For the quarterly period ended March 31, 2003 | | OR | | o | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | | For the transition period from to | | Commission File No. 1-9328 |
For the transition period from to
Commission File No. 1-9328
ECOLAB INC. | (Exact name of registrant as specified in its charter) | | | | Delaware | | 41-0231510 | (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) | | | | | | | 370 Wabasha Street N., St. Paul, Minnesota 55102 | (Address of principal executive offices) (Zip Code) | | | | 651-293-2233 | (Registrant’s telephone number, including area code) | | | | (Not Applicable) | (Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of October 31, 2002.April 30, 2003. 129,566,265131,395,820 shares of common stock, par value $1.00 per share.
Table of Contents
PART I - FINANCIAL INFORMATION Item 1. Financial Statements. ECOLAB INC. CONSOLIDATED STATEMENT OF INCOME
| | First Quarter Ended March 31 | | (amounts in thousands, except per share) | | 2003 | | 2002 | | | | (unaudited) | | | | | | | | Net sales | | $ | 875,852 | | $ | 786,109 | | | | | | | | Cost of sales (including special charges (income) of ($45) and $5,184 in 2003 and 2002, respectively) | | 430,482 | | 395,945 | | | | | | | | Selling, general and administrative expenses | | 344,033 | | 304,945 | | | | | | | | Special charges (income) | | (197 | ) | 12,296 | | | | | | | | Operating income | | 101,534 | | 72,923 | | | | | | | | Interest expense, net | | 10,703 | | 10,512 | | | | | | | | Income from continuing operations before income taxes | | 90,831 | | 62,411 | | | | | | | | Provision for income taxes | | 35,513 | | 25,370 | | | | | | | | Income from continuing operations before cumulative effect of change in accounting | | 55,318 | | 37,041 | | | | | | | | Change in accounting for goodwill and other intangible assets | | — | | (4,002 | ) | | | | | | | Gain from discontinued operations | | — | | 1,882 | | | | | | | | Net income | | $ | 55,318 | | $ | 34,921 | | | | | | | | Basic income per common share | | | | | | Income from continuing operations before change in accounting | | $ | 0.42 | | $ | 0.29 | | Change in accounting for goodwill | | — | | (0.03 | ) | Gain from discontinued operations | | — | | 0.01 | | Net income | | $ | 0.42 | | $ | 0.27 | | | | | | | | Diluted income per common share | | | | | | Income from continuing operations before change in accounting | | $ | 0.42 | | $ | 0.28 | | Change in accounting for goodwill | | — | | (0.03 | ) | Gain from discontinued operations | | — | | 0.01 | | Net income | | $ | 0.42 | | $ | 0.27 | | | | | | | | Dividends declared per common share | | $ | 0.145 | | $ | 0.135 | | | | | | | | Weighted-average common shares outstanding | | | | | | Basic | | 130,224 | | 128,406 | | Diluted | | 131,818 | | 130,180 | |
| | Third Quarter Ended September 30 | | (amounts in thousands, except per share) | | 2002 | | 2001 | | | | (unaudited) | | | | | | | | Net sales | | $ | 894,866 | | $ | 607,631 | | | | | | | | Cost of sales (including special charges of $301 in 2002) | | 434,195 | | 288,669 | | | | | | | | Selling, general and administrative expenses | | 327,666 | | 224,899 | | | | | | | | Special charges | | 2,109 | | (53 | ) | | | | | | | Operating income | | 130,896 | | 94,116 | | | | | | | | Interest expense, net | | 10,988 | | 7,010 | | | | | | | | Income before income taxes and equity in earnings of Henkel-Ecolab | | 119,908 | | 87,106 | | | | | | | | Provision for income taxes | | 47,826 | | 35,279 | | | | | | | | Equity in earnings of Henkel-Ecolab | | — | | 5,434 | | | | | | | | Net income | | $ | 72,082 | | $ | 57,261 | | | | | | | | Basic net income per common share | | $ | 0.56 | | $ | 0.45 | | | | | | | | Diluted net income per common share | | $ | 0.55 | | $ | 0.44 | | | | | | | | Dividends declared per common share | | $ | 0.135 | | $ | 0.13 | | | | | | | | Weighted-average common shares outstanding | | | | | | Basic | | 129,287 | | 127,675 | | Diluted | | 130,611 | | 129,809 | |
Per share amounts do not necessarily sum due to rounding. The accompanying notes are an integral part of the consolidated financial information. 2
ECOLAB INC. CONSOLIDATED STATEMENT OF INCOME
| | Nine Months Ended September 30 | | (amounts in thousands, except per share) | | 2002 | | 2001 | | | | (unaudited) | | | | | | | | Net sales | | $ | 2,520,205 | | $ | 1,766,012 | | | | | | | | Cost of sales (including special charges of $7,393 in 2002) | | 1,243,565 | | 844,078 | | | | | | | | Selling, general and administrative expenses | | 947,974 | | 670,438 | | | | | | | | Special charges | | 26,223 | | (245 | ) | | | | | | | Operating income | | 302,443 | | 251,741 | | | | | | | | Interest expense, net | | 33,455 | | 20,494 | | | | | | | | Income from continuing operations before income taxes and equity in earnings of Henkel-Ecolab | | 268,988 | | 231,247 | | | | | | | | Provision for income taxes | | 108,204 | | 93,655 | | | | | | | | Equity in earnings of Henkel-Ecolab | | — | | 12,276 | | | | | | | | Income from continuing operations before cumulative effect of change in accounting | | 160,784 | | 149,868 | | | | | | | | Change in accounting for goodwill and other intangible assets | | (4,002 | ) | — | | | | | | | | Gain from discontinued operations | | 1,882 | | — | | | | | | | | Net income | | $ | 158,664 | | $ | 149,868 | | | | | | | | Basic income per common share | | | | | | Income from continuing operations | | $ | 1.25 | | $ | 1.18 | | Change in accounting | | (0.03 | ) | — | | Gain from discontinued operations | | 0.01 | | — | | Net income | | $ | 1.23 | | $ | 1.18 | | | | | | | | Diluted income per common share | | | | | | Income from continuing operations | | $ | 1.23 | | $ | 1.15 | | Change in accounting | | (0.03 | ) | — | | Gain from discontinued operations | | 0.01 | | — | | Net income | | $ | 1.22 | | $ | 1.15 | | | | | | | | Dividends declared per common share | | $ | 0.405 | | $ | 0.39 | | | | | | | | Weighted-average common shares outstanding | | | | | | Basic | | 128,866 | | 127,323 | | Diluted | | 130,563 | | 130,096 | |
The accompanying notes are an integral part of the consolidated financial information.
3
ECOLAB INC.
CONSOLIDATED BALANCE SHEET (amounts in thousands) | | September 30 2002 | | December 31 2001 | | | March 31 2003 | | December 31 2002 | | | | (unaudited) | | | (unaudited) | | | | | | | | | | | | | ASSETS | | | | | | | | | | | | | | | | | | | | | | Current assets | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 95,462 | | $ | 41,793 | | | $ | 56,554 | | $ | 49,205 | | | | | | | | | | | | | Accounts receivable, net | | 571,406 | | 514,074 | | | 594,433 | | 553,154 | | | | | | | | | | | | | Inventories | | 296,295 | | 279,785 | | | 311,077 | | 291,506 | | | | | | | | | | | | | Deferred income taxes | | 60,099 | | 53,781 | | | 75,276 | | 71,147 | | | | | | | | | | | | | Other current assets | | 49,365 | | 40,150 | | | 62,296 | | 50,925 | | | | | | | | | | | | | Total current assets | | 1,072,627 | | 929,583 | | | 1,099,636 | | 1,015,937 | | | | | | | | | | | | | Property, plant and equipment, net | | 657,820 | | 644,323 | | | 694,729 | | 680,265 | | | | | | | | | | | | | Goodwill | | 650,100 | | 596,925 | | | Goodwill, net | | | 734,671 | | 695,700 | | | | | | | | | | | | | Other intangible assets | | 182,469 | | 178,951 | | | Other intangible assets, net | | | 204,438 | | 188,670 | | | | | | | | | | | | | Other assets, net | | 202,566 | | 175,218 | | | 291,698 | | 297,857 | | | | | | | | | | | | | Total assets | | $ | 2,765,582 | | $ | 2,525,000 | | | $ | 3,025,172 | | $ | 2,878,429 | | | | | | | | |
The accompanying notes are an integral part of the consolidated financial information. (Continued) 43
ECOLAB INC. CONSOLIDATED BALANCE SHEET (Continued)
(amounts in thousands, except per share) | | September 30 2002 | | December 31 2001 | | | March 31 2003 | | December 31 2002 | | | | | (unaudited) | | | | (unaudited) | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | | | Current liabilities | | | | | | | | | | | | | | | | | | | | | | Short-term debt | | $ | 132,350 | | $ | 233,393 | | | $ | 164,234 | | $ | 160,099 | | | | | | | | | | | | | Accounts payable | | 205,391 | | 199,772 | | | 207,303 | | 205,665 | | | | | | | | | | | | | Compensation and benefits | | 157,437 | | 132,720 | | | 149,340 | | 184,239 | | | | | | | | | | | | | Income taxes | | 36,081 | | 18,887 | | | 40,266 | | 12,632 | | | | | | | | | | | | | Other current liabilities | | 311,089 | | 243,180 | | | 323,524 | | 303,715 | | | | | | �� | | | | | | | Total current liabilities | | 842,348 | | 827,952 | | | 884,667 | | 866,350 | | | | | | | | | | | | | Long-term debt | | 539,636 | | 512,280 | | | 569,296 | | 539,743 | | | | | | | | | | | | | Postretirement health care and pension benefits | | 206,373 | | 183,281 | | | 213,133 | | 207,596 | | | | | | | | | | | | | Other liabilities | | 124,536 | | 121,135 | | | 160,144 | | 164,989 | | | | | | | | | | | | | Shareholders’ equity (common stock, par value $1.00 per share; shares outstanding: September 30, 2002 – 129,445; December 31, 2001 – 127,900) | | 1,052,689 | | 880,352 | | | Shareholders’ equity (common stock, par value $1.00 per share; shares outstanding: March 31, 2003 - 130,659; December 31, 2002 - 129,940) | | | 1,197,932 | | 1,099,751 | | | | | | | | | | | | | Total liabilities and shareholders’ equity | | $ | 2,765,582 | | $ | 2,525,000 | | | $ | 3,025,172 | | $ | 2,878,429 | |
The accompanying notes are an integral part of the consolidated financial information. 54
ECOLAB INC. CONSOLIDATED STATEMENT OF CASH FLOWS | | Nine Months Ended September 30 | | | First Quarter Ended March 31 | | (amounts in thousands) | | 2002 | | 2001 | | | 2003 | | 2002 | | | | (unaudited) | | | (unaudited) | | | | | | | | | | | | | OPERATING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | Net income | | $ | 158,664 | | $ | 149,868 | | | $ | 55,318 | | $ | 34,921 | | | | | | | | | | | | | Cumulative effect of change in accounting | | 4,002 | | — | | | — | | 4,002 | | | | | | | | | | | | | Gain from discontinued operations | | (1,882 | ) | — | | | — | | (1,882 | ) | | | | | | | | | | | | Income from continuing operations | | 160,784 | | 149,868 | | | 55,318 | | 37,041 | | | | | | | | | | | | | Adjustments to reconcile income from continuing operations to cash provided by operating activities: | | | | | | | | | | | Depreciation | | 139,664 | | 97,464 | | | 55,059 | | 47,826 | | Amortization | | 20,919 | | 24,668 | | | 7,445 | | 6,545 | | Deferred income taxes | | (3,203 | ) | 2,209 | | | (1,718 | ) | (654 | ) | Equity in earnings of Henkel-Ecolab | | — | | (12,276 | ) | | Henkel-Ecolab royalties and dividends | | — | | 15,459 | | | Special charges – asset disposals | | 4,810 | | — | | | Special charges - asset disposals | | | (7 | ) | 2,999 | | Other, net | | 630 | | (1,732 | ) | | 728 | | 530 | | Changes in operating assets and liabilities: | | | | | | | | | | | Accounts receivable | | (30,531 | ) | (59,491 | ) | | (12,821 | ) | (28,280 | ) | Inventories | | (5,325 | ) | (6,392 | ) | | (12,593 | ) | (1,946 | ) | Other assets | | (31,331 | ) | (25,393 | ) | | (17,302 | ) | (22,809 | ) | Accounts payable | | (5,900 | ) | (2,236 | ) | | (5,576 | ) | (1,933 | ) | Other liabilities | | 117,443 | | 53,501 | | | (3,198 | ) | 47,509 | | | | | | | | | | | | | Cash provided by operating activities | | $ | 367,960 | | $ | 235,649 | | | $ | 65,335 | | $ | 86,828 | |
The accompanying notes are an integral part of the consolidated financial information. (Continued) 65
ECOLAB INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Continued) | | Nine Months Ended September 30 | | | First Quarter Ended March 31 | | (amounts in thousands) | | 2002 | | 2001 | | | 2003 | | 2002 | | | | | (unaudited) | | | | (unaudited) | | | | | | | INVESTING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | Capital expenditures | | $ | (145,459 | ) | $ | (118,534 | ) | | $ | (56,401 | ) | $ | (46,081 | ) | Property disposals | | 5,858 | | 1,894 | | | 6,093 | | 1,395 | | Capitalized software expenditures | | (2,150 | ) | — | | | (622 | ) | (775 | ) | Businesses acquired and investments in affiliates | | (21,606 | ) | (12,398 | ) | | (25,599 | ) | (19,921 | ) | Other, net | | — | | (405 | ) | | Sale of businesses and assets | | | 7,334 | | — | | | | | | | | | Cash used for investing activities | | (163,357 | ) | (129,443 | ) | | (69,195 | ) | (65,382 | ) | | | | | | | | | | | | FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | Notes payable, net | | (370,796 | ) | (144,198 | ) | | Net issuances (repayments) of notes payable | | | 574 | | (291,427 | ) | Long-term debt borrowings | | 257,624 | | 149,817 | | | 8 | | 257,494 | | Long-term debt repayments | | (917 | ) | (1,672 | ) | | (207 | ) | (203 | ) | Reacquired shares | | (9,004 | ) | (31,852 | ) | | (9,008 | ) | (764 | ) | Cash dividends on common stock | | (52,108 | ) | (49,820 | ) | | (18,838 | ) | (17,265 | ) | Other, net, primarily exercise of stock options | | 22,997 | | 17,427 | | | Exercise of employee stock options | | | 32,085 | | 18,345 | | Other, net | | | (118 | ) | (1,362 | ) | | | | | | | | | | | | Cash used for financing activities | | (152,204 | ) | (60,478 | ) | | Cash provided by (used for) financing activities | | | 4,496 | | (35,182 | ) | | | | | | | | | | | | Effect of exchange rate changes on cash | | 1,270 | | 152 | | | 6,713 | | 2,175 | | | | | | | | | | | | | INCREASE IN CASH AND CASH EQUIVALENTS | | 53,669 | | 45,880 | | | INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | | 7,349 | | (11,561 | ) | | | | | | | | | | | | Cash and cash equivalents, beginning of period | | 41,793 | | 43,965 | | | 49,205 | | 41,793 | | | | | | | | | | | | | Cash and cash equivalents, end of period | | $ | 95,462 | | $ | 89,845 | | | $ | 56,554 | | $ | 30,232 | |
The accompanying notes are an integral part of the consolidated financial information. 76
ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Consolidated Financial Statements The unaudited consolidated financial statements as of September 30, 2002 and for the threefirst quarter ended March 31, 2003 and nine-month periods ended September 30, 2002, and 2001, reflect, in the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows of the company for the interim periods presented. Except for adjustments for special charges, a goodwill impairment charge and a gain from discontinued operations, these adjustments consisted of normal, recurring items. The financial results for any interim period are not necessarily indicative of results for the full year. The consolidated balance sheet data as of December 31, 20012002 was derived from audited consolidated financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America. The unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto incorporated in the company’s Annual Report on Form 10-K for the year ended December 31, 2001.2002. With respect to the unaudited financial information of Ecolab Inc. as of September 30, 2002 and for the third quarter ended March 31, 2003 and nine-month periods ended September 30, 2002, and 2001, included in this Form 10-Q, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards, which do not require an audit, for a review of such information. Therefore, their separate report dated OctoberApril 22, 20022003, appearing herein, states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 (the “Act”) for their report on the unaudited financial information because that report is not a report or a part of a registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act. 2. Selected Balance Sheet InformationStock-Based Compensation (amounts in thousands) | | September 30 2002 | | December 31 2001 | | | | (unaudited) | | | | Inventories | | | | | | Finished goods | | $ | 131,032 | | $ | 124,657 | | Raw materials and parts | | 167,398 | | 156,754 | | Excess of fifo cost over lifo cost | | (2,135 | ) | (1,626 | ) | Total | | $ | 296,295 | | $ | 279,785 | | | | | | | | Shareholders’ equity | | | | | | Common stock | | $ | 151,453 | | $ | 149,734 | | Additional paid-in capital | | 369,431 | | 319,452 | | Retained earnings | | 1,127,440 | | 1,021,049 | | Deferred compensation, net | | (2,213 | ) | (3,676 | ) | Accumulated other comprehensive loss | | (73,112 | ) | (95,623 | ) | Treasury stock | | (520,310 | ) | (510,584 | ) | Total | | $ | 1,052,689 | | $ | 880,352 | |
The company measures compensation cost for its stock incentive and option plans using the intrinsic value-based method of accounting. 8Had the company used the fair value-based method of accounting to measure compensation expense for its stock incentive and option plans and charged compensation cost against income over the vesting periods, based on the fair value of options at the date of grant, net income and the related basic and diluted per common share amounts for the first quarters ended March 31, 2003 and 2002 would have been reduced to the following pro forma amounts:
7
ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Stock-Based Compensation (Continued) | | First Quarter Ended March 31 | | | | 2003 | | 2002 | | | | (unaudited) | | | | | | | | Net income, as reported | | $ | 55,318 | | $ | 34,921 | | | | | | | | Add: Stock-based employee compensation expense included in reported net income, net of tax | | 285 | | 488 | | | | | | | | Deduct: Total stock-based employee compensation expense under fair value-based method, net of tax | | (4,533 | ) | (3,852 | ) | | | | | | | Pro forma net income | | $ | 51,070 | | $ | 31,557 | | | | | | | | Basic net income per common share | | | | | | As reported | | $ | 0.42 | | $ | 0.27 | | Pro forma | | 0.39 | | 0.25 | | | | | | | | Diluted net income per common share | | | | | | As reported | | 0.42 | | 0.27 | | Pro forma | | $ | 0.39 | | $ | 0.24 | |
3. Selected Balance Sheet Information (amounts in thousands) | | March 31 2003 | | December 31 2002 | | | | (unaudited ) | | Inventories | | | | | | Finished goods | | $ | 156,197 | | $ | 136,721 | | Raw materials and parts | | 157,722 | | 156,628 | | Excess of fifo cost over lifo cost | | (2,842 | ) | (1,843 | ) | Total | | $ | 311,077 | | $ | 291,506 | | | | | | | | Other intangible assets, net | | | | | | Customer relationships | | $ | 141,976 | | $ | 120,324 | | Intellectual property | | 68,548 | | 71,104 | | Trademarks | | 50,421 | | 50,308 | | Other intangibles | | 16,269 | | 13,502 | | Total | | 277,214 | | 255,238 | | Accumulated amortization | | (72,776 | ) | (66,568 | ) | Other intangible assets, net | | $ | 204,438 | | $ | 188,670 | | | | | | | | Shareholders’ equity | | | | | | Common stock | | $ | 152,852 | | $ | 151,950 | | Additional paid-in capital | | 422,397 | | 386,208 | | Retained earnings | | 1,196,078 | | 1,159,663 | | Deferred compensation, net | | (1,246 | ) | (1,710 | ) | Accumulated other comprehensive loss | | (42,843 | ) | (76,108 | ) | Treasury stock | | (529,306 | ) | (520,252 | ) | Total | | $ | 1,197,932 | | $ | 1,099,751 | |
8
ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. Selected Balance Sheet Information (Continued) Accumulated other comprehensive loss as of September 30, 2002March 31, 2003 consists of $3,196,000$2,593,000 of net unrealized gainslosses on primarily financial instruments and $76,308,000$40,250,000 of cumulative translation losses. Accumulated other comprehensive loss as of December 31, 20012002 consists of $586,000$1,571,000 of net unrealized losses on financial instruments and $95,037,000$74,537,000 of cumulative translation losses. 3.4. Financial Instruments
In February 2002, subsequent to the company’s most recent fiscal year-end, the company issued euro 300 million of 5.375 percent Eurobonds,Euronotes, due February 2007. The issuance of this debt gives rise to foreign currency exposures and in order to manage this risk the company designated a portion (approximately euro 200 million)250 million as of the end of the first quarter 2003) of this EurobondEuronote debt as a hedge of existing foreign currency exposures related to net investments the company has in certain European subsidiaries. Accordingly, the transaction gains and losses on the portion of the EurobondsEuronotes that are designated and are effective as hedges of the company’s net investments have been included as a component of the cumulative translation account. Total transaction losses related to the EurobondsEuronotes charged to shareholders’ equity were approximately $9.8 million and $23.9$17.1 million for the thirdfirst quarter and first nine months of 2002, respectively. The company also entered into an interest rate swap agreement in connection with the issuance of its Eurobonds. This agreement was used to help the company achieve a desired proportion of variable versus fixed rate debt. The interest rate swap agreement is effective until February 2007 and essentially converts approximately euro 80 million of the Eurobond debt from a fixed interest rate to a floating or variable interest rate.2003.
4.5. Comprehensive Income
Comprehensive income was as follows: | | Third Quarter Ended September 30 | | Nine Months Ended September 30 | | (amounts in thousands) | | 2002 | | 2001 | | 2002 | | 2001 | | | | (unaudited) | | (unaudited) | | | | | | | | | | | | Net income | | $ | 72,082 | | $ | 57,261 | | $ | 158,664 | | $ | 149,868 | | | | | | | | | | | | Foreign currency translation | | 18,581 | | 10,386 | | 18,729 | | 810 | | | | | | | | | | | | Financial instruments | | 2,110 | | (343 | ) | 3,782 | | (744 | ) | | | | | | | | | | | Comprehensive income | | $ | 92,773 | | $ | 67,304 | | $ | 181,175 | | $ | 149,934 | |
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ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | First Quarter Ended March 31 | | (amounts in thousands) | | 2003 | | 2002 | | | | (unaudited) | | | | | | | | Net income | | $ | 55,318 | | $ | 34,921 | | | | | | | | Foreign currency translation | | 34,287 | | (22,864 | ) | | | | | | | Financial instruments | | (1,022 | ) | 2,450 | | | | | | | | Comprehensive income | | $ | 88,583 | | $ | 14,507 | |
5. Reclassifications6.
In connection with adopting Emerging Issues Task Force (EITF) 01-09, Accounting for Consideration Given by a Vendor to a Customer, the company reclassified certain customer incentive costs from selling, general and administrative expenses to a component of revenue at the beginning of 2002. Prior year amounts have also been reclassified for consistency purposes. This reclassification decreased previously reported revenue by approximately $8.6 million for the quarter ended September 30, 2001 and by $26.9 million for the nine months ended September 30, 2001. Also, at the beginning of 2002, the company reclassified repair part costs from selling, general and administrative expense to cost of sales. Prior year amounts have also been reclassified for consistency purposes. The impact of this reclassification increased previously reported cost of sales by approximately $7.9 million for the quarter ended September 30, 2001 and by $23.3 million for the nine months ended September 30, 2001. These reclassifications had no impact on previously reported net income.
6. Special Charges
In the first quarter of 2002, management approved plans to undertake restructuring and cost saving actions during 2002, including costs related to the integration of the company’s European operations. These actions included global workforce reductions, facility closings, employee benefit changes and product line discontinuations. AsA portion of these actions were completed during the first quarter of 2002, and as a result, the company recorded restructuring expense of $1,438,000$22,991,000 ($896,000 after tax)in the third quarter of 2002 and $36,554,000 ($22,774,00014,289,000 after tax) in the first nine monthsquarter of 2002. This includes $18,122,000 for employee termination benefits, $2,999,000 for asset disposals and $1,870,000 for other charges. The company also incurred non-recurring merger integration costs of $972,000$280,000 ($535,000185,000 after tax) and $2,853,000 ($1,808,000 after tax) in the third quarter and the first nine months of 2002, respectively, related to the integration of European and other operations. TheseRestructuring and merger 9
ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6.Special Charges (Continued) integration costs have also been included as a component of “special charges” on the consolidated statement of income. The combinedincome with a portion of restructuring expenses included as a component of “cost of sales”. Amounts included as a component of “cost of sales” include asset disposals of $2,999,000 and merger integration costs decreased diluted earnings per share by $0.01 and $0.19manufacturing related severance of $2,185,000 for the three and nine-month periods ended September 30, 2002, respectively.first quarter of 2002.
Also included in “special charges” on the consolidated statement of income for the first nine monthsquarter of 2002 is a one-time curtailment gain of $5,791,000 ($3,501,000 after tax), or $0.03 per diluted share in 2002, related to changes to postretirement healthcare benefits made in the first quarter of 2002. Restructuring liabilities are classified in other current liabilities. Employee termination benefit expenses in the first quarter of 2002 included approximately 275 net personnel reductions through voluntary and involuntary terminations. Individuals were affected through facility closures and consolidation primarily within the corporate administrative, operations and research and development functions. Asset disposals include inventory and property, plant, and equipment charges. Inventory charges were $957,000 for the first quarter of 2002 and reflect the discontinuance of product lines, which are not consistent with the company’s long-term strategies. Property, plant and equipment charges during the first quarter of 2002 were $2,042,000, and reflect the downsizing and closure of production facilities as well as global changes to manufacturing and distribution operations in connection with the integration of European operations. Other charges include lease termination costs and other miscellaneous exit costs. The first quarter of 2003 includes the reversal of $242,000 of previously accrued severance costs. The company continued to record restructuring and merger integration charges throughout 2002 and completed these activities by December 31, 2002. For segment reporting purposes, each of these items has been included in the company’s corporate segment, which is consistent with the company’s internal management reporting. 10
ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Special Charges (Continued) The restructuring expenses described above and subsequent reductionsReductions to the relatedrestructuring liability accounts for each quarterly period throughout 2002during the first quarter of 2003 include the following:
(thousands) | | Employee Termination Benefits | | Asset Disposals | | Other | | Total | | Initial expense and accrual | | $ | 18,122 | | $ | 2,999 | | $ | 1,870 | | $ | 22,991 | | | | | | | | | | | | Cash payments | | (3,867 | ) | | | (377 | ) | (4,244 | ) | | | | | | | | | | | Non-cash charges | | | | (2,999 | ) | | | (2,999 | ) | Restructuring liability, March 31, 2002 | | 14,255 | | 0 | | 1,493 | | 15,748 | | | | | | | | | | | | Additional expense and accrual | | 9,458 | | 1,624 | | 1,043 | | 12,125 | | | | | | | | | | | | Cash payments | | (3,617 | ) | | | (694 | ) | (4,311 | ) | | | | | | | | | | | Non-cash charges | | | | (1,624 | ) | | | (1,624 | ) | Restructuring liability, June 30, 2002 | | 20,096 | | 0 | | 1,842 | | 21,938 | | | | | | | | | | | | Additional expense and accrual | | 1,004 | | 389 | | 247 | | 1,640 | | | | | | | | | | | | Cash payments | | (3,786 | ) | | | (164 | ) | (3,950 | ) | | | | | | | | | | | Revisions to prior estimates | | | | (202 | ) | | | (202 | ) | | | | | | | | | | | Non-cash charges | | | | (187 | ) | | | (187 | ) | Restructuring Liability, September 30, 2002 | | $ | 17,314 | | $ | 0 | | $ | 1,925 | | $ | 19,239 | |
11
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Special Charges (Continued)
Restructuring expenses have been included both as a component of “special charges” and a component of “cost of sales” on the accompanying Consolidated Statement of Income. Amounts included as a component of “cost of sales” include asset disposals of $187,000 and manufacturing related severance of $114,000 for the third quarter. Year-to-date asset disposals were $4,810,000 and manufacturing related severance was $2,583,000. Restructuring liabilities for employee termination benefits are classified as a component of compensation and benefits in current liabilities and restructuring liabilities for other costs are classified in other current liabilities.
Employee termination benefit expenses in the third quarter of 2002 included 56 personnel reductions through voluntary and involuntary terminations. Total net personnel reductions during the first nine months of 2002 were 542 people, with the possibility that additional people will be replaced in the future. Individuals were affected through facility closures and consolidation primarily within the corporate administrative functions.
Asset disposals include inventory and property, plant, and equipment charges. Net inventory and property, plant and equipment charges for the third quarter were $187,000 and include the reversal of $202,000 previously expensed in the first quarter. During the first nine months of 2002 inventory charges were $2,223,000, and reflect the discontinuance of product lines which are not consistent with the company’s long-term strategies. Property, plant and equipment charges during the first nine months of 2002 were $2,587,000, and reflect the downsizing and closure of production facilities as well as global changes to manufacturing and distribution operations in connection with the integration of European operations.
Other charges of $247,000 and $3,160,000 for the three and nine-month periods ended September 30, 2002, respectively, include lease termination costs and other miscellaneous exit costs.
The company continues to anticipate additional restructuring expenses during the remainder of 2002, which are expected to result in total pre-tax charges of $50 million to $60 million for the full year 2002.
(thousands) | | Employee Termination Benefits | | Asset Disposals | | Other | | Total | | | | | | | | | | | | Expense and accrual in 2002 | | $ | 36,366 | | $ | 6,180 | | $ | 5,221 | | $ | 47,767 | | | | | | | | | | | | Cash payments in 2002 | | (16,033 | ) | | | (1,711 | ) | (17,744 | ) | | | | | | | | | | | Non-cash charges in 2002 | | | | (6,180 | ) | | | (6,180 | ) | | | | | | | | | | | Restructuring liability, December 31, 2002 | | $ | 20,333 | | $ | 0 | | $ | 3,510 | | $ | 23,843 | | | | | | | | | | | | Cash payments | | (8,358 | ) | | | (713 | ) | (9,071 | ) | | | | | | | | | | | Revisions to prior estimates | | (235 | ) | (7 | ) | | | (242 | ) | | | | | | | | | | | Non-cash charges | | | | 7 | | | | 7 | | | | | | | | | | | | Effect of exchange rate changes | | 617 | | | | 569 | | 1,186 | | | | | | | | | | | | Restructuring liability, March 31, 2003 | | $ | 12,357 | | $ | 0 | | $ | 3,366 | | $ | 15,723 | |
7. Gain From Discontinued Operations During the first quarter of 2002, the company resolved a legal issue related to the disposal of its Chemlawn business in 1992. This resulted in the recognition of a gain from discontinued operations of approximately $1.9 million$1,882,000 (net of income tax benefit of $1.1 million)$1,079,000) or $0.01 per diluted share for the nine monthsfirst quarter ended September 30,March 31, 2002. 8. Business Acquisitions and Investments In JanuaryDecember 2002 (subsequent to the company’s International operation’s year-end), the company purchased certainacquired the Adams Healthcare business of Medical Solutions plc. Adams Healthcare is a leading supplier of hospital hygiene products in the United Kingdom with annual sales of approximately $19 million. These operations have become part of Kleencare Hygiene, a subsidiary of LHS Holdings Limited based in Manchester, Unitedthe company’s International Cleaning & Sanitizing segment. 1211
ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Business Acquisitions and Investments (Continued) Kingdom. Kleencare offers products, systems and services for the food and beverage industry. EcolabThis acquisition has acquired Kleencare operations in the United Kingdom, France, Switzerland and the Netherlands. These operations have become part of the company’s International Cleaning & Sanitizing operations. Annual sales of Kleencare prior to acquisition were approximately $30 million.
In January 2002, the company also purchased Chicago-based Audits International, a premier provider of food safety audits and food quality evaluations. Audits International, now known as EcoSure, has become part of the United States Other Services segment and had annual sales prior to acquisition of approximately $3 million.
These acquisitions have been accounted for as purchasesa purchase and, accordingly, the results of theirits operations have been included in the financial statements of the company from the datesdate of acquisition. Net sales and operating income of these businessesthis business are not significant to the company’s consolidated results of operations, financial position and cash flows.
The total cash paid by the company for acquisitions and investments in affiliates during the first nine monthsquarter of 2003 was $25,599,000. This included payments of restructuring costs related to Henkel-Ecolab that were accrued in 2002 was $21,606,000, the majority of which was paidand acquisition costs related to businesses acquired in the first quarter.2002. SubsequentAlso in December 2002, the company sold its Darenas janitorial products distribution business based in Birmingham, UK to the third quarterBunzl plc in London, UK at a nominal loss. The annualized sales of 2002, Ecolab purchased Terminix Ltd., a London-based provider of commercial pest elimination and property services throughout the United Kingdom and Republic of Ireland.this entity are approximately $30 million. These operations will becomewere part of the company’s International Cleaning & Sanitizing operations.segment.
The changes in the carrying amount of goodwill for each of the company’s reportable segments for the quarter ended March 31, 2003 were as follows: | | United States | | International Cleaning & Sanitizing | | Consolidated | | (thousands) | | Cleaning & Sanitizing | | Other Services | | Total | | | | | | | | | | | | | | Balance as of December 31, 2002 | | $ | 121,979 | | $ | 49,306 | | $ | 171,285 | | $ | 524,415 | | $ | 695,700 | | | | | | | | | | | | | | Goodwill acquired during quarter | | 73 | | (377 | ) | (304 | ) | 381 | | 77 | | | | | | | | | | | | | | Foreign currency translation | | — | | — | | — | | 38,894 | | 38,894 | | | | | | | | | | | | | | Balance as of March 31, 2003 | | $ | 122,052 | | $ | 48,929 | | $ | 170,981 | | $ | 563,690 | | $ | 734,671 | |
Goodwill acquired also includes adjustments to prior year acquisitions. International Cleaning & Sanitizing goodwill acquired in the first quarter of 2003 includes a reduction of $5.6 million for an adjustment related to the Terminix Ltd. has annual salesacquisition. This adjustment was related to a finalization of approximately $65 million.the pension valuation at the date of acquisition. United States Other Services goodwill acquired in the first quarter of 2003 includes a reduction of $0.4 million for an adjustment related to the EcoSure acquisition. 12
ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 9. Income Per Common Share The computations of the basic and diluted income from continuing operations before cumulative effect of change in accounting per share amounts were as follows: | | Third Quarter Ended September 30 | | Nine Months Ended September 30 | | (amounts in thousands, except per share) | | 2002 | | 2001 | | 2002 | | 2001 | | | | (unaudited) | | (unaudited) | | | | | | | | | | | | Income from continuing operations before cumulative effect of change in accounting | | $ | 72,082 | | $ | 57,261 | | $ | 160,784 | | $ | 149,868 | | | | | | | | | | | | Weighted-average common shares outstanding | | | | | | | | | | Basic | | 129,287 | | 127,675 | | 128,866 | | 127,323 | | Effect of dilutive stock options and awards | | 1,324 | | 2,134 | | 1,697 | | 2,773 | | Diluted | | 130,611 | | 129,809 | | 130,563 | | 130,096 | | | | | | | | | | | | Income from continuing operations per common share | | | | | | | | | | Basic | | $ | 0.56 | | $ | 0.45 | | $ | 1.25 | | $ | 1.18 | | Diluted | | $ | 0.55 | | $ | 0.44 | | $ | 1.23 | | $ | 1.15 | |
13
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Income Per Common Share (Continued)
| | First Quarter Ended March 31 | | (amounts in thousands, except per share) | | 2003 | | 2002 | | | | (unaudited) | | | | | | | | Income from continuing operations before cumulative effect of change in accounting | | $ | 55,318 | | $ | 37,041 | | | | | | | | Weighted-average common shares outstanding | | | | | | Basic | | 130,224 | | 128,406 | | Effect of dilutive stock options and awards | | 1,594 | | 1,774 | | Diluted | | 131,818 | | 130,180 | | | | | | | | Income from continuing operations before change in accounting per common share | | | | | | Basic | | $ | 0.42 | | $ | 0.29 | | Diluted | | $ | 0.42 | | $ | 0.28 | |
Restricted stock awards of approximately 128,000100,000 and 172,000192,000 shares were excluded from the company’s calculation of basic net income per share amounts for the threefirst quarter ended March 31, 2003 and nine months ended September 30, 2002 respectively, and 236,000 and 326,000 shares were excluded for the third quarter and nine months ended September 30, 2001, respectively, because such shares were not yet vested at those dates. Stock options to purchase approximately 2.2 million shares for both the three and nine months ended September 30, 2002 and 3.9 million and 2.8 million shares for the three and nine months ended September 30, 2001, respectively, were not dilutive during the first quarter ended March 31, 2002 and, therefore, were not included in the computations of diluted common shares outstanding. 10. Operating Segments Financial information for each of the company’s reportable segments is as follows: | | Third Quarter Ended September 30 | | Nine Months Ended September 30 | | | First Quarter Ended March 31 | | (amounts in thousands) | | 2002 | | 2001 | | 2002 | | 2001 | | | 2003 | | 2002 | | | | (unaudited) | | (unaudited) | | | (unaudited) | | Net Sales | | | | | | | | | | | | | | | United States | | | | | | | | | | | | | | | | | | | Cleaning & Sanitizing | | $ | 426,339 | | $ | 407,542 | | $ | 1,220,801 | | $ | 1,190,190 | | | $ | 417,299 | | $ | 392,349 | | Other Services | | 81,629 | | 69,296 | | 230,943 | | 200,857 | | | 73,329 | | 70,490 | | Total | | 507,968 | | 476,838 | | 1,451,744 | | 1,391,047 | | | 490,628 | | 462,839 | | International Cleaning & Sanitizing | | 362,842 | | 124,931 | | 1,043,134 | | 352,046 | | | 360,558 | | 340,933 | | Effect of foreign currency translation | | 24,056 | | 5,862 | | 25,327 | | 22,919 | | | 24,666 | | (17,663 | ) | Consolidated | | $ | 894,866 | | $ | 607,631 | | $ | 2,520,205 | | $ | 1,766,012 | | | $ | 875,852 | | $ | 786,109 | | | | | | | | | | | | | | | | | Operating Income | | | | | | | | | | | | | | | United States | | | | | | | | | | | | | | | | | | | Cleaning & Sanitizing | | $ | 80,361 | | $ | 71,129 | | $ | 214,280 | | $ | 193,710 | | | $ | 69,906 | | $ | 64,940 | | Other Services | | 10,761 | | 8,875 | | 25,247 | | 22,682 | | | 3,647 | | 5,262 | | Total | | 91,122 | | 80,004 | | 239,527 | | 216,392 | | | 73,553 | | 70,202 | | International Cleaning & Sanitizing | | 39,938 | | 14,226 | | 93,686 | | 35,471 | | | 25,717 | | 21,402 | | Corporate expense | | (2,411 | ) | (685 | ) | (33,617 | ) | (2,819 | ) | | 242 | | (17,480 | ) | Effect of foreign currency translation | | 2,247 | | 571 | | 2,847 | | 2,697 | | | 2,022 | | (1,201 | ) | Consolidated | | $ | 130,896 | | $ | 94,116 | | $ | 302,443 | | $ | 251,741 | | | $ | 101,534 | | $ | 72,923 | |
Prior to 2002, the company accounted for its investment in Henkel-Ecolab under the equity method of accounting. At year-end 2001, the company acquired the remaining 50 percent interest of the Henkel-Ecolab joint venture that it did not previously own, and Henkel-Ecolab became wholly-owned by the company. The results of operations for the European operations are included with the company’s International Cleaning & Sanitizing segment beginning in the first quarter of 2002.
1413
ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Operating Segments (Continued) The International Cleaning & Sanitizing amounts included above are based on translation into U.S. dollars at the fixed currency exchange rates used by management for 2002.2003. As described in Note 5, sales amounts for 2001 have been adjusted to reflect the adoption of EITF 01-09.
Prior to 2002, corporate expense normally represented only overhead costs directly related to Henkel-Ecolab. In 2002, these overhead costs have been included in the International Cleaning & Sanitizing segment due to the acquisition of Henkel-Ecolab at year-end 2001. Corporate expense in 2002 includes restructuring and integration charges (income) of approximately $2.4($0.2) million and $23.3 million for the thirdfirst quarter of 2003 and approximately $39.4 million for2002, respectively. Corporate expense in the nine months ended September 30,first quarter of 2002 as well asalso includes a curtailment gain of approximately $5.8 million due to benefit plan changes for the nine months ended September 30, 2002.changes. These items are described in Note 6.
11. Equity in Earnings of Henkel-EcolabGoodwill and Other Intangible Assets Certain financial data of Henkel-Ecolab and the components of the company’s equity in earnings of Henkel-Ecolab were as follows:
(amounts in thousands) | | Third Quarter Ended September 30 2001 | | Nine Months Ended September 30 2001 | | | | (unaudited) | | (unaudited) | | | | | | | | Henkel-Ecolab | | | | | | | | | | | | Net sales | | $ | 219,115 | | $ | 638,801 | | | | | | | | Gross profit | | 102,224 | | 299,120 | | | | | | | | Income before income taxes | | 21,757 | | 51,531 | | | | | | | | Net income | | $ | 12,864 | | $ | 30,852 | | | | | | | | Ecolab equity in earnings | | | | | | | | | | | | Ecolab equity in net income | | $ | 6,432 | | $ | 15,426 | | | | | | | | Ecolab royalty income from Henkel-Ecolab, net of income taxes | | 533 | | 1,566 | | | | | | | | Amortization expense for the excess of cost over the underlying net assets of Henkel-Ecolab | | (1,531 | ) | (4,716 | ) | | | | | | | Equity in earnings of Henkel-Ecolab | | $ | 5,434 | | $ | 12,276 | |
15
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Equity in Earnings of Henkel-Ecolab (Continued)
Prior to 2002, the company accounted for its investment in Henkel-Ecolab under the equity method of accounting. At year-end 2001, the company acquired the remaining 50 percent interest of the Henkel-Ecolab joint venture that it did not previously own, and Henkel-Ecolab became wholly-owned by the company and is now consolidated with the financial position and results of operations of the company.
The following unaudited pro forma financial information reflects the consolidated results of the company and Henkel-Ecolab assuming the acquisition had occurred at the beginning of 2001.
(amounts in thousands, | | Third Quarter Ended September 30 2001 | | Nine Months Ended September 30 2001 | | except per share) | | (unaudited) | | (unaudited) | | | | | | | | Net sales | | $ | 826,746 | | $ | 2,404,813 | | | | | | | | Net income | | 59,531 | | 152,748 | | | | | | | | Diluted net income per share | | $ | 0.46 | | $ | 1.17 | |
The unaudited pro forma results are presented for information purposes only. These unaudited pro forma results also do not include the benefits of improvements from synergies the company anticipates it will realize nor do they reflect the effects of SFAS No. 142 on comparisons with 2001 results. The results are not necessarily indicative of results that would have occurred had the acquisition been completed at the beginning of 2001, nor are they necessarily indicative of future operating results.
12. New Accounting Standards
Effective January 1, 2002, the company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill“Goodwill and Other Intangible AssetsAssets”. This statement discontinued the amortization of goodwill and indefinite-lived intangible assets, subject to periodic impairment testing. The effect of discontinuing amortization of these assets on the third quarter ended September 30, 2002 was to increase net income by approximately $7.2 million, or $0.06 for basic and diluted net income per share. The effect of this change for the nine-month period was to increase net income by approximately $21.7 million, or $0.17 for basic and diluted net income per share. This amount includes the additional goodwill amortization that would have been reflected for all acquisitions that occurred after June 30, 2001. The additional goodwill was primarily due to the acquisition of the remaining 50 percent of the Henkel-Ecolab joint venture, and also included several small acquisitions. The adjusted amounts shown below reflect the effect of retroactive application of the discontinuance of the amortization of goodwill as if the new method of accounting had been in effect during the first nine months of 2001. Prior to year-end 2001, the consolidated financial statements of the company did not include all of the goodwill associated with the Henkel-Ecolab acquisition. It only reflected the 50 percent interest of the joint venture that the company owned under the equity method of accounting. 16
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. New Accounting Standards (Continued)
| | Third Quarter Ended September 30 | | Nine Months Ended September 30 | | (amounts in thousands, | | 2002 | | 2001 | | 2002 | | 2001 | | except per share) | | (unaudited) | | (unaudited) | | | | | | | | | | | | Net income | | | | | | | | | | Reported net income | | $ | 72,082 | | $ | 57,261 | | $ | 158,664 | | $ | 149,868 | | Goodwill amortization (net of tax effect) | | — | | 3,661 | | — | | 10,983 | | Goodwill amortization reflected in equity in earnings of Henkel-Ecolab (net of tax effect) | | — | | 955 | | — | | 2,865 | | Adjusted net income | | $ | 72,082 | | $ | 61,877 | | $ | 158,664 | | $ | 163,716 | | | | | | | | | | | | Basic earnings per share | | | | | | | | | | Reported basic earnings per share | | $ | 0.56 | | $ | 0.45 | | $ | 1.23 | | $ | 1.18 | | Goodwill amortization (net of tax effect) | | — | | 0.04 | | — | | 0.11 | | Adjusted basic earnings per share | | $ | 0.56 | | $ | 0.48 | | $ | 1.23 | | $ | 1.29 | | | | | | | | | | | | Diluted earnings per share | | | | | | | | | | Reported diluted earnings per share | | $ | 0.55 | | $ | 0.44 | | $ | 1.22 | | $ | 1.15 | | Goodwill amortization (net of tax effect) | | — | | 0.04 | | — | | 0.11 | | Adjusted diluted earnings per share | | $ | 0.55 | | $ | 0.48 | | $ | 1.22 | | $ | 1.26 | |
Per share amounts do not necessarily sum due to changes in shares outstanding and rounding.
Ecolab was required to test all existing goodwill for impairment as of January 1, 2002 on a reporting unit basis. The company’s reporting units are its operating segments. Under SFAS No. 142, the fair value approach was used to test goodwill for impairment. This method differs from Ecolab’sthe company’s prior policy of using an undiscounted cash flows method for testing goodwill impairment. An impairment charge is recognized for the amount, if any, by which the carrying amount of goodwill exceeds its implied fair value. Fair values of reporting units were established using a discounted cash flow method. Where available and as appropriate, comparative market multiples were used to corroborate the results of the discounted cash flow method.
The result of testing goodwill for impairment in accordance with SFAS No. 142, was a non-cash charge of $4.0 million ($0.03 per share), which is reported on the accompanying statement of income in the caption “Change in accounting for goodwill and other intangible assets.” All of the impairment charge relatesrelated to the Africa/Export reporting unit, which is part of the International Cleaning and Sanitizing segment. The primary factor resulting in the impairment charge was the difficult economic environment in the region. No impairment charge was appropriate under the FASB’scompany’s previous goodwill impairment standard,policy, which was based on an undiscounted cash flows.flow model. 17
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. New Accounting Standards (Continued)
The following provides additional information concerning the company’sGoodwill and other intangible assets:
| | September 30 2002 | | December 31 2001 | | (amounts in thousands) | | (unaudited) | | | | | | | | | | Amortized intangible assets: | | | | | | Customer relationships | | $ | 118,463 | | $ | 104,277 | | Intellectual property | | 76,153 | | 71,069 | | Other | | 53,579 | | 60,181 | | Total | | 248,195 | | 235,527 | | Accumulated amortization | | (65,726 | ) | (56,576 | ) | Other intangible assets, net | | $ | 182,469 | | $ | 178,951 | |
Certain identifiable intangible asset amounts set forth above are based on preliminaryassets arise principally from business acquisitions. Goodwill represents the excess of the purchase price allocations associated with recent business acquisitions, and are subject to finalization and adjustment.
The other identifiableover the fair value of net assets acquired. Other intangible assets have been assigned an estimated useful lifeinclude primarily customer relationships, trademarks, patents and other technology. Other intangible assets are amortized on a straight-line basis over the numbertheir estimated economic lives that results in a weighted average useful life of 13 years that approximate their respective useful lives (ranging from three to 30 years). as of March 31, 2003.
The straight-line method of amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits obtained by the company in each reporting period. Total amortization expense related to other intangible assets during the threefirst quarter ended March 31, 2003 and nine months ended September 30, 2002 was approximately $5.3$5.0 million and $13.8 million, respectively. Total amortization expense related to other intangible assets during the three and nine months ended September 30, 2001 was approximately $1.1 million and $4.0$4.2 million, respectively. As of September 30, 2002,March 31, 2003, future estimated amortization expense related to amortizable other identifiable intangible assets will be (amounts in thousands): Fiscal Year | | | | Remainder 2002 (three-month period) | | $ | 4,993 | | 2003 | | 19,621 | | 2004 | | 15,337 | | 2005 | | 15,056 | | 2006 | | 14,663 | | 2007 | | 14,416 | | | | | | |
13. Transitional Disclosure to Previously Issued Annual Financial Statements
The adjusted amounts shown below reflect the effect of retroactive application of the discontinuance of the amortization of goodwill as if SFAS No. 142 had been in effect during the years ended December 31, 2001, 2000 and 1999.
1814
ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13.11. Transitional Disclosure to Previously Issued Annual Financial StatementsGoodwill and Other Intangible Assets (Continued)
(amounts in thousands) | | 2001 | | 2000 | | 1999 | | | | | | | | | | Net income | | | | | | | | Reported net income | | $ | 188,170 | | $ | 206,127 | | $ | 175,786 | | Goodwill amortization (net of tax effect) | | 14,652 | | 13,797 | | 12,048 | | Goodwill amortization reflected in equity in earnings of Henkel-Ecolab (net of tax effect) | | 3,819 | | 3,965 | | 4,583 | | Adjusted net income | | $ | 206,641 | | $ | 223,889 | | $ | 192,417 | | | | | | | | | | Basic earnings per share | | | | | | | | Reported basic earnings per share | | $ | 1.48 | | $ | 1.61 | | $ | 1.36 | | Goodwill amortization (net of tax effect) | | 0.14 | | 0.14 | | 0.13 | | Adjusted basic earnings per share | | $ | 1.62 | | $ | 1.75 | | $ | 1.49 | | | | | | | | | | Diluted earnings per share | | | | | | | | Reported diluted earnings per share | | $ | 1.45 | | $ | 1.56 | | $ | 1.31 | | Goodwill amortization (net of tax effect) | | 0.14 | | 0.13 | | 0.12 | | Adjusted diluted earnings per share | | $ | 1.59 | | $ | 1.70 | | $ | 1.43 | |
Per share amounts do not necessarily sum due to changes in shares outstanding and rounding.
Fiscal Year | | | | 2003 (Remainder: nine-month period) | | $ | 16,292 | | 2004 | | 19,337 | | 2005 | | 18,185 | | 2006 | | 17,877 | | 2007 | | 17,053 | | 2008 | | 16,149 | | | | | | |
1915
REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Directors Ecolab Inc. We have reviewed the accompanying consolidated balance sheet of Ecolab Inc. as of September 30, 2002,March 31, 2003, and the related consolidated statements of income for each of the three and nine-month periods ended September 30, 2002 and 2001, and of cash flows for the nine-monththree-month periods ended September 30, 2002March 31, 2003 and 2001.2002. These financial statements are the responsibility of the Company’s management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2001,2002, and the related consolidated statements of income, of comprehensive income and shareholders’ equity, and of cash flows for the year then ended (not presented herein); and in our report dated February 14, 2002,18, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2001,2002, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. | /s/ PricewaterhouseCoopers LLP | | | PRICEWATERHOUSECOOPERS LLP |
Minneapolis, Minnesota October April 22, 20022003
2016
ECOLAB INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis provides information that management believes is useful in understanding the company’s operating results, cash flows and financial condition. The discussion should be read in conjunction with the consolidated financial statements and related notes included in this Form 10-Q. The following discussion contains various “Forward-Looking Statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We refer readers to the company’s statement entitled “Forward-Looking Statements and Risk Factors” of this report. Additional risk factors may be described from time to time in Ecolab’sthe company’s filings with the Securities and Exchange Commission. Results of Operations – Third - - First Quarter and Nine Months Ended September 30, 2002March 31, 2003 FinancialThe comparability of the company’s results forof operations between the first nine monthsquarter of 2003 and 2002 include several unusual items, most notably (i)has been impacted by a transitional impairment chargechange in accounting for goodwill and other intangible assets from the adoption of SFAS No. 142 (ii)and a gain from discontinued operations as shown in the table below.
| | First Quarter Ended March 31 | | | | 2003 | | 2002 | | | | (unaudited) | | (Diluted earnings per share) | | | | | | | | | | | | Income from continuing operations before change in accounting | | $ | 0.42 | | $ | 0.28 | | | | | | | | Change in accounting for goodwill and other intangible assets | | — | | (0.03 | ) | | | | | | | Gain from discontinued operations | | — | | 0.01 | | | | | | | | Net income | | $ | 0.42 | | $ | 0.27 | |
Per share amounts do not necessarily sum due to rounding. In addition, the comparison of the financial results in the first quarter of 2003 to 2002 were also affected by a one-time gain from benefit plan changes (iii)of $3.5 million after tax and special charges related to restructuring activities and the integration of the European operations and (iv) a gain from discontinued operations. Comparison of results with those$14.5 million after tax which both occurred in the first quarter of a year ago is also affected by2002. Consolidated net sales for the adoptionfirst quarter ended March 31, 2003 were $876 million, an increase of SFAS No. 142 (the elimination11 percent over net sales of goodwill amortization) and$786 million in the acquisition and consolidation of the former European joint venture at the endfirst quarter of last year. The company has published certain historical unaudited pro forma financial information for 2001Consolidated net sales increased by approximately 1 percentage point in the first quarter of 2003 due to assist investors in understanding the pro forma effects of the adoption of SFAS No. 142, the acquisition of the former joint venture as well as the effects of certain reclassifying adjustments. In connection with adopting Emerging Issues Task Force (EITF) 01-09, “Accounting for Consideration Given by a Vendor to a Customer,” the company reclassified certain customer incentive costs from selling, general and administrative expenses to a component of revenue at the beginning of 2002. Prior year results have been reclassified for consistency purposes, the impact of which decreased previously reported revenue by approximately $8.6 million for the third quarter of 2001 and $26.9 million for the nine months ended September 30, 2001. Also at the beginning of 2002, the company reclassified repair part costs from selling, general and administrative expense to cost of sales. Prior year results have been reclassified for consistency purposes, the impact of which increased cost of sales by approximately $7.9 million for the third quarter of 2001 and $23.3 million for the nine months ended September 30, 2001. These reclassifications had no impact on previously reported net income. The following management discussion reflects these reclassifications.
The information included in the following table is not intended to be presented in accordance with SEC guidelines for pro forma financial information and should not be construed as an alternative to the reported results determined in accordance with accounting principles generally accepted in the United States of America. It is provided to assist in an
2117
ECOLAB INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations – Third- First Quarter and Nine Months Ended September 30, 2002 (Continued)March 31, 2003 (continued) investor’s understanding of the impact of the aforementioned items on the comparability of the company’s operations. The table below is an analysis that reflects as reported amounts as well as pro forma amounts that reflect the impact to ongoing operations of the items noted above.
| | Third Quarter Ended September 30 | | Nine Months Ended September 30 | | | | 2002 | | 2001 | | 2002 | | 2001 | | | | (unaudited) | | (unaudited) | | (Diluted earnings per share) | | | | | | | | | | | | | | | | | | | | Pro forma income from ongoing operations as described below | | $ | 0.56 | | $ | 0.50 | | $ | 1.39 | | $ | 1.29 | | | | | | | | | | | | Pro forma adjustments: | | | | | | | | | | Acquisition of Europe joint venture | | — | | (0.02 | ) | — | | (0.02 | ) | Adoption of SFAS No. 142 - to eliminate goodwill amortization | | — | | (0.04 | ) | — | | (0.11 | ) | Adoption of SFAS No. 142 - transitional impairment charge | | — | | — | | (0.03 | ) | — | | One-time gain from benefit plan changes | | — | | — | | 0.03 | | — | | Special charges | | (0.01 | ) | — | | (0.19 | ) | — | | Discontinued operations | | — | | — | | 0.01 | | — | | | | | | | | | | | | Net income, as reported | | $ | 0.55 | | $ | 0.44 | | $ | 1.22 | | $ | 1.15 | |
Per share amounts do not necessarily sum due to changes in shares outstanding and rounding.
Consolidated net sales for the third quarter ended September 30, 2002 were $895 million, an increase of 47 percent over net sales of $608 million in the third quarter of last year. For the first nine months of 2002, net sales increased 43 percent to $2.520 billion from $1.766 billion in the comparable period of 2001. Excluding acquisitions (primarily Henkel-Ecolab), consolidated net sales increased 7 percent in the third quarter and 3 percent for the first nine months of 2002. The acquisition of the remaining 50 percent of the Henkel-Ecolab joint venture and consolidation beginning in 2002 accounted for most of the acquisition-related increase in consolidated net sales.business acquisitions. Changes in currency translation positively impacted sales growth by approximately 35 percentage points for the thirdfirst quarter and had only a minimal effect on sales growth for the nine months ended September 30, 2002.March 31, 2003. Sales benefited from focusedaggressive new account sales efforts, successful new products and new product introductions.
22
ECOLAB INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations – Third Quarter and Nine Months Ended September 30, 2002 (Continued)
The following table includes various as reported and pro forma gross profit margins:
| | Third Quarter Ended September 30 | | Nine Months Ended September 30 | | | | 2002 | | 2001 | | 2002 | | 2001 | | | | (unaudited) | | (unaudited) | | | | | | | | | | | | As reported | | 51.5 | % | 52.5 | % | 50.7 | % | 52.2 | % | | | | | | | | | | | 2002 without restructuring | | 51.5 | % | | | 50.9 | % | | | | | | | | | | | | | 2001 pro forma* | | | | 50.9 | % | | | 50.7 | % |
* The addition of the former European joint venture had the effect of decreasing the consolidated gross profit margin.improved service initiatives.
For the thirdfirst quarter and first nine months of 2002,2003, the gross profit margin was 51.550.8 percent, and 50.7 percentup from last year’s first quarter gross profit margin of net sales, respectively.49.6 percent. Cost of sales included certain restructuring charges of $0.3 million and $7.4$5.2 million for the thirdfirst quarter and the first nine months of 2002, respectively.2002. Excluding these restructuring charges, the gross profit margin would have been 51.5 percent for the third quarter and 50.9 percent for the nine months ended September 30, 2002. For the third quarter and nine months of 2001, the reported gross profit margins were 52.5 percent and 52.2 percent, respectively. The gross profit margin comparison was negatively affected by the acquisition and consolidation of the European joint venture. Gross profit margins for 2001 on a pro forma basis (reflecting the acquisition of the European joint venture) were 50.9 percent for the third quarter and 50.750.3 percent for the first nine monthsquarter of 2001. Ecolab’s2002. The company’s gross profit margin in 2003 benefited from product mix improvements and cost reduction actions. Selling, general and administrative expenses for the third quarter and first nine months of 2002 were 36.6 percent and 37.639.3 percent of consolidated net sales respectively. For the third quarter and nine months of 2001, reported selling, general and administrative expense margins were 37.0 percent and 38.0 percent, respectively. Selling, general and administrative expense margins on a pro forma basis (reflecting the acquisition of Henkel-Ecolab and the elimination of goodwill amortization) for 2001 were 36.3 percent for the third quarter and 37.6 percent for the first nine monthsquarter, an increase from 38.8 percent of 2001.net sales in the comparable quarter of last year. This increase in the thirdfirst quarter is partially due to strongeracquisitions, increased sales trends, which resulted in higher commissions and bonus accruals.service investments and increased healthcare costs. It is also due to a comparison against the thirdfirst quarter of last year when costs were constrained due to a weakening in the economy as well as market disruptionsreduced following the events of September 11. Margins in 2002 benefited from savings related to restructuring activities.11, 2001. 23
ECOLAB INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations – Third Quarter and Nine Months Ended September 30, 2002 (Continued)
DuringIn the first quarter of 2002, management approved variousplans to undertake restructuring and other cost-saving actions in orderduring 2002, including costs related to streamline and improve the company’s global operations. These initiated and anticipated actions are expected to result in pre-tax charges of $50 million to $60 million in 2002. These charges will be partially offset by a curtailment gain attributable to certain benefit plan changes. The benefit plan changes resulted in a curtailment gain of $5.8 million in the first quarter of 2002 ($3.5 million after tax, or $0.03 per diluted share). The change in the benefit plan will also result in approximately $16 million of net unrealized gains that are expected to be amortized over 8 years and reduce future benefit costs. The restructuring is expected to include a reductionintegration of the company’s European operations. These actions included global workforce by approximately 2 percent during 2002, the closing of several facilities, the discontinuance of selectedreductions, facility closings, and product lines and other potential actions.line discontinuations. As a result, of actions completed, the company recorded restructuring expenses and other special charges totaling $2.4of $23.3 million in the thirdfirst quarter of 2002 ($1.414.5 million after tax, or $0.01 per diluted share) and $39.4 milliontax). Also included in special charges for the nine monthsquarter ended September 30,March 31, 2002, is a one-time curtailment gain of $5.8 million ($24.63.5 million after tax, or $0.19 per diluted share).tax), related to changes to post-retirement healthcare benefits made in the first quarter of 2002. The expected cost savings related to restructuring activities have begunbegan in 2002 and willare expected to have a full impact in 2003. Restructuring savings were approximately $5$7.5 million ($3.1 million after tax, or $0.02 per diluted share) for the thirdfirst quarter and $10 million ($6.4 million after tax, or $0.05 per diluted share) forended March 31, 2003. Some of these savings were reinvested in the nine months ended September 30, 2002. Upon completion of the plan, thebusiness. The company expects annual pretax savings of $25 million to $30 million ($15 million to $18 million after tax). The and the company expects to reinvest some of these savings in the business. Further details related to these restructuring expenses are included in Note 5 of the unaudited Notes to Consolidated Financial Statements.
Net income totaled $72 million, for the thirdfirst quarter ended March 31, 2003 totaled $55 million, an increase of 58 percent from net income of $35 million in the first quarter of 2002 and $57 million for the comparable period of 2001.2002. On a per share basis, diluted net income per common share was $0.55$0.42 for the thirdfirst quarter of 2002 and increased 252003, an increase of 56 percent over diluted net income per share of $0.44$0.27 in the thirdfirst quarter of last year. For the first nine months of 2002, net income was $159 million as compared to net income of $150 million in the comparable period of last year. Diluted net income per share increased 6 percent to $1.22 for the nine months ended September 30, 2002 from $1.15 for the first nine months of last year. The increase in thirdfirst quarter and year-to-date earnings reflects several one-time items. In the thirdfirst quarter of 2002, net income included restructuring charges of $1.4$14.5 million after tax, ($0.01 per diluted share). In the first nine months of 2002, net income included restructuring charges of $24.6 million after tax ($0.19 per diluted share), a curtailment gain of $3.5 million after tax, ($0.03 per diluted share), a gain from discontinued operations of $1.9 million after tax ($0.01 per diluted share) and a SFAS No. 142 transitional impairment charge of $4.0 million after tax ($0.03 per diluted share). Net income was also negatively affected by higher net interest expense due to higher borrowings primarily to finance the company’s Henkel-Ecolab acquisition.tax. Currency translation benefited diluted net income by $0.01 per shareapproximately $2 million for the thirdfirst quarter and had an immaterial impact on the first nine months of 2002.2003. 2418
ECOLAB INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations – Third- First Quarter and Nine Months Ended September 30, 2002 (Continued)March 31, 2003 Excluding the transitional impairment charge, the curtailment gain, the restructuring charges and discontinued operations, diluted income per share from ongoing operations would have been $0.56 for the third quarter and $1.39 for the first nine months of 2002, which compares to diluted income of $0.50 per share on a pro forma basis for the third quarter and $1.29 for the first nine months of 2001 as described in the pro forma analysis previously presented.
Among the changes affecting the comparison of 2002 net income to 2001 are the acquisition of the former European joint venture at year-end 2001 and the adoption of SFAS No. 142 at the beginning of 2002. The company included the results of the European joint venture operations in its financial statements using the equity method of accounting through year-end 2001. At the beginning of 2002, the results of the company’s European operations were consolidated with the rest of the company. If the European operations had been consolidated with Ecolab for the third quarter and first nine months of 2001, the effect would have been an increase in diluted income per share of $0.02 for both the third quarter and the first nine months of 2001. Also, effective January 1, 2002, the company adopted the provisions of SFAS No. 142. As a result, the company discontinued the amortization of goodwill, subject to periodic impairment testing. Retroactive application of SFAS No. 142 is not permitted. However, if SFAS No. 142 had been applied to the third quarter and first nine months of 2001, diluted income per share would have increased by $0.04 for the third quarter and $0.11 for the first nine months of 2001. (continued)
Sales of the company’s United States Cleaning & Sanitizing operationssegment were $426$417 million, an increase of 56 percent compared with sales of $408$392 million in the thirdfirst quarter of last year. United States Cleaning & Sanitizing sales were $1.221 billion for the first nine months of 2002, up 3 percent over net sales of $1.190 billion in the comparable period of last year. Sales benefited from good growth in sales of U.S. Institutional, Kay and KayProfessional Product operations. Selling price increases during the third quarter and first nine months of 2002 were approximately 1 percent. Sales of U.S. Institutional increased 5 percent for the third quarter and 46 percent for the first nine monthsquarter of 2002.2003. U.S. Institutional’s results benefited from the continued recovery in the foodservice and travel-relatedhospitality markets. Institutional also benefited from aggressive sales efforts to obtain new accounts as well as the successful introduction of new products. Kay’s U.S. operations reported sales growth of 1113 percent for the thirdfirst quarter and 8 percent for the nine-month period. Kay’s sales increases reflectincrease reflects strong growth in its food retail services business as well as solid growth in sales to its core quickservice customers. Textile Care sales increased 2decreased 6 percent for the thirdfirst quarter of 2003, following a strong fourth quarter 2002, and reflected weaker economic conditions and strong competition within the industry. Sales of Professional Products operations increased 17 percent for the first quarter with gains in both the janitorial and healthcare markets offsetting the continuing phase-out of the specialty business. Professional Products sales were also positively impacted in the first quarter of 2003 by a long-term supply agreement that became effective in December 2002. Water Care Services sales increased 1 percent for the first nine monthsquarter with modest growth in cruise, hospitality, health care and laundry. Water Care’s results reflect new account gains and equipment sales to cross-divisional customers. The company’s Food & Beverage operations reported a sales increase of 2002. Improved customer retention, new products2 percent for the first quarter, primarily due to improved sales to the soft drink and service improvements have helped contribute to thismeat and poultry markets. Vehicle Care sales increased 3 percent for the first quarter. The increase in the third quarter. Salesfirst quarter continues to be driven by new business with major oil companies as well as the success of Professional Products operations were flat fornew product introductions. For the thirdfirst quarter and decreased 7ended March 31, 2003, sales of the company’s United States Other Services segment increased 4 percent to $73 million compared with the sales of $70 million in the first quarter of last year. Acquisitions had no impact on sales in the first quarter of 2003. Pest Elimination sales increased 12 percent for the nine-month period. This year-to-date decrease reflects a declinefirst quarter of 2003 with double-digit sales growth in the core sales of the Janitorial marketboth contract and a decrease in the non-core specialty business due to a planned restructuring of the JaniSource business. Water Carenon-contract services. GCS Service sales decreased 6 percent for the thirdfirst quarter of 2003. The results reflected the division’s focus on building its standard operational structure. 25Management rate sales for the company’s International Cleaning & Sanitizing segment were $361 million for the first quarter of 2003, an increase of 6 percent over sales of $341 million in the comparable quarter of last year. Excluding the effects of acquisitions and divestitures, sales increased 3 percent for the first quarter. European sales increased 6 percent for the first quarter ended March 31, 2003. Sales in Europe, excluding acquisitions and divestitures, increased 2 percent over the comparable quarter in 2002. The increase in Europe’s sales was primarily driven by new account activity and new product launches which were partially offset by a weak European economy. Sales in the Asia Pacific region increased 3 percent for the first quarter of 2003. Excluding acquisitions and the divestiture of the Hygiene Services business in Australia, sales increased
19
ECOLAB INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations – Third- First Quarter and Nine Months Ended September 30, 2002 (Continued)March 31, 2003 (continued) quarter and 3 percent for the nine-month period. Water Care’s results have been hampered by customer cost cutting and consolidations. Also, Water Care continues to slowly exit non-core markets. The company’s Food & Beverage operations reported a sales increase of 4 percent for the third quarter and flat results for the nine-month period. The increase in the quarter was due to improved sales to the dairy plant and beverage market as well as new product offerings. Vehicle Care sales were down slightly for the third quarter and increased 2 percent for the first nine months of 2002. The decrease in the third quarter is due to a softening in industry sales due to the slow economy as well as the effects of a drought which hampered car wash business in parts of the United States. The increase in year-to-date sales is due to new business with major oil companies as well as new product introductions.
Sales of the company’s United States Other Services operations totaled $82 million for the third quarter of 2002, an increase of 18 percent over net sales of $69 million in the third quarter of last year. United States Other Services sales were $231 million for the first nine months of 2002, an increase of 15 percent over net sales of $201 million in the comparable period of last year. Excluding acquisitions, sales grew 5 percent for the third quarter and 3 percent for the nine months ended September 30, 2002. Pest Elimination sales increased 8 percent for the third quarter and 7 percent for the nine-month period of 2002 with double-digit sales growth in non-contract services and improved growth in new contract sales. GCS Service sales increased 31 percent for the third quarter and 25 percent for the first nine months of 2002. Excluding the effects of acquisitions, GCS sales were flat for the quarter and decreased 3 percent for nine-month period. The results reflected the division’s focus on building its standard operational procedures and the impact of the hospitality slowdown on the GCS business. United States Other Services also includes modest sales from the addition of EcoSure operations in January 2002.
Management rate sales for the company’s International Cleaning & Sanitizing operations were $363 million for the third quarter of 2002, an increase of 190 percent over sales of $125 million in the comparable quarter of last year. For the first nine months of 2002, management rate sales increased 196 percent to $1.043 billion from $352 million during the comparable period last year. Excluding the effects of acquisitions (primarily the European joint venture), sales increased 1 percent for the third quarter and 3 percent for the nine-month period. International Cleaning & Sanitizing includes European sales of $236 million for the third quarter and $679 million for the first nine months of 2002. Prior to 2002, the company included the results of the former European joint venture operations in its financial statements using the equity method of accounting. European sales, although not consolidated prior to 2002, increased 5 percent for the third quarter and 6 percent for the nine months ended September 30, 2002. Sales in the Asia Pacific region decreased 1 percent from the third quarter of 2001 and increased 1 percent over the nine-month period of last year.percent. Japan, New Zealand, Northeast Asia and NortheastSoutheast Asia showed good sales growth for the quarter while Australia’s sales declined due to the sale of its Hygiene Services business. Latin America sales rose 5 percent for the first quarter with sales increases in all countries except Venezuela, which saw reduced sales due to a general strike in that country. Mexico, the Caribbean, Central America and Argentina had especially strong sales growth the first quarter. Acquisitions had no impact on sales for Latin America in the first quarter. Sales in Canada increased 4 percent for the first quarter of 2003 due to the increased focus on obtaining new accounts and selling additional solutions to existing customers.
26Operating income of the company’s United States Cleaning & Sanitizing segment was $70 million for the first quarter of 2003, an increase of 8 percent over operating income of $65 million in the first quarter of last year. The operating income margin for the United States Cleaning & Sanitizing segment increased to 16.8 percent of sales from 16.6 percent of net sales in the first quarter of last year. The improvement in reported operating income margins reflected the higher sales volume, tight cost controls, savings from last year’s cost reduction initiatives, and the sale of new higher-margin products.
First quarter 2003 operating income of United States Other Services segment was $4 million, a decrease of 31 percent from the first quarter of last year. The operating income margin for United States Other Services decreased to 5.0 percent of net sales from 7.5 percent in the first quarter of last year. Pest Elimination had strong operating income growth while operating income for GCS declined for the first quarter of 2003 due to slower sales and continued investments in the division’s infrastructure. Operating income of International Cleaning & Sanitizing segment was $26 million for the first quarter of 2003 and increased 20 percent over operating income of $21 million in the first quarter of last year. Excluding acquisitions and divestitures, operating income increased 33 percent over the comparable quarter of last year. The operating income margin increased to 7.1 percent of net sales in the first quarter of 2003 from 6.3 percent in the comparable period of last year. Excluding acquisitions and divestitures, the operating income margin for International increased to 8.2 percent of net sales. Significant operating income growth during the first quarter in Europe, Asia Pacific, and Canada contributed to the increase. With the exception of Venezuela, operating income was also strong in the Latin America region. International operating income improvement for the segment was due to the introduction of new products, cost controls and the sale of the Hygiene Services business. Corporate operating expense (income) was ($0.2) million for the first quarter of 2003 as compared to $17.5 million for the comparable quarter last year. Corporate operating expense in the first quarter of 2002 included restructuring and merger integration costs of $23.3 million, which were partially offset by a curtailment gain of $5.8 million in the first quarter of 2002 related to benefit plan changes. 20
ECOLAB INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations – Third- First Quarter and Nine Months Ended September 30, 2002 (Continued)March 31, 2003 Acquisitions had a minimal effect on sales for the quarter and year to date periods for Asia Pacific. Latin America sales rose 7 percent for the third quarter and 9 percent for the nine-month period with good results in Brazil, Mexico, Argentina and Central America which were partially offset by the decrease in sales for Venezuela due to the devaluation of its currency. Excluding acquisitions, Latin America sales increased 5 percent for the third quarter and 6 percent for the nine-month period. Sales in Canada increased 1 percent for the third quarter of 2002 and 4 percent for the nine-month period with modest growth in sales to the institutional market. Africa/Export sales decreased 2 percent for the third quarter and 3 percent for the nine-month period with good growth in South Africa being offset by weakness in Israel.
Operating income of the company’s United States Cleaning & Sanitizing operations was $80 million for the third quarter of 2002, an increase of 13 percent over operating income of $71 million in the third quarter of last year. For the first nine months of 2002, operating income was $214 million, an increase of 11 percent over operating income of $194 million in the comparable period of last year. The operating income margin for the U.S. Cleaning & Sanitizing operations increased to 18.8 percent of sales from 17.5 percent of net sales in the third quarter of last year and increased to 17.6 percent of sales from 16.3 percent of net sales for the nine-month period. Operating income in 2001 does not reflect the effect of SFAS No. 142, and thus includes amortization expenses related to goodwill of $2.6 million in the third quarter and $7.8 million for the nine-month period. If the provisions of SFAS No. 142 had been applied retroactively to January 1, 2001, operating income for the United States Cleaning & Sanitizing operations would have increased 9 percent for the third quarter and 6 percent for the first nine months. If SFAS No. 142 had been applied during 2001, the operating income margin for the U.S. Cleaning & Sanitizing operations would have been 18.1 percent of sales for the third quarter of last year and 16.9 percent of net sales for the first nine months of 2001. The improvement in reported operating income margins reflected tight cost controls, savings from cost reduction initiatives, the sale of new products, and the impact of adopting SFAS No. 142.
Third quarter 2002 operating income of United States Other Services was $11 million, an increase of 21 percent over the third quarter of last year. For the nine-month period, operating income was $25 million, an increase of 11 percent over the comparable period last year. Operating income in 2001 does not reflect the effect of SFAS No. 142 and includes $0.5 million of amortization expenses related to goodwill in the third quarter and $1.4 million for the nine-month period. Excluding acquisitions and the effects of SFAS No. 142, operating income increased 9 percent over the comparable quarter of last year and 1 percent for the nine-month period. The operating income margin for United States Other Services increased to 13.2 percent of net sales from 12.8 percent in the third quarter of last year and decreased to 10.9 percent of net sales from 11.3 percent for the nine-month period of last year. Excluding acquisitions and including the pro forma effects of SFAS No. 142 on the prior year, the operating income margin for United States Other Services increased to 14.0 percent of sales from 13.5 percent in the third quarter of last year and decreased to 11.7 percent of net sales
27
ECOLAB INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations – Third Quarter and Nine Months Ended September 30, 2002 (Continued)
from 12.0 percent for the nine-month period. Pest Elimination had strong operating income growth while operating income for GCS declined for the first nine months of 2002 due to continued investments in the division’s infrastructure and systems.
Operating income of International Cleaning & Sanitizing operations was $40 million for the third quarter of 2002 and increased 181 percent over operating income of $14 million in the third quarter of last year. For the first nine months of 2002, operating income was $94 million and increased 164 percent over operating income of $35 million in the comparable period of last year. Excluding acquisitions and including the pro forma effects of SFAS No. 142 on the prior year, operating income increased 6 percent over the comparable quarter of last year and 1 percent for the nine-month period. The operating income margin decreased to 11.0 percent of net sales in the third quarter of 2002 from 11.4 percent in the comparable period of last year, and for the nine-month period ended September 30, 2002, decreased to 9.0 percent of net sales from 10.1 percent in the comparable period of last year. Excluding acquisitions and including the pro forma effects of SFAS No. 142 on the prior year, the operating income margin for International increased to 13.1 percent of net sales from 12.4 percent in the third quarter of last year and decreased to 11.1 percent of net sales from 11.2 percent for the nine-month period. Significant operating income growth and margin improvement during the third quarter in Asia Pacific, Latin America and Canada contributed to the increase.
Corporate operating expense was $2.4 million for the third quarter of 2002 as compared to $0.7 million for the comparable quarter last year. For the nine-month period, corporate operating expense was $33.6 million as compared to $2.8 million for the comparable period last year. In prior years, corporate operations normally represented only overhead costs directly related to Henkel-Ecolab. In 2002, these expenses were included in International Cleaning & Sanitizing operating segment. The amount remaining in corporate operating expense in the third quarter and first nine months of 2002 included restructuring and merger integration costs of $2.4 million and $39.4 million, respectively, which were partially offset by a curtailment gain of $5.8 million in the first quarter and first nine months of 2002 related to benefit plan changes. (continued)
Net interest expense totaled $11.0$10.7 million in the thirdfirst quarter of 2002, an2003, a 2 percent increase of 57 percent over net interest expense of $7.0$10.5 million in the thirdfirst quarter of 2001. For the nine-month period, net interest expense was $33.5 million, an increase of 63 percent over net interest expense of $20.5 million in the nine-month period of 2001. This increase is primarily due to higher debt levels incurred at year-end 2001 to finance the acquisition of the remaining 50 percent interest of Henkel-Ecolab which Ecolab did not previously own.2002. The provision for income taxes for the first nine monthsquarter of 20022003 reflected an effective income tax rate of 40.239.1 percent as compared to an effective income tax rate of 40.540.6 percent for the first nine monthsquarter of 2001.2002. Excluding the effects of special charges,restructuring and the estimated annualcurtailment gain, the effective income tax rate 28
ECOLAB INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations – Third Quarter and Nine Months Ended September 30, 2002 (Continued)
related to ongoing operations was 39.9 percent for the first nine monthsquarter of 2002. This decrease2002 was principally39.9 percent. The decline in the 2003 effective tax rate was primarily due to the adoption of SFAS No. 142 at the beginning of 2002, which eliminated the amortization of goodwilla lower international rate and related incomefavorable mix as well as state tax effects.
The company included the results of the former European joint venture operations in its financial statements using the equity method of accounting through year-end 2001. At the beginning of 2002, the results of the company’s European operations were consolidated with the rest of the company as a result of the company purchasing the remaining 50 percent of the company it did not own. Therefore, the company recorded no equity in earnings of Henkel-Ecolab in the third quarter or first nine months of 2002 as compared to $5.4 million of equity in earnings in the third quarter of last year and $12.3 million for the nine months ended September 30, 2001.reductions.
Financial Position and Liquidity Total assets were $2.766$3.025 billion at September 30, 2002,March 31, 2003, an increase of 105 percent over total assets at year-end 2001. Accounts receivable have increased 11 percent since year-end 2001, primarily2002. The change in the balance sheet was largely due to the increaseeffects of changes in 2002 third quarter salesexchange rates as compared to sales inwell as businesses acquired during the fourthfirst quarter of 2001. Other current liabilities have increased since year-end primarily due to an increase in restructuring accruals and accruals related to the higher distributor sales volumes in the first nine months of 2002. The effects of exchange rates are also a significant factor causing the increase in accounts receivable and other current liabilities.2003. Total debt was $672$734 million at September 30, 2002, downMarch 31, 2003, up from total debt of $746$700 million at year-end 2001.2002. This decreaseincrease in total debt was principally due to debt repayments made duringthe effect of exchange rates in the first nine monthsquarter of 2002. In February 2002, the company refinanced certain commercial paper borrowings through the issuance of 300 million euros (approximately $258 million of net proceeds) of 5.375 percent notes, due in February 2007.2003. The ratio of total debt to capitalization was 3938 percent at September 30, 2002,March 31, 2003, compared to 4639 percent at December 31, 2001.2002. Cash provided by operating activities totaled $362$65 million, an increasea decrease of 5425 percent over $236from $87 million for the first nine monthsquarter of last year. Operating cash flows for 2002 reflected2003 reflect the improvement in net income as well additional cash flows from businesses acquired, primarilyacquired. This was offset by a decrease in other liabilities which included payments in the European joint venture, as well as the improvementfirst quarter of bonuses and severance which were accrued at year end offset by an increase in days sales outstanding.income taxes payable. The company reacquired 165,000180,000 shares of its common stock during the first nine monthsquarter of 20022003 under its authorized share repurchase program including pursuant to a 10b-1 plan, plus 33,5841,390 shares reacquired from employees underrelated to the exercise of stock plans.options and vesting of stock awards. Shares were repurchased at a cost of approximately $8.7 million and are available for general corporate purposes including to offset the dilutive effect of shares issued for employee benefit plans. Approximately 4.24.0 million shares remain available for repurchase under the company’s authorized program. 29
ECOLAB INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Position and Liquidity (Continued)
The company currently expects to fund all of the requirements which are reasonably foreseeable for the remainder of 2002,2003, including new program investments, scheduled debt repayments, dividend payments, possible acquisitions, share repurchases, and pension contributions from operating activities, cash reserves and short-term borrowings. During 2002, the company’s pension plan assets have declined. While management has not made a final decision regarding the level of funding for the pension plan, the company has made a contribution of $35 million in November 2002 and it is likely that one or more additional cash contributions will be made to the plan before the end of 2002. The total amount of the contribution will be dependent on the performance of the plan assets prior to year-end 2002. The company’s contribution to the pension plan is not expected to have a material affect on the company’s consolidated results of operations, financial condition or liquidity.
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ECOLAB INC. Item 3. Quantitative and Qualitative Disclosures About Market Risk. The company uses primarily interest rate swaps, forward contracts, swaps and foreign currency optionsforward contracts to manage risks generally associated with foreign exchange rate and interest rate volatility. All hedgingTo the extent applicable, all derivative instruments are designated and effective as hedges, in accordance with accounting principles generally accepted in the United States of America. Other instruments that do not qualify for hedge accounting are marked to market with changes recognized in current earnings. The company does not hold or issue derivative financial instruments for trading purposes and is notof a party to leveraged derivatives.speculative nature. For a more detailed discussion of derivative instruments, refer to the notes to consolidated financial statements in the company’s 2001 Annual Report on Form 10-K.10-K for the year ended December 31, 2002. In February 2002, subsequent
Item 4. Controls and Procedures a. Within 90 days prior to the company’s most recent fiscal year-end,date of filing this report, the company issued euro 300 million of 5.375 percent Eurobonds, due February 2007. The company designated a portion (approximately euro 200 million) of this Eurobond debt as a hedge of existing foreign currency exposures related to net investmentscarried out an evaluation, under the company has in certain European subsidiaries. Accordingly,supervision and with the transaction gains and losses on the portion of the Eurobonds that are designated and are effective as hedgesparticipation of the company’s net investments have been included as a componentmanagement, including the Chairman of the cumulative translation account. Total transaction losses chargedBoard and Chief Executive Officer and the Senior Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the company’s disclosure controls and procedures. Based upon that evaluation, the company’s Chairman of the Board and Chief Executive Officer and the Senior Vice President and Chief Financial Officer concluded that the company’s disclosure controls and procedures are effective, among other things, in timely alerting them to shareholders’ equity were approximately $9.8 million and $23.9 million formaterial information relating to the third quarter and first nine monthscompany (including its consolidated subsidiaries) required to be included in the company’s reports filed under the Securities Exchange Act of 2002, respectively.1934, as amended. The company also entered into an interest rate swap agreement in connection with the issuance of its Eurobonds. This agreement was used to help the company achieve a desired proportion of variable versus fixed rate debt. The interest rate swap agreement is effective until February 2007 and essentially converts approximately euro 80 million of the Eurobond debt from a fixed interest rate to a floating or variable interest rate.
Item 4.
| Controls and Procedures.
| | | a.
| Within 90 days prior to the date of filing this report, the company carried out an evaluation, under the supervision and with the participation of the company’s management, including the Chairman of the Board and Chief Executive Officer and the Senior Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the company’s disclosure controls and procedures. Based upon that evaluation, the company’s Chairman of the Board and Chief Executive Officer and the Senior Vice President and Chief Financial Officer concluded that the company’s disclosure controls and procedures are effective, among other things, in timely alerting them to material information relating to the company (including its consolidated subsidiaries) required to be included in the company’s reports filed under the Securities Exchange Act of 1934, as amended.
| | | b.
| b.There were no significant changes in the company’s internal controls or in other factors that could significantly affect the controls subsequent to the date of their evaluation. | | | |
31
ECOLAB INC.
Forward-Looking Statements and Risk Factors The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In this report on Form 10-Q, management discusses expectations regarding future performance of the company which include anticipated restructuring expenses and cost savings, future amortization expenses, reinvestment in the business, liquidity pension contributions, and similar business and financial matters. Without limiting the foregoing, words or phrases such as “will likely result,” “are expected to,” “will continue,” “is anticipated,” “we believe,” “estimate,” “project” (including the negative or variations thereof) or similar terminology, generally identify forward-looking statements. Additionally, the company may refer to this section of the Form 10-Q to identify risk factors related to other forward lookingforward-looking statements made in oral presentations including telephone conferences and/or webcasts open to the public. 22
ECOLAB INC. Forward-Looking Statements and Risk Factors (continued) Forward-looking statements represent challenging goals for the company. As such, they are based on certain assumptions and estimates and are subject to certain risks and uncertainties. The company cautions that undo reliance should not be placed on such forward-looking statements, which speak only as of the date made. In order to comply with the terms of the safe harbor, the company hereby identifies important factors, which could affect the company’s financial performance and could cause the company’s actual results for future periods to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. These factors should be considered, together with any similar risk factors or other cautionary language, which may be made in the section of this report containing the forward-looking statement. Risks and uncertainties that may affect operating results and business performance include: the vitality of the foodservice, hospitality and travel industries; restraints on pricing flexibility due to competitive factors and customer and vendor consolidations; changes in oil or raw material prices or unavailability of adequate and reasonably priced raw materials; the occurrence of capacity constraints or the loss of a key supplier; the effect of future acquisitions or divestitures or other corporate transactions; the company’s ability to achieve plans for past acquisitions; the possibility that the company’s actual costs for its previously announced restructuring and integration activities will differ from current estimates set forth herein; the costs and effects of complying with (i) laws and regulations relating to the environment and to the manufacture, storage, distribution, efficacy and labeling of the company’s products and (ii) changes in national or international tax, fiscal, governmental and other regulatory policies or laws;policies; economic factors such as the worldwide economy, interest rates and currency movements, including, in particular, the company’s exposure to foreign currency risk; the occurrence of (i)(a) litigation or claims, (ii)(b) the loss or insolvency of a major customer or distributor, (iii) declared or undeclared(c) war, (iv)(d) natural or manmade disasters (including material acts of terrorism or other hostilities which impact the company’s markets) and, (v)(e) severe weather conditions or public health epidemics affecting the food servicefoodservice, hospitality and the hospitalitytravel industries; loss of, or changes in, executive management; the company’s ability to continue product introductions and technological innovations; and other uncertainties or risks reported from time-to-time in the company’s reports to the Securities and Exchange Commission. In addition, the company notes that its stock price can be affected by fluctuations in quarterly earnings. There can be no assurances that company’s earnings levels will meet investors’ expectations. 3223
PART II. OTHER INFORMATION Item 6.6. | Exhibits and Reports on Form 8-K8-K.. | | | | | | (a) | The following documents are filed as exhibits to this report: | | | | | | | (15) | Letter regarding unaudited interim financial information. | | | | | | | (99) | Certification of Chief Executive Officer and Chief Financial Officer. | | | | | | (b) | Reports on Form 8-K: | | | | | | | The company filedfurnished to the SEC two Current Reports on Form 8-K during the quarter ended September 30, 2002:March 31, 2003: (i) dated August 12,January 23, 2003 to announce preliminary 2002 to report compliance by the company’s principal executivefourth quarter and financial officers with Order No. 4-460 of the Securities and Exchange Commission;year end results; and (ii) dated August 20, 2002February 18, 2003 to announcereport earnings for the promotion of Douglas M. Baker, Jr. to the office of Presidentcompany’s fourth quarter and Chief Operating Officer.year ended December 31, 2002. |
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. | ECOLAB INC. | | | | | Date: November 8, 2002May 6, 2003 | By: | /s/ Daniel J. Schmechel | | | | Daniel J. Schmechel | | | Vice President and Controller (duly authorized officer and Chief Accounting Officer) |
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CERTIFICATIONS I, Allan L. Schuman, certify that:
| | | 1.
| I have reviewed this quarterly report on Form 10-Q of Ecolab Inc.;
| | 2.
| Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | 3.
| Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
| | 4.
| The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
| | | | | a)
| designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | | | | b)
| evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
| | | | | c)
| presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | | | 5.
| The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
| | | | | a)
| all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
| | | | | b)
| any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
| | | | 6.
| I, Allan L. Schuman, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Ecolab Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and 25
6.The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. | | | | | | |
Date: November 8, 2002
Date: May 6, 2003 | | | | | /s/ Allan L. Schuman | | | Allan L. Schuman | | Chairman of the Board and Chief Executive Officer |
34I, Steven L. Fritze, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ecolab Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 26
I, Steven L. Fritze, certify that:
| | | 1.
| I have reviewed this quarterly report on Form 10-Q of Ecolab Inc.;
| | 2.
| Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | 3.
| Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
| | 4.
| The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
| | | | | a)
| designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | | | | b)
| evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
| | | | | c)
| presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | | | 5.
| The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
| | | | | a)
| all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
| | | | | b)
| any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant internal controls; and
| | | | 6.
| 5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant internal controls; and 6.The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. | | | | | |
Date: November 8, 2002
Date: May 6, 2003 | | | | | /s/ Steven L. Fritze | | | Steven L. Fritze | | Senior Vice President and Chief Financial Officer |
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EXHIBIT INDEX Exhibit No. | | Document | | Method of Filing | | | | | | | | (15) | | Letter regarding unaudited interim financial information. | | Filed herewith electronically | | | | | | | | (99) | | Certification of Chief Executive Officer and Chief Financial Officer. | | Filed herewith electronically | |
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