Ecolab Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2015. Financial statements are unaudited; the independent accountant performed a review, not an audit. Dollar amounts are in millions except per-share data.
Business context and results
Ecolab provides products and services across Global Industrial, Global Institutional, Global Energy and Other. Second-quarter reported sales fell 5%, largely reflecting unfavorable currency translation; sales grew 2% at fixed currency rates. Management reported that volume drove most of the fixed-currency increase.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $3,389.1 | $3,568.2 | $6,686.7 | $6,904.8 |
| Operating income | $437.8 | $512.2 | $825.5 | $863.1 |
| Net income attributable to Ecolab | $302.0 | $311.4 | $535.4 | $502.4 |
| Diluted EPS | $1.00 | $1.02 | $1.77 | $1.64 |
| Reported operating margin | 12.9% | 14.4% | 12.3% | 12.5% |
| Reported gross margin | 46.7% | 46.5% | 46.6% | 46.0% |
| Net interest expense | $61.2 | $66.2 | $123.7 | $131.3 |
Material changes and segment performance
- Q2 fixed-currency sales increased 4% in Global Industrial, 6% in Global Institutional and 5% in Other; Global Energy declined 5%. Energy weakness reflected lower well-stimulation activity, reduced customer spending and lower pricing.
- Q2 segment operating income increased 21% in Global Institutional and 9% in Global Industrial at fixed currency, but declined 12% in Global Energy. Institutional margin improved 2.6 percentage points; Energy margin fell 1.0 point.
- Reported Q2 operating income decreased 15%, while adjusted fixed-currency operating income increased 8%. Adjusted diluted EPS was $1.08, up 5% from $1.03. These adjusted figures exclude special items and, for EPS, discrete tax items; they are non-GAAP measures.
- For the first six months, reported sales fell 3%, while fixed-currency sales rose 3%. Reported operating income fell 4%; adjusted fixed-currency operating income rose 8%. Diluted EPS increased 8% to $1.77; adjusted diluted EPS increased 6% to $1.87.
Cash flow, debt and liquidity
- Six-month operating cash flow was $636.6, versus $531.9 a year earlier. Investing activities used $340.0, including $327.5 of capital expenditures; financing activities used $184.0. Cash increased $101.0 to $310.6.
- At June 30, total debt was $7,309.5 and cash was $310.6, for net debt of $6,998.9. Net debt/EBITDA was 2.5x and net debt/adjusted EBITDA 2.4x on a trailing-twelve-month basis.
- Short-term debt was $2,185.3, including $1,331.9 of commercial paper and $790.4 of current maturities. Ecolab had a $2.0 billion revolving credit facility expiring in December 2019, with no borrowings outstanding, and reported compliance with debt covenants.
- Current assets were $4,971.1 and current liabilities $4,446.1. The company said it expected to fund foreseeable requirements over the next 12 months with operating cash flow, cash reserves and additional borrowing.
- Share repurchases totaled $726.3 in the first six months; $390 million remained under the announced $1.0 billion program, which the company expected to complete by mid-2016. Dividends declared were $0.33 per share in Q2, versus $0.275 a year earlier.
Outlook, unusual items and risks
- Management expected lower comparable Global Energy sales through the rest of 2015 if oil prices remained at then-current levels. It cited lower oil prices as a headwind to Energy demand but a potential benefit to raw-material costs across businesses.
- Management expected approximately $40 million of 2015 pre-tax Energy Plan restructuring charges and $50 million under the Combined Plan; both programs were expected to be substantially complete by year-end 2015, with some actions continuing into 2016. Expected 2015 savings were at least $125 million for the Energy Plan and $395 million for the Combined Plan; stated end-2016 annual savings/synergies targets were $150 million and $420 million, respectively.
- Special charges in Q2 totaled $76.6, versus a net gain of $5.0 in Q2 2014. Q2 2015 items included $30.2 for Venezuelan currency devaluation, $21.4 for an Ecovation business sale loss and other litigation-related charges, and restructuring and acquisition/integration costs. Q2 also included $39.4 of discrete tax benefits, primarily from recognition of a worthless-stock deduction; the reported tax rate was 18.0%, versus 29.4% a year earlier.
- Venezuelan sales were about 1% of consolidated sales and Venezuelan assets less than 2%. Ecolab continued to use the official 6.3 bolivares per U.S. dollar rate for certain units, but warned that remeasurement of their approximately $100 million of bolivar-denominated net monetary assets at a higher rate could produce a pre-tax loss of up to $100 million, based on May 31 balances. Further asset impairment was also possible if cash flows declined.
- In July, after quarter-end, Ecolab issued €575 million of 2.625% notes due 2025 to repay commercial paper and acquired Jianghai Environmental Protection for approximately $190 million; the acquired business had about $90 million in annual pre-acquisition sales.
- Risks include foreign-exchange volatility, oil-market weakness, substantial indebtedness, restructuring execution, litigation and environmental claims, and uncertain outcomes of Deepwater Horizon-related litigation. Management stated that it did not believe a material loss in excess of accruals was reasonably possible for current legal matters, but adverse developments could cause future charges.
Most important facts for investors to verify
- Whether fixed-currency and adjusted growth translate into sustained GAAP sales, operating income and EPS improvement, particularly amid currency headwinds.
- Global Energy demand, pricing and margins, and the pace of recovery in well-stimulation activity.
- Venezuela’s exchange-rate treatment and any further devaluation or impairment exposure.
- Delivery, timing and cash costs of restructuring savings, alongside the special charges excluded from adjusted results.
- Commercial-paper refinancing needs, debt levels and planned share repurchases relative to operating cash flow.