Ecolab Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. Amounts are in U.S. dollars. Interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Business context and performance
Ecolab supplies water, hygiene, and energy technologies and services. Its reportable segments are Global Industrial, Global Institutional, and Global Energy, plus Other. Results reflect strong growth in Institutional and Industrial, offset by continued weakness in Energy and adverse foreign-currency translation.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $3,386.1 million | $3,446.4 million | $9,800.7 million | $10,133.1 million |
| Operating income | $574.1 million | $413.0 million | $1,358.1 million | $1,238.5 million |
| Net income attributable to Ecolab | $374.1 million | $257.8 million | $863.3 million | $793.2 million |
| Diluted EPS | $1.27 | $0.86 | $2.91 | $2.63 |
- Reported sales fell 2% in Q3 and 3% year to date; fixed-currency sales increased 1% in both periods. Foreign exchange reduced Q3 and nine-month sales growth by approximately 3 and 4 percentage points, respectively.
- Reported operating margin was 17.0% in Q3 versus 12.0% a year earlier, and 13.9% year to date versus 12.2%. Excluding special gains and charges, adjusted Q3 operating income was flat, while adjusted fixed-currency operating income rose 5%; adjusted diluted EPS was $1.28 in both Q3 periods. For nine months, adjusted diluted EPS was $3.12 versus $3.15.
- Gross margin was 48.7% in Q3 versus 47.2%; adjusted gross margin was 48.7% versus 47.9%. Management cited lower delivered product costs, efficiencies, and a smaller contribution from lower-margin Energy. SG&A was 31.6% of sales in Q3 versus 31.1%.
- Q3 sales at fixed currency: Industrial +1%, Institutional +6%, Energy −8%, Other +8%. Energy’s year-to-date fixed-currency sales declined 12%, and operating income declined 27%; management attributed the weakness to lower activity, volume, and pricing, particularly upstream.
- Operating cash flow for nine months was $1,491.7 million versus $1,395.2 million. Capital expenditures were $478.6 million; cash used in investing was $581.8 million and cash used in financing was $823.4 million. Cash at period end was $180.6 million.
- At September 30, total debt was approximately $6.66 billion and net debt $6.48 billion; net debt/EBITDA was 2.6x (2.3x using adjusted EBITDA). Short-term debt was $1.57 billion and long-term debt $5.09 billion. The current ratio was approximately 1.0x.
Changes, unusual items, and management outlook
- The large increase in reported Q3 operating income and EPS partly reflects comparison with substantial 2015 special charges, including Venezuela devaluation and restructuring charges. Total special gains and charges were $3.2 million in Q3 2016 versus $155.4 million in Q3 2015; for nine months, $97.6 million versus $240.4 million.
- In Q2 2016, Ecolab recorded $63.6 million of Energy-related charges, including inventory, fixed-asset, and workforce costs, in response to depressed oil-market activity. No additional such charges were recorded in Q3. The company also recorded a $10.0 million Q2 impairment and related inventory charge for dry-polymer assets.
- Management reported approximately $20 million of incremental savings in the first nine months under each of two restructuring plans. It anticipated cumulative savings by year-end 2016 of $150 million under the Energy plan and $420 million under the Combined plan.
- Management expected strong operating cash flow to fund foreseeable needs, including debt repayments, investment, dividends, share repurchases, acquisitions, and pension contributions. No specific full-year earnings or sales guidance is stated in the supplied filing text.
- In October 2016, after quarter-end, Ecolab issued $1.0 billion of notes at fixed rates of 2.70% and 3.70%; proceeds were expected to help repay commercial paper and December 2016 notes. A planned acquisition of Laboratoires Anios, whose 2015 sales were approximately €220 million, remained subject to regulatory and competition approvals; closing was expected in late 2016.
- Key risks include prolonged weakness in oil and gas markets, currency movements and international political/economic uncertainty (including Brexit), substantial indebtedness, litigation and environmental matters, and execution risks in acquisitions and restructuring. Ecolab said it was in compliance with debt covenants and had sufficient borrowing capacity. It also disclosed ongoing Deepwater Horizon-related claims; the company expected newly filed claims to be dismissed under an earlier ruling but could not predict litigation outcomes.
- The U.S. postretirement health-care plan change reduced benefit obligations by $50 million and was expected to lower remaining-2016 costs by $5 million. Ecolab deconsolidated its Venezuelan subsidiaries at the end of 2015.
Important facts for investors to verify
- Whether Energy-market conditions, especially upstream activity and pricing, improve or further pressure sales and margins.
- How much reported earnings growth is attributable to lower special charges and tax items versus underlying operating performance.
- Debt maturities, refinancing execution, and the company’s leverage and liquidity after the October debt issuance and planned December repayment.
- Whether Anios closed as expected, and the purchase price, financing, and integration effects.
- Progress toward stated restructuring savings, and any material developments in Deepwater Horizon, wage-hour, environmental, or other litigation.