Ecolab(ECL) - 2020 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements This section includes the company's unaudited consolidated financial statements and notes, reflecting the ChampionX divestiture as a discontinued operation Consolidated Financial Statements This section presents consolidated statements for Q3 and YTD 2020, showing declines in net sales and net income primarily due to significant losses from discontinued operations Consolidated Statements of Income | (Millions of USD, except per share amounts) | Q3 2020 | Q3 2019 | YTD 2020 | YTD 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | 3,018.6 | 3,224.0 | 8,724.9 | 9,317.8 | | Operating Income | 411.4 | 549.0 | 979.6 | 1,327.0 | | Net Income from Continuing Operations Attributable to Ecolab | 246.2 | 435.9 | 667.1 | 1,030.9 | | Net (Loss) Income Attributable to Ecolab | 246.2 | 464.2 | (1,505.4) | 1,129.3 | | Diluted Earnings Per Share (Continuing Operations) | 0.85 | 1.49 | 2.29 | 3.52 | | Diluted (Loss) Earnings Per Share | 0.85 | 1.59 | (5.18) | 3.86 | Consolidated Balance Sheets | (Millions of USD) | September 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | 18,097.1 | 20,869.1 | | Total Liabilities | 12,047.7 | 12,143.3 | | Total Equity | 6,049.4 | 8,725.8 | Consolidated Statements of Cash Flows | (Millions of USD) | YTD 2020 | YTD 2019 | | :--- | :--- | :--- | | Cash Provided by Operating Activities - Continuing Operations | 1,092.0 | 1,299.0 | | Cash Used in Investing Activities - Continuing Operations | (795.9) | (881.1) | | Cash Provided by (Used in) Financing Activities - Continuing Operations | 30.3 | (844.6) | Condensed Notes to Consolidated Financial Statements These notes detail accounting for ChampionX as discontinued operations, special gains/charges, acquisitions/divestitures, debt, goodwill impairment, segment reporting, and new accounting standards - The company completed the divestiture of its upstream energy business (ChampionX) on June 3, 2020, with its historical performance reported as discontinued operations due to its strategic shift and significant impact on results[15][16] Special (Gains) and Charges | (Millions of USD) | Q3 2020 | YTD 2020 | | :--- | :--- | :--- | | Restructuring Activities | 27.9 | 38.0 | | Acquisition and Integration Activities | 4.2 | 9.6 | | Disposal and Impairment Activities | - | 45.9 | | Debt Refinancing | 83.1 | 83.8 | | Other | 12.4 | 68.4 | | Total Special (Gains) and Charges | 127.6 | 249.7 | - The company acquired CID Lines for $506.9 million cash on May 11, 2020, a leading livestock biosecurity and hygiene provider, resulting in $270.7 million in goodwill[29][32] - The company recognized a $2.1378 billion loss on the divestiture of ChampionX, as the business's net assets exceeded effective proceeds[35] - As of September 30, 2020, goodwill increased to $5.958 billion from $5.569 billion at year-end 2019, primarily due to the CID Lines acquisition and foreign currency changes, with no impairment found in Q2 2020[56][58] - In Q1 2020, the company reorganized reporting segments, eliminating Global Energy, establishing Global Healthcare and Life Sciences, and integrating downstream operations into Global Industrial, reflecting post-ChampionX divestiture structure[107] Management's Discussion and Analysis (MD&A) Management discusses financial condition and operating results, focusing on ChampionX divestiture comparability, COVID-19 impact, segment performance, financial position, cash flow, and liquidity Overview and Results of Operations Q3 2020 net sales declined 6% to $3.019 billion due to COVID-19, with reported operating income down 25% and diluted EPS from continuing operations at $0.85 Sales Performance | Performance Metric | Q3 2020 | Change | | :--- | :--- | :--- | | Reported Net Sales | $3.019 billion | -6% | | Fixed Currency Sales | - | -6% | | Acquisition-Adjusted Fixed Currency Sales | - | -8% | Financial Performance | Financial Metric | Q3 2020 | Change | | :--- | :--- | :--- | | Reported Operating Income | $411 million | -25% | | Adjusted Fixed Currency Operating Income | - | -22% | | Reported Diluted EPS (Continuing Operations) | $0.85 | -43% | | Adjusted Diluted EPS (Continuing Operations) | $1.15 | -24% | Sales Change Components | Sales Change Components (%) | Q3 2020 | YTD 2020 | | :--- | :--- | :--- | | Volume | (9) | (8) | | Price | 1 | 2 | | Acquisition-Adjusted Fixed Currency Sales Change | (8) | (7) | | Acquisitions and Divestitures | 2 | 2 | | Fixed Currency Sales Change | (6) | (5) | | Foreign Currency Translation | (1) | (1) | | Reported GAAP Net Sales Change | (6) | (6) | - The 'Accelerate 2020' restructuring plan, expected to complete by 2022 with $275 million in total costs, aims for $335 million in annualized cost savings by 2022, with $181 million cumulative savings achieved by Q3 2020[151] Diluted EPS Reconciliation | (USD/Share) | Q3 2020 | Q3 2019 | Change | | :--- | :--- | :--- | :--- | | Reported GAAP Diluted EPS (Continuing Operations) | 0.85 | 1.49 | (43)% | | Special (Gains) and Charges Adjustments | 0.34 | 0.08 | - | | Discrete Tax Adjustments | (0.04) | (0.05) | - | | Non-GAAP Adjusted Diluted EPS (Continuing Operations) | 1.15 | 1.52 | (24)% | Segment Performance Segment performance shows varied impacts: Global Industrial sales slightly down but operating income up, Global Institutional and Specialty sales significantly down, and Global Healthcare and Life Sciences sales strongly up Global Industrial Segment Performance | Global Industrial Segment (Q3 2020 vs Q3 2019) | Amount/Change | | :--- | :--- | | Fixed Currency Sales | -2% | | Acquisition-Adjusted Fixed Currency Sales | -3% | | Fixed Currency Operating Income | +19% | | Fixed Currency Operating Income Margin | 20.0% (vs 16.5%) | Global Institutional and Specialty Segment Performance | Global Institutional and Specialty Segment (Q3 2020 vs Q3 2019) | Amount/Change | | :--- | :--- | | Fixed Currency Sales | -22% | | Acquisition-Adjusted Fixed Currency Sales | -22% | | Fixed Currency Operating Income | -71% | | Fixed Currency Operating Income Margin | 9.2% (vs 24.4%) | Global Healthcare and Life Sciences Segment Performance | Global Healthcare and Life Sciences Segment (Q3 2020 vs Q3 2019) | Amount/Change | | :--- | :--- | | Fixed Currency Sales | +32% | | Acquisition-Adjusted Fixed Currency Sales | +29% | | Fixed Currency Operating Income | +82% | | Fixed Currency Operating Income Margin | 20.6% (vs 14.9%) | Financial Position, Cash Flows, and Liquidity As of September 30, 2020, total assets were $18.1 billion, total liabilities $12.0 billion, and total debt $6.9 billion, with strong operating cash flow expected - Cash flow from operating activities for the first nine months of 2020 was $1.092 billion, a $207 million decrease from $1.299 billion last year, primarily due to a $363 million reduction in net income from continuing operations[198] - Capital expenditures for the first nine months of 2020 were $362 million, down from $504 million in the prior year period[200] - As of September 30, 2020, the company had $2 billion in multi-year credit facilities and a $500 million 364-day revolving credit agreement, providing ample borrowing capacity for foreseeable operating needs[203] Global Economic Environment and Other Disclosures This section discusses the ongoing impact of COVID-19 on the company's business, particularly in hospitality, and notes other macroeconomic factors like high inflation in Argentina and Brexit uncertainty - The COVID-19 pandemic continues to impact global economies, with expected negative effects on the company's foodservice, hospitality, and entertainment businesses, while industrial sectors are less affected and some cleaning/sanitation products benefit[204] - Approximately half of the company's sales are outside the U.S., exposing it to economic conditions, foreign exchange rates, and political uncertainties, including Argentina's highly inflationary economy and Brexit[206][207] Quantitative and Qualitative Disclosures about Market Risk The company manages foreign exchange, interest rate, and net investment risks using forward contracts, interest rate swaps, and foreign currency debt, avoiding speculative derivatives - The company manages market risks related to foreign exchange, interest rates, and net investments in foreign operations using derivatives like forward contracts, interest rate swaps, and foreign currency debt, without engaging in speculative trading[216] Controls and Procedures Management assessed disclosure controls and procedures as effective as of September 30, 2020, with no material changes to internal controls over financial reporting, while ERP system upgrades are ongoing - Based on management's evaluation, including CEO and CFO participation, the company's disclosure controls and procedures were effective as of September 30, 2020[217] - The company is implementing a multi-year, phased enterprise resource planning (ERP) system upgrade, which will impact processes comprising its internal control over financial reporting[217] PART II - OTHER INFORMATION Risk Factors This section details key risks, including the ongoing COVID-19 impact, global economic vitality, execution of key initiatives, IT system security, ChampionX divestiture liabilities, talent reliance, competition, and international operations - The COVID-19 pandemic has significantly impacted the global economy, especially foodservice, hospitality, and travel, reducing demand for company products and services in these sectors and adversely affecting operations[220] - Company performance relies on market vitality; economic downturns, particularly in key markets like foodservice, hospitality, healthcare, and food processing, could reduce customer purchases and materially harm the business[223] - The company relies on IT systems vulnerable to failures, intrusions, and attacks; data security breaches could result in reputational damage, business disruption, and legal costs, adversely affecting operations[227] - The ChampionX divestiture may be deemed taxable, leading to significant tax liabilities for the company and shareholders, and potential indemnification obligations under the separation agreement could materially impact the business and financial statements[228][229] Unregistered Sales of Equity Securities and Use of Proceeds This section discloses the company's Q3 2020 stock repurchase activity, totaling 103,566 shares at an average price of $192.4716, with 6,342,568 shares remaining for repurchase Stock Repurchase Activity | Period | Total Shares Repurchased | Average Price Paid (USD) | Shares Repurchased Under Plan | Maximum Shares Available for Repurchase Under Plan | | :--- | :--- | :--- | :--- | :--- | | July 2020 | 3,112 | 198.5687 | - | 6,432,246 | | August 2020 | 84,725 | 191.4852 | 77,853 | 6,354,393 | | September 2020 | 15,729 | 196.5785 | 11,825 | 6,342,568 | | Total | 103,566 | 192.4716 | 89,678 | 6,342,568 | Other Items This section covers other statutory disclosures, noting ongoing legal proceedings referenced in Note 17, and stating that Items 3, 4, and 5 regarding senior securities, mine safety, and other information are not applicable - Regarding legal proceedings, the company is party to various lawsuits, claims, and environmental matters in the ordinary course of business; further details are in Note 17 to the financial statements[219] - Items 3 (Senior Securities Defaults), 4 (Mine Safety Disclosures), and 5 (Other Information) in this report are not applicable[248][249][250]