Ecolab(ECL) - 2023 Q4 - Annual Report

Part I Business Ecolab is a global leader in water, hygiene, and infection prevention solutions, with $15 billion in annual sales across three main segments - Ecolab is a global sustainability leader with $15 billion in annual sales, employing over 48,000 associates and serving customers in more than 170 countries[16] - The company's strategy, "Circle the Customer – Circle the Globe," provides diverse programs and services to meet customer operational and sustainability needs[17] - In 2022, Ecolab helped customers conserve over 219 billion gallons of water and avoid more than 3.6 million metric tons of greenhouse gas emissions[18] - The business is organized into three reportable segments: Global Industrial, Global Institutional & Specialty, and Global Healthcare & Life Sciences, with other smaller segments combined into "Other"[19] Global Industrial This segment provides water treatment, process applications, and cleaning solutions to large industrial customers across various sectors, comprising Water, Food & Beverage, and Paper operating segments - The Global Industrial segment comprises the Water, Food & Beverage, and Paper operating segments[20] - The Water operating segment offers water treatment programs for cooling, wastewater, boiler, and process water applications, including proprietary 3D TRASAR™ technologies[22][23] - The Food & Beverage operating segment supplies cleaning and sanitation products, systems, and antimicrobial solutions to dairy plants, farms, breweries, and food processors[25] - The Paper operating segment provides water and process applications for the pulp and paper industries, focusing on improving operational efficiency, water and energy savings[27] Global Institutional & Specialty This segment offers specialized cleaning and sanitizing products to foodservice, hospitality, and retail industries, comprising Institutional and Specialty operating segments - This segment consists of the Institutional and Specialty operating segments, serving industries such as foodservice, hospitality, and retail[29] - The Institutional operating segment provides warewashing, laundry, housekeeping, and food safety products and services, including the EcoSure Food Safety Management business[30] - The Specialty operating segment primarily serves quick service restaurant (QSR) chains and food retailers with customized cleaning and sanitation programs[33] Warewashing Product Sales as a Percentage of Consolidated Net Sales | Year | Percentage of Consolidated Net Sales | | :--- | :--- | | 2023 | 12% | | 2022 | 12% | | 2021 | 10% | Global Healthcare & Life Sciences This segment, comprising Healthcare and Life Sciences operating segments, delivers specialized cleaning and contamination control solutions to healthcare, personal care, and pharmaceutical industries - This segment is composed of the Healthcare and Life Sciences operating segments[37] - The Healthcare operating segment provides infection prevention and surgical solutions, such as hand hygiene and hard surface disinfection products, to acute care hospitals and surgery centers[38] - The Life Sciences operating segment offers end-to-end cleaning and contamination control solutions to pharmaceutical and personal care manufacturers, including premium fluid treatment and purification solutions from the Purolite acquisition[40] Other Segments This category includes operating segments not meeting separate reporting criteria: Pest Elimination, Textile Care, and the Colloidal Technologies Group - The Pest Elimination segment provides services to detect, prevent, and eliminate pests for commercial customers such as restaurants, hotels, and healthcare facilities[43] - The Textile Care segment offers products and services for large-scale commercial laundry operations, focusing on cleaning performance while reducing operating costs[45] - The Colloidal Technologies Group produces and sells colloidal silica used for binding and polishing applications in industries such as semiconductor and catalyst manufacturing[46] Human Capital Ecolab employed approximately 48,000 people worldwide as of December 31, 2023, focusing on diversity, development, competitive compensation, and employee well-being - Ecolab employed approximately 48,000 people as of December 31, 2023, with 42% in North America[57] - The company has a Diversity Council chaired by the CEO and supports 11 Employee Resource Groups (ERGs) to promote diversity, equity, and inclusion[59][60] - Ecolab maintains a market-competitive, performance-based pay philosophy and conducts pay equity studies to ensure fair compensation[62] - The company's safety goals are zero accidents, zero injuries, and zero violations, supported by robust safety programs and a Global Safety Dashboard[64] Environmental and Regulatory Considerations Ecolab's business is subject to extensive global environmental and public health regulations, actively managing climate-change risks with goals to reduce GHG emissions by half by 2030 and achieve net zero by 2050 - The company is subject to numerous regulations such as TSCA in the U.S. and REACH in the European Union, which govern chemical management and safety[80][81] - Ecolab's disinfecting and sanitizing products are regulated as "pesticides" under FIFRA in the U.S. and are subject to the Biocidal Products Regulation in Europe, requiring extensive registration and compliance[85][86] - The company has committed to reducing operational GHG emissions by half by 2030 and achieving net zero by 2050, in alignment with the UN's Business Ambition for 1.5⁰C[96] Environmental, Health and Safety Capital Expenditures | Year | Capital Expenditures (millions) | | :--- | :--- | | 2023 | $46 | | 2022 | $35 | | 2021 | $28 | | 2024 (Budgeted) | $51 | Environmental Remediation Costs | Metric | Amount (millions) | | :--- | :--- | | Worldwide Net Expenditures (2023) | $0.3 | | Worldwide Accruals for Future Remediation (as of Dec 31, 2023) | $9.3 | Risk Factors The company faces diverse risks, including economic, operational, strategic, legal, regulatory, compliance, and financial factors, which could materially impact its performance - Economic and Operational Risks: Results are impacted by worldwide economic factors, market vitality, and risks associated with significant non-U.S. operations, which accounted for 47% of 2023 net sales[119][120][121] - Strategic Risks: Challenges include successful integration of acquisitions like Purolite, execution of key initiatives such as ERP upgrades and supply chain investments, and intense competition requiring continuous innovation[133][134][135] - Legal, Regulatory, and Compliance Risks: The business is subject to numerous laws (environmental, climate change, anti-corruption) and potential liabilities from litigation, chemical spills, and sustainability commitments[138][140][142] - Financial Risks: Potential tax liabilities from the 2020 split-off of the Upstream Energy business, changes in global tax laws (e.g., OECD's Pillar Two), and risks associated with its $8.2 billion in outstanding indebtedness as of year-end 2023[152][153][156] Cybersecurity Ecolab's mature cybersecurity program, based on the NIST Framework and integrated into ERM, is overseen by the Board and CISO, focusing on technical safeguards, incident response, and employee education - Ecolab's cybersecurity program is based on recognized frameworks like the NIST Cybersecurity Framework and is integrated into its ERM program[162] - Oversight is provided by the Board and Audit Committee, with an Information Security Steering Committee (ISSC) chaired by the CISO and comprising executive leaders from across the company[166][168] - The program's strategy includes technical safeguards, incident response planning, third-party risk management, employee education, and periodic third-party assessments[170] Properties Ecolab operates a global network of 100 manufacturing facilities (32 U.S., 68 international), distribution centers, offices, and research centers, with key locations in Minnesota, Illinois, and Pennsylvania - The company operates 100 manufacturing facilities worldwide: 32 in 14 U.S. states and 68 in 38 other countries[171] - Corporate headquarters is an owned 17-story building in St. Paul, Minnesota, with a major research and development campus in Eagan, Minnesota[174] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Ecolab's common stock (ECL) is listed on the NYSE, with 4,797 holders of record as of January 31, 2024, and an ongoing share repurchase authorization with 12,917,097 shares remaining - The company's common stock trades on the New York Stock Exchange under the symbol "ECL"[179] - As of January 31, 2024, there were 4,797 holders of record of the company's Common Stock[180] - The Board of Directors has authorized the repurchase of up to 30,000,000 common shares in total, with 12,917,097 shares remaining available for repurchase at the end of 2023[182] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, Ecolab achieved 8% reported sales growth to $15.3 billion, with adjusted operating income up 20% and adjusted diluted EPS up 16% to $5.21, driven by pricing and strong cash flow Executive Summary For fiscal year 2023, Ecolab reported 8% sales growth to $15.3 billion, 28% rise in operating income to $2.0 billion, and 16% adjusted diluted EPS growth to $5.21, with strong cash flow and a 32nd consecutive dividend increase 2023 Key Financial Highlights vs. 2022 | Metric | 2023 Value | 2022 Value | % Change | | :--- | :--- | :--- | :--- | | Reported Sales | $15.3 billion | $14.2 billion | +8% | | Reported Operating Income | $2.0 billion | $1.6 billion | +28% | | Reported Diluted EPS | $4.79 | $3.81 | +26% | | Adjusted Diluted EPS | $5.21 | $4.49 | +16% | | Cash Flow from Operations | $2.4 billion | $1.8 billion | +33% | - The company increased its quarterly cash dividend by 8% in December 2023, marking the 32nd consecutive annual dividend rate increase[199] Results of Operations In 2023, reported net sales grew 8% (9% organic) driven by pricing, adjusted gross margin expanded to 40.4%, adjusted operating income increased 20%, and adjusted diluted EPS rose 16% to $5.21 Year-over-Year Sales Change Components | Component | 2023 vs 2022 (%) | 2022 vs 2021 (%) | | :--- | :--- | :--- | | Volume | 0% | 2% | | Price changes | 8% | 10% | | Organic sales change | 9% | 13% | | Acquisitions and divestitures | 0% | 3% | | Fixed currency sales change | 8% | 16% | | Foreign currency translation | 0% | -4% | | Reported GAAP net sales change | 8% | 11% | Gross Margin Analysis | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Reported GAAP Gross Margin | 40.2% | 37.8% | 40.2% | | Non-GAAP Adjusted Gross Margin | 40.4% | 38.2% | 40.9% | Operating Income Performance | Metric | 2023 (millions) | 2022 (millions) | % Change | | :--- | :--- | :--- | :--- | | Reported GAAP Operating Income | $1,992.3 | $1,562.5 | +28% | | Non-GAAP Adjusted Operating Income | $2,126.2 | $1,772.9 | +20% | | Non-GAAP Organic Operating Income | $2,117.5 | $1,759.4 | +20% | Diluted EPS Performance | Metric | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Reported GAAP Diluted EPS | $4.79 | $3.81 | +26% | | Non-GAAP Adjusted Diluted EPS | $5.21 | $4.49 | +16% | Segment Performance In 2023, Global Institutional & Specialty led fixed currency sales growth at 13%, with strong operating income growth across most segments, except Global Healthcare & Life Sciences which declined 17% Fixed Currency Net Sales by Segment (2023 vs 2022) | Segment | 2023 Sales (millions) | 2022 Sales (millions) | % Change | | :--- | :--- | :--- | :--- | | Global Industrial | $7,193.1 | $6,736.3 | +7% | | Global Institutional & Specialty | $4,994.0 | $4,414.3 | +13% | | Global Healthcare & Life Sciences | $1,576.9 | $1,505.8 | +5% | | Other | $1,442.3 | $1,313.3 | +10% | Fixed Currency Operating Income by Segment (2023 vs 2022) | Segment | 2023 OI (millions) | 2022 OI (millions) | % Change | | :--- | :--- | :--- | :--- | | Global Industrial | $1,080.7 | $935.8 | +15% | | Global Institutional & Specialty | $823.0 | $621.7 | +32% | | Global Healthcare & Life Sciences | $160.0 | $193.3 | -17% | | Other | $255.0 | $209.9 | +21% | Financial Position, Cash Flow and Liquidity As of December 31, 2023, Ecolab maintained a strong financial position with $21.8 billion in total assets, $8.2 billion in total debt, an improved net debt to EBITDA ratio of 2.4, and $2.4 billion in operating cash flow Key Financial Position Metrics | Metric (in millions, except ratio) | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $21,846.6 | $21,464.3 | | Total Debt | $8,181.8 | $8,580.4 | | Net Debt | $7,262.3 | $7,981.8 | | Net Debt to EBITDA Ratio | 2.4 | 3.2 | Cash Flow Summary | Cash Flow Activity (in millions) | 2023 | 2022 | | :--- | :--- | :--- | | Cash provided by operating activities | $2,411.8 | $1,788.4 | | Cash used for investing activities | ($990.5) | ($716.8) | | Cash used for financing activities | ($1,054.7) | ($837.3) | - The company maintains a $2.0 billion multi-year credit facility expiring in April 2026, with no borrowings outstanding at year-end 2023[320] - Long-term credit ratings as of December 31, 2023, were A- (negative) from S&P, A3 (negative) from Moody's, and A- (stable) from Fitch[322] Financial Statements and Supplementary Data This section presents Ecolab's audited consolidated financial statements for the three years ended December 31, 2023, including reports from management and PricewaterhouseCoopers LLP, detailing financial performance and position with key accounting notes - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[353] - A critical audit matter identified was the valuation of certain U.S. defined benefit pension plan obligations, due to significant management judgment in developing assumptions for discount rates and expected return on assets[361][362] Consolidated Statement of Income Highlights (in millions) | Line Item | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net Sales | $15,320.2 | $14,187.8 | $12,733.1 | | Operating Income | $1,992.3 | $1,562.5 | $1,598.6 | | Net Income Attributable to Ecolab | $1,372.3 | $1,091.7 | $1,129.9 | Consolidated Balance Sheet Highlights (in millions) | Line Item | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $21,846.6 | $21,464.3 | | Total Liabilities | $13,774.4 | $14,205.7 | | Total Equity | $8,072.2 | $7,258.6 | Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, while a multi-year ERP system upgrade is ongoing and expected to impact internal controls - The CEO and CFO concluded that disclosure controls and procedures were effective as of December 31, 2023[613] - Management concluded that internal control over financial reporting was effective as of December 31, 2023[349] - The company is in the process of a multi-year ERP system upgrade which is expected to impact internal controls over financial reporting[615] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance, including the Audit Committee and Code of Conduct, is incorporated by reference from the 2024 Proxy Statement - Information about directors, the Audit Committee, and the Code of Conduct is incorporated by reference from the Proxy Statement[620] Executive Compensation Detailed information concerning executive compensation, including Compensation Discussion and Analysis and summary tables, is incorporated by reference from the company's 2024 Proxy Statement - All information related to executive compensation is incorporated by reference from the Proxy Statement[621] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership by beneficial owners and management, and details on equity compensation plans, is incorporated by reference from the 2024 Proxy Statement, with 18,840,264 securities available for future issuance Equity Compensation Plan Information | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted average exercise price of outstanding options, warrants and rights ($) | Number of securities remaining available for future issuance under equity compensation plans | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 8,525,989 | $168.65 | 18,840,264 | Certain Relationships and Related Transactions, and Director Independence Information on related person transactions and director independence standards is incorporated by reference from the company's 2024 Proxy Statement - Information on related transactions and director independence is incorporated by reference from the Proxy Statement[624] Principal Accounting Fees and Services Information concerning fees paid to the principal independent registered public accounting firm for audit and other services is incorporated by reference from the 2024 Proxy Statement - Information on principal accounting fees and services is incorporated by reference from the Proxy Statement[625] Part IV Exhibit and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K report, with consolidated financial statements included from page 48 and schedules omitted where information is already provided - The consolidated financial statements for the years ended December 31, 2023, 2022, and 2021 are included in the report[628] - All financial statement schedules are omitted because they are not applicable or the required information is already provided in the consolidated financial statements or notes[629]