Ecolab Inc. — Q3 2020 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2020; amounts are in U.S. dollars. Ecolab provides cleaning, sanitizing, water-treatment and related products and services. Its reportable segments are Global Industrial, Global Institutional & Specialty, and Global Healthcare & Life Sciences, plus Other and Corporate.
Ecolab completed the separation of its Upstream Energy business, ChampionX, on June 3, 2020. ChampionX is presented as discontinued operations for all periods, so continuing-operations comparisons exclude it.
Financial performance
- Revenue: Q3 net sales were $3.019 billion, down 6% from $3.224 billion. Fixed-currency sales also fell 6%; volume declined 9%, partly offset by 1% pricing and a 2% net contribution from acquisitions and divestitures. Nine-month sales were $8.725 billion, down 6%.
- Segment trends: Q3 fixed-currency sales declined 2% in Global Industrial, 22% in Global Institutional & Specialty, and 12% in Other; Global Healthcare & Life Sciences rose 32%. Restaurant, lodging and entertainment weakness weighed on Institutional & Specialty; pandemic-related demand supported Healthcare & Life Sciences.
- Profit and margins: Q3 operating income was $411 million, down 25%; operating margin was 13.6%, versus 17.0%. Gross margin was 41.4%, versus 44.8%. Adjusted diluted EPS from continuing operations was $1.15, down 24%; reported diluted EPS was $0.85, versus $1.49. Nine-month operating income was $980 million, down 26%, and adjusted diluted EPS was $2.79, down 24%.
- Net income: Q3 continuing-operations net income attributable to Ecolab was $246 million, down 44%. For the first nine months, continuing-operations net income was $667 million. A $2.173 billion after-tax loss from discontinued operations, primarily reflecting the ChampionX separation, drove the consolidated nine-month net loss attributable to Ecolab to $1.505 billion.
- Cash flow: For the first nine months, cash from operating activities of continuing operations was $1.092 billion, down $207 million year over year. Continuing-operations investing activities used $796 million, including $362 million of capital expenditures and $487 million for acquisitions and affiliate investments. Dividends paid were $422 million.
- Debt and liquidity: At September 30, cash was $1.035 billion and total debt was about $6.915 billion, compared with $6.354 billion of debt at year-end 2019. Net debt was $5.880 billion; net debt to EBITDA was 2.5x, versus 2.3x. Ecolab reported $225 million of commercial paper outstanding, no borrowings under its $2.0 billion credit facility, and compliance with debt covenants. The current ratio was approximately 1.6x based on reported current assets and liabilities.
Material changes and unusual items
- Q3 special charges totaled $127.6 million before tax, including $83.1 million of debt-refinancing charges. Nine-month continuing-operations special charges totaled $249.7 million.
- The ChampionX separation resulted in a $2.138 billion loss in the separation accounting; related discontinued-operations special charges also included transaction and professional fees.
- Accelerate 2020 restructuring was expanded. Ecolab expects total costs of $275 million ($210 million after tax) through completion, now expected by the end of 2022. It reported $243.5 million of cumulative charges and $181 million of cumulative cost savings, with estimated annual savings of $335 million in continuing operations by 2022.
- Other notable items included a $28.6 million impairment of a minority equity-method investment, a $17.3 million loss and related fees on the Holchem disposal, and $26.2 million of charges over nine months primarily related to a European Healthcare product recall.
- The allowance for doubtful accounts rose to $88.2 million from $55.5 million at year-end. Management attributed increased bad-debt expense to pandemic-related deterioration and uncertainty, particularly among Institutional customers.
Outlook, management commentary and risks
Management expected COVID-19 to continue pressuring 2020 results and operating cash flow versus 2019, but said the full impact could not yet be estimated. It anticipated ongoing weakness in full-service restaurants, hospitality, lodging and entertainment, while hygiene demand supported certain Healthcare, Life Sciences and food-related businesses. Management cited cost reductions, lower capital spending and cost-saving initiatives, and expected operating cash flow to remain strong enough to fund foreseeable needs, with borrowing available if required. The filing provides no specific full-year earnings guidance.
Key risks include the duration and effects of COVID-19, customer credit and collection risk, global economic and foreign-exchange conditions, raw-material availability and cost, execution of restructuring and ERP upgrades, cybersecurity and operational disruption, and potential tax or indemnification liabilities related to the ChampionX separation. Ecolab also disclosed litigation and environmental matters; it said it did not currently believe material losses beyond accrued amounts were reasonably possible, while noting that unfavorable developments could result in additional charges. The interim financial statements received a limited review, not an audit.
Important facts for investors to verify
- How continuing-operations sales and margins respond as restaurant, hospitality and other pandemic-affected demand changes.
- The reconciliation and recurrence of special charges, especially refinancing, restructuring, legal and product-recall costs, when assessing adjusted results.
- Progress and cash costs of Accelerate 2020 against its revised end-2022 completion target and $335 million annual savings estimate.
- Debt, refinancing terms, liquidity and net-debt-to-EBITDA trajectory, including the effect of the ChampionX separation and future operating cash flow.
- Whether receivable reserves, customer collections and the effects of the pandemic on Institutional customers require further adjustment.
- Potential tax, indemnification, litigation and environmental exposures connected with the separation and other disclosed contingencies.