Ecolab Inc.’s (ECL - Analyst Report) adjusted earnings per share (excluding special gains and charges and discrete tax items) of 86 cents for the second quarter of 2013 were 2 cents ahead of the Zacks Consensus Estimate. This result represented a 19% jump from the year-ago earnings on the back of solid top-line growth as well as an improved operating margin.
The newly acquired Champion Technologies also contributed significantly in the quarter. The results also surpassed the company’s previously announced guidance of 81–85 cents.
Net income attributable to Ecolab in the reported quarter climbed 16% year over year to $213.1 million (or 69 cents per share).
Revenues grew 13% year over year (14% at constant exchange rate or CER) to $3,337.8 million, a record high for the company. Excluding acquisitions and divestures, adjusted fixed currency revenues increased 6%. However, revenues were lower than the Zacks Consensus Estimate of $3,410 million.
Effective from 2013, Ecolab has reorganized its reporting segments to take into account its latest acquisitions and growth in the global economy.
At CER, revenues from Global Industrial segment grew 4% to $1,220 million driven by strong sales in the Global Food & Beverage, Global Water and Global Paper businesses. Sales growth was solid in Latin America and Asia-Pacific, while the other regions posted moderate gains.
Revenues from the Global Institutional segment increased 3% to $1,055 million at CER on the back of healthy Global Specialty sales. However, Global Healthcare sales dipped marginally in the quarter. Regionally, Latin America, Asia Pacific and North America generated strong sales, partially offset by soft sales in Europe, the Middle East and Africa (EMEA).
The Global Energy segment posted solid revenues of $901 million, which grew 64% at CER. On an organic basis, revenues increased 14% year over year, driven by growth in the upstream market. The newly acquired Champions business has been integrated with this segment, which delivered better-than-expected results in the second quarter.
Revenues from the Other segment dropped 5% at CER to $180 million in the second quarter. After adjusting for divestment of Vehicle Care in the fourth quarter of 2012, fixed currency sales in the second quarter of 2013 increased 5%. The upside was driven by gains from Global Pest Elimination and Equipment Care businesses.
Gross margin decreased 40 basis points to 45.2% in the second quarter. Selling, general and administrative expenses (SG&A) increased 10.3% year over year to $1,083.3 million. However, adjusted operating margin improved 70 bps to 13.2% in the quarter. At CER, adjusted operating margin rose 60 bps to 13.2%.
Ecolab exited the quarter with cash and cash equivalents of $375.2 million, up 23.1% year over year. Long-tem debt increased 15.7% to $6,635.3 million.
Ecolab raised its guidance for 2013, which includes the impact of the acquisition of Champion Technologies. It anticipates 2013 adjusted EPS in a range of $3.48−$3.56 (earlier $3.45−$3.55), representing 17%−19% (earlier 16%-19%) earnings growth. The current Zacks Consensus Estimate for 2013 is pegged at $3.51, which lies within the guided range.
Special gains and charges (including restructuring charges, integration expenses along with costs associated with the Venezuelan devaluation charge and discrete tax items) are expected to be roughly 45 cents a share for 2013.
For third quarter 2013, adjusted earnings are expected in a range of $1.00–$1.05 per share, up 15%–21% year over year. The current Zacks Consensus Estimate of $1.02 remains within the predicted range.
Adjusted gross margin (except special gains and charges) is expected to be roughly 46% (earlier 45%–46%) and SG&A, margin is anticipated to be roughly between 31%−32% (earlier 32%–33%).
Further, Ecolab expects to incur extraordinary items amounting to 10 cents per share in the third quarter, mainly related to special gains and charges along with integration charges and restructuring costs.
Despite revenues missing the Zacks Consensus Estimate, we are impressed with Ecolab’s second-quarter results. We take note of the solid earnings growth in the reported quarter along with the raised outlook for the year. In addition, improvement in operating margin further reinstates our confidence in management’s ability to leverage operational efficiency.
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. 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, companies from the basic materials sector such as KapStone Paper and Packaging Corp. (KS - Snapshot Report), carrying a Zacks Rank #1 (Strong Buy), along with Sensient Technologies Corp. (SXT - Snapshot Report) and Ferro Corp. (FOE - Snapshot Report), carrying a Zacks Rank #2 (Buy), are expected to do well.