<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 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.)
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 July 31, 1999.
129,470,123 shares of common stock, par value $1.00 per share.
1
<PAGE>
PART I - FINANCIAL INFORMATION
ECOLAB INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Second Quarter Ended
June 30
(thousands, except per share) 1999 1998
-------- --------
(unaudited)
<S> <C> <C>
Net Sales $520,416 $468,460
Cost of Sales 234,725 210,116
Selling, General
and Administrative Expenses 213,949 194,604
-------- --------
Operating Income 71,742 63,740
Interest Expense, Net 6,209 5,400
-------- --------
Income Before Income Taxes and Equity
in Earnings of Henkel-Ecolab Joint Venture 65,533 58,340
Provision for Income Taxes 26,905 24,475
Equity in Earnings of
Henkel-Ecolab Joint Venture 4,756 3,824
-------- --------
Net Income $ 43,384 $ 37,689
-------- --------
-------- --------
Net Income Per Common Share
Basic $ 0.33 $ 0.29
Diluted $ 0.32 $ 0.28
Dividends Per Common Share $ 0.105 $ 0.095
Weighted-Average Common Shares
Outstanding
Basic 129,596 128,667
Diluted 134,666 133,803
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
ECOLAB INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30 December 31
(thousands, except per share) 1999 1998 1998
---------- -------- ----------
(unaudited)
<S> <C> <C>
Net Sales $1,009,720 $904,822 $1,888,226
Cost of Sales 455,150 406,025 851,173
Selling, General
and Administrative Expenses 420,565 381,337 775,073
---------- -------- ----------
Operating Income 134,005 117,460 261,980
Interest Expense, Net 11,959 10,806 21,742
---------- -------- ----------
Income From Continuing Operations
Before Income Taxes and Equity
in Earnings of Henkel-Ecolab
Joint Venture 122,046 106,654 240,238
Provision for Income Taxes 50,527 44,764 101,782
Equity in Earnings of
Henkel-Ecolab Joint Venture 6,903 6,387 16,050
---------- -------- ----------
Income From Continuing Operations 78,422 68,277 154,506
Gain From Discontinued Operations 38,000
---------- -------- ----------
Net Income $ 78,422 $ 68,277 $ 192,506
---------- -------- ----------
---------- -------- ----------
Basic Income Per Common Share
Income From Continuing Operations $ 0.61 $ 0.53 $ 1.20
Gain From Discontinued Operations 0.29
Net Income $ 0.61 $ 0.53 $ 1.49
Diluted Income Per Common Share
Income From Continuing Operations $ 0.58 $ 0.51 $ 1.15
Gain From Discontinued Operations 0.28
Net Income $ 0.58 $ 0.51 $ 1.44
Dividends Per Common Share $ 0.21 $ 0.19 $ 0.39
Weighted-Average Common Shares
Outstanding
Basic 129,567 128,813 129,157
Diluted 134,653 133,871 134,047
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
ECOLAB INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30 June 30 December 31
(thousands) 1999 1998 1998
---------- ---------- ----------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 29,915 $ 27,242 $ 28,425
Accounts receivable, net 300,717 247,783 246,695
Inventories 170,983 153,275 165,627
Deferred income taxes 35,710 35,175 36,256
Other current assets 17,474 35,794 26,511
---------- ---------- ----------
Current Assets 554,799 499,269 503,514
Property, Plant and
Equipment, Net 431,532 396,458 420,205
Investment in Henkel-Ecolab
Joint Venture 218,984 233,903 253,646
Other Assets 329,406 269,181 293,630
---------- ---------- ----------
Total Assets $1,534,721 $1,398,811 $1,470,995
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
(Continued)
4
<PAGE>
ECOLAB INC.
CONSOLIDATED BALANCE SHEET (Continued)
<TABLE>
<CAPTION>
June 30 June 30 December 31
(thousands, except per share) 1999 1998 1998
---------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt $ 91,669 $ 88,789 $ 67,991
Accounts payable 128,689 116,684 124,646
Compensation and benefits 69,757 66,478 79,431
Income taxes 8,973 244
Other current liabilities 136,758 131,836 127,479
---------- ---------- ----------
Current Liabilities 426,873 412,760 399,791
Long-Term Debt 237,573 240,382 227,041
Postretirement Health Care
and Pension Benefits 100,848 88,856 85,793
Other Liabilities 60,751 89,705 67,829
Shareholders' Equity (common stock,
par value $1.00 per share;
shares outstanding:
June 30, 1999 - 129,522;
June 30, 1998 - 128,650;
December 31, 1998 - 129,479) 708,676 567,108 690,541
---------- ---------- ----------
Total Liabilities and
Shareholders' Equity $1,534,721 $1,398,811 $1,470,995
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
ECOLAB INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30 December 31
(thousands) 1999 1998 1998
--------- -------- -----------
(unaudited)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 78,422 $ 68,277 $192,506
Less: gain from
discontinued operations 38,000
-------- -------- --------
Income from continuing operations 78,422 68,277 154,506
Adjustments to reconcile income
from continuing operations
to cash provided by continuing
operations:
Depreciation 53,574 47,575 99,276
Amortization 12,016 10,965 22,695
Deferred income taxes (732) (318) (2,012)
Equity in earnings of
Henkel-Ecolab joint venture (6,903) (6,387) (16,050)
Joint venture royalties
and dividends 19,135 7,241 10,451
Other, net (60) 766 1,526
Changes in operating assets
and liabilities:
Accounts receivable (47,074) (3,670) 1,352
Inventories (4,834) (607) (11,667)
Other assets (12,534) (4,304) (7,631)
Accounts payable 2,250 (14,016) (7,794)
Other liabilities 8,516 (4,659) 29,877
-------- -------- --------
Cash provided by continuing
operations 101,776 100,863 274,529
Cash used for discontinued
operations (30,200) (38,887)
-------- -------- --------
Cash provided by operating
activities $101,776 $ 70,663 $235,642
-------- -------- --------
-------- -------- --------
</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>
Six Months Ended Year Ended
June 30 December 31
(thousands) 1999 1998 1998
-------- ------- -----------
(unaudited)
<S> <C> <C> <C>
INVESTING ACTIVITIES
Capital expenditures $(64,043) $(68,172) $(147,631)
Property disposals 1,423 1,571 7,060
Businesses acquired (39,118) (27,766) (40,206)
Sale of Gibson businesses
and assets 8,801 14,226
Other, net (57) 4,861 4,766
-------- -------- ---------
Cash used for investing activities (92,994) (89,506) (161,785)
-------- -------- ---------
FINANCING ACTIVITIES
Notes payable 23,223 39,543 24,820
Long-term debt borrowings 58,895 16,940 117,740
Long-term debt repayments (51,153) (22,540) (151,143)
Reacquired shares (21,406) (26,281) (52,984)
Cash dividends on common stock (27,171) (24,491) (49,000)
Other, net 10,383 3,323 5,679
-------- -------- ---------
Cash used for financing activities (7,229) (13,506) (104,888)
-------- -------- ---------
Effect of exchange rate
changes on cash (63) (1,578) (1,713)
-------- -------- ---------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,490 (33,927) (32,744)
Cash and Cash Equivalents,
at beginning of period 28,425 61,169 61,169
-------- -------- ---------
Cash and Cash Equivalents,
at end of period $ 29,915 $ 27,242 $ 28,425
-------- -------- ---------
-------- -------- ---------
</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 financial statements for the second quarter and
the six months ended June 30, 1999 and 1998, reflect, in the opinion of
management, all adjustments necessary for a fair statement of the financial
position, results of operations and cash flows for the interim periods.
These adjustments consisted of normal, recurring items. The financial
results for any interim period are not necessarily indicative of results for
the full year. The consolidated balance sheet data as of December 31, 1998
and the related consolidated statements of income and cash flows 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>
June 30 June 30 December 31
(thousands) 1999 1998 1998
-------- -------- --------
(unaudited)
<S> <C> <C> <C>
Accounts Receivable, Net
Accounts receivable $313,966 $259,420 $259,588
Allowance for doubtful accounts (13,249) (11,637) (12,893)
-------- -------- --------
Total $300,717 $247,783 $246,695
-------- -------- --------
-------- -------- --------
Inventories
Finished goods $ 80,147 $ 62,793 $ 73,983
Raw materials and parts 92,897 93,287 93,862
Excess of fifo cost over lifo cost (2,061) (2,805) (2,218)
-------- -------- --------
Total $170,983 $153,275 $165,627
-------- -------- --------
-------- -------- --------
Property, Plant and Equipment, Net
Land $ 12,197 $ 11,980 $ 12,584
Buildings and leaseholds 159,164 148,478 157,302
Machinery and equipment 269,216 250,662 258,107
Merchandising equipment 463,626 405,995 435,998
Construction in progress 10,153 16,248 11,038
-------- -------- --------
914,356 833,363 875,029
Accumulated depreciation
and amortization (482,824) (436,905) (454,824)
-------- -------- --------
Total $431,532 $396,458 $420,205
-------- -------- --------
-------- -------- --------
</TABLE>
8
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
BALANCE SHEET INFORMATION (Continued)
<TABLE>
<CAPTION>
June 30 June 30 December 31
(thousands) 1999 1998 1998
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Other Assets
Intangible assets, net $261,869 $214,864 $236,659
Deferred income taxes 27,985 25,237 27,256
Other 39,552 29,080 29,715
-------- -------- --------
Total $329,406 $269,181 $293,630
-------- -------- --------
-------- -------- --------
Short-Term Debt
Notes payable $ 76,485 $ 73,014 $ 52,441
Long-term debt, current
maturities 15,184 15,775 15,550
-------- -------- --------
Total $ 91,669 $ 88,789 $ 67,991
-------- -------- --------
-------- -------- --------
Shareholders' Equity
Common stock $145,307 $143,210 $144,706
Additional paid-in capital 208,197 155,457 198,212
Retained earnings 688,386 538,796 637,147
Deferred compensation (8,638) (7,235) (10,998)
Accumulated other comprehensive
income: translation (54,159) (39,691) (29,880)
Treasury stock (270,417) (223,429) (248,646)
-------- -------- --------
Total $708,676 $567,108 $690,541
-------- -------- --------
-------- -------- --------
</TABLE>
Interest expense related to all debt was $12,923,000 and $12,581,000 for the
six months ended June 30, 1999 and 1998, respectively, and $25,012,000 for
the year ended December 31, 1998.
Other noncurrent liabilities included income taxes payable of $24 million at
June 30, 1999, $30 million at December 31, 1998, and $52 million at June 30,
1998.
9
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
COMPREHENSIVE INCOME
Comprehensive income for the Company includes net income and foreign currency
translation that is charged or credited to shareholders' equity.
Comprehensive income for the second quarter and six months ended June 30,
1999 and 1998 and the year ended December 31, 1998, was as follows:
<TABLE>
<CAPTION>
Second Quarter Six Months Year
Ended Ended Ended
June 30 June 30 December 31
(thousands) 1999 1998 1999 1998 1998
------- ------- ------- ------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net income $43,384 $37,689 $78,422 $68,277 $192,506
Change in cumulative
translation (6,622) (2,200) (24,279) (10,748) (937)
------- ------- ------- ------- --------
Comprehensive income $36,762 $35,489 $54,143 $57,529 $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 for any of the periods
presented.
10
<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>
Second Quarter Six Months Year
Ended Ended Ended
(thousands, June 30 June 30 December 31
except per share) 1999 1998 1999 1998 1998
------- ------- ------- ------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Income from
continuing operations $43,384 $37,689 $78,422 $68,277 $154,506
------- ------- ------- ------- --------
------- ------- ------- ------- --------
Weighted-average common
shares outstanding
Basic (actual
shares outstanding) 129,596 128,667 129,567 128,813 129,157
Effect of dilutive
stock options 5,070 5,136 5,086 5,058 4,890
------- ------- ------- ------- --------
Diluted 134,666 133,803 134,653 133,871 134,047
------- ------- ------- ------- --------
------- ------- ------- ------- --------
Income from continuing
operations per
common share
Basic $ 0.33 $ 0.29 $ 0.61 $ 0.53 $ 1.20
Diluted $ 0.32 $ 0.28 $ 0.58 $ 0.51 $ 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
computations of diluted income per 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.
11
<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>
Second Quarter Ended Six Months Ended Year Ended
June 30 June 30 December 31
(thousands) 1999 1998 1999 1998 1998
-------- -------- -------- ------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net Sales
United States
Cleaning & Sanitizing $358,272 $324,347 $ 695,094 $627,782 $1,296,797
Other Services 53,313 34,907 100,641 64,086 160,063
-------- -------- ---------- -------- ----------
Total 411,585 359,254 795,735 691,868 1,456,860
International Cleaning
and Sanitizing 108,279 105,137 211,038 203,073 419,898
Effect of Foreign
Currency Translation 552 4,069 2,947 9,881 11,468
-------- -------- ---------- -------- ----------
Consolidated $520,416 $468,460 $1,009,720 $904,822 $1,888,226
-------- -------- ---------- -------- ----------
-------- -------- ---------- -------- ----------
Operating Income
United States
Cleaning & Sanitizing $ 57,558 $ 52,644 $ 108,421 $ 97,250 $ 218,500
Other Services 6,149 4,725 10,700 7,655 19,084
-------- -------- ---------- -------- ----------
Total 63,707 57,369 119,121 104,905 237,584
International Cleaning
and Sanitizing 9,160 7,380 16,778 13,578 27,478
Corporate (1,234) (1,479) (2,333) (2,389) (4,347)
Effect of Foreign
Currency Translation 109 470 439 1,366 1,265
-------- -------- ---------- -------- ----------
Consolidated $ 71,742 $ 63,740 $ 134,005 $117,460 $ 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.
12
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
EQUITY IN EARNINGS OF HENKEL-ECOLAB JOINT VENTURE
Certain financial data of the Henkel-Ecolab joint venture and the components
of the Company's equity in earnings of Henkel-Ecolab for the second quarter
and six months ended June 30, 1999 and 1998 and for the year ended December
31, 1998 were:
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended Year Ended
June 30 June 30 December 31
(thousands) 1999 1998 1999 1998 1998
-------- -------- -------- ------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Henkel-Ecolab joint venture
Net sales $234,676 $223,498 $457,861 $423,408 $904,217
Gross profit 132,058 122,629 256,731 235,050 500,107
Income before
income taxes 20,950 16,208 32,891 28,286 65,946
Net income $ 12,114 $ 9,224 $ 19,027 $ 15,998 $ 38,540
Ecolab equity in earnings
Ecolab equity in
net income $ 6,057 $ 4,612 $ 9,514 $ 7,999 $ 19,270
Ecolab royalty
income from joint
venture, net of
income taxes 586 1,112 1,292 2,196 4,550
Amortization expense
for the excess of
cost over the
underlying net
assets of the joint
venture (1,887) (1,900) (3,903) (3,808) (7,770)
-------- -------- -------- -------- --------
Equity in earnings of
Henkel-Ecolab
joint venture $ 4,756 $ 3,824 $ 6,903 $ 6,387 $ 16,050
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
At June 30, 1999, the Company's investment in the Henkel-Ecolab joint venture
included approximately $125 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.
13
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors
Ecolab Inc.
We have reviewed the accompanying consolidated balance sheet of Ecolab
Inc. as of June 30, 1999 and 1998, and the related consolidated statements of
income for the three and six-month periods ended June 30, 1999 and 1998, and
the consolidated statement of cash flows for the six-month periods ended June
30, 1999 and 1998. 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 interim 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
July 22, 1999
14
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information that management
believes is useful in understanding the Company's operating results, cash
flows and financial condition. The discussion should be read in conjunction
with the consolidated financial statements and related notes included in this
Form 10-Q.
The following discussion contains various "Forward-Looking Statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. We
refer readers to the Company's statement entitled "Forward-Looking Statements
and Risk Factors" beginning on page 24 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 - SECOND QUARTER AND SIX MONTHS ENDED
JUNE 30, 1999
Consolidated net sales for the second quarter ended June 30, 1999 were $520
million, an increase of 11 percent over net sales of $468 million in the
second quarter of last year. For the first six months of 1999, net sales
increased 12 percent to just over $1 billion from $905 million in the
comparable period of 1998. Businesses acquired in 1999 and the annualized
effect of businesses acquired in 1998 accounted for approximately one-half of
the growth in consolidated net sales in both the second quarter and six-month
periods. Changes in currency translation had a negative effect on sales
growth and decreased the consolidated growth rate by approximately one
percentage point in each of the reporting periods. 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.
The gross profit margin for the second quarter of 1999 was 54.9 percent of
net sales, down slightly compared with the second quarter 1998 gross profit
margin of 55.1 percent of net sales. For the six-month periods, the gross
profit margins were also 54.9 percent in 1999 and 55.1 percent in 1998.
These modest decreases in gross profit margins reflected the lower gross
profit margins of businesses acquired, partially offset by the effects 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 six
months of 1999 were not significant.
Selling, general and administrative expenses represented 41.1 percent of net
sales in the second quarter of 1999, a decrease from 41.5 percent of net
sales in the second quarter of last year. For the six-month period, selling,
general and administrative expenses also decreased as a percentage of net
sales to 41.7 percent in 1999 from 42.1 percent in 1998. These improvements
in selling, general and administrative expenses reflected synergies from the
effects of
15
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS - SECOND QUARTER AND SIX MONTHS ENDED
JUNE 30, 1999 (continued)
businesses acquired, the benefits of tight cost controls 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.
Net income totaled $43 million for the second quarter of 1999, an increase of
15 percent over net income of $38 million in the second quarter of last year.
On a per share basis, diluted net income per share increased 14 percent to
$0.32 from $0.28 in the second quarter of 1998. For the first six months of
1999, net income was $78 million and increased 15 percent over net income of
$68 million in the comparable period of last year. Diluted net income per
share increased 14 percent to $0.58 for the six-months ended June 30, 1999
from $0.51 for the first six-months of last year. These earnings
improvements reflected double-digit growth in operating income, principally
due to the strong performances of the Company's U.S. core and Asia-Pacific
operations, and higher equity in earnings of the Henkel-Ecolab joint venture.
Earnings were negatively affected by increased interest expense compared with
the second quarter and six-month periods of last year.
During the fourth quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 131. Pursuant to this 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 second quarter and first six-months of
1998 have been restated to conform to the 1999 presentation.
Sales of the Company's United States Cleaning & Sanitizing operations totaled
$358 million for the second quarter of 1999, an increase of 10 percent over
net sales of $324 million in the second quarter of last year. United States
Cleaning & Sanitizing sales were $695 million for the first six-months of
1999, up 11 percent over net sales of $628 million in the comparable period
of last year. Sales benefited from business acquisitions and strong
performances of the core Institutional and Food & Beverage operations.
Business acquisitions accounted for approximately one-fourth of the growth in
sales during each of the reporting periods. 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
16
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS - SECOND QUARTER AND SIX MONTHS ENDED
JUNE 30, 1999 (continued)
the first six months of 1999 were not significant. Sales of the Company's
Institutional operations increased 9 percent for the second quarter and 10
percent for the first six months of 1999. Institutional's Ecotemp, specialty
and housekeeping programs continued to grow at double-digit rates, supported
by solid growth in the core warewashing business. Kay's U.S. operations
reported growth of 7 percent for the second quarter and 9 percent for the
six-month period reflecting double-digit growth in its food retail services
business and good results in sales to its core quickservice customers.
Textile Care sales increased 6 percent for the second quarter and 2 percent
for the first six months of 1999. Although Textile Care's sales benefited
from new customer business, the business continues to experience pressures
from consolidation 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 the
Company's Professional Products operations decreased during each of the
reporting periods; 6 percent for the second quarter of 1999 and 4 percent for
the six-month period. These sales declines reflected poor distributor sales
and sales to the government and education markets, partially offset by growth
in sales to corporate accounts. Water Care sales increased 2 percent for the
second quarter and 6 percent for the six-month period and reflected good new
customer business. The Company's Food & Beverage operations reported sales
growth of 12 percent for both the second quarter and six-month periods.
Excluding the effects of businesses acquired in 1998, Food & Beverage sales
growth was 8 percent for the second quarter and 9 percent for the first
six-months of 1999 with good growth in sales to 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.
Sales of the Company's United States Other Services operations totaled $53
million in the second quarter and $101 million in the first six-months of
1999. Excluding the sales of GCS Service, Inc. (GCS) which was acquired in
mid-1998, sales of U.S. Other Services increased 12 percent for the second
quarter of 1999 and 14 percent for the six-month period. Pest Elimination
reported sales growth of 13 percent for the second quarter and 14 percent for
the six-months with significant new customer business and a broader line of
service offerings. Sales of the Jackson equipment business increased 10
percent for the second quarter and 12 percent for the first six-months of
1999.
17
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS - SECOND QUARTER AND SIX MONTHS ENDED
JUNE 30, 1999 (continued)
Management rate sales for the Company's International Cleaning & Sanitizing
operations were $108 million for the second quarter ended June 30, 1999, an
increase of 3 percent over sales of $105 million in the second quarter of
last year. For the first six-months of 1999, sales increased 4 percent to
$211 million from $203 million during the comparable period of last year. The
benefits of business acquisitions were more than offset by the negative
effects of a Gibson business which was sold. Excluding these business
changes, International Cleaning & Sanitizing sales increased 5 percent for
each of the 1999 reporting periods. Sales in the Asia Pacific region
increased 3 percent for second quarter and 4 percent for the six-month
period, and included flat results in Japan and good growth in all other
regions. Latin America sales increased 4 percent for the second quarter and
5 percent for the first six-months of 1999. Sales in the region included
significant double-digit growth in Mexico and Central America which more than
offset lower sales in Brazil. Sales in Canada increased 7 percent for the
second quarter of 1999 and 6 percent for the six-month period with good
growth in sales to both the Food & Beverage and Institutional markets.
Excluding the effects of business acquisitions, sales of Africa/Export
operations increased by 1 percent in the second quarter and 5 percent for the
first six-months of 1999.
Operating income of the Company's United States Cleaning & Sanitizing
operations totaled $58 million for the second quarter of 1999, up 9 percent
over operating income of $53 million in the second quarter of last year. For
the first six-months of 1999, operating income was $108 million, an increase
of 11 percent over operating income of $97 million in the comparable period
of last year. Operating income reflected particularly good growth in the core
Institutional and Food & Beverage operations, which more than offset lower
operating income of Professional Products. Operating income margins declined
from 16.2 percent of net sales in the second quarter of last year to 16.1
percent in the second quarter of 1999 and increased slightly for the
six-month period from 15.5 percent of net sales in 1998 to 15.6 percent in
1999. The effects of the lower margins of businesses acquired, poor results
of Professional Products and investments in the sales-and-service force
generally offset the benefits of the strong core operations performance,
sales of new products and tight cost controls.
Second quarter 1999 operating income of United States Other Services was $6
million, an increase of 30 percent over the second quarter of last year. For
the six-month period, operating income was $11 million, up 40 percent.
Excluding GCS operations which were acquired in mid-1998, operating income of
U.S. Other Services rose over 25 percent in each of the reporting periods
reflecting double-digit performances by both the Pest Elimination and Jackson
businesses.
18
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS - SECOND QUARTER AND SIX MONTHS ENDED
JUNE 30, 1999 (continued)
Operating income margins decreased to 11.5 percent of net sales in 1999 from
13.5 percent for the second quarter of 1998 and decreased to 10.6 percent of
net sales in 1999 from 11.9 percent for the first six months of 1998. These
decreases reflected the addition of the lower margin GCS business.
Operating income of International Cleaning & Sanitizing operations totaled $9
million for the second quarter of 1999 and increased 24 percent over
operating income of $7 million in the second quarter of last year. For the
first six months of 1999, operating income was $17 million, also an increase
of 24 percent over the comparable period of last year. Operating income
margins improved to 8.5 percent of net sales in the second quarter of 1999
from 7.0 percent in 1998 and to 8.0 percent of net sales for the first six
months of 1999 from 6.7 percent during the first six-months of last year.
Significant double-digit operating income growth and good margin improvement
in Asia-Pacific and Africa/Export operations more than offset lower operating
income in Latin America. 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.
For the second quarter of 1999, the Company's equity in earnings of the
Henkel-Ecolab joint venture was $4.8 million, an increase of 24 percent over
equity earnings of $3.8 million in the second quarter of last year. For the
six-month period, the Company's equity in earnings of Henkel-Ecolab was $6.9
million, up 8 percent over equity earnings of $6.4 million last year.
Earnings of Henkel-Ecolab reflected strong sales, improved European economies
and the effects of tight cost controls which more than offset investments in
the sales-and-service force and expenses related to the year 2000 and Euro
conversions. Henkel-Ecolab sales, although not consolidated, increased 7
percent for the second quarter and 6 percent for the first six-months of 1999
on a fixed management rate basis of currency exchange.
Corporate operating expense was $1 million in the second quarter and $2
million in the first six-months of 1999 and represented overhead costs
directly related to the Henkel-Ecolab joint venture.
Net interest expense totaled $6 million in the second quarter of 1999, up 15
percent over the second quarter of last year and was $12 million for the
six-month period, an increase of 11 percent over the comparable period of
1998. These increases were primarily due to higher debt levels to finance
business acquisitions.
For the first six-months of 1999, the provision for income taxes reflected an
estimated annual effective income tax rate of 41.4 percent, down slightly
from last year's six-month estimated annual
19
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS - SECOND QUARTER AND SIX MONTHS ENDED
JUNE 30, 1999 (continued)
effective rate of 42.0 percent. The estimated annual effective income tax
rate was changed during the second quarter of 1999 and, therefore, the
effective rate for the second quarter was a lower 41.1 percent compared to
the second quarter of 1998 rate of 42.0 percent. These decreases were
principally due to lower anticipated overall effective rates on earnings of
International operations for 1999.
YEAR 2000 READINESS
The Year 2000 issue relates to problems caused by computer programs having
date-sensitive software which may recognize a date using 00 as the year 1900
rather than the year 2000. Included within the Year 2000 problem is the risk
that date-sensitive software may not recognize 2000 as a "leap year" - an
issue which would occur on February 29, 2000. The Company's Year 2000
readiness program is intended to identify, evaluate and address Company's
exposure to both of these issues.
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 the primary
systems which interface with customers 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
hardware. Some work remains for systems which are not judged mission
critical (e.g., internal 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 a
September 1999 completion. 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 active 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, designed and tested alternatives. The process of modification
and retrofitting, including testing, is substantially complete with a goal of
full renovation by the end of August 1999.
20
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
YEAR 2000 READINESS (continued)
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 is retrofitting equipment to become Year 2000
compliant. The Company is substantially complete in this process with a goal
of September 1999 completion.
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.
The Company is aware that Year 2000 failures at key suppliers and vendors
could cause supply interruptions. Therefore, the Company has contacted key
suppliers and vendors (including common carriers) 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 will 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.
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 continues 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 is developing
Year 2000 contingency plans. This includes (i) ensuring that dedicated
support and field service staff are available and properly positioned to deal
with any internal system issues or customer-related problems during the
critical Year 2000 periods (i.e., January 1 and February 29); (ii) the
creation of liaison plans with key customers; (iii) ensuring that adequate
distribution channels are available and (iv) establishing an 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.
21
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
YEAR 2000 READINESS (continued)
The Henkel-Ecolab joint venture is conducting its own Year 2000 compliance
program. The Company does receive reports on the status of this program and
believes the actions being taken by Henkel-Ecolab are appropriate to
addressing the risk.
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 timely
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. In addition, certain Year 2000 issues pose additional
uncertainties: (i) the issues related to vendors or suppliers because their
Year 2000 compliance programs are not within the Company's direct control and
(ii) the Company's operations outside of North America because they are more
decentralized and, in some cases, operate in economies that may not have the
level of awareness of the Year 2000 issue as exists in North America.
The failure to identify and remediate Year 2000 problems (including the
failure of the Henkel-Ecolab joint venture to remediate its Year 2000 issues)
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.
While the potential for very serious Year 2000 consequences cannot be
discounted, the more likely scenario, based on the Company's best current
opinion, is that there may be sporadic, isolated Year 2000 issues due to
circumstances not foreseen or completely rectified in the Year 2000
remediation process. However, in this scenario, it is expected that the
Company, overall, will be able to continue to provide its products and
services and collect and issue payments with little or no interruption.
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's Discussion and
Analysis of Financial Condition and Operations.
22
<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 approximately $1.5 billion at June 30, 1999, an increase of
4 percent over total assets at year-end 1998 and up 10 percent over total
assets as of the end of the second quarter of last year. Accounts receivable
at June 30, 1999 reflected exceptionally strong sales during the month of
June 1999. The increases in the other assets amount over prior periods was
principally due to business acquisitions.
Total debt was $329 million at June 30, 1999, up 12 percent over total debt
of $295 million at year-end 1998 and virtually unchanged from the total debt
level at June 30 of last year. The increase in total debt from year-end 1998
was principally due to financing for business acquisitions. The ratio of
total debt to capitalization was 32 percent at June 30, 1999, compared with
30 percent at year-end 1998 and 37 percent at June 30, 1998. The improvement
in the total debt to capitalization ratio from June 30 of last year 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 $61 million at June 30, 1999 from
$68 million at year-end 1998 and $90 million at June 30, 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, Company reduced its noncurrent
liabilities through the recognition of a gain from discontinued operations of
$38 million.
23
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
FINANCIAL POSITION AND LIQUIDITY (continued)
Cash provided by continuing operations totaled $102 million for the first
six-months of 1999, up slightly from $101 million during the first six-months
of last year. Increased earnings and higher dividends from the Henkel-Ecolab
joint venture were offset by an increased level of operating assets. Total
cash provided by operating activities increased to $102 million for the first
six-months of 1999 from $71 million during the first six-months of last year
due to a $30 million income tax deposit made in the second quarter of 1998
related to discontinued operations.
The Company reacquired 520,500 shares of its common stock during the first
six-months 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 June 30, 1999, there were approximately 3.4
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.
24
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FORWARD-LOOKING STATEMENTS AND RISK FACTORS (continued)
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 20); 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 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 20 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.
25
<PAGE>
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 14, 1999.
At the meeting, 89.2% of the outstanding shares of the Company's
voting stock were represented in person or by proxy. The first
proposal voted upon was the election of five Class I Directors for a
term ending at the annual meeting in 2002. The five persons nominated
by the Company's Board of Directors received the following votes and
were elected:
<TABLE>
<CAPTION>
NAME FOR WITHHELD
------------------ ----------- ----------
<S> <C> <C>
James J. Howard 115,220,652 427,845
Jerry W. Levin 115,204,121 444,376
Reuben F. Richards 104,776,852 10,871,645
Richard L. Schall 115,199,393 449,104
Roland Schulz 115,211,833 436,664
</TABLE>
In addition, the terms of office of the following directors continued
after the meeting: Class II Directors for a term ending in 2000 -
Leslie S. Biller, Ruth S. Block, Jerry A. Grundhofer, Allan L. Schuman
and Michael E. Shannon; and Class III Directors for a term ending in
2001 - William L. Jews, Joel W. Johnson, Hugo Uyterhoeven and Albrecht
Woeste.
The second proposal voted upon was to amend and restate the Company's
1997 Stock Incentive Plan (the "Plan") to increase the number of
shares authorized for issuance under the Plan and extend the Plan's
term by two years. The proposal was approved as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAINED BROKER NON-VOTES
---------- ---------- --------- ----------------
<S> <C> <C> <C>
70,559,469 25,021,633 1,224,751 18,842,644
</TABLE>
The third proposal voted upon was to adopt the Company's 1999
Management Performance Incentive Plan. The proposal was approved as
follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAINED
----------- --------- ---------
<S> <C> <C>
112,726,436 1,703,980 1,218,081
</TABLE>
The fourth proposal voted upon was the ratification of the appointment
of PricewaterhouseCoopers LLP as the Company's independent accountants
for the year ending December 31, 1999. The proposal was ratified as
follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAINED
----------- --------- ---------
<S> <C> <C>
115,294,738 87,184 266,575
</TABLE>
As to the first, third and fourth proposals, there were no broker
non-votes.
26
<PAGE>
PART II. OTHER INFORMATION (continued)
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as exhibits to this
report:
(15) Letter regarding unaudited interim financial
information.
(27) Financial Data Schedule.
(b) Reports on Form 8-K:
No reports on From 8-K were filed during the quarter ended
June 30, 1999.
27
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECOLAB INC.
Date: August 10, 1999 By: /s/ L. WHITE MATTHEWS
-----------------------------------------
L. White Matthews, III
Executive Vice President and Chief
Financial Officer
(duly authorized officer and Principal
Financial Officer)
28
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Document Method of Filing
----------- -------- ----------------
<S> <C> <C>
(15) Letter regarding unaudited interim Filed herewith
financial information electronically
(27) Financial Data Schedule Filed herewith
electronically
</TABLE>
29
<PAGE>
Exhibit (15)
August 10, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 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; 333-79449; 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 July 22, 1999 on our reviews of interim
financial information of Ecolab Inc. for the periods ended June 30, 1999 and
1998 and included in the Company's quarterly report on Form 10-Q for the
quarter ended June 30, 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 JUNE 30, 1999 AND THE RELATED STATEMENTS OF
INCOME AND CASH FLOWS FOR THE SIX MONTH PERIOD THEN ENDED AND IS QUALIFIED BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 29,915
<SECURITIES> 0
<RECEIVABLES> 313,966
<ALLOWANCES> 13,249
<INVENTORY> 170,983
<CURRENT-ASSETS> 554,799
<PP&E> 914,356
<DEPRECIATION> 482,824
<TOTAL-ASSETS> 1,534,721
<CURRENT-LIABILITIES> 426,873
<BONDS> 237,573
0
0
<COMMON> 145,307
<OTHER-SE> 563,369
<TOTAL-LIABILITY-AND-EQUITY> 1,534,721
<SALES> 1,009,720
<TOTAL-REVENUES> 1,009,720
<CGS> 455,150
<TOTAL-COSTS> 455,150
<OTHER-EXPENSES> 420,565
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 12,923
<INCOME-PRETAX> 122,046
<INCOME-TAX> 50,527
<INCOME-CONTINUING> 78,422
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 78,422
<EPS-BASIC> 0.61
<EPS-DILUTED> 0.58
<FN>
<F1>THE AMOUNT OF "LOSS PROVISION" IS NOT SIGNIFICANT AND HAS BEEN INCLUDED IN
"OTHER EXPENSES."
</FN>
</TABLE>
