10-QPeriod: Q3 FY2016

ECOLAB INC. Quarterly Report for Q3 Ended Sep 30, 2016

Filed November 3, 2016For Securities:ECL

Summary

Ecolab Inc. (ECL) reported mixed results for the third quarter and nine months ended September 30, 2016. While reported net sales saw a slight decline of 2% in Q3 and 3% for the nine months compared to the prior year, the company demonstrated resilience with a 1% increase in fixed currency sales for Q3 and a 1% increase for the nine months when excluding foreign currency impacts. Operating income showed a significant 39% increase in Q3, largely due to a reduction in special charges compared to the prior year, but adjusted operating income was flat year-over-year for the quarter. Diluted EPS rose by 48% to $1.27 in Q3, though adjusted diluted EPS remained flat at $1.28. The company's financial position remains solid, with a strong cash flow from operations and a healthy liquidity position supported by its credit facilities. The Global Industrial and Institutional segments showed positive fixed currency sales growth, while the Global Energy segment continued to face headwinds due to depressed oil prices, though efforts to manage costs and diversify within the segment are ongoing.

Financial Highlights

55 data points
Beta

Revenue

$3.39B

48.7% Gross Margin

Net Income

$374.10M

11.0% Net Margin

EPS (Diluted)

$1.27

Total Assets

$18.38B

Cash & Equivalents

$180.60M

Free Cash Flow

$442.00M

Financial Statements
Beta
Revenue$3.39B
Cost of Revenue$1.74B
Gross Profit$1.65B
SG&A Expenses$1.07B
Operating Income$574.10M
Interest Expense$69.00M
Net Income$374.10M
EPS (Basic)$1.28
EPS (Diluted)$1.27
Shares Outstanding (Basic)291.60M
Shares Outstanding (Diluted)295.70M

Key Highlights

  • 1Reported Net Sales: Q3 2016 sales were $3.39 billion, a 2% decrease year-over-year. Nine-month sales were $9.80 billion, down 3% year-over-year.
  • 2Fixed Currency Sales Growth: Q3 2016 fixed currency sales increased by 1% year-over-year, indicating underlying operational growth excluding currency impacts.
  • 3Operating Income Improvement: Reported operating income increased significantly by 39% in Q3 2016 to $574 million, primarily driven by a substantial reduction in special charges compared to Q3 2015.
  • 4Diluted EPS Growth: Reported diluted EPS for Q3 2016 rose to $1.27, a 48% increase from $0.86 in Q3 2015.
  • 5Segment Performance: Global Industrial and Institutional segments showed positive fixed currency sales growth, while the Global Energy segment experienced a 8% sales decline in Q3 due to industry conditions.
  • 6Strong Cash Flow from Operations: The company generated $1.49 billion in cash from operating activities for the nine months ended September 30, 2016, up from $1.40 billion in the prior year.
  • 7Debt Management: Total debt increased slightly to $6.7 billion from $6.5 billion, but the company maintained its credit ratings and compliance with debt covenants.

Frequently Asked Questions

The significant increase in reported operating income for Q3 2016 was primarily driven by a substantial reduction in 'special charges' compared to the same period in the prior year. In Q3 2015, special charges amounted to $155.4 million, whereas in Q3 2016, they were only $3.2 million. This favorable year-over-year comparison in special charges significantly boosted the reported operating income.

The Global Energy segment faced significant headwinds in Q3 2016, with fixed currency sales decreasing by 8% year-over-year. This decline was primarily due to continued depressed oil industry activity, which negatively impacted exploration and production investments. While the downstream business showed modest growth, it was more than offset by a decline in upstream businesses. The company incurred specific charges related to this segment, including inventory write-downs and fixed asset impairments, due to the challenging market conditions.

Ecolab utilizes a combination of strategies to manage foreign currency risks. They evaluate the performance of their international operations based on 'fixed currency exchange rates,' which eliminate the impact of currency fluctuations for internal analysis and reporting. Additionally, the company uses derivative instruments such as foreign currency forward contracts and foreign currency debt to hedge against risks related to foreign currency exchange rates and net investments in foreign operations. These hedging activities are not for speculative purposes.

Ecolab expects to fund its foreseeable cash requirements for the next twelve months through operating cash flow and potential additional borrowings. The company has a strong cash flow generation, a significant credit facility in place ($2.0 billion), and maintains good credit ratings. Management believes it has sufficient borrowing capacity to meet its operating needs and is compliant with debt covenants, indicating a stable outlook for liquidity and financial resources.