Ecolab's EPS Meets, Sales Lag - Analyst Blog

Leading cleaning and sanitation products maker Ecolab Inc’s (ECL) fourth-quarter fiscal 2011 adjusted (excluding special gains/charges, tax-related adjustments and the impact of Nalco Holding merger) earnings of 70 cents a share matched the Zacks Consensus Estimate and transcended the year-ago adjusted earnings of 60 cents. The results were within the company’s guidance of 69-71 cents.

Profit (attributable to Ecolab) for the quarter slid 32% year over year to $88.7 million (or 34 cents a share), hurt by charges associated with the company’s $8 billion acquisition of Illinois-based water treatment company Nalco Holding Company and restructuring program, which masked a double-digit growth in revenues.

For the full year, adjusted earnings of $2.54 a share were also in line with the Zacks Consensus Estimate and well above the year-ago earnings of $2.23. The Minnesota-based company has backed its earnings forecast for fiscal 2012 and initiated guidance for the first quarter which is below the Zacks Consensus Estimate.

Revenues

Net sales soared roughly 17% year over year to $1,845.3 million (a record) in the fourth quarter, but missed the Zacks Consensus Estimate of $1,934 million. For the fiscal, revenues climbed 12% year over year to $6,798.5 million, also trailing the Zacks Consensus Estimate of $6,869 million.

Sales in the fourth quarter were boosted by the company’s Food & Beverage and Kay businesses coupled with contributions from the Latin American operation and Nalco acquisition. In constant currency (excluding special charges and acquisitions) sales rose 4% in the quarter.

Segment Highlights

Revenues from Ecolab’s core U.S. Cleaning & Sanitizing division jumped 8% year over year to $733 million in the fourth quarter, led by the Food & Beverage sub-segment. The U.S. Other Services segment revenues crept up 2% to $114 million.

Revenues (at constant currency) from the company’s International operations rose 6% year over year to $816 million, primarily driven by the Latin American operation. The company noted that one month’s revenues from Nalco’s U.S. Water, Paper and Energy businesses clocked $193 million following the competition of the acquisition on December 1, 2011.

Margins

Gross margin fell to 47.6% in the fourth quarter from 50.3% a year ago, resulting from a 23% hike in cost of sales owing to the inventory step-up cost associated with the Nalco buyout. Operating margin declined to 8.9% from 12.9% a year ago, hit by the lofty restructuring and acquisition-related charges.

Financial Health

Ecolab ended the fiscal with cash and cash equivalents of $1,843.6 million, a roughly seven and a half fold year-over-year increase. Long-term debt increased roughly ten-fold year over year to $6,613.2 million.

Guidance and Recommendation

Ecolab has retained its adjusted earnings guidance for fiscal 2012 which is still expected in the band of $2.95 to $3.05 a share, representing a 16%-20% year-over-year increase. As communicated earlier, the company expects special gains and charges of 60 cents a share for the year, mainly associated with restructuring and Nalco merger. Analysts polled by Zacks are currently looking for earnings of $3.02 a share on an average for 2012.

For first-quarter 2012, Ecolab forecast adjusted earnings between 46 cents and 49 cents a share. The forecast assumes a dilution of roughly 30 cents a share, associated with the Nalco acquisition. The forecast is below the current Zacks Consensus Estimates of 54 cents.

Adjusted gross margin for the first quarter is expected to be roughly 46%. Moreover, Ecolab expects upper single-digit revenue growth in the quarter.

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 fluctuations and  the dilutive impact of hefty restructuring/acquisition expenses on the company’s bottom line. We currently have a Neutral recommendation on Ecolab, which is backed by a Zacks #3 Rank (Hold).

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