Ecolab Inc. (ECL) posted a decent 20% rise in adjusted earnings per share (excluding special gains and charges) to $1.03 for the second quarter of 2014 from 86 cents in the same quarter of 2013. With this, earnings per share inched past the Zacks Consensus Estimate by a penny.

The rise in adjusted earnings was attributable to strong sales growth and operating margin gains. Adjusted net earnings rose 18% to $314.4 million from $265.5 million in the second quarter of 2013.

Ecolab, Inc. - Earnings Surprise | FindTheBest

Revenues and Operating Earnings

Revenues grew 7% year over year to $3,568.2 million. Adjusted fixed currency revenues increased 8% to $3,532.2 million. Revenues were modestly higher than the Zacks Consensus Estimate of $3,558 million. Sales gain was driven by strong growth in Energy, Specialty and Water businesses as well as in Latin America and Asia Pacific regions.

Adjusted operating earnings rose 15% to $507.2 million while adjusted operating margin went up 100 basis points (bps) to 14.2% from 13.2% in the 2013-second quarter. In fixed currency, operating earnings escalated 17% to $503.2 million in the quarter.

Segment Results

At constant exchange rate (:CER), revenues from Global Industrial segment grew 3% to $1,214 million, driven by solid gains in Latin America and Asia Pacific and modest gains in both North America and Europe, the Middle East and Africa (:EMEA). Operating earnings in fixed currency increased 8% to $162 million compared with the year ago period.

AT CER, revenues from the Global Institutional segment increased 3% to $1,077 million, led by strong sales growth in Specialty business and decent gains in Latin America, North America, and Asia Pacific regions, which more than offset lower sales in EMEA. In fixed currency, operating earnings increased 3% to $200 million.

AT CER, the Global Energy segment revenues spiked 20% to $1,051 million in the second quarter the year. Operating earnings at fixed currency surged 44% to $157 million. Acquisition (Champion Technologies) adjusted fixed currency revenues grew 8% indicating decent growth in both the upstream and downstream markets, while acquisition adjusted fixed currency operating earnings jumped 40%, including synergies.

At CER, revenues from the Other segment grew 7% to $191 million in the second quarter. Fixed currency operating income rose 7% to $30 million.

Balance Sheet

ECL exited the quarter with cash and cash equivalents of $187.0 million, about half compared with $375.2 million as of Jun 30, 2013. Total debt decreased slightly by 5% to $7,128.8 million as of Jun 30, 2014 from $7,508.2 million as of Jun 30, 2013. With this, debt to capitalization ratio fell 400 bps to 49% from 53% as of Jun 30, 2013.

During the quarter, ECL repurchased 0.8 million shares of its common stock.

Guidance

For the third quarter of 2014, ECL expects adjusted gross margin of 47% and adjusted earnings per share of $1.18 to $1.22, which reflects a 13–17% rise from adjusted earnings per share of $1.04 in the comparable quarter of 2013. The Zacks Consensus Estimate of $1.20 lies within the guided range.

For full year 2014, ECL anticipates adjusted gross margin of 47% and upgraded its adjusted earnings per share to $4.14–$4.20 from $4.10 to $4.20. The upgraded earnings per share reflects a 17 to 19% rise over the prior year. The Zacks Consensus Estimate of $4.18 for the year lies within the guided range.

Our Take

We are impressed with ECL’s second quarter results, which beat the Zacks Consensus Estimate on both the earnings and revenue fronts. We take note of the considerable earnings growth in the reported quarter along with the growth-oriented outlook for the year.

However, we remain cautious about aggressive competition. Challenging economic and market trends along with unfavorable internal issues will likely be near-term headwinds for the company.

ECL currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry include Green Plains Inc. (GPRE), KMG Chemicals Inc. (KMG), and Minerals Technologies Inc. (MTX) . All of them carry a Zacks Rank #1 (Strong Buy).

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