Mixed 2Q for Ecolab, Profit Rises - Analyst Blog

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A global sanitation products company, Ecolab Inc. 's ( ECL ) adjusted earnings per share of 72 cents for the second quarter of 2012 were in line with the Zacks Consensus Estimate and above the year-ago earnings of 64 cents per share.

Adjusted earnings exclude tax adjustments as well as special gains and charges such as those related to the merger with Nalco. In the reported quarter, profit attributable to Ecolab rose 47% year over year to $184.5 million (or 62 cents per share) including the Nalco merger restructuring and integration expenses.

Revenue

Revenues soared 74% (including the Nalco merger) year over year to $2,958.7 million. On a fixed-currency basis, revenues grew 6% 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 $3,023 million. Growth was triggered by higher sales from Global Energy, Healthcare and Latin American franchises.

Segment Analysis

Revenues from the larger U.S. Cleaning & Sanitizing segment climbed 5% year over year, on a constant currency pro forma basis, to $760.9 million driven by the Kay and Healthcare businesses.

On a fixed currency pro forma basis, sales from the U.S. Other Services division rose 4% to $121.5 million in the quarter. Revenues from Ecolab's International Cleaning, Sanitizing & Other Services segment increased 5% on a constant currency pro forma basis to $796.5 million backed by solid sales in Latin America and Asia-Pacific and moderate growth in Europe.

Global Water sales were $509.8 million (up 1% on a constant currency pro forma basis), driven by higher sales in North America and Latin America, which offset lower demand from industrial clients in Asia and Europe. Revenues from Global Paper inched down 2% to $200.8 million while Global Energy segment's revenues climbed 19% to $548.3 million, on a constant currency pro forma basis.

Margins

Gross margin dropped to 45.6% in the second quarter from 49.3% a year ago. Adjusted fixed currency operating income rose 17% in the quarter to $369 million. Operating margin inched down to 11% from 11.7% in the prior-year quarter.

Selling, general and administrative expenses were lower at 33.2% of sales compared with 35.9% of sales in the year-ago quarter.

Balance Sheet

Ecolab exited the quarter with cash and cash equivalents of $304.9 million, up 86.8% from the previous-year quarter. Long-tem debt increased approximately seven-fold to $4,879.2 million.

The company repurchased $1.3 million shares in the quarter under its share buyback program.

Guidance

Ecolab lowered its forecast of adjusted earnings to $2.95 to $3.02 from $2.95 and $3.05 for fiscal 2012, representing a 16% to 19% year-over-year increase. Special gains and restructuring charges, such as Nalco acquisition costs, are expected to be roughly 65 cents a share (earlier 60-65 cents).

For third quarter 2012, adjusted earnings are expected to be in a range of 83 cents to 87 cents. 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 in a band of 32% and 33%. The company expects to incur extraordinary items amounting to 10 cents in the third quarter, mainly related to the Nalco merger and restructuring of operations in Europe.

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 are currently Neutral on the stock, supported by a short-term Zacks #3 Rank (Hold).


 
CHURCH & DWIGHT (CHD): Free Stock Analysis Report
 
CLOROX CO (CLX): Free Stock Analysis Report
 
ECOLAB INC (ECL): Free Stock Analysis Report
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: CHD , CLX , ECL

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