FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1995 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, 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 October 31, 1995. 64,628,051 shares of common stock, par value $1.00 per share.
PART I - FINANCIAL INFORMATION <TABLE> ECOLAB INC. CONSOLIDATED STATEMENT OF INCOME <CAPTION> Third Quarter Ended September 30 (thousands, except per share) 1995 1994 (unaudited) <S> <C> <C> Net Sales $348,519 $320,408 Cost of Sales 156,594 140,939 Selling, General and Administrative Expenses 142,643 133,785 Operating Income 49,282 45,684 Interest Expense, Net 3,436 3,206 Income Before Income Taxes and Equity in Earnings of Joint Venture 45,846 42,478 Provision for Income Taxes 17,979 16,447 Equity in Earnings of Henkel-Ecolab Joint Venture 2,010 2,456 Net Income $ 29,877 $ 28,487 Net Income Per Common Share $ 0.46 $ 0.42 Dividends Per Common Share $ 0.125 $ 0.11 Average Common Shares Outstanding 64,537 67,506 <FN> The third quarter ended September 30, 1994 has been restated. See notes to consolidated financial statements. </FN> </TABLE> -2-
<TABLE> ECOLAB INC. CONSOLIDATED STATEMENT OF INCOME <CAPTION> Nine Months Ended Year Ended September 30 December 31 (thousands, except per share) 1995 1994 1994 (unaudited) <S> <C> <C> <C> Net Sales $991,493 $894,503 $1,207,614 Cost of Sales 444,537 392,953 533,143 Selling, General and Administrative Expenses 426,261 391,882 529,507 Merger Costs and Expenses 8,000 Operating Income 120,695 109,668 136,964 Interest Expense, Net 8,453 10,548 12,909 Income Before Income Taxes and Equity in Earnings of Joint Venture 112,242 99,120 124,055 Provision for Income Taxes 44,672 37,800 50,444 Equity in Earnings of Henkel-Ecolab Joint Venture 6,540 7,547 10,951 Net Income $ 74,110 $ 68,867 $ 84,562 Net Income Per Common Share $ 1.11 $ 1.02 $ 1.25 Dividends Per Common Share $ 0.375 $ 0.33 $ 0.455 Average Common Shares Outstanding 66,574 67,530 67,550 <FN> The nine months ended September 30, 1994 has been restated. See notes to consolidated financial statements. </FN> </TABLE> -3-
<TABLE> ECOLAB INC. CONSOLIDATED BALANCE SHEET <CAPTION> September 30 September 30 December 31 (thousands) 1995 1994 1994 (unaudited) <S> <C> <C> <C> ASSETS Cash and cash equivalents $ 27,682 $ 94,629 $ 98,255 Accounts receivable, net 186,770 164,996 168,807 Inventories 108,432 100,003 100,015 Deferred income taxes 21,193 22,260 22,349 Other current assets 12,416 10,056 11,753 Current Assets 356,493 391,944 401,179 Property, Plant and Equipment, Net 270,647 233,480 246,191 Investment in Henkel-Ecolab Joint Venture 300,802 281,337 284,570 Other Assets 99,504 99,699 88,416 Total Assets $1,027,446 $1,006,460 $1,020,356 <FN> September 30, 1994 has been restated. See notes to consolidated financial statements. </FN> </TABLE> (Continued) -4-
<TABLE> ECOLAB INC. CONSOLIDATED BALANCE SHEET, Continued <CAPTION> September 30 September 30 December 31 (thousands, except per share) 1995 1994 1994 (unaudited) <S> <C> <C> <C> LIABILITIES AND SHAREHOLDERS' EQUITY Short-term debt $ 54,951 $ 23,459 $ 41,820 Accounts payable 74,775 73,979 76,905 Compensation and benefits 55,479 49,675 56,445 Income taxes 16,605 24,185 13,113 Other current liabilities 75,746 63,983 65,382 Current Liabilities 277,556 235,281 253,665 Long-Term Debt 103,952 120,118 105,393 Postretirement Health Care and Pension Benefits 79,243 83,602 70,882 Other Liabilities 133,201 117,781 128,608 Shareholders' Equity (common stock, par value $1.00 per share; shares outstanding: September 30, 1995 - 64,611; September 30, 1994 - 67,555; December 31, 1994 - 67,671) 433,494 449,678 461,808 Total Liabilities and Shareholders' Equity $1,027,446 $1,006,460 $1,020,356 <FN> September 30, 1994 has been restated. See notes to consolidated financial statements. </FN> </TABLE> -5-
<TABLE> ECOLAB INC. CONSOLIDATED STATEMENT OF CASH FLOWS <CAPTION> Nine Months Ended Year Ended September 30 December 31 (thousands) 1995 1994 1994 (unaudited) <S> <C> <C> <C> OPERATING ACTIVITIES Net income $ 74,110 $ 68,867 $ 84,562 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 48,209 42,591 56,867 Amortization 8,543 7,294 10,002 Deferred income taxes 1,554 (678) 2,352 Equity in earnings of joint venture, net of royalties received (2,096) (3,079) (5,273) Other, net 442 (576) 415 Changes in operating assets and liabilities: Accounts receivable (18,154) (17,429) (18,952) Inventories (8,089) (16,272) (14,285) Other assets (13,408) (5,661) (7,222) Accounts payable (2,416) 1,457 1,587 Other liabilities 20,871 55,257 44,293 Cash provided by continuing operations 109,566 131,771 154,346 Cash provided by discontinued operations 3,000 3,000 15,000 Cash provided by operating activities $112,566 $134,771 $169,346 <FN> Bracketed amounts indicate a use of cash. The nine months ended September 30, 1994 has been restated. See notes to consolidated financial statements. </FN> </TABLE> (Continued) -6-
<TABLE> ECOLAB INC. CONSOLIDATED STATEMENT OF CASH FLOWS, Continued <CAPTION> Nine Months Ended Year Ended September 30 December 31 (thousands) 1995 1994 1994 (unaudited) <C> <S> <S> <S> INVESTING ACTIVITIES Capital expenditures $(74,465) $(62,729) $ (88,457) Property disposals 1,177 4,656 4,836 Sale of investments in securities 3,009 5,022 Other, net (4,896) 4,374 459 Cash used for investing activities (78,184) (50,690) (78,140) FINANCING ACTIVITIES Notes payable 12,283 4,383 8,512 Long-term debt, net (1,237) (12,493) (14,621) Reacquired shares (90,056) (7,815) (7,889) Dividends (25,042) (23,114) (27,851) Kay shareholder distributions (2,288) Other, net (828) 2,210 3,301 Cash used for financing activities (104,880) (36,829) (40,836) Effect of exchange rate changes on cash (75) (1,265) (757) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (70,573) 45,987 49,613 Cash and Cash Equivalents, at beginning of period 98,255 48,642 48,642 Cash and Cash Equivalents, at end of period $ 27,682 $ 94,629 $ 98,255 <FN> Bracketed amounts indicate a use of cash. The nine months ended September 30, 1994 has been restated. See notes to consolidated financial statements. </FN> </TABLE> -7-
ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Consolidated Financial Statements The unaudited consolidated statements of income for the third quarter and the nine months ended September 30, 1995 and 1994, reflect, in the opinion of management, all adjustments necessary for a fair statement of the results of operations for the interim periods. The results of operations for any interim period are not necessarily indicative of results for the full year. All financial data as of September 30 and for the third quarter and nine month periods then ended have been restated for the pooling of interests treatment of the Company's December 1994 merger with Kay Chemical Company and affiliates. The consolidated balance sheet data as of December 31, 1994 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, 1994. 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. <TABLE> Balance Sheet Information <CAPTION> September 30 September 30 December 31 (thousands) 1995 1994 1994 (unaudited) <S> <C> <C> <C> Accounts Receivable, Net Accounts receivable $ 195,632 $ 173,509 $ 177,510 Allowance for doubtful accounts (8,862) (8,513) (8,703) Total $ 186,770 $ 164,996 $ 168,807 Inventories Finished goods $ 46,885 $ 45,601 $ 42,955 Raw materials and parts 64,995 57,006 60,251 Excess of fifo cost over lifo cost (3,448) (2,604) (3,191) Total $ 108,432 $ 100,003 $ 100,015 Property, Plant and Equipment, Net Land $ 6,398 $ 6,089 $ 6,348 Buildings and leaseholds 110,677 104,477 107,259 Machinery and equipment 183,544 168,332 174,203 Merchandising equipment 282,304 245,868 257,766 Construction in progress 8,424 4,392 6,236 591,347 529,158 551,812 Accumulated depreciation and amortization (320,700) (295,678) (305,621) Total $ 270,647 $ 233,480 $ 246,191 </TABLE> -8-
ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) <TABLE> Balance Sheet Information (Continued) <CAPTION> September 30 September 30 December 31 (thousands) 1995 1994 1994 (unaudited) <S> <C> <C> <C> Other Assets Intangible assets, net $ 42,529 $ 41,404 $ 37,549 Investments in securities 5,000 9,007 5,000 Deferred income taxes 25,749 28,068 26,212 Other 26,226 21,220 19,655 Total $ 99,504 $ 99,699 $ 88,416 Short-Term Debt Notes payable $ 38,225 $ 21,163 $ 25,302 Long-term debt, current maturities 16,726 2,296 16,518 Total $ 54,951 $ 23,459 $ 41,820 Shareholders' Equity Common stock $ 69,983 $ 69,910 $ 69,659 Additional paid-in capital 168,129 161,636 164,858 Retained earnings 309,539 250,350 257,462 Deferred compensation (7,210) (4,646) (4,192) Cumulative translation 13,458 5,202 6,756 Treasury stock (120,405) (32,774) (32,735) Total $433,494 $449,678 $461,808 </TABLE> Interest expense related to all debt was $11,936,000 and $12,675,000 for the nine months ended September 30, 1995 and 1994, respectively, and $16,213,000 for the year ended December 31, 1994. During the third quarter of 1995, the Company obtained commitments for a private placement debt arrangement with a group of insurance companies. Under the arrangement, the Company expects to incur $75 million of long-term debt in January 1996 at an interest rate of 7.19 percent and for a term of 10 years. Proceeds from the debt will be used for general corporate purposes. Other noncurrent liabilities included income taxes payable of $97 million at September 30, 1995, $94 million at December 31, 1994, and $86 million at September 30, 1994. During June 1995, shareholders' equity decreased due to the purchase of 3.5 million shares of the Company's common stock at $25.00 per share pursuant to the terms of a "Dutch Auction" self-tender offer. -9-
ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Kay Merger In connection with the Company's December 1994 merger with Kay Chemical Company, $8.0 million of merger costs and expenses ($6.9 million after-tax) were incurred and charged to expense in the fourth quarter of 1994. Also, Kay was a Subchapter S Corporation for income tax purposes and, accordingly, did not pay U.S. federal income taxes. Kay has been included in the Company's U.S. federal income tax return effective December 7, 1994 and, therefore, a net deferred tax liability and corresponding charge to income tax expense of $1.3 million was recorded in the fourth quarter of 1994. The table below includes unaudited pro forma net income and net income per share amounts which reflect the elimination of the nonrecurring merger costs and expenses in 1994 and pro forma adjustments to present income taxes on the basis on which they are being reported subsequent to the merger. <TABLE> <CAPTION> Third Quarter Nine Months Year Ended (thousands, Ended September 30 Ended September 30 December 31 except per share) 1994 1994 1994 <S> <C> <C> <C> Net income As reported $ 28,487 $ 68,867 $ 84,562 Merger costs and expenses 6,900 Kay net deferred tax liability 1,300 Kay Subchapter S status (789) (1,919) (2,298) Pro forma $ 27,698 $ 66,948 $ 90,464 Net income per common share As reported $ 0.42 $ 1.02 $ 1.25 Pro forma $ 0.41 $ 0.99 $ 1.34 </TABLE> -10-
ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Net Income Per Common Share Net income per common share amounts are computed by dividing net income by the weighted average number of common shares outstanding. Stock options did not have a significant dilutive effect. Geographic Segments The Company is a global developer of premium cleaning, sanitizing and maintenance products and services for the hospitality, institutional and industrial markets. Customers include hotels, restaurants, foodservice, healthcare and educational facilities, quick-service (fast food) restaurants, dairy plants and farms, and food and beverage processors around the world. International consists of Canadian, Asia Pacific, Latin American and Kay's international operations. The Company has also made recent acquisitions in South Africa. In addition, the Company and Henkel KGaA of Dusseldorf, Germany, each have a 50 percent economic interest in the Henkel-Ecolab 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. <TABLE> <CAPTION> Third Quarter Nine Months Year Ended Ended September 30 Ended September 30 December 31 (thousands) 1995 1994 1995 1994 1994 (unaudited) (unaudited) <S> <C> <C> <C> <C> <C> Net Sales United States $267,219 $250,138 $764,475 $701,825 $ 942,070 International 81,300 70,270 227,018 192,678 265,544 Total $348,519 $320,408 $991,493 $894,503 $1,207,614 Operating Income United States $ 44,416 $ 41,616 $109,878 $102,408 $ 134,510 International 5,613 4,959 13,927 10,356 14,838 Corporate (747) (891) (3,110) (3,096) (12,384) Total $ 49,282 $ 45,684 $120,695 $109,668 $ 136,964 </TABLE> -11-
ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Equity in Earnings of Henkel-Ecolab Joint Venture The Company's equity in earnings of the Henkel-Ecolab joint venture for the third quarter and nine months ended September 30, 1995 and 1994 and for the year ended December 31, 1994 was: <TABLE> <CAPTION> Third Quarter Nine Months Year Ended Ended September 30 Ended September 30 December 31 (thousands) 1995 1994 1995 1994 1994 (unaudited) (unaudited) <S> <C> <C> <C> <C> <C> Joint venture Net sales $235,422 $198,467 $674,193 $563,234 $776,647 Gross profit 127,116 111,973 372,291 317,068 440,993 Income before income taxes 12,463 10,653 35,080 34,249 48,389 Net income $ 5,905 $ 5,599 $ 17,892 $ 17,613 $ 26,109 Ecolab equity in earnings Ecolab equity in net income $ 2,952 $ 3,114 $ 8,946 $ 9,361 $ 13,605 Ecolab royalty income from joint venture, net of income taxes 1,436 1,493 4,553 4,370 5,745 Amortization expense for the excess of cost over the underlying net assets of the joint venture (2,378) (2,151) (6,959) (6,184) (8,399) Equity in earnings of Henkel-Ecolab joint venture $ 2,010 $ 2,456 $ 6,540 $ 7,547 $ 10,951 </TABLE> At September 30, 1995, the Company's investment in the Henkel-Ecolab joint venture included approximately $192 million for the 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. -12-
REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors Ecolab Inc. We have reviewed the accompanying consolidated balance sheet of Ecolab Inc. as of September 30, 1995 and 1994, and the related consolidated statements of income for the three-month and nine-month periods ended September 30, 1995 and 1994, and the consolidated statement of cash flows for the nine-month periods ended September 30, 1995 and 1994. 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, 1994, 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 27, 1995, 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, 1994, 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 October 19, 1995 -13-
ECOLAB INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - Third Quarter And Nine Months Ended September 30, 1995 Net sales for the third quarter ended September 30, 1995 were $349 million, an increase of 9 percent over net sales of $320 million in the third quarter of last year. For the first nine months of 1995, net sales were $991 million and increased 11 percent over sales of $895 million in the first nine months of last year. Both the Company's United States and International operations contributed to these sales improvements. The gross profit margin for the third quarter of 1995 was 55.1 percent of net sales, compared to a gross profit margin of 56.0 percent of net sales in the third quarter of last year. For the nine month period, the gross profit margin was 55.2 percent of net sales, compared to a gross profit margin of 56.1 percent of net sales during the first nine months of last year. The decreases in the gross profit margins for 1995 reflect increased raw material costs and limited selling price increases during 1995 due to competitive pressures in several of the markets in which the Company does business. Raw material costs moderated somewhat during the second and third quarters of 1995; however, management continues to focus on competition in the marketplace to minimize any impact on overall operating results. For the third quarter of 1995, selling, general and administrative expenses totaled $143 million, or 40.9 percent of net sales, an increase of 7 percent over selling, general and administrative expenses of $134 million, or 41.8 percent of net sales in the third quarter of last year. For the first nine months of 1995, selling, general and administrative expenses totaled $426 million, or 43.0 percent of net sales, and increased 9 percent over last year's aggregate expenses of $392 million, or 43.8 percent of net sales. These expenses decreased as a percentage of net sales primarily due to strong sales during 1995 and the Company's continued cost control efforts. Net income for the third quarter of 1995 was $30 million or $0.46 per share compared to net income of $28 million or $0.42 per share in the third quarter of last year. For the first nine months of 1995, net income was $74 million or $1.11 per share and compared to last year's net income of $69 million or $1.02 per share. These comparisons of net income were unfavorably affected by the loss of Kay's Subchapter S income tax status for 1995. Prior to its merger with Ecolab in December 1994, Kay was a Subchapter S corporation for federal income tax purposes and, therefore, did not pay U.S. income taxes. Effective with the merger, Kay -14-
ECOLAB INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) has been included in the Company's U.S. federal income tax return and, therefore, income tax expense no longer reflects the Subchapter S related tax benefit. On a pro forma basis, after adjustment to increase income tax expense in the third quarter of 1994 as if Kay was a tax paying entity, third quarter, 1995 net income of $30 million increased 8 percent over last year's pro forma net income of $28 million. Third quarter 1995 net income per share of $0.46 increased 12 percent over pro forma net income per share of $0.41 for the third quarter of last year. For the first nine months, net income of $74 million increased 11 percent over last year's pro forma net income of $67 million, and net income per share of $1.11 increased 12 percent over pro forma net income per share of $0.99. These net income improvements reflected the benefits of higher sales and cost controls, which more than offset a decrease in the equity in earnings of the Henkel-Ecolab joint venture. The net income improvement for the nine month period also reflected reduced net interest expense. On a per share basis, net income for both the third quarter and first nine months of 1995 benefited from a smaller number of average shares outstanding due to the 3.5 million shares which the Company repurchased in June 1995 under a "Dutch Auction" self-tender offer. For the Company's United States operations, net sales for the third quarter of 1995 totaled $267 million, a 7 percent increase over United States sales of $250 million in the third quarter of last year. For the first nine months of 1995, United States sales were $764 million and increased 9 percent over sales of $702 million for the first nine months of last year. United States sales continued to benefit from new product introductions, increased product volumes and good general economic conditions in the domestic hospitality and lodging industries. However, selling price increases have been limited during 1995 due to competitive pressures in several of the markets in which the Company does business. Sales of the U.S. Institutional Division increased 3 percent for the third quarter and 6 percent for the first nine months and included double digit growth in Institutional's Ecotemp warewashing program and in speciality product sales. The Pest Elimination Division continued its pattern of double digit sales growth with a 12 percent sales increase over last year for both the third quarter and nine-month periods. The Textile Care Division reported 6 percent sales growth for both the third quarter and the nine months, with growth in the commercial laundry and hospitality markets. Sales of the Janitorial Division increased 2 percent for the third quarter and 4 percent for the first nine months of 1995. Janitorial products sold through distributors enjoyed solid growth for both the third quarter and nine-month periods; however, sales of the division's Signature Label program compared against a strong third quarter and nine-month period of last year. The Food & Beverage Division (formerly the Klenzade Division) reported sales growth of 10 percent for the third quarter and 12 percent for the first nine months of 1995. Food & Beverage continued to report strong growth in all of its major markets, principally due to new customers and new product introductions. Sales of Kay's U.S. operations increased 15 percent for the third quarter and 12 percent for the nine months due to new customers and continued good growth in the large fast food chains which Kay serves. Sales of the recently formed Water Care Division were not significant during the first nine months of 1995. -15-
ECOLAB INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) For the third quarter of 1995, operating income for the Company's U.S. operations was $44 million, a 7 percent increase over operating income of $42 million in the third quarter of last year. For the first nine months of 1995, U.S. operating income was $110 million and increased 7 percent over operating income of $102 million for the first nine months of last year. With the exception of the start-up Water Care operations, all of the Company's U.S. businesses contributed to these operating income improvements, with particularly strong double digit growth reported for the third quarter and nine-month periods by the Pest Elimination and Kay operations. The operating income margins for the Company's United States operations were 16.6 percent for both the third quarter of 1995 and the third quarter of last year. For the nine-month period, the 1995 operating income margin was 14.4 percent, compared to 14.6 percent for the same period last year. Operating income for 1995 reflected strong sales and the benefits of cost controls which were offset by higher raw material costs, competitive pricing pressures and the annualized effect of last year's investments in the sales and service force. Sales of the Company's International Operations totaled $81 million for the third quarter of 1995, an increase of 16 percent over sales of $70 million for the third quarter of last year. For the nine-month period, International sales were $227 million and increased 18 percent over sales of $193 million for the comparable period of last year. Changes in currency translation effected certain regions of International's operations, but did not have a significant impact on overall International sales growth. Sales growth for International's Asia Pacific region was 14 percent for the third quarter and 18 percent for the first nine months of 1995. Sales in the Asia Pacific region were favorably affected by changes in currency translation and included continued double digit local currency growth in East Asia. Local currency sales growth included modest growth in Japan and flat results in the Australia/New Zealand area. Sales in China decreased due to difficult local economic and business conditions. Sales in the Latin American region increased 19 percent for the third quarter and 24 percent for the nine-month period. The sales increases included a continuation of significantly improved results in Brazil due to recent management changes and an improved economic environment. Sales in Mexico grew at approximately a 15 percent rate for each period in local currencies; however, these improvements were more than offset by the negative effects of the devaluation of the Mexican Peso. Canada reported sales growth of 7 percent for the third quarter and 4 percent for the first nine months of 1995. Canada's third quarter sales included double digit growth in the Food & Beverage and Janitorial businesses and solid growth in the Institutional business. Sales of Kay's international operations increased 14 percent for the third quarter and 17 percent for the nine months, as Kay continued to expand its offerings to the various international locations in which its existing customers operate. -16-
ECOLAB INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) For the third quarter of 1995, International Operations reported operating income of $6 million, a 13 percent increase over operating income of $5 million in the third quarter of last year. Operating income for the nine- month period was $14 million, an increase of 34 percent compared to last year's operating income of $10 million. For the third quarter, double digit operating income growth in each of International's regions was partially offset by recent investments in South Africa. Significantly improved results in Brazil continued during the third quarter; however, operating income growth moderated somewhat due to comparisons against stronger operating results last year. For the nine-month period, International's operating income growth included significantly improved results in Brazil and double digit growth in the Asia Pacific region and in Kay's international operations. Operating income in Canada was virtually unchanged from the prior year. For the nine months, operating income in 1995 was negatively affected by a $0.9 million pretax charge in the first quarter of 1995 related to the devaluation of the Mexican Peso. Last year's operating income also included an unusual charge of $1 million which was incurred in the second quarter due to the government's economic and monetary plan in Brazil. The Company's equity in earnings of the Henkel-Ecolab joint venture decreased for both the third quarter and nine month periods. For the third quarter of 1995, equity in earnings of the joint venture decreased to $2.0 million from $2.5 million in the third quarter of last year. For the nine months, equity in earnings of the joint venture decreased to $6.5 million from $7.5 million last year. The favorable effects of currency rate changes were more than offset by higher raw material costs, costs related to administrative changes being made by new management at the joint venture, higher overall income tax rates and weak conditions in the hospitality industry in the joint venture's key market of Germany. Although recent management changes have been made at the joint venture, the Company anticipates that its equity in earnings of the joint venture will be below last year's levels for the remainder of 1995. Corporate operating expense was $1 million for the third quarter and $3 million for the first nine months of 1995. Corporate operating expense represented overhead costs directly related to the joint venture. Net interest expense was $3 million for the third quarter of 1995 and was virtually unchanged from the third quarter of last year. For the first nine months of 1995, net interest expense was $8 million and declined significantly from net interest expense of $11 million for the comparable period of last year. This decrease was principally due to interest income earned on higher levels of cash and cash equivalents held during the first half of 1995. -17-
ECOLAB INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) For the first nine months of 1995, the provision for income taxes reflected an estimated effective rate of 39.8 percent compared to 38.1 percent for the first nine months of last year. This increase reflected the loss of Kay's Subchapter S status. On a pro forma basis, including an adjustment to increase income tax expense in 1994 as if Kay were a tax- paying entity, the estimated annual effective income tax rate for the first nine months of 1994 was 40.1 percent and was essentially equivalent to the 1995 rate. Financial Position and Liquidity In June 1995, Ecolab purchased approximately 3.5 million shares (approximately 5 percent of the Company's total outstanding shares) of the Company's common stock. These shares were purchased at a price of $25.00 per share pursuant to the terms of a "Dutch Auction" self-tender offer. The total purchase price for these shares was approximately $89 million and was funded by excess cash and by approximately $30 million of borrowings under the Company's credit agreements. During the third quarter of 1995, approximately $20 million of these borrowings were repaid with cash generated from operations. In addition, the Company may purchase approximately 2.5 million additional shares from time to time through open and privately negotiated transactions to complete the remaining portion of a 6 million share repurchase program which was authorized by the Company's Board of Directors in May 1995. Total debt at September 30, 1995 was $159 million, an increase of $12 million from total debt of $147 million at year-end 1994. The ratio of total debt to capitalization rose to 27 percent at September 30, 1995 from 24 percent at year-end 1994. The increase in the ratio of total debt to capitalization was due to the decrease in shareholders' equity which resulted from the purchase of common stock, as well as from the higher debt levels. Also, the Company has received commitments to borrow an additional $75 million of long-term debt in January 1996. Proceeds from this new debt will be used for general corporate purposes. For the nine months ended September 30, 1995, cash provided by continuing operations was $110 million compared to operating cash flows of $132 million for the first nine months of last year. Cash provided by continuing operations ("Other Liabilities") for the first nine months of 1994 included a one-time benefit from the receipt of an $18 million income tax refund related to prior years. -18-
ECOLAB INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Subsequent to the end of the third quarter of 1995, the Company announced two acquisitions. The Company purchased selected assets of Cremark Chemicals (PTY) Ltd., a leading supplier to the South African Institutional and Food & Beverage markets Cremark's business will be combined with Ecolab's existing South African operation with the combined business expected to have annual sales of approximately $20 million. The Company also added to its United States Water Care operations through the acquisition of Western Water Management, Inc. of Kansas City, Mo. Western is a manufacturer and marketer of water treatment products and services for the hospitality, commercial and industrial markets with annual sales of approximately $12 million. -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: No current reports on Form 8-K were filed during the quarter ended September 30, 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: November 8, 1995 By:/s/ Arthur E. Henningsen, Jr. Arthur E. Henningsen, Jr. Vice President and Controller (duly authorized Chief Accounting Officer) -20-
EXHIBIT INDEX Paper (P) or Exhibit Description Electronic (E) (15) Letter regarding unaudited interim E financial information. (27) Financial Data Schedule. E -21-