Ecolab Inc. — Third-Quarter 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; comparisons are to the same 2018 periods unless noted. Amounts are in U.S. dollars. Interim financial statements were reviewed, not audited, by PwC.
Business context and financial performance
Ecolab provides cleaning, sanitizing, water-treatment, energy and related services and products. Its reportable segments are Global Industrial, Global Institutional and Global Energy, with remaining activities in Other.
| Metric | Third quarter 2019 | Change | Nine months 2019 | Change |
|---|---|---|---|---|
| Net sales | $3.818 billion | +2% reported; +3% fixed currency | $11.083 billion | +2% reported; +4% fixed currency |
| Operating income | $587.6 million | +14% | $1.453 billion | +6% |
| Net income attributable to Ecolab | $464.2 million | +7% | $1.129 billion | +9% |
| Diluted EPS | $1.59 | +7% | $3.86 | +9% |
| Operating cash flow | Not separately stated for quarter | — | $1.600 billion | Up $149.3 million |
Reported gross margin was 42.2% for the quarter (41.5% in 2018) and 41.3% for the nine months (41.2%). Excluding special items, adjusted gross margin was 42.5% and 41.5%, respectively, versus 41.6% and 41.3%. Reported operating margin was 15.4% for the quarter and 13.1% year to date, compared with 13.8% and 12.5%. SG&A was 25.2% of sales for the quarter and 26.8% year to date, down from 25.7% and 27.7%.
Management’s non-GAAP adjusted diluted EPS was $1.71 for the quarter and $4.16 year to date, each up 12%. These figures exclude special charges and discrete tax items; reported EPS was $1.59 and $3.86. Quarterly sales growth reflected flat volume, 2% pricing and 1% acquisitions, partly offset by 1% unfavorable currency translation.
Segments and material changes
- Global Industrial: Fixed-currency sales rose 5% in the quarter and 7% year to date. Fixed-currency operating income rose 13% and 20%, respectively; management cited pricing and cost efficiencies.
- Global Institutional: Fixed-currency sales rose 4% in the quarter and 3% year to date. Operating income rose 9% and 5%.
- Global Energy: Fixed-currency sales declined 3% in the quarter and 1% year to date, amid reduced North American well-stimulation activity. Operating income nevertheless rose 17% and 11%, helped by pricing, cost initiatives and lower product costs.
- Other: Fixed-currency sales rose 7% in both periods; quarterly operating income rose 2%.
Interest expense, net declined 17% to $46.1 million for the quarter and 14% to $145.0 million year to date, primarily because of higher interest income and lower debt. The reported tax rate was 16.5% for the quarter versus 9.0% and 16.7% year to date versus 17.2%; discrete tax benefits and special items affected comparability.
Cash, debt and liquidity
- Cash and cash equivalents were $135.9 million at September 30, 2019, versus $114.7 million at December 31, 2018. Operating cash flow of $1.600 billion was partly offset by $929.2 million used in investing and $847.5 million used in financing.
- Capital expenditures were $550.4 million year to date, down from $634.1 million. Net cash paid for acquisitions was $386.6 million, versus $77.6 million in the prior-year period. Dividends paid were $418.0 million; share repurchases were $348.6 million.
- Total debt was approximately $6.746 billion at September 30, down from $7.045 billion at December 31, 2018. Short-term debt was $779.1 million and long-term debt $5.967 billion. Net debt to EBITDA was 2.1x; management’s comparable 2018 figure was 2.3x.
- The company had a $2.0 billion revolving credit facility, expiring in November 2022, with no borrowings outstanding. Commercial paper outstanding was $459 million. Ecolab reported compliance with debt covenants and said it expects operating cash flow and, if needed, borrowings to fund foreseeable requirements.
Outlook, management commentary and risks
- No specific full-year earnings or revenue guidance is provided in the supplied filing text. Management said it expects operating cash flow to remain strong.
- The Accelerate 2020 restructuring is expected to be completed by the end of 2020, with total estimated costs of $260 million pretax ($190 million after tax). Cumulative charges were $211.4 million through September 30, 2019; the remaining plan liability was $97.7 million. The plan had delivered $80 million in cumulative savings, with annual savings estimated at $325 million by 2021. Costs and savings remain estimates.
- Ecolab intends to pursue a tax-efficient spin-off of the Upstream business, subject to board and regulatory approvals, and expected completion in 2020. Spin-off charges were $48.5 million year to date, primarily professional fees. Completion, timing and tax treatment are uncertain.
- In October 2019, the U.K. Competition and Markets Authority said Ecolab must divest Holchem, acquired in 2018. Ecolab disagreed and was considering next steps, including an appeal.
- Risks include weaker oil and gas markets, foreign-exchange and economic volatility, raw-material costs, regulatory and environmental matters, litigation, cybersecurity and execution of the ERP upgrade. Ecolab also described ongoing Deepwater Horizon-related litigation; three cases remained pending and the company expected them to be dismissed under an earlier court order, but outcomes cannot be assured.
- Operating lease assets and liabilities were recognized following adoption of the new lease standard in 2019. The company also reported $38 million of gross uncertain tax-position liabilities and did not expect significant payments within the next year.
Important facts for investors to verify
- Progress, approvals, timing and tax consequences of the proposed Upstream spin-off, and the effect of separation costs.
- The Holchem divestiture requirement, any appeal or resolution, and resulting financial impact.
- Whether Accelerate 2020 achieves the stated $325 million annual savings target by 2021 and how much additional cash restructuring cost remains.
- Global Energy sales trends and exposure to oil and gas activity, alongside the durability of pricing and margin improvements.
- Reported versus adjusted earnings: adjusted measures exclude special items and discrete tax effects and are not GAAP measures.
- Cash conversion, debt reduction and the effect of acquisitions, capital spending, dividends and repurchases on liquidity.