Ecolab's EPS Meets, Profits Up


Ecolab Inc.’s (ECL) adjusted earnings per share of 87 cents for the third quarter of 2012 were in line with the Zacks Consensus Estimate. However, this result represented a 16% jump from the year-ago earnings of 75 cents per share.

Adjusted earnings exclude tax adjustments as well as special gains and charges such as those related to the merger with Nalco. Despite the inclusion of the Nalco merger restructuring and integration expenses, profit attributable to Ecolab in the reported quarter climbed 54% year over year to $238 million (or 80 cents per share).


Revenues soared 74% (including the Nalco merger) year over year to $3,023.3 million. On a fixed currency basis, revenues grew 7% in comparison to the year-ago pro forma fixed currency sales (inclusive of the Nalco operations).

However, revenues were lower than the Zacks Consensus Estimate of $3,086 million. Growth was triggered by higher sales from Global Energy, Healthcare, Latin America and worldwide Kay as well as the Pest Elimination franchises.

Segment Analysis

Revenues from the larger U.S. Cleaning & Sanitizing segment increased 4% year over year, on a constant currency pro forma basis, to $774.1 million led by the Kay and Healthcare businesses. On a constant currency pro forma basis, sales from the U.S. Other Services division grew 4% to $124.2 million in the quarter.

Revenues from Ecolab’s International Cleaning, Sanitizing & Other Services segment grew 5% on a constant currency pro forma basis to $813.5 million driven by strong sales in Latin America and Asia-Pacific and moderate growth in Europe.

Global Water sales were $542.9 million (up 5% on a constant currency pro forma basis). Higher sales in North America and Latin America, which offset lower demand from industrial clients in Asia and Europe, contributed to revenue growth. Revenues from Global Paper dropped 4% to $202.4 million, while Global Energy segment’s revenues surged 20% to $586.6 million, on a constant currency pro forma basis.


Gross margin dropped to 46.5% in the third quarter from 49.4% a year ago. Adjusted fixed currency operating income grew 19% in the quarter to $434 million. Reported operating margin inched down to 13.3% from 13.8% in the prior-year quarter.

Selling, general and administrative expenses were lower at 32.3% of sales compared with 34.3% of sales in the year-ago quarter.

Balance Sheet

Ecolab exited the quarter with cash and cash equivalents of $324 million, up 56.3% from the previous-year quarter. Long-tem debt increased more than seven times to $5,386.7 million.


With the exception of special gains and charges, Ecolab’s guidance for both fourth quarter and full year 2012 excludes the impact of the acquisition of Champion Technologies. The company narrowed its forecast of adjusted earnings per share to $2.96 to $3.00 from $2.95 to $3.02 for fiscal 2012, representing 17% to 18% year-over-year increase.

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 60 cents a share (earlier 65 cents) for 2012. These expenses will however be offset by a gain from the divestment of the Vehicle Care business.

For fourth quarter 2012, adjusted earnings are expected to be in a range of 87 cents to 91 cents, representing a 24%—30% year-over-year growth. Adjusted gross margin (except special gains and charges) is expected to be roughly 46%—47% and SG&A (including purchasing accounting), as a percentage of sales, is anticipated to be roughly 32%.

The company expects to incur extraordinary items amounting to 10 cents per share in the fourth quarter, mainly related to the Nalco merger, the pending Champion acquisition and restructuring of operations in Europe, offset by a gain from the divestment of the Vehicle Care business.

Our Take

St. Paul, Minnesota-based 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.

Management is currently emphasizing on product innovation, sales organization, volume growth, appropriate pricing, and merger synergies along with the rationalization of operating costs.

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). Raw material price inflation also remains a headwind.

We currently have a Neutral recommendation on Ecolab. The stock carries a Zacks #2 Rank which translates into a short-term Buy rating.

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