ECOLAB INC. - Quarter Report: 2021 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| | |
(Mark One) | | |
| | |
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | | |
For the quarterly period ended June 30, 2021 | | |
OR | | |
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | | |
For the transition period from to | | |
| | |
Commission File No. 1-9328 | |
ECOLAB INC.
(Exact name of registrant as specified in its charter)
Delaware | | 41-0231510 |
(State or other jurisdiction of | | (I.R.S. Employer |
incorporation or organization) | | Identification No.) |
1 Ecolab Place, St. Paul, Minnesota 55102
(Address of principal executive offices)(Zip Code)
1-800-232-6522
(Registrant’s telephone number, including area code)
(Not applicable)
(Former name, former address and former fiscal year,
if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | |
Title of each class | | Trading symbol(s) | | Name of each exchange on which registered | |
Common Stock, $1.00 par value 2.625% Euro Notes due 2025 1.000% Euro Notes due 2024 | | ECL ECL 25 ECL 24 | | New York Stock Exchange New York Stock Exchange New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ⌧ | | Accelerated filer ◻ |
Non-accelerated filer ◻ | | Smaller reporting company ☐ |
| | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ⌧
The number of shares of each of the registrant’s classes of Common Stock outstanding as of June 30, 2021: 286,087,223 shares, par value $1.00 per share.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
| | | | | | | | | | | | | | |
| | Second Quarter Ended | | Six Months Ended | ||||||||||
| | June 30 | | June 30 | ||||||||||
(millions, except per share amounts) | | 2021 |
| 2020 |
| 2021 |
| 2020 | ||||||
| | | | | | | | | | | | | | |
Product and equipment sales | | | $2,514.4 | | | | $2,167.1 | | | $4,807.8 | | | | $4,591.1 |
Service and lease sales | | | 648.3 | | | | 518.6 | | | 1,239.9 | | | | 1,115.2 |
Net sales | | | 3,162.7 | | | | 2,685.7 | | | 6,047.7 | | | | 5,706.3 |
Product and equipment cost of sales | | | 1,464.9 | | | | 1,301.5 | | | 2,827.8 | | | | 2,666.2 |
Service and lease cost of sales | | | 379.1 | | | | 334.2 | | | 728.2 | | | | 689.7 |
Cost of sales (including special charges (a)) | | | 1,844.0 | | | | 1,635.7 | | | 3,556.0 | | | | 3,355.9 |
Selling, general and administrative expenses | | | 853.3 | | | | 788.6 | | | 1,716.2 | | | | 1,696.9 |
Special (gains) and charges | | | 17.6 | | | | 69.4 | | | 30.4 | | | | 85.3 |
Operating income | | | 447.8 | | | | 192.0 |
| | 745.1 | | | | 568.2 |
Other expense (income) (b) | | | 2.5 | | | | (15.1) | | | (14.5) | | | | (30.5) |
Interest expense, net (c) | | | 45.6 | | | | 58.7 | | | 97.3 | | | | 107.0 |
Income before income taxes | | | 399.7 | | | | 148.4 |
| | 662.3 | | | | 491.7 |
Provision for income taxes | | | 86.1 | | | | 14.1 | | | 152.2 | | | | 61.1 |
Net income from continuing operations, including noncontrolling interest | | | 313.6 | | | | 134.3 | | | 510.1 | | | | 430.6 |
Net income from continuing operations attributable to noncontrolling interest | | | 2.8 | | | | 5.4 | | | 5.7 | | | | 9.7 |
Net income from continuing operations attributable to Ecolab | | | 310.8 | | | | 128.9 |
| | 504.4 | | | | 420.9 |
Net loss from discontinued operations, net of tax (Note 4) (d) | | | - | | | | (2,163.9) | | | - | | | | (2,172.5) |
Net income (loss) attributable to Ecolab | | | $310.8 | | | | ($2,035.0) | | | $504.4 | | | | ($1,751.6) |
| | | | | | | | | | | | | | |
Earnings (loss) attributable to Ecolab per common share | | | | | | | | | | | | | | |
Basic | | | | | | | | | | | | | | |
Continuing operations | | | $ 1.09 | | | | $ 0.45 | | | $ 1.76 | | | | $ 1.46 |
Discontinued operations | | | $ - | | | | ($ 7.51) | | | $ - | | | | ($ 7.53) |
Earnings attributable to Ecolab | | | $ 1.09 | | | | ($ 7.06) | | | $ 1.76 | | | | ($ 6.07) |
Diluted | | | | | | | | | | | | | | |
Continuing operations | | | $ 1.08 | | | | $ 0.44 | | | $ 1.75 | | | | $ 1.44 |
Discontinued operations | | | $ - | | | | ($ 7.42) | | | $ - | | | | ($ 7.44) |
Earnings attributable to Ecolab | | | $ 1.08 | | | | ($ 6.98) | | | $ 1.75 | | | | ($ 6.00) |
| | | | | | | | | | | | | | |
Weighted-average common shares outstanding | | | | | | | | | | | | | | |
Basic | |
| 286.0 | | | | 288.2 |
|
| 286.0 | | | | 288.5 |
Diluted | |
| 288.8 | | |
| 291.5 |
|
| 288.9 | | |
| 292.0 |
| | | | | | | | | | | | | | |
(a) | Cost of sales includes special (gains) and charges, net of $3.7 and $27.0 in the second quarter of 2021 and 2020, respectively, and $23.3 and $36.1 in the first six months of 2021 and 2020, respectively, which is recorded in product and equipment cost of sales. |
(b) | Other expense (income) includes special charges of $19.6 in the second quarter and first six months of 2021. |
(c) | Interest expense, net includes special charges of $0.7 in the second quarter and first six months of 2020. |
(d) | Net income (loss) from discontinued operations, net of tax includes noncontrolling interest of ($0.3) in the second quarter of 2020 and $2.2 in the first six months of 2020. |
The accompanying notes are an integral part of the consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
| | Second Quarter Ended | | Six Months Ended | ||||||||||
| | June 30 | | June 30 | ||||||||||
(millions) |
| 2021 |
| 2020 | | 2021 |
| 2020 | ||||||
| | | | | | | | | | | | | | |
Net income (loss) attributable to Ecolab | | | $310.8 | | | | ($2,035.0) | | | $504.4 | | | | ($1,751.6) |
Net income from continuing operations attributable to noncontrolling interest | | | 2.8 | | | | 5.4 | | | 5.7 | | | | 9.7 |
Net income (loss) from discontinued operations attributable to noncontrolling interest | | | - | | | | (0.3) | | | - | | | | 2.2 |
Net income (loss) attributable to Ecolab, including noncontrolling interest | | | 313.6 | | | | (2,029.9) | | | 510.1 | | | | (1,739.7) |
| | | | | | | | | | | | | | |
Other comprehensive income (loss), net of tax | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Foreign currency translation adjustments | | | | | | | | | | | | | | |
Foreign currency translation |
| | 83.2 | | | | (122.9) | | | 168.1 | | | | (161.2) |
Separation of ChampionX | | | - | | | | 229.9 | | | - | | | | 229.9 |
Loss on net investment hedges |
| | (14.2) | | | | (2.9) | | | (26.4) | | | | (4.0) |
Total foreign currency translation adjustments |
| | 69.0 | | | | 104.1 | |
| 141.7 | | |
| 64.7 |
| | | | | | | | | | | | | | |
Derivatives and hedging instruments |
| | 0.8 | | | | 2.1 | | | 1.4 | | | | 5.0 |
| | | | | | | | | | | | | | |
Pension and postretirement benefits | | | | | | | | | | | | | | |
Current period net actuarial gain |
| | 109.9 | | | | - | |
| 109.9 | | |
| - |
Settlement charge |
| | 14.9 | | | | - | |
| 14.9 | | |
| - |
Amortization of net actuarial loss and prior period service credits, net |
| | 8.6 | | | | 17.6 | | | 14.5 | | | | 30.5 |
Total pension and postretirement benefits |
| | 133.4 | | | | 17.6 | |
| 139.3 | | |
| 30.5 |
| | | | | | | | | | | | | | |
Subtotal |
| | 203.2 | | | | 123.8 | |
| 282.4 | | |
| 100.2 |
| | | | | | | | | | | | | | |
Total comprehensive income (loss), including noncontrolling interest |
| | 516.8 | | | | (1,906.1) | |
| 792.5 | | |
| (1,639.5) |
Comprehensive income (loss) attributable to noncontrolling interest |
| | 2.1 | | | | (19.4) | | | 4.3 | | | | (12.1) |
Comprehensive income (loss) attributable to Ecolab | | | $514.7 | | | | ($1,886.7) | | | $788.2 | | | | ($1,627.4) |
The accompanying notes are an integral part of the consolidated financial statements.
3
CONSOLIDATED BALANCE SHEETS
(unaudited)
| | | | | | | |
| | June 30 | | December 31 | |||
(millions, except per share amounts) |
| 2021 | | 2020 | |||
| | | | | | | |
ASSETS | | | | | | | |
Current assets | | | | | | | |
Cash and cash equivalents | | | $1,402.4 | | | | $1,260.2 |
Accounts receivable, net |
| | 2,331.0 | | | | 2,273.8 |
Inventories |
| | 1,418.5 | | | | 1,285.2 |
Other current assets | | | 335.5 | | | | 298.2 |
Total current assets |
| | 5,487.4 | | | | 5,117.4 |
Property, plant and equipment, net |
| | 3,077.9 | | | | 3,124.9 |
Goodwill |
| | 6,172.4 | | | | 6,006.9 |
Other intangible assets, net |
| | 2,925.4 | | | | 2,977.0 |
Operating lease assets | | | 391.5 | | | | 423.8 |
Other assets | | | 479.1 | | | | 476.0 |
Total assets | | | $18,533.7 | | | | $18,126.0 |
| | | | | | | |
LIABILITIES AND EQUITY | | | | | | | |
Current liabilities | | | | | | | |
Short-term debt | | | $17.3 | | | | $17.3 |
Accounts payable |
| | 1,213.3 | | | | 1,160.6 |
Compensation and benefits |
| | 430.3 | | | | 469.3 |
Income taxes |
| | 48.9 | | | | 96.1 |
Other current liabilities | | | 1,170.5 | | | | 1,188.9 |
Total current liabilities |
| | 2,880.3 | | | | 2,932.2 |
Long-term debt |
| | 6,708.9 | | | | 6,669.3 |
Postretirement health care and pension benefits |
| | 1,046.6 | | | | 1,226.2 |
Deferred income taxes | | | 567.3 | | | | 483.9 |
Operating lease liabilities | | | 273.8 | | | | 300.5 |
Other liabilities | | | 320.5 | | | | 312.4 |
Total liabilities |
| | 11,797.4 | | | | 11,924.5 |
Commitments and contingencies (Note 17) | | | | | | | |
| | | | | | | |
Equity (a) | | | | | | | |
Common stock |
| | 363.2 | | | | 362.6 |
Additional paid-in capital |
| | 6,333.3 | | | | 6,235.0 |
Retained earnings |
| | 8,472.8 | | | | 8,243.0 |
Accumulated other comprehensive loss |
| | (1,710.6) | | | | (1,994.4) |
Treasury stock |
| | (6,749.6) | | | | (6,679.7) |
Total Ecolab shareholders’ equity |
| | 6,709.1 | | | | 6,166.5 |
Noncontrolling interest |
| | 27.2 | | | | 35.0 |
Total equity |
| | 6,736.3 | | | | 6,201.5 |
Total liabilities and equity | | | $18,533.7 | | | | $18,126.0 |
(a) | Common stock, 800.0 shares authorized, $1.00 par value per share, 286.1 shares outstanding at June 30, 2021 and 285.7 shares outstanding at December 31, 2020. Shares outstanding are net of treasury stock. |
The accompanying notes are an integral part of the consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| | Six Months Ended | |||||
| | June 30 | |||||
(millions) | | 2021 | | 2020 | |||
| | | | | | | |
OPERATING ACTIVITIES | | | | | | | |
Net income (loss) including noncontrolling interest | | | $510.1 | | | | ($1,739.7) |
Less: Net loss from discontinued operations including noncontrolling interest | | | - | | | | (2,170.3) |
Net income from continuing operations including noncontrolling interest | | | 510.1 | | | | 430.6 |
Adjustments to reconcile net income to cash provided by operating activities: | | | | | | | |
Depreciation | | | 303.9 | | | | 293.0 |
Amortization | | | 116.7 | | | | 103.2 |
Deferred income taxes | | | 39.5 | | | | (25.0) |
Share-based compensation expense | | | 58.9 | | | | 53.7 |
Pension and postretirement plan contributions | | | (36.5) | | | | (34.1) |
Pension and postretirement plan expense, net | | | 23.6 | | | | 17.1 |
Restructuring charges, net of cash paid | | | (15.9) | | | | (23.3) |
Other, net | | | 12.0 | | | | 53.8 |
Changes in operating assets and liabilities, net of effect of acquisitions: | | | | | | | |
Accounts receivable | | | (19.1) | | | | 96.1 |
Inventories | | | (103.5) | | | | (151.9) |
Other assets | | | (53.8) | | | | (49.3) |
Accounts payable | | | 33.5 | | | | 20.1 |
Other liabilities | | | (71.1) | | | | (143.8) |
Cash provided by operating activities - continuing operations | | | 798.3 | | | | 640.2 |
Cash provided by operating activities - discontinued operations | | | - | | | | 118.4 |
Cash provided by operating activities | | | 798.3 | | | | 758.6 |
| | | | | | | |
INVESTING ACTIVITIES | | | | | | | |
Capital expenditures | | | (245.6) | | | | (250.6) |
Property and other assets sold | | | 0.3 | | | | 1.7 |
Acquisitions and investments in affiliates, net of cash acquired | | | (89.8) | | | | (486.8) |
Divestiture of businesses | | | - | | | | 55.4 |
Other, net | | | (12.7) | | | | (9.4) |
Cash used for investing activities - continuing operations | | | (347.8) | | | | (689.7) |
Cash provided by investing activities - discontinued operations | | | - | | | | 443.2 |
Cash used for investing activities | | | (347.8) | | | | (246.5) |
| | | | | | | |
FINANCING ACTIVITIES | | | | | | | |
Net issuances of commercial paper and notes payable | | | (1.0) | | | | 454.4 |
Long-term debt borrowings | | | - | | | | 768.9 |
Long-term debt repayments | | | - | | | | (300.0) |
Reacquired shares | | | (70.6) | | | | (104.7) |
Dividends paid | | | (286.6) | | | | (283.2) |
Exercise of employee stock options | | | 40.4 | | | | 188.7 |
Other, net | | | (0.5) | | | | (3.5) |
Cash (used for) provided by financing activities - continuing operations | | | (318.3) | | | | 720.6 |
Cash used for financing activities - discontinued operations | | | - | | | | (1.6) |
Cash (used for) provided by financing activities | | | (318.3) | | | | 719.0 |
| | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | | 10.0 | | | | (48.5) |
| | | | | | | |
Increase in cash and cash equivalents | | | 142.2 | | | | 1,182.6 |
Cash and cash equivalents, beginning of period - continuing operations | | | 1,260.2 | | | | 118.8 |
Cash and cash equivalents, beginning of period - discontinued operations | | | - | | | | 67.6 |
Cash and cash equivalents, beginning of period | | | 1,260.2 | | | | 186.4 |
Cash and cash equivalents, end of period - continuing operations | | | 1,402.4 | | | | 1,369.0 |
Cash and cash equivalents, end of period - discontinued operations | | | - | | | | - |
Cash and cash equivalents, end of period | | | $1,402.4 | | | | $1,369.0 |
| | | | | | | |
The accompanying notes are an integral part of the consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
| | Second Quarter Ended June 30, 2021 and 2020 | ||||||||||||||||||||||
(millions, except per share amounts) |
| Common |
| Additional |
| Retained |
| OCI |
| Treasury |
| Ecolab Shareholders' |
| Non-Controlling |
| Total | ||||||||
Balance, March 31, 2020 | |
| $360.8 | |
| $6,018.1 | |
| $10,136.9 | |
| ($2,113.7) | |
| ($5,580.0) | |
| $8,822.1 | |
| $38.5 | |
| $8,860.6 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net (loss) income | | | | | | | | | (2,035.0) | | | | | | | |
| (2,035.0) | |
| 5.1 | |
| (2,029.9) |
Other comprehensive income (loss) activity | | | | | | | | | | | | 124.0 | | | | |
| 124.0 | |
| (0.2) | |
| 123.8 |
Cash dividends declared (a) | | | | | | | | | (134.1) | | | | | | | |
| (134.1) | |
| (1.8) | |
| (135.9) |
Separation of ChampionX | | | | | | (8.5) | | | | | | | | | (1,051.4) | | | (1,059.9) | | | 3.4 | | | (1,056.5) |
Changes in noncontrolling interests | | | | | | 17.6 | | | | | | | | | | | | 17.6 | | | (10.0) | | | 7.6 |
Stock options and awards | |
| 1.2 | | | 127.8 | | | | | | | | | 1.2 | |
| 130.2 | | | | |
| 130.2 |
Reacquired shares | | | | | | | | | | | | | | | (9.7) | |
| (9.7) | | | | |
| (9.7) |
Balance, June 30, 2020 | |
| $362.0 | |
| $6,155.0 | |
| $7,967.8 | |
| ($1,989.7) | |
| ($6,639.9) | |
| $5,855.2 | |
| $35.0 | |
| $5,890.2 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, March 31, 2021 | |
| $363.0 | | | $6,285.7 | | | $8,299.3 | | | ($1,914.5) | | | ($6,741.2) | |
| $6,292.3 | |
| $27.8 | |
| $6,320.1 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | 310.8 | | | | | | | |
| 310.8 | |
| 2.8 | |
| 313.6 |
Other comprehensive income (loss) activity | | | | | | | | | | | | 203.9 | | | | |
| 203.9 | |
| (0.7) | |
| 203.2 |
Cash dividends declared (a) | | | | | | | | | (137.3) | | | | | | | |
| (137.3) | |
| (2.7) | |
| (140.0) |
Stock options and awards | |
| 0.2 | | | 47.6 | | | | | | | | | 0.4 | |
| 48.2 | | | | |
| 48.2 |
Reacquired shares | | | | | | | | | | | | | | | (8.8) | |
| (8.8) | | | | |
| (8.8) |
Balance, June 30, 2021 | |
| $363.2 | |
| $6,333.3 | |
| $8,472.8 | |
| ($1,710.6) | |
| ($6,749.6) | |
| $6,709.1 | |
| $27.2 | |
| $6,736.3 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2021 and 2020 | ||||||||||||||||||||||
(millions, except per share amounts) |
| Common |
| Additional |
| Retained |
| OCI |
| Treasury |
| Ecolab Shareholders' |
| Non-Controlling |
| Total | ||||||||
Balance, December 31, 2019 | |
| $359.6 | |
| $5,907.1 | |
| $9,993.7 | |
| ($2,089.7) | |
| ($5,485.4) | |
| $8,685.3 | |
| $40.5 | |
| $8,725.8 |
| | | | | | | | | | | | | | | | | | | | | | | | |
New accounting guidance adoption (b) | | | | | | | | | (4.3) | | | | | | | |
| (4.3) | |
| | |
| (4.3) |
Net (loss) income | | | | | | | | | (1,751.6) | | | | | | | |
| (1,751.6) | |
| 11.9 | |
| (1,739.7) |
Other comprehensive income (loss) activity | | | | | | | | | | | | 100.0 | | | | |
| 100.0 | |
| 0.2 | |
| 100.2 |
Cash dividends declared (a) | | | | | | | | | (270.0) | | | | | | | |
| (270.0) | |
| (11.7) | |
| (281.7) |
Separation of ChampionX | | | | | | (8.5) | | | | | | | | | (1,051.4) | | | (1,059.9) | | | 3.4 | | | (1,056.5) |
Changes in noncontrolling interests | | | | | | 17.6 | | | | | | | | | | | | 17.6 | | | (9.3) | | | 8.3 |
Stock options and awards |
|
| 2.4 | | | 238.8 | | | | | | | | | 1.6 | |
| 242.8 | | | | |
| 242.8 |
Reacquired shares | | | | | | | | | | | | | | | (104.7) | |
| (104.7) | | | | |
| (104.7) |
Balance, June 30, 2020 | | | $362.0 | | | $6,155.0 | | | $7,967.8 | | | ($1,989.7) | | | ($6,639.9) | | | $5,855.2 | | | $35.0 | | | $5,890.2 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2020 | |
| $362.6 | | | $6,235.0 | | | $8,243.0 | | | ($1,994.4) | | | ($6,679.7) | |
| $6,166.5 | |
| $35.0 | |
| $6,201.5 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | 504.4 | | | | | | | | | 504.4 | | | 5.7 | | | 510.1 |
Other comprehensive income (loss) activity | | | | | | | | | | | | 283.8 | | | | |
| 283.8 | |
| (1.4) | |
| 282.4 |
Cash dividends declared (a) | | | | | | | | | (274.6) | | | | | | | |
| (274.6) | |
| (12.1) | |
| (286.7) |
Stock options and awards |
|
| 0.6 | | | 98.3 | | | | | | | | | 0.7 | |
| 99.6 | | | | |
| 99.6 |
Reacquired shares | | | | | | | | | | | | | | | (70.6) | |
| (70.6) | | | | |
| (70.6) |
Balance, June 30, 2021 | | | $363.2 | | | $6,333.3 | | | $8,472.8 | | | ($1,710.6) | | | ($6,749.6) | | | $6,709.1 | | | $27.2 | | | $6,736.3 |
(a) | Dividends declared per common share were $0.48 and $0.47 in the second quarter of 2021 and 2020, respectively, and $0.96 and $0.94 in the first six months of 2021 and 2020, respectively. |
(b) | Upon adoption of ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, the Company reclassified the cumulative effect of applying the standard to retained earnings at the beginning of the period adopted. |
The accompanying notes are an integral part of the consolidated financial statements.
6
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. CONSOLIDATED FINANCIAL INFORMATION
The unaudited consolidated financial information for the second quarter ended June 30, 2021 and 2020 reflects, in the opinion of management, all adjustments necessary for a fair statement of the financial position, results of operations, comprehensive income (loss), equity and cash flows of Ecolab Inc. ("Ecolab" or "the Company") for the interim periods presented. Any adjustments consist of normal recurring items.
In March 2020, coronavirus 2019 (“COVID-19”) was declared a pandemic by the World Health Organization. As the impact of the pandemic continues to evolve, estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require judgment. These estimates and assumptions may change in future periods and will be recognized in the consolidated financial information as new events occur and additional information becomes known. To the extent actual results differ materially from those estimates and assumptions, the Company’s future financial statements could be affected.
On June 3, 2020, the Company completed the separation of its Upstream Energy business (the “ChampionX business”) in a Reverse Morris Trust transaction (the “Transaction”) through the split-off of ChampionX Holding Inc. (“ChampionX”), formed by Ecolab as a wholly owned subsidiary to hold the ChampionX Business, followed immediately by the merger (the “Merger”) of ChampionX with a wholly owned subsidiary of ChampionX Corporation (f/k/a Apergy Corporation, “Apergy”).
As discussed in Note 4 Discontinued Operations, during 2020, the ChampionX business met the criteria to be reported as discontinued operations because the separation of the ChampionX business was a strategic shift in business that had a major effect on the Company's operations and financial results. Therefore, the Company reported the historical results of ChampionX, including the results of operations, cash flows, and related assets and liabilities, as discontinued operations. Unless otherwise noted, the accompanying Notes to the Consolidated Financial Statements have all been revised to reflect the effect of the separation of ChampionX and all prior year balances have been revised accordingly to reflect continuing operations only.
Subsequent to the separation of ChampionX, effective the second quarter of 2020, the Company no longer reports the Upstream Energy segment, which previously held the ChampionX business. The Company is aligned into three reportable segments and Other.
Except for the changes due to adoption of the new accounting standards, the Company has consistently applied the accounting policies to all periods presented in these consolidated financial statements.
The financial results for any interim period are not necessarily indicative of results for the full year. The consolidated balance sheet data as of December 31, 2020 was derived from the audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. The unaudited consolidated financial information should be read in conjunction with the consolidated financial statements and notes thereto incorporated in the Company's Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission (“SEC”) on February 26, 2021.
With respect to the unaudited financial information of the Company for the second quarter ended June 30, 2021 and 2020 included in this Form 10-Q, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards for a review of such information. Their separate report dated August 5, 2021 appearing herein states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933, as amended (the "Act"), for their report on the unaudited financial information because that report is not a "report" or a "part" of a registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.
7
2. SPECIAL (GAINS) AND CHARGES
Special (gains) and charges reported on the Consolidated Statements of Income include the following:
| | Second Quarter Ended | | Six Months Ended | ||||||||||
| | June 30 | | June 30 | ||||||||||
(millions) |
| 2021 | | 2020 |
| 2021 | | 2020 | ||||||
Cost of sales | | | | | | | | | | | | | | |
Restructuring activities | | | $3.7 | | | | $2.6 | | | $21.9 | | |
| $5.6 |
Acquisition and integration activities | | | - | | | | 2.2 | | | - | | | | 2.6 |
COVID-19 activities, net | | | - | | | | 6.9 | | | 1.1 | | | | 6.9 |
Other | | | - | | | | 15.3 | | | 0.3 | | | | 21.0 |
Cost of sales subtotal | | | 3.7 | | | | 27.0 | | | 23.3 | | |
| 36.1 |
| | | | | | | | | | | | | | |
Special (gains) and charges | | | | | | | | | | | | | | |
Restructuring activities | | | 2.5 | | | | 0.3 | | | 6.1 | | |
| 4.5 |
Acquisition and integration activities | | | 1.3 | | | | (2.6) | | | 2.5 | | | | 2.8 |
Disposal and impairment activities | | | - | | | | 44.7 | | | - | | | | 45.9 |
COVID-19 activities, net | | | 8.3 | | | | 10.2 | | | 14.7 | | |
| 10.2 |
Other | | | 5.5 | | | | 16.8 | | | 7.1 | | |
| 21.9 |
Special (gains) and charges subtotal | | | 17.6 | | | | 69.4 | | | 30.4 | | |
| 85.3 |
| | | | | | | | | | | | | | |
Operating income subtotal | | | 21.3 | | | | 96.4 | | | 53.7 | | | | 121.4 |
| | | | | | | | | | | | | | |
Interest expense, net | | | - | | | | 0.7 | | | - | | | | 0.7 |
Other expense (income) | | | 19.6 | | | | - | | | 19.6 | | | | - |
| | | | | | | | | | | | | | |
Total special (gains) and charges | | | $40.9 | | | | $97.1 | | | $73.3 | | | | $122.1 |
For segment reporting purposes, special (gains) and charges are not allocated to reportable segments, which is consistent with the Company’s internal management reporting.
Restructuring activities
Restructuring activities are primarily related to the Institutional Advancement Program and Accelerate 2020, both of which are described below. Restructuring activities and related costs have been included as a component of both cost of sales and special (gains) and charges on the Consolidated Statements of Income. Restructuring liabilities have been classified as a component of other current and other noncurrent liabilities on the Consolidated Balance Sheets.
Institutional Advancement Program
The Company approved a restructuring plan in 2020 focused on the Institutional business (“the Institutional Plan”) which is intended to enhance our Institutional sales and service structure and allow the sales team to capture share and penetration while maximizing service effectiveness by leveraging our ongoing investments in digital technology. In February 2021, the Company expanded the Institutional Plan. The Company expects that these restructuring charges will be completed by 2023, with total anticipated costs of $80 million ($60 million after tax). The costs are expected to be primarily cash expenditures for severance and facility closures. The Company also anticipates non-cash costs related to equipment disposals. Actual costs may vary from these estimates depending on actions taken.
During the second quarter and first six months of 2021, the Company recorded restructuring charges of $2.2 million ($1.6 million after tax) and $8.1 million ($6.1 million after tax), respectively, primarily related to costs to support the transition to the new sales and service structure, and the disposal of equipment. The Company has recorded $43.3 million ($32.5 million after tax) of cumulative restructuring charges under the Institutional Plan. The liability related to the Institutional Plan was $11.5 million as of June 30, 2021 and is expected to be paid over a period of a few months to several quarters and will continue to be funded from operating activities.
8
Restructuring activity related to the Institutional Plan since inception of the underlying actions includes the following:
| | Employee |
|
| | |
| | |
| | |||||
| | Termination | | Asset | | | | | | | ||||||
(millions) |
| Costs |
| Disposals |
| Other |
| Total | ||||||||
2020 Activity | | | | | | | | | | | | | | | | |
Recorded expense and accrual | | | $25.6 | | | | $- | | | | $9.6 | | | | $35.2 | |
Net cash payments | |
| (0.9) | | | | - | | | | (9.6) | | | | (10.5) | |
Restructuring liability, December 31, 2020 | |
| 24.7 | | | | - | | | | - | | | | 24.7 | |
| | | | | | | | | | | | | | | | |
2021 Activity | | | | | | | | | | | | | | | | |
Recorded expense (income) and accrual |
|
| 1.3 | | | | 4.5 | | | | 2.3 | | |
| 8.1 | |
Net cash payments |
|
| (14.7) | | | | - | | | | (2.3) | | |
| (17.0) | |
Non-cash net charges |
|
| - | | | | (4.5) | | | | 0.2 | | |
| (4.3) | |
Restructuring liability, June 30, 2021 | | | $11.3 | | | | $- | | | | $0.2 | | | | $11.5 | |
Accelerate 2020
During 2018, the Company formally commenced a restructuring plan Accelerate 2020 (“the Plan”), to leverage technology and system investments and organizational changes. The goals of the Plan are to simplify and automate processes and tasks, reduce complexity and management layers, consolidate facilities and focus on key long-term growth areas by further leveraging technology and structural improvements. During 2020, the Company expanded the Plan for additional costs and savings to further leverage the technology and structural improvements. The Company now expects that the restructuring activities will be completed by the end of 2022, with total anticipated costs of $255 million ($195 million after tax) when revised for continuing operations. The remaining costs are expected to be primarily cash expenditures for severance costs and some facility closure costs relating to team reorganizations. Actual costs may vary from these estimates depending on actions taken.
The Company recorded restructuring charges (gains) of ($0.3) million ($0.2 million after tax) and $1.4 million ($1.6 million after tax) in the second quarter and first six months of 2021, respectively, primarily related to severance. The liability related to the Plan was $47.3 million as of the end of the second quarter of 2021. The Company has recorded $240.6 million ($185.4 million after tax) of cumulative restructuring charges under the Plan. The remaining liability is expected to be paid over a period of several quarters and will continue to be funded from operating activities.
Restructuring activity related to the Accelerate 2020 Plan since inception of the underlying actions includes the following:
|
| Employee |
|
| | |
| | |
| | |||||
| | Termination | | Asset | | | | | | | ||||||
(millions) |
| Costs |
| Disposals |
| Other |
| Total | ||||||||
2018-2020 Activity | | | | | | | | | | | | | | | | |
Recorded expense | | | $212.0 | | | | $8.0 | | | | $19.2 | | | | $239.2 | |
Net cash payments | |
| (144.3) | | | | 1.2 | | | | (12.2) | | |
| (155.3) | |
Non-cash charges | |
| - | | | | (9.2) | | | | (2.0) | | |
| (11.2) | |
Effect of foreign currency translation | |
| (0.9) | | | | - | | | | - | | |
| (0.9) | |
Restructuring liability, December 31, 2020 | | | 66.8 | | | | - | | | | 5.0 | | | | 71.8 | |
| | | | | | | | | | | | | | | | |
2021 Activity | | | | | | | | | | | | | | | | |
Recorded expense | | | 1.0 | | | | - | | | | 0.4 | | | | 1.4 | |
Net cash payments | |
| (25.3) | | | | - | | | | (0.6) | | | | (25.9) | |
Non-cash charges | |
| - | | | | - | | | | (0.1) | | | | (0.1) | |
Effect of foreign currency translation | |
| 0.1 | | | | - | | | | - | | | | 0.1 | |
Restructuring liability, June 30, 2021 | | | $42.6 | | | | $- | | | | $4.7 | | | | $47.3 | |
Other Restructuring Activities
During the second quarter and six months of 2021, the Company incurred restructuring charges of $4.3 million ($5.6 million after tax) and $18.5 million ($16.4 million after tax), respectively, related to other immaterial restructuring activity. The charges are primarily related to severance and asset write-offs. During the second quarters and first six months of 2021 and 2020, net restructuring charges related to prior year plans were minimal. The restructuring liability balance for all plans other than the Accelerate 2020 and Institutional Plan were $16.8 million and $5.9 million as of June 30, 2021 and December 31, 2020, respectively. The increase in liability was driven primarily by severance accruals. The remaining liability is expected to be paid over a period of a few months to several quarters and will continue to be funded from operating activities.
Cash payments during 2021 related to all other restructuring plans excluding the Accelerate 2020 and Institutional Plan were $1.1 million.
9
Acquisition and integration related costs
Acquisition and integration costs reported in special (gains) and charges on the Consolidated Statements of Income include $1.3 million ($1.0 million after tax) and $2.5 million ($2.1 million after tax) in the second quarter and first six months of 2021, respectively. Charges are related to Copal Invest NV, including its primary operating entity CID Lines (collectively, “CID Lines”), and Bioquell PLC (“Bioquell”) acquisitions and consist of integration costs, advisory and legal fees.
Acquisition and integration costs reported in special (gains) and charges on the Consolidated Statements of Income include ($2.6) million ($1.7 million after tax) and $2.8 million ($2.1 million after tax) in the second quarter and first six months of 2020, respectively. Charges are related to CID Lines, Bioquell and the Laboratoires Anios (“Anios”) acquisitions and consist of integration costs, advisory and legal fees. Acquisition and integration costs reported in product and equipment cost of sales of $2.2 million ($1.7 million after tax) and $2.6 million ($1.9 million after tax) on the Consolidated Statements of Income in the second quarter and first six months of 2020, respectively, related to the recognition of fair value step-up in the CID Lines inventory, severance and the closure of a facility. The Company also incurred $0.7 million ($0.5 million after tax) of interest expense in the second quarter of 2020.
Further information related to the Company’s acquisitions is included in Note 3.
Disposal and impairment charges
Disposal and impairment charges reported in special (gains) and charges on the Consolidated Statements of Income include $44.7 million ($44.1 million after tax) and $45.9 million ($45.0 million after tax) in the second quarter and first six months of 2020, respectively. During the second quarter of 2020, the Company recorded a $28.6 million ($28.6 million after tax) impairment for a minority equity method investment due to the impact of the economic environment and the liquidity of the minority equity method investment. In addition, the Company recorded charges of $16.1 million ($15.5 million after tax) related to transaction fees associated with the sale of Holchem Group Limited (“Holchem”).
Further information related to the Company’s disposal is included in Note 3.
COVID-19 activities
The Company recorded charges of $4.1 million and $26.5 million during the second quarter of 2021 and 2020, respectively, and $10.0 million and $26.5 million during the first six months of 2021 and 2020, respectively, to protect the wages for certain employees directly impacted by the COVID-19 pandemic. The Company also recorded charges during the second quarter and first six months of 2021 of $4.9 million and $8.4 million, respectively, related to COVID-19 testing and related expenses. In addition, the Company received subsidies and government assistance, which were recorded as a special (gain) of ($0.7) million and ($9.4) million during the second quarter of 2021 and 2020, respectively, and ($2.6) million and ($9.4) million during the first six months of 2021 and 2020, respectively. COVID-19 pandemic charges are recorded in product and equipment cost of sales, service and lease cost of sales, and special (gains) and charges on the Consolidated Statements of Income. After tax net charges related to the COVID-19 pandemic were $6.4 million and $13.2 million during the second quarter of 2021 and 2020, respectively, and $11.3 million and $13.2 million during the first six months of 2021 and 2020, respectively.
Other
Other special charges recorded in the first six months of 2021 in product and equipment cost of sales were $0.3 million ($0.2 million after tax). During the second quarter and first six months of 2020, the Company recorded special charges of $15.3 million ($10.5 million after tax) and $21.0 million (14.3 million after tax), respectively, in product and equipment cost of sales on the Consolidated Statements of Income related to a Healthcare product recall in Europe.
Other special charges of $5.5 million ($4.4 million after tax) and $7.1 million ($5.6 million after tax) recorded in the second quarter and first six months of 2021, respectively, relate primarily to legal reserve and certain legal charges and tax consulting fees associated with the ChampionX separation.
Other special charges of $16.8 million ($12.6 million after tax) and $21.9 million ($16.5 million after tax), respectively, recorded in the second quarter and first six months of 2020 relate primarily to legal reserve and certain legal charges which are recorded in special (gains) and charges on the Consolidated Statements of Income.
Other expense (income)
During the second quarter and first six months of 2021, the Company incurred settlement expense recorded in other expense (income) on the Consolidated Statements of Income of $19.6 million ($14.9 million after tax) related to U.S. pension plan lump-sum payments to retirees.
10
3. ACQUISITIONS AND DISPOSITIONS
Acquisitions
The Company makes business acquisitions that align with its strategic business objectives. The assets and liabilities of acquired businesses are recorded in the Consolidated Balance Sheets at fair value as of their acquisition dates. The purchase price allocation is based on estimates of the fair value of assets acquired, liabilities assumed and consideration transferred. Purchase consideration transferred is reduced by the amount of cash or cash equivalents acquired.
There were no acquisitions during the second quarter of 2021. Acquisitions during the first six months of 2021 and 2020 were not significant to the Company’s consolidated financial statements; therefore, pro forma financial information is not presented.
During the first quarter of 2021, the Company acquired VanBaerle Hygiene AG (“VanBaerle”), an institutional business which sells cleaning products and related services to restaurants, long-term care facilities, hotels and laundries. VanBaerle became part of the Global Institutional reporting segment. The purchase price included immaterial amounts of holdback and contingent consideration, which are recorded within other liabilities on the Consolidated Balance Sheets as of June 30, 2021.
Also, during the first quarter of 2021, the Company acquired TechTex Holdings Limited (“TechTex”), a healthcare business which sells wet and dry wipes and other nonwovens products to the Life Sciences and Healthcare industries. TechTex became part of the Global Healthcare and Life Sciences reporting segment. The purchase price included an immaterial holdback that is recorded within other liabilities on the Consolidated Balance Sheets as of June 30, 2021.
The purchase accounting for these acquisitions are preliminary and subject to change as the Company finalizes the valuation of intangible assets, income tax balances and working capital adjustments. The Company does not expect any of the goodwill related to its acquisitions of VanBaerle or TechTex to be tax deductible.
The following table summarizes the acquisition date fair value of net assets acquired from the Company’s acquisitions other than CID Lines during the first six months of 2021 and 2020.
| | Second Quarter Ended | | Six Months Ended | ||||||||||||
| | June 30 | | June 30 | ||||||||||||
(millions) |
| 2021 | | 2020 |
| 2021 | | 2020 | ||||||||
Net tangible assets (liabilities) acquired and equity method investments | | | $- | | | | $- | | | | ($2.4) | | | | $- | |
| | | | | | | | | | | | | | | | |
Identifiable intangible assets | | | | | | | | | | | | | | | | |
Customer relationships |
| | - | | | | - | |
| | 31.1 | | | | - | |
Trademarks |
| | - | | | | - | |
| | 3.6 | | | | - | |
Other technology | | | - | | | | - | | | | 1.5 | | | | - | |
Total intangible assets |
| | - | | | | - | |
| | 36.2 | | | | - | |
| | | | | | | | | | | | |