Ecolab Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless stated otherwise. Financial statements are unaudited and were subject to a limited review, not an audit.
Business context and results
Ecolab provides cleaning, sanitation, water, energy and related services and products. Its reportable segments are Global Industrial, Global Institutional and Global Energy, plus Other. Reported sales grew 10%; management reported 6% growth at fixed currency rates and 6% acquisition-adjusted fixed currency growth.
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Net sales | $3,470.9 million | $3,162.4 million | +10% reported |
| Operating income | $354.3 million | $357.2 million | -1% reported |
| Net income attributable to Ecolab | $247.3 million | $254.0 million | -3% |
| Diluted EPS | $0.84 | $0.86 | -2% |
| Gross margin | 40.0% | 41.4% | Down 1.4 percentage points |
| Reported operating margin | 10.2% | 11.3% | Down 1.1 percentage points |
| Net interest expense | $56.4 million | $62.5 million | Lower, primarily from lower interest rates on debt |
| Reported tax rate | 21.8% | 17.4% | Adjusted rates were 22.0% and 24.9%, respectively |
Management’s non-GAAP adjusted figures were operating income of $380.3 million, up 4%, and adjusted diluted EPS of $0.91, up 14%. These exclude special items and, for EPS, discrete tax items; they are not GAAP results. Management attributed lower gross margin mainly to higher delivered product costs. SG&A was 29.1% of sales versus 30.0%, reflecting volume leverage and cost savings that more than offset business investment.
Segments and material period changes
- Global Industrial: Fixed-currency sales rose 5% to $1,241 million; acquisition-adjusted growth was 3%. Operating income at fixed currency fell 4% to $129.9 million, with margin pressure from delivered costs and investment.
- Global Institutional: Fixed-currency sales rose 9% to $1,218 million; acquisition-adjusted growth was 5%. Operating income rose 6% to $198.7 million, while margin declined amid investment and higher delivered costs.
- Global Energy: Fixed-currency sales rose 9% to $847 million, including 10% acquisition-adjusted growth, led by well stimulation and gains in production and downstream. Operating income was flat at $70.9 million; margin declined.
- Other: Fixed-currency sales fell 11% to $197 million, mainly due to the 2017 Equipment Care divestiture; Pest Elimination grew. Operating income was $27.1 million.
Foreign-currency translation added about 3 percentage points to reported sales growth overall. Ecolab adopted the new revenue standard retrospectively, separately presenting product/equipment and service/lease revenue and reallocating some costs to cost of sales. Adoption reduced opening retained earnings by $29.3 million as of January 1, 2016. Adoption of the intra-entity transfer tax standard reduced opening 2018 retained earnings by $43.6 million. These changes affect presentation and comparability.
Cash flow, debt and liquidity
- Operating cash flow was $487.2 million, versus $425.7 million. Capital expenditures were $203.3 million, versus $167.5 million.
- Investing activities used $255.8 million, compared with $995.3 million in Q1 2017, which included the Anios acquisition. Q1 2018 acquisition payments were $76.5 million.
- Financing activities used $265.0 million. Ecolab repurchased $215.1 million of shares and paid $123.4 million in dividends. Cash and cash equivalents ended the quarter at $175.5 million.
- Total debt was approximately $7.42 billion and net debt $7.24 billion. Net debt/EBITDA was 2.5x and net debt/adjusted EBITDA 2.4x. Debt due within one year rose to $1.0 billion, including commercial paper borrowings and current maturities.
- Commercial paper outstanding was $336.4 million. The $2.0 billion revolving credit facility, expiring November 2022, had no borrowings. The company said it was in covenant compliance and had sufficient borrowing capacity; its long-term ratings were A- (S&P) and Baa1 (Moody’s), both stable.
Outlook, commentary, risks and unusual items
- No quantified full-year earnings or sales guidance is provided in the supplied filing text. Management expects strong operating cash flow and intends to continue strategic acquisitions and capital investment; foreseeable cash needs are expected to be funded from operations and, as needed, borrowings.
- Q1 special charges were $26.0 million, principally a $25.0 million commitment to the Ecolab Foundation in response to the new U.S. tax law. The company also recorded $11.3 million of additional provisional transition-tax expense and said its Tax Act estimates remained subject to change during the measurement period; it had not selected an accounting policy for GILTI.
- Oil and gas market volatility affects Global Energy, which represented approximately 24% of sales. International operations expose Ecolab to currency, economic and political risks; management also discussed Brexit uncertainty and raw-material cost pressures.
- Contingencies include litigation and environmental matters. Management did not believe a material loss beyond accrued amounts was reasonably possible at the time, but noted adverse developments could cause future charges. Nine Deepwater Horizon cases remained against Nalco; Ecolab believed they lacked merit and expected dismissal, but could not predict their outcome.
- Ecolab disclosed approximately $2.0 million of Q1 sales by a non-U.S. subsidiary to distributors in Dubai and Iran under U.S. General License H, with estimated pretax profit of $0.3 million. It stated the activity complied with applicable sanctions and export-control requirements.
- The company is implementing a phased ERP upgrade beginning in 2018; the project will affect financial-reporting processes and require control testing. Management concluded disclosure controls were effective and reported no material Q1 change in internal control over financial reporting.
Important facts for investors to verify
- Whether volume, pricing and fixed-currency growth persist, and whether gross-margin pressure from delivered costs eases.
- The bridge between GAAP and adjusted earnings, including the Foundation commitment, restructuring and other special charges, and discrete tax effects.
- Final Tax Act transition-tax accounting and future effects of GILTI and other tax provisions.
- Debt maturities, commercial-paper reliance, liquidity and leverage as the $1.0 billion of obligations due within one year is addressed.
- Developments in Deepwater Horizon and environmental matters, and execution and control risks associated with the ERP upgrade.