<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 MARCH 31, 1998
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
------
ECOLAB INC.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 41-0231510
- ------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Ecolab Center, 370 N. Wabasha Street, St. Paul, Minnesota 55102
- ------------------------------------------------------------------------------
(Address of principal executive offices)(Zip Code)
612-293-2233
------------
(Registrant's telephone number, including area code)
(Not Applicable)
- ------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of April 30, 1998.
128,752,964 shares of common stock, par value $1.00 per share.
<PAGE>
PART I - FINANCIAL INFORMATION
ECOLAB INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
First Quarter Ended Year Ended
March 31 December 31
(thousands, except per share) 1998 1997 1997
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Net Sales $436,362 $373,760 $1,640,352
Cost of Sales 195,909 165,726 722,084
Selling, General
and Administrative Expenses 186,733 164,604 699,764
-------- -------- ----------
Operating Income 53,720 43,430 218,504
Interest Expense, Net 5,406 2,998 12,637
-------- -------- ----------
Income Before Income Taxes
and Equity in Earnings of
Joint Venture 48,314 40,432 205,867
Provision for Income Taxes 20,289 16,577 85,345
Equity in Earnings of
Henkel-Ecolab Joint Venture 2,563 2,349 13,433
-------- -------- ----------
Net Income $ 30,588 $ 26,204 $ 133,955
-------- -------- ----------
-------- -------- ----------
Net Income Per Common Share
Basic $ 0.24 $0.20 $ 1.03
Diluted $ 0.23 $0.20 $ 1.00
Dividends Per Common Share $ 0.095 $0.08 $ 0.335
Weighted Average Common Shares
Outstanding
Basic 128,958 129,548 129,446
Diluted 133,934 133,520 133,822
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE>
ECOLAB INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31 March 31 December 31
(thousands) 1998 1997 1997
-------- -------- ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 18,624 $ 63,510 $ 61,169
Accounts receivable, net 242,669 205,426 246,041
Inventories 153,775 131,110 154,831
Deferred income taxes 35,047 29,107 34,978
Other current assets 38,815 8,669 12,482
---------- ---------- ----------
Current Assets 488,930 437,822 509,501
Property, Plant and
Equipment, Net 385,493 335,221 395,562
Investment in Henkel-Ecolab
Joint Venture 234,084 248,983 239,879
Other Assets 279,205 157,745 271,357
---------- ---------- ----------
Total Assets $1,387,712 $1,179,771 $1,416,299
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
(Continued)
-3-
<PAGE>
ECOLAB INC.
CONSOLIDATED BALANCE SHEET, Continued
<TABLE>
<CAPTION>
March 31 March 31 December 31
(thousands, except per share) 1998 1997 1997
--------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt $ 57,645 $ 30,232 $ 48,884
Accounts payable 118,122 97,877 130,682
Compensation and benefits 60,077 53,864 74,317
Income taxes 23,994 28,868 13,506
Other current liabilities 130,668 108,332 137,075
---------- ---------- ----------
Current Liabilities 390,506 319,173 404,464
Long-Term Debt 248,047 148,403 259,384
Postretirement Health Care
and Pension Benefits 84,019 79,192 76,109
Other Liabilities 119,740 121,448 124,641
Shareholders' Equity (common stock,
par value $1.00 per share;
shares outstanding: March 31,
1998 - 128,694; March 31, 1997 -
129,618; December 31, 1997 -
129,127) 545,400 511,555 551,701
---------- ---------- ----------
Total Liabilities and
Shareholders' Equity $1,387,712 $1,179,771 $1,416,299
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
ECOLAB INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
First Quarter Ended Year Ended
March 31 December 31
(thousands) 1998 1997 1997
------- ------- ------------
(unaudited)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $30,588 $ 26,204 $133,955
Adjustments to reconcile net
income to cash provided by
operating activities:
Depreciation 23,416 20,846 84,415
Amortization 5,444 3,817 16,464
Deferred income taxes 581 31 (2,074)
Equity in earnings of
joint venture (2,563) (2,349) (13,433)
Joint venture royalties
and dividends 1,074 13,787 25,367
Other, net 635 279 4,630
Changes in operating assets
and liabilities:
Accounts receivable 546 247 (21,231)
Inventories (4,396) (7,587) (14,395)
Other assets (4,322) (4,645) (10,993)
Accounts payable (13,629) (6,058) 20,876
Other liabilities 2,236 (17,867) 11,517
------- -------- --------
Cash provided by operating
activities $39,610 $ 26,705 $235,098
------- -------- --------
</TABLE>
Bracketed amounts indicate a use of cash.
See notes to consolidated financial statements.
(Continued)
-5-
<PAGE>
ECOLAB INC.
CONSOLIDATED STATEMENT OF CASH FLOWS, Continued
<TABLE>
<CAPTION>
First Quarter Ended Year Ended
March 31 December 31
(thousands) 1998 1997 1997
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
INVESTING ACTIVITIES
Capital expenditures $(28,243) $(25,145) $(121,667)
Property disposals 910 595 3,424
Businesses acquired (24,620) (6,068) (157,234)
Other, net (105) (230) (1,240)
-------- -------- ---------
Cash used for investing activities (52,058) (30,848) (276,717)
-------- -------- ---------
FINANCING ACTIVITIES
Notes payable 4,715 3,152 9,280
Long-term debt borrowings 16,940 117,000
Long-term debt repayments (22,540) (235) (15,210)
Reacquired shares (19,003) (8,753) (60,795)
Cash dividends on common stock (12,260) (10,366) (41,456)
Other, net 2,977 15,008 26,278
-------- -------- ---------
Cash provided by (used for)
financing activities (29,171) (1,194) 35,097
-------- -------- ---------
Effect of exchange rate
changes on cash (926) (428) (1,584)
-------- -------- ---------
DECREASE IN CASH AND
CASH EQUIVALENTS (42,545) (5,765) (8,106)
Cash and Cash Equivalents,
at beginning of period 61,169 69,275 69,275
-------- -------- ---------
Cash and Cash Equivalents,
at end of period $ 18,624 $ 63,510 $ 61,169
-------- -------- ---------
-------- -------- ---------
</TABLE>
Bracketed amounts indicate a use of cash.
See notes to consolidated financial statements.
-6-
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
The unaudited consolidated statement of income for the first quarter ended
March 31, 1998 and 1997, reflects, in the opinion of management, all
adjustments necessary for a fair statement of the results of operations for
the interim periods. These adjustments consist of normal, recurring items.
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, 1997 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, 1997. 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.
<TABLE>
<CAPTION>
BALANCE SHEET INFORMATION
March 31 March 31 December 31
(thousands) 1998 1997 1997
---------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
Accounts Receivable, Net
Accounts receivable $ 253,645 $ 215,247 $ 256,919
Allowance for doubtful accounts (10,976) (9,821) (10,878)
---------- ---------- ----------
Total $ 242,669 $ 205,426 $ 246,041
---------- ---------- ----------
---------- ---------- ----------
Inventories
Finished goods $ 66,420 $ 57,102 $ 67,823
Raw materials and parts 90,100 77,294 89,716
Excess of fifo cost over lifo cost (2,745) (3,286) (2,708)
---------- ---------- ----------
Total $ 153,775 $ 131,110 $ 154,831
---------- ---------- ----------
---------- ---------- ----------
Property, Plant and Equipment, Net
Land $ 12,473 $ 8,183 $ 18,184
Buildings and leaseholds 143,714 132,301 145,021
Machinery and equipment 245,131 212,572 232,940
Merchandising equipment 391,980 340,797 379,531
Construction in progress 18,805 8,501 19,862
---------- ---------- ----------
812,103 702,354 795,538
Accumulated depreciation
and amortization (426,610) (367,133) (399,976)
---------- ---------- ----------
Total $ 385,493 $ 335,221 $ 395,562
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
-7-
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Balance Sheet Information (Continued)
<TABLE>
<CAPTION>
March 31 March 31 December 31
(thousands) 1998 1997 1997
---------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
Other Assets
Intangible assets, net $ 221,191 $ 99,965 $ 217,120
Investments in securities 5,000 5,000 5,000
Deferred income taxes 24,824 26,305 23,444
Other 28,190 26,475 25,793
---------- --------- ----------
Total $ 279,205 $ 157,745 $ 271,357
---------- --------- ----------
---------- --------- ----------
Short-Term Debt
Notes payable $ 41,822 $ 14,979 $ 33,440
Long-term debt, current
maturities 15,823 15,253 15,444
---------- --------- ----------
Total $ 57,645 $ 30,232 $ 48,884
---------- --------- ----------
---------- --------- ----------
Shareholders' Equity
Common stock $ 143,030 $ 70,992 $ 142,797
Additional paid-in capital 150,817 190,548 149,137
Retained earnings 513,319 420,333 494,950
Deferred compensation (8,198) (6,768) (9,160)
Cumulative translation (37,491) (13,137) (28,943)
Treasury stock (216,077) (150,413) (197,080)
---------- --------- ----------
Total $ 545,400 $ 511,555 $ 551,701
---------- --------- ----------
---------- --------- ----------
</TABLE>
Interest expense related to all debt was $6,414,000 and $4,141,000 for the
first quarter ended March 31, 1998 and 1997, respectively, and $18,043,000
for the year ended December 31, 1997.
Other noncurrent liabilities included income taxes payable of $82 million
at March 31, 1998, December 31, 1997, and March 31, 1997.
-8-
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Business Acquisitions
GIBSON BUSINESS ACQUISITION
In October 1997, the Company made a public tender offer for all of the
outstanding stock of Gibson Chemical Industries Limited (Gibson) located in
Melbourne, Australia. Gibson is a manufacturer and marketer of cleaning and
sanitizing products, primarily for the Australian and New Zealand
institutional, healthcare and industrial markets. On November 5, 1997, the
Company waived all of the remaining conditions to its tender offer and,
effective November 30, 1997, had acquired substantially all of the outstanding
Gibson shares.
During the first quarter of 1998, the Company completed its plan for
integration of the Gibson businesses, including the determination of which of
the acquired businesses will not be retained, and decisions related to certain
duplicate facilities. The net assets related to these businesses and
facilities which are being held for sale totaled approximately $25 million and
have been reclassified to other current assets as of March 31, 1998.
The acquisition was accounted for as a purchase. The purchase price of the
shares and the direct costs of the transaction totaled approximately $130
million and were financed through the Company's Multicurrency Credit Agreement.
The excess of the purchase price over the tangible net assets acquired was
approximately $85 million and is being amortized on a straight-line basis over
an average useful life of 25 years. The Company's international subsidiaries
are included in the financial statements on the basis of their November 30
fiscal year ends, and, therefore, Gibson's operations were included in the
Company's consolidated statement of income beginning in the 1998 reporting
period. The assets acquired and the liabilities assumed in the transaction
were included in the Company's consolidated balance sheet as of the November 30
effective date.
The following unaudited pro forma financial information reflects the combined
results of the Company and the retained Gibson businesses assuming the
acquisition had occurred at the beginning of 1997. Pro forma adjustments
have been included to give effect to amortization of the excess of the
purchase price over the tangible net assets acquired, interest expense on
debt incurred to finance the acquisition and the related income tax effects.
The Company expects that certain efficiencies and synergies will result from
the business combination, however, in accordance with the pro forma
adjustment guidelines, these anticipated cost savings have not been reflected
in the information shown below.
<TABLE>
<CAPTION>
Year Ended
December 31
(thousands, except per share) 1997
-----------
<S> <C>
Net sales $1,741,006
Net income 131,455
Diluted net income per common share $ 0.98
</TABLE>
-9-
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
BUSINESS ACQUISITIONS (CONTINUED)
GIBSON BUSINESS ACQUISITION (CONTINUED)
The pro forma results are presented for informational purposes only and are not
necessarily indicative of the results of operations which actually would have
resulted had the combination occurred at the beginning of 1997 or of future
results of operations of the consolidated businesses.
OTHER BUSINESS ACQUISITIONS
In the first quarter of 1998, the Company acquired a cleaning and sanitizing
business in Japan from Henkel KGaA. This acquisition has been accounted for as
a purchase and, accordingly, the results of operations have been included in
the financial statements of the Company from the date of acquisition. Net
sales and operating income of this business for the first quarter ended March
31, 1998 were not significant.
COMPREHENSIVE INCOME (UNAUDITED)
In the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." The standard
requires the display and reporting of comprehensive income, which includes all
changes in shareholders' equity with the exception of additional investments by
shareholders or distributions to shareholders. Comprehensive income for the
Company includes net income and foreign currency translation which is charged
or credited to the cumulative translation account within shareholders' equity.
Comprehensive income for the first quarter ended March 31, 1998 and 1997 and
the year ended December 31, 1997 was as follows:
<TABLE>
<CAPTION>
First Quarter Ended Year Ended
March 31 December 31
(thousands) 1998 1997 1997
------- --------- -----------
<S> <C> <C> <C>
Net income $30,588 $ 26,204 $133,955
Change in cumulative
translation (8,548) (19,924) (35,730)
------- --------- ---------
Comprehensive income $22,040 $ 6,280 $ 98,225
------- --------- ---------
------- --------- ---------
</TABLE>
-10-
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NET INCOME PER COMMON SHARE
The computation of the basic and diluted per share amounts were as follows:
<TABLE>
<CAPTION>
First Quarter Ended Year Ended
March 31 December 31
(thousands, except per share) 1998 1997 1997
(unaudited)
---------- ---------- -------------
<S> <C> <C> <C>
Net income $ 30,588 $ 26,204 $133,955
--------- --------- --------
--------- --------- --------
Weighted average common shares
outstanding
Basic (actual shares outstanding) 128,958 129,548 129,446
Effect of dilutive stock options 4,976 3,972 4,376
--------- --------- --------
Diluted 133,934 133,520 133,822
--------- --------- --------
--------- --------- --------
Net income per common share
Basic $ 0.24 $ 0.20 $ 1.03
Diluted $ 0.23 $ 0.20 $ 1.00
</TABLE>
Stock options for approximately 2.3 million shares had exercise prices
substantially greater than the market value of the Company's common stock
during the first quarter of 1998 and were not dilutive. Therefore, these stock
options were not included in the computation of diluted net income per common
share for the first quarter ended March 31, 1998. Virtually all stock options
outstanding during the first quarter ended March 31, 1997 and the year ended
December 31, 1997 were dilutive and included in the calculation of the diluted
per share amounts.
-11-
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
GEOGRAPHIC SEGMENTS
The Company is the leading 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 own 50% of Henkel-Ecolab, a 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.
<TABLE>
<CAPTION>
First Quarter Year Ended
Ended March 31 December 31
(thousands) 1998 1997 1997
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Net Sales
United States $332,614 $290,703 $1,275,828
International 103,748 83,057 364,524
-------- -------- ----------
Total $436,362 $373,760 $1,640,352
-------- -------- ----------
-------- -------- ----------
Operating Income
United States $ 47,536 $ 38,441 $ 195,630
International 7,094 5,870 26,962
Corporate (910) (881) (4,088)
-------- -------- ----------
Total $ 53,720 $ 43,430 $ 218,504
-------- -------- ----------
-------- -------- ----------
</TABLE>
-12-
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
EQUITY IN EARNINGS OF HENKEL-ECOLAB JOINT VENTURE
Certain financial data of the Henkel-Ecolab joint venture and the components of
the Company's equity in earnings of the joint venture for the first quarter
ended March 31, 1998 and 1997 and for the year ended December 31, 1997 was:
<TABLE>
<CAPTION>
First Quarter Year Ended
Ended March 31 December 31
(thousands) 1998 1997 1997
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Joint venture
Net sales $199,910 $209,597 $844,689
Gross profit 112,421 115,058 470,698
Income before
income taxes 12,078 11,973 63,640
Net income $ 6,774 $ 6,670 $ 33,701
Ecolab equity in earnings
Ecolab equity in
net income $ 3,387 $ 3,335 $ 16,851
Ecolab royalty
income from joint
venture, net of
income taxes 1,084 1,135 4,583
Amortization expense
for the excess of
cost over the
underlying net
assets of the joint
venture (1,908) (2,121) (8,001)
-------- -------- --------
Equity in earnings of
Henkel-Ecolab
joint venture $ 2,563 $ 2,349 $ 13,433
-------- -------- --------
-------- -------- --------
</TABLE>
At March 31, 1998, the Company's investment in the Henkel-Ecolab joint venture
included approximately $139 million of 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.
-13-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors
Ecolab Inc.
We have reviewed the accompanying consolidated balance sheet of Ecolab
Inc. as of March 31, 1998 and 1997, and the related consolidated statements of
income and cash flows for the three-month periods then ended. 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, 1997, 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 23, 1998, 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, 1997, 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
April 24, 1998
-14-
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information that management
believes is useful in understanding the Company's operating results, cash flows
and financial condition. The discussion should be read in conjunction with
the consolidated financial statements and related notes included in this Form
10-Q.
The following discussion contains various "Forward-Looking Statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. These
statements, which represent Ecolab's expectations or beliefs concerning
various future events, are based on current expectations that involve a
number of risks and uncertainities which could cause actual results to differ
materially from those of such Forward-Looking Statements. We refer readers
to the Company's statement entitled "Forward-Looking Statements and Risk
Factors" which is contained under Item 1 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1997. Additional risk factors may
be described from time to time in Ecolab's filings with the Securities and
Exchange Commission.
RESULTS OF OPERATIONS - FIRST QUARTER ENDED MARCH 31, 1998
Net sales for the first quarter ended March 31, 1998 were $436 million, an
increase of 17 percent over net sales of $374 million in the first quarter
of last year. Businesses acquired in 1997 accounted for approximately one-
half of the growth in consolidated sales for the first quarter of 1998.
The growth in sales also reflected new products, a larger sales-and-service
force, new customers, competitive gains and a continuation of generally
good conditions in the hospitality and lodging industries, particularly in
the United States.
The gross profit margin for the first quarter of 1998 was 55.1 percent of
net sales, down slightly from the gross profit margin of 55.7 percent of
net sales in the first quarter of last year. The lower gross profit margin
was primarily due to a lower margin in the Asia Pacific region which was
negatively affected by economic and monetary problems and businesses the
Company added to the region through acquisitions. The lower Asia Pacific
margin was partially offset by modestly higher gross margins in virtually
all of the Company's other operations which included the benefits of higher
sales of the higher margin products of the Company's U.S. core operations
and sales volume growth of new products. The benefits from selling price
increases improved modestly over last year, however, continued to be
limited due to market pressures.
Selling, general and administrative expenses were 42.8 percent of net sales
for the first quarter of 1998, a decrease from selling, general and
administrative expenses of 44.0 percent of net sales in the first quarter
of last year. This decrease reflected tight cost controls and strong sales
growth. These benefits were partially offset by investments in the sales-
and-service force and additional business investments. The Company expects
to continue investing in its sales-and-service force, including investments
in training and productivity.
-15-
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Net income for the first quarter ended March 31, 1998 totaled $31 million, an
increase of 17 percent over net income of $26 million in the comparable period
of last year. On a per share basis, diluted net income per common share
increased 15 percent to $0.23 from $0.20 in the first quarter of last year.
These earnings improvements reflected double-digit growth in operating income
principally due to strong performance of the U.S. core operations, tight cost
controls, and a higher equity in earnings of the Henkel-Ecolab joint venture.
Earnings were negatively affected by increases in interest expense and income
taxes compared to the first quarter of last year.
Net sales for the Company's United States operations were $333 million for
the first quarter of 1998, an increase of 14 percent over net sales of $291
million in the first quarter of 1997. Sales benefited from business
acquisitions, a continuation of strong growth in the core Institutional and
Food and Beverage operations, sales of new products and continued good
business trends in the hospitality and lodging industries. Businesses
acquired in 1997 accounted for approximately one-third of the growth in U.S.
sales. Selling price increases continued to be modest and were 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 14 percent
over the first quarter of last year. Institutional's sales growth was 11
percent excluding the Grace-Lee Vehicle Wash business which was acquired in
December 1997 and included strong growth in sales of all of its business
units. Pest Elimination reported sales growth of 11 percent for the first
quarter of 1998 with good growth in new contracts and high retention of key
customers despite a competitive market environment. Sales of Kay's U.S.
operations improved 8 percent over the first quarter of last year and
included good results in sales to its core quickservice customers and growth
in its grocery/deli business. Sales of the Textile Care division rose 5
percent for the first quarter and included good growth in sales to the
laundry and hospitality markets. Textile Care continues to experience
pressures from plant consolidations, particularly in laundries serving the
healthcare market, and challenging market conditions. Sales of Professional
Products increased 10 percent over the first quarter of last year and
reflected continued growth in sales of branded products through its
commercial mass distribution line. Water Care sales were up 3 percent for
the first quarter of 1998 and included the negative effects of the
elimination of some low margin business. The Food and Beverage division
reported sales growth of 17 percent reflecting the acquisition of Chemidyne
in August of last year. Excluding Chemidyne, Food and Beverage sales
increased 8 percent with good growth in sales to all of its markets.
-16-
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Operating income of the Company's United States operations was $48 million
for the first quarter ended March 31, 1998, up 24 percent over operating
income of $38 million in the first quarter of last year. As a percentage of
net sales, the operating income margin increased to 14.3 percent from 13.2
percent in the first quarter of 1997. Operating income reflected growth in
all of the U.S. businesses, including strong growth of the core Institutional
and Food and Beverage operations. The overall improvement reflected strong
sales growth, modest increases in raw material costs, higher gross margins,
and the benefits of tight cost controls.
Sales of the Company's International operations were $104 million for the
first quarter of 1998, an increase of 25 percent over sales of $83 million in
the comparable period of last year. International sales benefited from
business acquisitions, however were negatively affected by changes in
currency, particularly in the Asia Pacific region. Excluding business
acquisitions, sales as reported in U.S. dollars were flat versus the first
quarter of last year. When measured in local currencies, total International
sales increased 38 percent for the quarter and, when acquisitions are
excluded increased 9 percent over the first quarter of last year. The Asia
Pacific region reported sales growth of 38 percent reflecting the benefits of
the acquisition of Gibson at the end of 1997. Excluding business
acquisitions and when measured in local currencies, Asia Pacific had sales
growth of 8 percent with double-digit growth in Japan, Australia and
Southeast Asia. Reported sales in the Latin America region increased 5
percent for the first quarter of 1998. When measured in local currencies,
Latin America sales growth was 10 percent with double-digit growth in Mexico
and Venezuela and modest growth in Brazil. Canada reported sales growth of 11
percent reflecting last year's acquisition of Savolite. Canada's local
currency growth excluding Savolite was 7 percent with double-digit growth in
sales to the Food and Beverage markets and good growth in sales to the other
markets its serves.
For the first quarter of 1998, International operations reported operating
income of $7 million, an increase of 21 percent over last year's first
quarter operating income of $6 million. Excluding the effects of business
acquisitions, International's operating income increased 2 percent.
Excluding business acquisitions and the negative effects of currency
translation, International's first quarter 1998 operating income growth was
34 percent with double-digit growth in all of its major regions of operation.
The Company continues to be cautious about near-term growth in the Asia
Pacific region due to the uncertain economic conditions in the region.
-17-
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company's equity in earnings of the Henkel-Ecolab joint venture was $2.6
million for the first quarter of 1998, an increase of 9 percent over $2.3
million of equity in earnings in the first quarter of last year. Results
were negatively affected by the stronger U.S. dollar. When measured in
Deutsche marks, first quarter 1998 joint venture net income increased 14
percent reflecting sales growth and improved gross margins. Joint venture
sales, although not consolidated, increased 7 percent when measured in
Deutsche marks. When measured in U.S. dollars, joint venture sales were
negatively affected by the strengthening U.S. dollar and decreased 5 percent
to $200 million from $210 million in the first quarter of last year.
Corporate operating expense was $1 million for the first quarter of 1998 and
represented overhead costs directly related to the joint venture.
Net interest expense totaled $5.4 million, up substantially from first
quarter 1997 net interest expense of $3 million. This increase was primarily
due to debt incurred under the Company's Multicurrency Credit Agreement for
the Gibson acquisition.
The first quarter 1998 provision for income taxes reflected an estimated
effective rate of 42.0 percent, compared to last year's first quarter
estimated effective rate of 41.0 percent. The increase in the effective
income tax rate was principally due to the effects of business acquisitions
made in 1997.
FINANCIAL POSITION AND LIQUIDITY
Total assets were approximately $1.4 billion at March 31, 1998, a decrease of
2 percent from total assets at year-end 1997 and an increase of 18 percent
over total assets at March 31, 1997, due in part to business acquisitions
made during 1997. Other current assets at March 31, 1998 included
approximately $25 million of net assets of the acquired Gibson businesses
which the Company has determined it will not retain. During the first quarter
of 1998 the Company completed its plan for the integration of Gibson and the
majority of these net assets held for sale initially had been included in the
Company's year-end 1997 balance sheet as property, plant and equipment,
accounts receivable and inventories.
Total debt was $306 million at March 31, 1998, virtually unchanged from $308
million at year-end 1997 and up from total debt of $179 million at March 31,
1997 due to debt incurred to finance the Gibson acquisition. The ratio of
total debt to capitalization was 36 percent at March 31, 1998, unchanged from
year-end 1997 and an increase from 26 percent at March 31, 1997.
-18-
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Cash provided by operating activities totaled $40 million, up from $27
million in the first quarter of last year. First quarter 1997 cash provided
by operating activities was unfavorably affected by an income tax deposit
made against outstanding income tax issues that had been accrued for in other
noncurrent liabilities and favorably affected by higher dividends received
from the Henkel-Ecolab joint venture.
During the first quarter of 1998, the Company reacquired 224,242 shares of
its common stock under its share repurchase program which provides shares to
fund employee benefit plans. The Company also acquired 432,358 shares of its
common stock under a separate 12 millon share repurchase program announced in
May 1995. At March 31, 1998, there were 3,748,888 shares remaining for
purchase from time to time under that 1995 purchase authorization. The
Company anticipates that it will continue to periodically reacquire shares
under these two programs.
-19-
<PAGE>
PART II. OTHER INFORMATION
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:
The Company filed one Current Report on Form 8-K, dated
February 20, 1998, to comply with the safe harbor protections
for "Forward-Looking Statements" offered by the Private
Securities Litigation Reform Act of 1995.
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: May 12, 1998 By: /s/ Michael E. Shannon
----------------- -------------------------------
Michael E. Shannon
Chairman of the Board, Chief Financial and
Administrative
Officer (duly authorized officer
and Principal Financial Officer)
-20-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Document Method of Filing
- ----------- -------- ----------------
<S> <C> <C>
(15) Letter regarding unaudited Filed herewith
interim financial electronically
information
(27) Financial Data Schedule Filed herewith
electronically
</TABLE>
<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;
333-21167; 333-35519; 333-40239; and 333-50969) and Ecolab Inc.
Registration Statements on Form S-3 (Registration
Nos. 333-14771 and 333-45295)
We are aware that our report dated April 24, 1998, on our reviews of interim
financial information of Ecolab Inc. for the periods ended March 31, 1998 and
1997, and included in the Company's quarterly report on Form 10-Q for the
quarter ended March 31, 1998, 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
May 12, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAIN SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF MAR-31-1998 AND THE RELATED STATEMENTS OF
INCOME AND CASH FLOWS FOR THE THREE MONTH PERIOD THEN ENDED AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 18,624
<SECURITIES> 0
<RECEIVABLES> 253,645
<ALLOWANCES> 10,976
<INVENTORY> 153,775
<CURRENT-ASSETS> 488,930
<PP&E> 812,103
<DEPRECIATION> 426,610
<TOTAL-ASSETS> 1,387,712
<CURRENT-LIABILITIES> 390,506
<BONDS> 248,047
0
0
<COMMON> 143,030
<OTHER-SE> 402,370
<TOTAL-LIABILITY-AND-EQUITY> 1,387,712
<SALES> 436,362
<TOTAL-REVENUES> 436,362
<CGS> 195,909
<TOTAL-COSTS> 195,909
<OTHER-EXPENSES> 186,733
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 6,414
<INCOME-PRETAX> 48,314
<INCOME-TAX> 20,289
<INCOME-CONTINUING> 30,588
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,588
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.23
<FN>
<F1>THE AMOUNT OF "LOSS PROVISION" IS NOT SIGNIFIGANT AND HAS BEEN INCLUDED IN
"OTHER EXPENSES."
</FN>
</TABLE>
