Leading cleaning and sanitation products maker Ecolab Inc. (ECL) posted fourth-quarter fiscal 2010 adjusted (excluding special gains/charges and tax related adjustments) earnings of 60 cents, missing the Zacks Consensus Estimate by a penny while surpassing the year-ago earnings of 55 cents.
For fiscal 2010, adjusted earnings of $2.23 a share also modestly trailed the Zacks Consensus Estimate of $2.24 and exceeded the year-ago earnings of $1.99.
Net income (attributable to Ecolab) for the quarter surged 13% year over year to $131.3 million (or 56 cents a share) on the back of higher sales from the company’s overseas business and lower tax.
Net sales edged up 1% year over year (up 2% at constant currency rates) to $1,575.5 million, yet missed the Zacks Consensus Estimate of $1,582 million. For fiscal 2010, revenues rose 3% year over year to $ 6,089.7 million, also below the Zacks Consensus Estimate of $6,102 million.
The results were once again driven by strong performances across Asia-Pacific and Latin American operations, accompanied by growth in global lodging and food and beverage businesses. Currency exchange translation had no material impact on the fourth quarter results.
Segment Results in Brief
Sales at the U.S.Cleaning & Sanitizing business, Ecolab’s mainstay in the U.S., grew 1% year over year in the quarter to $681 million. Revenues from the U.S.Other Services segment rose 2% to $111 million, supported by growth at the GCS Services division, which provides commercial kitchen parts and equipment repair services.
Revenues (at constant currency) from the International operations increased 3% year over year to $791 million, driven by emerging markets.
Operating margin for the quarter improved to 12.9% from 12.5% a year-ago, helped by management’s cost-management initiatives and operational efficiency. Gross margin increased marginally to 50.3% from 50.1% a year-ago.
Financial Condition
Ecolab exited fiscal 2010 with cash and cash equivalents of $242.3 million, a more than three-fold year over year increase. Long-term debt declined roughly 24% year over year to $656.4 million.
Outlook
For fiscal 2011, Ecolab envisions adjusted earnings per share in the range of $2.47 to $2.53. For first-quarter 2011, the company expects adjusted earnings between 42 cents and 45 cents a share. The current Zacks Consensus Estimates for first quarter and fiscal 2011 are 48 cents and $2.53, respectively.
Adjusted gross margin for the first quarter has been pegged at 49%-50%. The company expects sustained revenue growth at constant currency rates. Moreover, currency exchange translation has been predicted to favorably impact sales for the first quarter.
Ecolab will focus on improving sales and margins in 2011 and will take appropriate actions (including new product launches and pricing) to offset hike in raw material costs.
Restructuring in Europe
Ecolab has announced a major restructuring plan for its European business aimed at boosting efficiency and profitability in that operation. As part of this initiative, the company plans to prune headcount which will involve elimination of roughly 900 jobs.
The restructuring, once completed, has been projected to fetch annual cost saving of more than $120 million ($100 million net of tax), of which, roughly $4 million to $6 million is expected in 2011.
The move is expected to cost Ecolab roughly $150 million ($125 million after tax) over the next three years, starting first-quarter 2011. The company expects savings from the restructuring to benefit its second-half 2011 results.
Our Recommendation
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, Ecolab’s aggressive acquisition strategy has inherent integration risks.
Also, Ecolab’s international sales are susceptible to foreign exchange headwinds and raw material price fluctuations may weigh on its operating results. This is reflected in our current Neutral recommendation on the stock, backed by a short-term Zacks #3 Rank (Hold).
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