Ecolab Beats in 4Q, Profit Soars

Zacks

Ecolab Inc.’s (ECL) adjusted earnings per share of 89 cents for the fourth quarter of 2012 were in line with the Zacks Consensus Estimate. This result represented a 27% jump from the year-ago earnings of 70 cents per share.

The results were within the company’s guidance of 87–91 cents. Adjusted earnings exclude tax adjustments as well as special gains and charges. 

Profit attributable to Ecolab in the reported quarter increased 161% year over year to $231.4 million (or 77 cents per share) due to easy year-over-year comparisons. The year-ago quarter was hit by raw material cost inflation which adversely affected profits. 
 
For the full year, adjusted earnings of $2.98 a share were also in line with the Zacks Consensus Estimate and well above the year-ago earnings of $2.54. 
 
The Minnesota-based company is still working with the U.S. Department of Justice (:DOJ) regarding certain antitrust-related issues associated with the buyout of Champion Technologies. The company expects to resolve these issues by the first quarter of 2013.
 
Revenue
 
Revenues soared 65% (including the Nalco merger) year over year to $3,045.8 million for the fourth quarter. On a fixed currency basis, revenues grew 7% in comparison to the year-ago pro forma fixed currency sales (inclusive of the Nalco operations).
 
Revenues were higher than the Zacks Consensus Estimate of $3,033 million. Growth was triggered by higher sales from Global Energy, Latin America and worldwide Kay franchises.
 
For 2012, revenues climbed 74% year over year (5% on pro forma basis) to $11,838.7 million but slightly missed the Zacks Consensus Estimate of $11,843 million.
 
Segment Analysis
 
On a pro forma basis, revenues from the larger U.S. Cleaning & Sanitizing segment increased 5% year over year to $749.0 million led by the Kay and Institutional businesses. On a pro forma basis, sales from the U.S. Other Services division grew 3% to $117.5 million in the quarter.
 
Revenues from Ecolab’s International Cleaning, Sanitizing & Other Services segment grew 5%, on a constant currency pro forma basis, to $833.1 million driven by strong sales in Latin America and Asia-Pacific and moderate growth in Europe.
 
Global Water sales were $536.2 million (up 3% on a constant currency pro forma basis). Higher sales in Latin America, Asia-Pacific and Canada along with modest improvement in Europe led to revenue growth. Revenues from Global Paper inched up 1% to $203.2 million, while Global Energy segment’s revenues surged 18% to $596.2 million, on a constant currency pro forma basis.
 
Margins
 
Gross margin dropped to 46.0% in the fourth quarter from 47.6% a year ago. However, adjusted fixed currency operating income jumped 33% in the quarter to $331.6 million. Reported operating margin increased to 13.0% from 8.9% in the prior-year quarter.
 
Balance Sheet
 
Ecolab exited the quarter with cash and cash equivalents of $1,157.8 million, down 37.2% from the previous-year quarter. Long-tem debt decreased 13.3% to $5,736.1 million.
 
Guidance
 
Ecolab reiterated its guidance for 2013. With the exception of special gains and charges, Ecolab’s guidance excludes 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 $3.38 to $3.48, representing 13% to 17% earnings growth. The current Zacks Consensus Estimate for 2013 is pegged at $3.53.
 
Special gains and charges (including restructuring charges, Nalco merger and integration expenses along with costs associated with the pending Champion takeover) are expected to be roughly 35 cents a share for 2013. 
 
For first quarter 2013, adjusted earnings are expected in a range of 56 cents to 60 cents, up 12%—20% year over year. The forecast is below the current Zacks Consensus Estimate of 65 cents.
 
Results will be negatively impacted by pension costs of 2 cent and a share impact associated with the divestment of the Vehicle Care unit of 1 cent as well as tough year-over-year comparisons in the Energy business. 
 
The company expects moderate constant currency sales growth in the first quarter. Adjusted gross margin (except special gains and charges) is expected to be roughly 46% and SG&A (including purchasing accounting), as a percentage of sales, is anticipated to be roughly between 34% and 35%.
 
Further, Ecolab expects to incur extraordinary items amounting to 20 cents per share in the first quarter, mainly related to the Nalco merger, the pending Champion acquisition and impact of the Venezuelan currency devaluation.
 
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.
 
We are impressed with management’s focus on new product launch, sales and service force improvement, new account wins along with better customer penetration capabilities to drive growth in 2013 and beyond. Moreover, in an effort to leverage margin expansion, the company continues to undertake cost-saving measures, enhance operating performance and achieve merger synergies from the newly acquired entities.
 
Although we are impressed by Ecolab’s strong international exposure, we remain cautious about aggressive competition from the likes of Clorox (CLX) and Church & Dwight (CHD). Challenging economic and market trends in 2013 together with unfavorable pension expenses due to lower interest rates will likely be near-term headwinds for the company. Raw material price inflation also remains a cause of concern.
 
Ecolab currently carries a Zacks Rank #3 (Hold). While we remain on the sidelines regarding Ecolab, chem.-specialty company Penford Corp. (PENX) with a Zacks Rank #1 (Strong Buy) is expected to do well.
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