Ecolab Inc. — Q1 2019 Form 10-Q
Business context and reporting period
This filing covers the three months ended March 31, 2019, compared with Q1 2018; balance-sheet comparisons are with December 31, 2018. Ecolab provides products and services in water, hygiene, energy and related markets through Global Industrial, Global Institutional, Global Energy and Other. The interim financial statements were reviewed by PwC, not audited.
Financial performance and position
- Revenue: Net sales were $3.505 billion, up 1% reported, 4% at fixed currency rates and 3% on an acquisition-adjusted fixed-currency basis. Volume contributed 1% and pricing 3%; foreign exchange reduced reported growth by about 3 percentage points.
- Profit and margins: Operating income was $367.2 million, up 4%; reported operating margin was 10.5%, versus 10.2%. Adjusted operating income, a non-GAAP measure, increased 8% to $411.1 million, with an 11.7% adjusted margin versus 11.0%. Net income attributable to Ecolab was $296.5 million, up 20%; diluted EPS was $1.01 versus $0.84. Adjusted diluted EPS was $1.03, up 13%.
- Gross margin and costs: Reported gross margin was 40.2%, compared with 40.3%; adjusted gross margin was 40.3% in both periods. Management cited pricing and cost savings offset by higher delivered product costs. SG&A was 28.6% of sales versus 29.3%.
- Cash flow: Operating cash flow was $378.1 million, down from $487.2 million. Capital expenditures were $187.0 million; cash used for acquisitions was $281.8 million. Cash used in investing was $477.4 million. Dividends paid were $141.4 million and share repurchases were $131.4 million.
- Liquidity and debt: Cash was $79.0 million at quarter-end. Total debt was $7.14 billion and net debt was $7.06 billion; net debt/EBITDA was 2.4x. Short-term debt was $1.13 billion, including $787.5 million of commercial paper. A $2.0 billion credit facility, expiring November 2022, had no borrowings; the company reported covenant compliance and sufficient borrowing capacity.
- Balance sheet: Total assets were $20.93 billion and total liabilities $12.66 billion. Adoption of lease accounting added operating lease assets and liabilities; at March 31, these were $570.9 million and $571.3 million, respectively.
Changes versus the prior comparable period
- Fixed-currency sales grew 8% in Global Industrial, 2% in Global Institutional and 7% in Other; Global Energy declined 2%, reflecting reduced energy-market activity. Industrial operating income rose 21% at fixed currency; Institutional was flat, Energy rose 14% and Other rose 12%.
- Net income growth benefited from a lower reported tax rate: 11.4% versus 21.8%. The 2019 rate included a $27.7 million discrete tax benefit, including an $18.7 million share-based compensation benefit. Adjusted tax rates were 20.6% and 22.0%, respectively.
- Net interest expense fell 12% to $49.4 million, primarily due to lower outstanding debt and higher interest income. Operating cash flow decreased, with management citing working-capital timing and discretionary inventory build.
- Special charges totaled $44.1 million versus $26.0 million, including $40.5 million of restructuring charges and $4.3 million of spin-off costs in Q1 2019. Q1 2018 included a $25.0 million Ecolab Foundation commitment.
Outlook, commentary, risks and unusual items
- Outlook: Management expects operating cash flow to remain strong and anticipates funding foreseeable needs through operating cash flow and, as needed, borrowings. The filing provides no specific full-year revenue or EPS guidance.
- Accelerate 2020: Ecolab raised the plan’s goals to simplify and automate processes, reduce complexity and management layers, consolidate facilities and focus on growth areas. Completion is expected by end-2020; anticipated costs are $260 million pretax ($190 million after tax). Cumulative charges were $145.1 million through Q1, with an $81.4 million plan liability at quarter-end. Costs are expected primarily to be cash severance and facility expenses; actual costs may vary.
- Upstream Energy separation: Ecolab intends to spin off its Upstream businesses, subject to board and regulatory approvals, with completion expected in 2020. The transaction may not occur on the anticipated timeline or at all, and its tax treatment and expected benefits are uncertain.
- Other risks and contingencies: Management highlighted energy-market exposure, foreign exchange and international economic or political conditions, raw-material costs, cybersecurity and IT-system execution, acquisition integration, tax uncertainty, litigation and environmental matters. The filing describes five remaining Deepwater Horizon-related cases against Nalco, which Ecolab expects to be dismissed but cannot predict with certainty. A China environmental-law proceeding remained pending; the company anticipated no material adverse effect.
- Other unusual disclosures: The company reported $0.3 million of sales by a non-U.S. subsidiary relating to the Rhum gas field, authorized under an OFAC license, with nominal pretax profit. Lease accounting adoption recorded about $572 million of operating lease assets and $575 million of lease liabilities at January 1, 2019, with no impact on net earnings or cash flows.
Important facts for investors to verify
- Whether sales, margins and cash conversion remain resilient, particularly given lower Q1 operating cash flow and inventory build.
- Progress and actual costs, cash outlays and expected benefits of Accelerate 2020.
- Approval, timing, tax treatment and separation costs or benefits of the proposed Upstream Energy spin-off.
- Commercial-paper funding, debt maturities, leverage and ongoing compliance with debt covenants.
- Developments in the Deepwater Horizon and China matters, and any changes to environmental or other contingency accruals.
- Whether reported earnings growth is sustained apart from discrete tax benefits and other special items; adjusted measures are non-GAAP and should be assessed alongside GAAP results.