Ecolab Inc. — Q3 2017 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods. Ecolab operates in Global Industrial, Global Institutional, Global Energy and Other; results include the February 2017 acquisition of Anios. Interim results are not necessarily indicative of full-year results.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $3,563.3m | $3,386.1m | $10,187.6m | $9,800.7m |
| Operating income | $579.8m | $574.1m | $1,392.1m | $1,358.1m |
| Net income attributable to Ecolab | $392.4m | $374.1m | $942.5m | $863.3m |
| Diluted EPS | $1.34 | $1.27 | $3.20 | $2.91 |
| Reported gross margin | 46.9% | 48.7% | 46.5% | 47.4% |
| Reported operating margin | 16.3% | 17.0% | 13.7% | 13.9% |
Q3 sales rose 5% as reported and 5% at fixed currency rates; acquisition-adjusted fixed-currency growth was 3%. Volume and pricing contributed 2% and 1%, respectively, to sales growth. Hurricanes Harvey, Irma and Maria were estimated to reduce fixed-currency sales growth by 1% and adjusted fixed-currency operating-income growth by 3%. Q3 adjusted diluted EPS was $1.37, up 7%; this is a company-reported non-GAAP measure.
For the first nine months, operating cash flow was $1,444.9m versus $1,491.7m. Capital expenditures were $538.2m and capitalized software spending was $55.8m. Cash used in investing was $1,368.1m, including $831.2m for acquisitions and investments, principally reflecting Anios. Cash and cash equivalents were $209.1m at September 30, 2017, down from $327.4m at December 31, 2016.
At September 30, total debt including short-term borrowings was approximately $7,557.5m, versus $6,657.1m at December 31, 2016; cash was $209.1m. Net debt was $7,348.4m, and net debt to EBITDA was 2.6x (2.5x to adjusted EBITDA), compared with 2.6x and 2.3x, respectively, at year-end 2016. Current assets were $4,614.5m and current liabilities $3,756.6m. The company had a $2.0bn credit facility, with no facility borrowings, and $238m of Euro commercial paper outstanding. Debt covenants were met; S&P and Moody’s long-term ratings were A- and Baa1, both with stable outlooks.
Changes, operating performance and unusual items
- Global Institutional sales grew 7% at fixed currency in Q3 (2% acquisition-adjusted); operating income rose 5%. Global Industrial sales grew 4%, while operating income rose 2% in Q3 but declined 2% for the nine months. Global Energy sales grew 3% in Q3, but operating income fell 13%; well stimulation was strong, while production declined and margins faced higher delivered costs and other pressures.
- Gross margin declined year over year, primarily due to higher delivered product costs and a greater contribution from Global Energy, which more than offset pricing and cost savings. SG&A as a percentage of sales improved to 30.5% in Q3 from 31.6%, and to 32.3% for the nine months from 33.2%, reflecting volume leverage and cost savings.
- Special gains and charges were a net $5.2m in Q3 and $74.1m for the nine months, versus $3.2m and $97.6m in 2016. The 2017 nine-month total included restructuring, acquisition/integration costs, litigation and a Global Energy vendor contract termination, partly offset by Venezuela-related recovery gains. The 2016 comparison included $63.6m of energy-related charges; no such charges were recorded in 2017.
- A restructuring program launched in Q2 targets approximately 570 positions. Ecolab expects total charges of $40m–$45m pretax ($30m–$35m after tax), mostly in 2017; $36.6m had been recorded through September 30, and the related liability was $28.2m.
- Anios was acquired for total consideration of $798.3m, including $192.8m of debt repaid at closing. Its purchase-price allocation remained preliminary; goodwill recorded was $506.5m. The company also issued $500m of five-year notes at a 2.375% coupon in August.
Outlook, risks and contingencies
Management did not provide a specific sales or EPS forecast in the supplied filing text. It expected strong operating cash flow to help fund reasonably foreseeable next-12-month needs, including debt repayments, business investment, acquisitions, dividends, share repurchases and pension obligations, with additional borrowing available as needed. Management described gradual recovery in oil-and-gas activity and remained confident in Global Energy’s long-term prospects, while noting continued market volatility.
Key exposures include oil-and-gas market conditions, raw-material costs, foreign exchange and international political/economic uncertainty, customer and market dynamics, substantial indebtedness, acquisition integration, regulatory and environmental obligations, cybersecurity and execution of a multi-year ERP upgrade. The filing discusses Deepwater Horizon-related claims involving Nalco; the company said it intended to defend the claims and expected certain actions to be dismissed, but could not predict outcomes. It reported environmental assessments or remediation at approximately 45 locations and stated it did not currently believe material losses above accrued amounts were reasonably possible for the legal matters discussed, while acknowledging adverse developments could cause future charges. The company also disclosed compliant non-U.S. subsidiary sales to Iranian distributors under General License H.
Other notable items: the Equipment Care business sale closed November 1, 2017 and was not expected to be material; other announced purchase agreements were expected to close in Q4 and were not material individually or in aggregate. The interim financial statements received a limited review, not an audit opinion. Management concluded disclosure controls were effective as of September 30, 2017.
Most important facts for investors to verify
- Whether organic, acquisition-adjusted growth and segment trends—especially Global Energy profitability—persist beyond the quarter.
- How delivered product costs, pricing, cost savings and hurricane-related effects develop, and whether gross and operating margins recover.
- Actual restructuring costs, cash payments, workforce reductions and realized savings versus the $40m–$45m charge estimate.
- Integration and final purchase accounting for Anios, including goodwill and the acquisition’s contribution to growth and cash generation.
- Debt maturities, leverage, liquidity and cash-flow conversion, particularly with $1.1bn of debt and notes payable due within one year as disclosed by management.
- Developments in Deepwater Horizon litigation, environmental matters, tax exposures, Iran-related activity and ERP implementation risks.