<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, 2000
------------------
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.
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(Exact name of registrant as specified in its charter)
Delaware 41-0231510
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Ecolab Center, 370 Wabasha Street N., St. Paul, Minnesota 55102
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(Address of principal executive offices)(Zip Code)
651-293-2233
------------
(Registrant's telephone number, including area code)
(Not Applicable)
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(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, 2000.
127,014,480 shares of common stock, par value $1.00 per share.
<PAGE>
PART I - FINANCIAL INFORMATION
ECOLAB INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Third Quarter Ended
September 30
(thousands, except per share) 2000 1999
-------- --------
(unaudited)
<S> <C> <C>
Net sales $600,666 $554,511
Cost of sales 266,951 247,619
Selling, general
and administrative expenses 235,987 219,037
-------- --------
Operating income 97,728 87,855
Interest expense, net 6,528 4,860
-------- --------
Income before income taxes and equity
in earnings of Henkel-Ecolab 91,200 82,995
Provision for income taxes 36,232 33,555
Equity in earnings of Henkel-Ecolab 5,370 5,581
-------- --------
Net income $ 60,338 $ 55,021
======== ========
Net income per common share
Basic $ 0.47 $ 0.42
Diluted $ 0.46 $ 0.41
Dividends per common share $ 0.12 $ 0.105
Weighted-average common shares outstanding
Basic 127,112 129,546
Diluted 131,167 134,394
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
ECOLAB INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Nine Months Ended
September 30
(thousands, except per share) 2000 1999
---------- ----------
(unaudited)
<S> <C> <C>
Net sales $1,697,637 $1,564,231
Cost of sales 762,817 702,769
Selling, general
and administrative expenses 685,771 639,602
---------- ----------
Operating income 249,049 221,860
Interest expense, net 17,130 16,819
---------- ----------
Income before income taxes and equity
in earnings of Henkel-Ecolab 231,919 205,041
Provision for income taxes 93,927 84,082
Equity in earnings of Henkel-Ecolab 13,367 12,484
---------- ----------
Net income $ 151,359 $ 133,443
========== ==========
Net income per common share
Basic $ 1.18 $ 1.03
Diluted $ 1.14 $ 0.99
Dividends per common share $ 0.36 $ 0.315
Weighted-average common shares outstanding
Basic 128,134 129,560
Diluted 132,534 134,569
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
ECOLAB INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30 December 31
(thousands) 2000 1999
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 45,075 $ 47,748
Accounts receivable, net 358,100 299,751
Inventories 183,487 176,369
Deferred income taxes 43,717 41,701
Other current assets 14,229 11,752
---------- ----------
Total current assets 644,608 577,321
Property, plant and equipment, net 482,916 448,116
Investment in Henkel-Ecolab 198,359 219,003
Other assets 398,496 341,506
---------- ----------
Total assets $1,724,379 $1,585,946
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
(Continued)
4
<PAGE>
ECOLAB INC.
CONSOLIDATED BALANCE SHEET (Continued)
<TABLE>
<CAPTION>
September 30 December 31
(thousands, except per share) 2000 1999
------------ -----------
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ 234,310 $ 112,060
Accounts payable 139,434 122,701
Compensation and benefits 86,829 90,618
Income taxes -- 5,743
Other current liabilities 174,164 139,552
---------- ----------
Total current liabilities 634,737 470,674
Long-term debt 161,717 169,014
Postretirement health care
and pension benefits 108,866 97,527
Other liabilities 73,847 86,715
Shareholders' equity
(common stock, par value $1.00
per share; shares outstanding:
September 30, 2000 - 127,079;
December 31, 1999 - 129,416) 745,212 762,016
---------- ----------
Total liabilities and
shareholders' equity $1,724,379 $1,585,946
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
ECOLAB INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30
(thousands) 2000 1999
--------- ---------
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 151,359 $ 133,443
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation 88,360 82,090
Amortization 21,550 18,764
Deferred income taxes (4,589) (972)
Equity in earnings of Henkel-Ecolab (13,367) (12,484)
Henkel-Ecolab royalties and dividends 15,519 21,179
Other, net (625) 650
Changes in operating assets and liabilities:
Accounts receivable (51,303) (83,086)
Inventories (13,427) (2,972)
Other assets 1,063 (21,428)
Accounts payable 12,156 9,267
Other liabilities 29,347 54,510
--------- ---------
Cash provided by operating activities $ 236,043 $ 198,961
--------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
(Continued)
6
<PAGE>
ECOLAB INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
(thousands) 2000 1999
--------- ---------
(unaudited)
<S> <C> <C>
INVESTING ACTIVITIES
Capital expenditures $(110,203) $(102,012)
Property disposals 343 2,836
Business acquisitions and investments (74,505) (40,144)
Sale of Gibson businesses and assets 850 8,801
Other, net -- (72)
--------- ---------
Cash used for investing activities (183,515) (130,591)
--------- ---------
FINANCING ACTIVITIES
Notes payable 125,012 35,086
Long-term debt borrowings -- 62,540
Long-term debt repayments (8,983) (107,014)
Reacquired shares (143,295) (31,743)
Cash dividends on common stock (46,501) (40,769)
Other, net 17,169 11,843
--------- ---------
Cash used for financing activities (56,598) (70,057)
--------- ---------
Effect of exchange rate changes on cash 1,397 (261)
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (2,673) (1,948)
Cash and cash equivalents,
at beginning of period 47,748 28,425
--------- ---------
Cash and cash equivalents,
at end of period $ 45,075 $ 26,477
========= =========
</TABLE>
The accompanying notes are an integral part of the 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, 2000 and 1999, reflect, in the opinion of
management, all adjustments necessary for a fair presentation of the financial
position, results of operations and cash flows of the Company 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, 1999 were
derived from audited consolidated financial statements, but do not include all
disclosures required by accounting principles generally accepted in the United
States of America. The unaudited consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
incorporated in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999. 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) 2000 1999
------------ -----------
(unaudited)
<S> <C> <C>
Inventories
Finished goods $ 72,113 $ 71,395
Raw materials and parts 112,470 106,239
Excess of fifo cost over lifo cost (1,096) (1,265)
--------- ---------
Total $ 183,487 $ 176,369
========= =========
Shareholders' Equity
Common stock $ 147,043 $ 145,556
Additional paid-in capital 258,974 223,290
Retained earnings 861,696 756,601
Deferred compensation (9,265) (13,714)
Accumulated other comprehensive
loss: cumulative translation (78,771) (59,363)
Treasury stock (434,465) (290,354)
--------- ---------
Total $ 745,212 $ 762,016
========= =========
</TABLE>
8
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. COMPREHENSIVE INCOME
Comprehensive income was as follows:
<TABLE>
<CAPTION>
Third Quarter Nine Months
Ended Ended
September 30 September 30
(thousands) 2000 1999 2000 1999
--------- --------- --------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net income $ 60,338 $ 55,021 $ 151,359 $ 133,443
Foreign currency
translation (6,543) 1,261 (19,408) (23,018)
--------- --------- --------- ---------
Comprehensive income $ 53,795 $ 56,282 $ 131,951 $ 110,425
========= ========= ========= =========
</TABLE>
4. BUSINESS ACQUISITIONS AND INVESTMENTS
In February 2000, the Company issued 424,111 shares of common stock plus other
cash consideration to purchase Southwest Sanitary Distributing Company (SSDC) of
Carrollton, Texas. SSDC is a provider of cleaning and sanitizing products to the
quickservice (fast-food) restaurant industry and has become part of the
Company's Kay operations. Annual sales of SSDC were approximately $24 million in
1999.
In February 2000, the Company purchased Spartan de Chile Limitada and Spartan de
Argentina S.A. Both companies are leaders in the institutional and industrial
cleaning and sanitizing markets in their countries. Annual sales for the
combined companies were approximately $20 million in 1999 and these acquisitions
have become part of the Company's Latin America operations.
In May 2000, Ecolab purchased ARR/CRS, a Columbus, Ohio-based provider of
commercial kitchen equipment parts and repair services in the Upper Midwest.
ARR/CRS has become part of the Company's GCS operations. ARR/CRS's 1999 sales
were approximately $4 million.
In May 2000, the Company purchased the assets of Dong Woo Deterpan Co., Ltd., a
leading marketer of institutional cleaning and sanitizing products and services
based in Seoul, Korea. Sales for Dong Woo Deterpan were approximately $6 million
in 1999. The purchased assets have been combined with Ecolab's existing
operations in Korea and have become part of the Company's Asia Pacific
operations.
9
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. BUSINESS ACQUISITIONS AND INVESTMENTS (continued)
In August 2000, Ecolab purchased Stove Parts Supply, which provides commercial
kitchen equipment parts and repair services throughout central Texas. Stove
Parts Supply has become part of the Company's GCS operations. Stove Parts
Supply's 1999 sales were approximately $19 million.
In August 2000, the Company also purchased Facilitec Corp.(Facilitec), which
provides rooftop grease filter products and kitchen exhaust cleaning services
for restaurants and food service customers. Facilitec has become part of
Ecolab's Institutional division. Facilitec's 1999 sales were approximately $14
million.
In September 2000, Ecolab purchased a 17 percent equity interest in FreshLoc
Technologies Inc. FreshLoc is a privately held developer of wireless food safety
technology, which monitors conditions affecting fresh food via measurement
devices connected to the Internet.
The total cash paid by the Company for the above acquisitions included cash
of $74,505,000 and shares of common stock issued in the SSDC acquisition with
a market value of $14,139,000. As of September 30, 2000, the allocation of
the purchase price to the assets acquired and the liabilities assumed is
preliminary.
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 operations of these acquired
businesses are not significant to the Company's consolidated results of
operations, financial position and cash flows for the third quarter and nine
months ended September 30, 2000.
10
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. NET INCOME PER COMMON SHARE
The computations of the basic and diluted net income per share amounts were as
follows:
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
(thousands, September 30 September 30
except per share) 2000 1999 2000 1999
-------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net income $ 60,338 $ 55,021 $151,359 $133,443
======== ======== ======== ========
Weighted-average common
shares outstanding
Basic 127,112 129,546 128,134 129,560
Effect of dilutive
stock options
and awards 4,055 4,848 4,400 5,009
-------- -------- -------- --------
Diluted 131,167 134,394 132,534 134,569
======== ======== ======== ========
Net income per
common share
Basic $ 0.47 $ 0.42 $ 1.18 $ 1.03
Diluted $ 0.46 $ 0.41 $ 1.14 $ 0.99
</TABLE>
Stock options to purchase approximately 6.2 million shares for the third quarter
and nine months ended September 30, 2000 and 3.6 million shares for the third
quarter and nine months ended September 30, 1999 were not dilutive and,
therefore, were not included in the computations of the diluted net income per
common share amounts.
11
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. OPERATING SEGMENTS
Financial information for each of the Company's reportable segments was as
follows:
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
September 30 September 30
(thousands) 2000 1999 2000 1999
----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net Sales
United States
Cleaning & Sanitizing $ 407,521 $ 385,508 $ 1,156,351 $ 1,080,602
Other Services 67,596 56,467 183,918 157,108
----------- ----------- ----------- -----------
Total 475,117 441,975 1,340,269 1,237,710
International Cleaning
& Sanitizing 130,117 115,463 365,024 333,565
Effect of foreign
currency translation (4,568) (2,927) (7,656) (7,044)
----------- ----------- ----------- -----------
Consolidated $ 600,666 $ 554,511 $ 1,697,637 $ 1,564,231
=========== =========== =========== ===========
Operating Income
United States
Cleaning & Sanitizing $ 76,091 $ 70,479 $ 190,651 $ 178,900
Other Services 8,317 8,207 20,898 18,907
----------- ----------- ----------- -----------
Total 84,408 78,686 211,549 197,807
International Cleaning
& Sanitizing 14,804 10,766 37,839 28,761
Corporate income (expense) (786) (1,111) 625 (3,444)
Effect of foreign
currency translation (698) (486) (964) (1,264)
----------- ----------- ----------- -----------
Consolidated $ 97,728 $ 87,855 $ 249,049 $ 221,860
=========== =========== =========== ===========
</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 2000.
Corporate income (expense), which normally represents only overhead costs
directly related to Henkel-Ecolab, also includes $0.3 million of income for
third quarter and $4.1 million of income for the first nine months of 2000,
related to net reductions in probable losses related to certain environmental
matters.
12
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. EQUITY IN EARNINGS OF HENKEL-ECOLAB
Certain financial data of Henkel-Ecolab and the components of the Company's
equity in earnings of Henkel-Ecolab were as follows:
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
September 30 September 30
(thousands) 2000 1999 2000 1999
--------- --------- --------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Henkel-Ecolab
Net sales $ 220,689 $ 235,242 $ 655,516 $ 693,103
Gross profit 125,197 127,690 369,341 384,421
Income before
income taxes 21,886 24,582 58,735 57,473
Net income $ 12,819 $ 13,513 $ 33,411 $ 32,540
Ecolab equity in earnings
Ecolab equity in
net income $ 6,410 $ 6,756 $ 16,706 $ 16,270
Ecolab royalty income
from Henkel-Ecolab,
net of income taxes 596 651 1,707 1,943
Amortization expense
for the excess of
cost over the
underlying net assets
of Henkel-Ecolab (1,636) (1,826) (5,046) (5,729)
--------- --------- --------- ---------
Equity in earnings of
Henkel-Ecolab $ 5,370 $ 5,581 $ 13,367 $ 12,484
========= ========= ========= =========
</TABLE>
8. REVENUE RECOGNITION
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, which summarizes certain of the staff's views regarding the
application of generally accepted accounting principles to revenue recognition
in financial statements. The Company is in the process of analyzing the
requirements of the Bulletin and is required to comply with the Bulletin in the
fourth quarter of 2000. Management believes the ultimate outcome will not have a
significant effect on the Company's consolidated results of operations.
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, 2000, and the related consolidated statements of income for
each of the three and nine-month periods ended September 30, 2000 and 1999, and
of cash flows for the nine-month periods ended September 30, 2000 and 1999.
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 auditing standards generally accepted in the United States of
America, 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 accounting principles generally accepted in the
United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 1999, and the related consolidated statements of income, of
comprehensive income and shareholders' equity and of cash flows for the year
then ended (not presented herein); and in our report dated February 28, 2000, 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, 1999, 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
October 19, 2000
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 position. 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 19 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, 2000
Consolidated net sales for the third quarter ended September 30, 2000 were $601
million, an increase of 8 percent over net sales of $555 million in the third
quarter of last year. For the first nine months of 2000, net sales increased 9
percent to $1.698 billion from $1.564 billion in the comparable period of 1999.
Businesses acquired in 2000 and the annualized effect of businesses acquired in
1999 accounted for approximately 40 percent of the growth in consolidated net
sales for third quarter and 30 percent for the nine-months ended September 30,
2000. Changes in currency translation had an insignificant effect on sales for
the periods ended September 30, 2000. The growth in sales also reflected
benefits from new products, new customers, 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 third quarter of 2000 was 55.6 percent of net
sales, up slightly compared with the third quarter 1999 gross profit margin of
55.3 percent of net sales. For the nine-month periods, the gross profit margins
were 55.1 percent in both 2000 and 1999. The increase in gross profit margin for
the third quarter was primarily due to the strong Institutional and
International business performances, which helped offset the negative effect of
the lower margins of businesses acquired, and to a lesser extent, the higher
costs of fuel. Selling price increases during the first nine months of 2000 were
not significant.
Selling, general and administrative expenses represented 39.3 percent of net
sales in the third quarter of 2000, a decrease from 39.5 percent of net sales in
the third quarter of last year. For the nine-month period, selling, general and
administrative expenses also decreased as a percentage of net sales to 40.4
percent in 2000 from 40.9 percent in 1999. Selling, general and administrative
expense improvements
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, 2000 (continued)
reflected the Company's cost control efforts and lower expenses related to
retirement plans. These benefits were partially offset by continued 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 $60 million for the third quarter of 2000, an increase of 10
percent over net income of $55 million in the third quarter of last year. On a
per share basis, diluted net income per share increased 12 percent to $0.46 in
the third quarter of 2000 from $0.41 in the third quarter of 1999. During the
third quarter of 1999, the Company recognized a non-taxable gain of $1.5
million, or $0.01 per diluted share, on the receipt of shares from an insurance
company that demutualized through a public offering. 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 for 1999. Excluding this one-time gain from last
year's results, diluted earnings per share would have increased 15% for the
third quarter of 2000. For the first nine months of 2000, net income was $151
million and increased 13 percent over net income of $133 million in the
comparable period of last year. Diluted net income per share increased 15
percent to $1.14 for the nine months ended September 30, 2000 from $0.99 for the
first nine months of last year. These earnings improvements reflected good
operating income growth and a decrease in the effective tax rate. Net income was
negatively affected by higher net interest expense.
Sales of the Company's United States Cleaning & Sanitizing operations totaled
$408 million for the third quarter of 2000, an increase of 6 percent over net
sales of $386 million in the third quarter of last year. United States Cleaning
& Sanitizing sales were $1.156 billion for the first nine months of 2000, up 7
percent over net sales of $1.081 billion in the comparable period of last year.
Business acquisitions accounted for approximately one-third of the growth in
sales during the third quarter and approximately one-fourth of the growth in
sales for the nine months ended September 30, 2000. Sales reflected double-digit
growth in sales of Kay operations and a solid performance by Institutional.
Growth also reflected benefits from sales of new products and services, as well
as aggressive sales efforts and programs. Selling price increases during the
first nine months of 2000 were not significant. Sales of the Company's
Institutional operations increased 6 percent for the third quarter and 7 percent
for the first nine months of 2000. The acquisition of Facilitec in September
accounted for approximately $1 million of Institutional's sales for the third
quarter and nine-month periods. Institutional's specialty program grew at
double-digit rates for the quarter, supported
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, 2000 (continued)
by solid growth in the housekeeping and Ecotemp businesses. Kay's U.S.
operations reported sales growth of 36 percent for both the third quarter and
the nine-month periods. Excluding the acquisition of SSDC, Kay's sales increased
12 percent for the third quarter and 15 percent for the nine-month period. Kay's
sales increases reflect double-digit growth in its food retail services business
and solid growth in sales to its core quickservice customers. Textile Care sales
decreased 8 percent for the third quarter and 4 percent for the first nine
months of 2000. Textile Care sales decreases reflect the division's strategy to
improve profit margins by discontinuing low margin business. Although third
quarter sales were down from last year for Textile Care, gross margins rose. The
Company expects the U.S. Textile Care business to continue to experience
challenging market conditions over the near term while focusing on improving
profitability. Sales of the Company's Professional Products operations decreased
3 percent for the third quarter of 2000 and decreased 2 percent for the
nine-month period. The sales decrease for the quarter was due to lower sales in
the specialty market caused by the loss of a key customer and lower warehouse
club sales. Water Care sales increased 4 percent for the third quarter and 5
percent for the nine-month period with good growth in sales to the food and
beverage and hospitality markets. The Company's Food & Beverage operations
reported sales growth of 2 percent for the third quarter and 4 percent for the
nine-month period with good growth in sales to the dairy market. Sales for Food
& Beverage reflect the challenging conditions in several of its markets,
including very weak dairy industry conditions and continuing consolidation of
plants in food processing and beverage markets. Vehicle Care sales decreased 1
percent for the third quarter and increased 7 percent for the nine-month period.
When adjusted for the impact of the Blue Coral acquisition in 1999, nine-month
sales were flat, principally due to the effects of integration and a sales force
reorganization.
Sales of the Company's United States Other Services operations totaled $68
million for the third quarter of 2000, an increase of 20 percent over net sales
of $56 million in the third quarter of last year. United States Other Services
sales were $184 million for the first nine months of 2000, an increase of 17
percent over net sales of $157 million in the comparable period of last year.
Excluding business acquisitions, sales increased 11 percent for the third
quarter and 12 percent for the first nine months of 2000. Pest Elimination
reported sales growth of 11 percent for the third quarter and 12 percent for
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, 2000 (continued)
the nine months with significant new customer business as well as additional
product and service sales through new offerings to existing customers. GCS sales
increased 43 percent for the third quarter and 31 percent for the nine-month
period. Excluding the effects of GCS acquisitions, sales increased 10 percent
for the third quarter and 12 percent for the nine months. The Company is
continuing to focus on coordinating GCS operations with other Ecolab businesses
and expanding operations to provide national coverage.
Management rate sales for the Company's International Cleaning & Sanitizing
operations were $130 million for the third quarter ended September 30, 2000, an
increase of 13 percent over sales of $115 million in the third quarter of last
year. For the first nine months of 2000, sales increased 9 percent to $365
million from $334 million during the comparable period of last year. Strong
sales growth in core Latin America operations along with the benefits of
business acquisitions are the primary reasons for this increase. Sales in the
Asia Pacific region increased 8 percent for the third quarter and 4 percent for
the nine-month period. Excluding acquisitions, Asia Pacific sales increased 5
percent for the third quarter and 3 percent for the nine-month period.
Double-digit sales increases in East Asia were partially offset by slightly
lower sales in Australia. Latin America sales increased 40 percent for the third
quarter and 35 percent for the first nine months of 2000. Excluding
acquisitions, Latin America sales increased 12 percent for the third quarter and
11 percent for the nine-month period. Sales in the region included significant
double-digit growth in Northern and Central Latin America. Sales in Canada
increased 5 percent for the third quarter of 2000 and 7 percent for the
nine-month period with good growth in sales to the institutional market.
Operating income of the Company's United States Cleaning & Sanitizing operations
totaled $76 million for the third quarter of 2000, up 8 percent over operating
income of $70 million in the third quarter of last year. For the first nine
months of 2000, operating income was $191 million, an increase of 7 percent over
operating income of $179 million in the comparable period of last year.
Operating income increased from 18.3 percent of net sales in the third quarter
of last year to 18.7 percent in the third quarter of 2000 and decreased slightly
for the nine-month period from 16.6 percent of net sales
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, 2000 (continued)
in 1999 to 16.5 percent in 2000. Excluding acquisitions, operating income of
United States Cleaning & Sanitizing rose 7 percent over the third quarter of
last year and 5 percent over the nine-month period of last year. Operating
income benefited from Kay's strong sales performance, sales of new products and
cost controls but was partially offset by investments in the sales-and-service
force to support new business development and higher fuel costs.
Third quarter 2000 operating income of United States Other Services was $8
million, an increase of 1 percent over the third quarter of last year. For the
nine-month period, operating income was $21 million, up 11 percent over the
comparable period last year. Operating income decreased to 12.3 percent of net
sales in 2000 from 14.5 percent for the third quarter of 1999 and decreased to
11.4 percent of net sales in 2000 from 12.0 percent for the first nine months of
1999. Operating income margins declined for United States Other Services
primarily due to growth-related investments the Company made in GCS during the
third quarter.
Operating income of International Cleaning & Sanitizing operations at management
rates totaled $15 million for the third quarter of 2000 and increased 38 percent
over operating income of $11 million in the third quarter of last year. For the
first nine months of 2000, operating income was $38 million and increased 32
percent over operating income of $29 million in the comparable period of last
year. Operating income improved to 11.4 percent of net sales in the third
quarter of 2000 from 9.3 percent in 1999 and to 10.4 percent of net sales for
the first nine months of 2000 from 8.6 percent during the first nine months of
last year. Double-digit operating income growth and good margin improvement in
Asia Pacific, Latin America and Canada all contributed to this increase.
Corporate operating expense was $0.8 million in the third quarter of 2000 and
corporate operating income was $0.6 million in the first nine months of 2000.
Corporate operations, which normally represent only overhead costs directly
related to Henkel-Ecolab, also included the recognition of $0.3 million of
income for the third quarter and $4.1 million of income for the nine-month
period related to net reductions in probable losses related to certain
environmental matters in the first quarter of 2000.
Net interest expense totaled $7 million in the third quarter of 2000, up 34
percent from the third quarter of last year and was $17 million
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, 2000 (continued)
for the nine-month period, an increase of 2 percent from the comparable period
of 1999. This increase in interest expense is primarily due to higher debt
levels related to the financing of business acquisitions and to fund the
Company's share repurchase program.
The provision for income taxes for the third quarter of 2000 reflected an
effective income tax rate of 39.7 percent, down from the third quarter of 1999
effective rate of 40.4 percent. For the first nine months of 2000, the provision
for income taxes reflected an estimated annual effective income tax rate of 40.5
percent; down from last year's nine-month estimated annual effective tax rate of
41.0 percent. This decrease was principally due to lower anticipated overall
effective rates on earnings of international operations for 2000.
For the third quarter of 2000, the Company's equity in earnings of Henkel-Ecolab
was $5.4 million, a decrease of 4 percent compared to equity earnings of $5.6
million in the third quarter of last year. For the nine-month period, the
Company's equity in earnings of Henkel-Ecolab was $13.4 million, up 7 percent
over equity earnings of $12.5 million last year. Ecolab's equity in earnings was
unfavorably affected by weaker European currencies. Earnings of Henkel-Ecolab
reflected good sales growth and margin improvement. Henkel-Ecolab sales,
although not consolidated, increased 4 percent for the third quarter and
increased 6 percent for the first nine months of 2000 when measured in fixed
currencies.
20
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
FINANCIAL POSITION AND LIQUIDITY
Total assets were approximately $1.724 billion at September 30, 2000, an
increase of 9 percent over total assets at year-end 1999. Accounts receivable
have increased 19 percent since year-end 1999 and reflects strong third quarter
2000 sales. Compared to the same period last year, DSO has improved and the
Company has implemented changes to continue to improve its DSO in the future.
The investment in Henkel-Ecolab has decreased since year-end 1999 due to the
payment of dividends and the effects of changes in currency. The increase in
other assets over year-end 1999 was principally due to goodwill associated with
business acquisitions.
Total debt was $396 million at September 30, 2000, up 41 percent over total debt
of $281 million at year-end 1999. The increase in total debt from year-end 1999
was principally due to financing for business acquisitions and share
repurchases. The ratio of total debt to capitalization was 35 percent at
September 30, 2000, compared with 27 percent at year-end 1999.
Cash provided by operating activities totaled $236 million for the first nine
months of 2000, up 19 percent from $199 million during the first nine months of
last year. Increased earnings and the reduced effect of changes in net operating
assets contributed to the increase in cash provided by operating activities.
The Company reacquired 3,731,500 shares of its common stock during the first
nine months of 2000. The reacquired shares will be used for general corporate
purposes and to offset the dilutive effect of shares issued for employee benefit
plans. As stated in the Company's news release dated May 12, 2000, the Company
expects to repurchase up to $200 million of its own stock this year.
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 business or financial performance including business prospects, in
particular for the Textile Care and GCS divisions, investments in the
sales-and-service force, 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. Additionally, the Company may
refer to this section of the Form 10-Q to identify risk factors related to other
forward looking statements made
21
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
FORWARD-LOOKING STATEMENTS AND RISK FACTORS (CONTINUED)
in oral presentations including telephone conferences and/or webcasts open to
the public.
Forward-looking statements represent challenging goals for the Company. As such,
they are based on certain assumptions and estimates and are subject to certain
risks and uncertainties. The Company cautions that undue reliance should not be
placed on such forward-looking statements which speak only as of the date made.
In order to comply with the terms of the safe harbor, the Company hereby
identifies important factors, which could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from the anticipated results or other expectations expressed
in the forward-looking statements. These factors should be considered, together
with any similar risk factors or other cautionary language, which may be made in
the section of this report or any oral presentation containing the
forward-looking statement.
Risks and uncertainties that may affect operating results and business
performance include: restraints on pricing flexibility due to competitive
factors and customer consolidations; cost increases due to higher oil prices or
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; the effect of future acquisitions or
divestitures or other corporate transactions, as well as our ability to achieve
plans for past acquisitions, including difficulties in rationalizing acquired
businesses and in realizing related cost savings and other benefits; market or
regulatory factors which could affect the Company's ability to reacquire shares;
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.
22
<PAGE>
PART II. OTHER INFORMATION
Item 3. LEGAL PROCEEDINGS
As previously reported in the Company's Form 10-K for the
yearended December 31, -1999 and in prior Form 10-K's, a legal
action was commenced in August, 1989 in the District Court in
Zwolle, Netherlands, by the Netherlands government against a
former subsidiary of the Company. Netherlands authorities were
seeking monetary damages to cover the cost of investigation
and planned clean-up of soil and groundwater contamination,
allegedly resulting from the discharge of wastewater and
chemicals during a period ended in 1981, when the subsidiary
operated a plant on the site. In late September 2000, the
parties reached a final settlement of this matter. This
settlement did not have, nor is it expected to have a material
effect on the Company's consolidated financial position,
results of operations or liquidity.
In September 2000, Region 5 of the United States Environmental
Protection Agency ("U.S. EPA") initiated an administrative
proceeding alleging that three products had been sold by the
Company without registering the products as antimicrobial
pesticides. U.S. EPA seeks an administrative penalty of
$542,850. The Company has suspended sales of the relevant
products. The Company anticipates that this matter will not
have a material effect on the Company's consolidated financial
position, results of operations or liquidity.
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as exhibits to this
report:
(10) Ecolab Inc. 1997 Stock Incentive Plan, As
Amended and Restated as of August 18, 2000.
(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, 2000. Subsequent to the quarter
ended September 30, 2000, the Company filed on
October 23, 2000, a Current Report on Form 8-K to
report its third quarter financial results.
23
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECOLAB INC.
Date: November 6, 2000 By: /s/S.L. Fritze
---------------
Steven L. Fritze
Vice President and Controller
(duly authorized officer and Chief
Accounting Officer)
24
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Document Method of Filing
----------- -------- ----------------
<S> <C> <C>
(10) Ecolab Inc. 1997 Stock Incentive Plan, as Amended and Filed herewith
Restated as of August 18, 2000. electronically
(15) Letter regarding unaudited interim financial information. Filed herewith
electronically
(27) Financial Data Schedule. Filed herewith
electronically
</TABLE>
