Leading cleaning and sanitation products maker Ecolab Inc. (ECL) reported first-quarter fiscal 2011 adjusted (excluding special gains/charges and tax related adjustments) earnings of 45 cents, ahead of the Zacks Consensus Estimate of 44 cents while exceeding the year-ago adjusted earnings of 41 cents.
Net income (attributable to Ecolab) for the quarter, however, dipped 2% year over year to $93.6 million (or 40 cents a share), impacted by charges associated with the European restructuring and acquisition as well as higher tax, which masked an increase in the top line.
Net sales rose 6% year over year (up 4% at constant currency rates) to $1,518.3 million, beating the Zacks Consensus Estimate of $1,485 million.
The results were led by strong performances across the Minnesota-based company’s core U.S. Cleaning & Sanitizing business as well as Asia-Pacific and Latin American operations. Currency exchange translation had a favorable impact on first quarter results. Ecolab has taken appropriate actions (including proper pricing) in the quarter to offset the hike in raw material costs.
Segment Results
Revenues from Ecolab’s U.S. Cleaning & Sanitizing division, its mainstay in the U.S., climbed 8% year over year to $682 million, with sales improving across Institutional, Food & Beverage and Kay sub-segments.
Sales at the U.S. Other Services segment rose 2% to $107 million. Revenues (at constant currency) from International operations rose 5% year over year to $716 million, supported by the emerging markets.
Margins
Operating margin declined to 10% from 10.7% a year-ago, as higher costs more than offset revenue growth. Gross margin fell to 49.3% from 50% a year-ago as a result of a 7% increase in cost of sales.
Financial Condition
Ecolab exited the quarter with cash and cash equivalents of $151.4 million, a roughly 77% year over year increase. Long-term debt increased modestly year over year to $683.7 million. The company bought back 1.5 million shares during the quarter.
Outlook and Recommendation
Ecolab has raised its fiscal 2011adjusted earnings per share target to between $2.49 and $2.53 from its earlier forecast of $2.47 and $2.53. For second-quarter 2011, the company expects adjusted earnings between 62 cents and 64 cents a share. The current Zacks Consensus Estimates for second quarter and fiscal 2011 are 62 cents and $2.49, respectively.
Adjusted gross margin for the second quarter has been pegged at roughly 50%. Moreover, Ecolab expects improved year -over- year revenue growth in the quarter.
Although we are impressed with Ecolab’s strong international exposure, we remain concerned about intense competition. The company’s U.S. Cleaning & Sanitizing and International divisions face stiff competition from Clorox (CLX) and Church & Dwight (CHD).
Moreover, raw material price fluctuations represent a headwind for Ecolab and its aggressive acquisition strategy has inherent integration risks. We are currently Neutral on Ecolab.
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