<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 31, 1999.
129,580,163 shares of common stock, par value $1.00 per share.
1
<PAGE>
PART I - FINANCIAL INFORMATION
ECOLAB INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Third Quarter Ended
September 30
(thousands, except per share) 1999 1998
-------- --------
(unaudited)
<S> <C> <C>
Net Sales $554,511 $500,037
Cost of Sales 247,619 224,365
Selling, General
and Administrative Expenses 219,037 196,501
-------- --------
Operating Income 87,855 79,171
Interest Expense, Net 4,860 5,069
-------- --------
Income from Continuing Operations
Before Income Taxes and Equity in
Earnings of Henkel-Ecolab 82,995 74,102
Provision for Income Taxes 33,555 31,794
Equity in Earnings of Henkel-Ecolab
Joint Venture 5,581 4,704
-------- --------
Income from Continuing Operations 55,021 47,012
Gain from Discontinued Operations 38,000
-------- --------
Net Income $ 55,021 $ 85,012
-------- --------
-------- --------
Basic Income Per Common Share
Income from Continuing Operations $ 0.42 $ 0.36
Gain from Discontinued Operations 0.29
Net Income $ 0.42 $ 0.66
Diluted Income Per Common Share
Income from Continuing Operations $ 0.41 $ 0.35
Gain from Discontinued Operations 0.28
Net Income $ 0.41 $ 0.63
Dividends Per Common Share $ 0.105 $ 0.095
Weighted-Average Common Shares Outstanding
Basic 129,546 129,573
Diluted 134,394 134,319
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
ECOLAB INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Nine Months Ended
September 30
(thousands, except per share) 1999 1998
---------- ----------
(unaudited)
<S> <C> <C>
Net Sales $1,564,231 $1,404,859
Cost of Sales 702,769 630,390
Selling, General
and Administrative Expenses 639,602 577,838
---------- ----------
Operating Income 221,860 196,631
Interest Expense, Net 16,819 15,875
---------- ----------
Income from Continuing Operations Before
Income Taxes and Equity in Earnings
of Henkel-Ecolab 205,041 180,756
Provision for Income Taxes 84,082 76,558
Equity in Earnings of
Henkel-Ecolab Joint Venture 12,484 11,091
---------- ----------
Income from Continuing Operations 133,443 115,289
Gain from Discontinued Operations 38,000
---------- ----------
Net Income $ 133,443 $ 153,289
---------- ----------
---------- ----------
Basic Income Per Common Share
Income from Continuing Operations $ 1.03 $ 0.89
Gain from Discontinued Operations 0.29
Net Income $ 1.03 $ 1.19
Diluted Income Per Common Share
Income from Continuing Operations $ 0.99 $ 0.86
Gain from Discontinued Operations 0.28
Net Income $ 0.99 $ 1.14
Dividends Per Common Share $ 0.315 $ 0.285
Weighted-Average Common Shares Outstanding
Basic 129,560 129,066
Diluted 134,569 134,023
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
ECOLAB INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30 December 31
(thousands) 1999 1998
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 26,477 $ 28,425
Accounts receivable, net 336,400 246,695
Inventories 169,420 165,627
Deferred income taxes 35,683 36,256
Other current assets 16,543 26,511
---------- ----------
Current Assets 584,523 503,514
Property, Plant and Equipment, Net 439,822 420,205
Investment in Henkel-Ecolab Joint Venture 224,218 253,646
Other Assets 334,476 293,630
---------- ----------
Total Assets $1,583,039 $1,470,995
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
(continued)
4
<PAGE>
ECOLAB INC.
CONSOLIDATED BALANCE SHEET (continued)
<TABLE>
<CAPTION>
September 30 December 31
(thousands, except per share) 1999 1998
------------ -----------
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt $ 102,927 $ 67,991
Accounts payable 136,073 124,646
Compensation and benefits 81,929 79,431
Income taxes 6,812 244
Other current liabilities 151,952 127,479
---------- ----------
Current Liabilities 479,693 399,791
Long-Term Debt 184,327 227,041
Postretirement Health Care
and Pension Benefits 110,102 85,793
Other Liabilities 62,784 67,829
Shareholders' Equity (common stock,
par value $1.00 per share;
shares outstanding:
September 30, 1999 - 129,607;
December 31, 1998 - 129,479) 746,133 690,541
---------- ----------
Total Liabilities and
Shareholders' Equity $1,583,039 $1,470,995
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
ECOLAB INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30
(thousands) 1999 1998
---------- -----------
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 133,443 $ 153,289
Less: gain from discontinued operations 38,000
---------- -----------
Income from continuing operations 133,443 115,289
Adjustments to reconcile income from continuing operations to cash provided by
continuing operations:
Depreciation 82,090 72,848
Amortization 18,764 16,527
Deferred income taxes (972) (460)
Equity in earnings of
Henkel-Ecolab joint venture (12,484) (11,091)
Joint venture royalties and dividends 21,179 9,486
Other, net 650 1,234
Changes in operating assets and
liabilities:
Accounts receivable (83,086) (15,742)
Inventories (2,972) (7,040)
Other assets (21,428) (6,878)
Accounts payable 9,267 (13,242)
Other liabilities 54,510 38,230
---------- ----------
Cash provided by continuing operations 198,961 199,161
Cash used for discontinued operations (30,200)
---------- ----------
Cash provided by operating activities $ 198,961 $ 168,961
---------- ----------
</TABLE>
Bracketed amounts indicate a use of cash.
See notes to consolidated financial statements.
(continued)
6
<PAGE>
ECOLAB INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
(thousands) 1999 1998
----------- -----------
(unaudited)
<S> <C> <C>
INVESTING ACTIVITIES
Capital expenditures $ (102,012) $ (107,767)
Property disposals 2,836 2,458
Businesses acquired (40,144) (29,506)
Sale of Gibson businesses and assets 8,801 13,496
Other, net (72) 4,843
---------- ----------
Cash used for investing activities (130,591) (116,476)
---------- ----------
FINANCING ACTIVITIES
Notes payable 35,086 63,781
Long-term debt borrowings 62,540 73,740
Long-term debt repayments (107,014) (132,067)
Reacquired shares (31,743) (44,521)
Cash dividends on common stock (40,769) (36,702)
Other, net 11,843 7,253
---------- ----------
Cash used for financing activities (70,057) (68,516)
---------- ----------
Effect of exchange rate changes on cash (261) (2,746)
---------- ----------
DECREASE IN CASH AND CASH EQUIVALENTS (1,948) (18,777)
Cash and Cash Equivalents,
at beginning of period 28,425 61,169
---------- ----------
Cash and Cash Equivalents,
at end of period $ 26,477 $ 42,392
---------- ----------
---------- ----------
</TABLE>
Bracketed amounts indicate a use of cash.
See notes to consolidated financial statements.
7
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CONSOLIDATED FINANCIAL STATEMENTS
The unaudited consolidated financial statements for the third quarter and the
nine months ended September 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, except for the gain from
discontinued operations in 1998 discussed separately herein. 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 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 limited reviews of
the interim financial information included herein. Their report on such reviews
accompanies this filing.
2. BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
September 30 December 31
(thousands) 1999 1998
------------ -----------
(unaudited)
<S> <C> <C>
Accounts Receivable, Net
Accounts receivable $ 350,712 $ 259,588
Allowance for doubtful accounts (14,312) (12,893)
---------- ----------
Total $ 336,400 $ 246,695
========== ==========
Inventories
Finished goods $ 70,172 $ 73,983
Raw materials and parts 101,370 93,862
Excess of fifo cost over lifo cost (2,122) (2,218)
---------- ----------
Total $ 169,420 $ 165,627
========== ==========
Property, Plant and Equipment, Net
Land $ 12,311 $ 12,584
Buildings and leaseholds 160,600 157,302
Machinery and equipment 274,791 258,107
Merchandising equipment 482,124 435,998
Construction in progress 11,815 11,038
---------- ----------
941,641 875,029
Accumulated depreciation
and amortization (501,819) (454,824)
---------- ----------
Total $ 439,822 $ 420,205
---------- ----------
---------- ----------
</TABLE>
8
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. BALANCE SHEET INFORMATION (continued)
<TABLE>
<CAPTION>
September 30 December 31
(thousands) 1999 1998
------------ -----------
(unaudited)
<S> <C> <C>
Other Assets
Intangible assets, net $ 259,653 $ 236,659
Deferred income taxes 27,712 27,256
Other 47,111 29,715
---------- ----------
Total $ 334,476 $ 293,630
---------- ----------
---------- ----------
Short-Term Debt
Notes payable $ 87,795 $ 52,441
Long-term debt, current maturities 15,132 15,550
---------- ----------
Total $ 102,927 $ 67,991
---------- ----------
---------- ----------
Shareholders' Equity
Common stock $ 145,419 $ 144,706
Additional paid-in capital 218,669 198,212
Retained earnings 729,784 637,147
Deferred compensation (15,698) (10,998)
Accumulated other comprehensive
income: translation (52,898) (29,880)
Treasury stock (279,143) (248,646)
---------- ----------
Total $ 746,133 $ 690,541
---------- ----------
---------- ----------
</TABLE>
Interest expense related to all debt was $5,432,000 and $5,780,000 for the third
quarter of 1999 and 1998, respectively, and $18,355,000 and $18,361,000 for the
nine months ended September 30, 1999 and 1998, respectively.
9
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. COMPREHENSIVE INCOME
Comprehensive income for the Company includes net income and foreign currency
translation that is charged or credited to the cumulative translation account
within shareholders' equity. Comprehensive income for the third quarter and nine
months ended September 30, 1999 and 1998, was as follows:
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
September 30 September 30
(thousands) 1999 1998 1999 1998
---------- ---------- ---------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net income $ 55,021 $ 85,012 $ 133,443 $ 153,289
Change in cumulative
translation 1,261 (1,594) (23,018) (12,342)
---------- ---------- ---------- ----------
Comprehensive income $ 56,282 $ 83,418 $ 110,425 $ 140,947
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
4. 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.
10
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. 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>
Third Quarter Ended Nine Months Ended
(thousands, September 30 September 30
except per share) 1999 1998 1999 1998
---------- ---------- ---------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Income from continuing
operations $ 55,021 $ 47,012 $ 133,443 $ 115,289
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted-average common
shares outstanding
Basic (actual
shares outstanding) 129,546 129,573 129,560 129,066
Effect of dilutive
stock options 4,848 4,746 5,009 4,957
---------- ---------- ---------- ----------
Diluted 134,394 134,319 134,569 134,023
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income from continuing
operations
Basic $ 0.42 $ 0.36 $ 1.03 $ 0.89
Diluted $ 0.41 $ 0.35 $ 0.99 $ 0.86
</TABLE>
Certain 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 per share amounts for any of the periods presented.
6. 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.
11
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. OPERATING SEGMENTS (continued)
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.
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>
Third Quarter Ended Nine Months Ended
September 30 September 30
(thousands) 1999 1998 1999 1998
---------- ---------- ---------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net Sales
United States
Cleaning & Sanitizing $ 385,508 $ 343,771 $1,080,602 $ 971,553
Other Services 56,467 48,536 157,108 112,622
---------- ---------- ---------- ----------
Total 441,975 392,307 1,237,710 1,084,175
International Cleaning
& Sanitizing 111,580 108,173 322,618 311,246
Effect of Foreign
Currency Translation 956 (443) 3,903 9,438
---------- ---------- ---------- ----------
Consolidated $ 554,511 $ 500,037 $1,564,231 $1,404,859
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Operating Income
United States
Cleaning & Sanitizing $ 70,479 $ 65,128 $ 178,900 $ 162,378
Other Services 8,207 6,905 18,907 14,560
---------- ---------- ---------- ----------
Total 78,686 72,033 197,807 176,938
International Cleaning
& Sanitizing 10,078 8,375 26,856 21,953
Corporate (1,111) (1,149) (3,444) (3,538)
Effect of Foreign
Currency Translation 202 (88) 641 1,278
---------- ---------- ---------- ----------
Consolidated $ 87,855 $ 79,171 $ 221,860 $ 196,631
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The International Cleaning & Sanitizing amounts included above are based on
translation into U.S. dollars at the fixed currency exchange rates used by
management for 1999.
12
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. 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 third quarter and nine
months ended September 30, 1999 and 1998 were:
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
September 30 September 30
(thousands) 1999 1998 1999 1998
---------- ---------- ---------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Henkel-Ecolab joint venture
Net sales $ 235,242 $ 232,910 $ 693,103 $ 656,318
Gross profit 127,690 129,527 384,421 364,577
Income before
income taxes 24,582 19,750 57,473 48,036
Net income $ 13,513 $ 10,985 $ 32,540 $ 26,983
Ecolab equity in earnings
Ecolab equity in
net income $ 6,756 $ 5,493 $ 16,270 $ 13,492
Ecolab royalty
income from joint
venture, net of
income taxes 651 1,112 1,943 3,308
Amortization expense
for the excess of
cost over the
underlying net
assets of the joint
venture (1,826) (1,901) (5,729) (5,709)
---------- ---------- ---------- ----------
Equity in earnings of
Henkel-Ecolab
joint venture $ 5,581 $ 4,704 $ 12,484 $ 11,091
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
At September 30, 1999, the Company's investment in the Henkel-Ecolab joint
venture included approximately $124 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 September 30, 1999, and the related consolidated statements of income
for the three and nine-month periods ended September 30, 1999 and 1998, and the
consolidated statement of cash flows for the nine-month periods ended September
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, is fairly presented, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Saint Paul, Minnesota
October 21, 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 25 of this report. Additional risk factors may be
described from time to time in Ecolab's filings with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS - THIRD QUARTER AND NINE MONTHS ENDED
SEPTEMBER 30, 1999
Net sales for the third quarter ended September 30, 1999 were $555 million, an
increase of 11 percent over net sales of $500 million in the third quarter of
last year. For the first nine months of 1999, net sales were nearly $1.6 billion
and increased 11 percent over net sales of approximately $1.4 billion in the
comparable period of last year. Businesses acquired in 1999 and the annualized
effect of businesses acquired in 1998 accounted for approximately one-third of
the growth in consolidated net sales in both the third quarter and nine-month
periods. Changes in currency translation had a modest positive effect on the
consolidated sales growth rate for the third quarter of 1999. For the nine-month
period, changes in currency translation had a negative effect on sales growth
and decreased the consolidated growth rate by approximately one-half percentage
point. The growth in sales for each of the reporting periods also reflected
benefits from new products, new customers, sales promotion activities,
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 was 55.3 percent of net sales for the third quarter of
1999, up slightly from last year's third quarter gross profit margin of 55.1
percent. For the first nine months of 1999, the gross profit margin was 55.1
percent of net sales and was unchanged from the comparable period of last year.
The benefits from higher sales of the higher margin products of the Company's
U.S. core operations and sales volume growth of new products were generally
offset by the effects of the lower gross profit margins of businesses acquired.
For the third quarter of 1999, selling, general and administrative expenses were
39.5 percent of net sales, a slight increase compared with selling, general and
administrative expenses of 39.3 percent of net sales in the same period last
year. For the nine-month period,
15
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS - THIRD QUARTER AND NINE MONTHS ENDED
SEPTEMBER 30, 1999 (continued)
selling, general and administrative expenses were 40.9 percent of sales, down
slightly from expenses of 41.1 percent of net sales in the first nine-months of
last year. The increase in the selling, general and administrative expense
margin for the third quarter reflected the effects of higher investments in the
sales-and-service force to support growth and new business development, and
higher sales levels of the Company's U.S. core operations, partially offset by
the benefits of synergies from the effects of business acquisitions, tight cost
controls, lower investments in international areas experiencing difficult
economic conditions, strong sales growth, and a one-time gain related to the
demutualization of an insurance company. The Company expects to continue to
invest in its sales-and-service force, including investments in training and
productivity.
During the third quarter of 1999, the Company recognized a non-taxable gain of
$1.5 million, or $0.01 per share, on the receipt of shares from an insurance
company that demutualized and issued shares in a public offering. The shares
resulted from life insurance policies the Company holds on certain employees.
This one-time gain was recorded in selling, general and administrative expenses
during the quarter, and also had a favorable effect on the Company's third
quarter and nine-month effective income tax rates.
Income from continuing operations totaled $55 million, or $0.41 per diluted
share for the third quarter, an increase of 17 percent over income from
continuing operations of $47 million or $0.35 per share in the third quarter of
last year. For the first nine months of 1999, income from continuing operations
was $133 million and increased 16 percent over income from continuing operations
in the comparable period of last year. Diluted income from continuing operations
per share totaled $0.99 for the nine-month period, up 15 percent over the
comparable period of last year. Excluding the one-time gain from the
demutualization of an insurance company, diluted income from continuing
operations per share was $0.40 and $0.98 for the third quarter and first nine
months of 1999, respectively, which represented a 14 percent increase over the
comparable periods last year. These earnings improvements included strong
operating income performance, particularly from the Company's core U.S.
Institutional and Food & Beverage businesses and from Asia Pacific operations,
lower effective income tax rates, and double-digit growth in the Company's
equity in earnings of the Henkel-Ecolab joint venture. The Company expects lower
sales and income growth in United States Cleaning & Sanitizing operations for
the fourth quarter of 1999 due to the unusually strong sales levels achieved
during the third quarter. However, the Company also believes it will experience
significantly higher income growth from its International Cleaning & Sanitizing
operations during the fourth quarter.
16
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS - THIRD QUARTER AND NINE MONTHS ENDED
SEPTEMBER 30, 1999 (continued)
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 third quarter and first nine months of 1998 have been restated to conform to
the 1999 presentation.
Sales of the Company's United States Cleaning & Sanitizing operations were $386
million for the third quarter of 1999, an increase of 12 percent over net sales
of $344 million in the third quarter of last year. For the first nine months of
1999, United States Cleaning & Sanitizing sales were nearly $1.1 billion, up 11
percent over net sales of nearly $1.0 billion 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, sales promotion activities, competitive gains, a larger and
better-trained sales-and-service force and generally good conditions in the
hospitality and lodging industries. Selling price increases during the first
nine months of 1999 were not significant. Sales of the Company's U.S.
Institutional operations increased 11 percent for the third quarter and 10
percent for the first nine months of 1999 with continued double-digit growth in
its Ecotemp and specialty and housekeeping programs and solid growth across all
of its other lines of business. Kay's U.S. operations reported sales growth of
11 percent for the third quarter and 10 percent for the nine-month period with
double-digit growth in its food retail services business and good growth in
sales to its core quickservice customers. Sales of Textile Care operations
increased 7 percent for the third quarter and 4 percent for the first nine
months of 1999 and included benefits from new customer business and new product
offerings. The Textile Care business continues to experience pressures from
consolidation in the commercial laundry market and a difficult pricing
environment. The Company expects these challenging market conditions will
continue over the near term. Professional Products reported a 4 percent decrease
in sales for the both the third quarter and nine-month periods. Lower sales to
the government, education and specialty markets were partially offset by growth
in sales to corporate accounts and to the alternate care markets. The Company is
focusing on improving its Professional Products operations.
Water Care sales were virtually unchanged from the third quarter of
17
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS - THIRD QUARTER AND NINE MONTHS ENDED
SEPTEMBER 30, 1999 (continued)
last year and were up 4 percent for the nine-month period. Water Care sales
included new customer business; however, results were limited by a very
competitive business environment. The Company's Food & Beverage operations
reported sales growth of 11 percent for the third quarter of 1999 and 12 percent
for the nine-month period. Excluding the effects of businesses acquired in 1998,
Food & Beverage sales were up 9 percent for both the third quarter and
nine-month periods with particularly strong results in sales to the food, meat
and beverage processing markets. 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 combined with the Company's existing vehicle care operations.
Sales of the Company's United States Other Services operations totaled $56
million for the third quarter and $157 million for the first nine months of
1999. Excluding the sales of GCS Service, Inc. (GCS) which was acquired in the
third quarter of 1998, sales of United States Other Services increased 12
percent for both the third quarter and nine-month periods. Pest Elimination
reported sales growth of 12 percent for the third quarter and 13 percent for the
nine-month period with good new customer business and a larger number of service
offerings. Sales of the recently acquired GCS Service kitchen equipment repair
business continued to meet expectations, and the Company is focusing on
coordinating their operations with the other Ecolab businesses and expanding
operations to provide national coverage. Sales of the Jackson equipment business
grew 6 percent for the third quarter of 1999 and 10 percent for the nine-month
period.
Management rate sales for the Company's International Cleaning & Sanitizing
operations were $112 million for the third quarter of 1999, up 3 percent over
sales of $108 million in the third quarter of last year. For the first nine
months of 1999, sales totaled $323 million, an increase of 4 percent over sales
of $311 million in 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 5 percent for both the third quarter
and nine-month periods with good growth in Japan and Australia. Latin America
sales were up 7 percent for the third quarter and 6 percent for the first
nine-months of 1999. Significant double-digit growth in Mexico and solid growth
in most of the other countries in this region more than offset modestly lower
sales in Brazil. Sales in Canada increased 4 percent for the third quarter of
1999 and 5 percent for the nine months with higher sales to both the Food &
Beverage and Institutional markets. Excluding the effects of business
acquisitions, sales of Africa/Export operations decreased 11 percent for the
third quarter and 1 percent for the nine-month period.
18
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS - THIRD QUARTER AND NINE MONTHS ENDED
SEPTEMBER 30, 1999 (continued)
Operating income of the Company's United States Cleaning & Sanitizing operations
totaled $70 million for the third quarter of 1999, an increase of 8 percent over
operating income of $65 million in the third quarter of last year. For the
nine-month period, operating income was $179 million, up 10 percent over
operating income of $162 million in the comparable period of last year. As a
percent of sales, operating income margins decreased to 18.3 percent of sales
from 18.9 percent of sales for the third quarter and 16.6 percent of sales from
16.7 percent for the nine-month period. Operating income margins declined
slightly due to poor results of Professional Products operations, investments in
the sales-and-service force to support new business development and the effects
of the lower margins of businesses acquired. Operating income margins benefited
from strong core operations performance, higher sales volume, sales of new
products and tight cost controls.
Operating income of the Company's United States Other Services operations
totaled $8 million for the third quarter and increased 19 percent over the third
quarter of last year. For the nine-month period, operating income was $19
million and was up 30 percent. Excluding GCS operations which were acquired in
the third quarter of last year, operating income for United States Other
Services increased 17 percent for the third quarter and 23 percent for the first
nine months of 1999. For the third quarter, operating income margins improved to
14.5 percent of sales from 14.2 percent last year. For the nine-month period,
the operating income margin decreased to 12.0 percent of sales from 12.9 percent
last year. The lower operating income margin for the first nine months of 1999
reflected the addition of the lower margin GCS business. For the third quarter
of 1999, operating income of the GCS operation improved substantially and had a
favorable affect on the comparison of the overall United States Other Services
operating income margin with the third quarter of last year.
Operating income for the Company's International Cleaning & Sanitizing
operations was $10 million, an increase of 20 percent over operating income of
$8 million in the third quarter of last year. For the first nine months of 1999,
operating income totaled $27 million and was up 22 percent over nine-month 1998
operating income of $22 million. Operating income margins improved to 9.0
percent of sales from 7.7 percent for the third quarter and to 8.3 percent of
sales from 7.1 percent for the nine-month period. Significant operating income
growth and good operating income margin improvement in Asia Pacific and
Africa/Export operations more than offset lower operating income in Latin
America and Canada.
19
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS - THIRD QUARTER AND NINE MONTHS ENDED
SEPTEMBER 30, 1999 (continued)
The Company's equity in the earnings of the Henkel-Ecolab joint venture was $6
million for the third quarter of 1999, an increase of 19 percent over equity in
earnings of $5 million in the third quarter of last year. For the nine-month
period, the Company's equity in earnings of Henkel-Ecolab increased 13 percent
to $12 million in 1999 from $11 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 6 percent for both the third quarter and
first nine months of 1999 on a fixed management rate basis of currency exchange.
Corporate operating expense was $1 million in the third quarter and $3 million
in the first nine months of 1999 and represented overhead costs directly related
to the Henkel-Ecolab joint venture.
Net interest expense was $5 million for the third quarter of 1999, down 4
percent compared with the third quarter of last year. For the first nine months,
net interest expense totaled $17 million and increased 6 percent over the
comparable period of last year. Total debt levels have not changed significantly
over the last twelve months, although interest rates on short-term debt have
increased.
For the first nine months of 1999, the provision for income taxes reflected an
estimated annual effective income tax rate of 41.3 percent, down from last
year's nine-month estimated annual effective rate of 42.4 percent. This decrease
in the estimated annual effective income tax rate was principally due to a lower
anticipated overall effective rate on earnings of international operations for
1999. In addition, during the third quarter of 1999, a non-taxable one-time gain
of $1.5 million was recorded, which decreased the effective income tax rate to
40.4 percent for the third quarter and 41.0 percent for the first nine months of
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 the Company's exposure to
both of these issues.
20
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
YEAR 2000 READINESS (continued)
The Company has completed its inventory, assessment, renovation and testing of
Year 2000 compliance for its operating and application systems. 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 has remediated or replaced portions of the software
and hardware. At two small Company locations outside of North America, some
final work remains to convert those operations to packaged computer systems
which are Year 2000 compliant. Although the Company does not judge these
remaining issues to be material to its consolidated operations, it does expect
to complete this work before November 30, 1999.
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 identified, designed and tested
alternatives, and the process of modification and retrofitting, including
testing is complete.
The Company has analyzed its manufacturing and building maintenance operations
for date/time sensitivity relative to Year 2000. The Company has modified its
processes or retrofitted equipment to become Year 2000 compliant.
The Company believes that based on the foregoing steps and procedures, it has
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 was not 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 as it considers
necessary to verify the accuracy of vendor and supplier representations. The
Company believes it has alternative sources of supply in the event of temporary
dislocations.
21
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
YEAR 2000 READINESS (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 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 has developed
a Year 2000 contingency plan. The Company will have dedicated support and
field service staff available and properly positioned to deal with internal
system issues and to respond to customer-related problems during the critical
Year 2000 periods. Suppliers and customers have not advised the Company of
anticipated significant supply shortages or of unusual inventory
requirements. Accordingly, the Company has not made specific contingency
plans in this regard but is monitoring these issues closely and would attempt
to make adjustments as required. There can be no certainty that if
significant supply shortages or customer inventory requirements become known
closer to year-end that these contingencies could be adequately addressed.
The Company continues to monitor this.
The Company recognizes that in connection with the Year 2000, significant
demands could be placed on common carrier systems and that certain failures
in portions of the distribution system could occur. Based on its inquiries of
suppliers, customers and common carriers, it believes that with its own
delivery vehicles and those of suppliers/customers, it can deal with
temporary and sporadic distribution system interruptions. However, there can
be no assurance that significant or prolonged interruptions will not occur.
In the event, however, if they do occur, they could have an adverse affect on
the Company due to inability to obtain inventory or provide product to
customers. This issue is also being monitored and the Company would attempt
to respond to new information which arises.
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. However, there can be no assurance that these processes will be 100
percent effective in identifying all Year 2000 issues, or that the
remediation processes for its own operations will prove to be completely
effective. In addition, certain Year 2000 issues pose additional
uncertainties: (i) the issues related to vendors or suppliers, as well as the
Henkel-Ecolab Joint Venture, because their Year 2000 compliance programs are
not within the Company's direct control, (ii) the difficulty in predicting
demands which may be made upon common carriers, and (iii) 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.
22
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
YEAR 2000 READINESS (continued)
The failure to identify and remediate the Company's 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 believed that the Company, overall,
will be able, in material respects, to continue to provide its products and
services and collect and issue payments with minimal 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.
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.
23
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
FINANCIAL POSITION AND LIQUIDITY
Total assets were approximately $1.6 billion at September 30, 1999, an increase
of 8 percent over total assets of $1.5 billion at year-end 1998. Accounts
receivable at September 30, 1999 reflected exceptionally strong sales during the
last half of the third quarter of 1999. The increase in the other assets
(non-current) level over year-end 1998 was principally due to business
acquisitions. The decrease in the Company's investment in Henkel-Ecolab joint
venture was primarily due to changes in currency translation, and dividends and
royalties received from the joint venture, net of the Company's equity in
Henkel-Ecolab earnings.
As of September 30, 1999, total debt was $287 million, down slightly from total
debt of $295 million at year-end 1998. The ratio of total debt to capitalization
was 28 percent at September 30, 1999, compared with 30 percent at December 31,
1998. This improvement in the total debt to capitalization ratio was primarily
due to increased shareholders' equity and strong earnings performance.
Cash provided by continuing operations totaled $199 million for the first nine
months of 1999, virtually unchanged from the comparable period of last year.
Increased earnings and higher dividends from the Henkel-Ecolab joint venture
were offset by higher levels of operating assets. Total cash provided by
operating activities increased to $199 million during the first nine months of
1999 from $169 million last year. Total operating cash flow for the first nine
months of last year included a $30 million income tax deposit made in the second
quarter of 1998 related to discontinued operations.
The Company reacquired 698,000 shares of its common stock during the first nine
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. As of September 30, 1999, there were approximately 3.3 million shares
remaining to be purchased under this program. The Company anticipates that it
will continue to periodically reacquire shares under its share repurchase
program.
24
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In this report on Form 10-Q, management discusses
expectations regarding future performance of the Company which may include
anticipated financial performance, business prospects, prospects for
international growth 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 that could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from the anticipated results or other expectations expressed
in the forward-looking statements. These factors should be considered, together
with any similar risk factors or other cautionary language, which may be made in
the section of this report containing the forward-looking statement.
Risks and uncertainties that may affect operating results and business
performance include: pricing flexibility; availability of adequate and
reasonably priced raw materials; the occurrence of capacity constraints, or the
loss of a key supplier, which in either case limit the production of certain
products; ability to carry out the Company's acquisition strategy, including
difficulties in rationalizing acquired businesses and in realizing related cost
savings and other benefits; the costs and effects of Year 2000 computer software
issues (described under the heading "Year 2000 Readiness" 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.
25
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
FORWARD-LOOKING STATEMENTS AND RISK FACTORS (continued)
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 that 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 Readiness" 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, 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.
26
<PAGE>
PART II. OTHER INFORMATION
Item 3. LEGAL PROCEEDINGS
As previously reported in the Company's Form 10-K for the year ended
December 31, 1998 ("1998 Form 10-K"), Diversey Lever, Inc. filed suit
against the Company in Federal District Court, Eastern District of
Michigan, Southern Division on July 1, 1996. The suit alleges that two
Company products, which lubricate plastic beverage bottles, infringe
two patents held by Diversey Lever.
As noted in the 1998 Form 10-K, the Company had appealed the District
Court's 1998 finding that the Company had infringed the two patents
held by Diversey Lever. On September 10, 1999, the Federal Circuit
Court of Appeals ruled against the Company on its appeal. On September
24, 1999, the Company filed a request for a rehearing and rehearing EN
BANC with the Federal Circuit Court of Appeals. On October 21, 1999,
the Federal Circuit Court of Appeals ruled against the Company on its
requests for rehearing and rehearing EN BANC.
The case will now be remanded back to the District Court for a trial
on past damages. The Company continues to believe Diversey Lever's
damage request will be in the range of $3,000,000 to $5,000,000.
Diversey Lever is also requesting that damages be enhanced up to
three times if willful infringement is found.
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 September 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: November 9, 1999 By: /s/ S. L. Fritze
----------------------------------------
S.L. Fritze
Vice President and Controller
(duly authorized officer and
Principal Accounting Officer)
28
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Document Method of Filing
----------- -------- ----------------
<S> <C> <C>
(15) Letter regarding unaudited interim financial information Filed herewith
electronically
(27) Financial Data Schedule Filed herewith
electronically
</TABLE>
29
<PAGE>
Exhibit (15)
November 9, 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 October 21, 1999 on our reviews of interim
financial information of Ecolab Inc. for the periods ended September 30, 1999
and 1998 and included in the Company's quarterly report on Form 10-Q for the
quarter ended September 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 SEPTEMBER 30, 1999 AND THE RELATED STATEMENTS
OF INCOME AND CASH FLOWS FOR THE NINE MONTH PERIOD THEN ENDED AND IS QUALIFIED
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 26,477
<SECURITIES> 0
<RECEIVABLES> 350,712
<ALLOWANCES> 14,312
<INVENTORY> 169,420
<CURRENT-ASSETS> 584,523
<PP&E> 941,641
<DEPRECIATION> 501,819
<TOTAL-ASSETS> 1,583,039
<CURRENT-LIABILITIES> 479,693
<BONDS> 184,327
0
0
<COMMON> 145,419
<OTHER-SE> 600,714
<TOTAL-LIABILITY-AND-EQUITY> 1,583,039
<SALES> 1,564,231
<TOTAL-REVENUES> 1,564,231
<CGS> 702,769
<TOTAL-COSTS> 702,769
<OTHER-EXPENSES> 639,602
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 18,355
<INCOME-PRETAX> 205,041
<INCOME-TAX> 84,082
<INCOME-CONTINUING> 133,443
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 133,443
<EPS-BASIC> 1.03
<EPS-DILUTED> 0.99
<FN>
<F1>THE AMOUNT OF "LOSS PROVISION" IS NOT SIGNIFICANT AND HAS BEEN INCLUDED IN
"OTHER EXPENSES"
</FN>
</TABLE>
