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 June 30, 1997 ------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to __________________ Commission File No. 1-9328 ------ ECOLAB INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 41-0231510 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Ecolab Center, 370 N. Wabasha Street, St. Paul, Minnesota 55102 - -------------------------------------------------------------------------------- (Address of principal executive offices)(Zip Code) 612-293-2233 ------------ (Registrant's telephone number, including area code) (Not Applicable) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of July 31, 1997. 64,773,630 shares of common stock, par value $1.00 per share.
PART I -- FINANCIAL INFORMATION ECOLAB INC. CONSOLIDATED STATEMENT OF INCOME Second Quarter Ended June 30 (thousands, except per share) 1997 1996 -------- -------- (unaudited) Net Sales $411,810 $373,196 Cost of Sales 183,322 170,856 Selling, General and Administrative Expenses 175,685 156,991 -------- -------- Operating Income 52,803 45,349 Interest Expense, Net 3,054 4,584 -------- -------- Income Before Income Taxes and Equity in Earnings of Joint Venture 49,749 40,765 Provision for Income Taxes 20,397 16,346 Equity in Earnings of Henkel-Ecolab Joint Venture 3,542 3,179 -------- -------- Net Income $ 32,894 $ 27,598 -------- -------- -------- -------- Net Income Per Share Net Income Per Common Share $ 0.51 $ 0.43 Fully Diluted $ 0.49 $ 0.42 Dividends Per Common Share $ 0.16 $ 0.14 Average Common Shares Outstanding 64,889 64,307 See notes to consolidated financial statements. -2-
ECOLAB INC. CONSOLIDATED STATEMENT OF INCOME Six Months Ended Year Ended June 30 December 31 (thousands, except per share) 1997 1996 1996 -------- -------- ----------- (unaudited) Net Sales $785,570 $706,916 $1,490,009 Cost of Sales 349,048 323,445 674,953 Selling, General and Administrative Expenses 340,289 304,324 629,739 -------- -------- ----------- Operating Income 96,233 79,147 185,317 Interest Expense, Net 6,052 8,024 14,372 -------- -------- ----------- Income Before Income Taxes and Equity in Earnings of Joint Venture 90,181 71,123 170,945 Provision for Income Taxes 36,974 28,517 70,771 Equity in Earnings of Henkel-Ecolab Joint Venture 5,891 4,637 13,011 -------- -------- ----------- Net Income $ 59,098 $ 47,243 $ 113,185 -------- -------- ----------- -------- -------- ----------- Net Income Per Share Net Income Per Common Share $ 0.91 $ 0.73 $ 1.75 Fully Diluted $ 0.88 $ 0.72 $ 1.69 Dividends Per Common Share $ 0.32 $ 0.28 $ 0.58 Average Common Shares Outstanding 64,832 64,449 64,496 See notes to consolidated financial statements. -3-
ECOLAB INC. CONSOLIDATED BALANCE SHEET June 30 June 30 December 31 (thousands) 1997 1996 1996 ---------- ---------- ----------- (unaudited) ASSETS Cash and cash equivalents $ 70,550 $ 31,678 $ 69,275 Accounts receivable, net 217,550 201,247 205,026 Inventories 130,211 120,311 122,248 Deferred income taxes 29,227 21,901 29,344 Other current assets 8,145 25,670 9,614 ---------- ---------- ---------- Current Assets 455,683 400,807 435,507 Property, Plant and Equipment, Net 342,984 309,809 332,314 Investment in Henkel-Ecolab Joint Venture 248,297 284,404 285,237 Other Assets 161,410 139,276 155,351 ---------- ---------- ---------- Total Assets $1,208,374 $1,134,296 $1,208,409 ---------- ---------- ---------- ---------- ---------- ---------- See notes to consolidated financial statements. (Continued) -4-
ECOLAB INC. CONSOLIDATED BALANCE SHEET, (Continued) June 30 June 30 December 31 (thousands, except per share) 1997 1996 1996 ---------- ---------- ----------- (unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY Short-term debt $ 29,638 $ 56,601 $ 27,609 Accounts payable 100,623 80,565 103,803 Compensation and benefits 62,322 54,286 71,533 Income taxes 15,036 9,255 26,977 Other current liabilities 115,714 94,855 97,849 ---------- ---------- ---------- Current Liabilities 323,333 295,562 327,771 Long-Term Debt 149,196 163,875 148,683 Postretirement Health Care and Pension Benefits 82,591 76,519 73,577 Other Liabilities 121,290 133,874 138,415 Shareholders' Equity (common stock, par value $1.00 per share; shares outstanding: June 30, 1997 - 64,892; June 30, 1996 - 64,326; December 31, 1996 - 64,800) 531,964 464,466 519,963 ---------- ---------- ---------- Total Liabilities and Shareholders' Equity $1,208,374 $1,134,296 $1,208,409 ---------- ---------- ---------- ---------- ---------- ---------- See notes to consolidated financial statements. -5-
ECOLAB INC. CONSOLIDATED STATEMENT OF CASH FLOWS Six Months Ended Year Ended June 30 December 31 (thousands) 1997 1996 1996 --------- -------- ----------- (unaudited) OPERATING ACTIVITIES Net income $ 59,098 $47,243 $113,185 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 42,674 37,068 75,185 Amortization 7,431 6,568 14,338 Deferred income taxes (430) (557) (6,878) Equity in earnings of joint venture (5,891) (4,637) (13,011) Joint venture royalties and dividends 15,546 7,636 15,769 Other, net 628 229 1,023 Changes in operating assets and liabilities: Accounts receivable (10,009) 4,872 2,809 Inventories (6,306) (9,245) (6,852) Other assets (5,645) (7,413) (5,255) Accounts payable (3,608) (3,889) 16,397 Other liabilities (13,030) 1,943 47,559 --------- -------- -------- Cash provided by operating activities $ 80,458 $79,818 $254,269 --------- -------- -------- Bracketed amounts indicate a use of cash. See notes to consolidated financial statements. (Continued) -6-
ECOLAB INC. CONSOLIDATED STATEMENT OF CASH FLOWS, (Continued) Six Months Ended Year Ended June 30 December 31 (thousands) 1997 1996 1996 --------- --------- ----------- (unaudited) INVESTING ACTIVITIES Capital expenditures $(54,435) $(52,540) $(111,518) Property disposals 1,197 1,548 3,284 Businesses acquired (12,974) (39,930) (54,911) Other, net (235) 367 (1,449) --------- --------- ---------- Cash used for investing activities (66,447) (90,555) (164,594) --------- --------- ---------- FINANCING ACTIVITIES Notes payable 2,395 (13,954) (42,045) Long-term debt borrowings 1,000 75,000 75,000 Long-term debt repayments (470) (19,418) (35,690) Reacquired shares (14,145) (16,364) (22,790) Dividends on common stock (20,727) (18,084) (36,096) Other, net 19,051 10,778 17,088 --------- --------- ---------- Cash provided by (used for) financing activities (12,896) 17,958 (44,533) --------- --------- ---------- Effect of exchange rate changes on cash 160 (261) (585) --------- --------- ---------- INCREASE IN CASH AND CASH EQUIVALENTS 1,275 6,960 44,557 Cash and Cash Equivalents, at beginning of period 69,275 24,718 24,718 --------- --------- ---------- Cash and Cash Equivalents, at end of period $ 70,550 $ 31,678 $ 69,275 --------- --------- ---------- --------- --------- ---------- 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 second quarter and the six months ended June 30, 1997 and 1996, 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, 1996 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, 1996. 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 June 30 June 30 December 31 (thousands) 1997 1996 1996 ---------- ---------- ----------- (unaudited) Accounts Receivable, Net Accounts receivable $ 227,460 $ 209,543 $ 214,369 Allowance for doubtful accounts (9,910) (8,296) (9,343) ---------- ---------- ---------- Total $ 217,550 $ 201,247 $ 205,026 ---------- ---------- ---------- ---------- ---------- ---------- Inventories Finished goods $ 53,782 $ 57,691 $ 52,232 Raw materials and parts 79,794 66,590 73,060 Excess of fifo cost over lifo cost (3,365) (3,970) (3,044) ---------- ---------- ---------- Total $ 130,211 $ 120,311 $ 122,248 ---------- ---------- ---------- ---------- ---------- ---------- Property, Plant and Equipment, Net Land $ 8,257 $ 6,856 $ 7,969 Buildings and leaseholds 133,499 120,009 129,781 Machinery and equipment 217,508 203,168 208,704 Merchandising equipment 351,801 310,554 330,277 Construction in progress 9,818 10,893 11,745 ---------- ---------- ---------- 720,883 651,480 688,476 Accumulated depreciation and amortization (377,899) (341,671) (356,162) ---------- ---------- ---------- Total $ 342,984 $ 309,809 $ 332,314 ---------- ---------- ---------- ---------- ---------- ---------- -8-
ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Balance Sheet Information (Continued) June 30 June 30 December 31 (thousands) 1997 1996 1996 ---------- --------- ----------- (unaudited) Other Assets Intangible assets, net $ 102,965 $ 77,961 $ 96,865 Investments in securities 5,000 5,000 5,000 Deferred income taxes 26,591 27,671 26,582 Other 26,854 28,644 26,904 ---------- --------- ---------- Total $ 161,410 $139,276 $ 155,351 ---------- --------- ---------- ---------- --------- ---------- Short-Term Debt Notes payable $ 14,363 $ 40,149 $ 12,333 Long-term debt, current maturities 15,275 16,452 15,276 ---------- --------- ---------- Total $ 29,638 $ 56,601 $ 27,609 ---------- --------- ---------- ---------- --------- ---------- Shareholders' Equity Common stock $ 71,199 $ 70,212 $ 70,751 Additional paid-in capital 193,984 173,583 187,111 Retained earnings 443,016 355,445 404,362 Deferred compensation (6,027) (5,539) (7,390) Cumulative translation (14,406) 7,491 6,787 Treasury stock (155,802) (136,726) (141,658) ---------- --------- ---------- Total $ 531,964 $464,466 $ 519,963 ---------- --------- ---------- ---------- --------- ---------- Interest expense related to all debt was $8,500,000 and $10,129,000 for the six months ended June 30, 1997 and 1996, respectively, and $19,084,000 for the year ended December 31, 1996. Other noncurrent liabilities included income taxes payable of $82 million at June 30, 1997, $100 million at December 31, 1996, and $96 million at June 30, 1996. -9-
ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) BUSINESS ACQUISITIONS In February 1997, the Company acquired three small Institutional and Food and Beverage businesses in the Central Africa region. Also, in March 1997, the Company acquired the Institutional, Food and Beverage and Commercial Laundry cleaning and sanitizing businesses of the Savolite Group, which is based in Vancouver, British Columbia, Canada. The acquired Savolite businesses complement the Company's operations, primarily in Canada, with limited operations also in the U.S. Pacific Northwest. Sales of the acquired Savolite businesses were approximately $8 million in 1996. These acquisitions have been accounted for as purchases and, accordingly, the results of their operations have been included in the financial statements of the Company from the dates of acquisition. Net sales and operating income of these businesses for the second quarter and six months ended June 30, 1997 were not significant. NET INCOME PER SHARE Net income per common share amounts are computed by dividing net income by the weighted average number of common shares outstanding. Fully diluted per share amounts are computed as above and assume exercise of dilutive stock options. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, a new standard for computing and presenting earnings per share. The Company is required to adopt the new standard in the fourth quarter of 1997; earlier adoption is not permitted. The Company expects that earnings per share computed under the new standard will approximate earnings per share currently reported. -10-
ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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, African and Kay's international operations. 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. Second Quarter Six Months Year Ended Ended June 30 Ended June 30 December 31 (thousands) 1997 1996 1997 1996 1996 --------- --------- --------- --------- ----------- (unaudited) (unaudited) Net Sales United States $319,633 $287,278 $610,336 $542,973 $1,148,778 International 92,177 85,918 175,234 163,943 341,231 --------- --------- --------- --------- ----------- Total $411,810 $373,196 $785,570 $706,916 $1,490,009 --------- --------- --------- --------- ----------- --------- --------- --------- --------- ----------- Operating Income United States $ 47,184 $ 39,919 $ 85,625 $ 70,073 $ 164,886 International 6,669 6,271 12,539 10,649 23,871 Corporate (1,050) (841) (1,931) (1,575) (3,440) --------- --------- --------- --------- ----------- Total $ 52,803 $ 45,349 $ 96,233 $ 79,147 $ 185,317 --------- --------- --------- --------- ----------- --------- --------- --------- --------- ----------- -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 second quarter and six months ended June 30, 1997 and 1996 and for the year ended December 31, 1996 was: Second Quarter Six Months Year Ended Ended June 30 Ended June 30 December 31 (thousands) 1997 1996 1997 1996 1996 --------- --------- --------- --------- ----------- (unaudited) (unaudited) Joint venture Net sales $212,768 $232,935 $422,365 $449,782 $905,402 Gross profit 119,720 127,156 234,778 246,006 497,909 Income before income taxes 15,434 17,228 27,407 27,786 65,091 Net income $ 8,924 $ 8,460 $ 15,594 $ 13,643 $ 34,808 Ecolab equity in earnings Ecolab equity in net income $ 4,462 $ 4,230 $ 7,797 $ 6,822 $ 17,404 Ecolab royalty income from joint venture, net of income taxes 1,085 1,219 2,220 2,412 4,730 Amortization expense for the excess of cost over the underlying net assets of the joint venture (2,005) (2,270) (4,126) (4,597) (9,123) --------- --------- --------- --------- ----------- Equity in earnings of Henkel-Ecolab joint venture $ 3,542 $ 3,179 $ 5,891 $ 4,637 $ 13,011 --------- --------- --------- --------- ----------- --------- --------- --------- --------- ----------- At June 30, 1997, the Company's investment in the Henkel-Ecolab joint venture included approximately $153 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 June 30, 1997 and 1996, and the related consolidated statements of income for the three-month and six-month periods ended June 30, 1997 and 1996, and the consolidated statement of cash flows for the six-month periods ended June 30, 1997 and 1996. 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, 1996, 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 24, 1997, 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, 1996, 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 July 22, 1997 -13-
ECOLAB INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS -- SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1997 Net sales for the second quarter ended June 30, 1997 were $412 million, a 10 percent increase over net sales of $373 million in the second quarter of last year. For the first six months of 1997, net sales totaled $786 million and increased 11 percent over net sales of $707 million in the first half of 1996. Business acquisitions accounted for approximately 30 percent of the sales growth for the second quarter and 35 percent of the sales growth for the first six months of 1997. New product introductions, new customers, competitive gains and generally good business conditions in the hospitality and lodging industries also contributed significantly to the growth in sales. The gross profit margin for the second quarter of 1997 was 55.5 percent of net sales and increased from the gross profit margin of 54.2 percent of net sales in the second quarter of last year. For the six-month period, the gross profit margin was 55.6 percent of net sales, an increase from 54.2 percent of net sales in the first six months of last year. These improvements in the gross profit margin reflected higher sales levels of the higher margin products within the Company's core operations, a more stable raw material cost environment and good sales volume growth, particularly the growth in sales of new products. Selling price increases continued to be limited due to market pressures. Selling, general and administrative expenses were 42.7 percent of net sales in the second quarter, an increase compared to selling, general and administrative expenses of 42.1 percent of net sales in the second quarter of 1996. For the first six months of 1997, selling, general and administrative expenses were 43.3 percent of net sales, up slightly from selling, general and administrative expenses of 43.0 percent of net sales in the same period of last year. The increase in these expenses reflects the higher sales levels of the Company's core operations which have relatively higher selling expenses and investments in the sales-and-service force. These increases were partially offset by continued tight control of costs and strong sales growth during 1997. The Company expects to continue investing in its sales-and-service force during the second half of 1997, including investments in training and productivity. For the second quarter of 1997, net income totaled $33 million, or $0.51 per common share, an increase of 19 percent over net income of $28 million or $0.43 per common share in the comparable -14-
ECOLAB INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) period of last year. For the six-month period, net income of $59 million or $0.91 per common share increased 25 percent over net income of $47 million or $0.73 per common share in the first six months of 1996. These earnings improvements reflected the benefits of higher sales, particularly in the Company's core operations, continued tight cost controls, lower net interest expense and higher equity in earnings of the Henkel-Ecolab Joint Venture. These benefits were partially offset by investments in the sales-and-service force and increased income taxes. Net sales for the Company's United States operations totaled $320 million for the second quarter ended June 30, 1997, an increase of 11 percent over net sales of $287 million in the second quarter of last year. For the first six months of 1997, United States sales were $610 million, a 12 percent increase over net sales of $543 million in the comparable period of last year. United States sales reflected strong growth in the core Institutional and Food and Beverage operations and benefits from business acquisitions, new product introductions and continued good business trends in the hospitality and lodging industries. Business acquisitions accounted for approximately one-fourth of the growth in United States sales for the second quarter and one-third of the growth in sales for the first six months of 1997. Selling price increases continued to be limited due to tight pricing conditions in several of the markets in which the Company does business. Sales of the U.S. Institutional Division increased 11 percent for the second quarter and 10 percent for the first six months of 1997 and included strong growth in all product lines. The Pest Elimination Division reported sales growth of 9 percent for both the second quarter and six-month periods. Pest Elimination's growth was lower than its historical double-digit rate, reflecting lower than expected contract growth due to vacant sales force positions and some increase in competitive activity. Sales of Kay's U.S. operations increased 6 percent for the second quarter and 5 percent for the first half of 1997 and reflected sales to new customers which were partially offset by a slow-down in the quick-service market and comparison against a strong second quarter of last year when new accounts helped Kay record significant double-digit sales growth. Textile Care Division sales were down slightly, 2 percent for the second quarter and 1 percent for the first half of 1997. Continued consolidations in the laundry industry, increased competitive activity and a difficult comparison against periods which benefited significantly from new product introductions negatively affected Textile Care's sales growth. The Company expects Textile Care to experience difficult market conditions during the second half of 1997. Sales of the Professional Products Division grew 4 percent and 22 percent for the second quarter and the six month periods, respectively. Sales growth for the first -15-
ECOLAB INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) six months reflected the February 1996 acquisition of Huntington Laboratories. Excluding Huntington's sales, Professional Products sales growth was 5 percent for the six-month period. Professional Products sales included good growth in sales to corporate accounts, sales through distributors, and the addition of new branded products to its commercial mass distribution line, which were partially offset by poor sales to the school markets. Sales of the Company's recently formed Water Care Services Division increased 2 percent for the second quarter of 1997 and decreased 1 percent for the six-month period. Water Care Services sales reflected the consolidation of business acquisitions made over the past three years, integration of disparate product lines, elimination of low-margin business and the refining of sales efforts. The Food & Beverage Division reported sales growth of 32 percent for both the second quarter and six-month periods, reflecting the August 1996 acquisition of Monarch from H.B. Fuller. Excluding sales of the Monarch operations, Food & Beverage sales grew 11 percent for the second quarter and 10 percent for the first six months of 1997, with good growth in sales to each of its markets. For the second quarter ended June 30, 1997, operating income of the Company's United States operations totaled $47 million, an increase of 18 percent over operating income of $40 million in the comparable quarter of last year. For the first half of 1997, United States operating income was $86 million, up 22 percent over operating income of $70 million in the first six months of last year. With the exception of the Textile Care Division, all of the United States businesses reported increased operating income for both the second quarter and six-month periods, with significant double-digit growth in the core Institutional and Food and Beverage operations. United States operating income margins improved from the comparable periods of last year. For the second quarter, the United States operating income margin was 14.8 percent of net sales, an increase from 13.9 percent of net sales in the second quarter of last year. For the six-month period, the United States operating income margin of 14.0 percent of net sales compared favorably to the first half of 1996 operating income margin of 12.9 percent of net sales. The improvements in operating income reflected increased sales, particularly in the core operations, the benefits of stable raw material costs and tight cost controls which were partially offset by investments in the sales-and-service organization. -16-
ECOLAB INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Sales of the Company's International Operations were $92 million for the second quarter of 1997, an increase of 7 percent over sales of $86 million in the second quarter of last year. For the six-month period, sales totaled $175 million and increased 7 percent over sales of $164 million in the first six months of last year. Business acquisitions accounted for approximately 60 percent of second quarter sales growth and 45 percent of sales growth for the six-month period. Changes in currency translation had a negative impact on reported sales of International operations, particularly in the Asia Pacific region. Excluding the effects of currency translation, sales of International operations increased 12 percent for the second quarter and 11 percent for the first six months of 1997. The Asia Pacific region reported U.S. dollar sales growth of 4 percent for both the second quarter and six-month periods. However, when measured in local currencies, Asia Pacific sales grew 12 percent for the second quarter and 10 percent for the first half of 1997 and included double-digit growth in Japan and in the Northeast and Southeast Asia Pacific regions. Latin America reported U.S. dollar sales growth of 5 percent for the second quarter and 9 percent for the six months ended June 30, 1997. The effects of changes in currency translation did not have a significant impact on Latin America's reported sales. Latin America results included significant double-digit growth in Mexico and mid-single digit second quarter growth in Brazil. Sales growth in Brazil was unfavorably affected by soft market conditions and comparisons against sales levels which have increased significantly during the last few years. Canada reported sales growth of 13 percent for the second quarter and 14 percent for the six-month period and included a modest negative impact from changes in currency translation. Approximately 80 percent of Canada's sales growth was due to business acquisitions. Second quarter and six-month 1997 International sales also reflected double-digit growth in sales of Kay's International Operations and weak sales in South Africa. International operating income totaled $7 million in the second quarter ended June 30, 1997, a 6 percent increase compared with operating income of $6 million in the comparable quarter of last year. For the first half of 1997, International operating income of $13 million represented an 18 percent growth rate over operating income of $11 million in the same period of last year. The International operating income margin was 7.2 percent of net sales for 1997's second quarter, virtually unchanged from the second quarter of last year. The six-month operating income margin was 7.2 percent of net sales and compared favorably to the six-month 1996 operating income margin of 6.5 percent of net sales. International operating income included double-digit -17-
ECOLAB INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) growth in the Asia Pacific region and in Canada. These improvements were partially offset by significantly lower operating income in Latin America, particularly in Brazil, reflecting investments in the sales-and-service force, comparison against strong operating income levels of a year ago and a softening business environment. The Company's equity in earnings of the Henkel-Ecolab joint venture was $4 million in the second quarter of 1997, an increase of 11 percent over results for the second quarter of last year. For the six-month period, the Company's equity in earnings of the joint venture totaled $6 million, and increased 27 percent over the comparable period a year ago. These improvements reflected earnings growth at the joint venture due to product mix improvements, cost controls and savings, reduced capital project spending and a slightly lower overall effective income tax rate. Joint venture sales, although not consolidated in Ecolab's financial statements, increased 3 percent for the second quarter and 5 percent for the six-month period when measured in Deutsche marks. When measured in U.S. dollars, joint venture sales were negatively effected by the strengthening U.S. dollar and decreased 9 percent and 6 percent for the second quarter and for the six months ended June 30, 1997, respectively. Corporate operating expense was $1 million for the second quarter of 1997 and $2 million for the first six months of 1997 and represented overhead costs directly related to the joint venture. Net interest expense was $3 million in the second quarter of 1997, a decrease of 33 percent from net interest expense in the comparable quarter of last year. Six-month net interest expense was $6 million and decreased 25 percent compared to net interest expense in the first half of last year. These decreases in net interest expense were due to lower debt levels and higher levels of cash and cash equivalents. For both the second quarter and six-month periods, the provisions for income taxes reflected estimated effective rates of 41.0 percent in 1997, a slight increase compared with last year's effective rates of 40.1 percent. The increases in the effective income tax rates were principally due to the effects of business acquisitions. FINANCIAL POSITION AND LIQUIDITY Total assets were approximately $1.2 billion at June 30, 1997, virtually unchanged from total assets at December 31, 1996. Total assets reflected modest increases in accounts receivable, -18-
ECOLAB INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) inventories, property, plant and equipment and other assets due to business acquisitions and general business growth. These increased asset levels were offset by a lower investment in the Henkel-Ecolab joint venture due to the effects of changes in currency translation, and dividends which were received from the joint venture. Total debt at June 30, 1997 was $179 million, up slightly from total debt of $176 million at December 31, 1996. The ratio of total debt to capitalization was 25 percent at June 30, 1997, unchanged from the ratio of total debt to capitalization at December 31, 1996. Cash provided by operating activities totaled $80 million for the first six months of 1997, virtually unchanged from cash provided by operating activities during the comparable period of last year. Cash provided by operating activities reflected increased earnings compared with the first six months of last year and higher dividends received from the joint venture. These cash flow improvements were offset by cash outflows in 1997 due to the reversal of favorable timing of payments which affected the fourth quarter of 1996 and an income tax deposit made against outstanding federal income tax issues that had been accrued for in other noncurrent liabilities. Cash flows during the six months ended June 30, 1996 benefited from the collection of accounts receivable related to strong fourth quarter 1995 sales. 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. At June 30, 1997 there were approximately 2.4 million shares remaining under the existing repurchase authorization. Additionally, consistent with its longstanding practice, the Company has acquired shares under its systematic repurchase program to fund employee benefit plans. During 1997, a total of approximately 123,000 shares were purchased in the second quarter and 353,000 shares were purchased during the first six months under these programs. The Company intends to continue making purchases from time to time in open market and privately negotiated transactions. NEW ACCOUNTING PRONOUNCEMENT In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, a new standard for computing and presenting earnings per share. The Company is required to adopt the new standard in the fourth quarter of 1997; earlier adoption is not permitted. The Company expects that earnings per share computed under the new standard will approximate earnings per share currently reported. -19-
PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS Further developments with respect to a matter reported in the Company's Form 10-K for the fiscal year ended December 31, 1996, and Form 10-Q for the quarter ended March 31, 1997, are described below. As previously reported, the legal action commenced by ten distributors of the Company's Airkem janitorial products was reduced in scope by summary judgment rendered by the Court in April 1997 in favor of the Company. Two claims remained pending. Subsequently, the legal action was divided into separate trials for each of the plaintiff distributors. The first trial took place in May-June 1997, with a jury verdict in favor of the plaintiff in the amount of $29,000 on one of the claims, and a verdict in favor of the Company on the second claim. That part of the jury's decision favoring the plaintiff will be appealed by the Company. Prior to trial, the Company settled the claims of two of the plaintiffs on a basis not material to the Company. The trials of the other seven plaintiffs will likely be scheduled for 1998. Those plaintiffs may also appeal the Court's summary judgment decision. 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's Annual Meeting of Stockholders was held on May 9, 1997. At the meeting, 89.86% of the outstanding shares of the Company's voting stock was represented in person or by proxy. The first proposal voted upon was the election of three Class II Directors for a term ending at the annual meeting in 2000. The three persons nominated by the Company's Board of Directors received the following votes and were elected: Name For Withheld ---- --- -------- Ruth S. Block 57,989,822 235,692 Allan L. Schuman 57,992,232 233,282 Michael E. Shannon 57,989,335 236,179 -20-
PART II. OTHER INFORMATION (Continued) In addition, the terms of office of the following directors continued after the meeting: Class III Directors for a term ending in 1998 - Joel W. Johnson, Philip L. Smith, Hugo Uyterhoeven and Albrecht Woeste; and Class I Directors for a term ending in 1999 - James J. Howard, Jerry W. Levin, Reuben F. Richards, Richard L. Schall and Roland Schulz. The second proposal voted upon was the approval of the Ecolab Inc. 1997 Stock Incentive Plan. That Plan was approved as follows: For Against Abstained --- ------- --------- 53,982,688 4,046,235 196,591 The third proposal voted upon was the approval of the Ecolab Inc. 1997 Non-Employee Director Deferred Compensation Plan. That Plan was approved as follows: For Against Abstained --- ------- --------- 56,105,028 1,658,304 462,182 The fourth proposal voted upon was the ratification of the appointment of Coopers & Lybrand L.L.P. as the Company's independent accountants for the year ending December 31, 1997. The appointment was ratified as follows: For Against Abstained --- ------- --------- 57,976,825 110,447 138,242 As to each proposal, there were no broker non-votes. 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 reports on Form 8-K were filed during the quarter ended June 30, 1997. -21-
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: August 7, 1997 By: /s/ Michael E. Shannon -------------- ------------------------ Michael E. Shannon Chairman of the Board, Chief Financial and Administrative Officer (duly authorized officer and Principal Financial Officer) -22-
EXHIBIT INDEX Exhibit No. Document Method of Filing ----------- -------- ---------------- (15) Letter regarding unaudited Filed herewith interim financial electronically information (27) Financial Data Schedule Filed herewith electronically