Ecolab 1Q Earnings Beats, Revs Lag

Zacks

Ecolab Inc.’s (ECL) adjusted earnings per share of 60 cents for the first quarter of 2013 was above the Zacks Consensus Estimate by 2 cents. The results achieved the high-end of the company’s previously announced guidance of 56–60 cents. Adjusted earnings exclude tax adjustments as well as special gains and charges.

This result represented a 20% jump from the year-ago earnings on the back of solid Global Food & Beverage and Global Specialty sales as well as an improved operating margin and lower interest expense and tax rate.

Profit attributable to Ecolab (including one-time items) in the reported quarter soared 221% year over year to $159.6 million (or 53 cents per share).

The Minnesota-based company finally managed to successfully complete the pending acquisition of Champion Technologies and its related company Corsicana Technologies for $2.3 billion. The acquired entity has been incorporated into Ecolab’s Energy business.

Following the buyout, the company is restructuring its Energy franchise, which is expected to result in cost synergies of approximately $25 million in 2013, with annual acquisition cost synergies of $150 million achieved by the end of 2015.

Revenues

Revenues on a reported and fixed currency basis grew 2% year over year to $2,872.1 million for the first quarter. Excluding acquisitions and divestitures, adjusted fixed currency revenues increased 3%.

However, revenues were lower than the Zacks Consensus Estimate of $2,925 million by 1.8%. Strong gains in Latin America and Asia Pacific were partially offset by sluggish growth in North America and Europe.

Segment Analysis

Effective from 2013, Ecolab has reorganized its reporting segments to take into account its latest acquisitions and growth in the global economy.

On a fixed currency basis, revenues from Global Industrial segment grew 1% to $1,141 million driven by strong sales in Global Food & Beverage business, partially offset by soft Global Water and Global Paper sales.

Revenues from Global Institutional segment increased 2% to $975 million at a fixed currency rate on the back of healthy Global Specialty sales.

The Global Energy segment posted decent revenues of $579 million, which grew 7% at fixed currency rates. Year-over-year growth was led by growth in the upstream market.

Revenues from Other segment dropped 5% on a fixed currency basis to $167 million in the first quarter. Adjusted for the divestment of Vehicle Care in the fourth quarter of 2012, first quarter 2013 fixed currency sales increased 5%, driven by gains from Global Pest Elimination and Equipment Care businesses.

Margins

Gross margin increased to 45.5% in the first quarter from 42.6% a year ago. Adjusted fixed currency operating income rose 10% in the quarter to $312.6 million. Reported operating margin increased to 9.1% from 5.9% in the prior-year quarter.

Balance Sheet

Ecolab exited the quarter with cash and cash equivalents of $824.3 million, which increased more than twofold over the previous-year quarter. Long-tem debt increased 16.8% to $5,737.1 million.

Guidance

Ecolab revised its guidance for 2013, which now includes the impact of the acquisition of Champion Technologies. It anticipates 2013 adjusted EPS, excluding special gains and charges and discrete tax items, in a range of $3.45 to $3.55 (earlier $3.38 to $3.48), representing 16% to 19% earnings growth.

Adjusted EPS includes a forecasted accretion of 7 cents from the Champions acquisition. The current Zacks Consensus Estimate for 2013 is pegged at $3.52.

Special gains and charges (including restructuring charges, Nalco merger and integration expenses along with costs associated with the Champion takeover and the Venezuelan devaluation charge and discrete tax items) are expected to be roughly 45 cents a share for 2013.

For second quarter 2013, adjusted earnings are expected in a range of 81 cents to 85 cents, up 13%–18% year over year. This includes an accretion of a cent from Champions. The forecast is below the current Zacks Consensus Estimate of 85 cents.

The company expects double digit constant currency sales growth in the second quarter. Adjusted gross margin (except special gains and charges) is expected to be roughly 45%-46% and SG&A, as a percentage of sales, is anticipated to be roughly between 32% and 33%.

Further, Ecolab expects to incur extraordinary items amounting to 25 cents per share in the second quarter, mainly related to the Nalco integration, the Champion acquisition and integration charges and restructuring costs associated with the Energy segment.

Our Take

Ecolab serves the food service, food and beverage processing, healthcare, energy, water treatment and hospitality markets both in the U.S. as well as internationally. The company continues to invest in strategic areas such as health care, food, water and energy and global pest elimination to expand its business.

With a background of robust growth, Ecolab is poised to gain momentum via its aggressive strategy of pursuing acquisitions. Ecolab acquired Champions to become a giant in the oilfield chemical business and reduce competition for its Nalco subsidiary.

Although we are impressed by Ecolab’s strong international exposure, we remain cautious about aggressive competition. Challenging economic and market trends in 2013 together with unfavorable internal issues will likely be near-term headwinds for the company.

Ecolab currently carries a Zacks Rank #3 (Hold). While we remain on the sidelines regarding Ecolab, companies from the basic materials sector such as Gibraltar Industries (ROCK), Westlake Chemical Corp. (WLK) and KapStone Paper and Packaging Corp. (KS), with a Zacks Rank #1 (Strong Buy), are expected to do well.

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