ECOLAB INC.
The following management discussion and analysis ("MD&A") provides information
we believe is useful in understanding our operating results, cash flows and
financial condition. We provide quantitative information about the material
sales drivers including the impact of changes in volume and pricing and the
effect of acquisitions and changes in foreign currency at the corporate and
reportable segment level. We also provide quantitative information regarding
special (gains) and charges, discrete tax items and other significant factors we
believe are useful for understanding our results. Such quantitative drivers are
supported by comments meant to be qualitative in nature. Qualitative factors are
generally ordered based on estimated significance.
The MD&A should be read in conjunction with both the unaudited consolidated
financial information and related notes included in this Form 10-Q, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in our Annual Report on Form 10-K for the year ended
December 31, 2019 . This discussion contains various Non-GAAP Financial Measures
and also contains various Forward-Looking Statements within the meaning of the
Private Securities Litigation Reform Act of 1995. We refer readers to the
statements entitled "Non-GAAP Financial Measures" and "Forward-Looking
Statements" located at the end of Part I of this report.
Comparability of Results
ChampionX Transaction
OnJune 3, 2020 , the Company completed the previously announced separation of its Upstream Energy business (the "ChampionX business") in aReverse Morris Trust transaction (the "Transaction") through the split-off ofChampionX Holding Inc. ("ChampionX"), formed by Ecolab as a wholly owned subsidiary to hold the ChampionX Business, followed immediately by the merger of ChampionX (the "Merger") with a wholly owned subsidiary of ChampionX Corporation (f/k/aApergy Corporation , "Apergy"). The ChampionX business met the criteria to be reported as discontinued operations because it is a strategic shift in business that has a major effect on the Company's operations and financial results. Therefore, the Company is reporting the historical results of ChampionX, including the results of operations, cash flows, and related assets and liabilities, as discontinued operations for all periods presented herein. Unless otherwise noted, the accompanying MD&A has been revised to reflect the ChampionX business as discontinued operations and all prior year balances have been revised accordingly to reflect continuing operations only.
Fixed Currency Foreign Exchange Rates
Management evaluates the sales and operating income performance of our non-U.S. dollar functional currency international operations based on fixed currency exchange rates, which eliminate the impact of exchange rate fluctuations on our international operations. Fixed currency amounts are updated annually at the beginning of each year based on translation intoU.S. dollars at foreign currency exchange rates established by management, with all periods presented using such rates. Public currency rate data provided within the "Segment Performance" section of this MD&A reflect amounts translated at actual public average rates of exchange prevailing during the corresponding period and is provided for informational purposes only.
Comparability of Reportable Segments
The ChampionX business was previously recorded in the Global Energy reportable segment and has been reported in discontinued operations. The Downstream operating segment, which was previously included in the Global Energy reportable segment has been aggregated into theGlobal Industrial reportable segment. The table below reflects the elimination of the Global Energy reportable segment, creation of the Downstream operating segment which is reported in theGlobal Industrial reportable segment. Also, in the first quarter of 2020, we announced leadership changes which allow for shared oversight and focus on the Healthcare and Life Sciences operating segments and established theGlobal Healthcare and Life Sciences reportable segment. This segment is comprised of the Healthcare operating segment which was previously aggregated in the Global Institutional reportable segment and the Life Sciences operating segment which was previously aggregated in theGlobal Industrial reportable segment. Additionally, the Textile Care operating segment being reported in Other, which had previously been aggregated in theGlobal Industrial reportable segment. The Company made other immaterial changes, including the movement of certain customers and cost allocations between reportable segments.
Impact of Acquisitions and Divestitures
Acquisition adjusted growth rates exclude the results of our acquired businesses
from the first twelve months post acquisition and exclude the results of our
divested businesses from the twelve months prior to divestiture. In addition, as
part of the separation, the Company also entered into a Master Cross Supply and
Product Transfer agreement with ChampionX to provide, receive or transfer
certain products for a period up to 36 months. Sales of product to ChampionX
under this agreement are recorded in product and equipment sales in the
Corporate segment along with the related cost of sales. These sales are removed
from the consolidated results as part of the calculation of the impact of
acquisitions and divestitures.
36
CRITICAL ACCOUNTING ESTIMATES
In our report on Form 10-K for the year endedDecember 31, 2019 , filed with theSecurities and Exchange Commission onFebruary 28, 2020 , we disclosed our Critical Accounting Estimates. The discussion below provides an update to the Critical Accounting Estimates and should be read together with the full list of Critical Accounting Estimates set forth in the aforementioned Form 10-K.Goodwill
We had total goodwill of$5.8 billion and$5.6 billion as ofJune 30, 2020 andDecember 31, 2019 , respectively.Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination. Our reporting units are our operating segments. We assess goodwill for impairment on an annual basis during the second quarter. If circumstances change significantly, we would complete an interim goodwill assessment of a reporting unit's goodwill prior to its next annual assessment. During the second quarter of 2020, the Company completed its annual goodwill impairment assessment for each of its eleven reporting units using quantitative analyses consisting of discounted cash flow approaches that incorporated assumptions regarding future growth rates, terminal values, and discount rates. If the carrying value of a reporting unit is greater than its fair value, the Company will recognize an impairment loss for the amount by which the reporting unit's carrying value exceeds its fair value, but not to exceed the carrying amount of goodwill assigned to that reporting unit. The Company's goodwill impairment assessment for 2020 indicated the estimated fair values of each of its reporting units exceeded their carrying amounts by significant margins.
OVERVIEW OF THE SECOND QUARTER ENDED
Sales Performance
When comparing second quarter 2020 against second quarter 2019, sales performance was as follows:
? Reported net sales decreased 15% to
acquisition adjusted fixed currency sales decreased 13% and 14%, respectively.
Fixed currency sales for our
growth in Food & Beverage was more than offset by lower volumes in the other
Industrial businesses.
Fixed currency sales for our Global Institutional segment decreased 35% to
million. Acquisition adjusted fixed currency sales decreased 36%, as very ? strong growth in Specialty was more than offset by a sharp decline in the in
the Institutional businesses, which was impacted by depressed restaurant,
lodging and entertainment facility demand due to the COVID-19 pandemic's
shutdown of travel and dining.
Fixed currency sales for our
increased 20%, led by strong results due to increased sales due to COVID-19
pandemic in both the Healthcare and Life Sciences businesses.
Fixed currency sales and acquisition adjusted fixed currency sales for Other
? sales decreased 19% to
customer closures along with limited vendor access due to COVID-19 pandemic
restrictions. Financial Performance
When comparing second quarter 2020 against second quarter 2019, our financial performance was as follows:
Reported operating income decreased 59% to
adjusted operating income decreased 42% and our adjusted fixed currency
operating income decreased 39%.
Net income from continuing operations attributable to Ecolab decreased 62% to
?
tax items from both 2020 and 2019 reported results, our adjusted net income
attributable to Ecolab decreased 50%.
Reported diluted EPS from continuing operations of
both 2020 and 2019 reported results, adjusted diluted EPS decreased 49% to
Our reported tax rate was 9.5% during the second quarter of 2020, compared to
20.4% during the second quarter of 2019. Excluding the tax rate impact of ? special (gains) and charges and discrete tax items from both 2020 and 2019
results, our adjusted tax rate was 20.5% during the second quarter of 2020,
compared to 20.2% during the second quarter of 2019.
37
RESULTS OF OPERATIONS
Net Sales
Second Quarter Ended Six Months Ended
June 30 June 30
(millions) 2020 2019 Change 2020 2019 ChangeProduct and equipment sales$2,167.1 $2,560.0 $4,591.1 $4,919.8 Service and lease sales 518.6 609.1 1,115.2 1,174.0 Reported GAAP net sales$2,685.7 $3,169.1 (15) %$5,706.3 $6,093.8 (6) % Effect of foreign currency translation 79.3 3.1
98.5 (2.7)
Non-GAAP fixed currency sales
Product and sold equipment revenue is generated from providing cleaning,
sanitizing, water and energy products or selling equipment used in combination
with specialized products. Service and lease equipment revenue is generated from
providing services or leasing equipment to customers. All of our sales are
subject to the same economic conditions.
The percentage components of the period-over-period 2020 sales change are shown
below:
Second Quarter Ended Six Months Ended
June 30 June 30
(percent) 2020 2020
Volume (16) % (7) %
Price changes 2 2Acquisition adjusted fixed currency sales change (14) (6) Acquisitions and divestitures 1 1 Fixed currency sales change (13) (5) Foreign currency translation (2) (1) Reported GAAP net sales change (15) %
(6) %
Amounts do not necessarily sum due to rounding.
Cost of Sales ("COS") and Gross Profit Margin
Second Quarter Ended Six Months Ended
June 30 June 30
2020 2019 2020 2019
Gross Gross Gross Gross
(millions/percent) COS Margin COS Margin COS Margin COS Margin
Product and equipment cost of
sales $1,301.5 $1,422.1 $2,666.2 $2,762.7
Service and lease cost of
sales 334.2 358.2 689.7 693.1
Reported GAAP COS and gross
margin $1,635.7 39.1 % $1,780.3 43.8 %
7.8 36.1 11.4
Non-GAAP adjusted COS and
gross margin $1,608.7 40.1 % $1,772.5 44.1 % $3,319.8 41.8 % $3,444.4 43.5 %
Our COS and corresponding gross profit margin ("gross margin") are shown in the
table above. Gross margin is defined as net sales less cost of sales divided by
net sales.
Our reported gross margin was 39.1% and 43.8% for the second quarter of 2020 and
2019, respectively. Our reported gross margin for the first six months of 2020
and 2019 was 41.2 and 43.3%, respectively. Special (gains) and charges included
in items impacting COS are shown within the "Special (Gains) and Charges" table
on page 39.
Excluding the impact of special (gains) and charges within COS, second quarter
2020 adjusted gross margin was 40.1% and our adjusted gross margin for the first
six months of 2020 was 41.8%. These percentages compared against a second
quarter 2019 adjusted gross margin of 44.1% and an adjusted gross margin of
43.5% for the first six months of 2019.
Our adjusted gross margin decreased when comparing the second quarter of 2020
against the second quarter of 2019, and decreased compared to the first six
months of 2020 and 2019, which was driven primarily by lower volume and
unfavorable business mix which more than offset the benefits of pricing, cost
savings actions and lower delivered product costs.
38
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expenses as a percentage of sales
were 29.4% and 29.7% for the second quarter and first six months of 2020,
respectively, compared to 28.4% and 29.5% for the second quarter and first six
months of 2019, respectively. The increased SG&A ratio to sales in the second
quarter of 2020 was driven primarily by lower sales and increased bad debt
expense, which more than offset the benefits from lower incentive compensation,
discretionary expense and cost savings.
Special (Gains) and Charges
Special (gains) and charges reported on the Consolidated Statement of Income
include the following items:
Second Quarter Ended Six Months Ended
June 30 June 30
(millions) 2020 2019 2020 2019
Cost of sales
Restructuring activities $2.6 $6.5 $5.6 $9.9 Acquisition and integration activities 2.2 1.3
2.6 1.5
Other 22.2 - 27.9 -
Cost of sales subtotal 27.0 7.8 36.1 11.4
Special (gains) and charges
Restructuring activities 0.3 19.8 4.5 50.9Acquisition and integration activities (2.6) 0.4 2.8 2.9 Disposal and impairment activities 44.7 - 45.9 - Other 27.0 4.2 32.1 10.1 Special (gains) and charges subtotal 69.4 24.4
85.3 63.9 Operating income subtotal 96.4 32.2 121.4 75.3 Interest expense, net 0.7 - 0.7 0.2
Total special (gains) and charges$97.1 $32.2
$122.1 $75.5
For segment reporting purposes, special (gains) and charges are not allocated to reportable segments, which is consistent with our internal management reporting.
Restructuring activities
Restructuring activities are primarily related to Accelerate 2020 (described
below). These activities have been included as a component of cost of sales and
special (gains) and charges on the Consolidated Statement of Income.
Restructuring liabilities have been classified as a component of other current
and other noncurrent liabilities on the Consolidated Balance Sheet.
Restructuring charges directly related to the ChampionX business have been
recorded as discontinued operations, refer to Note 4.
Accelerate 2020
During the third quarter of 2018, we formally commenced a restructuring plan
Accelerate 2020 ("the Plan"), to leverage technology and system investments and
organizational changes. During the second quarter of 2019, we raised our goals
for the Plan to further simplify and automate processes and tasks, reduce
complexity and management layers, consolidated facilitates and focus on key
long-term growth areas by further leveraging technology and structural
improvements. We expect that the restructuring activities will be completed by
the end of 2020, with total anticipated costs of $215 million ($165 million
after tax), or $0.56 per diluted share, over this period of time. 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.
We recorded restructuring charges of $2.8 million ($2.4 million after tax), or
$0.01 per diluted share and $9.1 million ($7.7 million after tax), or $0.03 per
diluted share in the second quarter and first six months of 2020, respectively.
The liability related to the Plan was $72.5 million as of the end of the second
quarter of 2020. We have recorded $206.5 million ($158.6 million after tax), or
$0.55 per diluted share, of cumulative restructuring charges under the Plan. The
majority of the pretax charges represent net cash expenditures which are
expected to be paid over a period of a few months to several quarters and
continues to be funded from operating activities. Cash payments during 2020
related to Accelerate 2020 were $31.8 million .
The Plan has delivered
39
Other Restructuring Activities
During the second quarter and first six months of 2020, we incurred restructuring charges of$0.1 million (less than$0.1 million after tax), or less than$0.01 per diluted share and$1.0 million ($0.6 million after tax), or less than$0.01 per diluted share, respectively, related to an immaterial restructuring plan. The charges primarily related to severance. Prior to 2018, we engaged in a number of restructuring plans. During the second quarter and first six months of 2020 and 2019, net restructuring charges related to prior year plans were minimal. The restructuring liability balance for all plans commencing prior to 2018 was$6.1 million and$7.7 million as ofJune 30, 2020 andDecember 31, 2019 , respectively. The reduction in liability was driven primarily by severance payments. 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 2020 related to all other restructuring plans excluding
Accelerate 2020 were
Acquisition and integration related costs
Acquisition and integration costs reported in special (gains) and charges on the Consolidated Statement of Income include($2.6) million ($1.7 million after tax) or$0.01 per diluted share, and$2.8 million ($2.1 million after tax) or$0.01 per diluted share, in the second quarter and first six months of 2020, respectively. Charges are related toCopal Invest NV , including its primary operating entity CID Lines (collectively, "CID Lines"),Bioquell PLC ("Bioquell") and theLaboratoires Anios ("Anios") acquisitions and consist of integration costs, advisory and legal fees, and hedge activity. Acquisition and integration costs reported in product and equipment cost of sales of$2.6 million ($1.9 million after tax) or$0.01 per diluted share in the first six months of 2020, on the Consolidated Statement of Income relate to the recognition of fair value step-up in the CID Lines inventory, severance and the closure of a facility. We also incurred$0.7 million ($0.5 million after tax) or less than$0.01 per diluted share, of interest expense in the first six months of 2020. Acquisition and integration costs reported in special (gains) and charges on the Consolidated Statement of Income include$0.4 million ($0.3 million after tax) or less than$0.01 per diluted share, and$2.9 million ($2.1 million after tax) or less than$0.01 per diluted share, in the second quarter and first six months of 2019, respectively. Charges are related toBioquell and the Anios acquisitions and consist of integration costs, advisory and legal fees. Acquisition and integration costs reported in product and equipment cost of sales of$1.5 million ($1.1 million after tax) or less than$0.01 per diluted share, on the Consolidated Statement of Income in the first six months of 2019 relate to the recognition of fair value step-up in theBioquell inventory. We also incurred$0.2 million ($0.1 million after tax) or less than$0.01 per diluted share, of interest expense in the first six months of 2019.
Disposal and impairment charges
Disposal and impairment charges reported in special (gains) and charges on the Consolidated Statement of Income include$44.7 million ($44.1 million after tax) or$0.15 per diluted share, and$45.9 million ($45.0 million after tax) or$0.15 per diluted share in the second quarter and first six months of 2020, respectively. During the second quarter of 2020, we recorded a$28.6 million ($28.6 million after tax) or$0.10 per diluted share impairment for a minority equity method investment due to the COVID-19 impact on the economic environment and the liquidity of the minority equity method investment. In addition, we recorded charges of$16.1 million ($15.5 million after tax) or$0.06 per diluted share related to the disposal ofHolchem Group Limited ("Holchem") for the loss on sale and related transaction fees. Further information related to the our disposal is included in Note 3. Other
During the second quarter and first six months of 2020, we recorded charges of$26.5 million to protect the pay for certain employees directly impacted by the COVID-19 pandemic. In addition, we received subsidies and government assistance, which was recorded as a special (gain) of$9.4 million . The specific COVID-19 pandemic charges of$1.1 million are recorded in product and equipment sales on the Consolidated Statement of Income,$5.8 million in service and lease sales on the Consolidated Statement of Income and$10.2 million in special (gains) and charges on the Consolidated Statement of Income. After tax-charges related to COVID-19 pandemic were$13.2 million or$0.05 per diluted share during the second quarter and first six months of 2020.
During the second quarter and first six months of 2020, we recorded special
charges of
Other special charges of$16.8 million ($12.6 million after tax) or$0.04 per diluted share and$21.9 million ($16.5 million after tax) or$0.06 per diluted share recorded in the second quarter and first six months of 2020, respectively, relate primarily to a specific legal reserve and related legal charges which are recorded in special (gains) and charges on the Consolidated Statement of Income. During the second quarter and first six months of 2019, we recorded other special charges of$4.1 million ($3.1 million after tax) or$0.01 per diluted share and$10.0 million ($7.5 million after tax) or$0.03 per diluted share, respectively, which primarily related to legal charges. 40
Operating Income and Operating Income Margin
Second Quarter Ended Six Months Ended
June 30 June 30
(millions) 2020 2019 Change 2020 2019 ChangeReported GAAP operating income$192.0 $464.4 (59) %$568.2 $778.0 (27) % Special (gains) and charges 96.4 32.2 121.4 75.3 Non-GAAP adjusted operating income 288.4 496.6 (42) % 689.6 853.3 (19) % Effect of foreign currency translation 14.2 1.2 16.9 0.9 Non-GAAP adjusted fixed currency operating income$302.6 $497.8 (39) %$706.5 $854.2 (17) % Second Quarter Ended Six Months Ended June 30 June 30 (percent) 2020 2019 2020 2019 Reported GAAP operating income margin 7.1 % 14.7 % 10.0 % 12.8 % Non-GAAP adjusted operating income margin 10.7 % 15.7 % 12.1 % 14.0 % Non-GAAP adjusted fixed currency operating income margin 10.9 % 15.7 % 12.2 % 14.0 %
Our operating income and corresponding operating income margin are shown in the previous tables. Operating income margin is defined as operating income divided by net sales. Our reported operating income decreased 59% and 27% in the second quarter and first six months of 2020, respectively, versus the comparable periods of 2019. Our reported operating income for 2020 and 2019 was impacted by special (gains) and charges; excluding the impact of special (gains) and charges from 2020 and 2019 reported results, our adjusted operating income decreased 42% and 19% in the second quarter and first six months of 2020, respectively.
As shown in the previous table, foreign currency had a 3% and 2% impact on adjusted operating income growth for the second quarter and first six months of 2020, respectively. Foreign currency had a 4% impact on adjusted operating income growth for the second quarter and first six months of 2019.
Other (Income) Expense Other income was$15.1 million and$20.9 million in the second quarter of 2020 and 2019, respectively. Other income was$30.5 million and$42.1 million in the first six months of 2020 and 2019, respectively. Other income decreased due to the return on pension assets and non-service costs of our pension obligations. Interest Expense, Net Second Quarter Ended Six Months Ended June 30 June 30 (millions) 2020 2019 Change 2020 2019 Change Reported GAAP interest expense, net$58.7 $49.2 19 %$107.0 $98.5 9 % Special (gains) and charges 0.7 - 0.7 0.2 Non-GAAP adjusted interest expense, net$58.0 $49.2 18 %$106.3 $98.3 8 % Reported net interest expense was$58.7 million and$49.2 million in the second quarter of 2020 and 2019, respectively. Reported net interest expense was$107.0 million and$98.5 million in the first six months of 2020 and 2019, respectively. The increase in net interest expense when comparing 2020 against 2019 was driven primarily by higher outstanding debt. 41 Provision for Income Taxes
The following table provides a summary of our tax rate:
Second Quarter Ended Six Months Ended
June 30 June 30
(percent) 2020 2019 2020 2019
Reported GAAP tax rate 9.5 % 20.4 % 12.4 % 16.4 %
Tax rate impact of:Special (gains) and charges 1.9 0.1 0.9
0.8
Discrete tax items 9.1 (0.3) 7.2
3.3
Non-GAAP adjusted tax rate 20.5 % 20.2 % 20.5 % 20.5 %
Our reported tax rate was 9.5% and 20.4% for the second quarter of 2020 and 2019, respectively, and 12.4% and 16.4% for the first six months of 2020 and 2019, respectively. The change in our tax rate for the second quarter and first six months of 2020 versus the comparable period of 2019 was driven primarily by discrete tax items and special (gains) and charges. The tax impact of special (gains) and charges and discrete tax items will likely continue to impact comparability of our reported tax rate in the future as amounts included in special (gains) and charges are derived from tax jurisdictions with rates that vary from our effective tax rate, and discrete tax items are not necessarily consistent across periods. Further information related to special (gains) and charges is included in Note 2. Our tax rate is based on our interpretations of existing tax rules; potential future guidance including regulations not yet issued could impact the future tax rate. We recognized total net tax benefits related to discrete tax items of$22.5 million and$44.4 million in the second quarter and first six months of 2020, respectively. Share-based compensation excess tax benefit contributed$23.3 million and$45.6 million in the second quarter and first six months of 2020, respectively. Additionally, we recognized expense of$0.6 million and$4.5 million primarily related to the filing of prior year foreign tax returns and other income tax adjustments in the second quarter and first six months of 2020, respectively. The remaining discrete expense of$0.2 million and benefit of$3.3 million was due to the accrual of interest on uncertain tax positions offset by reserve released during the quarter and the first six months of 2020, respectively. We recognized total net tax expense related to discrete tax items of$1.2 million and net benefits of$26.2 million in the second quarter and first six months of 2019, respectively. Share-based compensation excess tax benefit contributed$13.0 million and$31.5 million in the second quarter and first six months of 2019, respectively. We also recognized expense of$6.2 million and$1.1 million in the second quarter and first six months of 2019, respectively, due to issuance of technical guidance during the quarter related to the one-time transition tax imposed by the Tax Cuts and Jobs Act (the "Act"). Additionally, we recognized expense of$10.2 million in the second quarter and first six months of 2019 due to issuance of technical guidance during the quarter related to the calculation of foreign tax credits. The remaining discrete benefit was primarily related to changes in tax rates in non-U.S. jurisdictions.
Net Income from Continuing Operations Attributable to Ecolab
Second Quarter Ended Six Months Ended
June 30 June 30
(millions) 2020 2019 Change 2020 2019 Change
Reported GAAP net income from
continuing operations
attributable to Ecolab $128.9 $343.4 (62) % $420.9 $595.0 (29) %
Adjustments:
Special (gains) and charges,
after tax 83.3 25.2 101.8 57.1
Discrete tax net expense
(benefit) (22.5) 1.2 (44.4) (26.2)
Non-GAAP adjusted net income from
continuing operations $189.7 $369.8 (49) % $478.3 $625.9 (24) %
attributable to Ecolab
Diluted EPS from Continuing Operations
Second Quarter Ended Six Months Ended
June 30 June 30
(dollars) 2020 2019 Change 2020 2019 Change
Reported GAAP diluted EPS from
continuing operations $0.44 $ 1.18 (63) % $1.44 $ 2.04 (29) %
Adjustments:
Special (gains) and charges 0.29 0.09 0.35 0.20
Discrete tax net expense
(benefit) (0.08) - (0.15) (0.09)Non-GAAP adjusted diluted EPS$0.65 $ 1.27 (49) %$1.64 $ 2.14 (23) % from continuing operations
Per share amounts in the above tables do not necessary sum due to rounding. Currency translation had an unfavorable impact of approximately$0.04 and$0.05 per share on diluted EPS for the second quarter and first six months of 2020, respectively, when compared to the comparable periods of 2019. 42 DISCONTINUED OPERATIONS The ChampionX business met the criteria to be reported as discontinued operations and the historical results of ChampionX, including the results of operations, are reported as discontinued operations for all periods presented. The net loss from discontinued operations, net of tax was$2,163.9 million and$2,172.5 million in the second quarter and first six months of 2020, respectively. Net income from discontinued operations, net of tax was$25.2 million and$70.1 million in the second quarter and first six months of 2019, respectively.
In connection with the ChampionX Separation, Ecolab received cash of
Special (gains) and charges of$2,186.1 million and$2,222.7 million in the second quarter and first six months of 2020, respectively primarily relate to the loss on separation, transaction fees, and other professional fees incurred to support the Transaction. Special (gains) and charges of$20.8 million and$20.3 million in the second quarter and first six months of 2019, respectively, primarily relate to restructuring charges and transaction fees and other professional fees incurred to support the Transaction. SEGMENT PERFORMANCE The non-U.S. dollar functional international amounts included within our reportable segments are based on translation intoU.S. dollars at the fixed currency exchange rates used by management for 2020. The difference between the fixed currency exchange rates and the actual currency exchange rates is reported as "effect of foreign currency translation" in the following tables. All other accounting policies of the reportable segments are consistent withU.S. GAAP and the accounting policies described in Note 2 of our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Additional information about our reportable segments is included in Note 16. Fixed currency net sales and operating income for the second quarter and first six months of 2020 and 2019 for our reportable segments are shown in the following tables. Net Sales Second Quarter Ended Six Months Ended June 30 June 30 (millions) 2020 2019 Change 2020 2019 Change Global Industrial$1,475.6 $1,500.7 (2) %$2,919.2 $2,897.7 1 % Global Institutional 722.4 1,112.5 (35) 1,794.5 2,132.7 (16)Global Healthcare and Life Sciences 307.6 252.8 22 554.1 479.8 15 Other 247.1 306.2 (19) 524.7 580.9 (10) Corporate 12.3 - 100 12.3 - 100 Subtotal at fixed currency 2,765.0 3,172.2 (13) 5,804.8 6,091.1 (5) Effect of foreign currency translation (79.3) (3.1) (98.5) 2.7 Consolidated reported GAAP net sales$2,685.7 $3,169.1 (15) %$5,706.3 $6,093.8 (6) % Operating Income Second Quarter Ended Six Months Ended June 30 June 30 (millions) 2020 2019 Change 2020 2019 Change Global Industrial$283.0 $220.9 28 %$489.6 $382.3 28 % Global Institutional (37.0) 234.4 (116) 145.4 409.2 (64)Global Healthcare and Life Sciences 65.6 31.2 110 88.5 56.0 58 Other 21.3 41.8 (49) 42.9 67.5 (36) Corporate (126.7) (62.7) (181.3) (136.1) Subtotal at fixed currency 206.2 465.6 (56) 585.1 778.9 (25) Effect of foreign currency translation (14.2) (1.2) (16.9) (0.9) Consolidated reported GAAP operating income$192.0 $464.4 (59) %$568.2 $778.0 (27) % 43
The following tables reconcile the impact of acquisitions and divestitures within our reportable segments.
Second Quarter Ended
June 30
Net Sales 2020 2019
Impact of Impact of
Acquisitions Acquisitions
Fixed and Acquisition Fixed and Acquisition
(millions) Currency Divestitures Adjusted Currency Divestitures Adjusted
Global Industrial $1,475.6 $(8.7) $1,466.9 $1,500.7 $(0.2) $1,500.5
Global Institutional 722.4 (12.9) 709.5 1,112.5 - 1,112.5
Global Healthcare and Life
Sciences 307.6 (5.8) 301.8 252.8 (0.4) 252.4
Other 247.1 (0.7) 246.4 306.2 - 306.2
Corporate 12.3 (12.3) - - - -
Subtotal at fixed currency 2,765.0 (40.4) 2,724.6 3,172.2 (0.6) 3,171.6
Effect of foreign currency
translation (79.3) (3.1)
Total reported net sales $2,685.7 $3,169.1
Operating Income 2020 2019
Impact of Impact of
Acquisitions Acquisitions
Fixed and Acquisition Fixed and Acquisition
(millions) Currency Divestitures Adjusted Currency Divestitures Adjusted
Global Industrial $283.0 $(1.0) $282.0 $220.9 $0.2 $221.1
Global Institutional (37.0) (0.8) (37.8) 234.4 - 234.4
Global Healthcare and Life
Sciences 65.6 (0.1) 65.5 31.2 - 31.2
Other 21.3 (0.4) 20.9 41.8 0.1 41.9
Corporate (30.3) - (30.3) (30.5) - (30.5)
Non-GAAP adjusted fixed
currency operating income 302.6 (2.3) 300.3 497.8 0.3 498.1
Special (gains) and charges 96.4 32.2
Subtotal at fixed currency 206.2 465.6
Effect of foreign currency
translation (14.2) (1.2)
Total reported operating
income $192.0 $464.4
Six Months Ended
June 30
Net Sales 2020 2019
Impact of Impact of
Acquisitions Acquisitions
Fixed and Acquisition Fixed and Acquisition
(millions) Currency Divestitures Adjusted Currency Divestitures Adjusted
Global Industrial $2,919.2 (8.8) $2,910.4 $2,897.7 (0.7) $2,897.0
Global Institutional 1,794.5 (27.1) 1,767.4 2,132.7 - 2,132.7
Global Healthcare and Life
Sciences 554.1 (15.4) 538.7 479.8 (0.4) 479.4
Other 524.7 (1.1) 523.6 580.9 (0.1) 580.8
Corporate 12.3 (12.3) - - - -
Subtotal at fixed currency 5,804.8 (64.7) 5,740.1 6,091.1 (1.2) 6,089.9
Effect of foreign currency
translation (98.5) 2.7
Total reported net sales $5,706.3 $6,093.8
Operating Income 2020 2019
Impact of Impact of
Acquisitions Acquisitions
Fixed and Acquisition Fixed and Acquisition
(millions) Currency Divestitures Adjusted Currency Divestitures Adjusted
Global Industrial $489.6 (1.0) $488.6 $382.3 0.1 $382.4
Global Institutional 145.4 (1.5) 143.9 409.2 - 409.2
Global Healthcare and Life
Sciences 88.5 0.6 89.1 56.0 - 56.0
Other 42.9 (0.1) 42.8 67.5 0.1 67.6
Corporate (59.9) - (59.9) (60.8) - (60.8)Non-GAAP adjusted fixed currency operating income 706.5 (2.0) 704.5 854.2
0.2 854.4
Special (gains) and charges 121.4 75.3
Subtotal at fixed currency 585.1 778.9
Effect of foreign currency
translation (16.9) (0.9)
Total reported operating
income $568.2 $778.0
44
Unless otherwise noted, the following segment performance commentary compares
the second quarter and first six months of 2020 against the second quarterand first six months of 2019.Global Industrial Second Quarter Ended Six Months Ended June 30 June 30 2020 2019 2020 2019
Sales at fixed currency (millions)$1,475.6 $1,500.7 $2,919.2 $2,897.7 Sales at public currency (millions) 1,425.2 1,501.0
2,859.2 2,902.2 Volume (4) % (1) % Price changes 2 % 2 % Acquisition adjusted fixed currency sales change (2) % 0 % Acquisitions and divestitures 1 % 0 % Fixed currency sales change (2) % 1 % Foreign currency translation (3) % (2) % Public currency sales change (5) % (1) % Operating income at fixed currency (millions)$283.0 $220.9 $489.6 $382.3 Operating income at public currency (millions) 272.3 220.9 477.1 382.9 Fixed currency operating income change 28 % 28 % Fixed currency operating income margin 19.2 % 14.7 % 16.8 % 13.2 % Acquisition adjusted fixed currency operating income change 28 % 28 % Acquisition adjusted fixed currency operating income margin 19.2 % 14.7 % 16.8 % 13.2 % Public currency operating income change 23 %
25 %
Percentages in the above table do not necessarily sum due to rounding.
Net Sales
Fixed currency sales forGlobal Industrial decreased in the second quarter and first six months of 2020, as lower volume more than offset pricing. In the second quarter and first six months, declines inNorth America more than offset gains in other regions. At an operating segment level, Water fixed currency sales decreased 5% in the second quarter of 2020 and 2% in the first six months of 2020. Globally, our light industry water treatment sales declined modestly as gains in commercial building accounts were more than offset by the impact of plant closures at transportation customers in the quarter. Heavy industry sales declined moderately as the COVID-19 pandemic impact on primary metals and chemical production hurt sales. Mining declined modestly as gains in precious metals and fertilizers were more than offset by weak coal and alumina markets. Food & Beverage fixed currency sales increased 5% in both the second quarter of 2020 and in the first six months of 2020, led by new business wins and pricing. Globally, we saw strong growth in food with modest gains in dairy and protein. Beverage and brewing businesses declined. Downstream fixed currency sales decreased 9% in the second quarter of 2020 and 2% in the first six months of 2020 as steady petrochemical demand was more than offset by the negative impact of lower global transportation fuel demand on refineries. Paper fixed currency sales were flat in the second quarter of 2020 and increased 1% in the first six months of 2020, as new business generation and good trends in packaging and tissue were offset by graphic paper declines. Operating Income
Fixed currency operating income and fixed currency operating income margins
increased for
Acquisition adjusted fixed currency operating income margins increased 4.5 and
3.6 percentage points during the second quarter and first six months of 2020,
respectively, and were positively impacted approximately 4.9 and 3.5 percentage
points by lower discretionary spending, pricing and cost savings initiatives,
which more than offset the 0.5 and 0.2 percentage point negative impact of lower
volume during the second quarter and first six months of 2020, respectively.
45
Global Institutional
Second Quarter Ended Six Months Ended
June 30 June 30
2020 2019 2020 2019Sales at fixed currency (millions)$722.4 $1,112.5 $1,794.5 $2,132.7 Sales at public currency (millions) 708.1 1,110.4
1,775.1 2,131.2 Volume (38) % (18) % Price changes 2 % 2 % Acquisition adjusted fixed currency sales change (36) % (17) % Acquisitions and divestitures 1 % 1 % Fixed currency sales change (35) % (16) % Foreign currency translation (1) % (1) % Public currency sales change (36) % (17) % Operating income at fixed currency (millions)$(37.0) $234.4 $145.4 $409.2 Operating income at public currency (millions) (37.8) 233.6 143.9 408.2 Fixed currency operating income change (116) % (64) % Fixed currency operating income margin (5.1) % 21.1 % 8.1 % 19.2 % Acquisition adjusted fixed currency operating income change (116) % (65) % Acquisition adjusted fixed currency operating income margin (5.3) % 21.1 % 8.1 % 19.2 % Public currency operating income change (116) %
(65) %
Percentages in the above table do not necessarily sum due to rounding.
Net Sales Fixed currency sales for Global Institutional decreased in the second quarter and first six months of 2020, driven by a decline in the Institutional business. At a regional level, the second quarter and first six months of 2020 fixed currency sales decreased in all major regions. At an operating segment level, Institutional fixed currency sales decreased 50% and 26% in the second quarter and first six months of 2020, respectively, reflecting strong hand and surface hygiene sales that were more than offset by mandated reductions for in-unit dining and domestic and international travel that significantly impacted foot traffic at full-service restaurants, occupancy rates at hotels and a reduction of customer visits to other entertainment facilities through the quarter. In addition, distributors reduced inventories in the second quarter of 2020. All regions showed significant declines. Specialty fixed currency sales increased 15% (9% acquisition adjusted) and 17% (12% acquisition adjusted) in the second quarter and first six months of 2020, respectively, led by very strong demand in the food retail sector, which more than offset modest declines in quickservice sales due to customer store closures in International markets, the slow return to dine-in inNorth America and some inventory destocking following the initial surge of cleaning and sanitizing
orders in the first quarter. Operating Income
Fixed currency operating income and fixed currency operating income margins decreased for our Global Institutional segment in the second quarter and first six months of 2020.
Acquisition adjusted fixed currency operating income margins decreased 26.4 and
11.1 percentage points during the second quarter and first six months of 2020,
respectively. Margins were negatively impacted approximately 30.4 and 13.4
percentage points in the second quarter and first six months of 2020,
respectively, from significant volume declines, reduced operating leverage,
unfavorable mix and higher bad debt, which more than offset the 4.4 percentage
point positive impact from lower discretionary spending and cost savings
initiatives during the second quarter of 2020, and the 2.8 percentage point
positive impact from improved pricing and cost savings initiatives during the
first six months of 2020.
46
Second Quarter Ended Six Months Ended
June 30 June 30
2020 2019 2020 2019
Sales at fixed currency (millions) $307.6 $252.8 $554.1 $479.8
Sales at public currency (millions) 298.5 251.9 542.3 479.4 Volume 18 % 11 % Price changes 1 % 1 % Acquisition adjusted fixed currency sales change 20 % 12 % Acquisitions and divestitures 2 % 3 % Fixed currency sales change 22 % 15 % Foreign currency translation (3) % (2) % Public currency sales change 18 % 13 % Operating income at fixed currency (millions)$65.6 $31.2 $88.5 $56.0 Operating income at public currency (millions) 63.0 31.0
85.5 55.8
Fixed currency operating income change 110 % 58 % Fixed currency operating income margin 21.3 % 12.3 % 16.0 % 11.7 % Acquisition adjusted fixed currency operating income change 110 % 59 % Acquisition adjusted fixed currency operating income margin 21.7 % 12.4 % 16.5 % 11.7 % Public currency operating income change 103 %
53 %
Percentages in the above table do not necessarily sum due to rounding.
Net Sales Fixed currency sales forGlobal Healthcare and Life Sciences increased in the second quarter and first six months of 2020, driven by volume gains. At a regional level, the second quarter and first six months of 2020 fixed currency sales increased in all regions. At an operating segment level, Healthcare fixed currency sales increased 15% (12% acquisition adjusted) and 11% (7% acquisition adjusted) in the second quarter and first six months of 2020, respectively, as strong COVID-19 pandemic-related hand and surface disinfection sales growth more than offset the unfavorable effects of delayed elective surgical procedures. Life Sciences fixed currency sales increased 52% (53% acquisition adjusted) and 39% (36% acquisition adjusted) in the second quarter and first six months of 2020, respectively, driven by significant demand for ourBioquell biodecontamination systems due to COVID-19 pandemic concerns, business wins and an apparent moderate inventory build by customers. Operating Income
Fixed currency operating income and fixed currency operating income margins for ourGlobal Healthcare and Life Sciences segment increased in the second quarter and first six months of 2020. Acquisition adjusted fixed currency operating income margins increased 9.3 and 4.8 percentage points during the second quarter and first six months of 2020, respectively. Strong volume gains, favorable mix, lower discretionary spending and improved pricing impacted margins by approximately 9.3 and 5.8 percentage points during the second quarter and first six months of 2020, respectively, which more than offset reduced operating leverage and lower efficiency due to the Healthcare product recall remediation which negatively impacted margins by 0.5 percentage points during the first six months of 2020. 47 Other Second Quarter Ended Six Months Ended June 30 June 30 2020 2019 2020 2019 Sales at fixed currency (millions)$247.1 $306.2 $524.7 $580.9 Sales at public currency (millions) 241.6 305.8
517.4 581.0 Volume (21) % (11) % Price changes 2 % 2 % Acquisition adjusted fixed currency sales change (20) % (10) % Acquisitions and divestitures 0 % 0 % Fixed currency sales change (19) % (10) % Foreign currency translation (2) % (1) % Public currency sales change (21) % (11) % Operating income at fixed currency (millions)$21.3 $41.8 $42.9 $67.5 Operating income at public currency (millions) 20.8 41.8
42.4 67.5
Fixed currency operating income change (49) % (36) % Fixed currency operating income margin 8.6 % 13.7 % 8.2 % 11.6 % Acquisition adjusted fixed currency operating income change (50) % (37) % Acquisition adjusted fixed currency operating income margin 8.5 % 13.7 % 8.2 % 11.6 % Public currency operating income change (50) % (37) %
Percentages in the above table do not necessarily sum due to rounding.
Net Sales Fixed currency sales for Other decreased in the second quarter and first six months of 2020 due to the impact of COVID-19 on partial and full customer closures along with limited vendor access. At a regional level, the second quarter and first six months of 2020 sales results impactedNorth America andEurope . At an operating segment level, Pest Elimination fixed currency sales decreased 10% and 5% in the second quarter and first six months of 2020, respectively. Sales results reflect the partial and full customer closures along with limited vendor access policies due to pandemic restrictions hurt Pest Elimination service delivery and sales inNorth America andEurope through the quarter.Colloidal Technologies Group fixed currency sales decreased 22% and 12% in the second quarter and first six months of 2020, respectively. Textile Care fixed currency sales decreased 44% and 24% in the second quarter and first six months of 2020, respectively. Operating Income Acquisition adjusted fixed currency operating income margins for Other decreased 5.2 and 3.4 percentage points during the second quarter and first six months of 2020, respectively. Lower volume, reduced operating leverage and unfavorable mix negatively impacted margins by approximately 8.5 and 6.1 percentage points for the second quarter and first six months of 2020, respectively. These margin declines were partially offset by lower discretionary spending, improved pricing and cost savings initiatives which positively impacted margins by approximately 4.1 and 3.2 percentage points for the second quarter and first six months of 2020, respectively. Corporate
Consistent with our internal management reporting, Corporate amounts in the table on page 43 include sales to ChampionX in accordance with the long-term supply agreement entered into with the Transaction post-separation, as discussed in Note 4, intangible asset amortization specifically from the Nalco merger and special (gains) and charges that are not allocated to our reportable segments. Items included within special (gains) and charges are shown in the table on
page
39.
48
FINANCIAL POSITION, CASH FLOWS AND LIQUIDITY
Financial Position Total assets were$18.1 billion as ofJune 30, 2020 compared to total assets of$20.9 billion as ofDecember 31, 2019 . The decrease in total assets reflects the separation of ChampionX.
Total liabilities were
Our net debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") is shown in the following table. EBITDA is a non-GAAP measures discussed further in the "Non-GAAP Financial Measures" section of this MD&A.
The inputs to EBITDA reflect the trailing twelve months of activity for the
period presented.
2020 2019
(ratio)
Net debt to EBITDA 2.4 2.7
(millions)
Total debt $7,286.9 $7,056.1
Cash 1,369.0 15.7
Net debt $5,917.9 $7,040.4
Net income including noncontrolling interest $1,270.5 $1,333.1
Provision for income taxes 231.1 301.1
Interest expense, net 199.1 207.5
Depreciation 580.8 554.0
Amortization 205.9 199.5
EBITDA $2,487.4 $2,595.2
Cash Flows
Operating Activities
Six Months Ended
June 30
(millions) 2020 2019 Change
Cash provided by operating activities
We continue to generate cash flow from operations, amidst the COVID-19 pandemic, allowing us to fund our ongoing operations, acquisitions, investments in the business and pension obligations along with returning cash to our shareholders through dividend payments and share repurchases. Cash provided by operating activities decreased$124 million in the first six months of 2020 compared to the first six months of 2019, driven primarily by a$172 million reduction in net income from continuing operations including noncontrolling interest and$40 million in net cash payment for restructuring, partially offset by$67 million due to favorable fluctuations in accounts receivable, inventories and accounts payable ("working capital"). The cash flow impact from working capital accounts was driven by lower sales volume, partially offset by lower accounts receivable and inventory turnover. Investing Activities Six Months Ended June 30 (millions) 2020 2019 Change
Cash used for investing activities
49
Cash used for investing activities is primarily impacted by the timing of business acquisitions and dispositions as well as capital investments in the business.
Total cash paid for acquisitions, net of cash acquired along with net cash received from dispositions, during the first six months of 2020 and 2019, was$431 million and$288 million , respectively. Our acquisitions and divestitures are discussed further in Note 3. We continue to target strategic business acquisitions which complement our growth strategy and expect to continue to make capital investments and acquisitions in the future to support our long-term growth. We continue to make capital investments in the business, including merchandising and customer equipment and manufacturing facilities. Total capital expenditures were$251 million and$341 million in the second quarter of 2020 and 2019,
respectively.
Financing Activities
Six Months Ended
June 30
(millions) 2020 2019 Change
Cash provided by (used for) financing
activities $720.6 $(473.7) $1,194.3 Our cash flows from financing activities primarily reflect the issuances and repayment of debt, common stock repurchases, proceeds from common stock issuances related to our equity incentive programs and dividend payments.
We issued$750 million par value and received$769 million in proceeds of long-term debt in the first six months of 2020. We repaid$300 million and$400 million of long-term debt in the first six months of 2020 and 2019, respectively. The proceeds received from the debt issuances will be used for repayment of commercial paper and general corporate purposes. In addition, we had net issuances of commercial paper of$454 million and$434 million in the second quarter of 2020 and 2019, respectively. Shares are repurchased for the purpose of partially offsetting the dilutive effect of our equity compensation plans and stock issued in acquisitions, to manage our capital structure and to efficiently return capital to shareholders. We repurchased a total of$105 million and$348 million of shares in the first six months of 2020 and 2019, respectively. Cash proceeds and tax benefits from stock option exercises provide a portion of the funding for repurchase activity. The impact on financing cash flows of commercial paper and notes payable issuances and long-term debt borrowings and repayments are shown in the following table: Six Months Ended June 30 (millions) 2020 2019 Change Net issuances of commercial paper and notes payable$454.4 $434.4 $20.0 Long-term debt borrowings 768.9 - 768.9 Long-term debt repayments (300.0) (400.0) 100.0 50
Liquidity and Capital Resources
We currently expect to fund the cash requirements which are reasonably foreseeable for the next twelve months, including scheduled debt repayments, new investments in the business, share repurchases, dividend payments, possible business acquisitions and pension and postretirement contributions with cash from operating activities, and as needed, additional short-term and/or long-term borrowings. We continue to expect our operating cash flow to remain strong. As ofJune 30, 2020 , we had$1,369 million of cash and cash equivalents on hand, of which$194 million was held outside of theU.S. We have increased our available cash on hand during the second quarter to meet current and any future potential operational cash needs as a result of COVID-19 pandemic. We will continue to evaluate our cash position in light of future developments. As ofJune 30, 2020 , we have a$2.0 billion multi-year credit facility which expires inNovember 2022 . The credit facility has been established with a diverse syndicate of banks and supports ourU.S. and Euro commercial paper programs. The maximum aggregate amount of commercial paper that may be issued under ourU.S. commercial paper program and our Euro commercial paper program may not exceed$2.0 billion . At the end of the second quarter of 2020, we had$314 million (€283 million) of commercial paper outstanding under our Euro program and$203 million outstanding under ourU.S. program. There were no borrowings under our credit facility as ofJune 30, 2020 or 2019. As ofJune 30, 2020 , both programs were rated A-2 byStandard & Poor's , P-2 by Moody's and
F-1 by Fitch. As ofJune 30, 2020 , we have a$500 million 364-day revolving credit agreement to be used for general corporate purposes with a diverse syndicate of banks to provide for further liquidity over the next twelve months in response to the coronavirus pandemic. There were no borrowings under this revolving credit agreement as ofJune 30, 2020 . In addition, we executed a$305 million term credit agreement inApril 2020 , which we drew on and repaid$303 million during the second quarter of 2020. Our long-term debt issuance and repayment activity through the first six months of 2020 and 2019 is discussed in the Cash Flows - Financing Activities section of this MD&A.
We are in compliance with our debt covenants and believe we have sufficient borrowing capacity to meet our foreseeable operating activities, as needed.
The schedule of contractual obligations included in the Financial Position and Liquidity section of our Form 10-K for the year endedDecember 31, 2019 disclosed total notes payable and long-term debt due within one year of$326 million . As ofJune 30, 2020 , the total notes payable and long-term debt due within one year decreased to$18 million . The commercial paper outstanding as ofJune 30, 2020 increased to$517 million . The commercial paper outstanding as ofDecember 31, 2019 was$55 million . Our gross liability for uncertain tax positions was$26 million as ofJune 30, 2020 and$28 million as ofDecember 31, 2019 . We are not able to reasonably estimate the amount by which the liability will increase or decrease over time; however, at this time, we do not expect significant payments related to these obligations within the next year. GLOBAL ECONOMIC ENVIRONMENT
Coronavirus disease 2019 (COVID-19)
InMarch 2020 , the coronavirus disease 2019 (COVID-19) was declared a pandemic by theWorld Health Organization . The COVID-19 pandemic is continuing to affect major economic and financial markets, while industries are facing the challenges with the economic conditions resulting from efforts to address the pandemic. As the spread of the pandemic continues, many countries have required companies to limit or suspend business operations and have implemented travel restrictions. These conditions have had and will continue to have a negative impact on market conditions and customer demand throughout the world. We anticipate continued adverse impacts and disruptions in our restaurant, hospitality and entertainment-related business operations, with modest impact on our Industrial segment businesses and limited or no adverse impacts on certain other parts of our business, supply chain and business continuity plans from COVID-19 restrictions; certain of our business will benefit from increased cleaning and sanitizing product demand. The ongoing effects of the global COVID-19 outbreak could result in a global recession. We anticipate a reduction to our 2020 results of operations and operating cash flows versus prior year levels due to lower market demand, but we are not yet able to estimate the full impact of the coronavirus outbreak as it continues to spread globally. While we continue to provide cleaning, disinfection programs and increased sanitizing protocols in response to the COVID-19 pandemic in healthcare, quick-service and food and beverage plant customers, we anticipate products and services provided to the full-service restaurant, hospitality, lodging and entertainment industries will continue to be negatively impacted in the upcoming quarter due to the regulatory and organizational mandates that have been put in place. We have taken, and are continuing to take, steps to reduce costs, including reductions in capital expenditures, as well as other ongoing cost initiatives. 51 Global Economies Approximately half of our sales are outside of theU.S. Our international operations subject us to changes in economic conditions and foreign currency exchange rates as well as political uncertainty in some countries which could impact future operating results.Argentina has continued to experience negative economic trends, evidenced by multiple periods of increasing inflation rates, devaluation of the peso, and increasing borrowing rates.Argentina is classified as a highly inflationary economy in accordance withU.S. GAAP, and theU.S. dollar is the functional currency for our subsidiaries inArgentina . During the first six months of 2020, sales inArgentina represented less than 1% of our consolidated sales. Assets held inArgentina at the end of the second quarter represented less than 1%
of our consolidated assets. Brexit Referendum EffectiveJanuary 31, 2020 , theU.K. left theEuropean Union . TheU.K.'s relationship with the EU will no longer be governed by the EU Treaties, but instead by the terms of the Withdrawal Agreement agreed between theU.K. and the EU in late 2019. The Withdrawal Agreement provides for a "transition" period, which commenced the moment theU.K. left the EU and is currently set to end onDecember 31, 2020 . At the end of the transition period, there may be significant changes to theU.K.'s business environment. While the effects of Brexit will depend on any agreements theU.K. makes to retain access to EU markets or the failure to reach such agreements, the uncertainties created by Brexit, any resolution between theU.K. and EU countries or the failure to reach any such resolutions, could adversely affect our relationships with customers, suppliers and employees and could adversely affect our business. NEW ACCOUNTING PRONOUNCEMENTS
For information on new accounting pronouncements, refer to Note 18 to the Consolidated Financial Statements.
NON-GAAP FINANCIAL MEASURES
This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operation" in Item 2, contains financial measures that have not been calculated in accordance with accounting principles generally accepted in theU.S. (GAAP). These non-GAAP measures include: ? Fixed currency sales
? Acquisition adjusted fixed currency sales
? Adjusted cost of sales ? Adjusted gross margin
? Fixed currency operating income
? Fixed currency operating income margin
? Adjusted operating income
? Adjusted operating income margin
? Adjusted fixed currency operating income
? Adjusted fixed currency operating income margin
? Acquisition adjusted fixed currency operating income
? Acquisition adjusted fixed currency operating income margin
? Adjusted interest expense, net
? EBITDA ? Adjusted tax rate
? Adjusted net income attributable to Ecolab
? Adjusted diluted EPS
We provide these measures as additional information regarding our operating
results. We use these non-GAAP measures internally to evaluate our performance
and in making financial and operational decisions, including with respect to
incentive compensation. We believe that our presentation of these measures
provides investors with greater transparency with respect to our results of
operations and that these measures are useful for period-to-period comparison of
results.
52
Our non-GAAP financial measures for cost of sales, gross margin and operating
income exclude the impact of special (gains) and charges, and our non-GAAP
measures for tax rate, net income attributable to Ecolab and diluted EPS further
exclude the impact of discrete tax items. We include items within special
(gains) and charges and discrete tax items that we believe can significantly
affect the period-over-period assessment of operating results and not
necessarily reflect costs and/or income associated with historical trends and
future results. After tax special (gains) and charges are derived by applying
the applicable local jurisdictional tax rate to the corresponding pre-tax
special (gains) and charges.
EBITDA is defined as the sum of net income including noncontrolling interest,
provision for income taxes, net interest expense, depreciation and amortization.
EBITDA is used in our net debt to EBITDA ratio, which we view as important
indicators of the operational and financial health of our organization.
We evaluate the performance of our international operations based on fixed
currency rates of foreign exchange. Fixed currency amounts included in this Form
10-Q are based on translation into U.S. dollars at the fixed foreign currency
exchange rates established by management at the beginning of 2020.
Acquisition adjusted growth rates exclude the results of our acquired businesses from the first twelve months post acquisition, exclude the results of our divested businesses from the twelve months prior to divestiture.
These non-GAAP measures are not in accordance with, or an alternative toU.S. GAAP, and may be different from non-GAAP measures used by other companies. Investors should not rely on any single financial measure when evaluating our business. We recommend that investors view these measures in conjunction with theU.S. GAAP measures included in this MD&A and we have provided reconciliations of reportedU.S. GAAP amounts to the non-GAAP amounts.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include the effects of the COVID-19 pandemic; expectations concerning timing, amount and type of restructuring costs and savings from restructuring activities; tax deductibility of goodwill; capital investments and acquisitions; amortization expense; non-performance of financial counterparties; payments and contributions to pension and postretirement health care benefit plans; impact of tax reform; the impact of lawsuits, claims and environmental matters; impact of new accounting pronouncements; cash flows, borrowing capacity and funding of cash requirements; payments related to uncertain tax positions; and implementation of ERP system upgrade. Without limiting the foregoing, words or phrases such as "will likely result," "are expected to," "will continue," "is anticipated," "we believe," "we expect," "estimate," "project" (including the negative or variations thereof) or similar terminology, generally identify forward-looking statements. Forward-looking statements may also represent challenging goals for us. These statements, which represent our expectations or beliefs concerning various future events, are based on current expectations that involve a number of risks and uncertainties that could cause actual results to differ materially from those of such forward-looking statements. In particular, the effects of the COVID-19 pandemic depend on the duration of the outbreak, government response to the outbreak, the success of mitigation strategies, the ability of our customers to ramp up operations and the frequency of additional outbreaks; and the ultimate results of any restructuring and business improvement actions, including cost synergies, depend on a number of factors, including the development of final plans, the impact of local regulatory requirements regarding employee terminations, the time necessary to develop and implement the restructuring and other business improvement initiatives and the level of success achieved through such actions in improving competitiveness, efficiency and effectiveness. We caution that undue reliance should not be placed on such forward-looking statements, which speak only as of the date made. Some of the factors which could cause results to differ materially from those expressed in any forward-looking statements are set forth under Item 1A of our most recent Form 10-K, and our other public filings with theSecurities and Exchange Commission (the "SEC"), and include the effects of the coronavirus (COVID-19) pandemic; the vitality of the markets we serve; the impact of economic factors such as the worldwide economy, capital flows, interest rates, foreign currency risk and reduced sales and earnings in our international operations resulting from the weakening of local currencies versus theU.S. dollar; our ability to execute key business initiatives, including restructurings and our Enterprise Resource Planning system upgrades; potential information technology infrastructure failures or breaches in data security; our ability to attract, retain and develop high caliber management talent to lead our business; our ability to successfully compete with respect to value, innovation and customer support; exposure to global economic, political and legal risks related to our international operations; difficulty in procuring raw materials or fluctuations in raw material costs; pressure on operations from consolidation of customers or vendors; the costs and effects of complying with laws and regulations, including those relating to the environment, to the manufacture, storage, distribution, sale and use of our products and to labor and employment, as well as to the conduct of our business generally; the occurrence of litigation or claims, including class action lawsuits; restraints on pricing flexibility due to contractual obligations; our ability to acquire complementary businesses and to effectively integrate such businesses; changes in tax laws and unanticipated tax liabilities; potential loss of deferred tax assets; our indebtedness, and any failure to comply with the covenants that apply to our indebtedness; public health outbreaks, epidemics or pandemics, such as the current outbreak of COVID-19; potential losses arising from the impairment of goodwill or other assets; potential chemical spill or release; the loss or insolvency of a major customer or distributor; repeated or prolonged government and/or business shutdowns or similar events; acts of war or terrorism; natural or man-made disasters; water shortages; severe weather conditions; and other uncertainties or risks reported from time to time in our reports to theSEC . There can be no assurances that our earnings levels will meet investors' expectations. Except as may be required under applicable law, we do not undertake, and expressly disclaim, any duty to update our Forward-Looking Statements. 53
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