Ecolab Inc. — Q1 2021 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2021; comparisons are to Q1 2020 and reflect continuing operations. Ecolab provides cleaning, sanitizing, water-treatment and related products, equipment, services and leases. Following the June 2020 separation of its Upstream Energy business, results are reported in Global Industrial, Global Institutional & Specialty, Global Healthcare & Life Sciences, Other and Corporate.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $2,885.0 million | $3,020.6 million |
| Operating income | $297.3 million | $376.2 million |
| Net income attributable to Ecolab from continuing operations | $193.6 million | $292.0 million |
| Diluted EPS from continuing operations | $0.67 | $1.00 |
| Cash provided by operating activities | $295.3 million | $308.3 million |
| Capital expenditures | $102.1 million | $147.7 million |
- Reported sales fell 4%; fixed-currency sales declined 6% and acquisition-adjusted fixed-currency sales declined 8%. Volume was down 10%, partly offset by 1% pricing; foreign currency translation contributed 2% to reported sales.
- Reported gross margin was 40.7%, versus 43.1%; adjusted gross margin was 41.3%, versus 43.4%. Reported operating margin was 10.3%, versus 12.5%; adjusted operating margin was 11.4%, versus 13.3%.
- Adjusted operating income declined 18% to $329.7 million; adjusted diluted EPS from continuing operations decreased 18% to $0.81. These are non-GAAP measures and exclude specified special charges and, for adjusted earnings measures, discrete tax items.
- Reported tax rate was 25.2%, versus 13.7%; adjusted tax rate was 19.7%, versus 20.5%. Q1 2021 included $16.1 million of net discrete tax expense, including a $25.1 million non-cash deferred tax charge related to an interaffiliate transfer of intangible property. Q1 2020 included $21.9 million of net discrete tax benefits.
- Net interest expense increased to $51.7 million from $48.3 million, primarily due to higher average debt levels.
Segments and material changes
- Global Industrial: Fixed-currency sales declined 2% to $1,433.9 million, while operating income increased 5% to $219.2 million. The Texas freeze disrupted supply chains and customers, particularly in Downstream; cost savings and pricing supported margins.
- Global Institutional & Specialty: Fixed-currency sales fell 21% to $858.5 million and operating income fell 66% to $63.1 million. COVID-19 restrictions and weak restaurant, lodging and entertainment demand more than offset continued sanitizing-product sales; volume declines and mix pressure weighed on margins.
- Global Healthcare & Life Sciences: Fixed-currency sales grew 14% to $293.7 million and operating income rose 90% to $45.6 million, supported by COVID-related demand, business wins and pricing.
- Other: Fixed-currency sales declined 3% to $271.3 million, while operating income rose 51% to $32.9 million, reflecting cost savings, pricing and mix.
- Q1 2020 continuing-operations comparisons exclude ChampionX, which was reported as discontinued operations after its 2020 separation. Q1 2020 included an $8.6 million net loss from discontinued operations; Q1 2021 had none.
Cash, debt and liquidity
- At March 31, 2021, cash and cash equivalents were $1,189.5 million; total debt was approximately $6.71 billion and net debt was $5.52 billion. Net debt to trailing-twelve-month EBITDA was 2.5x, versus 2.4x at the comparable prior-year point.
- Cash from operations was $295.3 million, down $13 million year over year. Lower continuing-operations income was partly offset by favorable deferred-tax and working-capital movements, including improved days sales outstanding.
- Investing activities used $192.4 million, including $88 million of acquisition payments; financing activities used $183.1 million. Dividends paid were $146.7 million and share repurchases were $61.8 million. Cash decreased $70.7 million during the quarter.
- Ecolab reported no commercial paper outstanding and no borrowings under its revolving credit facilities at quarter-end, and said it was in compliance with debt covenants. In April 2021, it extended its $2.0 billion revolving credit facility’s maturity from November 2022 to April 2026.
Outlook, commentary, risks and unusual items
- Management expected very strong Q2 growth versus Q2 2020, led by a substantial recovery in Institutional as reopening improved in some U.S. states. It anticipated continued robust consolidated gains in the second half if the pandemic continued to wane, while noting that the outlook remained uncertain. No specific full-year earnings or sales guidance is stated in the provided filing text.
- COVID-19 continued to affect demand unevenly: institutional end markets remained pressured, while Healthcare and Life Sciences benefited from related demand. The Texas freeze caused customer operating and supply-chain disruptions, especially in Downstream.
- Q1 special gains and charges totaled $32.4 million, versus $25.0 million. They included restructuring, COVID-related employee-wage protection and testing costs, and other items. The expanded Institutional restructuring plan anticipates total costs of $80 million and approximately $50 million of savings by 2024; Accelerate 2020 anticipates total costs of $255 million and annual savings of $315 million by 2022. Costs and savings are estimates and may vary.
- Q1 acquisitions included VanBaerle Hygiene AG and TechTex; their purchase accounting remained preliminary. Net cash paid for acquisitions was $86.6 million in the acquisition note.
- Management cited pandemic duration and resurgence, uneven economic recovery, foreign exchange and political risks, raw-material supply and costs, execution of restructuring and ERP upgrades, cybersecurity, debt and covenant risks, and litigation and environmental matters. The company was assessing and remediating approximately 30 environmental sites; it stated that it did not currently believe material losses beyond recorded accruals were reasonably possible for the legal matters discussed, while cautioning that adverse developments could cause future charges.
- The interim financial statements received a limited review by PwC, not an audit. Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Institutional demand recovers as reopening progresses, and whether volume and mix improve without relying on pandemic-related product demand.
- Whether the reported margin declines reverse and whether restructuring savings are realized on schedule relative to remaining cash costs.
- Whether operating cash flow remains adequate as inventories, acquisition spending, dividends and other capital needs evolve.
- How discrete tax items, including the non-cash intangible-transfer charge, affect future reported tax rates and earnings comparability.
- Whether the 2.5x net debt-to-EBITDA ratio and debt-service capacity remain manageable under less favorable operating conditions.
- Developments in COVID-19 conditions, supply-chain disruption, environmental remediation, litigation and ERP implementation risks.