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, 1996 ------------------ 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, 1996. 64,545,900 shares of common stock, par value $1.00 per share.
PART I - FINANCIAL INFORMATION ECOLAB INC. CONSOLIDATED STATEMENT OF INCOME Third Quarter Ended September 30 (thousands, except per share) 1996 1995 -------- -------- (unaudited) Net Sales $392,065 $348,519 Cost of Sales 175,232 156,594 Selling, General and Administrative Expenses 160,534 142,643 -------- -------- Operating Income 56,299 49,282 Interest Expense, Net 3,592 3,436 -------- -------- Income Before Income Taxes and Equity in Earnings of Joint Venture 52,707 45,846 Provision for Income Taxes 22,263 17,979 Equity in Earnings of Henkel-Ecolab Joint Venture 5,084 2,010 -------- -------- Net Income $ 35,528 $ 29,877 -------- -------- -------- -------- Net Income Per Common Share $ 0.55 $ 0.46 Dividends Per Common Share $ 0.14 $ 0.125 Average Common Shares Outstanding 64,366 64,537 See notes to consolidated financial statements. -2-
ECOLAB INC. CONSOLIDATED STATEMENT OF INCOME Nine Months Ended Year Ended September 30 December 31 (thousands, except per share) 1996 1995 1995 ---------- -------- ---------- (unaudited) Net Sales $1,098,981 $991,493 $1,340,881 Cost of Sales 498,677 444,537 603,167 Selling, General and Administrative Expenses 464,858 426,261 575,028 ---------- -------- ---------- Operating Income 135,446 120,695 162,686 Interest Expense, Net 11,616 8,453 11,505 ---------- -------- ---------- Income Before Income Taxes and Equity in Earnings of Joint Venture 123,830 112,242 151,181 Provision for Income Taxes 50,780 44,672 59,694 Equity in Earnings of Henkel-Ecolab Joint Venture 9,721 6,540 7,702 ---------- -------- ---------- Net Income $ 82,771 $ 74,110 $ 99,189 ---------- -------- ---------- ---------- -------- ---------- Net Income Per Common Share $ 1.28 $ 1.11 $ 1.50 Dividends Per Common Share $ 0.42 $ 0.375 $ 0.515 Average Common Shares Outstanding 64,421 66,574 66,097 See notes to consolidated financial statements. -3-
ECOLAB INC. CONSOLIDATED BALANCE SHEET September 30 September 30 December 31 (thousands) 1996 1995 1995 ------------ ------------ ----------- (unaudited) ASSETS Cash and cash equivalents $ 51,681 $ 27,682 $ 24,718 Accounts receivable, net 203,461 186,770 198,432 Inventories 114,738 108,432 106,117 Deferred income taxes 21,848 21,193 21,617 Other current assets 11,408 12,416 7,188 --------- --------- ---------- Current Assets 403,136 356,493 358,072 Property, Plant and Equipment, Net 322,806 270,647 292,937 Investment in Henkel-Ecolab Joint Venture 297,267 300,802 302,298 Other Assets 158,109 99,504 107,573 ---------- ---------- ---------- Total Assets $1,181,318 $1,027,446 $1,060,880 ---------- ---------- ---------- ---------- ---------- ---------- See notes to consolidated financial statements. (Continued) -4-
ECOLAB INC. CONSOLIDATED BALANCE SHEET, (Continued) September 30 September 30 December 31 (thousands, except per share) 1996 1995 1995 ------------ ------------ ----------- (unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY Short-term debt $ 25,972 $ 54,951 $ 71,647 Accounts payable 82,997 74,775 81,931 Compensation and benefits 67,619 55,479 59,766 Income taxes 33,049 16,605 18,248 Other current liabilities 100,965 75,746 78,946 ---------- ---------- ---------- Current Liabilities 310,602 277,556 310,538 Long-Term Debt 163,814 103,952 89,402 Postretirement Health Care and Pension Benefits 78,254 79,243 70,666 Other Liabilities 133,170 133,201 133,616 Shareholders' Equity (common stock, par value $1.00 per share; shares outstanding: September 30 1996 - 64,409; September 30,1995 - 64,611; December 31, 1995 - 64,701) 495,478 433,494 456,658 ---------- ---------- ---------- Total Liabilities and Shareholders' Equity $1,181,318 $1,027,446 $1,060,880 ---------- ---------- ---------- ---------- ---------- ---------- See notes to consolidated financial statements. -5-
ECOLAB INC. CONSOLIDATED STATEMENT OF CASH FLOWS Nine Months Ended Year Ended September 30 December 31 (thousands) 1996 1995 1995 -------- -------- ----------- (unaudited) OPERATING ACTIVITIES Net income $ 82,771 $ 74,110 $ 99,189 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 56,108 48,209 64,651 Amortization 10,116 8,543 11,628 Deferred income taxes (625) 1,554 (759) Equity in earnings of joint venture (9,721) (6,540) (7,702) Joint venture 9,990 4,444 5,610 Other, net 817 442 801 Changes in operating assets and liabilities: Accounts receivable 3,291 (18,154) (26,843) Inventories (919) (8,089) (4,136) Other assets (6,957) (13,408) (11,371) Accounts payable (4,439) (2,416) 4,561 Other liabilities 36,258 20,871 27,834 -------- -------- -------- Cash provided by continuing operations 176,690 109,566 163,463 Cash provided by discontinued operations 3,000 3,000 -------- -------- -------- Cash provided by operating activities $176,690 $112,566 $166,463 -------- -------- -------- -------- -------- -------- Bracketed amounts indicate a use of cash. See notes to consolidated financial statements. (Continued) -6-
ECOLAB INC. CONSOLIDATED STATEMENT OF CASH FLOWS, (Continued) Nine Months Ended Year Ended September 30 December 31 (thousands) 1996 1995 1995 --------- -------- ----------- (unaudited) INVESTING ACTIVITIES Capital expenditures $ (82,018) $ (74,465) $(109,894) Property disposals 1,945 1,177 1,806 Businesses acquired (41,150) (7,423) (26,437) Sale of investments in securities 4,007 Other, net (1,148) 2,527 6,991 --------- --------- --------- Cash used for investing activities (122,371) (78,184) (123,527) --------- --------- --------- FINANCING ACTIVITIES Notes payable (43,407) 12,283 29,355 Long-term debt borrowings 75,000 25,000 2,141 Long-term debt repayments (20,640) (26,237) (20,060) Reacquired shares (19,279) (90,056) (90,391) Dividends (27,088) (25,042) (33,114) Other, net 8,256 (828) (4,561) --------- --------- --------- Cash used for financing activities (27,158) (104,880) (116,630) --------- --------- --------- Effect of exchange rate changes on cash (198) (75) 157 --------- --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 26,963 (70,573) (73,537) Cash and Cash Equivalents, at beginning of period 24,718 98,255 98,255 --------- --------- --------- Cash and Cash Equivalents, at end of period $ 51,681 $ 27,682 $ 24,718 --------- --------- --------- --------- --------- --------- Bracketed amounts indicate a use of cash. See notes to consolidated financial statements. -7-
ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS The unaudited consolidated statements of income for the third quarter and nine months ended September 30, 1996 and 1995, 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. The consolidated balance sheet data as of December 31, 1995 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 consolidated financial statements and notes thereto incorporated in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. Coopers & Lybrand L.L.P., the Company's independent accountants, have performed a limited review of the interim financial information included herein. Their report on such review accompanies this filing. BALANCE SHEET INFORMATION September 30 September 30 December 31 (thousands) 1996 1995 1995 ------------ ------------ ----------- (unaudited) Accounts Receivable, Net Accounts receivable $ 212,755 $ 195,632 $ 206,763 Allowance for doubtful accounts (9,294) (8,862) (8,331) --------- --------- --------- Total $ 203,461 $ 186,770 $ 198,432 --------- --------- --------- --------- --------- --------- Inventories Finished goods $ 47,818 $ 46,885 $ 47,035 Raw materials and parts 70,813 64,995 62,132 Excess of fifo cost over lifo cost (3,893) (3,448) (3,050) --------- --------- --------- Total $ 114,738 $ 108,432 $ 106,117 --------- --------- --------- --------- --------- --------- Property, Plant and Equipment, Net Land $ 7,616 $ 6,398 $ 6,941 Buildings and leaseholds 127,110 110,677 117,042 Machinery and equipment 205,558 183,544 188,453 Merchandising equipment 321,429 282,304 292,962 Construction in progress 11,188 8,424 14,571 --------- --------- --------- 672,901 591,347 619,969 Accumulated depreciation and amortization (350,095) (320,700) (327,032) --------- --------- --------- Total $ 322,806 $ 270,647 $ 292,937 --------- --------- --------- --------- --------- --------- -8-
ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) BALANCE SHEET INFORMATION (Continued) September 30 September 30 December 31 (thousands) 1996 1995 1995 ------------ ------------ ----------- (unaudited) Other Assets Intangible assets, net $ 98,125 $ 42,529 $ 50,773 Investments in securities 5,000 5,000 5,000 Deferred income taxes 27,847 25,749 27,383 Other 27,137 26,226 24,417 -------- -------- -------- Total $158,109 $ 99,504 $107,573 -------- -------- -------- -------- -------- -------- Short-Term Debt Notes payable $ 10,690 $ 38,225 $ 54,950 Long-term debt, current maturities 15,282 16,726 16,697 -------- -------- -------- Total $ 25,972 $ 54,951 $ 71,647 -------- -------- -------- -------- -------- -------- Shareholders' Equity Common stock $ 70,268 $ 69,983 $ 70,078 Additional paid-in capital 174,506 168,129 171,765 Retained earnings 384,184 309,539 325,674 Deferred compensation (8,344) (7,210) (6,484) Cumulative translation 12,903 13,458 16,272 Treasury stock (138,039) (120,405) (120,647) -------- -------- -------- Total $495,478 $433,494 $456,658 -------- -------- -------- -------- -------- -------- Interest expense related to all debt was $14,604,000 and $11,936,000 for the nine months ended September 30, 1996 and 1995, respectively, and $15,857,000 for the year ended December 31, 1995. Other noncurrent liabilities included income taxes payable of $96 million at September 30, 1996 and December 31, 1995, and $97 million at September 30, 1995. In January 1996, the Company issued $75 million of 7.19 percent senior notes to a group of insurance companies. The notes mature in January 2006. Proceeds from the debt were used to reduce short-term borrowings and for business acquisitions and other general corporate purposes. In September 1996, the Company replaced its $150 million credit facility with a $225 million Multicurrency Credit Agreement. The terms of the new agreement are similar to the credit facility which it replaced. The agreement originally expires in September 2001 and includes a covenant regarding the ratio of total debt to capitalization. -9-
ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) BALANCE SHEET INFORMATION (Continued) In October 1996, the Company filed a shelf registration with the Securities and Exchange Commission for the issuance of up to $200 million of debt securities. The filing is intended to enhance the Company's future financial flexibility in funding general business needs. The Company has no immediate plans to issue the new debt. BUSINESS ACQUISITIONS On February 20, 1996, the Company acquired Huntington Laboratories, Inc. ("Huntington") of Huntington, Indiana. Huntington is a leading manufacturer and marketer of disinfectants, germicides, surgical scrubs and sterilants, primarily serving the U.S. healthcare and education janitorial markets. Huntington has become part of the Company's Professional Products Division (formerly the Janitorial Division), complementing the division's existing product lines. Included in the purchase was Huntington's QUATS-Surfactants disinfectant business which did not fit Ecolab's business strategies and, therefore, was sold in July 1996. The annual sales of the core Huntington operations, which the Company retained, are approximately $50 million. Ecolab's purchase price for Huntington included cash consideration and the assumption of existing indebtedness which the Company repaid concurrent with the consummation of the stock purchase transaction. On August 2, 1996 the Company acquired the Monarch division of H.B. Fuller Company of Saint Paul, Minnesota. Monarch is a provider of cleaning and sanitizing products and services to the food processing and farm markets in the United States and Canada. Monarch had sales of approximately $30 million in 1995 and has become part of the Company's Food & Beverage Division. Each of these acquisitions has been accounted for as a purchase and, accordingly, the results of their operations have been included in the financial statements of the Company from the dates of acquisition. For each acquisition, the allocation of the purchase price and the determination of the excess of the purchase price over the fair market value of the net assets acquired were preliminary as of September 30, 1996. The acquisitions were financed with a portion of the proceeds received from the issuance of $75 million of senior notes in January 1996 and with existing lines of credit. -10-
ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) BUSINESS ACQUISITIONS (Continued) Net sales for the third quarter and nine months ended September 30, 1996 included approximately $18 million and $37 million, respectively of sales from these operations from the dates of acquisition. Operating income from these businesses for the third quarter and nine months ended September 30, 1996 was not significant. 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 and marketer of premium cleaning, sanitizing and maintenance products and services for the hospitality, institutional and industrial markets. Customers include hotels and restaurants; foodservice, healthcare and educational facilities; quickservice (fast-food) units; commercial laundries; light industry; dairy plants and farms; and food and beverage processors around the world. International consists of Canadian, Asia Pacific, Latin American and African operations and the international operations of Kay. In addition, the Company and Henkel KGaA of Dusseldorf, Germany, each have a 50% 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. Third Quarter Nine Months Year Ended Ended September 30 Ended September 30 December 31 (thousands) 1996 1995 1996 1995 1995 -------- -------- ---------- -------- ---------- (unaudited) (unaudited) Net Sales United States $305,147 $267,219 $ 848,120 $764,475 $1,030,126 International 86,918 81,300 250,861 227,018 310,755 -------- -------- ---------- -------- ---------- Total $392,065 $348,519 $1,098,981 $991,493 $1,340,881 -------- -------- ---------- -------- ---------- -------- -------- ---------- -------- ---------- Operating Income United States $ 49,889 $ 44,416 $ 119,962 $109,878 $ 147,330 International 7,242 5,613 17,891 13,927 19,580 Corporate (832) (747) (2,407) (3,110) (4,224) -------- -------- ---------- -------- ---------- Total $ 56,299 $ 49,282 $ 135,446 $120,695 $ 162,686 -------- -------- ---------- -------- ---------- -------- -------- ---------- -------- ---------- -11-
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, 1996 and 1995 and for the year ended December 31, 1995 was: Third Quarter Nine Months Year Ended Ended September 30 Ended September 30 December 31 (thousands) 1996 1995 1996 1995 1995 -------- -------- -------- -------- ----------- (unaudited) (unaudited) Joint venture Net sales $227,719 $235,422 $677,501 $674,193 $909,196 Gross profit 129,164 127,116 375,170 372,291 502,849 Income before income taxes 22,389 12,463 50,175 35,080 44,392 Net income $ 12,455 $ 5,904 $ 26,097 $ 17,892 $ 22,406 Ecolab equity in earnings Ecolab equity in net income $ 6,227 $ 2,952 $ 13,049 $ 8,946 $ 11,203 Ecolab royalty income from joint venture, net of income taxes 1,122 1,436 3,534 4,553 5,814 Amortization expense for the excess of cost over the underlying net assets of the joint venture (2,265) (2,378) (6,862) (6,959) (9,315) -------- -------- -------- -------- -------- Equity in earnings of Henkel-Ecolab joint venture $ 5,084 $ 2,010 $ 9,721 $ 6,540 $ 7,702 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- At September 30, 1996, the Company's investment in the Henkel-Ecolab joint venture included approximately $182 million of unamortized excess of the Company's investment over its equity in the joint venture's net assets. -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, 1996 and 1995, and the related consolidated statements of income for the three-month and nine-month periods ended September 30, 1996 and 1995, and the consolidated statements of cash flows for the nine-month periods ended September 30, 1996 and 1995. 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, 1995, 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 26, 1996, 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, 1995, 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 22, 1996 -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, 1996 Net sales for the third quarter ended September 30, 1996 were $392 million, an increase of 12 percent over net sales of $349 million for the third quarter of last year. For the first nine months of 1996, net sales totaled $1,099 million and increased 11 percent over net sales of $991 million in the first nine months of last year. These increases in sales reflected good growth in the Company's core businesses, the benefits of significant new product introductions and business acquisitions in both the United States and International operations. Business acquisitions accounted for approximately one-half of the growth in sales. The gross profit margin for the third quarter of 1996 was 55.3 percent of net sales, up slightly from the gross profit margin of 55.1 percent of net sales in the third quarter of last year. For the nine-month period ended September 30, 1996, the gross profit margin was 54.6 percent of net sales, a decrease from the gross profit margin of 55.2 percent of net sales for the the comparable period of last year. The decrease in gross profit margin for the nine-month period reflects increased raw material costs, limited selling price increases due to competitive pressures, and product mix. The improvement in gross profit margin for the third quarter reflects stabilizing raw material costs, more favorable product mix and the benefits of the Company's cost control efforts. Selling, general and administrative expenses for the third quarter totaled $161 million, or 40.9 percent of net sales, an increase of 13 percent over selling, general and administrative expenses of $143 million, or 40.9 percent of net sales for the third quarter of last year. For the first nine months of 1996, selling, general and administrative expenses were $465 million, or 42.3 percent of net sales, an increase of 9 percent over selling, general and administrative expenses of $426 million, or 43.0 percent of net sales for the comparable period of last year. For the nine-month period, the decrease in the ratio of these expenses to net sales was primarily due to strong sales during 1996 and to the Company's continued cost control efforts. An emphasis on cost controls has resulted in significant cost savings over the last few years. Therefore, the Company expects it to be more difficult to attain further improvement in the comparison of the ratio of these expenses as a percentage of net sales in future periods. For the third quarter of 1996, net income totaled $36 million, and increased 19 percent over net income of $30 million for the third quarter of last year. For the nine-month period, net income was $83 million, an increase of 12 percent over net income of $74 million for the comparable period of 1995. These net income improvements reflected the benefits of higher sales, the effects of the Company's cost control efforts and higher equity in earnings of the Henkel- Ecolab joint venture, partially offset by an increase in income taxes. For the nine-month period, these benefits were also partially offset by a decrease in gross profit margin and by higher net interest expense. On a per share basis, net income per share for the third quarter of 1996 was $0.55, an increase of 20 percent over -14-
ECOLAB INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) net income per share of $0.46 in the third quarter of last year. For the first nine months of 1996, net income per share was $1.28, up 15 percent compared to net income per share of $1.11 for the comparable period of last year. For the nine-month period, the comparison of net income per share benefited from a smaller number of average shares outstanding due to the purchase of approximately 3.5 million shares of the Company's common stock in June 1995 and the purchase of approximately 600,000 additional shares during the first nine months of 1996. Net sales for the Company's United States operations were $305 million for the third quarter of 1996, an increase of 14 percent over third quarter 1995 net sales of $267 million. United States sales for the first nine months of 1996 totaled $848 million, up 11 percent compared to net sales of $764 million during the first nine months of last year. United States sales benefited from business acquisitions, significant new product introductions, new customer business and favorable economic conditions in the hospitality and lodging industries. Business acquisitions accounted for approximately one-half of the sales increase for both the third quarter and nine-month periods. Sales of the U.S. Institutional Division increased 5 percent for the third quarter and 3 percent for the first nine months of 1996. Institutional's sales growth included sales to new customers and continued double-digit growth in the Ecotemp warewashing program. The Pest Elimination Division continued its pattern of double-digit sales growth with sales increases of 13 percent for the third quarter and 12 percent for the nine-month period. Sales of the Textile Care Division increased 11 percent for both the third quarter and nine-month periods and reflected new products and continued success in sales to the commercial laundry and hospitality markets. Sales of the Company's Professional Products Division (formerly the Janitorial Division) nearly doubled due to the February 1996 acquisition of Huntington Laboratories. Excluding Huntington's sales, Professional Products sales increased 2 percent for the third quarter and 1 percent for the first nine months of 1996, due to increased sales of its Airkem products. Operating results of the Food & Beverage Division include the operations of Monarch since its acquisition from H.B. Fuller in the beginning of August 1996. Excluding sales of the Monarch operations, Food & Beverage sales increased 9 percent for the third quarter and 5 percent for the nine-month period. Food & Beverage sales benefited from sales to new customers, and good growth in sales to the food processing industries. Sales of Kay's U.S. operations increased 7 percent for the third quarter and 13 percent for the first nine months of 1996. The benefits of new customers and good general growth of the quickservice market were partially offset by the unfavorable effects of a change in distribution and delivery patterns to certain customers. Sales of the Company's recently formed Water Care Services Division increased by over 150 percent for both the third quarter and nine-month periods, due to businesses which were acquired during 1995 and to new customers which have been added, in part by leveraging alliances with the Company's other divisions. -15-
ECOLAB INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Operating income for the Company's United States operations was $50 million for the third quarter of 1996, an increase of 12 percent over operating income of $44 million in the third quarter of last year. For the first nine months of 1996, United States operating income totaled $120 million and increased 9 percent over nine-month 1995 operating income of $110 million. Third quarter operating income of the Institutional Division was equal to the third quarter of last year reflecting continued competitive markets and investments in the sales-and-service force. Kay reported a modest decrease in operating income versus last year's third quarter, reflecting the change in distribution and delivery patterns to certain customers. All of the Company's other United States businesses reported significant double-digit increases in operating income for the third quarter of 1996. United States operating income margins were down slightly from the comparable periods of last year. For the third quarter, the United States operating income margin was 16.3 percent, compared to 16.6 percent last year. The operating income margin for the nine-month period was 14.1 percent, and compared to last year's nine-month operating income margin of 14.4 percent. Operating income margins reflected increased sales and the benefits of cost controls which were offset by higher raw material costs and competitive pricing pressures. Sales of the Company's International Operations were $87 million for the third quarter of 1996, an increase of 7 percent compared to third quarter 1995 sales of $81 million. For the nine-month period, International's sales totaled $251 million, an increase of 11 percent over sales of $227 million in the first nine months of 1995. Approximately one-half of International's sales growth was due to business acquisitions. Changes in currency translation had a negative impact on reported sales of International's operations, particularly in the Asia Pacific region. Excluding the effects of currency translation, International's sales grew 13 percent for the third quarter and 15 percent for the first nine months of 1996. The Asia Pacific region reported a 3 percent decrease in sales for the third quarter and a 2 percent increase in sales for the first nine months of 1996. However, when measured in local currencies, the Asia Pacific region had sales growth of 5 percent for the third quarter and 8 percent for the nine-month period. Local currency sales included good growth in Japan and modest growth in the Australia/New Zealand region. Reported sales of the Latin American region increased 12 percent for both the third quarter and nine-month periods. Latin American sales included a continuation of significant double- digit growth in Brazil and good growth in Mexico. Sales in Canada increased 9 percent for the third quarter and 10 percent for the nine-month period. Canadian sales included the benefits of the Huntington and Monarch acquisitions and good growth in sales to the Institutional and Food & Beverage markets. -16-
ECOLAB INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Company's International Operations reported operating income of $7 million for the third quarter of 1996, a 29 percent increase over operating income of $6 million in the comparable period of last year. For the nine-month period, operating income totaled $18 million in 1996 and increased 28 percent over operating income of $14 million last year. International operating income margins improved for both periods. For the third quarter of 1996, the International operating income margin was 8.3 percent, compared to a 6.9 percent operating income margin last year. For the nine-month period, International's operating income margin of 7.1 percent improved from last year's operating income margin of 6.1 percent. International's operating income results included double-digit growth in each of the major regions of operations, with a continuation of particularly strong growth in Brazil. The Company's equity in earnings of the Henkel-Ecolab joint venture was $5 million for the third quarter of 1996, a significant increase over $2 million of equity in earnings of the joint venture in the third quarter of 1995. For the first nine months of 1996, the Company's equity in earnings of the joint venture was $10 million, and increased 49 percent over $7 million of equity in earnings for the comparable period of last year. Joint venture results reflected a number of cost control programs which were put into effect during 1996. Joint venture results also reflected some benefits from investments made in the joint venture beginning in late 1995. However, the hospitality industry in much of Europe has not showed signs of a sustained improvement and sales of the joint venture have remained sluggish during 1996. Corporate operating expense was $1 million for the third quarter and $2 million for the first nine months of 1996. Corporate operating expense represented overhead costs directly related to the joint venture. For the third quarter of 1996, net interest expense was approximately $4 million, an increase of 5 percent over net interest expense in the third quarter of 1995. For the nine-month period, net interest expense totaled $12 million and increased 37 percent over the first nine months of last year. The increase in net interest expense for the nine-month period was due to lower average cash levels and increased debt levels reflecting cash used during 1995 for the mid- year stock repurchase self-tender offer and for business acquisitions during 1995 and 1996. Debt levels were decreased during the third quarter of 1996 due to the proceeds received from the sale of Huntington's QUATS-Surfactants business and strong operating cash flows. For the nine months ended September 30, 1996 the provision for income taxes reflected an estimated effective rate of 41.0 percent and compared to last year's nine-month estimated rate of 39.8 percent. The third quarter 1996 effective tax rate of 42.2 percent increased from a rate of 39.2 percent for the third quarter of 1995. These increases in the effective tax rates were principally due to increased overall income tax rates related to the Company's international operations and to the effects of business acquisitions. -17-
ECOLAB INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL POSITION AND LIQUIDITY The Company's consolidated total assets at September 30, 1996 reflected the February 1996 acquisition of Huntington Laboratories and the August 1996 acquisition of the Monarch operations of H.B.Fuller. The increase in other noncurrent assets from year-end 1995 was principally due to these acquisitions. Total debt at September 30, 1996 was $190 million, an increase of $29 million from total debt of $161 million at December 31, 1995. The increase in debt was due to $75 million of 7.19 percent senior notes which were issued to a group of insurance companies in January of 1996. The notes mature in January 2006. Proceeds from the debt were used to reduce short-term borrowings and for general corporate purposes, including the Huntington and Monarch acquisitions. The ratio of total debt to capitalization increased to 28 percent at September 30, 1996 from 26 percent at December 31, 1995. In September 1996, the Company replaced its $150 million credit facility with a $225 million Multicurrency Credit Agreement. The terms of the new agreement are similar to the credit facility which it replaced. Also, in October 1996, the Company filed a shelf registration with the Securities and Exchange Commission for the issuance of up to $200 million of debt securities. The filing is intended to enhance the Company's future financial flexibility in funding general business needs. The Company has no immediate plans to issue the new debt. Cash provided by continuing operations was $177 million for the first nine months of 1996, an increase of 61 percent over cash provided from continuing operations of $110 million in the first nine months of last year. Strong earnings, additional cash flows from businesses acquired, favorable timing of payments and cash flows from the collection of accounts receivable related to strong fourth quarter 1995 sales were significant factors in this cash flow improvement. The Company expects strong and improved flows from operations for full year 1996; however, not at the rate of growth achieved during the nine months ended September 30, 1996. In May 1995, the Company announced a six million share repurchase program. As part of that program, the Company purchased approximately 3.5 million shares in June 1995 under a "Dutch Auction" self-tender offer. During the first nine months of 1996, the Company purchased approximately 35,000 shares under this program and at September 30, 1996 there were approximately 2.4 million shares remaining under the existing repurchase authorization. In addition, the Company maintains an ongoing systematic share repurchase program, which is intended to offset the dilutive effect of shares issued for employee benefit plans. During the first nine months of 1996, approximately 565,000 shares were purchased under this program. The Company intends to continue making purchases under both of these programs from time to time in open market and privately negotiated transactions. -18-
PART II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following documents are filed as exhibits to this report: (4) Multicurrency Credit Agreement dated as of September 29, 1993, as Amended and Restated as of January 1, 1995, and as Further Amended and Restated as of September 30, 1996, Among Ecolab Inc., the Financial Institutions party thereto, Citibank, N.A., as Administrative Agent, Citibank International Plc, as Euro-Agent and Morgan Guaranty Trust Company of New York as Co-Agent. (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, 1996. 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 12, 1996 By: /s/ Michael E. Shannon ------------------------------ Michael E. Shannon Chairman of the Board, Chief Financial and Administrative Officer (duly authorized officer and Principal Financial Officer) -19-
EXHIBIT INDEX Paper (P) or Exhibit Description Electronic (E) - ------- ----------- --------------- (4) Multicurrency Credit Agreement dated E as of September 29, 1993, as Amended and Restated as of January 1, 1995, and as Further Amended and Restated as of September 30, 1996, Among Ecolab Inc., the Financial Institutions party thereto, Citibank, N.A.,as Administrative Agent, Citibank International Plc, as Euro-Agent and Morgan Guaranty Trust Company of New York as Co-Agent (15) Letter regarding unaudited interim E financial information (27) Financial Data Schedule E