Ecolab Third-Quarter Earnings Chug Along Despite Currency Headwinds

By Markets Fool.com

Image source: Getty Images.

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Ecolab (NYSE: ECL) believes that its long-term growth with be driven by its ability to provide services and solutions in food, water, energy, and healthcare markets. In the third quarter of 2016, the company delivered, following a relatively strong performance across its business units in the first half of the year. While low oil and natural gas prices continued to weigh on results, CEO Douglas M. Baker, Jr. is confident that the company's energy segment will begin a gradual recovery in 2017.

A shining example of buy-and-hold investing, Ecolab chugged along in the third quarter despite currency headwinds. Here's what investors need to know.

By the numbers

You can check the press release for the full financial rundown, but here are the most important GAAP metrics for investors compared to the year-ago period:

Metric

Q3 2016

Q3 2015

Change (YOY)

Revenue

$3.39 billion

$3.45 billion

(1.8%)

Gross profit

$1.65 billion

$1.82 billion

(9.4%)

Operating expenses

$1.07 billion

$1.21 billion

(11.2%)

Operating income

$574 million

$413 million

39%

Diluted EPS

$1.27

$0.86

47.7%

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Data source: Press release. YOY = year over year.

Given the global footprint of Ecolab's operations, the company also reports non-GAAP fixed currency financial numbers, which attempt to smooth out differences in currency fluctuations between reporting periods. On that basis, revenue climbed 1% and operating income grew 50% year over year. While the numbers are helpful for understanding the business, investors should stick to GAAP metrics.

Of course, Ecolab turned in a solid performance in the third quarter no matter how you look at the numbers. The numbers in the table above are in line with financial guidance provided at the end of this year's second quarter, which called for up to 49% gross margin (actual 48.7%) and EPS between $1.24 and $1.32 during the third quarter.

Another great metric: Operating cash flow for the first nine months of the year totaled $1.5 billion, an improvement of 7% compared to the year-ago period. The ability to generate healthy amounts of cash during difficult global markets is a great sign. It also highlights that Ecolab has been feverishly cutting costs to boost the efficiency -- and profitability -- of operations.

Picking the numbers apart by operating segment demonstrates the strengths of Ecolab's business and shows organic growth in key industries is being achieved. Here are the GAAP metrics broken down by operating segment (industrial, institutional, energy, and other):

Metric

Q3 2016

Q3 2015

Change (YOY)

Global industrial, revenue

$1.22 billion

$1.23 billion

(1%)

Global industrial, operating income

$204.9 million

$195.5 million

4.8%

Global institutional, revenue

$1.18 billion

$1.11 billion

5.7%

Global institutional, operating income

$269.0 million

$259.4 million

3.7%

Global energy, revenue

$780.2 million

$904.5 million

(13.8%)

Global energy, operating income

$104.2 million

$130.4 million

(20%)

Other, revenue

$211.6 million

$199.0 million

6.3%

Other, operating income

$41.4 million

$37.5 million

10.4%

Data source: Press release. YOY = year over year.

Again, these numbers are stronger when adjusted for currency headwinds. And of course, one segment in particular stands out: energy. The prolonged rout of crude oil and natural gas markets has really weighed on Ecolab's financial results and share price in recent years. That should be hardly surprising considering nearly 40% of the world's crude oil production, or a staggering 35 million barrels per day, is aided by Ecolab technology.

The bad news is that selling prices, sales volumes, and plant run rates (higher utilization rates drive down per-unit costs) were all down compared to the year-ago period. The good news is that management expects the energy segment to begin a gradual recovery in 2017.

Outlook

Ecolab didn't update many numbers for its full-year 2016 financial guidance, sticking with expectations of adjusted gross margins of approximately 48%. However, with better forecasting of how the energy segment will perform (or underperform) in the fourth quarter, management lowered the high end of its EPS range from $4.50 to $4.45 for the year. The new range for full-year 2016 EPS is now between $4.35 to $4.45. That would mark a significant improvement from full-year 2015 EPS of $3.32.

What does it mean for investors?

In the last 25 years, Ecolab stock has delivered gains of roughly 4,200% to long-term investors. That doesn't happen by accident. That happens because of a steady strategy that builds leadership in specific industries and executes on long-term visions by investing in organic growth. Nothing from the third-quarter 2016 earnings update changes what the company has built over the years. You're still getting a solid company that is known for quality services and products with clearly identified growth opportunities ahead of it.

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Maxx Chatsko has no position in any stocks mentioned. Follow him on Twitterto keep up with developments in engineered biology and materials science.

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