Shareholders will surely be happy to see Ecolab (NYSE:ECL) kick off 2019 in high gear. The water, hygiene, and energy conglomerate delivered year-over-year growth of 13% in adjusted diluted earnings per share in the first quarter. That's at the high end of the company's full-year 2019 EPS guidance range calling for growth of 10% to 14% over last year.

While it's good to see the business humming along, a closer look reveals that Ecolab received a significant boost to its bottom line from a smaller tax bill. First-quarter 2019 revenue increased by just $34 million year over year, but net income increased by $49 million thanks to a 44% decrease in tax expense in that span. Management said that was the result of "global tax planning strategies and the geographic mix of income."

Setting aside the question of whether tax planning strategies are sustainable in the long run, investors might be encouraged by strong results from the company's core segments.

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Image source: Getty Images.

By the numbers

Ecolab reported a roughly $25 million year-over-year improvement, or 6%, in operating income from its three main operating segments in the first quarter of 2019. That rate of expansion was easily better than the 1% gain in revenue in that span, which reflects the success of various cost management initiatives underway.

Efficiency comes at a cost, however. The company reported nearly $15 million more in operating losses from its corporate segment, primarily related to the implementation of cost savings measures. Assuming those expenses can be reduced once the global rollout is completed, Ecolab appears to be on solid footing. 

Metric

Q1 2019

Q1 2018

Year-Over-Year Change

Global energy revenue

$809.6 million

$842.9 million

(4%)

Global industrial revenue

$1.28 billion

$1.23 billion

5%

Global institutional revenue

$1.21 billion

$1.21 billion

0%

Global energy operating income

$78.1 million

$70.6 million

11%

Global industrial operating income

$147.1 million

$127.3 million

16%

Global institutional operating income

$195.4 million

$197.8 million

(1%)

Corporate operating income

($83.5 million)

($68.8 million)

N/A

DATA SOURCE: ECOLAB. ALL NUMBERS ARE REPORTED IN PUBLIC CURRENCY RATES AND ARE NOT ADJUSTED.

Digging even deeper reveals more reasons for optimism. Ecolab reported year-over-year revenue increases of 11% and 27%, respectively, for its food and beverage and life sciences units (on a fixed currency basis). That helped drive a strong performance for the industrial segment and highlights the high-margin market opportunities that the business is prioritizing. 

Zooming back out shows a few areas for investors to watch on the income statement for the remainder of the year. For example, the cost savings measures are reflected in both a higher operating income and an improving operating margin. Ideally, that trend would continue. It may not seem like much, but annual gains of a few percent can really add up for a business as large as Ecolab.

Metric

Q1 2019

Q1 2018

Year-Over-Year Change

Revenue

$3.50 billion

$3.47 billion

1%

Operating income

$367.2 million

$354.3 million

4%

Operating margin

10.5%

10.2%

30 basis points

Interest expense

$49.4 million

$56.4 million

(12%)

Earnings before income taxes

$339.0 million

$317.3 million

7%

Income taxes

$38.6 million

$69.1 million

(44%)

Net income

$296.5 million

$247.3 million

20%

DATA SOURCE: ECOLAB. ALL NUMBERS ARE REPORTED IN PUBLIC CURRENCY RATES AND ARE NOT ADJUSTED.

Two factors drove the increase in net earnings and EPS: a lower interest expense and a lower tax rate. Both are likely to be temporary tailwinds.

Ecolab's full-year 2019 guidance called for interest expense to decline by only $2 million compared to last year, which suggests that the expense will creep up in later quarters. Indeed, management expects interest expense of $55 million in the second quarter of 2019 and didn't change its original outlook.

Similarly, Ecolab reported a first-quarter 2019 income tax rate of just 11.4%, compared to 21.8% in the year-ago period. But the rate rises to 20.6% in the most recent period once special items are excluded. Management didn't change its original guidance for adjusted income tax rate, which is still expected to be in the neighborhood of 20.5% for the year.

A snail climbing up ascending stacks of coins.

Image source: Getty Images.

Humming along the path of long-term growth

The nature of Ecolab's business means it's not going to deliver eye-popping growth in the short term, but shareholders can be pleased with slow and steady growth in operating income and operating margin. It still would be wise to keep an eye on the factors driving net income higher, especially since decreasing interest expenses and tax rates might be more difficult to sustain in the long run. Ultimately, improving operating efficiency will have the greatest impact on the business -- and the company appears to be executing on that strategy.