-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SZ3sYnA2725VGZikRTIc56Ctv8tmEg0zK5EZ+0c0fFbHLVdxXslMh45cXX+WRFRG cdlxAvwPpTqKWLT7+ZV4Zw== 0001047469-98-019542.txt : 19980514 0001047469-98-019542.hdr.sgml : 19980514 ACCESSION NUMBER: 0001047469-98-019542 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980513 SROS: NYSE SROS: PCX FILER: COMPANY DATA: COMPANY CONFORMED NAME: ECOLAB INC CENTRAL INDEX KEY: 0000031462 STANDARD INDUSTRIAL CLASSIFICATION: SOAP, DETERGENT, CLEANING PREPARATIONS, PERFUMES, COSMETICS [2840] IRS NUMBER: 410231510 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09328 FILM NUMBER: 98617309 BUSINESS ADDRESS: STREET 1: ECOLAB CTR STREET 2: 370 N WABASHA ST CITY: ST PAUL STATE: MN ZIP: 55102 BUSINESS PHONE: 6122932233 FORMER COMPANY: FORMER CONFORMED NAME: ECONOMICS LABORATORY INC DATE OF NAME CHANGE: 19861203 10-Q 1 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 1998 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 N. Wabasha Street, St. Paul, Minnesota 55102 - ------------------------------------------------------------------------------ (Address of principal executive offices)(Zip Code) 612-293-2233 ------------ (Registrant's telephone number, including area code) (Not Applicable) - ------------------------------------------------------------------------------ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of April 30, 1998. 128,752,964 shares of common stock, par value $1.00 per share. PART I - FINANCIAL INFORMATION ECOLAB INC. CONSOLIDATED STATEMENT OF INCOME
First Quarter Ended Year Ended March 31 December 31 (thousands, except per share) 1998 1997 1997 -------- -------- ----------- (unaudited) Net Sales $436,362 $373,760 $1,640,352 Cost of Sales 195,909 165,726 722,084 Selling, General and Administrative Expenses 186,733 164,604 699,764 -------- -------- ---------- Operating Income 53,720 43,430 218,504 Interest Expense, Net 5,406 2,998 12,637 -------- -------- ---------- Income Before Income Taxes and Equity in Earnings of Joint Venture 48,314 40,432 205,867 Provision for Income Taxes 20,289 16,577 85,345 Equity in Earnings of Henkel-Ecolab Joint Venture 2,563 2,349 13,433 -------- -------- ---------- Net Income $ 30,588 $ 26,204 $ 133,955 -------- -------- ---------- -------- -------- ---------- Net Income Per Common Share Basic $ 0.24 $0.20 $ 1.03 Diluted $ 0.23 $0.20 $ 1.00 Dividends Per Common Share $ 0.095 $0.08 $ 0.335 Weighted Average Common Shares Outstanding Basic 128,958 129,548 129,446 Diluted 133,934 133,520 133,822
See notes to consolidated financial statements. -2- ECOLAB INC. CONSOLIDATED BALANCE SHEET
March 31 March 31 December 31 (thousands) 1998 1997 1997 -------- -------- ------------ (unaudited) ASSETS Cash and cash equivalents $ 18,624 $ 63,510 $ 61,169 Accounts receivable, net 242,669 205,426 246,041 Inventories 153,775 131,110 154,831 Deferred income taxes 35,047 29,107 34,978 Other current assets 38,815 8,669 12,482 ---------- ---------- ---------- Current Assets 488,930 437,822 509,501 Property, Plant and Equipment, Net 385,493 335,221 395,562 Investment in Henkel-Ecolab Joint Venture 234,084 248,983 239,879 Other Assets 279,205 157,745 271,357 ---------- ---------- ---------- Total Assets $1,387,712 $1,179,771 $1,416,299 ---------- ---------- ---------- ---------- ---------- ----------
See notes to consolidated financial statements. (Continued) -3- ECOLAB INC. CONSOLIDATED BALANCE SHEET, Continued
March 31 March 31 December 31 (thousands, except per share) 1998 1997 1997 --------- ---------- ---------- (unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY Short-term debt $ 57,645 $ 30,232 $ 48,884 Accounts payable 118,122 97,877 130,682 Compensation and benefits 60,077 53,864 74,317 Income taxes 23,994 28,868 13,506 Other current liabilities 130,668 108,332 137,075 ---------- ---------- ---------- Current Liabilities 390,506 319,173 404,464 Long-Term Debt 248,047 148,403 259,384 Postretirement Health Care and Pension Benefits 84,019 79,192 76,109 Other Liabilities 119,740 121,448 124,641 Shareholders' Equity (common stock, par value $1.00 per share; shares outstanding: March 31, 1998 - 128,694; March 31, 1997 - 129,618; December 31, 1997 - 129,127) 545,400 511,555 551,701 ---------- ---------- ---------- Total Liabilities and Shareholders' Equity $1,387,712 $1,179,771 $1,416,299 ---------- ---------- ---------- ---------- ---------- ----------
See notes to consolidated financial statements. -4- ECOLAB INC. CONSOLIDATED STATEMENT OF CASH FLOWS
First Quarter Ended Year Ended March 31 December 31 (thousands) 1998 1997 1997 ------- ------- ------------ (unaudited) OPERATING ACTIVITIES Net income $30,588 $ 26,204 $133,955 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 23,416 20,846 84,415 Amortization 5,444 3,817 16,464 Deferred income taxes 581 31 (2,074) Equity in earnings of joint venture (2,563) (2,349) (13,433) Joint venture royalties and dividends 1,074 13,787 25,367 Other, net 635 279 4,630 Changes in operating assets and liabilities: Accounts receivable 546 247 (21,231) Inventories (4,396) (7,587) (14,395) Other assets (4,322) (4,645) (10,993) Accounts payable (13,629) (6,058) 20,876 Other liabilities 2,236 (17,867) 11,517 ------- -------- -------- Cash provided by operating activities $39,610 $ 26,705 $235,098 ------- -------- --------
Bracketed amounts indicate a use of cash. See notes to consolidated financial statements. (Continued) -5- ECOLAB INC. CONSOLIDATED STATEMENT OF CASH FLOWS, Continued
First Quarter Ended Year Ended March 31 December 31 (thousands) 1998 1997 1997 -------- -------- ----------- (unaudited) INVESTING ACTIVITIES Capital expenditures $(28,243) $(25,145) $(121,667) Property disposals 910 595 3,424 Businesses acquired (24,620) (6,068) (157,234) Other, net (105) (230) (1,240) -------- -------- --------- Cash used for investing activities (52,058) (30,848) (276,717) -------- -------- --------- FINANCING ACTIVITIES Notes payable 4,715 3,152 9,280 Long-term debt borrowings 16,940 117,000 Long-term debt repayments (22,540) (235) (15,210) Reacquired shares (19,003) (8,753) (60,795) Cash dividends on common stock (12,260) (10,366) (41,456) Other, net 2,977 15,008 26,278 -------- -------- --------- Cash provided by (used for) financing activities (29,171) (1,194) 35,097 -------- -------- --------- Effect of exchange rate changes on cash (926) (428) (1,584) -------- -------- --------- DECREASE IN CASH AND CASH EQUIVALENTS (42,545) (5,765) (8,106) Cash and Cash Equivalents, at beginning of period 61,169 69,275 69,275 -------- -------- --------- Cash and Cash Equivalents, at end of period $ 18,624 $ 63,510 $ 61,169 -------- -------- --------- -------- -------- ---------
Bracketed amounts indicate a use of cash. See notes to consolidated financial statements. -6- ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS The unaudited consolidated statement of income for the first quarter ended March 31, 1998 and 1997, reflects, in the opinion of management, all adjustments necessary for a fair statement of the results of operations for the interim periods. These adjustments consist of normal, recurring items. The results of operations for any interim period are not necessarily indicative of results for the full year. The consolidated balance sheet data as of December 31, 1997 and the related consolidated statements of income and cash flows data for the year then ended were derived from audited consolidated financial statements, but do not include all disclosures required by generally accepted accounting principles. The unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto incorporated in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. Coopers & Lybrand L.L.P., the Company's independent accountants, have performed a limited review of the interim financial information included herein. Their report on such review accompanies this filing.
BALANCE SHEET INFORMATION March 31 March 31 December 31 (thousands) 1998 1997 1997 ---------- ---------- ----------- (unaudited) Accounts Receivable, Net Accounts receivable $ 253,645 $ 215,247 $ 256,919 Allowance for doubtful accounts (10,976) (9,821) (10,878) ---------- ---------- ---------- Total $ 242,669 $ 205,426 $ 246,041 ---------- ---------- ---------- ---------- ---------- ---------- Inventories Finished goods $ 66,420 $ 57,102 $ 67,823 Raw materials and parts 90,100 77,294 89,716 Excess of fifo cost over lifo cost (2,745) (3,286) (2,708) ---------- ---------- ---------- Total $ 153,775 $ 131,110 $ 154,831 ---------- ---------- ---------- ---------- ---------- ---------- Property, Plant and Equipment, Net Land $ 12,473 $ 8,183 $ 18,184 Buildings and leaseholds 143,714 132,301 145,021 Machinery and equipment 245,131 212,572 232,940 Merchandising equipment 391,980 340,797 379,531 Construction in progress 18,805 8,501 19,862 ---------- ---------- ---------- 812,103 702,354 795,538 Accumulated depreciation and amortization (426,610) (367,133) (399,976) ---------- ---------- ---------- Total $ 385,493 $ 335,221 $ 395,562 ---------- ---------- ---------- ---------- ---------- ----------
-7- ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Balance Sheet Information (Continued)
March 31 March 31 December 31 (thousands) 1998 1997 1997 ---------- ---------- ---------- (unaudited) Other Assets Intangible assets, net $ 221,191 $ 99,965 $ 217,120 Investments in securities 5,000 5,000 5,000 Deferred income taxes 24,824 26,305 23,444 Other 28,190 26,475 25,793 ---------- --------- ---------- Total $ 279,205 $ 157,745 $ 271,357 ---------- --------- ---------- ---------- --------- ---------- Short-Term Debt Notes payable $ 41,822 $ 14,979 $ 33,440 Long-term debt, current maturities 15,823 15,253 15,444 ---------- --------- ---------- Total $ 57,645 $ 30,232 $ 48,884 ---------- --------- ---------- ---------- --------- ---------- Shareholders' Equity Common stock $ 143,030 $ 70,992 $ 142,797 Additional paid-in capital 150,817 190,548 149,137 Retained earnings 513,319 420,333 494,950 Deferred compensation (8,198) (6,768) (9,160) Cumulative translation (37,491) (13,137) (28,943) Treasury stock (216,077) (150,413) (197,080) ---------- --------- ---------- Total $ 545,400 $ 511,555 $ 551,701 ---------- --------- ---------- ---------- --------- ----------
Interest expense related to all debt was $6,414,000 and $4,141,000 for the first quarter ended March 31, 1998 and 1997, respectively, and $18,043,000 for the year ended December 31, 1997. Other noncurrent liabilities included income taxes payable of $82 million at March 31, 1998, December 31, 1997, and March 31, 1997. -8- ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Business Acquisitions GIBSON BUSINESS ACQUISITION In October 1997, the Company made a public tender offer for all of the outstanding stock of Gibson Chemical Industries Limited (Gibson) located in Melbourne, Australia. Gibson is a manufacturer and marketer of cleaning and sanitizing products, primarily for the Australian and New Zealand institutional, healthcare and industrial markets. On November 5, 1997, the Company waived all of the remaining conditions to its tender offer and, effective November 30, 1997, had acquired substantially all of the outstanding Gibson shares. During the first quarter of 1998, the Company completed its plan for integration of the Gibson businesses, including the determination of which of the acquired businesses will not be retained, and decisions related to certain duplicate facilities. The net assets related to these businesses and facilities which are being held for sale totaled approximately $25 million and have been reclassified to other current assets as of March 31, 1998. The acquisition was accounted for as a purchase. The purchase price of the shares and the direct costs of the transaction totaled approximately $130 million and were financed through the Company's Multicurrency Credit Agreement. The excess of the purchase price over the tangible net assets acquired was approximately $85 million and is being amortized on a straight-line basis over an average useful life of 25 years. The Company's international subsidiaries are included in the financial statements on the basis of their November 30 fiscal year ends, and, therefore, Gibson's operations were included in the Company's consolidated statement of income beginning in the 1998 reporting period. The assets acquired and the liabilities assumed in the transaction were included in the Company's consolidated balance sheet as of the November 30 effective date. The following unaudited pro forma financial information reflects the combined results of the Company and the retained Gibson businesses assuming the acquisition had occurred at the beginning of 1997. Pro forma adjustments have been included to give effect to amortization of the excess of the purchase price over the tangible net assets acquired, interest expense on debt incurred to finance the acquisition and the related income tax effects. The Company expects that certain efficiencies and synergies will result from the business combination, however, in accordance with the pro forma adjustment guidelines, these anticipated cost savings have not been reflected in the information shown below.
Year Ended December 31 (thousands, except per share) 1997 ----------- Net sales $1,741,006 Net income 131,455 Diluted net income per common share $ 0.98
-9- ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) BUSINESS ACQUISITIONS (CONTINUED) GIBSON BUSINESS ACQUISITION (CONTINUED) The pro forma results are presented for informational purposes only and are not necessarily indicative of the results of operations which actually would have resulted had the combination occurred at the beginning of 1997 or of future results of operations of the consolidated businesses. OTHER BUSINESS ACQUISITIONS In the first quarter of 1998, the Company acquired a cleaning and sanitizing business in Japan from Henkel KGaA. This acquisition has been accounted for as a purchase and, accordingly, the results of operations have been included in the financial statements of the Company from the date of acquisition. Net sales and operating income of this business for the first quarter ended March 31, 1998 were not significant. COMPREHENSIVE INCOME (UNAUDITED) In the first quarter of 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." The standard requires the display and reporting of comprehensive income, which includes all changes in shareholders' equity with the exception of additional investments by shareholders or distributions to shareholders. Comprehensive income for the Company includes net income and foreign currency translation which is charged or credited to the cumulative translation account within shareholders' equity. Comprehensive income for the first quarter ended March 31, 1998 and 1997 and the year ended December 31, 1997 was as follows:
First Quarter Ended Year Ended March 31 December 31 (thousands) 1998 1997 1997 ------- --------- ----------- Net income $30,588 $ 26,204 $133,955 Change in cumulative translation (8,548) (19,924) (35,730) ------- --------- --------- Comprehensive income $22,040 $ 6,280 $ 98,225 ------- --------- --------- ------- --------- ---------
-10- ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NET INCOME PER COMMON SHARE The computation of the basic and diluted per share amounts were as follows:
First Quarter Ended Year Ended March 31 December 31 (thousands, except per share) 1998 1997 1997 (unaudited) ---------- ---------- ------------- Net income $ 30,588 $ 26,204 $133,955 --------- --------- -------- --------- --------- -------- Weighted average common shares outstanding Basic (actual shares outstanding) 128,958 129,548 129,446 Effect of dilutive stock options 4,976 3,972 4,376 --------- --------- -------- Diluted 133,934 133,520 133,822 --------- --------- -------- --------- --------- -------- Net income per common share Basic $ 0.24 $ 0.20 $ 1.03 Diluted $ 0.23 $ 0.20 $ 1.00
Stock options for approximately 2.3 million shares had exercise prices substantially greater than the market value of the Company's common stock during the first quarter of 1998 and were not dilutive. Therefore, these stock options were not included in the computation of diluted net income per common share for the first quarter ended March 31, 1998. Virtually all stock options outstanding during the first quarter ended March 31, 1997 and the year ended December 31, 1997 were dilutive and included in the calculation of the diluted per share amounts. -11- ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) GEOGRAPHIC SEGMENTS The Company is the leading global developer and marketer of premium cleaning, sanitizing and maintenance products and services for the hospitality, institutional and industrial markets. Customers include hotels and restaurants; foodservice, healthcare and educational facilities; quickservice (fast-food) units; commercial laundries; light industry; dairy plants and farms; and food and beverage processors around the world. International consists of Canadian, Asia Pacific, Latin American, African and Kay's international operations. In addition, the Company and Henkel KGaA of Dusseldorf, Germany, each own 50% of Henkel-Ecolab, a joint venture which operates institutional and industrial cleaning and sanitizing businesses in Europe. Information concerning the Company's equity in earnings of the Henkel-Ecolab joint venture is provided in a separate note to the consolidated financial statements.
First Quarter Year Ended Ended March 31 December 31 (thousands) 1998 1997 1997 -------- -------- ----------- (unaudited) Net Sales United States $332,614 $290,703 $1,275,828 International 103,748 83,057 364,524 -------- -------- ---------- Total $436,362 $373,760 $1,640,352 -------- -------- ---------- -------- -------- ---------- Operating Income United States $ 47,536 $ 38,441 $ 195,630 International 7,094 5,870 26,962 Corporate (910) (881) (4,088) -------- -------- ---------- Total $ 53,720 $ 43,430 $ 218,504 -------- -------- ---------- -------- -------- ----------
-12- ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) EQUITY IN EARNINGS OF HENKEL-ECOLAB JOINT VENTURE Certain financial data of the Henkel-Ecolab joint venture and the components of the Company's equity in earnings of the joint venture for the first quarter ended March 31, 1998 and 1997 and for the year ended December 31, 1997 was:
First Quarter Year Ended Ended March 31 December 31 (thousands) 1998 1997 1997 -------- -------- ----------- (unaudited) Joint venture Net sales $199,910 $209,597 $844,689 Gross profit 112,421 115,058 470,698 Income before income taxes 12,078 11,973 63,640 Net income $ 6,774 $ 6,670 $ 33,701 Ecolab equity in earnings Ecolab equity in net income $ 3,387 $ 3,335 $ 16,851 Ecolab royalty income from joint venture, net of income taxes 1,084 1,135 4,583 Amortization expense for the excess of cost over the underlying net assets of the joint venture (1,908) (2,121) (8,001) -------- -------- -------- Equity in earnings of Henkel-Ecolab joint venture $ 2,563 $ 2,349 $ 13,433 -------- -------- -------- -------- -------- --------
At March 31, 1998, the Company's investment in the Henkel-Ecolab joint venture included approximately $139 million of unamortized excess of the Company's investment over its equity in the joint venture's net assets. This excess is being amortized on a straight-line basis over estimated economic useful lives of up to 30 years. -13- REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Directors Ecolab Inc. We have reviewed the accompanying consolidated balance sheet of Ecolab Inc. as of March 31, 1998 and 1997, and the related consolidated statements of income and cash flows for the three-month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 31, 1997, and the related consolidated statements of income, shareholders' equity and cash flows for the year then ended (not presented herein); and in our report dated February 23, 1998, 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, 1997, and the related consolidated statements of income and cash flows for the year then ended, is fairly presented, in all material respects, in relation to the consolidated balance sheet and statements of income and cash flows from which it has been derived. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Saint Paul, Minnesota April 24, 1998 -14- 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. These statements, which represent Ecolab's expectations or beliefs concerning various future events, are based on current expectations that involve a number of risks and uncertainities which could cause actual results to differ materially from those of such Forward-Looking Statements. We refer readers to the Company's statement entitled "Forward-Looking Statements and Risk Factors" which is contained under Item 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 1997. Additional risk factors may be described from time to time in Ecolab's filings with the Securities and Exchange Commission. RESULTS OF OPERATIONS - FIRST QUARTER ENDED MARCH 31, 1998 Net sales for the first quarter ended March 31, 1998 were $436 million, an increase of 17 percent over net sales of $374 million in the first quarter of last year. Businesses acquired in 1997 accounted for approximately one- half of the growth in consolidated sales for the first quarter of 1998. The growth in sales also reflected new products, a larger sales-and-service force, new customers, competitive gains and a continuation of generally good conditions in the hospitality and lodging industries, particularly in the United States. The gross profit margin for the first quarter of 1998 was 55.1 percent of net sales, down slightly from the gross profit margin of 55.7 percent of net sales in the first quarter of last year. The lower gross profit margin was primarily due to a lower margin in the Asia Pacific region which was negatively affected by economic and monetary problems and businesses the Company added to the region through acquisitions. The lower Asia Pacific margin was partially offset by modestly higher gross margins in virtually all of the Company's other operations which included the benefits of higher sales of the higher margin products of the Company's U.S. core operations and sales volume growth of new products. The benefits from selling price increases improved modestly over last year, however, continued to be limited due to market pressures. Selling, general and administrative expenses were 42.8 percent of net sales for the first quarter of 1998, a decrease from selling, general and administrative expenses of 44.0 percent of net sales in the first quarter of last year. This decrease reflected tight cost controls and strong sales growth. These benefits were partially offset by investments in the sales- and-service force and additional business investments. The Company expects to continue investing in its sales-and-service force, including investments in training and productivity. -15- ECOLAB INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Net income for the first quarter ended March 31, 1998 totaled $31 million, an increase of 17 percent over net income of $26 million in the comparable period of last year. On a per share basis, diluted net income per common share increased 15 percent to $0.23 from $0.20 in the first quarter of last year. These earnings improvements reflected double-digit growth in operating income principally due to strong performance of the U.S. core operations, tight cost controls, and a higher equity in earnings of the Henkel-Ecolab joint venture. Earnings were negatively affected by increases in interest expense and income taxes compared to the first quarter of last year. Net sales for the Company's United States operations were $333 million for the first quarter of 1998, an increase of 14 percent over net sales of $291 million in the first quarter of 1997. Sales benefited from business acquisitions, a continuation of strong growth in the core Institutional and Food and Beverage operations, sales of new products and continued good business trends in the hospitality and lodging industries. Businesses acquired in 1997 accounted for approximately one-third of the growth in U.S. sales. Selling price increases continued to be modest and were limited due to tight pricing conditions in several of the markets in which the Company does business. Sales of the U.S. Institutional division increased 14 percent over the first quarter of last year. Institutional's sales growth was 11 percent excluding the Grace-Lee Vehicle Wash business which was acquired in December 1997 and included strong growth in sales of all of its business units. Pest Elimination reported sales growth of 11 percent for the first quarter of 1998 with good growth in new contracts and high retention of key customers despite a competitive market environment. Sales of Kay's U.S. operations improved 8 percent over the first quarter of last year and included good results in sales to its core quickservice customers and growth in its grocery/deli business. Sales of the Textile Care division rose 5 percent for the first quarter and included good growth in sales to the laundry and hospitality markets. Textile Care continues to experience pressures from plant consolidations, particularly in laundries serving the healthcare market, and challenging market conditions. Sales of Professional Products increased 10 percent over the first quarter of last year and reflected continued growth in sales of branded products through its commercial mass distribution line. Water Care sales were up 3 percent for the first quarter of 1998 and included the negative effects of the elimination of some low margin business. The Food and Beverage division reported sales growth of 17 percent reflecting the acquisition of Chemidyne in August of last year. Excluding Chemidyne, Food and Beverage sales increased 8 percent with good growth in sales to all of its markets. -16- ECOLAB INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Operating income of the Company's United States operations was $48 million for the first quarter ended March 31, 1998, up 24 percent over operating income of $38 million in the first quarter of last year. As a percentage of net sales, the operating income margin increased to 14.3 percent from 13.2 percent in the first quarter of 1997. Operating income reflected growth in all of the U.S. businesses, including strong growth of the core Institutional and Food and Beverage operations. The overall improvement reflected strong sales growth, modest increases in raw material costs, higher gross margins, and the benefits of tight cost controls. Sales of the Company's International operations were $104 million for the first quarter of 1998, an increase of 25 percent over sales of $83 million in the comparable period of last year. International sales benefited from business acquisitions, however were negatively affected by changes in currency, particularly in the Asia Pacific region. Excluding business acquisitions, sales as reported in U.S. dollars were flat versus the first quarter of last year. When measured in local currencies, total International sales increased 38 percent for the quarter and, when acquisitions are excluded increased 9 percent over the first quarter of last year. The Asia Pacific region reported sales growth of 38 percent reflecting the benefits of the acquisition of Gibson at the end of 1997. Excluding business acquisitions and when measured in local currencies, Asia Pacific had sales growth of 8 percent with double-digit growth in Japan, Australia and Southeast Asia. Reported sales in the Latin America region increased 5 percent for the first quarter of 1998. When measured in local currencies, Latin America sales growth was 10 percent with double-digit growth in Mexico and Venezuela and modest growth in Brazil. Canada reported sales growth of 11 percent reflecting last year's acquisition of Savolite. Canada's local currency growth excluding Savolite was 7 percent with double-digit growth in sales to the Food and Beverage markets and good growth in sales to the other markets its serves. For the first quarter of 1998, International operations reported operating income of $7 million, an increase of 21 percent over last year's first quarter operating income of $6 million. Excluding the effects of business acquisitions, International's operating income increased 2 percent. Excluding business acquisitions and the negative effects of currency translation, International's first quarter 1998 operating income growth was 34 percent with double-digit growth in all of its major regions of operation. The Company continues to be cautious about near-term growth in the Asia Pacific region due to the uncertain economic conditions in the region. -17- ECOLAB INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Company's equity in earnings of the Henkel-Ecolab joint venture was $2.6 million for the first quarter of 1998, an increase of 9 percent over $2.3 million of equity in earnings in the first quarter of last year. Results were negatively affected by the stronger U.S. dollar. When measured in Deutsche marks, first quarter 1998 joint venture net income increased 14 percent reflecting sales growth and improved gross margins. Joint venture sales, although not consolidated, increased 7 percent when measured in Deutsche marks. When measured in U.S. dollars, joint venture sales were negatively affected by the strengthening U.S. dollar and decreased 5 percent to $200 million from $210 million in the first quarter of last year. Corporate operating expense was $1 million for the first quarter of 1998 and represented overhead costs directly related to the joint venture. Net interest expense totaled $5.4 million, up substantially from first quarter 1997 net interest expense of $3 million. This increase was primarily due to debt incurred under the Company's Multicurrency Credit Agreement for the Gibson acquisition. The first quarter 1998 provision for income taxes reflected an estimated effective rate of 42.0 percent, compared to last year's first quarter estimated effective rate of 41.0 percent. The increase in the effective income tax rate was principally due to the effects of business acquisitions made in 1997. FINANCIAL POSITION AND LIQUIDITY Total assets were approximately $1.4 billion at March 31, 1998, a decrease of 2 percent from total assets at year-end 1997 and an increase of 18 percent over total assets at March 31, 1997, due in part to business acquisitions made during 1997. Other current assets at March 31, 1998 included approximately $25 million of net assets of the acquired Gibson businesses which the Company has determined it will not retain. During the first quarter of 1998 the Company completed its plan for the integration of Gibson and the majority of these net assets held for sale initially had been included in the Company's year-end 1997 balance sheet as property, plant and equipment, accounts receivable and inventories. Total debt was $306 million at March 31, 1998, virtually unchanged from $308 million at year-end 1997 and up from total debt of $179 million at March 31, 1997 due to debt incurred to finance the Gibson acquisition. The ratio of total debt to capitalization was 36 percent at March 31, 1998, unchanged from year-end 1997 and an increase from 26 percent at March 31, 1997. -18- ECOLAB INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Cash provided by operating activities totaled $40 million, up from $27 million in the first quarter of last year. First quarter 1997 cash provided by operating activities was unfavorably affected by an income tax deposit made against outstanding income tax issues that had been accrued for in other noncurrent liabilities and favorably affected by higher dividends received from the Henkel-Ecolab joint venture. During the first quarter of 1998, the Company reacquired 224,242 shares of its common stock under its share repurchase program which provides shares to fund employee benefit plans. The Company also acquired 432,358 shares of its common stock under a separate 12 millon share repurchase program announced in May 1995. At March 31, 1998, there were 3,748,888 shares remaining for purchase from time to time under that 1995 purchase authorization. The Company anticipates that it will continue to periodically reacquire shares under these two programs. -19- PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) The following documents are filed as exhibits to this report: (15) Letter regarding unaudited interim financial information. (27) Financial Data Schedule. (b) Reports on Form 8-K: The Company filed one Current Report on Form 8-K, dated February 20, 1998, to comply with the safe harbor protections for "Forward-Looking Statements" offered by the Private Securities Litigation Reform Act of 1995. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. ECOLAB INC. Date: May 12, 1998 By: /s/ Michael E. Shannon ----------------- ------------------------------- Michael E. Shannon Chairman of the Board, Chief Financial and Administrative Officer (duly authorized officer and Principal Financial Officer) -20- EXHIBIT INDEX
Exhibit No. Document Method of Filing - ----------- -------- ---------------- (15) Letter regarding unaudited Filed herewith interim financial electronically information (27) Financial Data Schedule Filed herewith electronically
EX-15 2 EXHIBIT 15 Exhibit (15) Securities and Exchange Commission 450 Fifth Street N.W. Washington, DC 20549 RE: Ecolab Inc. Registration Statements on Form S-8 (Registration Nos. 2-60010; 2-74944; 33-1664; 33-41828; 2-90702; 33-18202; 33-55986; 33-56101 33-26241; 33-34000; 33-56151; 333-18627; 33-39228; 33-56125; 33-60266; 33-65364; 33-59431; 333-18617; 333-21167; 333-35519; 333-40239; and 333-50969) and Ecolab Inc. Registration Statements on Form S-3 (Registration Nos. 333-14771 and 333-45295) We are aware that our report dated April 24, 1998, on our reviews of interim financial information of Ecolab Inc. for the periods ended March 31, 1998 and 1997, and included in the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1998, is incorporated by reference in these registration statements. Pursuant to Rule 436(c) under the Securities Act of 1933, this report should not be considered a part of the registration statements prepared or certified by us within the meaning of Sections 7 and 11 of that Act. /s/Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Saint Paul, Minnesota May 12, 1998 EX-27 3 EXHIBIT 27 FDS
5 THIS SCHEDULE CONTAIN SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF MAR-31-1998 AND THE RELATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE THREE MONTH PERIOD THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1998 MAR-31-1998 18,624 0 253,645 10,976 153,775 488,930 812,103 426,610 1,387,712 390,506 248,047 0 0 143,030 402,370 1,387,712 436,362 436,362 195,909 195,909 186,733 0 6,414 48,314 20,289 30,588 0 0 0 30,588 0.24 0.23 THE AMOUNT OF "LOSS PROVISION" IS NOT SIGNIFIGANT AND HAS BEEN INCLUDED IN "OTHER EXPENSES."
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