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 March 31, 2005
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 April 30, 2005.

 

255,384,521 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
	Review Report of Independent Registered Public Accounting Firm
	Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
		•	Overview
		•	Results of Operations – First Quarter Ended March 31, 2005
		•	Financial Position and Liquidity
		•	Subsequent Event
	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

 

		First Quarter Ended March 31
(amounts in thousands, except per share)		2005			2004
		(unaudited)
Net sales		$	1,069,880		$	979,371
Cost of sales (including income from special charges of $50 in 2004)		526,556			474,094
Selling, general and administrative expenses		416,955			385,333
Special charges		—			3,805
Operating income		126,369			116,139
Interest expense, net		11,190			11,173
Income before income taxes		115,179			104,966
Provision for income taxes		40,531			38,960
Net income		$	74,648		$	66,006
Basic net income per common share		$	0.29		$	0.26
Diluted net income per common share		$	0.29		$	0.25
Dividends declared per common share		$	0.0875		$	0.0800
Weighted-average common shares outstanding
Basic		256,272			257,025
Diluted		260,044			260,227

 

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

 

2

 

ECOLAB INC.

CONSOLIDATED BALANCE SHEET

 

(amounts in thousands)		March 31 2005			December 31 2004
		(unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	83,447		$	71,231
Accounts receivable, net		767,857			738,266
Inventories		345,921			338,603
Deferred income taxes		75,821			76,038
Other current assets		73,962			54,928
Total current assets		1,347,008			1,279,066
Property, plant and equipment, net		838,759			834,730
Goodwill		1,001,794			991,811
Other intangible assets, net		230,700			229,095
Other assets, net		380,073			381,472
Total assets		$	3,798,334		$	3,716,174

 

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

 

3

 

ECOLAB INC.

CONSOLIDATED BALANCE SHEET (Continued)

 

(amounts in thousands, except per share)		March 31 2005			December 31 2004
		(unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Short-term debt		$	276,282		$	56,132
Accounts payable		257,933			269,561
Compensation and benefits		182,014			231,856
Income taxes		36,349			22,709
Other current liabilities		362,324			359,289
Total current liabilities		1,114,902			939,547
Long-term debt		566,636			645,445
Postretirement health care and pension benefits		296,645			270,930
Other liabilities		288,570			297,733
Shareholders’ equity (common stock, par value $1.00 per share; shares outstanding:
March 31, 2005 – 255,313; December 31, 2004 – 257,542)		1,531,581			1,562,519
Total liabilities and shareholders’ equity		$	3,798,334		$	3,716,174

 

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

 

4

 

ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

 

		First Quarter Ended March 31
(amounts in thousands)		2005			2004
		(unaudited)
OPERATING ACTIVITIES
Net income		$	74,648		$	66,006
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		55,953			53,309
Amortization		9,088			7,977
Deferred income taxes		(1,590		)	1,822
Disposal loss		—			3,980
Other, net		37			(91		)
Changes in operating assets and liabilities:
Accounts receivable		(25,556		)	(4,341		)
Inventories		(7,715		)	(5,170		)
Other assets		(7,867		)	(19,146		)
Accounts payable		(12,451		)	(2,863		)
Other liabilities		(18,954		)	(10,940		)
Cash provided by operating activities		$	65,593		$	90,543

 

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

 

5

 

ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)

 

		First Quarter Ended March 31
(amounts in thousands)		2005			2004
		(unaudited)
INVESTING ACTIVITIES
Capital expenditures		$	(58,156	)	$	(68,454	)
Property disposals		234			3,729
Capitalized software expenditures		(2,706		)	(701		)
Businesses acquired and investments in affiliates, net of cash acquired		(20,980		)	(118,250		)
Sale of businesses and assets		800			—
Cash used for investing activities		(80,808		)	(183,676		)
FINANCING ACTIVITIES
Net issuances of notes payable		145,046			96,754
Long-term debt borrowings		1,285			582
Long-term debt repayments		(1,582		)	(117		)
Reacquired shares		(118,569		)	(34,876		)
Cash dividends on common stock		(22,590		)	(20,596		)
Exercise of employee stock options		23,804			11,662
Other, net		—			(37		)
Cash provided by financing activities		27,394			53,372
Effect of exchange rate changes on cash		37			457
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		12,216			(39,304		)
Cash and cash equivalents, beginning of period		71,231			85,626
Cash and cash equivalents, end of period		$	83,447		$	46,322

 

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

 

6

 

ECOLAB INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. Consolidated Financial Information

 

The unaudited consolidated financial information for the first quarters ended March 31, 2005 and 2004, 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, 2004 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 information 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, 2004.

 

With respect to the unaudited financial information of the company for the first quarters ended March 31, 2005 and 2004 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 April 21, 2005 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 first quarters ended March 31, 2005 and 2004 would have been reduced to the pro forma amounts in the following table:

 

7

 

ECOLAB INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2. Stock-Based Compensation (continued)

 

		First Quarter Ended March 31
(amounts in thousands, except per share)		2005			2004
		(unaudited)
Net income, as reported		$	74,648		$	66,006
Add: Stock-based employee compensation expense included in reported net income, net of tax		61			56
Deduct: Total stock-based employee compensation expense under fair value-based method, net of tax		(5,283		)	(4,791		)
Pro forma net income		$	69,426		$	61,271
Basic net income per common share
As reported		$	0.29		$	0.26
Pro forma		0.27			0.24
Diluted net income per common share
As reported		0.29			0.25
Pro forma		$	0.27		$	0.24

 

3. Selected Balance Sheet Information

 

(amounts in thousands)		March 31 2005			December 31 2004
		(unaudited)
Inventories
Finished goods		$	179,412		$	167,787
Raw materials and parts		176,674			176,336
Excess of fifo cost over lifo cost		(10,165		)	(5,520		)
Total		$	345,921		$	338,603
Other intangible assets, net
Customer relationships		$	193,718		$	189,572
Intellectual property		41,030			38,130
Trademarks		63,329			62,874
Other intangibles		7,532			17,104
Total		305,609			307,680
Accumulated amortization
Customer relationships		(47,976		)	(43,798		)
Intellectual property		(8,315		)	(7,726		)
Trademarks		(13,715		)	(12,764		)
Other intangibles		(4,903		)	(14,297		)
Other intangible assets, net		$	230,700		$	229,095

 

8

 

ECOLAB INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3. Selected Balance Sheet Information (continued)

 

(amounts in thousands)		March 31 2005			December 31 2004
		(unaudited)
Shareholders’ equity
Common stock		$	317,126		$	315,743
Additional paid-in capital		531,996			501,809
Retained earnings		1,638,165			1,585,957
Deferred compensation, net		(392		)	(414		)
Accumulated other comprehensive income		75,979			72,160
Treasury stock		(1,031,293		)	(912,736		)
Total		$	1,531,581		$	1,562,519

 

Accumulated other comprehensive income as of March 31, 2005 consists of $14.3 million of net unrealized losses on financial instruments and additional minimum pension liabilities as well as $90.3 million of cumulative translation income.  Accumulated other comprehensive income as of December 31, 2004 consists of $14.9 million of net unrealized losses on financial instruments and additional minimum pension liabilities as well as $87.1 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 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 to shareholders’ equity were gains of approximately $1.8 million and losses of approximately $14.6 million for the first quarter of 2005 and 2004, respectively.

 

9

 

ECOLAB INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

5. Comprehensive Income

 

Comprehensive income was as follows:

 

		First Quarter Ended March 31
(amounts in thousands)		2005			2004
		(unaudited)
Net income		$	74,648		$	66,006
Foreign currency translation		3,232			24,008
Derivative instruments		586			254
Comprehensive income		$	78,466		$	90,268

 

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 at December 31, 2003 and through December 31, 2004 primarily represented contractual periodic payments to be made over time.  At December 31, 2004, the accrued restructuring liabilities were satisfied.

 

The first quarter of 2004 includes the reversal of $225,000 of previously accrued estimated severance and lease termination costs.  Of the $225,000 reversed for the first quarter of 2004, $50,000 is included as a component of cost of sales.

 

Also included in “Special Charges” in the first quarter of 2004 is a loss related to the disposal of the grease management product line of the Institutional division of the U.S. Cleaning & Sanitizing segment of $4.0 million ($2.4 million after tax).

 

Remaining restructuring liabilities of approximately $3,705,000 at March 31, 2004 are classified as a component of other current liabilities.

 

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.

 

10

 

ECOLAB INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7. Business Acquisitions and Investments

 

In January 2005, the company acquired Associated Chemicals & Services, Inc. (aka Midland Research), a water treatment business.  Midland had annual sales of approximately $16 million and their operations became part of the company’s United States Cleaning & Sanitizing and International operations.

 

In February 2005, the company acquired YSC Chemical Company (YSC) based in Bangkok, Thailand.  YSC provides floor cleaning and finishing products in East Asia.  YSC had annual sales of approximately $3 million and their operations became part of the company’s International operations.

 

The total cash paid for acquisitions and investments in affiliates was $21.0 million and $118.3 million during the first quarter of 2005 and 2004, respectively.  Cash paid for acquisitions in 2004 included payments of restructuring costs related to the integration of the former Henkel-Ecolab European joint venture that were accrued in 2002.  The aggregate purchase price has been reduced for any cash or cash equivalents acquired with the acquisitions.  The allocation of the purchase price contains adjustments to preliminary allocations from prior periods, if any.

 

Based upon purchase price allocations, some of which may have components representing preliminary allocations with respect to recent acquisitions, the components of the aggregate purchase prices of the acquisitions made during the three months ended March 31, 2005 and 2004, and the allocation of the purchase prices, were as follows:

 

(unaudited)
(amounts in millions)		2005			2004
Net tangible assets acquired		$	3		$	(6	)
Identifiable intangible assets		7			42
Goodwill		11			82
Purchase price		$	21		$	118

 

The changes in the carrying amount of goodwill for each of the company’s reportable segments for the quarter ended March 31, 2005 were as follows:

 

		United States
(unaudited) (thousands)		Cleaning & Sanitizing			Other Services			Total			International			Consolidated
Balance as of December 31, 2004		$	177,213		$	48,929		$	226,142		$	765,669		$	991,811
Goodwill acquired during quarter		9,548			—			9,548			1,244			10,792
Goodwill related to dispositions		—			—			—			(376		)	(376		)
Foreign currency translation		—			—			—			(433		)	(433		)
Balance as of March 31, 2005		$	186,761		$	48,929		$	235,690		$	766,104		$	1,001,794

 

Goodwill acquired in 2005 also includes adjustments to prior year acquisitions.  Goodwill disposed of in 2005 relates to the sale of a small business in Europe.

 

11

 

ECOLAB INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7. Business Acquisitions and Investments (continued)

 

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 2005, the company expanded its European food and beverage hygiene business through the purchase of certain operations of Kilco Chemicals Ltd. Based near Belfast, Northern Ireland, Kilco offers products, systems and services for the food and beverage processing industry.  Kilco had sales of approximately $5 million annually, and these operations will become part of the company’s International operations.

 

8. Net Income Per Common Share

 

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

 

		First Quarter Ended March 31
(amounts in thousands, except per share)		2005			2004
		(unaudited)
Net income		$	74,648		$	66,006
Weighted-average common shares outstanding
Basic		256,272			257,025
Effect of dilutive stock options and awards		3,772			3,202
Diluted		260,044			260,227
Net income per common share
Basic		$	0.29		$	0.26
Diluted		$	0.29		$	0.25

 

Stock options to purchase approximately 4.2 million and 4.7 million shares for the first quarters ended March 31, 2005 and 2004, respectively, were anti-dilutive and, therefore, were not included in the computation of diluted common shares outstanding.

 

12

 

ECOLAB INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

9. Pension and Postretirement Plans

 

The components of net periodic pension and postretirement healthcare benefit costs for the first quarter are as follows:

 

														U.S.
								International						Postretirement Health
(unaudited)		U.S. Pension Benefits						Pension Benefits						Care Benefits
(amounts in thousands)		2005			2004			2005			2004			2005			2004
Service cost		$	9,737		$	7,863		$	3,379		$	3,356		$	771		$	799
Interest cost on benefit obligation		9,467			8,548			4,783			4,519			2,215			2,368
Expected return on plan assets		(13,279		)	(12,540		)	(3,011		)	(2,784		)	(443		)	(465		)
Amortization of prior service cost (benefit)		385			434			(1		)	30			(1,415		)	(1,424		)
Amortization of unrecognized transition (asset)/obligation		(176		)	(351		)	88			89			—			—
Recognition of net actuarial loss		2,507			1,380			442			464			1,434			1,737
Total expense		$	8,641		$	5,334		$	5,680		$	5,674		$	2,562		$	3,015

 

The company previously disclosed in its financial statements for the year ended December 31, 2004, that it was not required to make any contributions to the U.S. pension plan and postretirement healthcare benefit plans in 2005.  During the first quarter ended March 31, 2005, no contributions were made to those plans. The company is not required to make any contributions to the U.S. pension plan and postretirement healthcare benefit plans for the remainder of 2005.  The maximum tax deductible contribution for 2005 is $45 million for the U.S. pension plan.

 

Certain international pension benefit plans are required to be funded in accordance with local government requirements.  The company contributed $4.3 million to its international pension benefit plans during the quarter ended March 31, 2005.  The company estimates that it will contribute approximately $13 million to the international pension benefit plans during the remainder of 2005.

 

10. Operating Segments

 

Financial information for each of the company’s reportable segments is as follows:

 

		First Quarter Ended
		March 31
(amounts in thousands)		2005			2004
		(unaudited)
Net Sales
United States
Cleaning & Sanitizing		$	467,179		$	430,734
Other Services		85,810			77,775
Total		552,989			508,509
International		505,034			483,807
Effect of foreign currency translation		11,857			(12,945		)
Consolidated		$	1,069,880		$	979,371

 

13

 

ECOLAB INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

10. Operating Segments (continued)

 

		First Quarter Ended
		March 31
(amounts in thousands)		2005			2004
		(unaudited)
Operating Income
United States
Cleaning & Sanitizing		$	76,444		$	77,290
Other Services		8,471			5,198
Total		84,915			82,488
International		40,009			38,513
Corporate expense		—			(3,755		)
Effect of foreign currency translation		1,445			(1,107		)
Consolidated		$	126,369		$	116,139

 

The International amounts included above are based on translation into U.S. dollars at the fixed currency exchange rates used by management for 2005.

 

Corporate operating expense in the first quarter ended March 31, 2004 includes income from reductions in restructuring accruals of $0.2 million.  Corporate expense for the first quarter ended March 31, 2004 also includes a charge of $4.0 million related to the disposal of the grease management product line.

 

11. Goodwill and Other Intangible Assets

 

Under Statement of Financial Accounting Standards (SFAS) No. 142, goodwill must be tested annually for impairment.  The company performs its annual goodwill impairment test during the second quarter.  If circumstances change significantly within a reporting unit, the company would test it for impairment prior to the annual test for impairment.

 

Goodwill and other intangible assets arise principally from business acquisitions.  Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired.  Other intangible assets include primarily customer relationships, trademarks, patents and other technology. Other intangible assets are amortized on a straight-line basis over their estimated economic lives.  The weighted-average useful life of other intangible assets was 13 and 14 years as of March 31, 2005 and 2004, respectively.

 

The straight-line method of amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits obtained by the company in each reporting period.  Total amortization expense related to other intangible assets during the first quarter ended March 31, 2005 and 2004 was approximately $6.0 million and $5.4 million, respectively.  As of March 31, 2005, future estimated amortization expense related to amortizable other identifiable intangible assets will be:

 

14

 

ECOLAB INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

11. Goodwill and Other Intangible Assets (continued)

 

(unaudited)
(amounts in thousands)
2005 (Remainder: nine-month period)		$	18,962
2006		24,389
2007		24,031
2008		23,810
2009		22,317

 

12. New Accounting Pronouncements

 

In December 2004, the FASB issued SFAS No. 123 (Revised 2004) Share-Based Payments (“SFAS No. 123R”).  The Securities and Exchange Commission (SEC) staff issued in March 2005 Staff Accounting Bulletin No. 107 (SAB 107) to assist preparers by simplifying some of the implementation challenges of FAS 123R while enhancing the information investors receive.  SFAS No. 123R addresses all forms of share-based payment awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights.  SFAS No. 123R will require the company to expense share-based payment awards with compensation cost measured at the fair value of the award.  Based on recent guidance issued by the SEC, SFAS No. 123R requires the company to adopt the new accounting provisions beginning in the first quarter of 2006.  The company expects to restate prior period results as part of its transition to the new standard in line with the pro forma amounts historically shown in the notes to consolidated financial statements.

 

In December 2004, the FASB issued an FSP titled “Application of FASB Statement No. 109, Accounting for Income Taxes (SFAS No. 109), the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” (the “Act”) (FSP 109-1).  Under the guidance in FSP 109-1, the deduction received under the provisions of the Act will be treated as a “special deduction” as described in SFAS No. 109.  As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date.  Rather, the impact of this deduction will be reported in the period in which the deduction is claimed on the company’s tax return.  The company began including the modest benefits from this deduction in tax expense beginning in 2005.

 

In December 2004, the FASB issued an FSP titled “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (FSP 109-2).  FSP 109-2 allows the company time beyond the fourth quarter of 2004, the period of enactment, to evaluate the effect of the Act on its plans for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109.  The Act includes a deduction for 85 percent of certain foreign earnings that are repatriated, as defined in the Act, at an effective tax cost of 5.25 percent on any such repatriated foreign earnings.  Companies may elect to apply this provision to qualifying earnings repatriations in 2005.  The company has begun an evaluation of the effects of the repatriation provisions; however, the company does not expect to be able to complete this evaluation until Congress or the Treasury Department provides additional clarifying language on key elements of the provision.  The company expects to complete its evaluation of the effects of the repatriation provision within a reasonable period of time following the publication of the additional clarifying language.

 

15

 

REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and Directors
Ecolab Inc.

 

We have reviewed the accompanying consolidated balance sheet of Ecolab Inc. as of March 31, 2005, and the related consolidated statements of income and of cash flows for the three-month periods ended March 31, 2005 and 2004. These financial statements are the responsibility of the Company’s management.

 

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Oversight Board (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 interim consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

 

We have previously audited, in accordance with standards of the Public Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2004, and the related consolidated statements of income, of comprehensive income and changes in shareholders’ equity, and of cash flows for the year then ended, management’s assessment of the effectives of the company’s internal control over financial reporting as of December 31, 2004 and the effectiveness of the company’s internal control over financial reporting as of December 31, 2004; and in our report dated February 24, 2005, we expressed unqualified opinions thereon (our opinion contained an explanatory paragraph stating the company changed the manner in which it accounts for goodwill and other intangible assets as of January 1, 2002).  The consolidated financial statements and management’s assessment of the effectiveness of internal control over financial reporting referred to above are not presented herein.  In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2004, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

 

/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP

 

 

Minneapolis, Minnesota
April 21, 2005

 

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ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis provides information that we believe is useful in understanding our operating results, cash flows and financial condition.  The discussion should be read in conjunction with the unaudited consolidated financial information 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 statement entitled “Forward-Looking Statements and Risk Factors” located at the end of Part I of this report.  Additional risk factors may be described from time to time in our filings with the Securities and Exchange Commission.

 

Overview for the Quarter Ended March 31, 2005

The first quarter of 2005 provided another quarter of sales and operating income growth causing diluted net income per share to rise 16 percent to $0.29 per share.  The strong earnings performance leveraged continued growth in domestic and international businesses as well as favorable currency translation and lower income tax rates.

 

Operating Performance

•                  Sales of our United States Cleaning & Sanitizing operations rose 8 percent to $467 million in the first quarter of 2005, showing an increase in sales in all divisions.  Kay sales were up 20 percent and Food & Beverage, including the acquired Alcide business, had sales growth of 13 percent over the first quarter of 2004.  Institutional showed steady sales growth over last year.

•                  First quarter sales for our United States Other Services operations increased 10 percent to $86 million.  Both Pest Elimination, with sales growth of 12 percent, and GCS, with sales growth of 8 percent, contributed to the strong overall sales increase.

•                  Sales of our International operations rose 4 percent to $505 million in the first quarter when measured in fixed currency rates.  Asia Pacific, Latin America and Canada all showed good sales growth while sales in Europe grew modestly.  At public currency rates, International sales increased 10 percent.

•                  Operating income for U.S. Cleaning & Sanitizing was negatively impacted in the first quarter of 2005 by rising raw material costs.  Our raw material cost contracts and arrangements tended to post cost increases early in 2005. The company has implemented selling price increases and will continue to pursue increases as customer contracts renew during the year.

 

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ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Financial Performance

•                  Cash provided by operating activities for the first quarter of $66 million helped us to repurchase 3.6 million shares, make acquisitions and meet our ongoing obligations and commitments.

•                  Currency translation continued to have a positive impact on our income growth during the first quarter, adding approximately $1.5 million to net income compared with the first quarter 2004 benefit of $2.6 million.

•                  An improvement in our income tax rate from 37.1 percent in the first quarter of 2004 to 35.2 percent in 2005 added approximately $2.1 million to net income.  The first quarter 2005 had one-time items including a deduction for product contributed to the tsunami relief efforts and a tax credit for a state settlement.

•                  Diluted net income per share was $0.29 for the first quarter of 2005, up 16 percent from $0.25 in the comparable period of 2004.  Earnings for the first quarter of 2004 included an after-tax charge of $2.4 million related to the disposal of a grease management product line.

 

Results of Operations - First Quarter Ended March 31, 2005

 

Consolidated net sales for the first quarter ended March 31, 2005 were $1.070 billion, an increase of 9 percent over net sales of $979 million in the first quarter of last year.  Excluding acquisitions and divestitures, consolidated net sales increased 8 percent in the first quarter.  Changes in currency translation positively impacted sales growth by approximately 2.6 percentage points for the first quarter.  Sales benefited from customer gains, additional sales to existing customers and investments in new products and the sales and service force.

 

The gross profit margin (defined as the difference between net sales less cost of sales divided by net sales) was 50.8 percent and 51.6 percent of net sales for the first quarter ended March 31, 2005 and 2004, respectively.  The decrease reflects higher delivered product costs and a less favorable business mix which were partially offset by selling price increases and cost savings.

 

Selling, general and administrative expenses were 39.0 percent and 39.3 percent of consolidated net sales for the first quarter of 2005 and 2004, respectively.  Selling, general and administrative expenses as a percent of sales improved primarily due to sales leverage and aggressive cost savings programs which offset business investments.

 

Net income totaled $75 million, for the first quarter of 2005 and $66 million for the comparable period of 2004.  On a per share basis, diluted net income per common share was $0.29 for the first quarter of 2005 and increased 16 percent over diluted net income per share of $0.25 in the first quarter of 2004.  Net income for the first quarter of 2004 included an after-tax charge of $2.4 million related to the disposal of the grease management product line.  Currency translation positively impacted net income growth by approximately $1.5 million for the first quarter of 2005 compared to last year’s first quarter benefit of $2.6 million.  The comparison of net income also benefited from a lower income tax rate in 2005 of 35.2 percent versus an income tax rate of 37.1 percent in the first quarter of 2004.

 

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ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Results of Operations - First Quarter Ended March 31, 2005 (continued)

 

Sales for each of our reportable segments for the quarters ended March 31, 2005 and 2004 are as follows:

 

		First Quarter Ended
		March 31
(amounts in thousands)		2005			2004
		(unaudited)
Net Sales
United States
Cleaning & Sanitizing		$	467,179		$	430,734
Other Services		85,810			77,775
Total		552,989			508,509
International		505,034			483,807
Effect of foreign currency translation		11,857			(12,945		)
Consolidated		$	1,069,880		$	979,371

 

The following table shows the increase or growth in sales for the first quarter ended March 31, 2005 over the first quarter of 2004 by operating segment:

 

		Percent Change
		First Quarter
Net Sales
United States Cleaning & Sanitizing
Institutional		4	%
Kay		20
Textile Care		10
Professional Products		11
Healthcare		14
Water Care Services		33
Vehicle Care		14
Food & Beverage		13
Total United States Cleaning & Sanitizing		8	%
United States Other Services
Pest Elimination		12	%
GCS Service		8
Total United States Other Services		10	%
Total United States		9	%
International
Europe		2	%
Asia Pacific		7
Latin America		15
Canada		9
Total International		4	%
Consolidated (management rates)		7	%
Consolidated (public rates)		9	%

 

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