Ecolab Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Figures are in U.S. dollars; financial-statement amounts are in millions unless stated otherwise. Interim statements were reviewed, not audited.
Business context and results
Ecolab provides cleaning, sanitation, water, energy and related services through Global Industrial, Global Institutional, Global Energy and Other. Management reported solid fixed-currency growth, led by Global Industrial. Foreign-exchange translation reduced reported sales growth.
| Metric | Q2 2019 | Q2 2018 | First six months 2019 | First six months 2018 |
|---|---|---|---|---|
| Net sales | $3,759.4 | $3,689.6 | $7,264.8 | $7,160.5 |
| Operating income | $498.6 | $494.6 | $865.8 | $848.9 |
| Net income attributable to Ecolab | $368.6 | $351.3 | $665.1 | $598.6 |
| Diluted EPS | $1.26 | $1.20 | $2.28 | $2.04 |
| GAAP gross margin | 41.3% | 41.8% | 40.8% | 41.1% |
| GAAP operating margin | 13.3% | 13.4% | 11.9% | 11.9% |
| Net interest expense | $49.5 | $56.3 | $98.9 | $112.7 |
Performance and material changes
- Reported sales rose 2% in Q2 and 1% in the first half. On a fixed-currency basis, sales increased 5% and 4%, respectively; acquisition-adjusted fixed-currency growth was 4% in both periods. Pricing contributed 3% and volume 1% in each period; currency reduced reported growth by 3%.
- Q2 fixed-currency sales increased 8% in Global Industrial, 4% in Global Institutional and 1% in Global Energy; Other grew 6%. Global Energy’s first-half fixed-currency sales were approximately flat.
- Reported operating income increased 1% in Q2 and 2% in the first half. Excluding special items, adjusted operating income increased 10% and 9%, respectively; adjusted fixed-currency operating income rose 14% and 13%.
- Reported net income and diluted EPS grew 5% in Q2 and 11% in the first half. Management’s non-GAAP adjusted diluted EPS was $1.42 for Q2, up 12%, and $2.45 for the first half, up 12%. These adjusted measures exclude specified special items and discrete tax effects.
- Gross margin declined year over year, including on an adjusted basis, primarily due to higher delivered product costs and business mix, partly offset by pricing and cost savings. SG&A fell to 26.7% of sales in Q2 from 28.1%, which management attributed to sales leverage, savings and mix.
- The reported tax rate was 20.8% in Q2 and 16.9% in the first half, versus 22.8% and 22.4% in 2018. The first-half rate benefited from net discrete tax benefits of $26.7 million.
Cash flow, balance sheet and liquidity
- First-half cash from operations was $917.5, up from $785.7. Investing activities used $657.5, versus $444.4, including $288.8 of net acquisition and affiliate investment spending versus $78.1. Capital expenditures were $370.5, down from $412.5.
- Financing activities used $475.7. Cash dividends paid were $280.7 and share repurchases were $347.5; net commercial-paper and notes-payable issuance provided $434.3, while long-term debt repayments were $401.0. Cash, cash equivalents and restricted cash decreased $208.3 to $85.7; there was no restricted cash at period-end.
- At June 30, total assets were $20.8 billion and total liabilities $12.6 billion. Cash was $85.7; current assets were $4.85 billion and current liabilities $4.13 billion.
- Debt totaled approximately $7.06 billion: short-term debt of $1.07 billion and long-term debt of $5.99 billion. Commercial paper outstanding was $746.3 million. A $2.0 billion revolving credit facility, expiring November 2022, had no borrowings. The company reported compliance with debt covenants and net debt/EBITDA of 2.3.
- Operating lease assets and liabilities were recorded following adoption of the new lease standard; adoption added approximately $572 million of lease assets and $575 million of liabilities at January 1, 2019, with no impact on earnings or cash flows.
Outlook, management commentary and risks
- Management expects operating cash flow to remain strong and believes available borrowing capacity and operating cash flow can fund foreseeable needs, including debt service, investment, acquisitions, dividends, repurchases and pension contributions. The filing provides no specific full-year sales or EPS guidance.
- The Accelerate 2020 restructuring is expected to conclude by the end of 2020, with total estimated costs of $260 million pretax ($190 million after tax). Ecolab reported $182.6 million of cumulative charges and $90.6 million of related liabilities at June 30. The plan delivered $45 million of savings in the first half; estimated annual savings are $325 million by 2021.
- Ecolab intends, subject to board and regulatory approvals, to spin off its Upstream Energy business, with completion expected in 2020. Q2 spin-off costs were $14.5 million; first-half costs were $18.8 million. The transaction may not occur on schedule or at all.
- Management expects a voluntary $120 million contribution to its U.S. qualified pension plan in 2019, in addition to other expected pension and postretirement contributions.
- Risks highlighted include oil-and-gas market conditions, foreign exchange and international economic or political uncertainty, raw-material costs, customer and competitive pressures, execution of restructuring and the proposed spin-off, cybersecurity and ERP implementation, tax changes, and litigation and environmental matters.
- The company reported approximately 40 environmental assessment or remediation sites. It said it did not believe material losses beyond accrued amounts were reasonably possible for the described legal matters, while noting adverse developments could result in future charges. Three Deepwater Horizon-related cases remained against Nalco; Ecolab expected dismissal under an earlier order but could not predict outcomes.
- A non-U.S. subsidiary reported $0.3 million of 2019 sales related to the Rhum gas field, under an OFAC customer license; associated pretax profit was nominal. Further activity may require additional disclosure.
Important facts for investors to verify
- Whether reported growth and margin trends persist after separating price, volume, acquisitions, foreign exchange and special charges.
- Progress, cash costs and realized savings under Accelerate 2020, compared with the $260 million cost estimate and $325 million annual savings target.
- Timing, approvals, costs and expected financial effects of the proposed Upstream Energy spin-off.
- Debt maturities, commercial-paper reliance, liquidity headroom and the company’s ability to sustain dividends, repurchases and planned pension funding.
- Developments in environmental and litigation contingencies, including the remaining Deepwater Horizon cases, and any changes to tax exposures or the Rhum-related activity.