Ecolab Inc. — Q3 2015 Form 10-Q
Business context and reporting period. Ecolab provides water, hygiene and energy technologies and services. Its reportable segments are Global Industrial, Global Institutional and Global Energy, plus Other. This unaudited filing covers the quarter and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods unless noted. International segment results are also discussed at fixed currency rates, a non-GAAP measure.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $3,446.4 million | $3,694.9 million | $10,133.1 million | $10,599.7 million |
| Operating income | $413.0 million | $571.4 million | $1,238.5 million | $1,434.5 million |
| Net income attributable to Ecolab | $257.8 million | $364.9 million | $793.2 million | $867.3 million |
| Diluted EPS | $0.86 | $1.19 | $2.63 | $2.83 |
| Reported operating margin | 12.0% | 15.5% | 12.2% | 13.5% |
| Reported gross margin | 47.2% | 46.7% | 46.8% | 46.2% |
- Sales and margins: Reported sales fell 7% in Q3 and 4% year to date, principally reflecting a 7% adverse currency impact in each period. At fixed currency, sales rose 1% in Q3 and 2% year to date; Q3 acquisition-adjusted fixed-currency sales were flat. Excluding special charges, gross margin was 47.9% in Q3 and 47.1% year to date, versus 46.7% and 46.3% in 2014, respectively. Management cited product-cost savings and synergies.
- Adjusted results: Management reported Q3 adjusted fixed-currency operating income growth of 7%, adjusted net income growth of 4%, and adjusted diluted EPS of $1.28, up 6%. For the first nine months, adjusted diluted EPS was $3.15, up 6%. These are non-GAAP measures and exclude special items and, where applicable, discrete tax items.
- Segment trends: Q3 fixed-currency sales grew 7% in Global Industrial, 5% in Global Institutional and 5% in Other, but fell 12% in Global Energy. Energy weakness reflected lower volumes and prices, particularly in North American upstream activity; its fixed-currency operating income declined 21%. Industrial and Institutional operating income rose 21% and 14%, respectively, at fixed currency.
- Cash flow: Operating cash flow for the first nine months was $1,395.2 million, up from $1,145.0 million. Investing activities used $549.1 million, including $551.6 million of capital expenditures; financing activities used $822.8 million. Cash declined $24.8 million from year-end 2014 to $184.8 million.
- Debt and liquidity: At September 30, total debt was $6,762.8 million and cash was $184.8 million, for net debt of $6,578.0 million. Short-term debt was $1,009.1 million and long-term debt was $5,753.7 million. The company had a $2.0 billion credit facility expiring in December 2019, with no facility borrowings, and $687 million of U.S. commercial paper outstanding. Management said it expected operating cash flow, cash reserves and borrowing to fund reasonably foreseeable needs for the next 12 months and reported compliance with debt covenants.
Material changes and unusual items
- Special gains and charges affecting operating income totaled $166.5 million in Q3 and $251.5 million for the first nine months, compared with $7.8 million and $38.4 million in 2014. The 2015 amounts included Venezuela-related charges, restructuring, acquisition and integration costs, and other litigation, settlement and disposition items.
- Venezuela remeasurement and impairment charges were $124.6 million in Q3 and $154.8 million year to date, after tax, or $0.42 and $0.51 per diluted share, respectively. The company applied the SIMADI exchange rate to specified Venezuelan net assets. Venezuela represented approximately 2% of nine-month sales and 1% of consolidated assets; management noted that deconsolidation could increase exposure by $80 million due to intercompany balances.
- The effective tax rate was 29.6% in Q3 and 24.9% year to date. Discrete tax benefits were $19.2 million and $56.0 million, respectively, including a valuation allowance release and other tax items.
- Q3 comprehensive income attributable to Ecolab was $48.3 million versus $339.7 million in 2014; the quarter included a $211.5 million foreign-currency translation loss.
- During the first nine months, Ecolab issued $600 million of U.S. notes and €575 million of notes, repaid maturing debt and term-loan borrowings, and repurchased $727.8 million of shares. Its $1.0 billion repurchase program had $390 million remaining and was expected to be completed by mid-2016.
Outlook, commentary and risks
- No specific consolidated revenue or EPS guidance is provided in the supplied filing text. Management expected lower comparable Global Energy sales for the remainder of 2015 if oil prices remained at then-current levels, while expressing confidence in the segment’s longer-term prospects. It also expected a strong U.S. dollar to continue weighing on reported results.
- Management projected Energy Restructuring Plan savings and acquisition synergies of at least $125 million in 2015 and $150 million annually by the end of 2016. The Combined Restructuring Plan was expected to deliver $395 million of cumulative savings in 2015 and $420 million annually by the end of 2016. Both plans were expected to be substantially complete by year-end 2015, with some actions continuing into 2016.
- Risks include further Venezuelan currency devaluation or asset impairment, oil-market weakness, foreign-exchange volatility, substantial indebtedness and international political and economic uncertainty. The company also disclosed litigation and environmental matters, including wage-hour claims and Deepwater Horizon-related suits; it said it did not believe material losses above accrued amounts were reasonably possible for the legal matters discussed, while noting that unfavorable developments could result in additional charges.
- The company had approximately $25 million invested in inventory for the delayed Kashagan oil project and said a further delay or failure to restart was not expected to materially affect consolidated financial position or results. On November 2, 2015, after quarter-end, Ecolab completed its acquisition of Swisher’s U.S. operations for approximately $40 million; the acquired operations had 2014 sales of approximately $176 million.
Investor verification priorities
- Reconcile GAAP results with management’s adjusted and fixed-currency measures, including the unusually large Venezuela charges and discrete tax benefits.
- Assess whether Energy segment declines, oil-market conditions and expected currency pressure persist, and whether growth in Industrial and Institutional can offset them.
- Review the assumptions behind restructuring savings, remaining charges and cash costs, as well as the pace and funding of share repurchases.
- Monitor debt maturities, commercial-paper usage, net leverage and the availability of the credit facility.
- Track Venezuela’s exchange-rate and operating developments, possible further impairment or deconsolidation, and the status of disclosed litigation and environmental contingencies.