<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission File No. 1-9328
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ECOLAB INC.
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(Exact name of registrant as specified in its charter)
Delaware 41-0231510
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Ecolab Center, 370 N. Wabasha Street, St. Paul, Minnesota 55102
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(Address of principal executive offices)(Zip Code)
612-293-2233
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(Registrant's telephone number, including area code)
(Not Applicable)
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of July 31, 1997.
64,773,630 shares of common stock, par value $1.00 per share.
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PART I -- FINANCIAL INFORMATION
ECOLAB INC.
CONSOLIDATED STATEMENT OF INCOME
Second Quarter Ended
June 30
(thousands, except per share) 1997 1996
-------- --------
(unaudited)
Net Sales $411,810 $373,196
Cost of Sales 183,322 170,856
Selling, General
and Administrative Expenses 175,685 156,991
-------- --------
Operating Income 52,803 45,349
Interest Expense, Net 3,054 4,584
-------- --------
Income Before Income Taxes
and Equity in Earnings of
Joint Venture 49,749 40,765
Provision for Income Taxes 20,397 16,346
Equity in Earnings of Henkel-Ecolab
Joint Venture 3,542 3,179
-------- --------
Net Income $ 32,894 $ 27,598
-------- --------
-------- --------
Net Income Per Share
Net Income Per Common Share $ 0.51 $ 0.43
Fully Diluted $ 0.49 $ 0.42
Dividends Per Common Share $ 0.16 $ 0.14
Average Common Shares Outstanding 64,889 64,307
See notes to consolidated financial statements.
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ECOLAB INC.
CONSOLIDATED STATEMENT OF INCOME
Six Months Ended Year Ended
June 30 December 31
(thousands, except per share) 1997 1996 1996
-------- -------- -----------
(unaudited)
Net Sales $785,570 $706,916 $1,490,009
Cost of Sales 349,048 323,445 674,953
Selling, General
and Administrative Expenses 340,289 304,324 629,739
-------- -------- -----------
Operating Income 96,233 79,147 185,317
Interest Expense, Net 6,052 8,024 14,372
-------- -------- -----------
Income Before Income Taxes
and Equity in Earnings of
Joint Venture 90,181 71,123 170,945
Provision for Income Taxes 36,974 28,517 70,771
Equity in Earnings of
Henkel-Ecolab Joint Venture 5,891 4,637 13,011
-------- -------- -----------
Net Income $ 59,098 $ 47,243 $ 113,185
-------- -------- -----------
-------- -------- -----------
Net Income Per Share
Net Income Per Common Share $ 0.91 $ 0.73 $ 1.75
Fully Diluted $ 0.88 $ 0.72 $ 1.69
Dividends Per Common Share $ 0.32 $ 0.28 $ 0.58
Average Common Shares Outstanding 64,832 64,449 64,496
See notes to consolidated financial statements.
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ECOLAB INC.
CONSOLIDATED BALANCE SHEET
June 30 June 30 December 31
(thousands) 1997 1996 1996
---------- ---------- -----------
(unaudited)
ASSETS
Cash and cash equivalents $ 70,550 $ 31,678 $ 69,275
Accounts receivable, net 217,550 201,247 205,026
Inventories 130,211 120,311 122,248
Deferred income taxes 29,227 21,901 29,344
Other current assets 8,145 25,670 9,614
---------- ---------- ----------
Current Assets 455,683 400,807 435,507
Property, Plant and
Equipment, Net 342,984 309,809 332,314
Investment in Henkel-Ecolab
Joint Venture 248,297 284,404 285,237
Other Assets 161,410 139,276 155,351
---------- ---------- ----------
Total Assets $1,208,374 $1,134,296 $1,208,409
---------- ---------- ----------
---------- ---------- ----------
See notes to consolidated financial statements.
(Continued)
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ECOLAB INC.
CONSOLIDATED BALANCE SHEET, (Continued)
June 30 June 30 December 31
(thousands, except per share) 1997 1996 1996
---------- ---------- -----------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt $ 29,638 $ 56,601 $ 27,609
Accounts payable 100,623 80,565 103,803
Compensation and benefits 62,322 54,286 71,533
Income taxes 15,036 9,255 26,977
Other current liabilities 115,714 94,855 97,849
---------- ---------- ----------
Current Liabilities 323,333 295,562 327,771
Long-Term Debt 149,196 163,875 148,683
Postretirement Health Care
and Pension Benefits 82,591 76,519 73,577
Other Liabilities 121,290 133,874 138,415
Shareholders' Equity (common stock,
par value $1.00 per share;
shares outstanding: June 30,
1997 - 64,892; June 30, 1996
- 64,326; December 31, 1996
- 64,800) 531,964 464,466 519,963
---------- ---------- ----------
Total Liabilities and
Shareholders' Equity $1,208,374 $1,134,296 $1,208,409
---------- ---------- ----------
---------- ---------- ----------
See notes to consolidated financial statements.
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ECOLAB INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended Year Ended
June 30 December 31
(thousands) 1997 1996 1996
--------- -------- -----------
(unaudited)
OPERATING ACTIVITIES
Net income $ 59,098 $47,243 $113,185
Adjustments to reconcile net
income to cash provided by
operating activities:
Depreciation 42,674 37,068 75,185
Amortization 7,431 6,568 14,338
Deferred income taxes (430) (557) (6,878)
Equity in earnings of joint venture (5,891) (4,637) (13,011)
Joint venture royalties and dividends 15,546 7,636 15,769
Other, net 628 229 1,023
Changes in operating assets and
liabilities:
Accounts receivable (10,009) 4,872 2,809
Inventories (6,306) (9,245) (6,852)
Other assets (5,645) (7,413) (5,255)
Accounts payable (3,608) (3,889) 16,397
Other liabilities (13,030) 1,943 47,559
--------- -------- --------
Cash provided by operating activities $ 80,458 $79,818 $254,269
--------- -------- --------
Bracketed amounts indicate a use of cash.
See notes to consolidated financial statements.
(Continued)
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<PAGE>
ECOLAB INC.
CONSOLIDATED STATEMENT OF CASH FLOWS, (Continued)
Six Months Ended Year Ended
June 30 December 31
(thousands) 1997 1996 1996
--------- --------- -----------
(unaudited)
INVESTING ACTIVITIES
Capital expenditures $(54,435) $(52,540) $(111,518)
Property disposals 1,197 1,548 3,284
Businesses acquired (12,974) (39,930) (54,911)
Other, net (235) 367 (1,449)
--------- --------- ----------
Cash used for investing activities (66,447) (90,555) (164,594)
--------- --------- ----------
FINANCING ACTIVITIES
Notes payable 2,395 (13,954) (42,045)
Long-term debt borrowings 1,000 75,000 75,000
Long-term debt repayments (470) (19,418) (35,690)
Reacquired shares (14,145) (16,364) (22,790)
Dividends on common stock (20,727) (18,084) (36,096)
Other, net 19,051 10,778 17,088
--------- --------- ----------
Cash provided by (used for)
financing activities (12,896) 17,958 (44,533)
--------- --------- ----------
Effect of exchange rate
changes on cash 160 (261) (585)
--------- --------- ----------
INCREASE IN CASH AND
CASH EQUIVALENTS 1,275 6,960 44,557
Cash and Cash Equivalents,
at beginning of period 69,275 24,718 24,718
--------- --------- ----------
Cash and Cash Equivalents,
at end of period $ 70,550 $ 31,678 $ 69,275
--------- --------- ----------
--------- --------- ----------
Bracketed amounts indicate a use of cash.
See notes to consolidated financial statements.
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ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
The unaudited consolidated statements of income for the second quarter and the
six months ended June 30, 1997 and 1996, reflect, in the opinion of management,
all adjustments necessary for a fair statement of the results of operations for
the interim periods. The results of operations for any interim period are not
necessarily indicative of results for the full year. The consolidated balance
sheet data as of December 31, 1996 and the related consolidated statements of
income and cash flows data for the year then ended were derived from audited
consolidated financial statements, but do not include all disclosures required
by generally accepted accounting principles. The unaudited consolidated
financial statements should be read in conjunction with the financial
statements and notes thereto incorporated in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996. Coopers & Lybrand L.L.P., the
Company's independent accountants, have performed a limited review of the
interim financial information included herein. Their report on such review
accompanies this filing.
BALANCE SHEET INFORMATION
June 30 June 30 December 31
(thousands) 1997 1996 1996
---------- ---------- -----------
(unaudited)
Accounts Receivable, Net
Accounts receivable $ 227,460 $ 209,543 $ 214,369
Allowance for doubtful accounts (9,910) (8,296) (9,343)
---------- ---------- ----------
Total $ 217,550 $ 201,247 $ 205,026
---------- ---------- ----------
---------- ---------- ----------
Inventories
Finished goods $ 53,782 $ 57,691 $ 52,232
Raw materials and parts 79,794 66,590 73,060
Excess of fifo cost over lifo cost (3,365) (3,970) (3,044)
---------- ---------- ----------
Total $ 130,211 $ 120,311 $ 122,248
---------- ---------- ----------
---------- ---------- ----------
Property, Plant and Equipment, Net
Land $ 8,257 $ 6,856 $ 7,969
Buildings and leaseholds 133,499 120,009 129,781
Machinery and equipment 217,508 203,168 208,704
Merchandising equipment 351,801 310,554 330,277
Construction in progress 9,818 10,893 11,745
---------- ---------- ----------
720,883 651,480 688,476
Accumulated depreciation
and amortization (377,899) (341,671) (356,162)
---------- ---------- ----------
Total $ 342,984 $ 309,809 $ 332,314
---------- ---------- ----------
---------- ---------- ----------
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<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Balance Sheet Information (Continued)
June 30 June 30 December 31
(thousands) 1997 1996 1996
---------- --------- -----------
(unaudited)
Other Assets
Intangible assets, net $ 102,965 $ 77,961 $ 96,865
Investments in securities 5,000 5,000 5,000
Deferred income taxes 26,591 27,671 26,582
Other 26,854 28,644 26,904
---------- --------- ----------
Total $ 161,410 $139,276 $ 155,351
---------- --------- ----------
---------- --------- ----------
Short-Term Debt
Notes payable $ 14,363 $ 40,149 $ 12,333
Long-term debt, current
maturities 15,275 16,452 15,276
---------- --------- ----------
Total $ 29,638 $ 56,601 $ 27,609
---------- --------- ----------
---------- --------- ----------
Shareholders' Equity
Common stock $ 71,199 $ 70,212 $ 70,751
Additional paid-in capital 193,984 173,583 187,111
Retained earnings 443,016 355,445 404,362
Deferred compensation (6,027) (5,539) (7,390)
Cumulative translation (14,406) 7,491 6,787
Treasury stock (155,802) (136,726) (141,658)
---------- --------- ----------
Total $ 531,964 $464,466 $ 519,963
---------- --------- ----------
---------- --------- ----------
Interest expense related to all debt was $8,500,000 and $10,129,000 for the six
months ended June 30, 1997 and 1996, respectively, and $19,084,000 for the year
ended December 31, 1996.
Other noncurrent liabilities included income taxes payable of $82 million at
June 30, 1997, $100 million at December 31, 1996, and $96 million at June 30,
1996.
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ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
BUSINESS ACQUISITIONS
In February 1997, the Company acquired three small Institutional and Food and
Beverage businesses in the Central Africa region. Also, in March 1997, the
Company acquired the Institutional, Food and Beverage and Commercial Laundry
cleaning and sanitizing businesses of the Savolite Group, which is based in
Vancouver, British Columbia, Canada. The acquired Savolite businesses
complement the Company's operations, primarily in Canada, with limited
operations also in the U.S. Pacific Northwest. Sales of the acquired Savolite
businesses were approximately $8 million in 1996.
These acquisitions have been accounted for as purchases and, accordingly, the
results of their operations have been included in the financial statements of
the Company from the dates of acquisition. Net sales and operating income of
these businesses for the second quarter and six months ended June 30, 1997 were
not significant.
NET INCOME PER SHARE
Net income per common share amounts are computed by dividing net income by the
weighted average number of common shares outstanding.
Fully diluted per share amounts are computed as above and assume exercise of
dilutive stock options.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, a new standard for computing and
presenting earnings per share. The Company is required to adopt the new
standard in the fourth quarter of 1997; earlier adoption is not permitted. The
Company expects that earnings per share computed under the new standard will
approximate earnings per share currently reported.
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<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
GEOGRAPHIC SEGMENTS
The Company is a global developer and marketer of premium cleaning, sanitizing
and maintenance products and services for the hospitality, institutional and
industrial markets. Customers include hotels and restaurants; foodservice,
healthcare and educational facilities; quickservice (fast-food) units;
commercial laundries; light industry; dairy plants and farms; and food and
beverage processors around the world. International consists of Canadian, Asia
Pacific, Latin American, African and Kay's international operations. In
addition, the Company and Henkel KGaA of Dusseldorf, Germany, each have a 50%
economic interest in the Henkel-Ecolab joint venture, which operates
institutional and industrial cleaning and sanitizing businesses in Europe.
Information concerning the Company's equity in earnings of the Henkel-Ecolab
joint venture is provided in a separate note to the consolidated financial
statements.
Second Quarter Six Months Year Ended
Ended June 30 Ended June 30 December 31
(thousands) 1997 1996 1997 1996 1996
--------- --------- --------- --------- -----------
(unaudited) (unaudited)
Net Sales
United States $319,633 $287,278 $610,336 $542,973 $1,148,778
International 92,177 85,918 175,234 163,943 341,231
--------- --------- --------- --------- -----------
Total $411,810 $373,196 $785,570 $706,916 $1,490,009
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Operating Income
United States $ 47,184 $ 39,919 $ 85,625 $ 70,073 $ 164,886
International 6,669 6,271 12,539 10,649 23,871
Corporate (1,050) (841) (1,931) (1,575) (3,440)
--------- --------- --------- --------- -----------
Total $ 52,803 $ 45,349 $ 96,233 $ 79,147 $ 185,317
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
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<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
EQUITY IN EARNINGS OF HENKEL-ECOLAB JOINT VENTURE
The Company's equity in earnings of the Henkel-Ecolab joint venture for the
second quarter and six months ended June 30, 1997 and 1996 and for the year
ended December 31, 1996 was:
Second Quarter Six Months Year Ended
Ended June 30 Ended June 30 December 31
(thousands) 1997 1996 1997 1996 1996
--------- --------- --------- --------- -----------
(unaudited) (unaudited)
Joint venture
Net sales $212,768 $232,935 $422,365 $449,782 $905,402
Gross profit 119,720 127,156 234,778 246,006 497,909
Income before
income taxes 15,434 17,228 27,407 27,786 65,091
Net income $ 8,924 $ 8,460 $ 15,594 $ 13,643 $ 34,808
Ecolab equity in earnings
Ecolab equity in
net income $ 4,462 $ 4,230 $ 7,797 $ 6,822 $ 17,404
Ecolab royalty
income from joint
venture, net of
income taxes 1,085 1,219 2,220 2,412 4,730
Amortization expense
for the excess of
cost over the
underlying net
assets of the joint
venture (2,005) (2,270) (4,126) (4,597) (9,123)
--------- --------- --------- --------- -----------
Equity in earnings of
Henkel-Ecolab
joint venture $ 3,542 $ 3,179 $ 5,891 $ 4,637 $ 13,011
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
At June 30, 1997, the Company's investment in the Henkel-Ecolab joint venture
included approximately $153 million for the unamortized excess of the Company's
investment over its equity in the joint venture's net assets. This excess is
being amortized on a straight-line basis over estimated economic useful lives of
up to 30 years.
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<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Ecolab Inc.
We have reviewed the accompanying consolidated balance sheet of Ecolab
Inc. as of June 30, 1997 and 1996, and the related consolidated statements of
income for the three-month and six-month periods ended June 30, 1997 and 1996,
and the consolidated statement of cash flows for the six-month periods ended
June 30, 1997 and 1996. These financial statements are the responsibility of
the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, 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 financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1996, and the
related consolidated statements of income, shareholders' equity and cash flows
for the year then ended (not presented herein); and in our report dated
February 24, 1997, 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, 1996, and the
related consolidated statements of income and cash flows for the year then
ended is fairly presented, in all material respects, in relation to the
consolidated balance sheet and statements of income and cash flows from which
it has been derived.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Saint Paul, Minnesota
July 22, 1997
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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, 1997
Net sales for the second quarter ended June 30, 1997 were $412 million, a 10
percent increase over net sales of $373 million in the second quarter of last
year. For the first six months of 1997, net sales totaled $786 million and
increased 11 percent over net sales of $707 million in the first half of 1996.
Business acquisitions accounted for approximately 30 percent of the sales
growth for the second quarter and 35 percent of the sales growth for the first
six months of 1997. New product introductions, new customers, competitive
gains and generally good business conditions in the hospitality and lodging
industries also contributed significantly to the growth in sales.
The gross profit margin for the second quarter of 1997 was 55.5 percent of net
sales and increased from the gross profit margin of 54.2 percent of net sales
in the second quarter of last year. For the six-month period, the gross profit
margin was 55.6 percent of net sales, an increase from 54.2 percent of net
sales in the first six months of last year. These improvements in the gross
profit margin reflected higher sales levels of the higher margin products
within the Company's core operations, a more stable raw material cost
environment and good sales volume growth, particularly the growth in sales of
new products. Selling price increases continued to be limited due to market
pressures.
Selling, general and administrative expenses were 42.7 percent of net sales in
the second quarter, an increase compared to selling, general and administrative
expenses of 42.1 percent of net sales in the second quarter of 1996. For the
first six months of 1997, selling, general and administrative expenses were
43.3 percent of net sales, up slightly from selling, general and administrative
expenses of 43.0 percent of net sales in the same period of last year. The
increase in these expenses reflects the higher sales levels of the Company's
core operations which have relatively higher selling expenses and investments
in the sales-and-service force. These increases were partially offset by
continued tight control of costs and strong sales growth during 1997. The
Company expects to continue investing in its sales-and-service force during the
second half of 1997, including investments in training and productivity.
For the second quarter of 1997, net income totaled $33 million, or $0.51 per
common share, an increase of 19 percent over net income of $28 million or $0.43
per common share in the comparable
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ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
period of last year. For the six-month period, net income of $59 million or
$0.91 per common share increased 25 percent over net income of $47 million or
$0.73 per common share in the first six months of 1996. These earnings
improvements reflected the benefits of higher sales, particularly in the
Company's core operations, continued tight cost controls, lower net interest
expense and higher equity in earnings of the Henkel-Ecolab Joint Venture. These
benefits were partially offset by investments in the sales-and-service force and
increased income taxes.
Net sales for the Company's United States operations totaled $320 million for
the second quarter ended June 30, 1997, an increase of 11 percent over net
sales of $287 million in the second quarter of last year. For the first six
months of 1997, United States sales were $610 million, a 12 percent increase
over net sales of $543 million in the comparable period of last year. United
States sales reflected strong growth in the core Institutional and Food and
Beverage operations and benefits from business acquisitions, new product
introductions and continued good business trends in the hospitality and lodging
industries. Business acquisitions accounted for approximately one-fourth of the
growth in United States sales for the second quarter and one-third of the
growth in sales for the first six months of 1997. Selling price increases
continued to be limited due to tight pricing conditions in several of the
markets in which the Company does business. Sales of the U.S. Institutional
Division increased 11 percent for the second quarter and 10 percent for the
first six months of 1997 and included strong growth in all product lines. The
Pest Elimination Division reported sales growth of 9 percent for both the
second quarter and six-month periods. Pest Elimination's growth was lower than
its historical double-digit rate, reflecting lower than expected contract
growth due to vacant sales force positions and some increase in competitive
activity. Sales of Kay's U.S. operations increased 6 percent for the second
quarter and 5 percent for the first half of 1997 and reflected sales to new
customers which were partially offset by a slow-down in the quick-service
market and comparison against a strong second quarter of last year when new
accounts helped Kay record significant double-digit sales growth. Textile Care
Division sales were down slightly, 2 percent for the second quarter and 1
percent for the first half of 1997. Continued consolidations in the laundry
industry, increased competitive activity and a difficult comparison against
periods which benefited significantly from new product introductions negatively
affected Textile Care's sales growth. The Company expects Textile Care to
experience difficult market conditions during the second half of 1997. Sales
of the Professional Products Division grew 4 percent and 22 percent for the
second quarter and the six month periods, respectively. Sales growth for the
first
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<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
six months reflected the February 1996 acquisition of Huntington Laboratories.
Excluding Huntington's sales, Professional Products sales growth was 5 percent
for the six-month period. Professional Products sales included good growth in
sales to corporate accounts, sales through distributors, and the addition of
new branded products to its commercial mass distribution line, which were
partially offset by poor sales to the school markets. Sales of the Company's
recently formed Water Care Services Division increased 2 percent for the second
quarter of 1997 and decreased 1 percent for the six-month period. Water Care
Services sales reflected the consolidation of business acquisitions made over
the past three years, integration of disparate product lines, elimination of
low-margin business and the refining of sales efforts. The Food & Beverage
Division reported sales growth of 32 percent for both the second quarter and
six-month periods, reflecting the August 1996 acquisition of Monarch from H.B.
Fuller. Excluding sales of the Monarch operations, Food & Beverage sales grew
11 percent for the second quarter and 10 percent for the first six months of
1997, with good growth in sales to each of its markets.
For the second quarter ended June 30, 1997, operating income of the Company's
United States operations totaled $47 million, an increase of 18 percent over
operating income of $40 million in the comparable quarter of last year. For
the first half of 1997, United States operating income was $86 million, up 22
percent over operating income of $70 million in the first six months of last
year. With the exception of the Textile Care Division, all of the United
States businesses reported increased operating income for both the second
quarter and six-month periods, with significant double-digit growth in the core
Institutional and Food and Beverage operations. United States operating income
margins improved from the comparable periods of last year. For the second
quarter, the United States operating income margin was 14.8 percent of net
sales, an increase from 13.9 percent of net sales in the second quarter of last
year. For the six-month period, the United States operating income margin of
14.0 percent of net sales compared favorably to the first half of 1996
operating income margin of 12.9 percent of net sales. The improvements in
operating income reflected increased sales, particularly in the core
operations, the benefits of stable raw material costs and tight cost controls
which were partially offset by investments in the sales-and-service
organization.
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<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Sales of the Company's International Operations were $92 million for the second
quarter of 1997, an increase of 7 percent over sales of $86 million in the
second quarter of last year. For the six-month period, sales totaled $175
million and increased 7 percent over sales of $164 million in the first six
months of last year. Business acquisitions accounted for approximately 60
percent of second quarter sales growth and 45 percent of sales growth for the
six-month period. Changes in currency translation had a negative impact on
reported sales of International operations, particularly in the Asia Pacific
region. Excluding the effects of currency translation, sales of International
operations increased 12 percent for the second quarter and 11 percent for the
first six months of 1997. The Asia Pacific region reported U.S. dollar sales
growth of 4 percent for both the second quarter and six-month periods.
However, when measured in local currencies, Asia Pacific sales grew 12 percent
for the second quarter and 10 percent for the first half of 1997 and included
double-digit growth in Japan and in the Northeast and Southeast Asia Pacific
regions. Latin America reported U.S. dollar sales growth of 5 percent for the
second quarter and 9 percent for the six months ended June 30, 1997. The
effects of changes in currency translation did not have a significant impact on
Latin America's reported sales. Latin America results included significant
double-digit growth in Mexico and mid-single digit second quarter growth in
Brazil. Sales growth in Brazil was unfavorably affected by soft market
conditions and comparisons against sales levels which have increased
significantly during the last few years. Canada reported sales growth of 13
percent for the second quarter and 14 percent for the six-month period and
included a modest negative impact from changes in currency translation.
Approximately 80 percent of Canada's sales growth was due to business
acquisitions. Second quarter and six-month 1997 International sales also
reflected double-digit growth in sales of Kay's International Operations and
weak sales in South Africa.
International operating income totaled $7 million in the second quarter ended
June 30, 1997, a 6 percent increase compared with operating income of $6
million in the comparable quarter of last year. For the first half of 1997,
International operating income of $13 million represented an 18 percent growth
rate over operating income of $11 million in the same period of last year. The
International operating income margin was 7.2 percent of net sales for 1997's
second quarter, virtually unchanged from the second quarter of last year. The
six-month operating income margin was 7.2 percent of net sales and compared
favorably to the six-month 1996 operating income margin of 6.5 percent of net
sales. International operating income included double-digit
-17-
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
growth in the Asia Pacific region and in Canada. These improvements were
partially offset by significantly lower operating income in Latin America,
particularly in Brazil, reflecting investments in the sales-and-service force,
comparison against strong operating income levels of a year ago and a softening
business environment.
The Company's equity in earnings of the Henkel-Ecolab joint venture was $4
million in the second quarter of 1997, an increase of 11 percent over results
for the second quarter of last year. For the six-month period, the Company's
equity in earnings of the joint venture totaled $6 million, and increased 27
percent over the comparable period a year ago. These improvements reflected
earnings growth at the joint venture due to product mix improvements, cost
controls and savings, reduced capital project spending and a slightly lower
overall effective income tax rate. Joint venture sales, although not
consolidated in Ecolab's financial statements, increased 3 percent for the
second quarter and 5 percent for the six-month period when measured in Deutsche
marks. When measured in U.S. dollars, joint venture sales were negatively
effected by the strengthening U.S. dollar and decreased 9 percent and 6 percent
for the second quarter and for the six months ended June 30, 1997,
respectively.
Corporate operating expense was $1 million for the second quarter of 1997 and
$2 million for the first six months of 1997 and represented overhead costs
directly related to the joint venture.
Net interest expense was $3 million in the second quarter of 1997, a decrease
of 33 percent from net interest expense in the comparable quarter of last year.
Six-month net interest expense was $6 million and decreased 25 percent compared
to net interest expense in the first half of last year. These decreases in net
interest expense were due to lower debt levels and higher levels of cash and
cash equivalents.
For both the second quarter and six-month periods, the provisions for income
taxes reflected estimated effective rates of 41.0 percent in 1997, a slight
increase compared with last year's effective rates of 40.1 percent. The
increases in the effective income tax rates were principally due to the effects
of business acquisitions.
FINANCIAL POSITION AND LIQUIDITY
Total assets were approximately $1.2 billion at June 30, 1997, virtually
unchanged from total assets at December 31, 1996. Total assets reflected
modest increases in accounts receivable,
-18-
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
inventories, property, plant and equipment and other assets due to business
acquisitions and general business growth. These increased asset levels were
offset by a lower investment in the Henkel-Ecolab joint venture due to the
effects of changes in currency translation, and dividends which were received
from the joint venture.
Total debt at June 30, 1997 was $179 million, up slightly from total debt of
$176 million at December 31, 1996. The ratio of total debt to capitalization
was 25 percent at June 30, 1997, unchanged from the ratio of total debt to
capitalization at December 31, 1996.
Cash provided by operating activities totaled $80 million for the first six
months of 1997, virtually unchanged from cash provided by operating activities
during the comparable period of last year. Cash provided by operating
activities reflected increased earnings compared with the first six months of
last year and higher dividends received from the joint venture. These cash
flow improvements were offset by cash outflows in 1997 due to the reversal of
favorable timing of payments which affected the fourth quarter of 1996 and an
income tax deposit made against outstanding federal income tax issues that had
been accrued for in other noncurrent liabilities. Cash flows during the six
months ended June 30, 1996 benefited from the collection of accounts receivable
related to strong fourth quarter 1995 sales.
In May 1995, the Company announced a six million share repurchase program. As
part of that program, the Company purchased approximately 3.5 million shares in
June 1995 under a "Dutch Auction" self-tender offer. At June 30, 1997 there
were approximately 2.4 million shares remaining under the existing repurchase
authorization. Additionally, consistent with its longstanding practice, the
Company has acquired shares under its systematic repurchase program to fund
employee benefit plans. During 1997, a total of approximately 123,000 shares
were purchased in the second quarter and 353,000 shares were purchased during
the first six months under these programs. The Company intends to continue
making purchases from time to time in open market and privately negotiated
transactions.
NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, a new standard for computing and
presenting earnings per share. The Company is required to adopt the new
standard in the fourth quarter of 1997; earlier adoption is not permitted. The
Company expects that earnings per share computed under the new standard will
approximate earnings per share currently reported.
-19-
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Further developments with respect to a matter reported in the
Company's Form 10-K for the fiscal year ended December 31, 1996, and
Form 10-Q for the quarter ended March 31, 1997, are described below.
As previously reported, the legal action commenced by ten distributors
of the Company's Airkem janitorial products was reduced in scope by
summary judgment rendered by the Court in April 1997 in favor of the
Company. Two claims remained pending. Subsequently, the legal action
was divided into separate trials for each of the plaintiff
distributors. The first trial took place in May-June 1997, with a
jury verdict in favor of the plaintiff in the amount of $29,000 on one
of the claims, and a verdict in favor of the Company on the second
claim. That part of the jury's decision favoring the plaintiff will
be appealed by the Company. Prior to trial, the Company settled the
claims of two of the plaintiffs on a basis not material to the
Company. The trials of the other seven plaintiffs will likely be
scheduled for 1998. Those plaintiffs may also appeal the Court's
summary judgment decision.
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 9, 1997.
At the meeting, 89.86% of the outstanding shares of the Company's
voting stock was represented in person or by proxy. The first
proposal voted upon was the election of three Class II Directors for a
term ending at the annual meeting in 2000. The three persons
nominated by the Company's Board of Directors received the following
votes and were elected:
Name For Withheld
---- --- --------
Ruth S. Block 57,989,822 235,692
Allan L. Schuman 57,992,232 233,282
Michael E. Shannon 57,989,335 236,179
-20-
<PAGE>
PART II. OTHER INFORMATION (Continued)
In addition, the terms of office of the following directors continued
after the meeting: Class III Directors for a term ending in 1998 -
Joel W. Johnson, Philip L. Smith, Hugo Uyterhoeven and Albrecht
Woeste; and Class I Directors for a term ending in 1999 - James J.
Howard, Jerry W. Levin, Reuben F. Richards, Richard L. Schall and
Roland Schulz.
The second proposal voted upon was the approval of the Ecolab Inc.
1997 Stock Incentive Plan. That Plan was approved as follows:
For Against Abstained
--- ------- ---------
53,982,688 4,046,235 196,591
The third proposal voted upon was the approval of the Ecolab Inc. 1997
Non-Employee Director Deferred Compensation Plan. That Plan was
approved as follows:
For Against Abstained
--- ------- ---------
56,105,028 1,658,304 462,182
The fourth proposal voted upon was the ratification of the appointment
of Coopers & Lybrand L.L.P. as the Company's independent accountants
for the year ending December 31, 1997. The appointment was ratified
as follows:
For Against Abstained
--- ------- ---------
57,976,825 110,447 138,242
As to each proposal, there were no broker non-votes.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as exhibits to this report:
(15) Letter regarding unaudited interim financial
information.
(27) Financial Data Schedule.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended June
30, 1997.
-21-
<PAGE>
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: August 7, 1997 By: /s/ Michael E. Shannon
-------------- ------------------------
Michael E. Shannon
Chairman of the Board, Chief
Financial and Administrative
Officer (duly authorized
officer and Principal
Financial Officer)
-22-
<PAGE>
EXHIBIT INDEX
Exhibit No. Document Method of Filing
----------- -------- ----------------
(15) Letter regarding unaudited Filed herewith
interim financial electronically
information
(27) Financial Data Schedule Filed herewith
electronically
<PAGE>
Exhibit (15)
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, DC 20549
RE: Ecolab Inc. Registration Statements on Form S-8
(Registration Nos. 2-60010; 2-74944; 33-1664;
33-41828; 2-90702; 33-18202; 33-55986; 33-56101;
33-26241; 33-34000; 33-56151; 333-18627;
33-39228; 33-56125; 33-60266; 33-65364;
33-59431; 333-18617; and 333-21167) and Ecolab
Inc. Registration Statement on Form S-3
(Registration No. 333-14771)
We are aware that our report dated July 22, 1997 on our reviews of interim
financial information of Ecolab Inc. for the periods ended June 30, 1997 and
1996, and included in the Company's quarterly report on Form 10-Q for the
quarter ended June 30, 1997, is incorporated by reference in these
registration statements. Pursuant to Rule 436(c)under the Securities Act of
1933, this report should not be considered a part of the registration
statements prepared or certified by us within the meaning of Sections 7 and
11 of that Act.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Saint Paul, Minnesota
August 7, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JUN-30-1997 AND THE RELATED STATEMENTS OF
INCOME AND CASH FLOWS FOR THE SIX MONTH PERIOD THEN ENDED AND IS QUALIFIED BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 70,550
<SECURITIES> 0
<RECEIVABLES> 227,460
<ALLOWANCES> 9,910
<INVENTORY> 130,211
<CURRENT-ASSETS> 455,683
<PP&E> 720,883
<DEPRECIATION> 377,899
<TOTAL-ASSETS> 1,208,374
<CURRENT-LIABILITIES> 323,333
<BONDS> 149,196
0
0
<COMMON> 71,199
<OTHER-SE> 460,765
<TOTAL-LIABILITY-AND-EQUITY> 1,208,374
<SALES> 785,570
<TOTAL-REVENUES> 785,570
<CGS> 349,048
<TOTAL-COSTS> 349,048
<OTHER-EXPENSES> 340,289
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 8,500
<INCOME-PRETAX> 90,181
<INCOME-TAX> 36,974
<INCOME-CONTINUING> 59,098
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59,098
<EPS-PRIMARY> 0.91
<EPS-DILUTED> 0.88
<FN>
<F1>The amount of "loss provision" is not significant and has been included in
"other expenses."
</FN>
</TABLE>