Ecolab Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Unaudited interim financial statements; the independent accountant performed a review, not an audit.
Business context and results
Ecolab provides water, hygiene, energy and related services through Global Industrial, Global Institutional, Global Energy and Other segments. Second-quarter reported sales declined amid foreign-exchange headwinds and a sharp downturn in energy markets; sales grew 1% at fixed currency rates. For the first six months, reported sales fell 4%, while fixed-currency sales rose 1%.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $3,317.2m | $3,389.1m | $6,414.6m | $6,686.7m |
| Operating income | $412.5m | $437.8m | $784.0m | $825.5m |
| Net income attributable to Ecolab | $258.4m | $302.0m | $489.2m | $535.4m |
| Diluted EPS | $0.87 | $1.00 | $1.64 | $1.77 |
| Reported operating margin | 12.4% | 12.9% | 12.2% | 12.3% |
- Q2 adjusted diluted EPS, excluding special items and discrete tax items, was $1.08, unchanged year over year; adjusted net income was down 1%. For the six months, adjusted diluted EPS was $1.85 versus $1.87.
- Adjusted gross margin was 48.0% in Q2 versus 47.0%; six-month adjusted gross margin was 47.7% versus 46.8%. Management cited lower delivered product costs and cost efficiencies.
- Q2 adjusted fixed-currency operating income increased 3%; six-month adjusted fixed-currency operating income increased 4%. These are non-GAAP measures.
Segments and changes versus prior periods
- Global Industrial: Q2 fixed-currency sales increased 4% and operating income increased 16%; growth included Food & Beverage gains and improved margins.
- Global Institutional: Fixed-currency sales rose 8% and operating income rose 7% in Q2, led by Institutional and Specialty sales. Q2 operating margin declined to 21.4% from 21.7%.
- Global Energy: Fixed-currency sales fell 13% and operating income fell 29% in Q2; six-month declines were 14% and 36%, respectively. Weak upstream activity, lower pricing and adverse product mix weighed on results.
- Other: Q2 fixed-currency sales increased 8% and operating income increased 22%, with growth in Pest Elimination and Equipment Care.
- Reported Q2 sales fell 2%, while the stronger U.S. dollar reduced sales growth by about 3 percentage points. Currency translation reduced Q2 diluted EPS by approximately $0.08.
Cash flow, debt and liquidity
- Six-month operating cash flow was $874.8m, up from $636.6m. Management attributed the improvement mainly to working-capital trends; pension contributions were $192.0m versus $38.0m in the prior-year period.
- Investing cash outflow was $323.9m, including $303.7m of capital expenditures. Financing cash outflow was $477.2m, including $637.9m of share repurchases and $217.6m of dividends paid. Cash increased to $167.4m from $92.8m at year-end 2015.
- Total debt was $6.85bn at June 30; net debt was $6.68bn. Net debt/EBITDA was 2.8x versus 2.5x in June 2015; net debt/adjusted EBITDA was 2.3x versus 2.4x.
- Current maturities and other short-term debt totaled $1.75bn; long-term debt was $5.10bn. The company issued $800m of senior notes in January and repaid its remaining $125m term loan. It reported compliance with debt covenants and had no borrowings on its $2bn revolving credit facility.
- Management said foreseeable cash requirements for the next 12 months are expected to be funded by operating cash flow, cash reserves and borrowing capacity. S&P and Moody’s long-term ratings were A- and Baa1, each with stable outlook.
Outlook, unusual items and risks
- No consolidated earnings or sales guidance for the year is provided in the filing. Management expected strong operating cash flow and remained confident in Global Energy’s long-term prospects, while noting continued near-term pressure from weak oil-market activity.
- Q2 and first-half 2016 special gains and charges totaled $88.1m and $94.4m, respectively. These included $63.6m of energy-related charges for inventory, fixed assets, workforce reductions and other items; a further $10.0m dry-polymer facility and inventory charge; and litigation-related charges. The energy charges reflected depressed oil activity and reduced outlook.
- Management reported approximately $15m of incremental savings in the first half under each of the Energy and Combined restructuring plans, and expected cumulative savings by year-end 2016 of $150m for the Energy plan and $420m for the Combined plan.
- Post-quarter developments: Ecolab signed a definitive agreement to acquire French hygiene and disinfection company Anios, with closing expected in late 2016 subject to regulatory and competition clearances. It also acquired a 33% minority interest in Aquatech International, to be accounted for under the equity method.
- Risks include persistent energy-sector weakness, foreign-exchange volatility and Brexit-related uncertainty, international political and regulatory exposure, substantial indebtedness, and litigation. The filing describes Deepwater Horizon-related claims, wage-hour matters and environmental remediation at approximately 40 locations; management stated it did not believe material loss beyond accrued amounts was reasonably possible for the legal matters discussed, but adverse developments could result in additional charges.
Important facts for investors to verify
- Whether Global Energy demand and margins stabilize, and whether the related inventory, asset and restructuring charges are substantially complete.
- How reported performance compares with adjusted results, including the magnitude and recurrence of special charges and tax items.
- Debt maturities, refinancing needs and leverage following the 2016 note issuance and share repurchases.
- Whether Anios receives required approvals and closes on expected terms, and the financial impact of the Aquatech investment.
- Developments in Deepwater Horizon, wage-hour and environmental matters, including any change to recorded accruals.