Ecolab Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Amounts are in millions except per-share data and ratios. Interim financial statements were reviewed, not audited.
Business context
Ecolab provides cleaning, sanitizing, water treatment, process treatment and related services and equipment. Its reportable segments are Global Industrial, Global Institutional & Specialty, and Global Healthcare & Life Sciences. Results include the December 2021 acquisition of Purolite, a provider of ion-exchange resins; reported segment growth in Healthcare & Life Sciences was substantially acquisition-driven.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $3,580.6 | $3,162.7 | $6,847.3 | $6,047.7 |
| Operating income | $425.8 | $447.8 | $680.3 | $745.1 |
| Net income attributable to Ecolab | $308.3 | $310.8 | $480.2 | $504.4 |
| Diluted EPS | $1.08 | $1.08 | $1.67 | $1.75 |
| Gross margin, reported | 38.2% | 41.7% | 37.4% | 41.2% |
| Operating margin, reported | 11.9% | 14.2% | 9.9% | 12.3% |
| Cash from operating activities | — | $492.5 | $798.3 | |
| Capital expenditures | — | $317.5 | $245.6 |
Q2 reported sales grew 13%; fixed-currency sales rose 17%, including 4 percentage points from acquisitions and divestitures. Acquisition-adjusted fixed-currency sales increased 13%, reflecting 4% volume growth and 9% pricing. Reported operating income fell 5%; adjusted fixed-currency operating income fell 4%. Adjusted diluted EPS declined 10% to $1.10, excluding special items and discrete tax items.
For the first six months, sales rose 13% reported and 16% at fixed currency. Reported operating income declined 9%, net income attributable to Ecolab fell 5%, and diluted EPS decreased 5%. Adjusted diluted EPS was $1.92, down 5%.
Higher delivered product costs more than offset pricing benefits and pressured gross margin. Q2 adjusted gross margin was 38.3%, versus 41.8% a year earlier. SG&A as a share of sales improved to 26.3% from 27.0%, as sales leverage and cost savings outweighed business investment.
Liquidity, debt and cash flow
At June 30, 2022, cash was $124.9, short-term debt $618.3 and long-term debt $8,167.8, for total debt of approximately $8.8 billion. Net debt was $8.66 billion and trailing-twelve-month net debt/EBITDA was 3.5x, compared with 2.2x a year earlier. Cash declined $235.0 in the first half to $124.9. Operating cash flow was down $305.8 year over year, primarily due to a $292 million increase in working capital, which management attributed mainly to sales growth.
First-half financing cash outflow was $428.2, including $402.8 of share repurchases and $300.1 of dividends, partly offset by $208.0 of net commercial paper and notes payable issuance. The company had $604 million of U.S. commercial paper outstanding, no Euro commercial paper outstanding, and no borrowings on its $2.0 billion revolving facility, which expires in April 2026. Management reported covenant compliance and stated it believes borrowing capacity is sufficient for foreseeable needs.
Material changes and segment results
- Global Industrial fixed-currency sales increased 13% in Q2, but operating income declined 10%; pricing was outweighed by higher delivered product costs and unfavorable mix.
- Global Institutional & Specialty sales increased 18% and operating income 11% at fixed currency. Strong Institutional volume, pricing and new business supported results; Q2 segment margin nevertheless declined 0.9 percentage points.
- Global Healthcare & Life Sciences sales increased 37% at fixed currency, largely reflecting Purolite. Acquisition-adjusted sales were flat; acquisition-adjusted operating margin declined 6.0 percentage points amid higher costs, lower volumes and investment.
- Foreign currency translation reduced Q2 sales growth by approximately 3 percentage points and diluted EPS by about $0.06 versus the prior-year quarter.
Outlook, commentary and risks
Management expected growth to continue amid elevated inflation and increasingly challenging currency effects. It said global energy surcharges and pricing were expected to accelerate to help stay ahead of inflation, and it expected operating cash flow to remain strong. The filing does not provide a specific consolidated earnings or EPS forecast.
Management cited significant delivered-cost inflation, supply constraints, labor and logistics disruptions, foreign-exchange exposure and uncertain COVID-19 effects. Ecolab limited Russian operations to activities considered essential to life and may further narrow its presence. Russia and Ukraine asset recoverability charges were $13.3 million in the first half, partly offset by a $5.7 million Q2 recovery.
Special charges totaled $5.3 million in Q2 2022 versus $40.9 million in Q2 2021, including the prior-year $19.6 million pension settlement expense. First-half special charges were $82.3 million versus $73.3 million, including $54.6 million of cost-of-sales items, principally acquisition-related inventory step-up, COVID-19, Russia/Ukraine and restructuring costs. Ecolab also recorded $15 million of excess sanitizer inventory and disposal reserves in Q1.
More than 5,000 plaintiffs have claims against Ecolab subsidiary Nalco related to the 2019 TPC Group plant explosion. The company says it believes the claims are without merit and expects insurance coverage subject to deductibles, but stated that a loss estimate cannot currently be made. TPC and affiliates filed for Chapter 11 in June 2022. Ecolab also reported environmental remediation at approximately 30 locations and stated that litigation developments could result in charges beyond recorded accruals.
Restructuring plans remained in progress: Accelerate 2020 was expected to be completed by year-end 2022, with anticipated total costs of $255 million and estimated annual continuing-operations savings of $315 million by 2022; the Institutional Plan was expected to be completed by 2023, with anticipated costs of $65 million and estimated annual savings of $50 million by 2024. Actual costs and savings may differ.
Important facts for investors to verify
- Whether pricing and surcharges can offset delivered-cost inflation without further volume loss or margin pressure.
- Working-capital trends, operating cash generation, and the trajectory of net debt/EBITDA.
- Purolite integration, acquisition-related costs, and the extent to which Healthcare & Life Sciences growth is organic.
- Developments in the TPC litigation, environmental matters, and Russia/Ukraine exposure and asset recoverability.
- Progress, remaining costs and realized savings from restructuring plans, and the timing and impact of ERP system upgrades.