<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 September 30, 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 Wabasha Street N., St. Paul, Minnesota 55102
- ----------------------------------------------------------------------
(Address of principal executive offices)(Zip Code)
651-293-2233
-------------
(Registrant's telephone number, including area code)
(Not Applicable)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of October 31, 1998.
129,374,763 shares of common stock, par value $1.00 per share.
1
<PAGE>
PART I - FINANCIAL INFORMATION
ECOLAB INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Third Quarter Ended
September 30
(thousands, except per share) 1998 1997
-------- --------
(unaudited)
<S> <C> <C>
Net Sales $500,037 $432,873
Cost of Sales 224,365 188,178
Selling, General
and Administrative Expenses 196,501 177,899
-------- --------
Operating Income 79,171 66,796
Interest Expense, Net 5,069 3,351
-------- --------
Income from Continuing Operations
Before Income Taxes and Equity in
Earnings of Joint Venture 74,102 63,445
Provision for Income Taxes 31,794 26,613
Equity in Earnings of Henkel-Ecolab
Joint Venture 4,704 3,657
-------- --------
Income from Continuing Operations 47,012 40,489
Gain from Discontinued Operations 38,000
-------- --------
Net Income $ 85,012 $ 40,489
-------- --------
-------- --------
Basic Income Per Common Share
Income from Continuing Operations $ 0.36 $ 0.31
Gain from Discontinued Operations 0.29
Net Income $ 0.66 $ 0.31
Diluted Income Per Common Share
Income from Continuing Operations $ 0.35 $ 0.30
Gain from Discontinued Operations 0.28
Net Income $ 0.63 $ 0.30
Dividends Per Common Share $ 0.095 $ 0.08
Weighted Average Common Shares Outstanding
Basic 129,573 129,462
Diluted 134,319 133,930
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
ECOLAB INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30 December 31
(thousands, except per share) 1998 1997 1997
---------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
Net Sales $1,404,859 $1,218,443 $1,640,352
Cost of Sales 630,390 537,226 722,084
Selling, General
and Administrative Expenses 577,838 518,188 699,764
---------- ---------- ----------
Operating Income 196,631 163,029 218,504
Interest Expense, Net 15,875 9,403 12,637
---------- ---------- ----------
Income from Continuing Operations
Before Income Taxes and Equity
in Earnings of Joint Venture 180,756 153,626 205,867
Provision for Income Taxes 76,558 63,587 85,345
Equity in Earnings of
Henkel-Ecolab Joint Venture 11,091 9,548 13,433
---------- ---------- ----------
Income from Continuing Operations 115,289 99,587 133,955
Gain from Discontinued Operations 38,000
---------- ---------- ----------
Net Income $ 153,289 $ 99,587 $ 133,955
---------- ---------- ----------
---------- ---------- ----------
Basic Income Per Common Share
Income from Continuing Operations $ 0.89 $ 0.77 $ 1.03
Gain from Discontinued Operations 0.29
Net Income $ 1.19 $ 0.77 $ 1.03
Diluted Income Per Common Share
Income from Continuing Operations $ 0.86 $ 0.74 $ 1.00
Gain from Discontinued Operations 0.28
Net Income $ 1.14 $ 0.74 $ 1.00
Dividends Per Common Share $ 0.285 $ 0.24 $ 0.335
Weighted Average Common Shares
Outstanding
Basic 129,066 129,596 129,446
Diluted 134,023 133,835 133,822
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
ECOLAB INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30 December 31
(thousands) 1998 1997 1997
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 42,392 $ 66,972 $ 61,169
Accounts receivable, net 260,729 230,609 246,041
Inventories 159,563 132,761 154,831
Deferred income taxes 35,698 29,301 34,978
Other current assets 22,189 8,371 12,482
----------- ----------- -----------
Current Assets 520,571 468,014 509,501
Property, Plant and
Equipment, Net 406,346 347,445 395,562
Investment in Henkel-Ecolab
Joint Venture 242,373 239,719 239,879
Other Assets 276,788 208,290 271,357
----------- ----------- -----------
Total Assets $ 1,446,078 $ 1,263,468 $ 1,416,299
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
(continued)
4
<PAGE>
ECOLAB INC.
CONSOLIDATED BALANCE SHEET (continued)
<TABLE>
<CAPTION>
September 30 December 31
(thousands, except per share) 1998 1997 1997
---------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt $ 104,420 $ 52,039 $ 48,884
Accounts payable 121,397 105,819 130,682
Compensation and benefits 73,539 73,679 74,317
Income taxes 7,003 24,217 13,506
Other current liabilities 137,927 116,474 137,075
---------- ---------- ----------
Current Liabilities 444,286 372,228 404,464
Long-Term Debt 191,971 148,934 259,384
Postretirement Health Care
and Pension Benefits 93,180 85,266 76,109
Other Liabilities 61,456 122,048 124,641
Shareholders' Equity (common stock, par
value $1.00 per share; shares
outstanding: September 30, 1998 - 129,465;
September 30, 1997 - 129,427;
December 31, 1997 - 129,127) 655,185 534,992 551,701
---------- ---------- ----------
Total Liabilities and
Shareholders' Equity $1,446,078 $1,263,468 $1,416,299
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
ECOLAB INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30 December 31
(thousands) 1998 1997 1997
--------- -------- -----------
(unaudited)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $153,289 $ 99,587 $133,955
Gain from discontinued operations (38,000)
-------- -------- --------
Income from continuing operations 115,289 99,587 133,955
Adjustments to reconcile income from continuing
operations to cash provided by operating activities:
Depreciation 72,848 63,865 84,415
Amortization 16,527 11,203 16,464
Deferred income taxes (460) (619) (2,074)
Equity in earnings of joint venture (11,091) (9,548) (13,433)
Joint venture royalties and dividends 9,486 17,799 25,367
Other, net 1,234 1,557 4,630
Changes in operating assets and liabilities:
Accounts receivable (15,742) (26,166) (21,231)
Inventories (7,040) (9,708) (14,395)
Other assets (6,878) (15,338) (10,993)
Accounts payable (13,242) 3,135 20,876
Other liabilities 38,230 13,726 11,517
-------- -------- --------
Cash provided by continuing operations 199,161 149,493 235,098
Cash used for discontinued operations (30,200)
-------- -------- --------
Cash provided by operating activities $168,961 $149,493 $235,098
-------- -------- --------
</TABLE>
Bracketed amounts indicate a use of cash.
See notes to consolidated financial statements.
(continued)
6
<PAGE>
ECOLAB INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30 December 31
thousands) 1998 1997 1997
--------- -------- -----------
(unaudited)
<S> <C> <C> <C>
INVESTING ACTIVITIES
Capital expenditures $(107,767) $(83,171) $ (121,667)
Property disposals 2,458 2,594 3,424
Businesses acquired (29,506) (58,225) (157,234)
Sale of Gibson businesses & assets 13,496
Sale of investments in securities 5,000
Other, net (157) (1,218) (1,240)
--------- -------- ---------
Cash used for investing activities (116,476) (140,020) (276,717)
--------- -------- ---------
FINANCING ACTIVITIES
Notes payable 63,781 26,254 9,280
Long-term debt borrowings 73,740 1,000 117,000
Long-term debt repayments (132,067) (711) (15,210)
Reacquired shares (44,521) (34,367) (60,795)
Cash dividends on common stock (36,702) (31,105) (41,456)
Other, net 7,253 27,556 26,278
--------- -------- ---------
Cash provided by (used for)
financing activities (68,516) (11,373) 35,097
--------- -------- ---------
Effect of exchange rate
changes on cash (2,746) (403) (1,584)
--------- -------- ---------
DECREASE IN CASH AND
CASH EQUIVALENTS (18,777) (2,303) (8,106)
Cash and Cash Equivalents,
at beginning of period 61,169 69,275 69,275
--------- -------- ---------
Cash and Cash Equivalents,
at end of period $ 42,392 $ 66,972 $ 61,169
--------- -------- ---------
--------- -------- ---------
</TABLE>
Bracketed amounts indicate a use of cash.
See notes to consolidated financial statements.
7
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
The unaudited consolidated statements of income for the third quarter and the
nine months ended September 30, 1998 and 1997, reflect, 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, except for the gain from discontinued operations discussed
separately herein. 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. PricewaterhouseCoopers LLP, the Company's
independent accountants, have performed limited reviews of the interim financial
information included herein. Their report on such reviews accompanies this
filing.
BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
September 30 December 31
(thousands) 1998 1997 1997
---------- --------- -----------
(unaudited)
<S> <C> <C> <C>
Accounts Receivable, Net
Accounts receivable $273,405 $241,511 $256,919
Allowance for doubtful accounts (12,676) (10,902) (10,878)
-------- -------- --------
Total $260,729 $230,609 $246,041
-------- -------- --------
-------- -------- --------
Inventories
Finished goods $ 69,038 $ 54,833 $ 67,823
Raw materials and parts 93,391 81,332 89,716
Excess of fifo cost over lifo cost (2,866) (3,404) (2,708)
-------- -------- --------
Total $159,563 $132,761 $154,831
-------- -------- --------
-------- -------- --------
Property, Plant and Equipment, Net
Land $ 11,887 $ 7,961 $ 18,184
Buildings and leaseholds 151,534 133,908 145,021
Machinery and equipment 254,955 218,287 232,940
Merchandising equipment 425,582 362,432 379,531
Construction in progress 13,589 11,864 19,862
-------- -------- --------
857,547 734,452 795,538
Accumulated depreciation
and amortization (451,201) (387,007) (399,976)
-------- -------- --------
Total $406,346 $347,445 $395,562
-------- -------- --------
-------- -------- --------
</TABLE>
8
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
BALANCE SHEET INFORMATION (continued)
<TABLE>
<CAPTION>
September 30 December 31
(thousands) 1998 1997 1997
-------- --------- -----------
(unaudited)
<S> <C> <C> <C>
Other Assets
Intangible assets, net $226,947 $124,305 $217,120
Investments in securities 5,000 5,000
Deferred income taxes 25,221 26,354 23,444
Other 24,620 52,631 25,793
-------- -------- --------
Total $276,788 $208,290 $271,357
-------- -------- --------
-------- -------- --------
Short-Term Debt
Notes payable $ 88,722 $ 36,778 $ 33,440
Long-term debt, current
maturities 15,698 15,261 15,444
-------- -------- --------
Total $104,420 $ 52,039 $ 48,884
-------- -------- --------
-------- -------- --------
Shareholders' Equity
Common stock $144,503 $ 71,340 $142,797
Additional paid-in capital 193,012 196,387 149,137
Retained earnings 611,511 476,963 494,950
Deferred compensation (12,342) (10,097) (9,160)
Cumulative translation (41,285) (24,998) (28,943)
Treasury stock (240,214) (174,603) (197,080)
-------- -------- --------
Total $655,185 $534,992 $551,701
-------- -------- --------
-------- -------- --------
</TABLE>
Interest expense related to all debt was $18,361,000 and $13,256,000 for the
nine months ended September 30, 1998 and 1997, respectively, and $18,043,000 for
the year ended December 31, 1997.
Other noncurrent liabilities decreased from $125 million at year-end 1997 to $61
million at September 30, 1998 principally due to the resolution of a tax issue
related to the disposal of a business in 1992. The Company posted a bond with
the Internal Revenue Service against an outstanding tax issue related to this
business in the second quarter and recognized a gain from discontinued
operations as a result of the settlement of the issue in the third quarter of
1998.
In August 1998, the Company issued approximately $60 million of 5.835 percent
Australian dollar denominated medium-term notes that mature in November 2001.
The Company also issued approximately $30 million of Australian dollar
denominated commercial paper. The proceeds from these debt issuances were used
to reduce debt under the Company's Multicurrency Credit Agreement, which was
classified as long-term.
9
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
GAIN FROM DISCONTINUED OPERATIONS
During the third quarter, the Company resolved a tax issue related to the
disposal of a business in 1992. As a result of tax losses on the disposition of
this business, the Company's U.S. federal income tax payments were reduced in
1992 through 1995 by approximately $58 million. However, pending final
acceptance of the Company's treatment of the losses, no income tax benefit was
recognized for financial reporting purposes. During the third quarter of 1998,
an agreement was reached with the Internal Revenue Service on the final tax
treatment for the losses. This agreement resulted in the recognition of a gain
from discontinued operations of $38 million or $0.28 per diluted share in the
Company's financial statements for the third quarter and nine-month periods
ended September 30, 1998. A major portion of the tax liability due was funded by
posting a bond with the Internal Revenue Service during the second quarter of
1998.
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 would be retained, and decisions related to certain duplicate
facilities. The net assets related to these businesses and facilities, which
were being held for sale, totaled approximately $25 million and were
reclassified to other current assets at March 31, 1998. As of September 30,
1998, there were approximately $10 million of businesses and assets still being
held for sale.
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
10
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
BUSINESS ACQUISITIONS (continued)
Gibson Business Acquisition (continued)
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>
The pro forma results are presented for information 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
At the beginning of the first quarter of 1998, the Company acquired a cleaning
and sanitizing business in Japan from Henkel KGaA. Sales of the acquired
business were approximately $10 million in 1997.
In June 1998, the Company acquired certain assets of American Fluid Technologies
(AFT) which is based in Hopkins, Minnesota. AFT provides cleaning and
optimization products and services for membrane systems used to process water
for food, beverage, pharmaceutical and industrial applications. AFT has become
part of the Company's Food & Beverage division. AFT sales were approximately $3
million in 1997.
Also in June 1998, the Company acquired certain assets of Puremark
International, a Fairfield, New Jersey-based manufacturer of systems which help
purify and condition water used in food service soda fountain dispensers, ice
makers, coffee makers and similar items. The acquired business had sales of
approximately $2 million in 1997, and has become part of the Company's
Institutional division.
11
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
BUSINESS ACQUISITIONS (continued)
Other Business Acquisitions (continued)
In July 1998, the Company issued approximately 850,000 shares of common stock to
purchase GCS Service, Inc., a Danbury, Connecticut-based provider of commercial
kitchen equipment repair services. GCS Service, Inc. sales were $48 million in
1997.
These acquisitions have been accounted for as purchases and, accordingly, the
results of operations have been included in the financial statements of the
Company from the dates of acquisition. Net sales and operating income of these
businesses are not significant to the Company's consolidated results of
operations, financial position and cash flows.
COMPREHENSIVE INCOME
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 that is charged or
credited to the cumulative translation account within shareholders' equity.
Comprehensive income for the third quarter and nine months ended September 30,
1998 and 1997 and the year ended December 31, 1997, was as follows:
<TABLE>
<CAPTION>
Third Quarter Nine Months Year
Ended Ended Ended
September 30 September 30 December 31
(thousands) 1998 1997 1998 1997 1997
------- ------- ------- ------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net income $85,012 $40,489 $153,289 $99,587 $133,955
Change in cumulative
translation (1,594) (10,592) (12,342) (31,785) (35,730)
------- ------- -------- ------- --------
Comprehensive income $83,418 $29,897 $140,947 $67,802 $ 98,225
------- ------- -------- ------- --------
------- ------- -------- ------- --------
</TABLE>
12
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
INCOME PER COMMON SHARE
The computation of the basic and diluted per share amounts were as follows:
<TABLE>
<CAPTION>
Third Quarter Nine Months Year
Ended Ended Ended
(thousands, September 30 September 30 December 31
except per share) 1998 1997 1998 1997 1997
----------- ----------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Income from continuing
operations $ 47,012 $ 40,489 $115,289 $ 99,587 $133,955
Gain from discontinued
operations 38,000 38,000
----------- ----------- -------- -------- --------
Net income $ 85,012 $ 40,489 $153,289 $ 99,587 $133,955
----------- ----------- -------- -------- --------
----------- ----------- -------- -------- --------
Weighted average common
shares outstanding
Basic (actual
shares outstanding) 129,573 129,462 129,066 129,596 129,446
Effect of dilutive
stock options 4,746 4,468 4,957 4,239 4,376
----------- ----------- -------- -------- --------
Diluted 134,319 133,930 134,023 133,835 133,822
----------- ----------- -------- -------- --------
----------- ----------- -------- -------- --------
Basic income per common share
Income from continuing
operations $ 0.36 $ 0.31 $ 0.89 $ 0.77 $ 1.03
Gain from discontinued
operations 0.30 0.30
Net income $ 0.66 $ 0.31 $ 1.19 $ 0.77 $ 1.03
Diluted income per common share
Income from continuing
operations $ 0.35 $ 0.30 $ 0.86 $ 0.74 $ 1.00
Gain from discontinued
operations 0.28 0.28
Net income $ 0.63 $ 0.30 $ 1.14 $ 0.74 $ 1.00
</TABLE>
13
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
INCOME PER COMMON SHARE (continued)
Stock options for approximately 2.3 million shares were granted in 1998 with
exercise prices substantially greater than the market value of the Company's
common stock. These stock options were not dilutive and therefore were not
included in the computation of diluted net income per common share for the third
quarter and nine months ended September 30, 1998. Virtually all other stock
options outstanding during the third quarter and nine months ended September 30,
1998 and 1997, and the year ended December 31, 1997, were dilutive and included
in the calculation of the diluted per share amounts.
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 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.
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended Year Ended
September 30 September 30 December 31
(thousands) 1998 1997 1998 1997 1997
-------- -------- ---------- ---------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net Sales
United States $392,307 $338,764 $1,084,175 $ 949,100 $1,275,828
International 107,730 94,109 320,684 269,343 364,524
-------- -------- ---------- ---------- ----------
Total $500,037 $432,873 $1,404,859 $1,218,443 $1,640,352
-------- -------- ---------- ---------- ----------
-------- -------- ---------- ---------- ----------
Operating Income
United States $ 72,033 $ 60,738 $ 176,938 $ 146,363 $ 195,630
International 8,287 7,102 23,231 19,641 26,962
Corporate (1,149) (1,044) (3,538) (2,975) (4,088)
-------- -------- ---------- ---------- ----------
Total $ 79,171 $ 66,796 $ 196,631 $ 163,029 $ 218,504
-------- -------- ---------- ---------- ----------
-------- -------- ---------- ---------- ----------
</TABLE>
14
<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 third quarter and
nine months ended September 30, 1998 and 1997 and for the year ended December
31, 1997 were:
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended Year Ended
September 30 September 30 December 31
(thousands) 1998 1997 1998 1997 1997
-------- -------- -------- -------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Joint venture
Net sales $232,910 $204,454 $656,318 $626,819 $ 844,689
Gross profit 129,527 111,829 364,577 346,607 470,698
Income before
income taxes 19,750 14,734 48,036 42,141 63,640
Net income $ 10,985 $ 8,770 $ 26,983 $ 24,364 $ 33,701
Ecolab equity in earnings
Ecolab equity in
net income $ 5,493 $ 4,385 $ 13,492 $ 12,182 $ 16,851
Ecolab royalty
income from joint
venture, net of
income taxes 1,112 1,192 3,308 3,412 4,583
Amortization expense
for the excess of
cost over the
underlying net
assets of the joint
venture (1,901) (1,920) (5,709) (6,046) (8,001)
-------- -------- -------- -------- -----------
Equity in earnings of
Henkel-Ecolab
joint venture $ 4,704 $ 3,657 $ 11,091 $ 9,548 $ 13,433
-------- -------- -------- -------- -----------
-------- -------- -------- -------- -----------
</TABLE>
At September 30, 1998, the Company's investment in the Henkel-Ecolab joint
venture included approximately $140 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.
15
<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 September 30, 1998 and 1997, and the related consolidated statements of
income for the three-month and nine-month periods ended September 30, 1998 and
1997, and the consolidated statement of cash flows for the nine-month periods
ended September 30, 1998 and 1997. 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/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Saint Paul, Minnesota
October 20, 1998
16
<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 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" beginning on page 26 of this report. Additional risk factors may be
described from time to time in Ecolab's filings with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS - THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998
Net sales for the third quarter ended September 30, 1998 were $500 million, an
increase of 16 percent over net sales of $433 million in the third quarter of
last year. For the nine month-period ended September 30, 1998, net sales were
just over $1.4 billion and increased 15 percent over net sales of approximately
$1.2 billion in the comparable period of last year. Business acquisitions were
significant to sales growth and accounted for approximately one-half of the
Company's sales growth for both the third quarter and nine-month periods.
Changes in currency translation decreased the Company's sales growth by three to
four percentage points in each of the reporting periods. 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. Selling
price increases continued to be restrained due to limited pricing conditions in
several markets in which the Company does business.
The gross profit margin was 55.1 percent of net sales for the third quarter
of 1998, down from last year's third quarter gross profit margin of 56.5
percent of net sales. For the nine-month period, the gross profit margin was
also 55.1 percent of net sales, a decrease compared to the nine-month 1997
gross profit margin of 55.9 percent. The decrease in gross profit margins
reflected comparison against an exceptionally strong third quarter 1997
margin, lower margins in the Asia Pacific region and the effects of business
acquisitions. Gross margins in the Asia Pacific region were negatively
affected by economic and monetary problems in the area, and by businesses the
Company added to the region through acquisitions. In the United States, gross
margins were also negatively affected by business acquisitions. These
decreases to the gross margins were partially offset by higher sales of the
higher margin products of the Company's U.S. core operations and sales volume
17
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS - THIRD QUARTER AND NINE MONTHS ENDED
SEPTEMBER 30, 1998 (continued)
growth of new products. The benefits from selling price increases improved
modestly over last year, however, continued to be limited due to market
pressures.
For the third quarter of 1998, selling, general and administrative expenses were
39.3 percent of net sales and decreased from selling, general and administrative
expenses of 41.1 percent of net sales in the third quarter of last year. For the
first nine months of 1998, selling, general and administrative expenses
represented 41.1 percent of net sales, down from selling, general and
administrative expenses of 42.5 percent of net sales in the comparable period of
last year. Selling, general and administrative margins were down for both the
Company's U.S. and International Operations with significant decreases in the
Asia Pacific region. These decreases reflected the benefits of tight cost
controls, the integration of businesses acquired 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.
Income from continuing operations for the third quarter of 1998 totaled $47
million, an increase of 16 percent over income from continuing operations of $40
million in the third quarter of 1997. Diluted income from continuing operations
per share for the third quarter was $0.35, an increase of 17 percent compared to
diluted income from continuing operations per share of $0.30 in the third
quarter of last year. For the first nine months of 1998, income from continuing
operations totaled $115 million, or $0.86 per diluted share, and increased 16
percent over income from continuing operations of $100 million, or $0.74 per
diluted share in the comparable period of last year. These earnings improvements
reflected double-digit growth in operating income, principally due to the
stronger performances of the Company's U.S. core operations, and a higher equity
in earnings of the Henkel-Ecolab joint venture. Earnings were negatively
affected by increased interest expense and income taxes compared with the third
quarter and nine-month periods of last year.
In addition to ongoing operations, a tax issue related to the disposal of a
business in 1992 was resolved during the third quarter, resulting in a one-time
gain of $38 million, or $0.28 per diluted share. When the business was
discontinued at the end of 1991, no income tax benefits were anticipated as part
of the loss on disposition. Subsequently, the Company was able to adopt a
strategy to realize some income tax benefits on the disposition. The Company's
treatment of the loss for income tax purposes was resolved with the Internal
Revenue Service during the third quarter.
18
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS - THIRD QUARTER AND NINE MONTHS ENDED
SEPTEMBER 30, 1998 (continued)
Net sales for the Company's United States operations were $392 million for
the third quarter of 1998, an increase of 16 percent over net sales of $339
million in the third quarter of last year. For the nine-month period, United
States sales totaled $1.1 billion in 1998, up 14 percent over sales of $949
million in 1997. U.S. sales for both periods benefited from business
acquisitions, a continuation of strong growth in the core Institutional and
Food & Beverage operations, sales of new products, and good business trends
in the hospitality and lodging industries. Business acquisitions accounted
for approximately 40 percent of the growth in U.S. sales for each of the
reporting periods. Selling price increases continued to be restrained due to
limited pricing conditions in several of the markets in which the Company
does business. Sales of the Company's U.S. Institutional Division increased
12% for both the third quarter and nine-month reporting periods with strong
growth in sales of all of its business units. The Grace-Lee Vehicle Wash
business, which was acquired in December of last year, added approximately 2
percentage points to Institutional's sales growth rates. Sales of the Pest
Elimination Division increased 15 percent for the third quarter and 14
percent for the first nine months of 1998. Pest Elimination sales benefited
from good new contract growth, continued high customer retention, additional
product and service offerings and higher customer demand related to weather
conditions. Kay reported sales growth of 10 percent for the third quarter and
9 percent for the nine-month period with good new customer business,
continued growth of its food retail (grocery/deli) services business and
additional offerings to its core quick-service customers. Textile Care sales
decreased 1 percent for the third quarter of 1998 and were up 1 percent for
the first nine months of 1998. Although Textile Care has a number of new
product offerings, its business continues to experience pressures from plant
consolidations, particularly in laundries serving the healthcare market, and
challenging market conditions. Sales of the Company's Professional Products
businesses were up 4 percent for the third quarter and 6 percent for the
nine-month period with improved growth in sales to its core janitorial and
infection prevention markets. Water Care sales increased 7 percent for the
third quarter and 5 percent for the first nine months of 1998 with a
continued focus on the hospitality, cruise ship, food and beverage and
laundry markets. The Food & Beverage Division reported sales growth of 17
percent for both the third quarter and nine-month reporting periods
reflecting the acquisition of Chemidyne in August of last year. Excluding
Chemidyne, Food & Beverage sales increased 11 percent for the third quarter
and 8 percent for the nine-month period with strong growth in sales to the
beverage and food processing markets.
19
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS - THIRD QUARTER AND NINE MONTHS ENDED
SEPTEMBER 30, 1998 (continued)
Operating income of the Company's United States operations was $72 million for
the third quarter ended September 30, 1998, an increase of 19 percent over
operating income of $61 million in the third quarter of 1997. For the first nine
months of 1998, U.S. operating income totaled $177 million, up 21 percent over
operating income of $146 million in the comparable period of last year. U.S.
operating income reflected a continuation of particularly good growth in the
core Institutional and Food and Beverage operations and also in the Pest
Elimination business. As a percent of net sales, the third quarter U.S.
operating income margin improved to 18.4 percent in 1998 from 17.9 percent last
year. For the nine-month period, the operating income margin also improved to
16.3 percent of net sales in 1998 from 15.4 percent of net sales in 1997. These
improvements in operating income margins reflected strong sales growth,
particularly in the core operations and in sales of new products, modest
increases in raw material costs, and the benefits of tight cost controls.
Reported sales of the Company's International Operations were $108 million
for the third quarter of 1998, and increased 14 percent over sales of $94
million in the third quarter of last year. For the first nine months of 1998,
the Company's International Operations reported sales of $321 million, up 19
percent over sales of $269 million during the first nine months of 1997.
International sales benefited from business acquisitions; however, sales were
negatively affected by changes in currency translation, particularly in the
Asia Pacific region. Excluding business acquisitions, sales as reported in
U.S. dollars decreased 3 percent for the third quarter and were flat for the
nine-month period. When measured in local currencies, International sales
increased over 30 percent for both the third quarter and nine-month reporting
periods, and when business acquisitions are excluded, local currency sales
for both the third quarter and nine-month periods of 1998 increased
approximately 11 percent. The Asia Pacific region reported U.S. dollar sales
growth of 24 percent for the third quarter and 31 percent for the first nine
months of 1998. Excluding business acquisitions and when measured in local
currencies, sales in the Asia Pacific region increased 16 percent for each of
the reporting periods with good growth in Australia and Southeast Asia.
Reported sales in Latin America were up modestly, 1 percent for the third
quarter and 3 percent for the nine-month period. When measured in local
currencies, Latin America sales increased 8 percent for the third quarter and
9 percent for the nine-month period with double-digit growth in Mexico,
Venezuela and Central America and flat results in Brazil and the Caribbean.
Canada reported flat sales results for the third quarter and sales growth of
3 percent for the first nine months of 1998. Canada's local currency growth,
excluding the March 1997 acquisition of Savolite, was 7 percent for the third
quarter and 6 percent for the nine-month period and reflected good growth in
Institutional and Food & Beverage sales.
20
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS - THIRD QUARTER AND NINE MONTHS ENDED
SEPTEMBER 30, 1998 (continued)
For the third quarter ended September 30, 1998, International reported
operating income of $8 million, an increase of 17 percent over operating
income of $7 million in the third quarter of last year. For the first nine
months of 1998, International operating income totaled $23 million, up 18
percent over operating income of $20 million in the comparable period of last
year. Excluding business acquisitions, International operating income as
reported in U.S. dollars was down approximately 1 percent for both the third
quarter and nine-month reporting periods, reflecting lower income in the Asia
Pacific region due to the difficult business and economic conditions in the
region. Excluding business acquisitions and the negative effects of currency
translation, International's operating income increased approximately 25
percent in both the third quarter and nine-month reporting periods reflecting
growth in all of the Company's major regions of operation with significant
growth in the Latin America region. The Company continues to be cautious
about near-term growth in the Asia Pacific region due to the uncertain
economic conditions in the region.
The Company's equity in earnings of the Henkel-Ecolab joint venture were $4.7
million for the third quarter of 1998, an increase of 29 percent over $3.7
million of equity in earnings of the joint venture in the comparable quarter
of last year. For the nine-month period, the Company's equity in the joint
venture's earnings increased 16 percent to $11.1 million in 1998 from $9.5
million last year. Joint venture sales, although not consolidated in the
Company's financial statements, were up 14 percent for the third quarter and
11 percent for the first nine months of 1998 when measured in Deutsche marks,
with good growth across all business lines and in most geographic areas.
Sales in Germany and the United Kingdom continued to be weak, due in part to
government and private spending cutbacks. When measured in U.S. dollars,
joint venture sales also increased 14 percent for the third quarter, however,
sales increased only 5 percent for the nine-month period due to the negative
effects of the strengthening U.S. dollar.
Corporate operating expense was just over $1 million for the third quarter and
$3.5 million for the first nine months of 1998 and represented overhead costs
directly related to the Henkel-Ecolab joint venture.
Net interest expense was $5.1 million for the third quarter and nearly $16
million for the nine-month period and increased more than 50 percent over net
interest expense in the comparable periods of last year. These increases were
primarily due to debt incurred for the Gibson and other business acquisitions
and for an income tax deposit made in the second quarter of 1998.
21
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS - THIRD QUARTER AND NINE MONTHS ENDED
SEPTEMBER 30, 1998 (continued)
For the first nine months of 1998, the provision for income taxes reflected an
estimated annual effective income tax rate of 42.4 percent. The effective income
tax rate for the third quarter of 1998 was 42.9 percent. These effective income
tax rates were 1.0 percent higher than the comparable periods of last year,
principally due to the effects of business acquisitions and higher overall
effective rates on earnings of International operations.
YEAR 2000 CONVERSION
The Company has completed an assessment of Year 2000 compliance for its North
American operations related to its critical operating and application systems,
particularly customer-oriented systems such as sales and order processing,
billing and collections and associated infrastructure. As a result, the Company
has renovated or is replacing portions of its software and hardware. The
renovation, validation and implementation processes are approximately 85 to 90
percent complete and the intention is to be completed by the end of 1998 in all
material respects. The costs related to Year 2000 to complete this activity are
not material and should not exceed $5 million, in both capital and expense, of
which approximately $3 million has been incurred to date. Of this cost, only a
small part is related to accelerated replacement due to Year 2000 concerns.
With regard to operations and application systems in operations outside of North
America, the Company is in various stages of assessment, renovation, validation
or implementation depending on the circumstances. The Company intends to follow
the same process internationally, as it has taken in North America and intends
to complete the process by the end of 1998 in all material respects. Costs
related to the international process are not expected to be material.
As a part of its Year 2000 conversion, the Company is in the process of
demonstrating its Year 2000 readiness by simulating the Year 2000 in an
orchestrated manner for its key infrastructure components, critical business
processes and key application systems in St. Paul. The Company expects that
minor Year 2000 compliance issues will be identified as an outcome of the Year
2000 simulation test and intends to address these compliance issues in the first
quarter of 1999.
On a worldwide basis, the Company is 95 percent complete in the assessment stage
relative to remediating its dispensing and cleaning systems and its
manufacturing and building maintenance operations for date/time sensitivity and
has begun the renovation, validation and implementation stages with the goal of
completion by the end of 1998. The Company believes that its requirements
relative to Year 2000
22
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
YEAR 2000 CONVERSION (continued)
remediation for its dispensing and cleaning systems and manufacturing and
building maintenance operations are limited in nature and although a final cost
estimate has not been determined at this time, the Company does not believe the
cost will be material.
The Company has contacted key suppliers and vendors in order to determine the
status of such third parties' Year 2000 remediation plans. This process will be
ongoing into 1999. In the Company's experience, its suppliers and vendors are
still only in the process of Year 2000 renovation. Therefore, the Company will
be better able to fully assess the risk and prepare contingency plans when third
party processes are more complete.
The Company recognizes the need for Year 2000 contingency plans in the event
that remediation is not fully successful or that the remediation efforts of
its vendors, suppliers and governmental/regulatory agencies are not timely
completed. The Company intends to address contingency planning in early 1999.
The Company intends to complete its Year 2000 remediation efforts primarily with
in-house resources, but has and will continue to use consultants for specific
tasks. The Company costs of Year 2000 remediation described above are funded
from operations.
The Company recognizes that issues related to Year 2000 constitute a material
known uncertainty. The Company also recognizes the importance of ensuring its
operations will not be adversely affected by Year 2000 issues. It believes that
the processes described above will be effective to manage the risks associated
with the problem. However, there can be no assurance that the process can be
completed on the timetable described above or that the remediation processes
will be fully effective. The failure to identify and remediate Year 2000
problems or, the failure of key third parties who do business with the Company
or governmental/regulatory agencies to timely remediate their Year 2000 issues
could cause system failures or errors, business interruptions and in a worst
case scenario, the inability to engage in normal business practices for an
unknown length of time. The effect on the Company's operations, income and
financial condition could be materially adverse.
EURO CURRENCY CONVERSION
The Company's principal activities in Europe are not conducted directly, rather
such activities are conducted through its Henkel-Ecolab joint venture.
On January 1, 1999, 11 of the 15 member countries of the European Monetary Union
are scheduled to establish fixed conversion rates
23
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
EURO CURRENCY CONVERSION (continued)
between their existing currencies and a new currency, the Euro. During a
transition period from January 1, 1999 - 2002, the Euro will replace the
national currencies that exist in the participating countries.
The transition to the Euro creates a number of sales, marketing, finance and
accounting issues that are currently being addressed by joint venture
management.
Given the nature of the Company's exposure to the change, management does not
expect the transition to the Euro to have a material impact on the results of
operations or financial condition of the Company.
FINANCIAL POSITION AND LIQUIDITY
Total assets at September 30, 1998, were over $1.4 billion, an increase of 2
percent over total assets at year-end 1997 and up 14 percent over total assets
at the end of the third quarter of last year. The increase in total assets from
September 30 of last year is principally due to the acquisition of the Gibson
business at the end of 1997.
Total debt was $296 million at September 30, 1998, and compared to total debt of
$308 million at December 31, 1997, and $201 million at the end of the third
quarter of 1997. The increase in debt from the end of the third quarter of last
year reflected borrowings to finance the Gibson acquisition and funding for an
income tax deposit made in the second quarter of 1998. During the third quarter,
the Company replaced long-term debt under its Multicurrency Credit Agreement
with approximately $60 million of Australian dollar denominated debt under a
three and one-quarter year medium-term note agreement and approximately $30
million of Australian dollar denominated commercial paper. The ratio of total
debt to capitalization was 31 percent at September 30, 1998, compared with 36
percent at year-end 1997 and 27 percent at September 30, 1997.
Other noncurrent liabilities decreased to $61 million at September 30, 1998,
from $125 million at year-end 1997 and $122 million at the end of the third
quarter of last year. These decreases were due to the resolution of a tax issue
related to the disposal of a business in 1992. As a result of tax losses on the
disposition of this business, the Company's U.S. federal income tax payments
were reduced in 1992 through 1995 by approximately $58 million. However, pending
final acceptance of the Company's treatment of the losses, no income tax benefit
was recognized for financial reporting purposes. During the second quarter of
1998, the Company reduced its noncurrent liabilities and posted a bond with the
Internal Revenue Service against the
24
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
FINANCIAL POSITION AND LIQUIDITY (continued)
outstanding tax issue related to this business. In the third quarter of 1998, an
agreement was reached with the Internal Revenue Service on the final tax
treatment of the losses. This agreement resulted in the further reduction of
noncurrent liabilities and recognition of a gain from discontinued operations of
$38 million during the third quarter ended September 30, 1998.
Cash provided by continuing operations totaled $199 million for the first nine
months of 1998, an increase of 33 percent over cash provided by continuing
operations of $149 million during the comparable period of last year. The
comparison of cash flow from continuing operations was favorably affected by a
cash outflow in 1997 due to an $18 million income tax deposit made against
outstanding federal income tax issues that had been accrued for in other
noncurrent liabilities. Total cash provided by operating activities was $169
million for the nine months ended September 30, 1998, and included a $30 million
income tax deposit made in the second quarter of 1998 related to discontinued
operations.
The Company reacquired 557,500 shares of its common stock during the third
quarter and 1,444,100 shares of its common stock during the first nine months of
1998 under its two authorized share repurchase programs. Under one plan, the
Company reacquires shares to fund current share needs for employee incentive and
benefit plans. During any fiscal quarter, the number of shares reacquired is not
intended to exceed approximate plan needs for such quarter. Under a second
program, established in 1995 (the "1995 Plan"), the Company reacquires shares
for general corporate purposes, including certain acquisitions. As of September
30, 1998, there were approximately 3.7 million shares remaining under the 1995
Plan. The Company anticipates that it will continue to periodically reacquire
shares under these two programs.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, a new standard of accounting and
reporting for derivative instruments and hedging activities. The Company is
required to adopt the new standard in the first quarter of 2000. Although the
Company has not completed a full analysis of all of the requirements of the new
standard, the Company's use of derivative and hedging financial instruments is
limited and therefore the Company does not anticipate the impact of the new
standard to be significant.
25
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements. In this report on Form 10-Q, Management
discusses expectations regarding future performance of the Company which may
include anticipated financial performance, business prospects, prospects for
international growth, investments in the sales and service force, year 2000
issues, Euro conversion, share repurchases, the affect of new accounting
principles and similar 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.
Forward-looking statements represent challenging goals for the Company. As such,
they are based on certain assumptions and estimates and are subject to certain
risks and uncertainties. The Company cautions that undue reliance should not be
placed on such forward-looking statements which speak only as of the date made.
In order to comply with the terms of the safe harbor, the Company hereby
identifies important factors which could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from the anticipated results or other expectations expressed
in the forward-looking statements. These factors should be considered, together
with any similar risk factors or other cautionary language which may be made in
the section of this report containing the forward-looking statement.
Risks and uncertainties that may affect operating results and business
performance include: pricing flexibility; availability of adequate and
reasonably-priced raw materials; the occurrence of capacity constraints, or the
loss of a key supplier, which in either case limit the production of certain
products; ability to carry out the Company's acquisition strategy, including
difficulties in rationalizing acquired businesses and in realizing related cost
savings and other benefits; the costs and effects of "year 2000" computer
software issues (described under the heading "Year 2000 Conversion" beginning on
page 22); the costs and effects of complying with: (i) the significant
environmental laws and regulations which apply to the Company's operations and
facilities, (ii) government regulations relating to the manufacture, storage,
distribution and labeling of the Company's products and (iii) changes in tax,
fiscal, governmental and other regulatory policies; economic factors such as the
worldwide economy, interest rates, currency movements, Euro conversion and the
development of markets; the occurrence of (i) litigation or claims, (ii) natural
or man-made disasters and (iii) severe weather conditions affecting the food
service and hospitality industry; loss of, or changes in, executive management;
the Company's ability to continue product introductions and technological
innovations; and other uncertainties or risks reported from time-to-time in the
Company's reports to the Securities and Exchange Commission. In addition, the
26
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
FORWARD-LOOKING STATEMENTS AND RISK FACTORS (continued)
Company notes that its stock price can be affected by fluctuations in quarterly
earnings. Despite favorable year-over-year quarterly comparisons in recent
years, there can be no assurances that earnings will continue to increase or
that the degree of improvement will meet investors' expectations.
The "year 2000" issue is the result of computer programs having date-sensitive
software which may recognize a date using 00 as the year 1900 rather than the
year 2000. If not detected and corrected, this can result in system failure or
miscalculations causing disruptions of operations, including a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities. The year 2000 issue can arise at any point in the Company's
supply, manufacturing, processing, distribution and any financial chains.
Accordingly, the failure to resolve year 2000 issues could have a material
impact on the Company. The Company has put in place plans and processes (see
Year 2000 Conversion on page 22 hereof) which it believes will be sufficient to
evaluate and manage risk associated with year 2000 issues and will use both
internal and external resources. However, estimates of year 2000 costs, time
schedules and the Company's belief that it can successfully resolve year 2000
issues are based on presently available information and are subject to certain
assumptions and risks. These include the availability of necessary and trained
personnel who can be hired or retained on a contract basis, the ability to
locate and correct all relevant computer codes and uncertainties surrounding the
ability of suppliers and vendors to resolve their year 2000 issues. The ability
of governmental agencies to resolve year 2000 issues is an additional risk and
uncertainty. However, although such risks and uncertainties exist, the Company
believes that its exposure to year 2000 issues is not dissimilar to that of
other companies engaged in similar businesses.
27
<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 on July 15, 1998, a Current Report on Form 8-K
announcing completion of its previously announced acquisition of
GCS Service, Inc. of Danbury, Connecticut.
28
<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: November 10, 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)
29
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT METHOD OF FILING
- ----------- -------- ----------------
<S> <C> <C>
(15) Letter regarding unaudited interim financial Filed herewith
information electronically
(27) Financial Data Schedule Filed herewith
electronically
</TABLE>
30
<PAGE>
Exhibit (15)
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, DC 10549
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; 333-50969; and 333-62183) and
Ecolab Inc. Registration Statements on Form S-3 (Registration
Nos. 333-14771 and 333-45295)
We are aware that our report dated October 20, 1998, on our reviews of interim
financial information of Ecolab Inc. for the periods ended September 30, 1998
and 1997, and included in the Company's quarterly report on Form 10-Q for the
quarter ended September 30, 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/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Saint Paul, Minnesota
November 10, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998 AND THE RELATED STATEMENTS
OF INCOME AND CASH FLOWS FOR THE NINE MONTH PERIOD THEN ENDED AND IS QUALIFIED
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 42,392
<SECURITIES> 0
<RECEIVABLES> 273,405
<ALLOWANCES> 12,676
<INVENTORY> 159,563
<CURRENT-ASSETS> 520,571
<PP&E> 857,547
<DEPRECIATION> 451,201
<TOTAL-ASSETS> 1,446,078
<CURRENT-LIABILITIES> 444,286
<BONDS> 191,971
0
0
<COMMON> 144,503
<OTHER-SE> 510,682
<TOTAL-LIABILITY-AND-EQUITY> 1,446,078
<SALES> 1,404,859
<TOTAL-REVENUES> 1,404,859
<CGS> 630,390
<TOTAL-COSTS> 630,390
<OTHER-EXPENSES> 577,838
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 18,361
<INCOME-PRETAX> 180,756
<INCOME-TAX> 76,558
<INCOME-CONTINUING> 115,289
<DISCONTINUED> 38,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 153,289
<EPS-PRIMARY> 1.19
<EPS-DILUTED> 1.14
<FN>
<F1>The Amount of "Loss Provision" Is Not Significant And Has Been Included In
"Other Expenses".
</FN>
</TABLE>
