UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | |||||||||||||||
| |||||||||||||||
| |||||||||||||||
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 | (I.R.S. Employer | |
|
| |
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, |
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 June 30,October 31, 2004.
257,440,930257,706,764 shares of common stock, par value $1.00 per share.
Table of Contents
PART I - - FINANCIAL INFORMATION
Item 1.1. Financial Statements.
ECOLAB INC.
CONSOLIDATED STATEMENT OF INCOME
|
| Second Quarter Ended |
|
| Third Quarter Ended |
| ||||||||
(amounts in thousands, except per share) |
| 2004 |
| 2003 |
|
| 2004 |
| 2003 |
| ||||
|
| (unaudited) |
|
| (unaudited) |
| ||||||||
|
|
|
|
|
|
|
|
|
|
| ||||
Net sales |
| $ | 1,042,711 |
| $ | 946,735 |
|
| $ | 1,090,316 |
| $ | 982,766 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cost of sales |
| 504,609 |
| 466,734 |
|
| 519,669 |
| 478,163 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Selling, general and administrative expenses |
| 402,487 |
| 358,783 |
|
| 410,360 |
| 357,923 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Special charges (income) |
| (254 | ) | (147 | ) | |||||||||
Special charges |
| 1,345 |
| 1,224 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
| ||||
Operating income |
| 135,869 |
| 121,365 |
|
| 158,942 |
| 145,456 |
| ||||
|
|
|
|
|
| |||||||||
Gain on sale of equity investment |
| — |
| 10,877 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
| ||||
Interest expense, net |
| 11,217 |
| 11,752 |
|
| 11,566 |
| 12,051 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Income before income taxes |
| 124,652 |
| 109,613 |
|
| 147,376 |
| 144,282 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Provision for income taxes |
| 46,359 |
| 42,458 |
|
| 52,429 |
| 56,843 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 78,293 |
| $ | 67,155 |
|
| $ | 94,947 |
| $ | 87,439 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic net income per common share |
| $ | 0.30 |
| $ | 0.26 |
|
| $ | 0.37 |
| $ | 0.34 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted net income per common share |
| $ | 0.30 |
| $ | 0.25 |
|
| $ | 0.36 |
| $ | 0.33 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Dividends declared per common share |
| $ | 0.0800 |
| $ | 0.0725 |
|
| $ | 0.0800 |
| $ | 0.0725 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted-average common shares outstanding |
|
|
|
|
|
|
|
|
|
| ||||
Basic |
| 257,135 |
| 261,246 |
|
| 258,368 |
| 258,694 |
| ||||
Diluted |
| 260,905 |
| 264,553 |
|
| 262,252 |
| 261,609 |
|
The accompanying notes are an integral part of the consolidated financial information.
2
ECOLAB INC.
CONSOLIDATED STATEMENT OF INCOME
|
| Six Months Ended |
|
| Nine Months Ended |
| ||||||||
(amounts in thousands, except per share) |
| 2004 |
| 2003 |
|
| 2004 |
| 2003 |
| ||||
|
| (unaudited) |
|
| (unaudited) |
| ||||||||
|
|
|
|
|
|
|
|
|
|
| ||||
Net sales |
| $ | 2,022,082 |
| $ | 1,822,587 |
|
| $ | 3,112,398 |
| $ | 2,805,353 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cost of sales |
| 978,703 |
| 897,216 |
|
| 1,498,372 |
| 1,375,379 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Selling, general and administrative expenses |
| 787,820 |
| 702,816 |
|
| 1,198,180 |
| 1,060,739 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Special charges (income) |
| 3,551 |
| (344 | ) | |||||||||
Special charges |
| 4,896 |
| 880 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
| ||||
Operating income |
| 252,008 |
| 222,899 |
|
| 410,950 |
| 368,355 |
| ||||
|
|
|
|
|
| |||||||||
Gain on sale of equity investment |
| — |
| 10,877 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
| ||||
Interest expense, net |
| 22,390 |
| 22,455 |
|
| 33,956 |
| 34,506 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Income before income taxes |
| 229,618 |
| 200,444 |
|
| 376,994 |
| 344,726 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Provision for income taxes |
| 85,319 |
| 77,971 |
|
| 137,748 |
| 134,814 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 144,299 |
| $ | 122,473 |
|
| $ | 239,246 |
| $ | 209,912 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic net income per common share |
| $ | 0.56 |
| $ | 0.47 |
|
| $ | 0.93 |
| $ | 0.81 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted net income per common share |
| $ | 0.55 |
| $ | 0.46 |
|
| $ | 0.92 |
| $ | 0.80 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Dividends declared per common share |
| $ | 0.1600 |
| $ | 0.145 |
|
| $ | 0.2400 |
| $ | 0.2175 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted-average common shares outstanding |
|
|
|
|
|
|
|
|
|
| ||||
Basic |
| 257,080 |
| 260,847 |
|
| 257,509 |
| 260,129 |
| ||||
Diluted |
| 260,645 |
| 264,236 |
|
| 261,240 |
| 263,378 |
|
The accompanying notes are an integral part of the consolidated financial information.
3
ECOLAB INC.
CONSOLIDATED BALANCE SHEET
(amounts in thousands) |
| June 30 |
| December 31 |
|
| September 30 |
| December 31 |
| ||||
|
| (unaudited) |
|
| (unaudited) |
| ||||||||
|
|
|
|
|
|
|
|
|
|
| ||||
ASSETS |
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Current assets |
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
| $ | 41,246 |
| $ | 85,626 |
|
| $ | 72,097 |
| $ | 85,626 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Accounts receivable (net of allowance of $45,014 at June 30, 2004 and $44,011 at December 31, 2003) |
| 676,158 |
| 626,002 |
| |||||||||
Accounts receivable (net of allowance of $44,753 at September 30, 2004 and $44,011 at December 31, 2003) |
| 739,057 |
| 626,002 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
| ||||
Inventories |
| 322,453 |
| 309,959 |
|
| 325,951 |
| 309,959 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Deferred income taxes |
| 76,359 |
| 75,820 |
|
| 75,984 |
| 75,820 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Other current assets |
| 64,390 |
| 52,933 |
|
| 53,456 |
| 52,933 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Total current assets |
| 1,180,606 |
| 1,150,340 |
|
| 1,266,545 |
| 1,150,340 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Property, plant and equipment, net |
| 771,963 |
| 736,797 |
|
| 783,210 |
| 736,797 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Goodwill, net |
| 890,937 |
| 797,211 |
|
| 934,671 |
| 797,211 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Other intangible assets, net |
| 228,264 |
| 203,859 |
|
| 221,875 |
| 203,859 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Other assets, net |
| 341,062 |
| 340,711 |
|
| 343,111 |
| 340,711 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Total assets |
| $ | 3,412,832 |
| $ | 3,228,918 |
|
| $ | 3,549,412 |
| $ | 3,228,918 |
|
The accompanying notes are an integral part of the consolidated financial information.
4
ECOLAB INC.
CONSOLIDATED BALANCE SHEET (Continued)
(amounts in thousands, except per share) |
| June 30 |
| December 31 |
|
| September 30 |
| December 31 |
| ||||
|
| (unaudited) |
|
| (unaudited) |
| ||||||||
|
|
|
|
|
|
|
|
|
|
| ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Current liabilities |
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Short-term debt |
| $ | 100,976 |
| $ | 70,203 |
|
| $ | 83,312 |
| $ | 70,203 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Accounts payable |
| 226,164 |
| 212,287 |
|
| 251,921 |
| 212,287 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Compensation and benefits |
| 191,496 |
| 190,386 |
|
| 214,342 |
| 190,386 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Income taxes |
| 48,561 |
| 59,829 |
|
| 68,043 |
| 59,829 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Other current liabilities |
| 342,233 |
| 319,237 |
|
| 350,370 |
| 319,237 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Total current liabilities |
| 909,430 |
| 851,942 |
|
| 967,988 |
| 851,942 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Long-term debt |
| 611,385 |
| 604,441 |
|
| 611,378 |
| 604,441 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Postretirement health care and pension benefits |
| 250,899 |
| 249,906 |
|
| 254,199 |
| 249,906 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Other liabilities |
| 246,396 |
| 227,203 |
|
| 245,321 |
| 227,203 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Shareholders’ equity |
| 1,394,722 |
| 1,295,426 |
| |||||||||
Shareholders’ equity (common stock, par value $1.00 per share; shares outstanding: September 30, 2004 - 257,512; December 31, 2003 – 257,417) |
| 1,470,526 |
| 1,295,426 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
| ||||
Total liabilities and shareholders’ equity |
| $ | 3,412,832 |
| $ | 3,228,918 |
|
| $ | 3,549,412 |
| $ | 3,228,918 |
|
The accompanying notes are an integral part of the consolidated financial information.
5
ECOLAB INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
|
| Six Months Ended |
|
| Nine Months Ended |
| ||||||||
(amounts in thousands) |
| 2004 |
| 2003 |
|
| 2004 |
| 2003 |
| ||||
|
| (unaudited) |
|
| (unaudited) |
| ||||||||
|
|
|
|
|
|
|
|
|
|
| ||||
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 144,299 |
| $ | 122,473 |
|
| $ | 239,246 |
| $ | 209,912 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Adjustments to reconcile net income to cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
| ||||
Depreciation |
| 106,310 |
| 100,484 |
|
| 159,981 |
| 152,116 |
| ||||
Amortization |
| 16,379 |
| 13,285 |
|
| 25,218 |
| 21,391 |
| ||||
Deferred income taxes |
| (70 | ) | (525 | ) |
| (140 | ) | 2,054 |
| ||||
Gain on sale of equity investment |
| — |
| (10,877 | ) | |||||||||
Disposal loss |
| 3,980 |
| — |
|
| 3,980 |
| — |
| ||||
Charge for in-process research and development |
| 1,600 |
| — |
| |||||||||
Special charges - asset disposals |
| — |
| (7 | ) |
| — |
| 1,665 |
| ||||
Other, net |
| (39 | ) | 1,003 |
|
| (717 | ) | 1,063 |
| ||||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
| ||||
Accounts receivable |
| (29,524 | ) | (34,798 | ) |
| (89,146 | ) | (59,315 | ) | ||||
Inventories |
| (4,411 | ) | (13,372 | ) |
| (9,104 | ) | (8,681 | ) | ||||
Other assets |
| (5,513 | ) | 1,812 |
|
| (628 | ) | 18,020 |
| ||||
Accounts payable |
| 2,316 |
| 2,044 |
|
| 27,331 |
| (5,922 | ) | ||||
Other liabilities |
| (597 | ) | 28,070 |
|
| 59,156 |
| 77,456 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Cash provided by operating activities |
| $ | 233,130 |
| $ | 220,469 |
|
| $ | 416,777 |
| $ | 398,882 |
|
The accompanying notes are an integral part of the consolidated financial information.
6
ECOLAB INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
|
| Six Months Ended |
|
| Nine Months Ended |
| ||||||||
(amounts in thousands) |
| 2004 |
| 2003 |
|
| 2004 |
| 2003 |
| ||||
|
| (unaudited) |
|
| (unaudited) |
| ||||||||
|
|
|
|
|
|
|
|
|
|
| ||||
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Capital expenditures |
| $ | (129,165 | ) | $ | (97,604 | ) |
| $ | (188,579 | ) | $ | (148,649 | ) |
Property disposals |
| 6,190 |
| 3,849 |
|
| 12,184 |
| 5,731 |
| ||||
Capitalized software expenditures |
| (2,111 | ) | (1,725 | ) |
| (3,501 | ) | (5,912 | ) | ||||
Businesses acquired and investments in affiliates |
| (128,931 | ) | (27,893 | ) | |||||||||
Businesses acquired and investments in affiliates, net of cash acquired |
| (130,517 | ) | (28,881 | ) | |||||||||
Sale of businesses and assets |
| 3,292 |
| 7,334 |
|
| 3,292 |
| 24,832 |
| ||||
|
|
|
|
|
| |||||||||
Cash used for investing activities |
| (250,725 | ) | (116,039 | ) |
| (307,121 | ) | (152,879 | ) | ||||
|
|
|
|
|
|
|
|
|
|
| ||||
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Net issuances (repayments) of notes payable |
| 31,713 |
| (62,719 | ) |
| 14,232 |
| (83,246 | ) | ||||
Long-term debt borrowings |
| 2,273 |
| 16 |
|
| 3,641 |
| 16 |
| ||||
Long-term debt repayments |
| (1,492 | ) | (9,964 | ) |
| (2,400 | ) | (10,065 | ) | ||||
Reacquired shares |
| (41,336 | ) | (129,532 | ) |
| (104,291 | ) | (198,947 | ) | ||||
Cash dividends on common stock |
| (41,184 | ) | (37,740 | ) |
| (61,775 | ) | (56,643 | ) | ||||
Exercise of employee stock options |
| 23,081 |
| 114,454 |
|
| 27,982 |
| 119,525 |
| ||||
Other, net |
| 206 |
| (80 | ) |
| (564 | ) | (129 | ) | ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Cash used for financing activities |
| (26,739 | ) | (125,565 | ) |
| (123,175 | ) | (229,489 | ) | ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Effect of exchange rate changes on cash |
| (46 | ) | 2,502 |
|
| (10 | ) | 1,243 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
DECREASE IN CASH AND CASH EQUIVALENTS |
| (44,380 | ) | (18,633 | ) | |||||||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
| (13,529 | ) | 17,757 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents, |
| 85,626 |
| 49,205 |
|
| 85,626 |
| 49,205 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents, |
| $ | 41,246 |
| $ | 30,572 |
|
| $ | 72,097 |
| $ | 66,962 |
|
The accompanying notes are an integral part of the consolidated financial information.
7
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Consolidated Financial Information
The unaudited consolidated financial information as of JuneSeptember 30, 2004 and for the three and six-monthnine-month periods ended JuneSeptember 30, 2004 and 2003, reflect, in the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows of Ecolab Inc. (“the company”) for the interim periods presented. 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, 2003 were derived from the 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, 2003.
With respect to the unaudited financial information of the company as of JuneSeptember 30, 2004 and for the three and six-monthnine-month periods ended JuneSeptember 30, 2004 and 2003, 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 July 22,October 21, 2004 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. Stock-BasedStock-Based Compensation
The company measures compensation cost for its stock incentive and option plans using the intrinsic value-based method of accounting.
Had 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 three and six-monthnine-month periods ended JuneSeptember 30, 2004 and 2003 would have been reduced to the pro forma amounts in the following table.
8
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2.Stock-Based Compensation (continued)
|
| Second Quarter Ended |
| Six Months Ended |
|
| Third Quarter Ended |
| Nine Months Ended |
| ||||||||||||||||
|
| 2004 |
| 2003 |
| 2004 |
| 2003 |
|
| 2004 |
| 2003 |
| 2004 |
| 2003 |
| ||||||||
|
| (unaudited) |
| (unaudited) |
|
| (unaudited) |
| (unaudited) |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net income, as reported |
| $ | 78,293 |
| $ | 67,155 |
| $ | 144,299 |
| $ | 122,473 |
|
| $ | 94,947 |
| $ | 87,439 |
| $ | 239,246 |
| $ | 209,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Add: Stock-based employee compensation expense included in reported net income, net of tax |
| 58 |
| 428 |
| 114 |
| 713 |
|
| 61 |
| 171 |
| 175 |
| 884 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Deduct: Total stock-based employee compensation expense under fair value-based method, net of tax |
| (4,705 | ) | (4,700 | ) | (9,496 | ) | (9,233 | ) |
| (4,728 | ) | (4,395 | ) | (14,224 | ) | (13,628 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Pro forma net income |
| $ | 73,646 |
| $ | 62,883 |
| $ | 134,917 |
| $ | 113,953 |
|
| $ | 90,280 |
| $ | 83,215 |
| $ | 225,197 |
| $ | 197,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Basic net income per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
As reported |
| $ | 0.30 |
| $ | 0.26 |
| $ | 0.56 |
| $ | 0.47 |
|
| $ | 0.37 |
| $ | 0.34 |
| $ | 0.93 |
| $ | 0.81 |
|
Pro forma |
| 0.29 |
| 0.24 |
| 0.52 |
| 0.44 |
|
| 0.35 |
| 0.32 |
| 0.87 |
| 0.76 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Diluted net income per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
As reported |
| 0.30 |
| 0.25 |
| 0.55 |
| 0.46 |
|
| 0.36 |
| 0.33 |
| 0.92 |
| 0.80 |
| ||||||||
Pro forma |
| $ | 0.28 |
| $ | 0.24 |
| $ | 0.52 |
| $ | 0.43 |
|
| $ | 0.34 |
| $ | 0.32 |
| $ | 0.86 |
| $ | 0.75 |
|
3. Selected Balance Sheet Information
(amounts in thousands) |
| June 30 |
| December 31 |
|
| September 30 |
| December 31 |
| ||||
|
| (unaudited) |
| |||||||||||
|
|
|
|
|
|
| (unaudited) |
| ||||||
Inventories |
|
|
|
|
|
|
|
|
|
| ||||
Finished goods |
| $ | 161,958 |
| $ | 159,633 |
|
| $ | 156,035 |
| $ | 159,633 |
|
Raw materials and parts |
| 163,886 |
| 152,127 |
|
| 173,289 |
| 152,127 |
| ||||
Excess of fifo cost over lifo cost |
| (3,391 | ) | (1,801 | ) |
| (3,373 | ) | (1,801 | ) | ||||
Total |
| $ | 322,453 |
| $ | 309,959 |
|
| $ | 325,951 |
| $ | 309,959 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other intangible assets, net |
|
|
|
|
|
|
|
|
|
| ||||
Customer relationships |
| $ | 181,413 |
| $ | 153,479 |
|
| $ | 175,591 |
| $ | 153,479 |
|
Intellectual property |
| 34,396 |
| 77,793 |
|
| 37,306 |
| 77,793 |
| ||||
Trademarks |
| 59,490 |
| 52,283 |
|
| 61,814 |
| 52,283 |
| ||||
Other intangibles |
| 17,506 |
| 16,012 |
|
| 16,871 |
| 16,012 |
| ||||
Total |
| 292,805 |
| 299,567 |
|
| 291,582 |
| 299,567 |
| ||||
|
|
|
|
|
| |||||||||
Accumulated amortization |
|
|
|
|
|
|
|
|
|
| ||||
Customer relationships |
| (33,353 | ) | (27,565 | ) |
| (36,743 | ) | (27,565 | ) | ||||
Intellectual property |
| (6,769 | ) | (45,809 | ) |
| (7,272 | ) | (45,809 | ) | ||||
Trademarks |
| (10,779 | ) | (9,313 | ) |
| (11,756 | ) | (9,313 | ) | ||||
Other intangibles |
| (13,640 | ) | (13,021 | ) |
| (13,936 | ) | (13,021 | ) | ||||
Other intangible assets, net |
| $ | 228,264 |
| $ | 203,859 |
|
| $ | 221,875 |
| $ | 203,859 |
|
9
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3.Selected Balance Sheet Information (continued)
(amounts in thousands) |
| June 30 |
| December 31 |
|
| September 30 |
| December 31 |
| ||||
|
| (unaudited) |
| |||||||||||
|
|
|
|
|
|
| (unaudited) |
| ||||||
Shareholders’ equity |
|
|
|
|
|
|
|
|
|
| ||||
Common stock |
| $ | 311,805 |
| $ | 310,284 |
|
| $ | 313,940 |
| $ | 310,284 |
|
Additional paid-in capital |
| 398,262 |
| 369,015 |
|
| 459,553 |
| 369,015 |
| ||||
Retained earnings |
| 1,463,000 |
| 1,359,879 |
|
| 1,537,303 |
| 1,359,879 |
| ||||
Deferred compensation, net |
| (224 | ) | (410 | ) |
| (301 | ) | (410 | ) | ||||
Accumulated other comprehensive income |
| 10,604 |
| 4,098 |
|
| 11,684 |
| 4,098 |
| ||||
Treasury stock |
| (788,725 | ) | (747,440 | ) |
| (851,653 | ) | (747,440 | ) | ||||
Total |
| $ | 1,394,722 |
| $ | 1,295,426 |
|
| $ | 1,470,526 |
| $ | 1,295,426 |
|
Accumulated other comprehensive income as of JuneSeptember 30, 2004 consists of $11.4$11.8 million of net unrealized losses primarily on financial instruments and additional minimum pension liabilities and $22.0$23.5 million of cumulative translation income. Accumulated other comprehensive income as of December 31, 2003 consists of $12.0 million of net unrealized losses primarily on financial instruments and additional minimum pension liabilities and $16.1 million of cumulative translation income.
In February 2002, the company issued euro 300 million of 5.375 percent Euronotes, due February 2007. The company has designated a portionthis Euronote debt (euro 300 million as of the end of the secondthird quarter 2004) of this Euronote 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 Euronotes 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 gains and losses related to the Euronotes charged or credited to the foreign currency translation account that is a component of shareholders’ equity were gains of $8.7$0.4 million and losses of $26.9$24.2 million for the secondthird quarter of 2004 and 2003, respectively, and losses of $5.9$5.5 million and $44.0$22.3 million for the first sixnine months of 2004 and 2003, respectively.
10
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Comprehensive Income
Comprehensive income was as follows:
|
| Second Quarter Ended |
| Six Months Ended |
| Third Quarter Ended |
| Nine Months Ended |
| |||||||||||||||||
(amounts in thousands) |
| 2004 |
| 2003 |
| 2004 |
| 2003 |
|
| 2004 |
| 2003 |
| 2004 |
| 2003 |
| ||||||||
|
| (unaudited) |
| (unaudited) |
|
| (unaudited) |
| (unaudited) |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net income |
| $ | 78,293 |
| $ | 67,155 |
| $ | 144,299 |
| $ | 122,473 |
|
| $ | 94,947 |
| $ | 87,439 |
| $ | 239,246 |
| $ | 209,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Foreign currency translation |
| (18,082 | ) | 37,996 |
| 5,926 |
| 72,283 |
|
| 1,506 |
| (27,146 | ) | 7,432 |
| 45,137 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Derivative instruments, net of tax |
| 326 |
| (760 | ) | 580 |
| (1,782 | ) |
| (426 | ) | 980 |
| 154 |
| (802 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Comprehensive income |
| $ | 60,537 |
| $ | 104,391 |
| $ | 150,805 |
| $ | 192,974 |
|
| $ | 96,027 |
| $ | 61,273 |
| $ | 246,832 |
| $ | 254,247 |
|
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, and product line discontinuations. These actions were substantially completed by December 31, 2003. Remaining amounts accrued primarily represent contractual periodic payments to be made over time.
The secondthird quarter and sixnine months ended JuneSeptember 30, 2004 includesinclude the reversal of $270,000$255,000 and $495,000,$750,000, respectively, of previously accrued estimated severance and lease termination costs. Of the $270,000$750,000 reversed in the second quarter of 2004, $16,000first nine months, $66,000 is included as a component of cost of sales. The three- and nine-month periods ended September 30, 2003 include the reversal of $448,000 and $837,000, respectively, of previously accrued severance cost. Of the $495,000$837,000 reversed infor the first six months, $66,000nine-month period ended September 30, 2003, $45,000 is included as a component of cost of sales.
Also included in “Special Charges” for the third quarter and nine months ended September 30, 2004 is $1.6 million of in-process research and development charges related to the Alcide acquisition. These charges include the portion of the purchase price assigned to research and development projects not yet completed at the date of acquisition and which have no alternative future use. For the first sixnine months of 2004 is“Special Charges” also includes a loss related to the disposal of a grease management product line of the Institutional division of the U.S. Cleaning & Sanitizing segment of $4.0 million ($2.4 million after tax). For the three- and nine month periods ended September 30, 2003, “Special Charges” also includes $1.7 million of expense related to a change in the amount of goodwill allocated to the Darenas business sold in 2003.
Restructuring liabilities are classified as a component of other current liabilities.
11
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6.Special Charges (continued)
For segment reporting purposes, each of these items have been included in the company’s corporate segment, which is consistent with the company’s internal management reporting.
Changes to the restructuring liability accounts include the following:
(unaudited) |
| Employee |
| Asset |
| Other |
| Total |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| Employee |
| Asset |
| Other |
| Total |
| ||||||||
(unaudited) |
|
| ||||||||||||||||||||||||
(amounts in thousands) |
|
| ||||||||||||||||||||||||
Initial expense and accrual |
| $ | 36,366 |
| $ | 6,180 |
| $ | 5,221 |
| $ | 47,767 |
|
| $ | 36,366 |
| $ | 6,180 |
| $ | 5,221 |
| $ | 47,767 |
|
Cash payments |
| (16,033 | ) |
|
| (1,711 | ) | (17,744 | ) |
| (16,033 | ) |
|
| (1,711 | ) | (17,744 | ) | ||||||||
Non-cash charges |
|
|
| (6,180 | ) |
|
| (6,180 | ) |
|
|
| (6,180 | ) |
|
| (6,180 | ) | ||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Restructuring liability, |
| $ | 20,333 |
| $ | — |
| $ | 3,510 |
| $ | 23,843 |
|
| $ | 20,333 |
| $ | — |
| $ | 3,510 |
| $ | 23,843 |
|
Cash payments |
| (16,770 | ) |
|
| (2,471 | ) | (19,241 | ) |
| (16,770 | ) |
|
| (2,471 | ) | (19,241 | ) | ||||||||
Non-cash credits |
|
|
| 7 |
|
|
| 7 |
|
|
|
| 7 |
|
|
| 7 |
| ||||||||
Revisions to prior estimates |
| (1,352 | ) | (7 | ) |
|
| (1,359 | ) |
| (1,352 | ) | (7 | ) |
|
| (1,359 | ) | ||||||||
Effect of foreign currency translation |
| 1,222 |
|
|
| 670 |
| 1,892 |
|
| 1,222 |
|
|
| 670 |
| 1,892 |
| ||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Restructuring liability, |
| $ | 3,433 |
| $ | — |
| $ | 1,709 |
| $ | 5,142 |
|
| $ | 3,433 |
| $ | — |
| $ | 1,709 |
| $ | 5,142 |
|
Cash payments |
| (1,451 | ) |
|
| (88 | ) | (1,539 | ) |
| (1,451 | ) |
|
| (88 | ) | (1,539 | ) | ||||||||
Revisions to prior estimates |
| (127 | ) |
|
| (98 | ) | (225 | ) |
| (127 | ) |
|
| (98 | ) | (225 | ) | ||||||||
Effect of foreign currency translation |
| 211 |
|
|
| 116 |
| 327 |
|
| 211 |
|
|
| 116 |
| 327 |
| ||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Restructuring liability, |
| $ | 2,066 |
| $ | — |
| $ | 1,639 |
| $ | 3,705 |
|
| $ | 2,066 |
| $ | — |
| $ | 1,639 |
| $ | 3,705 |
|
Cash payments |
| (327 | ) |
|
| (144 | ) | (471 | ) |
| (327 | ) |
|
| (144 | ) | (471 | ) | ||||||||
Revisions to prior estimates |
| (270 | ) |
|
|
|
| (270 | ) |
| (270 | ) |
|
|
|
| (270 | ) | ||||||||
Effect of foreign currency translation |
| (36 | ) |
|
| (18 | ) | (54 | ) |
| (36 | ) |
|
| (18 | ) | (54 | ) | ||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Restructuring liability, |
| $ | 1,433 |
| $ | — |
| $ | 1,477 |
| $ | 2,910 |
|
| $ | 1,433 |
| $ | — |
| $ | 1,477 |
| $ | 2,910 |
|
Cash payments |
| (146 | ) |
|
| (44 | ) | (190 | ) | |||||||||||||||||
Revisions to prior estimates |
| — |
|
|
| (255 | ) | (255 | ) | |||||||||||||||||
Effect of foreign currency translation |
| (4 | ) |
|
| (3 | ) | (7 | ) | |||||||||||||||||
Restructuring liability, September 30, 2004 |
| $ | 1,283 |
| $ | — |
| $ | 1,175 |
| $ | 2,458 |
|
12
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Business Acquisitions and Investments
In January 2004, the company acquired Nigiko, a Paris-based provider of commercial pest elimination services throughout France. Nigiko pest elimination has annual sales of approximately $55 million. These operations became part of ourthe company’s International Cleaning & Sanitizing operations.
In February 2004, the company acquired Daydots International, a Texas-based provider of food safety products. Daydots has annual sales of approximately $22 million. These operations became part of ourthe company’s U.S. Cleaning & Sanitizing operations.
In May 2004, the company acquired Elimco, a Cape Town, South Africa-based provider of commercial pest elimination services. Elimco has annual sales of approximately $4 million. These operations became part of ourthe company’s International Cleaning & Sanitizing operations.
In June 2004, the company acquired the Restoration and Maintenance business unit of VIC International located in Knoxville, Tennessee. This business unit has sales of approximately $5 million and will becomebecame part of ourthe company’s U.S. Cleaning & Sanitizing operations and ourthe company’s International Cleaning & Sanitizing operations.
In July 2004, the company acquired Alcide Corporation, a Redmond, Washington-based producer of biocidal and sanitation products that are primarily used in the dairy, meat and poultry industries. Alcide has annual sales of approximately $22 million. These operations became part of the company’s U.S. Cleaning & Sanitizing operations.
The total cash paid for acquisitions and investments in affiliates was $10.7 million and $2.3$1.6 million during the secondthird quarter of 2004 and 2003, respectively.2004. In addition, 1,834,759 shares of common stock were issued with a market value of $57.1 million in the Alcide acquisition plus $23,000 of cash in-lieu of fractional shares during the third quarter of 2004. Total cash paid for acquisitions and investments in affiliates was $128.9$1.0 million during the third quarter of 2003. During the first nine months of 2004, total cash paid for acquisitions and $27.9investments in affiliates, net of cash acquired, was $130.5 million plus common stock issued with a market value of approximately $57.1 million. Total cash paid for acquisitions and investments in affiliates was $28.9 million during the first sixnine months of 2004 and 2003, respectively.2003. This included payments of restructuring costs related to Henkel-Ecolab that were accrued in 2002. The aggregate purchase price has been reduced for any cash or cash equivalents acquired with the acquisitions.
Based upon purchase price allocations, which may have components representing preliminary allocations with respect to recent acquisitions, the components of the aggregate purchase prices of the acquisitions made, and the allocation of the purchase prices, were as follows:
(unaudited) |
| Second Quarter Ended |
| Six Months Ended |
|
| Third Quarter Ended |
| Nine Months Ended |
| ||||||||||||||||
(amounts in millions) |
| 2004 |
| 2003 |
| 2004 |
| 2003 |
|
| 2004 |
| 2003 |
| 2004 |
| 2003 |
| ||||||||
Net tangible assets acquired |
| $ | 3 |
| $ | 1 |
| $ | (3 | ) | $ | 17 |
|
| $ | 14 |
| $ | 1 |
| $ | 11 |
| $ | 18 |
|
Identifiable intangible assets |
| 4 |
| — |
| 46 |
| 10 |
|
| (2 | ) | — |
| 44 |
| 10 |
| ||||||||
In-process research & development |
| 2 |
| — |
| 2 |
| — |
| |||||||||||||||||
Goodwill |
| 4 |
| 1 |
| 86 |
| 1 |
|
| 45 |
| — |
| 131 |
| 1 |
| ||||||||
Purchase price |
| $ | 11 |
| $ | 2 |
| $ | 129 |
| $ | 28 |
|
| $ | 59 |
| $ | 1 |
| $ | 188 |
| $ | 29 |
|
The allocation of the purchase price containsincludes adjustments to preliminary allocations from prior periods, if any. In the third quarter 2004 the company finalized its purchase accounting valuation of identifiable intangibles in the Nigiko acquisition which resulted in a decrease in identifiable intangible assets of $7.9 million and a corresponding increase
13
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7.Business Acquisitions and Investments (continued)in goodwill. In the third quarter of 2004, the company recorded a charge of $1.6 million for in-process research & development as part of the allocation of purchase price in the Alcide acquisition.
The changes in the carrying amount of goodwill for each of the company’s reportable segments for the quarter and sixnine months ended JuneSeptember 30, 2004 were as follows:
|
| United States |
|
|
|
|
|
| United States |
| International |
|
|
| ||||||||||||||||||
(unaudited) |
| Cleaning & |
| Other |
| Total |
| International |
| Consolidated |
|
| Cleaning & |
| Other |
| Total |
| Cleaning & |
| Consolidated |
| ||||||||||
Balance as of December 31, 2003 |
| $ | 122,346 |
| $ | 48,929 |
| $ | 171,275 |
| $ | 625,936 |
| $ | 797,211 |
|
| $ | 122,346 |
| $ | 48,929 |
| $ | 171,275 |
| $ | 625,936 |
| $ | 797,211 |
|
Goodwill acquired during quarter |
| 18,629 |
| — |
| 18,629 |
| 63,799 |
| 82,428 |
|
| 18,629 |
| — |
| 18,629 |
| 63,799 |
| 82,428 |
| ||||||||||
Goodwill related to dispositions |
| (69 | ) | — |
| (69 | ) | — |
| (69 | ) |
| (69 | ) | — |
| (69 | ) | — |
| (69 | ) | ||||||||||
Foreign currency translation |
| — |
| — |
| — |
| 27,672 |
| 27,672 |
|
| — |
| — |
| — |
| 27,672 |
| 27,672 |
| ||||||||||
Balance as of March 31, 2004 |
| $ | 140,906 |
| $ | 48,929 |
| $ | 189,835 |
| $ | 717,407 |
| $ | 907,242 |
|
| $ | 140,906 |
| $ | 48,929 |
| $ | 189,835 |
| $ | 717,407 |
| $ | 907,242 |
|
Goodwill acquired during quarter |
| 2,098 |
| — |
| 2,098 |
| 1,780 |
| 3,878 |
|
| 2,098 |
| — |
| 2,098 |
| 1,780 |
| 3,878 |
| ||||||||||
Foreign currency translation |
| — |
| — |
| — |
| (20,183 | ) | (20,183 | ) |
| — |
| — |
| — |
| (20,183 | ) | (20,183 | ) | ||||||||||
Balance as of June 30, 2004 |
| $ | 143,004 |
| $ | 48,929 |
| $ | 191,933 |
| $ | 699,004 |
| $ | 890,937 |
|
| $ | 143,004 |
| $ | 48,929 |
| $ | 191,933 |
| $ | 699,004 |
| $ | 890,937 |
|
Goodwill acquired during quarter |
| 34,075 |
| — |
| 34,075 |
| 10,776 |
| 44,851 |
| |||||||||||||||||||||
Foreign currency translation |
| — |
| — |
| — |
| (1,117 | ) | (1,117 | ) | |||||||||||||||||||||
Balance as of September 30, 2004 |
| $ | 177,079 |
| $ | 48,929 |
| $ | 226,008 |
| $ | 708,663 |
| $ | 934,671 |
|
Goodwill acquired in 2004 also includes adjustments to prior year acquisitions.
Operations of the acquired companies have been included in the operations of the company since the date of the respective acquisition. The purchase prices have been allocated to assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition. These acquisitions individually and in the aggregate are not material to the company’s operations.
In April 2004, the company sold its grease management product line to National Fire Services of Gurnee, Illinois effective March 31, 2004. Sales of the grease management product line totaled approximately $20 million in 2003 and were included in the company’s U.S. Cleaning & Sanitizing operations.
14
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Income Per Common Share
The computations of the basic and diluted net income per share amounts were as follows:
|
| Second Quarter Ended |
| Six Months Ended |
| |||||||||||||||||||||||
(amounts in thousands, except per share) |
| 2004 |
| 2003 |
| 2004 |
| 2003 |
| |||||||||||||||||||
(amounts in thousands, |
| Third Quarter Ended |
| Nine Months Ended |
| |||||||||||||||||||||||
except per share) |
| 2004 |
| 2003 |
| 2004 |
| 2003 |
| |||||||||||||||||||
|
| (unaudited) |
| (unaudited) |
|
| (unaudited) |
| (unaudited) |
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
| $ | 78,293 |
| $ | 67,155 |
| $ | 144,299 |
| $ | 122,473 |
|
| $ | 94,947 |
| $ | 87,439 |
| $ | 239,246 |
| $ | 209,912 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Weighted-average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Basic |
| 257,135 |
| 261,246 |
| 257,080 |
| 260,847 |
|
| 258,368 |
| 258,694 |
| 257,509 |
| 260,129 |
| ||||||||||
Effect of dilutive stock options and awards |
| 3,770 |
| 3,307 |
| 3,565 |
| 3,389 |
|
| 3,884 |
| 2,915 |
| 3,731 |
| 3,249 |
| ||||||||||
Diluted |
| 260,905 |
| 264,553 |
| 260,645 |
| 264,236 |
|
| 262,252 |
| 261,609 |
| 261,240 |
| 263,378 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Net income per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Basic |
| $ | 0.30 |
| $ | 0.26 |
| $ | 0.56 |
| $ | 0.47 |
|
| $ | 0.37 |
| $ | 0.34 |
| $ | 0.93 |
| $ | 0.81 |
| ||
Diluted |
| $ | 0.30 |
| $ | 0.25 |
| $ | 0.55 |
| $ | 0.46 |
|
| $ | 0.36 |
| $ | 0.33 |
| $ | 0.92 |
| $ | 0.80 |
|
Stock options to purchase approximately 200,00084,000 shares and 330,000 shares for the sixquarter and nine months ended JuneSeptember 30, 2004, respectively, were not dilutive and, therefore, were not included in the computations of diluted common shares outstanding. Stock options to purchase approximately 185,000 shares for both the third quarter and nine months ended September 30, 2003 were not dilutive and, therefore, were not included in the computations of diluted common shares outstanding.
15
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Pension and Postretirement Plans
The components of net periodic pension and postretirement healthcare benefit costs for the secondthird quarter are as follows:
(unaudited) |
| U.S. Pension Benefits |
| International |
| U.S. |
|
| U.S. Pension Benefits |
| International |
| U.S. |
| ||||||||||||||||||||||||
(amounts in thousands) |
| 2004 |
| 2003 |
| 2004 |
| 2003 |
| 2004 |
| 2003 |
|
| 2004 |
| 2003 |
| 2004 |
| 2003 |
| 2004 |
| 2003 |
| ||||||||||||
Service cost |
| $ | 7,863 |
| $ | 6,611 |
| $ | 3,263 |
| $ | 2,899 |
| $ | 799 |
| $ | 736 |
|
| $ | 7,863 |
| $ | 6,611 |
| $ | 3,258 |
| $ | 2,989 |
| $ | 795 |
| $ | 736 |
|
Interest cost on benefit obligation |
| 8,548 |
| 8,052 |
| 4,358 |
| 3,642 |
| 2,368 |
| 2,149 |
|
| 8,548 |
| 8,052 |
| 4,405 |
| 3,755 |
| 2,152 |
| 2,149 |
| ||||||||||||
Expected return on plan assets |
| (12,540 | ) | (10,603 | ) | (2,741 | ) | (2,428 | ) | (465 | ) | (395 | ) |
| (12,540 | ) | (10,603 | ) | (2,852 | ) | (2,512 | ) | (457 | ) | (395 | ) | ||||||||||||
Amortization of prior service cost (benefit) |
| 434 |
| 482 |
| 29 |
| 26 |
| (1,424 | ) | (1,325 | ) |
| 434 |
| 482 |
| 29 |
| 29 |
| (1,424 | ) | (1,325 | ) | ||||||||||||
Amortization of unrecognized transition (asset)/obligation |
| (351 | ) | (351 | ) | 81 |
| 119 |
| — |
| — |
|
| (351 | ) | (351 | ) | 86 |
| 127 |
| — |
| — |
| ||||||||||||
Recognition of net actuarial loss |
| 1,380 |
| 863 |
| 430 |
| 217 |
| 1,737 |
| 1,573 |
|
| 1,380 |
| 863 |
| 449 |
| 206 |
| 1,117 |
| 1,573 |
| ||||||||||||
Settlements and curtailments |
| — |
| — |
| — |
| 164 |
| — |
| — |
| |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Total expense |
| $ | 5,334 |
| $ | 5,054 |
| $ | 5,420 |
| $ | 4,639 |
| $ | 3,015 |
| $ | 2,738 |
|
| $ | 5,334 |
| $ | 5,054 |
| $ | 5,375 |
| $ | 4,594 |
| $ | 2,183 |
| $ | 2,738 |
|
The components of net periodic pension and postretirement healthcare benefit costs for the sixnine months ended JuneSeptember 30 are as follows:
(unaudited) |
| U.S. Pension Benefits |
| International |
| U.S. |
|
| U.S. Pension Benefits |
| International |
| U.S. |
| ||||||||||||||||||||||||
(amounts in thousands) |
| 2004 |
| 2003 |
| 2004 |
| 2003 |
| 2004 |
| 2003 |
|
| 2004 |
| 2003 |
| 2004 |
| 2003 |
| 2004 |
| 2003 |
| ||||||||||||
Service cost |
| $ | 15,726 |
| $ | 13,222 |
| $ | 6,618 |
| $ | 5,652 |
| $ | 1,598 |
| $ | 1,472 |
|
| $ | 23,589 |
| $ | 19,833 |
| $ | 9,876 |
| $ | 8,641 |
| $ | 2,393 |
| $ | 2,208 |
|
Interest cost on benefit obligation |
| 17,096 |
| 16,104 |
| 8,850 |
| 7,094 |
| 4,736 |
| 4,298 |
|
| 25,644 |
| 24,156 |
| 13,255 |
| 10,849 |
| 6,888 |
| 6,447 |
| ||||||||||||
Expected return on plan assets |
| (25,080 | ) | (21,206 | ) | (5,524 | ) | (4,725 | ) | (930 | ) | (790 | ) |
| (37,620 | ) | (31,809 | ) | (8,376 | ) | (7,237 | ) | (1,387 | ) | (1,185 | ) | ||||||||||||
Amortization of prior service cost (benefit) |
| 868 |
| 964 |
| 60 |
| 50 |
| (2,848 | ) | (2,650 | ) |
| 1,302 |
| 1,446 |
| 89 |
| 79 |
| (4,272 | ) | (3,975 | ) | ||||||||||||
Amortization of unrecognized transition (asset)/obligation |
| (702 | ) | (702 | ) | 166 |
| 233 |
| — |
| — |
|
| (1,053 | ) | (1,053 | ) | 252 |
| 360 |
| — |
| — |
| ||||||||||||
Recognition of net actuarial loss |
| 2,760 |
| 1,726 |
| 875 |
| 423 |
| 3,474 |
| 3,146 |
|
| 4,140 |
| 2,589 |
| 1,324 |
| 629 |
| 4,591 |
| 4,719 |
| ||||||||||||
Settlements and curtailments |
| — |
| — |
| — |
| 103 |
| — |
| — |
|
| — |
| — |
| — |
| 103 |
| — |
| — |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Total expense |
| $ | 10,668 |
| $ | 10,108 |
| $ | 11,045 |
| $ | 8,830 |
| $ | 6,030 |
| $ | 5,476 |
|
| $ | 16,002 |
| $ | 15,162 |
| $ | 16,420 |
| $ | 13,424 |
| $ | 8,213 |
| $ | 8,214 |
|
The company previously disclosed in its financial statements for the year ended December 31, 2003, that it was not required to make any contributions to the U.S. pension plan and postretirement healthcare benefit plans in 2004. As of JuneSeptember 30, 2004, no contributions have been made to those plans. TheSubsequent to September 30, 2004, the company is not required to make any contributionsmade a contribution to the U.S. pension plan of $25 million. The company is considering making an additional contribution to the U.S. pension plan in the fourth quarter of 2004 depending on business and postretirement healthcare benefit plans for the remainder of 2004.market conditions.
Certain international pension benefit plans are required to be funded in accordance with local government requirements. The company contributed $10.7$2.0 million and $13.1$15.1 million to its international pension benefit plans during the secondthird quarter and sixnine months ended JuneSeptember 30, 2004, respectively.respectively, a portion of which was discretionary. Currently, the company expects that it will contribute $4.7$2.7 million to the international pension benefit plans during the remainder of 2004.
16
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Financial information for each of the company’s reportable segments is as follows:
|
| Second Quarter Ended |
| Six Months Ended |
|
| Third Quarter Ended |
| Nine Months Ended |
| ||||||||||||||||
(amounts in thousands) |
| 2004 |
| 2003 |
| 2004 |
| 2003 |
|
| 2004 |
| 2003 |
| 2004 |
| 2003 |
| ||||||||
|
| (unaudited) |
| (unaudited) |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| (unaudited) |
| (unaudited) |
| ||||||||||||
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
United States |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cleaning & Sanitizing |
| $ | 450,625 |
| $ | 430,901 |
| $ | 881,359 |
| $ | 848,200 |
|
| $ | 478,464 |
| $ | 444,791 |
| $ | 1,359,823 |
| $ | 1,292,991 |
|
Other Services |
| 85,875 |
| 82,963 |
| 163,650 |
| 156,292 |
|
| 89,157 |
| 83,497 |
| 252,807 |
| 239,789 |
| ||||||||
Total |
| 536,500 |
| 513,864 |
| 1,045,009 |
| 1,004,492 |
|
| 567,621 |
| 528,288 |
| 1,612,630 |
| 1,532,780 |
| ||||||||
International Cleaning & Sanitizing |
| 485,819 |
| 448,744 |
| 924,993 |
| 864,467 |
|
| 497,717 |
| 460,371 |
| 1,422,710 |
| 1,324,838 |
| ||||||||
Effect of foreign currency translation |
| 20,392 |
| (15,873 | ) | 52,080 |
| (46,372 | ) |
| 24,978 |
| (5,893 | ) | 77,058 |
| (52,265 | ) | ||||||||
Consolidated |
| $ | 1,042,711 |
| $ | 946,735 |
| $ | 2,022,082 |
| $ | 1,822,587 |
|
| $ | 1,090,316 |
| $ | 982,766 |
| $ | 3,112,398 |
| $ | 2,805,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Operating Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
United States |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cleaning & Sanitizing |
| $ | 75,297 |
| $ | 71,943 |
| $ | 152,587 |
| $ | 141,849 |
|
| $ | 86,443 |
| $ | 82,472 |
| $ | 239,030 |
| $ | 224,321 |
|
Other Services |
| 8,123 |
| 6,785 |
| 13,321 |
| 10,432 |
|
| 6,697 |
| 8,755 |
| 20,018 |
| 19,187 |
| ||||||||
Total |
| 83,420 |
| 78,728 |
| 165,908 |
| 152,281 |
|
| 93,140 |
| 91,227 |
| 259,048 |
| 243,508 |
| ||||||||
International Cleaning & Sanitizing |
| 50,049 |
| 44,524 |
| 84,998 |
| 75,104 |
|
| 64,020 |
| 56,772 |
| 149,018 |
| 131,876 |
| ||||||||
Corporate (expense) income |
| 270 |
| 106 |
| (3,485 | ) | 348 |
|
| (1,345 | ) | (1,184 | ) | (4,830 | ) | (836 | ) | ||||||||
Effect of foreign currency translation |
| 2,130 |
| (1,993 | ) | 4,587 |
| (4,834 | ) |
| 3,127 |
| (1,359 | ) | 7,714 |
| (6,193 | ) | ||||||||
Consolidated |
| $ | 135,869 |
| $ | 121,365 |
| $ | 252,008 |
| $ | 222,899 |
|
| $ | 158,942 |
| $ | 145,456 |
| $ | 410,950 |
| $ | 368,355 |
|
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 2004.
Consistent with the company’s internal management reporting, corporate operating income includes income from reductions in restructuring accruals of approximately $0.3 million and $0.1$0.5 million for secondthird quarter 2004 and 2003, respectively and approximately $0.5 million and $0.3$0.8 million for both the sixnine months ended JuneSeptember 30, 2004 and 2003, respectively.2003. Corporate expense for the first sixthird quarter and nine months ended JuneSeptember 30, 2004 also includes a charge of $1.6 million for in-process research and development recorded as part of the allocation of purchase price in the Alcide acquisition. For the first nine months ended September 30, 2004 corporate expense also includes a charge of $4.0 million related to the disposal of a grease management product
line. line. For the third quarter and nine months ended September 30, 2003, corporate expense includes a charge of $1.7 million related to a change in the amount of goodwill allocated to a business sold in 2003.
17
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Goodwill and Other Intangible Assets
Under Statement of Financial Accounting Standards (SFAS) No. 142, goodwill must be tested annually for impairment. As of June 30, 2004, theThe company has completed its annual 2004 test for goodwill impairment, including businesses reporting losses such as GCS Service. Based on this testing, no adjustment to the carrying value of goodwill is necessary.
Goodwill and other intangible assets arise principally from business acquisitions. Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Other intangible assets include primarily customer relationships, trademarks, patents and other technology. Other intangible assets are amortized on a straight-line basis over their estimated economic lives that results in a weighted average useful life of 1413 and 12 years as of JuneSeptember 30, 2004 and 2003, respectively.
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 secondthird quarter ended JuneSeptember 30, 2004 and 2003 was approximately $5.8$5.1 million and $4.4$6.5 million, respectively. Total amortization expense related to other intangible assets during the sixnine months ended JuneSeptember 30, 2004 and 2003 was approximately $11.2$16.3 million and $9.4$15.9 million, respectively. As of JuneSeptember 30, 2004, future estimated amortization expense related to amortizable other identifiable intangible assets will be (amounts in thousands):
Fiscal Year |
|
|
|
|
|
| ||
Remainder 2004 (six-month period) |
| $ | 11,700 |
| ||||
Remainder 2004 (three-month period) |
| $ | 5,775 |
| ||||
2005 |
| 22,644 |
|
| 23,646 |
| ||
2006 |
| 21,919 |
|
| 22,113 |
| ||
2007 |
| 21,620 |
|
| 22,032 |
| ||
2008 |
| 21,464 |
|
| 21,992 |
|
18
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. New Accounting Pronouncements
On December 17, 2003, the SEC staff released Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. The staff updated and revised the existing revenue recognition in Topic 13, Revenue Recognition, to make its interpretive guidance consistent with current accounting guidance, principally EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” Also, SAB 104 incorporates portions of the Revenue Recognition in Financial Statements – Frequently Asked Questions and Answers document that the SEC staff considered relevant and rescinds the remainder. The company’s revenue recognition policies are consistent with this guidance; therefore, this guidance did not have an immediate impact on the company’s consolidated financial statements.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans. The company’s U.S. Postretirement Health Care Benefits plan offers prescription drug benefits and the company expects towill benefit from this legislation. The company does not anticipate that its plan will need to be amended to obtain the benefits provided under the Act. In accordance with the FASB’s original guidance on the accounting for the Act, the company elected to defer recognition of the effects of the Act and any measures of benefit cost or benefit obligation in the financial statements or accompanying notes. In April 2004, the FASB issued FASB Staff Position No. FAS 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 which provided additional accounting guidance. The company expects to beginbegan recording the favorable benefits provided by the Act in the third quarter of 2004 using the prospective transition method consistent with this guidance and is currently considering whether to adopt the Act prospectively or retroactively to the date of this Act’s enactment.guidance. The company has estimated an annual after-tax benefit for 2004 is approximately $1.0 million. The company recorded approximately $0.5 million of this amount in the rangethird quarter of $1.52004 and expects to $2.0record the remaining $0.5 million related toin the fourth quarter of 2004. The impact of the Act in 2004.is estimated to be a reduction on the postretirement benefit obligation of approximately $15 million.
On July 30,The company believes it will benefit from the recently signed tax legislation, American Jobs Creation Act of 2004. The company expects to benefit from the special deduction for qualified domestic production activities with a modest benefit beginning in 2005. The company closed onis currently studying the purchase of Alcide Corporation (NASDQ: ALCD). Alcide is a Redmond, Washington-based producer of biocidal and sanitation products that are primarily used in the dairy, meat and poultry industries. Pursuant to the merger agreement, a wholly-owned acquisition subsidiaryimpact of the company was merged withone-time foreign dividend provisions and into Alcide. Based on an exchange ratiocurrently has no expectations of 0.6744, we will issue approximately 1,830,000 sharesthe benefits of Ecolab common stock plus additional cash-in-lieu of fractional shares to the former shareholders of Alcide, in exchange for 2,721,683 shares of Alcide Corporation common stock outstanding as of July 30, 2004. In addition, Ecolab assumed certain outstanding options granted by Alcide; after adjustment for the merger, the Alcide stock options entitle 16 holders to purchase an aggregate of approximately 20,100 shares of Ecolab common stock, at adjusted prices ranging from $17.79 to $93.42. The options expire at various times through April 30, 2011.these provisions.
19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Directors
Ecolab Inc.
We have reviewed the accompanying consolidated balance sheet of Ecolab Inc. as of JuneSeptember 30, 2004, and the related consolidated statements of income for each of the three and six-monthnine-month periods ended JuneSeptember 30, 2004 and 2003, and of cash flows for the six-monthnine-month periods ended JuneSeptember 30, 2004 and 2003. These interim financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 the standards of the Public Company Accounting Oversight Board (United States), 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 the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2003, 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 26, 2004, 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, 2003, 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 21, 2004
20
ECOLAB INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2.2. Mangement’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” located at the end of Part I of this report. Additional risk factors may be described from time to time in Ecolab’s filings with the Securities and Exchange Commission.
The second quarterthree months ending September 30, 2004 showed another quarter of earnings gains, improved sales growth and operational improvement ascausing diluted net income per share rose 20% to 30 centsrise 9 percent to $0.36 per share. The strong earnings performance leveraged our improving market conditions during the second quarter. These better trends and continued margin strength from our U.S.growth in domestic and international businesses were bolstered byas well as favorable currency translation and lowerincome tax rate, and enabled us to outperform the industry and to gain market share.rates.
• SecondThird quarter sales for our United States Cleaning & Sanitizing operations rose 5%8 percent to $451$478 million, showing improving sales trends for almost every division. Kay sales were up 16%,20 percent, led by strong gains in quick-service restaurants and food retail. Institutional also showed improving sales trends are improving as economic indicators in the hospitality and foodservice industries are showing a recovery is underway. Food & Beverage sales growth accelerated in the second quarter, increasing 6%.most customer end markets.
• Our United States Other Services sales increased 4%7 percent to $86$89 million in the secondthird quarter. Pest Elimination had sales growth of 8% was offset by a9 percent while sales decreaseincreased 2 percent at GCS Service.
• Sales of our International Cleaning & Sanitizing operations rose 8%8 percent in the secondthird quarter when measured at fixed currency rates to $486$498 million. Strong sales in Latin America and Canada were offset by slowerAsia Pacific showed strong sales growth while sales in Europe and Asia Pacific.grew modestly. At public currency rates, International Cleaning and& Sanitizing sales increased 17%.15 percent.
• We continued to invest in future growth during the secondthird quarter of 2004. This included investing in our sales-and-service force, research and development, information technology, as well as acquiring Elimco (pest elimination businessAlcide Corporation (a producer of biocidal and sanitation products that are primarily used in South Africa)the dairy, meat and the Restoration and Maintenance business unit of VIC International.poultry industries).
21
ECOLAB INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
• Cash provided by operating activities for the secondthird quarter continued to be strong and helped us to repurchase approximately 2 million shares, make acquisitions and finance other cash requirements.
• Currency translation had a positive impact on our financial results during the secondthird quarter, adding approximately $2.5$2.8 million to net income. For the first sixnine months of 2004, currency translation added $5.1$7.9 million to net income.
• An improvementImprovement in our annual effective income tax rate from 38.9 percent for the first six months of 2003 to 37.2 in 2004 added approximately $2.1$2.8 million to net income for the secondthird quarter and $4.0$7.3 million for the first sixnine months of 2004.
• Diluted net income per share was $0.30$0.36 for the secondthird quarter of 2004, up 209 percent from $0.25$0.33 in the comparable period of 2003. For the first sixnine months, net income per share was $0.55$0.92 in 2004 compared to $0.46$0.80 in 2003. Earnings for the third quarter of 2004 include a favorable tax benefit of $1.9 million related to prior periods and a charge of $1.6 million for in-process research and development related to our acquisition of Alcide Corp. Earnings for the first sixnine months of 2004 also include an after-tax charge of $2.4 million related to the disposal of a grease management product line in the first quarter of 2004. The third quarter and first nine months of 2003 include a charge of $1.7 million related to a change in the amount of goodwill allocated to a business sold in 2003 and a gain on the sale of an equity investment of $6.2 million after tax.
Results of Operations - SecondThird Quarter and SixNine Months Ended JuneSeptember 30, 2004
Consolidated net sales for the secondthird quarter ended JuneSeptember 30, 2004 were $1.043$1.090 billion, an increase of 1011 percent over net sales of $0.947$0.983 billion in the secondthird quarter of last year. For the first sixnine months of 2004, net sales increased 11 percent to $2.022$3.112 billion from $1.823$2.805 billion in the comparable period of 2003. Excluding acquisitions and divestitures, consolidated net sales increased 8 percent in the second quarter and 9 percent for both the third quarter and the first sixnine months of 2004. Changes in currency translation positively impacted sales growth by approximately 43 percentage points for the secondthird quarter and approximately 5 percentage points for the sixnine months ended JuneSeptember 30, 2004.
The gross profit margin (defined as themargins (the difference between net sales less cost of sales divided by net sales) was 51.6were 52.3 percent and 50.751.3 percent of net sales for the quarterquarters ended JuneSeptember 30, 2004 and 2003, respectively. For the six-monthnine-month periods, the gross profit margins were 51.651.9 percent in 2004 and 50.851.0 percent in 2003. The increase in the gross margins for the secondthird quarter and year-to-date periods compared with the 2003 gross profit margins is principally due to the benefits of cost savings initiatives, improved business and product mix as well as cost savings initiatives.and favorable raw material prices.
22
Selling, general and administrative expenses were 38.637.6 percent of consolidated net sales for the secondthird quarter of 2004, an increase from 37.936.4 percent of net sales in the comparable quarter of last year. For the six-monthnine-month period, selling, general and administrative expenses also increased as a percentage of net sales to 39.038.5 percent in 2004 from 38.637.8 percent in 2003. This increase for the quarter and year-to-date periods is principally due to an increaseinvestments in the sales and service force investments, as well as, research and development, information technology, acquisitions and higher sales commissions and incentives.
22
ECOLAB INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Second Quarter and Six Months Ended June 30, 2004 (continued)
Net income totaled $78$95 million for the secondthird quarter of 2004 and $67$87 million for the comparable period of 2003. On a per share basis, diluted net income per common share was $0.30$0.36 for the secondthird quarter of 2004 and increased 209 percent over diluted net income per share of $0.25$0.33 in the secondthird quarter of last year. For the first sixnine months of 2004, net income was $144$239 million as compared to net income of $122$210 million in the comparable period of last year. Diluted net income per share increased 2015 percent to $0.55$0.92 for the sixnine months ended JuneSeptember 30, 2004 from $0.46$0.80 for the first sixnine months of last year. Net income for third quarter 2004 includes a favorable tax benefit of $1.9 million related to prior periods and a charge of $1.6 million for in-process research and development related to the Alcide acquisition. Net income for the first sixnine months of 2004 also includes aan after-tax charge of $2.4 million related to the disposal of a grease management product line in the first quarter of 2004. For the third quarter and nine months ended September 30, 2004, net income included $0.3 million and $0.5 million, respectively, of reductions in previously recorded restructuring expenses (after tax) recorded as special charges. The financial results for the third quarter and first nine months of 2003 included a gain on the sale of an equity investment of $6.2 million after tax in special charges. Net income also included approximately $1.7 million of expense related to a change in the amount of goodwill allocated to a business sold in 2003. For the third quarter and nine months ended September 30, 2003, net income also included $0.3 million and $0.5 million, respectively, of reductions in previously recorded restructuring expenses (after tax) recorded as special charges. Currency translation benefited net income by approximately $2.5$2.8 million for the secondthird quarter and $5.1$7.9 million for the first sixnine months of 2004. The comparison of net income also benefited from a lower effective tax rate in 2004.
23
Sales for each of our reportable segments isare as follows:
|
| Second Quarter Ended |
| Six Months Ended |
| ||||||||
(amounts in thousands) |
| 2004 |
| 2003 |
| 2004 |
| 2003 |
| ||||
|
| (unaudited) |
| (unaudited) |
| ||||||||
|
|
|
|
|
|
|
|
|
| ||||
Net Sales |
|
|
|
|
|
|
|
|
| ||||
United States |
|
|
|
|
|
|
|
|
| ||||
Cleaning & Sanitizing |
| $ | 450,625 |
| $ | 430,901 |
| $ | 881,359 |
| $ | 848,200 |
|
Other Services |
| 85,875 |
| 82,963 |
| 163,650 |
| 156,292 |
| ||||
Total |
| 536,500 |
| 513,864 |
| 1,045,009 |
| 1,004,492 |
| ||||
International Cleaning & Sanitizing |
| 485,819 |
| 448,744 |
| 924,993 |
| 864,467 |
| ||||
Effect of foreign currency translation |
| 20,392 |
| (15,873 | ) | 52,080 |
| (46,372 | ) | ||||
Consolidated |
| $ | 1,042,711 |
| $ | 946,735 |
| $ | 2,022,082 |
| $ | 1,822,587 |
|
23
ECOLAB INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Second Quarter and Six Months Ended June 30, 2004 (continued)
|
| Third Quarter Ended |
| Nine Months Ended |
| ||||||||
(amounts in thousands) |
| 2004 |
| 2003 |
| 2004 |
| 2003 |
| ||||
|
| (unaudited) |
| (unaudited) |
| ||||||||
Net Sales |
|
|
|
|
|
|
|
|
| ||||
United States |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cleaning & Sanitizing |
| $ | 478,464 |
| $ | 444,791 |
| $ | 1,359,823 |
| $ | 1,292,991 |
|
Other Services |
| 89,157 |
| 83,497 |
| 252,807 |
| 239,789 |
| ||||
Total |
| 567,621 |
| 528,288 |
| 1,612,630 |
| 1,532,780 |
| ||||
International Cleaning & Sanitizing |
| 497,717 |
| 460,371 |
| 1,422,710 |
| 1,324,838 |
| ||||
Effect of foreign currency translation |
| 24,978 |
| (5,893 | ) | 77,058 |
| (52,265 | ) | ||||
Consolidated |
| $ | 1,090,316 |
| $ | 982,766 |
| $ | 3,112,398 |
| $ | 2,805,353 |
|
The following table shows the increase or growth in sales by operating segment for the secondthird quarter ended JuneSeptember 30, 2004 over the secondthird quarter of 2003 and for the sixnine months ended JuneSeptember 30, 2004 over the first sixnine months of 2003:
|
| Percent Change |
|
| Percent Change |
| ||||
|
| Second Quarter |
| Six Months |
|
| Third Quarter |
| Nine Months |
|
Net Sales |
|
|
|
|
|
|
|
|
|
|
United States Cleaning & Sanitizing |
|
|
|
|
|
|
|
|
|
|
Institutional |
| 4 | % | 4 | % |
| 6 | % | 5 | % |
Kay |
| 16 |
| 14 |
|
| 20 |
| 16 |
|
Textile Care |
| 3 |
| (1 | ) |
| 12 | �� | 3 |
|
Professional Products |
| (16 | ) | (21 | ) |
| (18 | ) | (20 | ) |
Healthcare |
| — |
| (2 | ) |
| 13 |
| 3 |
|
Water Care Services |
| 13 |
| 12 |
|
| 6 |
| 10 |
|
Vehicle Care |
| (1 | ) | (3 | ) |
| (3 | ) | (3 | ) |
Food & Beverage |
| 6 |
| 5 |
|
| 12 |
| 7 |
|
Total United States Cleaning & Sanitizing |
| 5 | % | 4 | % |
| 8 | % | 5 | % |
United States Other Services |
|
|
|
|
|
|
|
|
|
|
Pest Elimination |
| 8 | % | 9 | % |
| 9 | % | 9 | % |
GCS Service |
| (4 | ) | (3 | ) |
| 2 |
| (1 | ) |
Total United States Other Services |
| 4 | % | 5 | % |
| 7 | % | 5 | % |
Total United States |
| 4 | % | 4 | % |
| 7 | % | 5 | % |
International Cleaning & Sanitizing |
|
|
|
|
|
|
|
|
|
|
Europe |
| 8 | % | 7 | % |
| 8 | % | 7 | % |
Asia Pacific |
| 5 |
| 3 |
|
| 9 |
| 5 |
|
Latin America |
| 13 |
| 13 |
|
| 12 |
| 12 |
|
Canada |
| 7 |
| 4 |
|
| 6 |
| 4 |
|
Total International Cleaning & Sanitizing |
| 8 | % | 7 | % |
| 8 | % | 7 | % |
Consolidated (management rates) |
| 6 | % | 5 | % |
| 8 | % | 6 | % |
Consolidated (public rates) |
| 10 | % | 11 | % |
| 11 | % | 11 | % |
24
ECOLAB INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Second Quarter and Six Months Ended June 30, 2004 (continued)
Sales of our United States Cleaning & Sanitizing operations for the third quarter were $451$478 million, an increase of 58 percent compared with sales of $431$445 million in the secondthird quarter of last year. United States Cleaning & Sanitizing sales were $881 million$1.360 billion for the first sixnine months of 2004, up 45 percent over net sales of $848 million$1.293 billion in the comparable period of last year. Excluding acquisitions and dispositions, sales increased 46 percent and 34 percent for the quarter and sixnine months ended JuneSeptember 30, 2004, respectively. Sales benefited from double-digit growth in Kay, Healthcare and WaterTextile Care Services and good growth in Institutional and Food & Beverage, which were partially offset by lower sales in Professional Products due to the exit of a non-strategic business line. The increase in sales in our Institutional division reflects an increase inincreased account retention through enhanced service, new accounts, the successful introduction ofproduct and program initiatives and aggressive new products and the benefits of our improved service initiatives.account sales efforts. Institutional’s results include sales increases in most market segments, particularlyall end markets, including restaurant, hospitality, healthcare, travel and casual dining. Improving trends in the hospitality, foodservice and healthcare markets are also expected to help sales growth in the remainder of 2004.government markets. Excluding the acquisition of Daydots and the disposition of a grease management product line, sales growth for Institutional was 6 percent for the third quarter and 4 percent for both the quarter and sixnine months ended JuneSeptember 30, 2004. Kay’s sales growthresults reflects strong growth in its food retail services business and to its core quickservice customers. New customers, better account penetration and new products and programs such as those sold to our specialty retail customers, are also showingdrove Kay’s good results. Textile Care sales increased during the second quartercontinue to increase due to new corporate accounts gained earlier in the year and improved customer retention. For the first six months of 2004, Textile Care sales growth is slightly negative as the division begins to recover from account losses in the second half of 2003. Sales growth in corporate accounts in our Professional Products operations was more than offset by the planned phase down of the janitorial equipment distribution business. Thebusiness and weak distributor sales. Our Healthcare division had a double-digit sales increase during the third quarter driven by strong growth in our Healthcare division was flat for the second quarter and slightly negative for thesurgical instrument care sales. The first sixnine months of 2004 showed a small positive increase for Healthcare due to good sales of instrument care solids and skincare products being partially offset by the exit of a private label product line. Adjusting for this, our Healthcare division achieved good growth in both skin care and surgical instrument care revenues. Our Food & Beverage operations reported an increase in sales due to improved sales to the agri, dairy, soft drink meat and poultry and food markets. Excluding the acquisition of Alcide, sales growth for Food & Beverage was 5 percent for both the third quarter and nine months ended September 30, 2004. Water Care Services had strong sales growth in our majorthe food processing, healthcare, laundry and cruise ship markets, especially the food and beverage market. Our “Circle the Customer” strategy has producedcontinues to produce new account gains as our Water Care division works with our Food & Beverage, Healthcare and Textile Care divisions to drive its sales growth. Vehicle Care sales declined for both the quarter and year-to-date periods. The secondperiods due to poor weather conditions and higher gasoline prices during much of the third quarter sales were hurt byand first nine months of the very wet weather in May and June and the year-to-date sales were also impacted by the severe U.S. winter weather in January.year.
25
Sales of our United States Other Services operations totaled $86$89 million for the secondthird quarter of 2004, an increase of 47 percent over net sales of $83 million in the secondthird quarter of last year. United States Other Services sales were $164$253 million for the first sixnine months of 2004, an increase of 5 percent over net sales of $156$240 million in the comparable period of last year. Pest Elimination sales increased with good growth in core pest elimination contract services and continuing growth in non-contract services such as one-shot services, bird work, the Stealth fly program and its food safety audit
25
ECOLAB INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Second Quarter and Six Months Ended June 30, 2004 (continued)
business. business. GCS Service sales increased for the third quarter due to good growth in direct part sales. Sales decreased slightly for bothGCS Service during the second quarter and sixfirst nine months of 2004 as an increase in direct part sales was more than offset by a decrease in service sales.
Management rate sales for our International Cleaning & Sanitizing operations were $486$498 million for the secondthird quarter of 2004, an increase of 8 percent over sales of $449$460 million in the comparable quarter of last year. For the first sixnine months of 2004, sales increased 7 percent to $925 million$1.423 billion from $864 million$1.325 billion during the comparable period last year. Excluding the effects of acquisitions and divestitures, sales increased 5 percent for the third quarter and 4 percent for both the second quarter and for the six-month periodsnine-month period ended JuneSeptember 30, 2004. Sales in Europe, excluding acquisitions and divestitures, increased 3 percent for both the secondthird quarter and first sixnine months of 2004, primarily due to successful new product launches, beingaggressive marketing and added headcount that was partially offset by the effects of a weak European economy. Sales growth for Asia Pacific was positive, led bywith improving sales trends in Japan during the third quarter in addition to the double-digit sales growth in New Zealand and East Asia for the quarter. For the first nine months of 2004, East Asia experienced strong sales growth in East Asia being offset by flatwhile sales growth in Japan and Australia.Australia was flat. For both the third quarter and year-to-date periods, Latin America had double-digit sales increases in almost all countriesMexico and benefited from increasedthe Caribbean driven by the strong tourism as well asmarket and improved growth in Brazil due to continued success with food retail programs. Sales in Canada for the nine-month period increased as trends in the hospitality industry improveimproved and the third quarter also benefited as the market recovers from the impact of last year’s SARS outbreak.
Operating income for each of our reportable segments is:
|
| Second Quarter Ended |
| Six Months Ended |
|
| Third Quarter Ended |
| Nine Months Ended |
| ||||||||||||||||
(amounts in thousands) |
| 2004 |
| 2003 |
| 2004 |
| 2003 |
|
| 2004 |
| 2003 |
| 2004 |
| 2003 |
| ||||||||
|
| (unaudited) |
|
|
|
|
| |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| (unaudited) |
|
|
|
|
| ||||||||||
Operating Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
United States |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cleaning & Sanitizing |
| $ | 75,297 |
| $ | 71,943 |
| $ | 152,587 |
| $ | 141,849 |
|
| $ | 86,443 |
| $ | 82,472 |
| $ | 239,030 |
| $ | 224,321 |
|
Other Services |
| 8,123 |
| 6,785 |
| 13,321 |
| 10,432 |
|
| 6,697 |
| 8,755 |
| 20,018 |
| 19,187 |
| ||||||||
Total |
| 83,420 |
| 78,728 |
| 165,908 |
| 152,281 |
|
| 93,140 |
| 91,227 |
| 259,048 |
| 243,508 |
| ||||||||
International Cleaning & Sanitizing |
| 50,049 |
| 44,524 |
| 84,998 |
| 75,104 |
|
| 64,020 |
| 56,772 |
| 149,018 |
| 131,876 |
| ||||||||
Corporate (expense) income |
| 270 |
| 106 |
| (3,485 | ) | 348 |
|
| (1,345 | ) | (1,184 | ) | (4,830 | ) | (836 | ) | ||||||||
Effect of foreign currency translation |
| 2,130 |
| (1,993 | ) | 4,587 |
| (4,834 | ) |
| 3,127 |
| (1,359 | ) | 7,714 |
| (6,193 | ) | ||||||||
Consolidated |
| $ | 135,869 |
| $ | 121,365 |
| $ | 252,008 |
| $ | 222,899 |
|
| $ | 158,942 |
| $ | 145,456 |
| $ | 410,950 |
| $ | 368,355 |
|
26
ECOLAB INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Second Quarter and Six Months Ended June 30, 2004 (continued)
Operating income of our United States Cleaning & Sanitizing operations increased 5 percent and 87 percent over operating income in the secondthird quarter and first sixnine months of 2003, respectively. Excluding acquisitions and divestitures, operating income increased 32 percent and 65 percent over operating income in the secondthird quarter and first sixnine months of 2003, respectively. The operating income margin for the U.S. Cleaning & Sanitizing segment was 16.718.1 percent of net sales in both the secondthird quarter of 2004, down from 18.5 percent in the comparable quarter last year. Excluding acquisition and 2003 and increaseddivestitures, the operating income margin decreased to 17.3 percent of sales from 16.718.2 percent of net sales from 19.0 percent in the third quarter of 2003. The decrease in operating margin for the six-month period. Operating income margin comparisons reflect aquarter is due to investments in the sales force, research and development, information technology, higher sales commissions and incentives and freight expense offsetting favorable business mix and cost efficiency improvements in several divisionsdivisions. The operating income margin for the nine-month period increased to 17.6 percent of net sales in 2004 from 17.3 percent of net sales in 2003. Excluding acquisitions and divestitures, the operating income margin increased to 17.7 percent of net sales from 17.6 percent in the first nine months of 2003. Operating income margin year-to-date comparisons reflect cost efficiency improvements and a favorable business and product mix partially offset by sales force and other investments.
SecondThird quarter 2004 operating income of our United States Other Services operations increased 20 percentdecreased to $7 million from $9 million in the second quarter of last year.comparable period for 2003. For the six-monthnine-month period, operating income increased 284 percent from the comparable period last year. The operating income margin for United States Other Services increaseddecreased to 9.57.5 percent from 8.210.5 percent in the secondthird quarter of last year.2003. For the six-monthnine month period, the operating income margin was 8.17.9 percent, an increasea decrease from 6.78.0 percent for the same period last year. Operating income for U.S. Other Services declined as Pest Elimination gains were offset by higher costs in GCS Service. Third quarter 2004 results included a charge related to the GCS transition to a centralized business model. Nine month results for Other Services benefited from a $0.6$2.1 million patent settlement in the second quarterfirst half of 2004 and $2.1 million in the first six months of 2004. In addition, Pest Elimination showed profit gains while GCS Service showed comparatively larger operating losses for the quarter and year-to-date periods.
Operating income of our International Cleaning & Sanitizing operations increased 1213 percent fromfor both the secondthird quarter of last year. For theand first sixnine months of 2004 operating income increased 13 percent from the comparable period of last year.over 2003. Excluding acquisitions and divestitures, operating income increased 910 percent over the comparable quarter of last year and 89 percent for the six-monthnine-month period. The operating income margin increased to 10.312.9 percent of net sales in the secondthird quarter of 2004 from 9.912.3 percent in the comparable period of last year. For the six-monthnine-month period ended JuneSeptember 30, 2004, the operating income margin increased to 9.210.5 percent of net sales from 8.710.0 percent in the comparable period of last year. Excluding acquisitions and divestitures, the operating income margin for International increased to 10.212.8 percent of net sales from 9.712.2 percent in the secondthird quarter of last year and increased to 9.110.4 percent of net sales from 8.79.9 percent for the six-monthnine-month period. Profits were up across all regions and were achieved through higher sales and careful cost management.
27
ECOLAB INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Second Quarter and Six Months Ended June 30, 2004 (continued)
Corporate operating incomeexpense was $0.3$1.3 million for the secondthird quarter of 2004 as compared to $0.1$1.2 million for the comparable quarter last year. For the six-monthnine-month period, corporate operating income (expense)expense was ($3.5)$4.8 million as compared to $0.3$0.8 million for the comparable period last year. Corporate operating
27
expense includes income from reductions in restructuring accruals of $0.3 million and $0.5 million for the third quarter ended September 30, 2004 and 2003, respectively and $0.8 million for both the nine-month periods ended September 30, 2004 and 2003. Corporate operating expense for the third quarter and first sixnine months of 2004 includes a charge of $1.6 million for in-process research and development recorded as part of the allocation of purchase price in the Alcide acquisition in July. The first nine months of 2004 also includes a charge of $4.0 million related to the disposal of a grease management product line in the first quarter offset by a reduction in restructuring accruals of $0.5 million.2004. Corporate operating income inexpense for the third quarter and first sixnine months of 2003 is income fromincludes expense of $1.7 million related to a change in the reductionamount of goodwill allocated to a business sold in restructuring accruals.2003.
Net interest expense totaled $11.2$11.6 million in the secondthird quarter of 2004, a decrease of 54 percent from net interest expense of $11.8$12.1 million in the secondthird quarter of 2003. For the six-month period,nine-month periods, net interest expense was $22.4$34.0 million and $22.5$34.5 million in 2004 and 2003, respectively. Net interest expense decreased due to an increase in interest income and a shift in the mix of external debt balances in the company’s foreign subsidiary locations towards countries with lower interest rates.
The provision for income taxes for the first sixnine months of 2004 reflected an effective income tax rate of 37.236.5 percent as compared to an effective income tax rate of 38.939.1 percent for the first sixnine months of 2003. The reduction in the 2004 effective tax rate is primarily due to a lower international rates, and tax savings efforts.efforts and the favorable tax benefit recorded in the third quarter of 2004.
Financial Position and Liquidity
Total assets were $3.413$3.549 billion at JuneSeptember 30, 2004, an increase of $184$320 million, or 610 percent, over total assets at year-end 2003. Approximately $15$16 million of the increase in assets was related to the strengthening of foreign currencies.currencies against the U.S. dollar. In addition, the net increase in assets (excluding cash and cash equivalents) acquired and disposed of was approximately $170$226 million for the first sixnine months of 2004.
Total debt was $712$695 million at JuneSeptember 30, 2004, up from total debt of $675 million at year-end 2003. The ratio of total debt to capitalization was 32 percent at September 30, 2004, down from 34 percent at June 30, 2004, unchanged from December 31, 2003 due to an increase in debtshareholders equity being only partially offset by an increase in shareholders’ equity.debt. We are in compliance with all of our debt covenants and we believe we have ample borrowing capacity to meet reasonably foreseeable business needs.
Cash provided by operating activities totaled $233$417 million and $220$399 million, for the first sixnine months of 2004 and 2003, respectively. Operating cash flows for 2004 increased over 2003 primarily due to higher sales in the first sixnine months compared to the prior year which were partially offset by an increase in accounts receivable driven by the increase in sales. Operating cash flow was also higher in 2004 due to increased federal tax payments in 2004 compared to 2003. Cash used for investing activities in 2004 has increased significantly over 2003 resulting from the increased acquisition activity for the company. The increase in cash-funded acquisitions was offset by a reduction in net repayments on notes payable.
28
We currently expect to fund all of the cash requirements which are reasonably foreseeable for the remainder of 2004, including new program investments, scheduled debt repayments, dividend payments, possible acquisitions and planned share repurchases from operating activities, cash reserves and short-term borrowings. In the event of a significant acquisition or other significant funding need, fundingfinancing may occur through additional long-term borrowing.
28
ECOLAB INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Subsequent EventEvents
On July 30,We believe that we will benefit from the recently signed tax law, American Jobs Creation Act of 2004. We expect to benefit from the special deduction for qualified domestic production activities with a modest benefit beginning in 2005. We are currently studying the impact of the one-time favorable foreign dividend provisions and currently have no expectations of the benefits of these provisions.
In December 2003, Henkel KG&A reported that it may sell a portion or all of its holdings of Ecolab common stock and/or its holdings of common stock of The Clorox Company, or a combination of both, in connection with refinancing its acquisition of The Dial Corporation. In October 2004, we closed onHenkel announced it had entered into a share exchange agreement with Clorox. If the purchase of Alcide Corporation (NASDQ: ALCD). Alcideshare exchange transaction is a Redmond, Washington-based producer of biocidal and sanitation productsfinalized, Henkel has reported that are primarily usedit currently believes that it will have taken sufficient steps to refinance the debt incurred in the dairy, meatacquisition of Dial, and poultry industries. Pursuantexpects that it would not sell any shares of Ecolab common stock. In that event, Henkel would continue to the merger agreement, a wholly-owned acquisition subsidiary of the company was merged with and into Alcide. Based on an exchange ratio of 0.6744, we will issue approximately 1,830,000hold its shares of Ecolab common stock plus additional cash-in-lieu of fractional sharesas a long-term minority investor. However, Henkel would intend to the former shareholders of Alcide,continue to review its investment in exchange for 2,721,683 shares of Alcide CorporationEcolab common stock outstandingfrom time to time and, depending on certain factors, such as the financial performance of July 30, 2004. In addition, Ecolab assumed certain outstanding options granted by Alcide; after adjustment foras well as the merger, the Alcide stock options entitle 16 holders to purchase an aggregateavailability and price of 20,100 shares of Ecolab common stock at adjusted prices ranging from $17.79on the open market, Henkel may determine to $93.42. The options expire at various times through April 30, 2011.acquire additional shares or sell shares of Ecolab common stock.
Item 3.3. Quantitative and Qualitative Disclosures about Market Risk.
We primarily use interest rate swaps, foreign currency forward contracts and foreign currency debt to manage risks generally associated with interest rate volatility, foreign exchange risk and net investments in our foreign operations. To 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. We do not hold derivative financial instruments of a speculative nature. For a more detailed discussion of derivative instruments, refer to the notes to consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2003.
Item 4.4. Controls and Procedures.Procedures
As of JuneSeptember 30, 2004, we carried out an evaluation, under the supervision and with the participation of our management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures are effective, among other things, in timely alerting them to material information relating to us (including our consolidated subsidiaries) required to be included in our reports filed under the Securities Exchange Act of 1934, as amended.
29
During the period AprilJuly 1 through JuneSeptember 30, 2004, there were no changes in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
29
ECOLAB INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-LookingForward-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, we discuss expectations regarding future performance of the company which include improving business trends, sales growth, expected strategic investments in the business, favorable liquidity, impact of recent tax legislation, the intent of significant shareholders 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, we may refer to this section of the Form 10-Q to identify risk factors related to other forward looking statements made in oral presentations including telephone conferences and/or webcasts open to the public.
Forward-looking statements represent challenging goals for us. As such, they are based on certain assumptions and estimates and are subject to certain risks and uncertainties. We caution 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, we hereby identify important factors, which could affect our financial performance and could cause our actual results for future periods to differ materially from our anticipated results or other expectations expressed in our 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, customer or vendor consolidations, and customer and vendor consolidations;existing contractual obligations; changes in oil or raw material prices or unavailability of adequate and reasonably priced raw materials;materials or substitutes therefor; the occurrence of capacity constraints or the loss of a key supplier;supplier or the inability to obtain or renew supply agreements on favorable terms; the effect of future acquisitions or divestitures or other corporate transactions; the company’s ability to achieve plans for past acquisitions; the costs and effects of complying withwith: (i) laws and regulations relating to the environment and to the manufacture, storage, distribution, efficacy and labeling of our products and (ii) changes in tax, fiscal, governmental and other regulatory policies; economic factors such as the worldwide economy, interest rates and currency movements, including, in particular, our exposure to foreign currency risk; the occurrence of (a) litigation or claims, (b) the loss or insolvency of a major customer or distributor, (c) war, (d) natural or manmade disasters (including acts of terrorism or other hostilities which impact our markets) and, (e) severe weather conditions or public health epidemics affecting the foodservice, hospitality, and travel industries; loss of, or changes in, executive management; our ability to continue product introductions or reformulations and technological innovations; and other uncertainties or risks reported from time-to-time in our reports to the Securities and Exchange Commission. In addition, we note that our stock price can be affected by fluctuations in quarterly earnings. There can be no assurances that our earnings levels will meet investors’ expectations.
30
PART II.II. OTHER INFORMATION
Item 2.Changes inUnregistered Sales of Equity Securities and Use of Proceeds.
(e)(c) Issuer Purchases of Equity Securities
Period |
| (a) |
| (b) Average |
| (c) |
| (d) |
| |
April 1-30, 2004 |
| 206,555 |
| $ | 28.5954 |
| 180,000 |
| 8,907,900 |
|
May 1-31, 2004 |
| 13,740 |
| $ | 29.4764 |
| 0 |
| 8,907,900 |
|
June 1-30, 2004 |
| 4,706 |
| $ | 30.5931 |
| 0 |
| 8,907,900 |
|
Total |
| 225,001 |
| $ | 28.6910 |
| 180,000 |
| 8,907,900 |
|
Period |
| (a) |
| (b) |
| (c) |
| (d) |
| |
July 1 - 31, 2004 |
| 0 |
| $ | 0 |
| 0 |
| 8,907,900 |
|
August 1 - 31, 2004 |
| 1,025,658 |
| $ | 29.8572 |
| 1,024,600 |
| 7,883,300 |
|
September 1 - 30, 2004 |
| 1,045,000 |
| $ | 30.9398 |
| 1,045,000 |
| 6,838,300 |
|
Total |
| 2,070,658 |
| $ | 30.4036 |
| 2,069,600 |
| 6,838,300 |
|
(1) Includes brokerage commissions paid, plus the value of 45,0011,058 shares reacquired from employees and/or directors as swaps for the cost of stock options, or shares surrendered to satisfy minimum statutory tax obligations, under the Company’s Stock Incentive Plans.
(2) On October 17, 2003, we announced that our Board of Directors authorized the repurchase of up to 10,000,000 shares of Common Stock, including shares to be repurchased under Rule 10b5-1. We intend to repurchase all shares under such authorization, for which no expiration date has been established, subject to market conditions.
Item 4.6. Submission of Matters to a Vote of Security HoldersExhibit.
Our Annual Meeting of Stockholders was held on May 7, 2004. At the meeting, 85.5% of the outstanding shares of our voting stock were represented in person or by proxy. The first proposal voted upon was the election of five Class III Directors for a term ending at the annual meeting in 2007. The five persons nominated by our Board of Directors received the following votes and were elected:
Name |
| For |
| Withheld |
|
Richard U. De Schutter |
| 216,309,569 |
| 3,861,427 |
|
William L. Jews |
| 215,773,787 |
| 4,397,209 |
|
Joel W. Johnson |
| 215,512,412 |
| 4,658,584 |
|
Ulrich Lehner |
| 214,426,056 |
| 5,744,940 |
|
Beth M. Pritchard |
| 217,471,263 |
| 2,699,733 |
|
In addition, the terms of office of the following directors continued after the meeting: Class I Directors for a term ending in 2005 – Douglas M. Baker, Jr., Stefan Hamelmann, James J. Howard, Jerry W. Levin and Robert L. Lumpkins; Class II Directors for a term ending in 2006 – Les S. Biller, Jerry A. Grundhofer, Jochen Krautter and Allan L. Schuman.
31
The second proposal voted upon was to re-approve the Ecolab Inc. Management Performance Incentive Plan. The proposal received the following votes and was approved:
For |
| Against |
| Abstain |
| Broker Non-Votes |
|
213,552,001 |
| 5,473,136 |
| 1,145,859 |
| 0 |
|
The third proposal voted upon was to approve the Ecolab Stock Purchase Plan. The proposal received the following votes and was approved:
For |
| Against |
| Abstain |
| Broker Non-Votes |
|
185,567,077 |
| 15,561,897 |
| 683,423 |
| 18,358,599 |
|
The fourth proposal voted upon was the ratification of the appointment of PricewaterhouseCoopers LLP as our registered public accounting firm for the year ending December 31, 2004.s.
The proposal received the following votes and was ratified:documents are filed as exhibits to this report:
For |
| Against |
| Abstain |
| Broker Non-Votes |
|
216,377,417 |
| 3,311,460 |
| 482,119 |
| 0 |
|
| (i) |
| ||
|
| |||
|
|
| ||
| (ii) | Amendment No. 2 dated as of August 13, 2004 to Australian Dollar Local Currency Addendum dated as of October 17, 1997, among Ecolab Pty Limited, Ecolab Inc., the Local Currency Banks named therein, Citicorp USA, Inc., as Administrative Agent, and Citisecurities Limited, as Local Currency Agent. |
31
|
|
| ||
|
|
| ||
(15) |
| |||
| ||||
| ||||
|
| |||
| ||||
|
32
|
| |||
|
| |||
| ||||
| ||||
| Letter regarding unaudited interim financial information. | |||
|
| |||
| ||||
(31) |
|
| Rule 13a - 14(a) Certifications. | |
|
| |||
| ||||
(32) |
|
| Section 1350 Certifications. | |
|
| |||
|
3332
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: | By: | /s/ Daniel J. Schmechel |
| |
|
| Daniel J. Schmechel | ||
|
| Vice President and Controller |
3433
Exhibit |
| Document |
| Method of | ||
|
|
|
|
| ||
(10) A. |
|
|
| |||
|
| Filed herewith electronically | ||||
|
|
|
|
| ||
|
| (ii) | Amendment No. 2 dated as |
| Filed herewith electronically | |
|
|
|
|
| ||
|
|
|
| |||
|
| (iii) |
| |||
|
| Filed herewith electronically | ||||
|
|
|
|
| ||
|
| |||||
|
|
| ||||
|
| |||||
|
| |||||
|
| |||||
|
| |||||
(15) |
| Letter regarding unaudited interim financial information. |
| Filed herewith electronically | ||
|
|
|
|
| ||
(31) |
| Rule 13a - 14(a) Certifications. |
| Filed herewith electronically | ||
|
|
|
|
| ||
(32) |
| Section 1350 Certifications. |
| Filed herewith electronically |
3534