Ecolab Inc. — Q1 2022 Form 10-Q
Business context and reporting period. This quarterly report covers the three months ended March 31, 2022, compared with Q1 2021. 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. Results include the December 2021 acquisition of Purolite, a provider of ion-exchange resins, within Life Sciences.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change / context |
|---|---|---|---|
| Net sales | $3.267 billion | $2.885 billion | Up 13% reported; 16% at fixed currency and 12% acquisition-adjusted at fixed currency |
| Operating income | $254.5 million | $297.3 million | Down 14%; adjusted operating income was $331.5 million versus $329.7 million, up 1% |
| Gross margin | 36.5% | 40.7% | Adjusted margin was 38.1% versus 41.3% |
| Net income attributable to Ecolab | $171.9 million | $193.6 million | Down 11%; adjusted net income rose 1% to $236.5 million |
| Diluted EPS | $0.60 | $0.67 | Down 10%; adjusted diluted EPS was $0.82 versus $0.81 |
| Cash from operating activities | $170.1 million | $295.3 million | Down $125.2 million |
| Capital expenditures | $148.7 million | $102.1 million | Higher investment in the business |
| Cash and cash equivalents | $99.4 million | $359.9 million at Dec. 31, 2021 | $65 million held outside the U.S. |
| Total debt | Approximately $8.8 billion | Approximately $8.8 billion at Dec. 31, 2021 | Net debt was $8.661 billion; net debt / EBITDA was 3.5x |
Reported tax rate was 20.7%, compared with 25.2%; adjusted tax rate was 19.5%, compared with 19.7%. SG&A was 28.0% of sales versus 29.9%. Ecolab paid $154.0 million in dividends and spent $262.1 million to reacquire shares in the quarter.
Material changes and segment trends
- Sales growth reflected 7% volume growth, 5% pricing, a 4% contribution from acquisitions and divestitures, and a 2% foreign-currency headwind.
- Global Industrial: Fixed-currency sales rose 12% to $1.557 billion, but operating income fell 10% to $189.2 million; margin declined to 12.2% from 15.1%. Higher delivered product costs and unfavorable mix outweighed pricing and volume gains.
- Global Institutional & Specialty: Fixed-currency sales rose 19% to $1.005 billion and operating income increased 79% to $110.8 million. Improved volume, pricing and new business supported the recovery.
- Global Healthcare & Life Sciences: Fixed-currency sales rose 29% to $362.6 million, including Purolite; acquisition-adjusted sales declined 7%. Operating income increased 4% to $44.1 million, but acquisition-adjusted margin fell to 9.4% from 15.2%, reflecting weaker comparable demand and higher costs.
Cash, debt and liquidity
Operating cash flow declined principally because of an $88 million increase in working capital (excluding non-cash special charges), driven mainly by higher sales volumes, and $37 million in higher bonus payments. Investing activities used $129.2 million, including $148.7 million of capital expenditures; financing activities used $305.3 million, including share repurchases and dividends. Cash declined $260.5 million during the quarter.
At March 31, Ecolab had $493.1 million of short-term debt, including $475 million of U.S. commercial paper, and $8.267 billion of long-term debt. It had no borrowings under its $2.0 billion revolving credit facility, which expires in April 2026, and reported compliance with debt covenants. Management said it expects to fund reasonably foreseeable needs over the next 12 months with operating cash flow and, as needed, additional borrowings; it expects operating cash flow to remain strong.
Outlook, risks and unusual items
- Management expected substantial raw-material and cost inflation to remain a challenge through the balance of 2022. It was pursuing additional structural pricing and began energy-related surcharges in Q2, while expecting pricing, volume growth, cost savings and productivity improvements to offset cost increases.
- Total special charges were $77.0 million, versus $32.4 million in Q1 2021. They included $27.6 million for Purolite inventory fair-value step-up, $18.0 million related to recoverability risks for assets in Russia and Ukraine, and COVID-related charges including $15.0 million of excess-sanitizer inventory reserves.
- Ecolab said it would limit Russian operations to essential-life-supporting activities and could further narrow its presence. Russia and Ukraine represented approximately 1% of 2021 sales; further charges remain possible.
- COVID-19 effects, supply constraints, inflation, foreign exchange, geopolitical developments and customer demand remain uncertainties. The company also cited risks from international operations, litigation, environmental matters, acquisitions and integration, and execution of restructuring and ERP upgrades.
- In litigation related to the 2019 TPC Group plant explosion, Ecolab subsidiary Nalco was named in claims by more than 5,000 plaintiffs. The company said it believes the claims are without merit and expects insurance coverage subject to deductibles; it could not estimate a loss or range at this stage. Ecolab also participates in environmental assessments or remediation at approximately 30 locations.
- Ongoing restructuring plans carry estimated total costs of $65 million for the Institutional Plan (expected completion by 2023) and $255 million for Accelerate 2020 (expected completion by end-2022). Management reported cumulative savings of $45 million and $308 million, respectively, and targeted annual savings of $50 million by 2024 and $315 million by 2022.
- The interim financial statements received a review, not an audit; the independent accountant reported no material modifications it believed were necessary.
Important facts for investors to verify
- Whether pricing and energy surcharges can offset persistent input-cost inflation without weakening volume or customer retention.
- Whether working-capital demands ease and operating cash flow recovers as sales grow.
- Purolite’s contribution to growth, margins and cash generation as integration proceeds.
- Leverage and liquidity trends, including commercial-paper needs and the 3.5x net debt-to-EBITDA ratio.
- Further financial or operational effects from Russia/Ukraine developments and the outcome or insurability of the TPC Group litigation.
- Delivery of restructuring savings and the accuracy of associated remaining-cost estimates.