<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
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ECOLAB INC.
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(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
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(Address of principal executive offices)(Zip Code)
651-293-2233
------------
(Registrant's telephone number, including area code)
(Not Applicable)
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of July 31, 2000.
128,037,303 shares of common stock, par value $1.00 per share.
1
<PAGE>
PART I - FINANCIAL INFORMATION
ECOLAB INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Second Quarter Ended
June 30
(thousands, except per share) 2000 1999
---------- ---------
(unaudited)
<S> <C> <C>
Net sales $ 570,711 $ 520,416
Cost of sales 259,382 234,725
Selling, general
and administrative expenses 232,689 213,949
---------- ---------
Operating income 78,640 71,742
Interest expense, net 5,245 6,209
---------- ---------
Income before income taxes and equity
in earnings of Henkel-Ecolab 73,395 65,533
Provision for income taxes 30,092 26,905
Equity in earnings of Henkel-Ecolab 5,106 4,756
---------- ---------
Net income $ 48,409 $ 43,384
========== =========
Net income per common share
Basic $ 0.38 $ 0.33
Diluted $ 0.36 $ 0.32
Dividends per common share $ 0.12 $ 0.105
Weighted-average common shares outstanding
Basic 128,346 129,596
Diluted 132,990 134,666
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
ECOLAB INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Six Months Ended
June 30
(thousands, except per share) 2000 1999
---------- ----------
(unaudited)
<S> <C> <C>
Net sales $1,096,971 $1,009,720
Cost of sales 495,866 455,150
Selling, general
and administrative expenses 449,784 420,565
---------- ----------
Operating income 151,321 134,005
Interest expense, net 10,602 11,959
Income before income taxes and equity
in earnings of Henkel-Ecolab 140,719 122,046
Provision for income taxes 57,695 50,527
Equity in earnings of Henkel-Ecolab 7,997 6,903
---------- ----------
Net income $ 91,021 $ 78,422
========== ==========
Net income per common share
Basic $ 0.71 $ 0.61
Diluted $ 0.68 $ 0.58
Dividends per common share $ 0.24 $ 0.21
Weighted-average common shares outstanding
Basic 128,645 129,567
Diluted 133,275 134,653
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
ECOLAB INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30 December 31
(thousands) 2000 1999
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 30,132 $ 47,748
Accounts receivable, net 325,545 299,751
Inventories 172,811 176,369
Deferred income taxes 41,260 41,701
Other current assets 16,494 11,752
----------- -----------
Total current assets 586,242 577,321
Property, plant and equipment, net 470,765 448,116
Investment in Henkel-Ecolab 201,998 219,003
Other assets 387,468 341,506
----------- -----------
Total assets $ 1,646,473 $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>
June 30 December 31
(thousands, except per share) 2000 1999
----------- -----------
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ 189,179 $ 112,060
Accounts payable 127,931 122,701
Compensation and benefits 86,218 90,618
Income taxes 5,743
Other current liabilities 158,604 139,552
----------- -----------
Total current liabilities 561,932 470,674
Long-term debt 161,802 169,014
Postretirement health care
and pension benefits 100,183 97,527
Other liabilities 71,893 86,715
Shareholders' equity
(common stock, par value $1.00
per share; shares outstanding:
June 30, 2000 - 128,190;
December 31, 1999 - 129,416) 750,663 762,016
----------- -----------
Total liabilities and
shareholders' equity $ 1,646,473 $ 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>
Six Months Ended
June 30
(thousands) 2000 1999
---------- ----------
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 91,021 $ 78,422
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation 58,537 53,574
Amortization 13,935 12,016
Deferred income taxes (2,429) (732)
Equity in earnings of Henkel-Ecolab (7,997) (6,903)
Henkel-Ecolab royalties and dividends 14,935 19,135
Other, net (521) (60)
Changes in operating assets and liabilities:
Accounts receivable (22,280) (47,074)
Inventories (4,716) (4,834)
Other assets (3,761) (12,534)
Accounts payable 2,091 2,250
Other liabilities (2,679) 8,516
---------- ----------
Cash provided by operating activities $ 136,136 $ 101,776
---------- ----------
</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>
Six Months Ended
June 30
(thousands) 2000 1999
---------- -----------
(unaudited)
<S> <C> <C>
INVESTING ACTIVITIES
Capital expenditures $ (71,714) $ (64,043)
Property disposals 984 1,423
Businesses acquired (46,698) (39,118)
Sale of Gibson businesses and assets 8,801
Other, net (62) (57)
---------- -----------
Cash used for investing activities (117,490) (92,994)
---------- -----------
FINANCING ACTIVITIES
Notes payable 77,811 23,223
Long-term debt borrowings 58,895
Long-term debt repayments (5,923) (51,153)
Reacquired shares (88,049) (21,406)
Cash dividends on common stock (31,081) (27,171)
Other, net 10,548 10,383
---------- -----------
Cash used for financing activities (36,694) (7,229)
---------- -----------
Effect of exchange rate changes on cash 432 (63)
---------- -----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (17,616) 1,490
Cash and cash equivalents,
at beginning of period 47,748 28,425
---------- -----------
Cash and cash equivalents,
at end of period $ 30,132 $ 29,915
========== ===========
</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 second quarter and the
six months ended June 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. 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, 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>
June 30 December 31
(thousands) 2000 1999
---------- ----------
(unaudited)
<S> <C> <C>
Inventories
Finished goods $ 72,259 $ 71,395
Raw materials and parts 101,904 106,239
Excess of fifo cost over lifo cost (1,352) (1,265)
---------- ----------
Total $ 172,811 $ 176,369
========== ==========
Shareholders' Equity
Common stock $ 146,638 $ 145,556
Additional paid-in capital 249,179 223,290
Retained earnings 816,650 756,601
Deferred compensation (10,543) (13,714)
Accumulated other comprehensive
income (loss): translation (72,228) (59,363)
Treasury stock (379,033) (290,354)
---------- ----------
Total $ 750,663 $ 762,016
========== ==========
</TABLE>
8
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. COMPREHENSIVE INCOME
Comprehensive income was as follows:
<TABLE>
<CAPTION>
Second Quarter Six Months
Ended Ended
June 30 June 30
(thousands) 2000 1999 2000 1999
-------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net income $ 48,409 $ 43,384 $ 91,021 $ 78,422
Foreign currency
translation (3,021) (6,622) (12,865) (24,279)
-------- -------- -------- --------
Comprehensive income $ 45,388 $ 36,762 $ 78,156 $ 54,143
======== ======== ======== ========
</TABLE>
4. BUSINESS ACQUISITIONS
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 also 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 will become part of the Company's GCS operations. ARR/CRS's 1999 sales
were approximately $4 million.
In May 2000, the Company also 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 will be combined with Ecolab's existing
operations in Korea.
9
<PAGE>
ECOLAB INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. BUSINESS ACQUISITIONS (continued)
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 second quarter and six
months ended June 30, 2000.
5. NET INCOME PER COMMON SHARE
The computations of the basic and diluted net income per share amounts were as
follows:
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
(thousands, June 30 June 30
except per share) 2000 1999 2000 1999
-------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net income $ 48,409 $ 43,384 $ 91,021 $ 78,422
======== ======== ======== ========
Weighted-average common
shares outstanding
Basic (actual
shares outstanding) 128,346 129,596 128,645 129,567
Effect of dilutive
stock options
and awards 4,644 5,070 4,630 5,086
-------- -------- -------- --------
Diluted 132,990 134,666 133,275 134,653
======== ======== ======== ========
Net income per
common share
Basic $ 0.38 $ 0.33 $ 0.71 $ 0.61
Diluted $ 0.36 $ 0.32 $ 0.68 $ 0.58
</TABLE>
Stock options to purchase approximately 3.7 million shares for the second
quarter and six months ended June 30, 2000 and 2.4 million shares for the second
quarter and six months ended June 30, 1999 were not dilutive and, therefore,
were not included in the computations of the diluted net income per common share
amounts.
10
<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>
Second Quarter Ended Six Months Ended
June 30 June 30
(thousands) 2000 1999 2000 1999
---------- ---------- ---------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net Sales
United States
Cleaning & Sanitizing $ 388,443 $ 358,272 $ 748,830 $ 695,094
Other Services 61,774 53,313 116,322 100,641
---------- ---------- ---------- ----------
Total 450,217 411,585 865,152 795,735
International Cleaning
& Sanitizing 123,199 112,035 234,907 218,102
Effect of foreign
currency translation (2,705) (3,204) (3,088) (4,117)
---------- ---------- ---------- ----------
Consolidated $ 570,711 $ 520,416 $1,096,971 $1,009,720
========== ========== ========== ==========
Operating Income
United States
Cleaning & Sanitizing $ 60,702 $ 57,558 $ 114,560 $ 108,421
Other Services 7,147 6,149 12,581 10,700
---------- ---------- ---------- ----------
Total 67,849 63,707 127,141 119,121
International Cleaning
& Sanitizing 12,177 9,844 23,035 17,995
Corporate income (expense) (1,173) (1,234) 1,411 (2,333)
Effect of foreign
currency translation (213) (575) (266) (778)
---------- ---------- ---------- ----------
Consolidated $ 78,640 $ 71,742 $ 151,321 $ 134,005
========== ========== ========== ==========
</TABLE>
The International Cleaning & Sanitizing amounts included above are based on
translation into U.S. dollars at the fixed currency exchange rate used by
management for 2000.
Corporate income (expense), which normally represents only overhead costs
directly related to Henkel-Ecolab, also included $3.8 million of income during
the first six months of 2000, related to net reductions in damages claimed in
environmental matters.
11
<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>
Second Quarter Ended Six Months Ended
June 30 June 30
(thousands) 2000 1999 2000 1999
---------- ---------- ---------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Henkel-Ecolab
Net sales $ 222,706 $ 234,676 $ 434,827 $ 457,861
Gross profit 124,632 132,058 244,144 256,731
Income before
income taxes 22,274 20,950 36,849 32,891
Net income $ 12,342 $ 12,114 $ 20,592 $ 19,027
Ecolab equity in earnings
Ecolab equity in
net income $ 6,171 $ 6,057 $ 10,296 $ 9,514
Ecolab royalty income
from Henkel-Ecolab,
net of income taxes 586 586 1,111 1,292
Amortization expense
for the excess of
cost over the
underlying net assets
of Henkel-Ecolab (1,651) (1,887) (3,410) (3,903)
--------- --------- ---------- ---------
Equity in earnings of
Henkel-Ecolab $ 5,106 $ 4,756 $ 7,997 $ 6,903
========= ========= ========== =========
</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 by the
fourth quarter of 2000. Management believes the ultimate outcome will not have a
significant effect on the Company's consolidated results of operations,
financial position or liquidity.
12
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors
Ecolab Inc.
We have reviewed the accompanying consolidated balance sheet of Ecolab
Inc. as of June 30, 2000, and the related consolidated statements of income
for each of the three and six-month periods ended June 30, 2000 and 1999,
and of cash flows for the six-month periods ended June 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, 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.
We have previously audited, in accordance with auditing standards
generally accepted in the United States, 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
Saint Paul, Minnesota
July 26, 2000
13
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information that management
believes is useful in understanding the Company's operating results, cash flows
and financial condition. The discussion should be read in conjunction with the
consolidated financial statements and related notes included in this Form 10-Q.
The following discussion contains various "Forward-Looking Statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. We refer
readers to the Company's statement entitled "Forward-Looking Statements and Risk
Factors" beginning on page 20 of this report. Additional risk factors may be
described from time to time in Ecolab's filings with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS - SECOND QUARTER AND SIX MONTHS ENDED
JUNE 30, 2000
Consolidated net sales for the second quarter ended June 30, 2000 were $571
million, an increase of 10 percent over net sales of $520 million in the second
quarter of last year. For the first six months of 2000, net sales increased 9
percent to $1.097 billion from $1.010 billion in the comparable period of 1999.
Businesses acquired in 2000 and the annualized effect of businesses acquired in
1999 accounted for approximately one-fourth of the growth in consolidated net
sales in both the three and six-month periods of 2000. Changes in currency
translation had an insignificant effect on sales for the periods ended June 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 second quarter of 2000 was 54.6 percent of net
sales, down slightly compared with the second quarter 1999 gross profit margin
of 54.9 percent of net sales. For the six-month periods, the gross profit
margins were 54.8 percent in 2000 and 54.9 percent in 1999. These modest
decreases in gross profit margins reflected the lower gross profit margins of
businesses acquired, the repurchase of inventory related to the bankruptcy of
Ameriserve, a large distributor of the Company's products, and higher costs of
fuel, partially offset by the sales effect of new products. Selling price
increases during the first six months of 2000 were not significant.
Selling, general and administrative expenses represented 40.8 percent of net
sales in the second quarter of 2000, a decrease from 41.1 percent of net sales
in the second quarter of last year. For the six-month period, selling, general
and administrative expenses also decreased as a percentage of net sales to 41.0
percent in 2000 from 41.7 percent in 1999. Selling, general and administrative
expenses
14
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS - SECOND QUARTER AND SIX MONTHS ENDED
JUNE 30, 2000 (continued)
for the six months ended June 30, 2000 were reduced by $3.8 million of liability
reversals related to favorable settlements anticipated on environmental claims,
offset by $1.7 million of bad debt expense related to the bankruptcy filing by
AmeriServe. Excluding these unusual items, selling, general and administrative
expenses would have been 41.2 percent of consolidated net sales in the first six
months of 2000. Selling, general and administrative expense improvements
reflected synergies from the effects of businesses acquired, the benefits of
cost controls, lower expenses related to retirement plans and strong sales
growth. These benefits were partially offset by investments in the growth and
training of the sales-and-service force. The Company expects to continue
investing in its sales-and-service force, including investments in training and
productivity.
Net income totaled $48 million for the second quarter of 2000, an increase of 12
percent over net income of $43 million in the second quarter of last year. On a
per share basis, diluted net income per share increased 13 percent to $0.36 from
$0.32 in the second quarter of 1999. For the first six months of 2000, net
income was $91 million and increased 16 percent over net income of $78 million
in the comparable period of last year. Diluted net income per share increased 17
percent to $0.68 for the six-months ended June 30, 2000 from $0.58 for the first
six months of last year. Excluding the unusual items mentioned above, diluted
net income per common share would have been $0.67 per share. These earnings
improvements reflected good operating income growth and lower net interest
expense.
Sales of the Company's United States Cleaning & Sanitizing operations totaled
$388 million for the second quarter of 2000, an increase of 8 percent over net
sales of $358 million in the second quarter of last year. United States Cleaning
& Sanitizing sales were $749 million for the first six months of 2000, up 8
percent over net sales of $695 million in the comparable period of last year.
Sales benefited from the double-digit growth in sales of Kay operations and good
growth from the Institutional and Food & Beverage businesses. Growth also
reflected benefits from sales of new products, new customers, a larger
sales-and-service force and generally good conditions in the hospitality and
lodging industries. Business acquisitions accounted for approximately one-fourth
of the growth in sales during each of the reporting periods. Selling price
increases during the first six months of 2000 were not significant. Sales of the
Company's Institutional operations increased 8 percent for the second quarter
and 7 percent for the first six months of 2000. Institutional's housekeeping
program continued to grow at double-digit rates,
15
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS - SECOND QUARTER AND SIX MONTHS ENDED
JUNE 30, 2000 (continued)
supported by solid growth in the Ecotemp and specialty businesses. Kay's U.S.
operations reported sales growth of 44 percent for the second quarter and 35
percent for the six-month period. Excluding the acquisition of SSDC, Kay's sales
increased 18 percent for the second quarter and 16 percent for the six-month
period. Kay's sales increases reflect double-digit growth in its food retail
services business and solid results in sales to its core quickservice customers.
Textile Care sales decreased 3 percent for the second quarter and 2 percent for
the first six months of 2000. Textile Care continues to experience pressures
from consolidation in the commercial laundry market and a difficult pricing
environment. The Company expects the U.S. Textile Care business to continue to
experience challenging market conditions over the near term. Sales of the
Company's Professional Products operations increased 5 percent for the second
quarter of 2000 and decreased 1 percent for the six-month period. The sales
increase for the quarter reflected growth in distributor sales, new product
introductions, and corporate account growth which was partially offset by a
decrease in sales to the government market, as well as the loss of a key
customer in the specialty business. Water Care sales increased 6 percent for the
second quarter and 5 percent for the six-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 6 percent for the second quarter and 5
percent for the six-month period with good growth in sales to the dairy, food
and beverage markets. Vehicle Care sales decreased 3 percent for the second
quarter and increased 11 percent for the six-month period. When adjusted for the
impact of the Blue Coral acquisition in 1999, six month sales were flat
principally due to unusual weather conditions, which depressed car wash usage,
and a sales force reorganization.
Sales of the Company's United States Other Services operations totaled $62
million for the second quarter of 2000, an increase of 16 percent over net sales
of $53 million in the second quarter of last year. United States Other Services
sales were $116 million for the first six months of 2000, an increase of 16
percent over net sales of $101 million in the comparable period of last year.
Pest Elimination reported sales growth of 13 percent for the second quarter and
12 percent for the six months with significant new customer business. GCS sales
increased 25 percent for both the second quarter and the six-month period.
Excluding the effects of GCS acquisitions, sales increased 12 percent for the
second quarter and 13 percent for the six months. The Company is continuing to
focus on coordinating GCS operations with other Ecolab businesses and expanding
operations to provide national coverage.
16
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS - SECOND QUARTER AND SIX MONTHS ENDED
JUNE 30, 2000 (continued)
Management rate sales for the Company's International Cleaning & Sanitizing
operations were $123 million for the second quarter ended June 30, 2000, an
increase of 10 percent over sales of $112 million in the second quarter of last
year. For the first six months of 2000, sales increased 8 percent to $235
million from $218 million during the comparable period of last year. Strong
sales growth in Latin America along with the benefits of business acquisitions
are the primary reasons for this increase. Sales in the Asia Pacific region
increased 3 percent for the second quarter and 1 percent for the six-month
period. A double-digit sales increase in East Asia was offset by lower sales in
Japan and Australia. Latin America sales increased 44 percent for the second
quarter and 33 percent for the first six months of 2000. Excluding acquisitions,
Latin America sales increased 9 percent for the second quarter and 10 percent
for the six-month period. Sales in the region included significant double-digit
growth in Mexico and Central America. Sales in Canada increased 10 percent for
the second quarter of 2000 and 8 percent for the six-month period with good
growth in sales to the institutional market.
Operating income of the Company's United States Cleaning & Sanitizing operations
totaled $61 million for the second quarter of 2000, up 5 percent over operating
income of $58 million in the second quarter of last year. For the first six
months of 2000, operating income was $115 million, an increase of 6 percent over
operating income of $108 million in the comparable period of last year.
Operating income reflected particularly strong growth in Kay operations.
Operating income declined from 16.1 percent of net sales in the second quarter
of last year to 15.6 percent in the second quarter of 2000 and decreased for the
six-month period from 15.6 percent of net sales in 1999 to 15.3 percent in 2000.
Operating income benefited from sales of new products and cost controls but were
offset by higher costs related to businesses acquired, investments in the
sales-and-service force to support new business development, higher fuel costs,
the repurchase of AmeriServe inventory, and for the six-month period, a $1.7
million bad debt expense from AmeriServe in the first quarter.
Second quarter 2000 operating income of United States Other Services was $7
million, an increase of 16 percent over the second quarter of last year. For the
six-month period, operating income was $13 million, up 18 percent over the
comparable period last year. Excluding GCS acquisitions, operating income of
U.S. Other Services rose 14 percent over the second quarter of last year and 15
percent over the six-month period of last year. Operating income increased to
11.6 percent of net sales in 2000 from 11.5 percent for the second quarter of
1999 and increased to 10.8 percent of net sales in 2000 from 10.6 percent for
the first six months of 1999.
17
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS - SECOND QUARTER AND SIX MONTHS ENDED
JUNE 30, 2000 (continued)
Operating income of International Cleaning & Sanitizing operations at management
rates totaled $12 million for the second quarter of 2000 and increased 24
percent over operating income of $10 million in the second quarter of last year.
For the first six months of 2000, operating income was $23 million and increased
28 percent over operating income of $18 million in the comparable period of last
year. Operating income improved to 9.9 percent of net sales in the second
quarter of 2000 from 8.8 percent in 1999 and to 9.8 percent of net sales for the
first six months of 2000 from 8.3 percent during the first six months of last
year. Significant double-digit operating income growth and good margin
improvement in Latin America and Canada contributed to this increase. Operating
income in the Asia Pacific region was up slightly for both the second quarter
and first six months of 2000.
Corporate operating expense was $1 million in the second quarter of 2000 and
corporate operating income was $1 million in the first six months of 2000.
Corporate operations, which normally represent only overhead costs directly
related to Henkel-Ecolab, also included the recognition of $3.8 million of
income for the six-month period related to net reductions in damages claimed in
environmental matters in the first quarter of 2000.
For the second quarter of 2000, the Company's equity in earnings of
Henkel-Ecolab was $5.1 million, an increase of 7 percent over equity earnings of
$4.8 million in the second quarter of last year. For the six-month period, the
Company's equity in earnings of Henkel-Ecolab was $8.0 million, up 16 percent
over equity earnings of $6.9 million last year. Ecolab's equity in earnings was
unfavorably affected by changes in European currency. Earnings of Henkel-Ecolab
reflected strong sales, margin improvement, and cost controls which more than
offset investments in the sales-and-service force. Henkel-Ecolab sales, although
not consolidated, increased 9 percent for the second quarter and first six
months of 2000 when measured in Deutsche marks.
Net interest expense totaled $5 million in the second quarter of 2000, down
16 percent from the second quarter of last year and was $11 million for the
six-month period, a decrease of 11 percent from the comparable period of
1999. This decrease in interest expense is partially due to a reduction in
the principal of the Company's 9.68% Senior Notes.
18
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS - SECOND QUARTER AND SIX MONTHS ENDED
JUNE 30, 2000 (continued)
The provision for income taxes for the second quarter of 2000 reflected an
estimated annual effective income tax rate of 41.0 percent, down slightly from
the second quarter of 1999 estimated annual effective rate of 41.1 percent. For
the first six months of 2000, the provision for income taxes reflected an
estimated annual effective income tax rate of 41.0 percent, down from last
year's six-month estimated annual effective rate of 41.4 percent. This decrease
was principally due to lower anticipated overall effective rates on earnings of
international operations for 2000.
FINANCIAL POSITION AND LIQUIDITY
Total assets were approximately $1.6 billion at June 30, 2000, an increase of 4
percent over total assets at year-end 1999. Accounts receivable have increased 9
percent since year-end 1999. The Company has modestly decreased DSO since
year-end 1999 and has implemented changes to continue to reduce 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 prior periods was principally due to business acquisitions.
Total debt was $351 million at June 30, 2000, up 25 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 32 percent at June 30, 2000,
compared with 27 percent at year-end 1999.
Cash provided by operating activities totaled $136 million for the first six
months of 2000, up 34 percent from $101 million during the first six months of
last year. Increased earnings and a decrease in the level of operating assets
contributed to the increase in cash provided by operating activities.
The Company reacquired 2,260,300 shares of its common stock during the first six
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.
19
<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 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, steps which may
reduce accounts receivable levels, and similar matters. Without limiting the
foregoing, words or phrases such as "will likely result," "are expected to,"
"will continue," "is anticipated," "we believe," "estimate," "project"
(including the negative or variations thereof) or similar terminology, generally
identify forward-looking statements.
Forward-looking statements represent challenging goals for the Company. As such,
they are based on certain assumptions and estimates and are subject to certain
risks and uncertainties. The Company cautions that undue reliance should not be
placed on such forward-looking statements which speak only as of the date made.
In order to comply with the terms of the safe harbor, the Company hereby
identifies important factors which could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from the anticipated results or other expectations expressed
in the forward-looking statements. These factors should be considered, together
with any similar risk factors or other cautionary language, which may be made in
the section of this report containing the forward-looking statement.
Risks and uncertainties that may affect operating results and business
performance include: restraints on pricing flexibility due to competitive
factors and customer consolidations, cost increases due to higher oil prices;
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 effects of acquisitions and difficulties
in carrying 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 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,
20
<PAGE>
ECOLAB INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FORWARD-LOOKING STATEMENTS AND RISK FACTORS (continued)
(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.
21
<PAGE>
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 12, 2000.
At the meeting, 87.2% of the outstanding shares of the Company's voting
stock were represented in person or by proxy. The first proposal voted
upon was the election of four Class II Directors for a term ending at
the annual meeting in 2003. The four persons nominated by the Company's
Board of Directors received the following votes and were elected:
<TABLE>
<CAPTION>
Name For Withheld
------------------- ----------- ---------
<S> <C> <C>
Leslie S. Biller 112,443,438 738,999
Ruth S. Block 112,339,956 842,481
Jerry A. Grundhofer 112,156,077 1,026,360
Allan L. Schuman 104,324,895 8,857,542
</TABLE>
In addition, the terms of office of the following directors continued
after the meeting: Class III Directors for a term ending in 2001 -
William L. Jews, Joel W. Johnson, Hugo Uyterhoeven and Albrecht Woeste;
Class I Directors for a term ending in 2002 - James J. Howard, Jerry W.
Levin, Robert L. Lumpkins and Roland Schulz.
The second proposal voted upon was the ratification of the appointment
of PricewaterhouseCoopers LLP as the Company's independent accountants
for the year ending December 31, 2000. The proposal was ratified as
follows:
<TABLE>
<CAPTION>
For Against Abstained
----------- ------- ---------
<S> <C> <C>
112,517,746 203,483 461,208
</TABLE>
As to all proposals, there were no broker non-votes.
Item 5 EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as exhibits to this report:
(10) A. Ecolab Inc. 1977 Stock Incentive Plan, As Amended
and Restated Through May 12, 2000.
B. Ecolab Inc. 1993 Stock Incentive Plan, As Amended and
Restated as of May 12, 2000.
C. Amendment No.1 to Amended and Restated Stockholder's
Agreement between Henkel KGaA and Ecolab Inc.
22
<PAGE>
PART II. OTHER INFORMATION (continued)
(15) Letter regarding unaudited interim financial
information.
(27) Financial Data Schedule.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter
ended June 30, 2000.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECOLAB INC.
Date: August 8, 2000 By: /s/S. L. Fritze
--------------------------
Steven L. Fritze
Vice President and Controller
(duly authorized officer and
Chief Accounting Officer)
23
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Document Method of Filing
----------- -------- ----------------
<S> <C> <C>
(10) A. Ecolab Inc. 1977 Stock Filed herewith
Incentive Plan, As Amended and electronically.
Restated Through May 12, 2000
B. Ecolab Inc. 1993 Stock Filed herewith
Incentive Plan, As Amended and electronically.
Restated As of May 12, 2000
C. Amendment No.1 to Amended and Filed herewith
Restated Stockholder's electronically.
Agreement between Henkel KGaA and
Ecolab Inc.
(15) Letter regarding unaudited interim Filed herewith
financial information electronically.
(27) Financial Data Schedule Filed herewith
electronically.
</TABLE>
24
