Ecolab Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Amounts are in U.S. dollars; financial statements are unaudited and were reviewed, not audited, by PwC.
Business context and results
Ecolab supplies cleaning, sanitation, water, energy and related services and products. Its reportable segments are Global Industrial, Global Institutional, Global Healthcare and Life Sciences, Upstream Energy, and Other. The company reorganized segment reporting in 2020 ahead of the planned Upstream Energy separation.
| Metric | Q1 2020 | Prior comparable period | Change |
|---|---|---|---|
| Net sales | $3,581.4 million | $3,505.4 million | +2% reported; +3% at fixed currency |
| Operating income | $397.2 million | $367.2 million | +8% |
| Operating margin | 11.1% | 10.5% | +0.6 percentage points |
| Net income attributable to Ecolab | $283.4 million | $296.5 million | -4% |
| Diluted EPS | $0.97 | $1.01 | -4% |
| Net cash from operating activities | $371.8 million | $378.1 million | Down $6.3 million |
Gross margin was 40.9%, versus 40.4%; adjusted gross margin, excluding special charges, was 41.1%, versus 40.5%. Management reported adjusted operating income of $458.7 million, up 12%, and adjusted diluted EPS of $1.13, up 10%; these are non-GAAP measures. Adjusted net income was $331.3 million, up 10%. The reported effective tax rate was 20.3%, versus 11.4%; the adjusted rate was 20.6% in both periods.
Segments and material period-over-period changes
- At fixed currency, sales increased 3% in Global Industrial, 5% in Global Institutional and 8% in Global Healthcare and Life Sciences; Upstream Energy declined 3%, while Other increased 1%.
- Global Industrial operating income rose 25% at fixed currency, with pricing, lower delivered product costs and volume gains supporting margins. Global Institutional operating income rose 4%; management cited strong cleaning and sanitizing sales but weaker demand from restaurant, lodging and entertainment customers.
- Global Healthcare and Life Sciences operating income declined 6%, in part due to a European Healthcare product recall and business investment. Upstream Energy operating income increased 7% despite lower sales, helped by cost savings and lower delivered product costs.
- Sales growth reflected volume and pricing; foreign currency translation reduced reported growth. Management said COVID-19-related customer closures affected some Pest Elimination sales and that institutional customer demand was slowing.
Cash, debt and liquidity
Cash and cash equivalents were $1,661.9 million at March 31, 2020, compared with $186.4 million at year-end. Operating cash flow was $371.8 million; capital expenditures were $160.7 million. Cash used in investing activities was $165.7 million, versus $477.4 million a year earlier, when acquisition spending was substantially higher. Financing activities provided $1,265.8 million, principally reflecting debt issuance and commercial paper borrowing, partly offset by debt repayments, dividends and share repurchases.
Total debt was $7,782.3 million, versus $6,354.1 million at December 31, 2019; net debt was $6,120.4 million. Net debt to trailing-twelve-month EBITDA was 2.0x, versus 2.1x. Short-term debt included $1,000.9 million of commercial paper. The company had a $2.0 billion credit facility, with no borrowings under it at quarter-end, and said it was in compliance with debt covenants. In April, it entered into a $500 million 364-day revolver and drew on a $305 million term credit agreement, due to be repaid in Q2.
Current assets were $6,437.1 million and current liabilities were $4,257.4 million at March 31. The filing reported continued access to borrowing capacity and expected operating cash flow to fund foreseeable requirements, while noting that pandemic effects could reduce cash flow.
Outlook, risks and unusual items
- COVID-19 and oil markets: Management anticipated lower 2020 operating results and operating cash flows from reduced demand, but said it could not yet estimate the full impact. It expected further declines in full-service restaurant, hospitality, lodging and entertainment demand, while some disinfection and sanitizing businesses could benefit. Management cited cost actions, including reduced capital expenditures. The filing gives no specific full-year earnings guidance.
- ChampionX separation: Ecolab planned a tax-efficient Reverse Morris Trust transaction combining Upstream Energy with Apergy, subject to customary closing conditions, including stockholder, regulatory and tax-related approvals. Ecolab expected approximately $0.5 billion in cash proceeds and intended to use proceeds for debt repayment, dividends, repurchases or a combination. Illustrative share-value assumptions produced potential non-cash losses of $2.5 billion using Apergy’s March 31 share price and $0.8 billion using its Q1 average; these are transaction valuation sensitivities, not a reported Q1 loss. ChampionX remained classified as held for use. The Upstream Energy reporting unit’s estimated fair value exceeded carrying value by more than 30%, but the filing warned that changing assumptions or market conditions could lead to future impairment.
- Special charges: Q1 operating special charges were $61.5 million, compared with $43.9 million a year earlier. They included $36.6 million of ChampionX separation costs, $6.4 million of Accelerate 2020 restructuring charges, and $5.7 million related to a Healthcare product recall in Europe. Accelerate 2020 had incurred $247.6 million of cumulative charges; management expected total plan costs of $260 million and estimated annual savings of $325 million by 2021, with completion expected by year-end 2020. Cumulative savings were reported at $159 million.
- Other exposures: The company described litigation, environmental matters at approximately 40 sites, and three remaining Deepwater Horizon-related cases involving entities expected to become part of ChampionX. It said it believed the cases were expected to be dismissed under an earlier ruling, but could not predict outcomes. Management did not believe material losses above accrued amounts were reasonably possible for its other legal matters. Other risks include volatile energy markets, foreign exchange, Brexit, customer and supply-chain disruption, and potential goodwill impairment.
Important facts for investors to verify
- Whether COVID-19 demand effects, customer shutdowns and oil-market weakness develop beyond the company’s Q1 observations, and how they affect full-year sales, earnings and cash flow.
- Current commercial paper balances, available liquidity and repayment of the April-drawn $305 million term credit agreement.
- Progress, approvals, consideration and final valuation of the ChampionX separation; the filing’s large non-cash loss figures are sensitivities, not recognized results.
- Whether restructuring savings and completion timing remain on track, and whether the Healthcare recall or related costs recur.
- Changes in Upstream Energy goodwill assumptions and the status of Deepwater Horizon and other legal or environmental contingencies.