Definition Linkbase. | Filed herewith electronically. | ||||
(101.LAB) | Inline XBRL Taxonomy Extension Label Linkbase. | Filed herewith electronically. | ||||
(101.PRE) | Inline XBRL Taxonomy Extension Presentation Linkbase. | Filed herewith electronically. | ||||
(104) | Cover Page Interactive Data File. | Formatted as Inline XBRL and contained in Exhibit 101. | ||||
† This exhibit is an executive compensation plan or arrangement.
Item 16. Form 10-K Summary.
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Ecolab Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 23rd day of February, 2024.
ECOLAB INC. | ||
(Registrant) | ||
By: | /s/ Christophe Beck | |
Christophe Beck | ||
Chairman and Chief Executive Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Ecolab Inc. and in the capacities indicated, on the 23rd day of February, 2024.
/s/ Christophe Beck | Chairman and Chief Executive Officer | |
Christophe Beck | (Principal Executive Officer and Director) | |
/s/ Scott D. Kirkland | Chief Financial Officer | |
Scott D. Kirkland | (Principal Financial Officer) | |
/s/ Jennifer J. Bradway | Senior Vice President and Corporate Controller | |
Jennifer J. Bradway | (duly authorized officer and Principal Accounting Officer) | |
/s/ Lanesha T. Minnix | Directors | |
Lanesha T. Minnix | ||
as attorney-in-fact for: | ||
Shari L. Ballard, Barbara J. Beck, Eric M. Green, Arthur J. Higgins, Michael Larson, David W. MacLennan, Tracy B. McKibben, Lionel L. Nowell, III, Victoria J. Reich, Suzanne M. Vautrinot and John J. Zillmer |
103
