UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
OR
o	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 incorporation or organization)	(I.R.S. Employer Identification No.)
370 Wabasha Street N., St. Paul, Minnesota 55102
(Address of principal executive offices)(Zip Code)
651-293-2233
(Registrant’s telephone number, including area code)
(Not Applicable)
(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ý                                                             No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ý                                                             No o

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of October 31, 2004.

 

257,706,764 shares of common stock, par value $1.00 per share.

 

 

Table of Contents

 

PART I	FINANCIAL INFORMATION
			Item 1.  Financial Statements.
			•		Consolidated Statement of Income
			•		Consolidated Balance Sheet
			•		Consolidated Statement of Cash Flows
			Notes to Consolidated Financial Statements
			•		1.				Consolidated Financial Information
			•		2.				Stock-Based Compensation
			•		3.				Selected Balance Sheet Information
			•		4.				Financial Instruments
			•		5.				Comprehensive Income
			•		6.				Special Charges
			•		7.				Business Acquisitions and Investments
			•		8.				Net Income Per Common Share
			•		9.				Pension and Postretirement Plans
			•		10.				Operating Segments
			•		11.				Goodwill and Other Intangible Assets
			•		12.				New Accounting Pronouncements
			•		13.				Subsequent Events
			Report of Independent Accountants
			Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
			•			Overview
			•			Results of Operations - Third Quarter and Nine Months Ended September 30, 2004
			•			Financial Position and Liquidity
			•			Subsequent Events
			Item 3.  Quantitative and Qualitative Disclosures About Market Risk.
			Item 4.  Controls and Procedures.
			Forward-Looking Statements and Risk Factors
PART II		OTHER INFORMATION
			Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.
			Item 6.  Exhibits.

 

 

PART I - - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

ECOLAB INC.

CONSOLIDATED STATEMENT OF INCOME

 

		Third Quarter Ended September 30
(amounts in thousands, except per share)		2004			2003
		(unaudited)
Net sales		$	1,090,316		$	982,766
Cost of sales		519,669			478,163
Selling, general and administrative expenses		410,360			357,923
Special charges		1,345			1,224
Operating income		158,942			145,456
Gain on sale of equity investment		—			10,877
Interest expense, net		11,566			12,051
Income before income taxes		147,376			144,282
Provision for income taxes		52,429			56,843
Net income		$	94,947		$	87,439
Basic net income per common share		$	0.37		$	0.34
Diluted net income per common share		$	0.36		$	0.33
Dividends declared per common share		$	0.0800		$	0.0725
Weighted-average common shares outstanding
Basic		258,368			258,694
Diluted		262,252			261,609

 

The accompanying notes are an integral part of the consolidated financial information.

 

2

 

		Nine Months Ended September 30
(amounts in thousands, except per share)		2004			2003
		(unaudited)
Net sales		$	3,112,398		$	2,805,353
Cost of sales		1,498,372			1,375,379
Selling, general and administrative expenses		1,198,180			1,060,739
Special charges		4,896			880
Operating income		410,950			368,355
Gain on sale of equity investment		—			10,877
Interest expense, net		33,956			34,506
Income before income taxes		376,994			344,726
Provision for income taxes		137,748			134,814
Net income		$	239,246		$	209,912
Basic net income per common share		$	0.93		$	0.81
Diluted net income per common share		$	0.92		$	0.80
Dividends declared per common share		$	0.2400		$	0.2175
Weighted-average common shares outstanding
Basic		257,509			260,129
Diluted		261,240			263,378

 

The accompanying notes are an integral part of the consolidated financial information.

 

3

 

ECOLAB INC.

CONSOLIDATED BALANCE SHEET

 

(amounts in thousands)		September 30 2004			December 31 2003
		(unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	72,097		$	85,626
Accounts receivable (net of allowance of $44,753 at September 30, 2004 and $44,011 at December 31, 2003)		739,057			626,002
Inventories		325,951			309,959
Deferred income taxes		75,984			75,820
Other current assets		53,456			52,933
Total current assets		1,266,545			1,150,340
Property, plant and equipment, net		783,210			736,797
Goodwill, net		934,671			797,211
Other intangible assets, net		221,875			203,859
Other assets, net		343,111			340,711
Total assets		$	3,549,412		$	3,228,918

 

The accompanying notes are an integral part of the consolidated financial information.

 

4

 

(amounts in thousands, except per share)		September 30 2004			December 31 2003
		(unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Short-term debt		$	83,312		$	70,203
Accounts payable		251,921			212,287
Compensation and benefits		214,342			190,386
Income taxes		68,043			59,829
Other current liabilities		350,370			319,237
Total current liabilities		967,988			851,942
Long-term debt		611,378			604,441
Postretirement health care and pension benefits		254,199			249,906
Other liabilities		245,321			227,203
Shareholders’ equity (common stock, par value $1.00 per share; shares outstanding: September 30, 2004 - 257,512; December 31, 2003 – 257,417)		1,470,526			1,295,426
Total liabilities and shareholders’ equity		$	3,549,412		$	3,228,918

 

The accompanying notes are an integral part of the consolidated financial information.

 

5

 

ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

 

		Nine Months Ended September 30
(amounts in thousands)		2004			2003
		(unaudited)
OPERATING ACTIVITIES
Net income		$	239,246		$	209,912
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		159,981			152,116
Amortization		25,218			21,391
Deferred income taxes		(140		)	2,054
Gain on sale of equity investment		—			(10,877		)
Disposal loss		3,980			—
Charge for in-process research and development		1,600			—
Special charges - asset disposals		—			1,665
Other, net		(717		)	1,063
Changes in operating assets and liabilities:
Accounts receivable		(89,146		)	(59,315		)
Inventories		(9,104		)	(8,681		)
Other assets		(628		)	18,020
Accounts payable		27,331			(5,922		)
Other liabilities		59,156			77,456
Cash provided by operating activities		$	416,777		$	398,882

 

The accompanying notes are an integral part of the consolidated financial information.

 

6

 

		Nine Months Ended September 30
(amounts in thousands)		2004			2003
		(unaudited)
INVESTING ACTIVITIES
Capital expenditures		$	(188,579	)	$	(148,649	)
Property disposals		12,184			5,731
Capitalized software expenditures		(3,501		)	(5,912		)
Businesses acquired and investments in affiliates, net of cash acquired		(130,517		)	(28,881		)
Sale of businesses and assets		3,292			24,832
Cash used for investing activities		(307,121		)	(152,879		)
FINANCING ACTIVITIES
Net issuances (repayments) of notes payable		14,232			(83,246		)
Long-term debt borrowings		3,641			16
Long-term debt repayments		(2,400		)	(10,065		)
Reacquired shares		(104,291		)	(198,947		)
Cash dividends on common stock		(61,775		)	(56,643		)
Exercise of employee stock options		27,982			119,525
Other, net		(564		)	(129		)
Cash used for financing activities		(123,175		)	(229,489		)
Effect of exchange rate changes on cash		(10		)	1,243
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(13,529		)	17,757
Cash and cash equivalents, beginning of period		85,626			49,205
Cash and cash equivalents, end of period		$	72,097		$	66,962

 

The accompanying notes are an integral part of the consolidated financial information.

 

7

 

ECOLAB INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.                     Consolidated Financial Information

 

The unaudited consolidated financial information as of September 30, 2004 and for the three and nine-month periods ended September 30, 2004 and 2003, reflect, in the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows of Ecolab Inc. (“the company”) for the interim periods presented. 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, 2003 were derived from the 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, 2003.

 

With respect to the unaudited financial information of the company as of September 30, 2004 and for the three and nine-month periods ended September 30, 2004 and 2003, included in this Form 10-Q, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards, which do not require an audit, for a review of such information. Therefore, their separate report dated October 21, 2004 appearing herein, states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied.  PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 (the “Act”) for their report on the unaudited financial information because that report is not a report or a part of a registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.

 

2.                    Stock-Based Compensation

 

The company measures compensation cost for its stock incentive and option plans using the intrinsic value-based method of accounting.

 

Had the company used the fair value-based method of accounting to measure compensation expense for its stock incentive and option plans and charged compensation cost against income over the vesting periods, based on the fair value of options at the date of grant, net income and the related basic and diluted per common share amounts for the three and nine-month periods ended September 30, 2004 and 2003 would have been reduced to the pro forma amounts in the following table.

 

8

 

		Third Quarter Ended September 30						Nine Months Ended September 30
		2004			2003			2004			2003
		(unaudited)						(unaudited)
Net income, as reported		$	94,947		$	87,439		$	239,246		$	209,912
Add: Stock-based employee compensation expense included in reported net income, net of tax		61			171			175			884
Deduct: Total stock-based employee compensation expense under fair value-based method, net of tax		(4,728		)	(4,395		)	(14,224		)	(13,628		)
Pro forma net income		$	90,280		$	83,215		$	225,197		$	197,168
Basic net income per common share
As reported		$	0.37		$	0.34		$	0.93		$	0.81
Pro forma		0.35			0.32			0.87			0.76
Diluted net income per common share
As reported		0.36			0.33			0.92			0.80
Pro forma		$	0.34		$	0.32		$	0.86		$	0.75

 

3.                     Selected Balance Sheet Information

 

(amounts in thousands)		September 30 2004			December 31 2003
		(unaudited)
Inventories
Finished goods		$	156,035		$	159,633
Raw materials and parts		173,289			152,127
Excess of fifo cost over lifo cost		(3,373		)	(1,801		)
Total		$	325,951		$	309,959
Other intangible assets, net
Customer relationships		$	175,591		$	153,479
Intellectual property		37,306			77,793
Trademarks		61,814			52,283
Other intangibles		16,871			16,012
Total		291,582			299,567
Accumulated amortization
Customer relationships		(36,743		)	(27,565		)
Intellectual property		(7,272		)	(45,809		)
Trademarks		(11,756		)	(9,313		)
Other intangibles		(13,936		)	(13,021		)
Other intangible assets, net		$	221,875		$	203,859

 

9

 

(amounts in thousands)		September 30 2004			December 31 2003
		(unaudited)
Shareholders’ equity
Common stock		$	313,940		$	310,284
Additional paid-in capital		459,553			369,015
Retained earnings		1,537,303			1,359,879
Deferred compensation, net		(301		)	(410		)
Accumulated other comprehensive income		11,684			4,098
Treasury stock		(851,653		)	(747,440		)
Total		$	1,470,526		$	1,295,426

 

Accumulated other comprehensive income as of September 30, 2004 consists of $11.8 million of net unrealized losses primarily on financial instruments and additional minimum pension liabilities and $23.5 million of cumulative translation income.  Accumulated other comprehensive income as of December 31, 2003 consists of $12.0 million of net unrealized losses primarily on financial instruments and additional minimum pension liabilities and $16.1 million of cumulative translation income.

 

4.                    Financial Instruments

 

In February 2002, the company issued euro 300 million of 5.375 percent Euronotes, due February 2007. The company has designated this Euronote debt (euro 300 million as of the end of the third quarter 2004) as a hedge of existing foreign currency exposures related to net investments the company has in certain European subsidiaries.  Accordingly, the transaction gains and losses on the portion of the Euronotes that are designated and are effective as hedges of the company’s net investments have been included as a component of the cumulative translation account.  Total transaction gains and losses related to the Euronotes charged or credited to the foreign currency translation account that is a component of shareholders’ equity were gains of $0.4 million and $24.2 million for the third quarter of 2004 and 2003, respectively, and losses of $5.5 million and $22.3 million for the first nine months of 2004 and 2003, respectively.

 

10

 

5.                    Comprehensive Income

 

Comprehensive income was as follows:

 

		Third Quarter Ended September 30						Nine Months Ended September 30
(amounts in thousands)		2004			2003			2004			2003
		(unaudited)						(unaudited)
Net income		$	94,947		$	87,439		$	239,246		$	209,912
Foreign currency translation		1,506			(27,146		)	7,432			45,137
Derivative instruments, net of tax		(426		)	980			154			(802		)
Comprehensive income		$	96,027		$	61,273		$	246,832		$	254,247

 

6.       Special Charges

 

In the first quarter of 2002, management approved plans to undertake restructuring and cost saving actions during 2002, including costs related to the integration of the company’s European operations.  These actions included global workforce reductions, facility closings, and product line discontinuations.  These actions were substantially completed by December 31, 2003.  Remaining amounts accrued primarily represent contractual periodic payments to be made over time.

 

The third quarter and nine months ended September 30, 2004 include the reversal of $255,000 and $750,000, respectively, of previously accrued estimated severance and lease termination costs.  Of the $750,000 reversed in the first nine months, $66,000 is included as a component of cost of sales.  The three- and nine-month periods ended September 30, 2003 include the reversal of $448,000 and $837,000, respectively, of previously accrued severance cost.  Of the $837,000 reversed for the nine-month period ended September 30, 2003, $45,000 is included as a component of cost of sales.

 

Also included in “Special Charges” for the third quarter and nine months ended September 30, 2004 is $1.6 million of in-process research and development charges related to the Alcide acquisition.  These charges include the portion of the purchase price assigned to research and development projects not yet completed at the date of acquisition and which have no alternative future use.  For the first nine months of 2004 “Special Charges” also includes a loss related to the disposal of a grease management product line of the Institutional division of the U.S. Cleaning & Sanitizing segment of $4.0 million ($2.4 million after tax).  For the three- and nine month periods ended September 30, 2003, “Special Charges” also includes $1.7 million of expense related to a change in the amount of goodwill allocated to the Darenas business sold in 2003.

 

Restructuring liabilities are classified as a component of other current liabilities.

 

11

 

For segment reporting purposes, each of these items have been included in the company’s corporate segment, which is consistent with the company’s internal management reporting.

 

Changes to the restructuring liability accounts include the following:

 

		Employee Termination Benefits			Asset Disposals			Other			Total
(unaudited)
(amounts in thousands)
Initial expense and accrual		$	36,366		$	6,180		$	5,221		$	47,767
Cash payments		(16,033		)				(1,711		)	(17,744		)
Non-cash charges					(6,180		)				(6,180		)
Restructuring liability, December 31, 2002		$	20,333		$	—		$	3,510		$	23,843
Cash payments		(16,770		)				(2,471		)	(19,241		)
Non-cash credits					7						7
Revisions to prior estimates		(1,352		)	(7		)				(1,359		)
Effect of foreign currency translation		1,222						670			1,892
Restructuring liability, December 31, 2003		$	3,433		$	—		$	1,709		$	5,142
Cash payments		(1,451		)				(88		)	(1,539		)
Revisions to prior estimates		(127		)				(98		)	(225		)
Effect of foreign currency translation		211						116			327
Restructuring liability, March 31, 2004		$	2,066		$	—		$	1,639		$	3,705
Cash payments		(327		)				(144		)	(471		)
Revisions to prior estimates		(270		)							(270		)
Effect of foreign currency translation		(36		)				(18		)	(54		)
Restructuring liability, June 30, 2004		$	1,433		$	—		$	1,477		$	2,910
Cash payments		(146		)				(44		)	(190		)
Revisions to prior estimates		—						(255		)	(255		)
Effect of foreign currency translation		(4		)				(3		)	(7		)
Restructuring liability, September 30, 2004		$	1,283		$	—		$	1,175		$	2,458

 

 

12

 

7.                    Business Acquisitions and Investments

 

In January 2004, the company acquired Nigiko, a Paris-based provider of commercial pest elimination services throughout France.  Nigiko pest elimination has annual sales of approximately $55 million.  These operations became part of the company’s International Cleaning & Sanitizing operations.

 

In February 2004, the company acquired Daydots International, a Texas-based provider of food safety products.  Daydots has annual sales of approximately $22 million.  These operations became part of the company’s U.S. Cleaning & Sanitizing operations.

 

In May 2004, the company acquired Elimco, a Cape Town, South Africa-based provider of commercial pest elimination services.  Elimco has annual sales of approximately $4 million.  These operations became part of the company’s International Cleaning & Sanitizing operations.

 

In June 2004, the company acquired the Restoration and Maintenance business unit of VIC International located in Knoxville, Tennessee.  This business unit has sales of approximately $5 million and became part of the company’s U.S. Cleaning & Sanitizing operations and the company’s International Cleaning & Sanitizing operations.

 

In July 2004, the company acquired Alcide Corporation, a Redmond, Washington-based producer of biocidal and sanitation products that are primarily used in the dairy, meat and poultry industries.  Alcide has annual sales of approximately $22 million.  These operations became part of the company’s U.S. Cleaning & Sanitizing operations.

 

The total cash paid for acquisitions and investments in affiliates was $1.6 million during the third quarter of 2004.  In addition, 1,834,759 shares of common stock were issued with a market value of $57.1 million in the Alcide acquisition plus $23,000 of cash in-lieu of fractional shares during the third quarter of 2004.  Total cash paid for acquisitions and investments in affiliates was $1.0 million during the third quarter of 2003.  During the first nine months of 2004, total cash paid for acquisitions and investments in affiliates, net of cash acquired, was $130.5 million plus common stock issued with a market value of approximately $57.1 million.  Total cash paid for acquisitions and investments in affiliates was $28.9 million during the first nine months of 2003.  This included payments of restructuring costs related to Henkel-Ecolab that were accrued in 2002.  The aggregate purchase price has been reduced for any cash or cash equivalents acquired with the acquisitions.

 

Based upon purchase price allocations, which may have components representing preliminary allocations with respect to recent acquisitions, the components of the aggregate purchase prices of the acquisitions made, and the allocation of the purchase prices, were as follows:

 

(unaudited)		Third Quarter Ended September 30						Nine Months Ended September 30
(amounts in millions)		2004			2003			2004			2003
Net tangible assets acquired		$	14		$	1		$	11		$	18
Identifiable intangible assets		(2		)	—			44			10
In-process research & development		2			—			2			—
Goodwill		45			—			131			1
Purchase price		$	59		$	1		$	188		$	29

 

The allocation of the purchase price includes adjustments to preliminary allocations from prior periods, if any.  In the third quarter 2004 the company finalized its purchase accounting valuation of identifiable intangibles in the Nigiko acquisition which resulted in a decrease in identifiable intangible assets of $7.9 million and a corresponding increase

 

13

 

 

in goodwill. In the third quarter of 2004, the company recorded a charge of $1.6 million for in-process research & development as part of the allocation of purchase price in the Alcide acquisition.

 

The changes in the carrying amount of goodwill for each of the company’s reportable segments for the quarter and nine months ended September 30, 2004 were as follows:

 

		United States									International
(unaudited) (amounts in thousands)		Cleaning & Sanitizing			Other Services			Total			Cleaning & Sanitizing			Consolidated
Balance as of December 31, 2003		$	122,346		$	48,929		$	171,275		$	625,936		$	797,211
Goodwill acquired during quarter		18,629			—			18,629			63,799			82,428
Goodwill related to dispositions		(69		)	—			(69		)	—			(69		)
Foreign currency translation		—			—			—			27,672			27,672
Balance as of March 31, 2004		$	140,906		$	48,929		$	189,835		$	717,407		$	907,242
Goodwill acquired during quarter		2,098			—			2,098			1,780			3,878
Foreign currency translation		—			—			—			(20,183		)	(20,183		)
Balance as of June 30, 2004		$	143,004		$	48,929		$	191,933		$	699,004		$	890,937
Goodwill acquired during quarter		34,075			—			34,075			10,776			44,851
Foreign currency translation		—			—			—			(1,117		)	(1,117		)
Balance as of September 30, 2004		$	177,079		$	48,929		$	226,008		$	708,663		$	934,671

 

Goodwill acquired in 2004 also includes adjustments to prior year acquisitions.

 

Operations of the acquired companies have been included in the operations of the company since the date of the respective acquisition.  The purchase prices have been allocated to assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition.  These acquisitions individually and in the aggregate are not material to the company’s operations.

 

In April 2004, the company sold its grease management product line to National Fire Services of Gurnee, Illinois effective March 31, 2004.  Sales of the grease management product line totaled approximately $20 million in 2003 and were included in the company’s U.S. Cleaning & Sanitizing operations.

 

14

 

8.                    Income Per Common Share

 

The computations of the basic and diluted net income per share amounts were as follows:

 

(amounts in thousands,		Third Quarter Ended September 30							Nine Months Ended September 30
except per share)		2004			2003				2004				2003
		(unaudited)							(unaudited)
Net income		$	94,947		$	87,439				$	239,246		$	209,912
Weighted-average common shares outstanding
Basic		258,368			258,694					257,509			260,129
Effect of dilutive stock options and awards		3,884			2,915					3,731			3,249
Diluted		262,252			261,609					261,240			263,378
Net income per common share
Basic		$	0.37		$	0.34				$	0.93		$	0.81
Diluted		$	0.36		$	0.33				$	0.92		$	0.80

 

Stock options to purchase approximately 84,000 shares and 330,000 shares for the quarter and nine months ended September 30, 2004, respectively, were not dilutive and, therefore, were not included in the computations of diluted common shares outstanding.  Stock options to purchase approximately 185,000 shares for both the third quarter and nine months ended September 30, 2003 were not dilutive and, therefore, were not included in the computations of diluted common shares outstanding.

 

15