<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, 1999
--------------
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.)
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 April 30, 1999.
129,642,171 shares of common stock, par value $1.00 per share.
1
<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) 1999 1998 1998
-------- -------- ----------
(unaudited)
<S> <C> <C> <C>
Net Sales $489,304 $436,362 $1,888,226
Cost of Sales 220,425 195,909 851,173
Selling, General
and Administrative Expenses 206,616 186,733 775,073
-------- -------- ----------
Operating Income 62,263 53,720 261,980
Interest Expense, Net 5,750 5,406 21,742
-------- -------- ----------
Income From Continuing Operations
Before Income Taxes and Equity
in Earnings of Henkel-Ecolab 56,513 48,314 240,238
Provision for Income Taxes 23,622 20,289 101,782
Equity in Earnings of
Henkel-Ecolab Joint Venture 2,147 2,563 16,050
-------- -------- ----------
Income From Continuing Operations 35,038 30,588 154,506
Gain From Discontinued Operations 38,000
-------- -------- ----------
Net Income $ 35,038 $ 30,588 $ 192,506
-------- -------- ----------
-------- -------- ----------
Basic Income Per Common Share
Income from Continuing Operations $ 0.27 $ 0.24 $ 1.20
Gain from Discontinued Operations 0.29
Net Income $ 0.27 $ 0.24 $ 1.49
Diluted Income Per Common Share
Income from Continuing Operations $ 0.26 $ 0.23 $ 1.15
Gain from Discontinued Operations 0.28
Net Income $ 0.26 $ 0.23 $ 1.44
Dividends Per Common Share $ 0.105 $ 0.095 $ 0.39
Weighted-Average Common Shares
Outstanding
Basic 129,539 128,958 129,157
Diluted 134,626 133,934 134,047
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
ECOLAB INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31 March 31 December 31
(thousands) 1999 1998 1998
---------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 25,418 $ 18,624 $ 28,425
Accounts receivable, net 281,978 242,669 246,695
Inventories 165,453 153,775 165,627
Deferred income taxes 35,789 35,047 36,256
Other current assets 29,327 38,815 26,511
---------- ---------- ----------
Current Assets 537,965 488,930 503,514
Property, Plant and
Equipment, Net 419,744 385,493 420,205
Investment in Henkel-Ecolab
Joint Venture 242,150 234,084 253,646
Other Assets 319,098 279,205 293,630
---------- ---------- ----------
Total Assets $1,518,957 $1,387,712 $1,470,995
---------- ---------- ----------
---------- ---------- ----------
</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) 1999 1998 1998
---------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt $ 78,339 $ 57,645 $ 67,991
Accounts payable 122,979 118,122 124,646
Compensation and benefits 63,758 60,077 79,431
Income taxes 18,495 23,994 244
Other current liabilities 137,979 130,668 127,479
---------- ---------- ----------
Current Liabilities 421,550 390,506 399,791
Long-Term Debt 247,838 248,047 227,041
Postretirement Health Care
and Pension Benefits 95,141 84,019 85,793
Other Liabilities 65,575 119,740 67,829
Shareholders' Equity (common stock,
par value $1.00 per share;
shares outstanding: March 31,
1999 - 129,543; March 31, 1998 -
128,694; December 31, 1998 -
129,479) 688,853 545,400 690,541
---------- ---------- ----------
Total Liabilities and
Shareholders' Equity $1,518,957 $1,387,712 $1,470,995
---------- ---------- ----------
---------- ---------- ----------
</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) 1999 1998 1998
---------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 35,038 $ 30,588 $192,506
Less: gain from discontinued
operations 38,000
---------- ---------- ----------
Income from continuing operations 35,038 30,588 154,506
Adjustments to reconcile income
from continuing operations
to cash provided by continuing
operations:
Depreciation 26,778 23,416 99,276
Amortization 5,939 5,444 22,695
Deferred income taxes (1,582) 581 (2,012)
Equity in earnings of
Henkel-Ecolab joint venture (2,147) (2,563) (16,050)
Joint venture royalties
and dividends 2,751 1,074 10,451
Other, net (130) 635 1,526
Changes in operating assets and liabilities:
Accounts receivable (32,728) 546 1,352
Inventories (195) (4,396) (11,667)
Other assets (3,022) (4,322) (7,631)
Accounts payable (3,251) (13,629) (7,794)
Other liabilities 17,713 2,236 29,877
---------- ---------- ----------
Cash provided by continuing
operations 45,164 39,610 274,529
Cash used for discontinued
operations (38,887)
---------- ---------- ----------
Cash provided by operating
activities $ 45,164 $ 39,610 $235,642
---------- ---------- ----------
</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) 1999 1998 1998
---------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
INVESTING ACTIVITIES
Capital expenditures $(29,337) $(28,243) $(147,631)
Property disposals 687 910 7,060
Businesses acquired (34,191) (24,620) (40,206)
Sale of Gibson businesses
and assets 14,226
Other, net (37) (105) 4,766
---------- ---------- ----------
Cash used for investing activities (62,878) (52,058) (161,785)
---------- ---------- ----------
FINANCING ACTIVITIES
Notes payable 11,122 4,715 24,820
Long-term debt borrowings 21,810 16,940 117,740
Long-term debt repayments (603) (22,540) (151,143)
Reacquired shares (9,722) (19,003) (52,984)
Cash dividends on common stock (13,552) (12,260) (49,000)
Other, net 6,106 2,977 5,679
---------- ---------- ----------
Cash provided by (used for)
financing activities 15,161 (29,171) (104,888)
---------- ---------- ----------
Effect of exchange rate
changes on cash (454) (926) (1,713)
---------- ---------- ----------
DECREASE IN CASH AND
CASH EQUIVALENTS (3,007) (42,545) (32,744)
Cash and Cash Equivalents,
beginning of period 28,425 61,169 61,169
---------- ---------- ----------
Cash and Cash Equivalents,
end of period $ 25,418 $ 18,624 $ 28,425
---------- ---------- ----------
---------- ---------- ----------
</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, 1999 and 1998, reflects, in the opinion of management, all adjustments
necessary for a fair statement of the results of operations for the interim
periods. These adjustments consisted 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, 1998 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, 1998.
PricewaterhouseCoopers LLP, the Company's independent accountants, have
performed a limited review of the interim financial information included herein.
Their report on such review accompanies this filing.
BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
March 31 March 31 December 31
(thousands) 1999 1998 1998
---------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
Accounts Receivable, Net
Accounts receivable $ 295,398 $ 253,645 $ 259,588
Allowance for doubtful accounts (13,420) (10,976) (12,893)
---------- ---------- ----------
Total $ 281,978 $ 242,669 $ 246,695
---------- ---------- ----------
---------- ---------- ----------
Inventories
Finished goods $ 78,237 $ 66,420 $ 73,983
Raw materials and parts 89,237 90,100 93,862
Excess of fifo cost over lifo cost (2,021) (2,745) (2,218)
---------- ---------- ----------
Total $ 165,453 $ 153,775 $ 165,627
---------- ---------- ----------
---------- ---------- ----------
Property, Plant and Equipment, Net
Land $ 12,045 $ 12,473 $ 12,584
Buildings and leaseholds 157,719 143,714 157,302
Machinery and equipment 263,499 245,131 258,107
Merchandising equipment 446,184 391,980 435,998
Construction in progress 5,887 18,805 11,038
---------- ---------- ----------
885,334 812,103 875,029
Accumulated depreciation
and amortization (465,590) (426,610) (454,824)
---------- ---------- ----------
Total $ 419,744 $ 385,493 $ 420,205
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
7
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
BALANCE SHEET INFORMATION (Continued)
<TABLE>
<CAPTION>
March 31 March 31 December 31
(thousands) 1999 1998 1998
---------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
Other Assets
Intangible assets, net $ 262,824 $ 221,191 $ 236,659
Investments in securities 5,000
Deferred income taxes 28,273 24,824 27,256
Other 28,001 28,190 29,715
---------- ---------- ----------
Total $ 319,098 $ 279,205 $ 293,630
---------- ---------- ----------
---------- ---------- ----------
Short-Term Debt
Notes payable $ 62,842 $ 41,822 $ 52,441
Long-term debt, current
maturities 15,497 15,823 15,550
---------- ---------- ----------
Total $ 78,339 $ 57,645 $ 67,991
---------- ---------- ----------
---------- ---------- ----------
Shareholders' Equity
Common stock $ 145,046 $ 143,030 $ 144,706
Additional paid-in capital 200,973 150,817 198,212
Retained earnings 658,617 513,319 637,147
Deferred compensation (9,791) (8,198) (10,998)
Accumulated other comprehensive
income: translation (47,537) (37,491) (29,880)
Treasury stock (258,455) (216,077) (248,646)
---------- ---------- ----------
Total $ 688,853 $ 545,400 $ 690,541
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Interest expense was $6,211,000 and $6,414,000 for the first quarter ended March
31, 1999 and 1998, respectively, and $25,012,000 for the year ended December 31,
1998.
Other noncurrent liabilities included income taxes payable of $29 million at
March 31, 1999, $30 million at December 31, 1998, and $82 million at March 31,
1998.
8
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
COMPREHENSIVE INCOME
Comprehensive income for the Company includes net income and foreign currency
translation which is charged or credited to shareholders' equity.
Comprehensive income for the quarters ended March 31, 1999 and 1998 and the
year ended December 31, 1998 was as follows:
<TABLE>
<CAPTION>
First Quarter Ended Year Ended
March 31 December 31
(thousands) 1999 1998 1998
---------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
Net income $ 35,038 $ 30,588 $ 192,506
Foreign currency translation (17,657) (8,548) (937)
---------- ---------- ----------
Comprehensive income $ 17,381 $ 22,040 $ 191,569
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
BUSINESS ACQUISITIONS
In December 1998, the Company acquired selected assets of Brent Chemical
Technologies (Brent) of Johannesburg, South Africa. Brent is a leading
manufacturer and marketer of cleaning and sanitizing products and services to
the food and beverage markets in South Africa. Annual sales of Brent were
approximately $5 million.
In February 1999, the Company purchased substantially all of the assets of Blue
Coral Systems, a subsidiary of the Pennzoil-Quaker State Company. Blue Coral
Systems is a leading marketer of a broad line of branded vehicle cleaning,
appearance and specialty products to the commercial vehicle wash industry, with
annual sales of approximately $30 million. Pennzoil-Quaker State Company
retained all consumer applications for Blue Coral products and provided the
Company with exclusive rights to the United States and Canadian commercial
markets.
These acquisitions have been accounted for as purchases and, accordingly, the
results of their operations have been included in the financial statements of
the company from the dates of acquisition. The financial results of these
businesses were not significant to the Company's consolidated results of
operations, financial position and cash flows.
9
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCOME PER COMMON SHARE
The computations of the basic and diluted per share amounts for the Company's
continuing operations were as follows:
<TABLE>
<CAPTION>
First Quarter Ended Year Ended
March 31 December 31
(thousands, except per share) 1999 1998 1998
-------- -------- ----------
(unaudited)
<S> <C> <C> <C>
Income from continuing operations $ 35,038 $ 30,588 $154,506
-------- -------- ----------
-------- -------- ----------
Weighted-average common shares
outstanding
Basic (actual shares outstanding) 129,539 128,958 129,157
Effect of dilutive stock options 5,087 4,976 4,890
-------- -------- ----------
Diluted 134,626 133,934 134,047
-------- -------- ----------
-------- -------- ----------
Income from continuing operations
per common share
Basic $ 0.27 $ 0.24 $ 1.20
Diluted $ 0.26 $ 0.23 $ 1.15
</TABLE>
Stock options granted in the first quarter of 1998 for approximately 2.2 million
shares were not dilutive and, therefore, were not included in the computation of
diluted income per common share amounts.
OPERATING SEGMENTS
The Company's operating segments have generally similar products and services
and the Company is organized to manage its operations geographically. The
Company's operating segments have been aggregated into three reportable
segments.
The "United States Cleaning & Sanitizing" segment provides cleaning and
sanitizing products and services to United States markets through its
Institutional, Kay, Textile Care, Professional Products, Water Care, Vehicle
Care and Food & Beverage operations.
The "United States Other Services" segment includes all other U.S. operations of
the Company. This segment provides pest elimination and commercial dishwashing
and equipment services through its Pest Elimination, GCS Service and Jackson
operations.
The Company's "International Cleaning & Sanitizing" segment provides cleaning
and sanitizing product and service offerings to international markets in Asia
Pacific, Latin America, Africa and Canada, and also includes the Company's
Export operations.
10
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
OPERATING SEGMENTS (CONTINUED)
The Company evaluates the performance of its international operations based on
fixed management currency exchange rates. All other accounting policies of the
reportable segments are consistent with generally accepted accounting principles
and the accounting policies of the Company. The profitability of the Company's
operating segments is evaluated by management based on operating income.
Intersegment sales and transfers were not significant.
<TABLE>
<CAPTION>
First Quarter Ended Year Ended
March 31 December 31
(thousands) 1999 1998 1998
-------- -------- ------------
(unaudited)
<S> <C> <C> <C>
Net Sales
United States
Cleaning & Sanitizing $336,822 $303,435 $1,296,797
Other Services 47,328 29,179 160,063
-------- -------- ------------
Total 384,150 332,614 1,456,860
International Cleaning
& Sanitizing 102,759 97,936 419,898
Effect of Foreign
Currency Translation 2,395 5,812 11,468
-------- -------- ------------
Consolidated $489,304 $436,362 $1,888,226
-------- -------- ------------
-------- -------- ------------
Operating Income
United States
Cleaning & Sanitizing $ 50,863 $ 44,606 $ 218,500
Other Services 4,551 2,930 19,084
-------- -------- ------------
Total 55,414 47,536 237,584
International Cleaning
& Sanitizing 7,618 6,198 27,478
Corporate (1,099) (910) (4,347)
Effect of Foreign
Currency Translation 330 896 1,265
-------- -------- ------------
Consolidated $ 62,263 $ 53,720 $ 261,980
-------- -------- ------------
-------- -------- ------------
</TABLE>
The International Cleaning & Sanitizing amounts included above are based on
translation into U.S. dollars at the fixed currency exchange rate used by
management for 1999.
11
<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 Henkel-Ecolab for the quarters ended March
31, 1999 and 1998 and for the year ended December 31, 1998 were:
<TABLE>
<CAPTION>
First Quarter Ended Year Ended
March 31 December 31
(thousands) 1999 1998 1998
--------- -------- ------------
(unaudited)
<S> <C> <C> <C>
Joint venture
Net sales $223,185 $199,910 $904,217
Gross profit 124,673 112,421 500,107
Income before income taxes 11,941 12,078 65,946
Net income $ 6,913 $ 6,774 $ 38,540
Ecolab equity in earnings
Ecolab equity in
net income $ 3,457 $ 3,387 $ 19,270
Ecolab royalty
income from joint venture,
net of income taxes 706 1,084 4,550
Amortization expense
for the excess of cost
over the underlying net
assets of the joint venture (2,016) (1,908) (7,770)
--------- -------- ------------
Equity in earnings of
Henkel-Ecolab joint venture $ 2,147 $ 2,563 $ 16,050
--------- -------- ------------
--------- -------- ------------
</TABLE>
At March 31, 1999, the Company's investment in the Henkel-Ecolab joint venture
included approximately $133 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.
12
<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, 1999 and 1998, 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, 1998, and the
related consolidated statements of income, comprehensive income and
shareholders' equity and cash flows for the year then ended (not presented
herein); and in our report dated February 22, 1999, 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, 1998, 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
April 22, 1999
13
<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. We refer
readers to the Company's statement entitled "Forward-Looking Statements and Risk
Factors" beginning on page 21 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 - FIRST QUARTER ENDED MARCH 31, 1999
Consolidated net sales for the first quarter ended March 31, 1999 were $489
million, an increase of 12 percent over net sales of $436 million in the first
quarter of last year. Businesses acquired in the first quarter of 1999 and the
annualized effect of businesses acquired in 1998 accounted for approximately
one-third of the growth in consolidated net sales. Changes in currency
translation had a negative effect on sales and decreased the consolidated growth
rate by one percentage point. The growth in sales also reflected benefits from
new products, competitive gains, investments in the growth and training of the
sales-and-service force, and a continuation of generally good conditions in the
hospitality and lodging industries in the United States.
For the first quarter of 1999, the gross profit margin was 55.0 percent of net
sales, a slight decrease from the gross profit margin of 55.1 percent of net
sales in the first quarter of last year. The decrease in gross profit margin
reflected the lower gross profit margins of businesses acquired, partially
offset by the affects of sales of new products and good sales volume growth,
particularly in the Company's U.S. core operations. Selling price increases
during the first quarter of 1999 were not significant.
Selling, general and administrative expenses were 42.2 percent of consolidated
net sales for the first quarter of 1999, a decrease from 42.8 percent of net
sales in the comparable quarter of last year. This improvement in the selling,
general and administrative expense margin reflected the benefits of tight cost
controls, synergies from the integration of businesses acquired and strong sales
growth. These benefits were partially offset by investments in the growth and
training of the sales-and-service force. The Company expects to continue
investing in its sales-and-service force, including investments in training and
productivity.
14
<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, 1999 totaled $35 million, an
increase of 15 percent over net income of $31 million in the first quarter of
1998. On a per share basis, diluted net income per common share was $0.26 for
the first quarter of 1999 and increased 13 percent over diluted net income of
$0.23 per share in the first quarter of last year. These earnings improvements
reflected strong double-digit growth in operating income, which was partially
offset by lower equity in earnings of the Henkel-Ecolab joint venture and
increases in interest and income tax expenses.
During the fourth quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 131. Pursuant to the new standard, the Company's
operating segments were aggregated into three reportable segments: United States
Cleaning & Sanitizing operations, United States Other Services, and
International Cleaning & Sanitizing operations. The Company evaluates the
performance of its International operations based on fixed management rates of
currency exchange. Therefore, the International financial information included
in this financial discussion is based on translation into U.S. dollars at the
fixed currency exchange rates used by management for 1999. Operating segment
information for the first quarter of 1998 has been restated to conform to the
1999 presentation.
Sales of the Company's United States Cleaning & Sanitizing operations were $337
million, an increase of 11 percent compared with sales of $303 million in the
first quarter of last year. Sales benefited from business acquisitions and
double-digit growth in Institutional, Food & Beverage and Kay operations.
Business acquisitions accounted for approximately 20 percent of the growth in
U.S. Cleaning & Sanitizing sales. Growth also reflected benefits from sales of
new products, competitive gains, investments in the sales-and-service force and
generally good conditions in the hospitality and lodging industries. Selling
price increases during the first quarter of 1999 were not significant. Sales of
the Company's Institutional operations increased 12 percent for the first
quarter of 1999. Institutional's results included strong double-digit growth in
its specialty, housekeeping and Ecotemp programs and good growth in its core
warewashing business. Kay's U.S. operations reported sales growth of 11 percent
with continued double-digit growth in its food retail services business and good
results in sales to its core quickservice customers. Textile Care sales
decreased 1 percent for the first quarter of 1999. Textile Care continues to
experience pressures from consolidations in the commercial laundry market and a
difficult pricing environment. The Company expects the U.S. Textile Care
business to continue to experience challenging market conditions over the near
term. Sales of Professional Products operations were down 3 percent reflecting
lower specialty product sales and slow growth in distributor sales and sales to
government and education markets. Water Care sales increased 10 percent for the
first quarter with good growth in sales to the food and beverage, hospitality
and commercial laundry markets. The Company's Food & Beverage
15
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
operations reported sales growth of 13 percent. Excluding the effects of
businesses acquired in 1998, Food & Beverage sales growth was 10 percent for the
first quarter of 1999 with good growth in sales of all of its business units. In
February 1999, the Company acquired Blue Coral Systems, a leading manufacturer
of branded vehicle cleaning, appearance and specialty products to the commercial
vehicle wash industry. Blue Coral Systems was combined with the Company's
existing vehicle care operations.
For the first quarter ended March 31, 1999, sales of the Company's United States
Other Services operations increased 62 percent to $47 million. Excluding the
sales of GCS Service, Inc. (GCS) which was acquired in mid-1998, sales of U.S.
Other Services increased 15 percent. Pest Elimination sales increased 15 percent
for the first quarter with strong sales across all of its business lines. Sales
of the Jackson equipment business also increased 15 percent for the first
quarter of 1999.
Management rate sales for the Company's International Cleaning & Sanitizing
operations were $103 million for the first quarter of 1999, an increase of 5
percent over sales of $98 million in the comparable quarter of last year. The
benefits of business acquisitions were offset by the effects of a Gibson
business which was sold in 1998. Sales in the Asia Pacific region increased 6
percent for the first quarter and reflected modest growth in Japan and New
Zealand, and good growth in Australia. Latin America sales also rose 6 percent
for the quarter. Sales in the region included significant double-digit growth in
Mexico which more than offset lower sales in Brazil. Sales in Canada increased 5
percent with good growth in sales to both the food and beverage and
institutional markets. Africa/Export operations sales increased 8 percent for
the first quarter, excluding the effects of business acquisitions.
Operating income of the Company's United States Cleaning & Sanitizing operations
was $51 million for the first quarter of 1999, an increase of 14 percent over
operating income of $45 million in the first quarter of last year. The operating
income margin for the U.S. Cleaning & Sanitizing operations increased to 15.1
percent of net sales from 14.7 percent of net sales in the first quarter of
1998. The higher operating income margin reflected a strong performance in the
core Institutional and Food and Beverage operations, sales of new products and
the benefits of tight cost controls. These benefits more than offset investments
which were made in the sales-and-service force.
First quarter 1999 operating income of United States Other Services rose 55
percent to $5 million. Excluding the GCS operations, which were acquired in
mid-1998, operating income increased 34 percent and reflected a strong
performance by Pest Elimination. The operating income margin for U.S. Other
Services decreased to 9.6 percent of net sales from 10.0 percent of net sales in
the first quarter of last year, principally due to the addition of GCS.
16
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Operating income of International Cleaning & Sanitizing operations was $8
million for the first quarter, an increase of 23 percent over first quarter 1998
operating income of $6 million. The operating income margin improved to 7.4
percent of net sales in the first quarter of 1999 from 6.3 percent in the
comparable period of last year. Significant operating income growth in the Asia
Pacific region more than offset lower operating income in Latin America, Canada
and in Africa/Export operations. The Company continues to be cautious about
near-term growth in Asia Pacific due to the lingering uncertain economic
conditions in the region. The recent currency devaluation in Brazil is also
expected to slow growth in Latin America during 1999.
The Company's equity in earnings of Henkel-Ecolab were $2.1 million for the
first quarter ended March 31, 1999, and decreased 16 percent from $2.6 million
of equity in earnings in the first quarter of last year. This decrease reflected
only modest improvement in Henkel-Ecolab sales and higher costs related to
investments in the sales-and-service force, expenditures for information systems
for the year 2000 conversion and Euro conversion costs. Henkel-Ecolab sales,
although not consolidated, increased 5 percent when measured in Deutsche marks.
Excluding the effects of business acquisitions, sales were up 3 percent and
reflected a general slow down in most markets throughout Europe during the first
quarter. When measured in U.S. dollars, Henkel-Ecolab's sales increased 12
percent for the first quarter of 1999.
Corporate operating expense was $1 million for the first quarter of 1999 and
represented overhead costs directly related to the Henkel-Ecolab joint venture.
Net interest expense totaled $5.8 million for the first quarter, an increase of
6 percent over net interest expense of $5.4 million in the first quarter of
1998. This increase was primarily due to higher debt levels related to business
acquisitions.
The provision for income taxes for the first quarter of 1999 reflected an
estimated annual effective income tax rate of 41.8 percent, down slightly from
the first quarter of 1998 estimated annual effective rate of 42.0 percent. This
decrease was principally due to lower anticipated overall effective rates on
earnings of international operations for 1999.
YEAR 2000 CONVERSION
The Company has completed its inventory, assessment, renovation and testing of
Year 2000 compliance for its critical operating and application systems located
at its St. Paul-based headquarters. These include customer-oriented systems such
as sales and order processing, billing and collections and associated
infrastructure. As a part of this process, the Company remediated or replaced
portions of the software and
17
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
hardware. Some work remains for systems which are not judged mission critical
(e.g., internal reporting systems). The Company's plan is to complete and test
these remaining non-mission critical systems by the end of September 1999.
Each business unit not on the St. Paul system has completed the inventory and
assessment stages of a Year 2000 compliance plan for its critical operating and
application systems. At units considered most significant to the Company's
overall operations, full renovation, implementation and testing is complete. At
remaining units, the activities are on a schedule for completion later in the
year. A special Management Year 2000 team oversees this process to ensure that
compliance efforts for these units and subsidiaries are consistent with
corporate-wide standards.
The Company has completed an assessment of its dispensing and cleaning systems
which are at customer locations, for date/time sensitivity. Tests conducted on
the dispensing equipment found no date/time issues that would cause disruption
in the dispensing of cleaning solutions at customer sites. However, a very small
portion of the equipment exhibited time/date sensitivity in the area of
consumption and usage reporting. The Company has identified or designed
alternatives which it believes will resolve these issues and has begun to modify
or retrofit the affected units with the intention of completion by the end of
July 1999.
The Company has analyzed its manufacturing and building maintenance operations
for date/time sensitivity relative to Year 2000. The Company is modifying its
processes or retrofitting equipment to become Year 2000 compliant and intends to
complete the process by July 1999.
The Company believes that it will have its own internal systems, ready in all
material respects, for the Year 2000 conversion, although it anticipates there
will be certain transitional issues which should not be mission-critical. This
judgment is subject to certain contingencies and uncertainties which are noted
below. The cost of bringing its own operations into Year 2000 compliance is not
expected to be material to the Company's results of operations, financial
position or liquidity.
Year 2000 failures at key suppliers and vendors could cause supply
interruptions. Therefore, the Company has contacted key suppliers and vendors in
order to determine the status of their Year 2000 remediation plans. In the
Company's experience, its key suppliers and vendors are aware of the Year 2000
issue and represent that they have plans for being compliant on a timely basis.
The Company intends to continue to monitor progress and may take further actions
to verify the accuracy of vendor and supplier representations. The Company
believes it has alternative sources of supply in the event of temporary
dislocations.
18
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company is dependent upon its customers for sales and cash flow. Customers'
Year 2000 failures could result in reduced sales, increased inventory or
receivable levels and cash flow reductions. While these events are possible, the
Company's customer base is wide and diverse and the Company does not, at this
point, believe that customers' Year 2000 failures will have a material effect on
the Company. The Company will continue to monitor this issue and will consider
further actions as may be warranted in the circumstances.
In addition to completing its own remediation plan and assessing the status of
key suppliers and customers as described above, the Company has begun the
process of developing Year 2000 contingency plans. This will include (i)
ensuring that adequate support and field service staff are available and
properly positioned to deal with any internal system issues or customer-related
problems during the critical January 1, 2000 period; (ii) the creation of
liaison plans with key customers; (iii) development of more detailed plans
concerning alternate supply sources and (iv) inventory policy, i.e., determining
the need for the Company to have on hand extra inventory and to work with
customers regarding any requirements on their part to maintain extra inventory.
The Henkel-Ecolab joint venture is conducting its own Year 2000 compliance
program.
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 Year 2000 compliance. However, there can be no assurance that the process
can be completed on the timetable described above, that it will be 100 percent
effective in identifying all Year 2000 issues, or that the remediation processes
for its own operations will be completely effective. The issues related to
vendors or suppliers create additional uncertainties because their Year 2000
compliance programs are not within the Company's direct control.
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. Litigation
could also ensue. The effect on the Company's results of operations, financial
position, or liquidity could be materially adverse. Additional information
pertinent to assessing Year 2000 risk is found under the Company's statement
entitled "Forward-Looking Statements and Risk Factors" which is contained at the
end of this Management Discussion and Analysis of Financial Condition and
Operations.
19
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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
established fixed conversion rates between their existing currencies and a new
currency, the Euro. During a transition period from January 1, 1999 through
January 1, 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. These issues are being addressed by the management of the
Henkel-Ecolab joint venture.
While the Company will continue to evaluate the impact of the Euro introduction
over time, based on currently available information and the nature of the
Company's exposures, the Company does not, at this time, believe that the
transition to the Euro will have a material adverse impact on the Company's
results of operations, financial position, or liquidity.
FINANCIAL POSITION AND LIQUIDITY
Total assets were $1.5 billion at March 31, 1999, an increase of 3 percent over
total assets at year-end 1998 and up 9 percent over total assets as of the end
of the first quarter of last year. Accounts receivable at March 31, 1999
reflected exceptionally strong sales during the month of March 1999. The
increases in March 31, 1999 other assets over prior periods was principally due
to business acquisitions.
Total debt was $326 million at March 31, 1999, up slightly from total debt of
$295 million at year-end 1998 and $306 million at March 31, 1998. These
increases in total debt were principally due to business acquisitions. The ratio
of total debt to capitalization was 32 percent at March 31, 1999, compared with
30 percent at year-end 1998 and 36 percent at the end of the first quarter of
1998. The improvement in the total debt to capitalization ratio from March 31,
1998 was principally due to increased shareholders' equity which resulted from
strong earnings performance and the 1998 gain from discontinued operations.
Other noncurrent liabilities decreased to $66 million at March 31, 1999 from $68
million at year-end 1998, and $120 million at March 31, 1998. During the third
quarter of 1998, the Company resolved a tax issue related to the disposal of a
business in 1992. As a result, the Company reduced its noncurrent liabilities
through the payment of income taxes of approximately $39 million and the
recognition of a gain from discontinued operations of $38 million.
20
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Cash provided by operating activities totaled $45 million, an increase of 14
percent over $40 million in the first quarter of last year. Operating cash flows
for 1999 reflected strong earnings performance and the additional cash flows
from businesses acquired.
The Company reacquired 253,000 shares of its common stock during the first
quarter of 1999 under its two authorized share repurchase programs. The Company
maintains a share repurchase program which is intended to offset the dilutive
effect of shares issued for employee benefit plans. The Company also reacquires
shares for general corporate purposes under a separate program established in
1995. At March 31, 1999, there were approximately 3.5 million shares remaining
to be purchased under this program. The Company anticipates that it will
continue to periodically reacquire shares under its share repurchase programs.
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 and international currency and economic conditions,
investments in the sales-and-service force, Year 2000 issues, Euro conversion,
continuation of share repurchases, 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 undo reliance should not be
placed on such forward-looking statements which speak only as of the date made.
In order to comply with the terms of the safe harbor, the Company hereby
identifies important factors which could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from the anticipated results or other expectations expressed
in the forward-looking statements. These factors should be considered, together
with any similar risk factors or other cautionary language, which may be made in
the section of this report containing the forward-looking statement.
Risks and uncertainties that may affect operating results and business
performance include: 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
21
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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 17); 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
manufacturer, 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 manmade disasters and (iii) severe weather
conditions affecting the food service and the 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 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 17 hereof) which it believes will be sufficient
to evaluate and manage risk associated with Year 2000 issues. 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, in particular, uncertainties surrounding the ability of suppliers, vendors
and customers to resolve their Year 2000 issues since their Year 2000 conversion
processes are not within the Company's control. The ability of governmental
agencies to resolve Year 2000 issues is an additional risk and uncertainty.
22
<PAGE>
PART II. OTHER INFORMATION
Item 5(d) RECENT SALES OF UNREGISTERED SECURITIES
On January 9, 1999, the Company sold 5,000 shares of Common Stock to
Mr. Oscar Robertson pursuant to the exercise of a Non-Statutory Stock
Option granted to Mr. Robertson on February 24, 1996 while he was the
president of a private corporation in which the Company had an equity
interest. The aggregate purchase price paid to the Company by Mr.
Robertson was $78,437.50. The transaction was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933.
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 March 25, 1999, a Current Report on Form 8-K
to amend the Company's Form S-8 registration statements filed
pursuant to the Securities Act of 1933 in order to obtain the
benefits provided by Section 11(b)(3)(C) of the Securities Act of
1933.
23
<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: May 12, 1999 By:/s/Michael E. Shannon
--------------------------
Michael E. Shannon
Chairman of the Board, Chief
Financial and Administrative
Officer (duly authorized
officer and Principal
Financial Officer)
24
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT METHOD OF FILING
----------- -------- ----------------
<C> <S> <C>
(15) Letter regarding unaudited interim Filed herewith
financial information electronically
(27) Financial Data Schedule Filed herewith
electronically
</TABLE>
25
<PAGE>
Exhibit (15)
May 12, 1999
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; 333-70835;
33-60266; 33-65364; 33-59431; 333-18617; 333-21167; 333-35519; 333-40239;
333-50969; and 333-62183) and the Registration Statement on Form S-3 of
Ecolab Inc. (Registration No. 333-14771).
Commissioners:
We are aware that our report dated April 22, 1999 on our review of interim
financial information of Ecolab Inc. for the periods ended March 31, 1999 and
1998 and included in the Company's quarterly report on Form 10-Q for the
quarter ended March 31, 1999 is incorporated by reference in Ecolab Inc.'s
Registration Statements listed above.
Yours very truly,
/s/PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF MAR-31-1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 25,418
<SECURITIES> 0
<RECEIVABLES> 295,398
<ALLOWANCES> 13,420
<INVENTORY> 165,453
<CURRENT-ASSETS> 537,965
<PP&E> 885,334
<DEPRECIATION> 465,590
<TOTAL-ASSETS> 1,518,957
<CURRENT-LIABILITIES> 421,550
<BONDS> 247,838
0
0
<COMMON> 145,046
<OTHER-SE> 543,807
<TOTAL-LIABILITY-AND-EQUITY> 1,518,957
<SALES> 489,304
<TOTAL-REVENUES> 489,304
<CGS> 220,425
<TOTAL-COSTS> 220,425
<OTHER-EXPENSES> 206,616
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 6,211
<INCOME-PRETAX> 56,513
<INCOME-TAX> 23,622
<INCOME-CONTINUING> 35,038
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,038
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.26
<FN>
<F1>THE AMOUNT OF "LOSS PROVISION" IS NOT SIGNIFICANT AND HAS BEEN INCLUDED IN
"OTHER EXPENSES."
</FN>
</TABLE>
