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, 1998 ------------------ 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 Wabasha Street N., St. Paul, Minnesota 55102 - ---------------------------------------------------------------------- (Address of principal executive offices)(Zip Code) 651-293-2233 ------------- (Registrant's telephone number, including area code) (Not Applicable) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of October 31, 1998. 129,374,763 shares of common stock, par value $1.00 per share. 1
PART I - FINANCIAL INFORMATION ECOLAB INC. CONSOLIDATED STATEMENT OF INCOME <TABLE> <CAPTION> Third Quarter Ended September 30 (thousands, except per share) 1998 1997 -------- -------- (unaudited) <S> <C> <C> Net Sales $500,037 $432,873 Cost of Sales 224,365 188,178 Selling, General and Administrative Expenses 196,501 177,899 -------- -------- Operating Income 79,171 66,796 Interest Expense, Net 5,069 3,351 -------- -------- Income from Continuing Operations Before Income Taxes and Equity in Earnings of Joint Venture 74,102 63,445 Provision for Income Taxes 31,794 26,613 Equity in Earnings of Henkel-Ecolab Joint Venture 4,704 3,657 -------- -------- Income from Continuing Operations 47,012 40,489 Gain from Discontinued Operations 38,000 -------- -------- Net Income $ 85,012 $ 40,489 -------- -------- -------- -------- Basic Income Per Common Share Income from Continuing Operations $ 0.36 $ 0.31 Gain from Discontinued Operations 0.29 Net Income $ 0.66 $ 0.31 Diluted Income Per Common Share Income from Continuing Operations $ 0.35 $ 0.30 Gain from Discontinued Operations 0.28 Net Income $ 0.63 $ 0.30 Dividends Per Common Share $ 0.095 $ 0.08 Weighted Average Common Shares Outstanding Basic 129,573 129,462 Diluted 134,319 133,930 </TABLE> See notes to consolidated financial statements. 2
ECOLAB INC. CONSOLIDATED STATEMENT OF INCOME <TABLE> <CAPTION> Nine Months Ended Year Ended September 30 December 31 (thousands, except per share) 1998 1997 1997 ---------- ---------- ---------- (unaudited) <S> <C> <C> <C> Net Sales $1,404,859 $1,218,443 $1,640,352 Cost of Sales 630,390 537,226 722,084 Selling, General and Administrative Expenses 577,838 518,188 699,764 ---------- ---------- ---------- Operating Income 196,631 163,029 218,504 Interest Expense, Net 15,875 9,403 12,637 ---------- ---------- ---------- Income from Continuing Operations Before Income Taxes and Equity in Earnings of Joint Venture 180,756 153,626 205,867 Provision for Income Taxes 76,558 63,587 85,345 Equity in Earnings of Henkel-Ecolab Joint Venture 11,091 9,548 13,433 ---------- ---------- ---------- Income from Continuing Operations 115,289 99,587 133,955 Gain from Discontinued Operations 38,000 ---------- ---------- ---------- Net Income $ 153,289 $ 99,587 $ 133,955 ---------- ---------- ---------- ---------- ---------- ---------- Basic Income Per Common Share Income from Continuing Operations $ 0.89 $ 0.77 $ 1.03 Gain from Discontinued Operations 0.29 Net Income $ 1.19 $ 0.77 $ 1.03 Diluted Income Per Common Share Income from Continuing Operations $ 0.86 $ 0.74 $ 1.00 Gain from Discontinued Operations 0.28 Net Income $ 1.14 $ 0.74 $ 1.00 Dividends Per Common Share $ 0.285 $ 0.24 $ 0.335 Weighted Average Common Shares Outstanding Basic 129,066 129,596 129,446 Diluted 134,023 133,835 133,822 </TABLE> See notes to consolidated financial statements. 3
ECOLAB INC. CONSOLIDATED BALANCE SHEET <TABLE> <CAPTION> September 30 December 31 (thousands) 1998 1997 1997 ----------- ----------- ----------- (unaudited) <S> <C> <C> <C> ASSETS Cash and cash equivalents $ 42,392 $ 66,972 $ 61,169 Accounts receivable, net 260,729 230,609 246,041 Inventories 159,563 132,761 154,831 Deferred income taxes 35,698 29,301 34,978 Other current assets 22,189 8,371 12,482 ----------- ----------- ----------- Current Assets 520,571 468,014 509,501 Property, Plant and Equipment, Net 406,346 347,445 395,562 Investment in Henkel-Ecolab Joint Venture 242,373 239,719 239,879 Other Assets 276,788 208,290 271,357 ----------- ----------- ----------- Total Assets $ 1,446,078 $ 1,263,468 $ 1,416,299 ----------- ----------- ----------- ----------- ----------- ----------- </TABLE> See notes to consolidated financial statements. (continued) 4
ECOLAB INC. CONSOLIDATED BALANCE SHEET (continued) <TABLE> <CAPTION> September 30 December 31 (thousands, except per share) 1998 1997 1997 ---------- ---------- ----------- (unaudited) <S> <C> <C> <C> LIABILITIES AND SHAREHOLDERS' EQUITY Short-term debt $ 104,420 $ 52,039 $ 48,884 Accounts payable 121,397 105,819 130,682 Compensation and benefits 73,539 73,679 74,317 Income taxes 7,003 24,217 13,506 Other current liabilities 137,927 116,474 137,075 ---------- ---------- ---------- Current Liabilities 444,286 372,228 404,464 Long-Term Debt 191,971 148,934 259,384 Postretirement Health Care and Pension Benefits 93,180 85,266 76,109 Other Liabilities 61,456 122,048 124,641 Shareholders' Equity (common stock, par value $1.00 per share; shares outstanding: September 30, 1998 - 129,465; September 30, 1997 - 129,427; December 31, 1997 - 129,127) 655,185 534,992 551,701 ---------- ---------- ---------- Total Liabilities and Shareholders' Equity $1,446,078 $1,263,468 $1,416,299 ---------- ---------- ---------- ---------- ---------- ---------- </TABLE> See notes to consolidated financial statements. 5
ECOLAB INC. CONSOLIDATED STATEMENT OF CASH FLOWS <TABLE> <CAPTION> Nine Months Ended Year Ended September 30 December 31 (thousands) 1998 1997 1997 --------- -------- ----------- (unaudited) <S> <C> <C> <C> OPERATING ACTIVITIES Net income $153,289 $ 99,587 $133,955 Gain from discontinued operations (38,000) -------- -------- -------- Income from continuing operations 115,289 99,587 133,955 Adjustments to reconcile income from continuing operations to cash provided by operating activities: Depreciation 72,848 63,865 84,415 Amortization 16,527 11,203 16,464 Deferred income taxes (460) (619) (2,074) Equity in earnings of joint venture (11,091) (9,548) (13,433) Joint venture royalties and dividends 9,486 17,799 25,367 Other, net 1,234 1,557 4,630 Changes in operating assets and liabilities: Accounts receivable (15,742) (26,166) (21,231) Inventories (7,040) (9,708) (14,395) Other assets (6,878) (15,338) (10,993) Accounts payable (13,242) 3,135 20,876 Other liabilities 38,230 13,726 11,517 -------- -------- -------- Cash provided by continuing operations 199,161 149,493 235,098 Cash used for discontinued operations (30,200) -------- -------- -------- Cash provided by operating activities $168,961 $149,493 $235,098 -------- -------- -------- </TABLE> Bracketed amounts indicate a use of cash. See notes to consolidated financial statements. (continued) 6
ECOLAB INC. CONSOLIDATED STATEMENT OF CASH FLOWS (continued) <TABLE> <CAPTION> Nine Months Ended Year Ended September 30 December 31 thousands) 1998 1997 1997 --------- -------- ----------- (unaudited) <S> <C> <C> <C> INVESTING ACTIVITIES Capital expenditures $(107,767) $(83,171) $ (121,667) Property disposals 2,458 2,594 3,424 Businesses acquired (29,506) (58,225) (157,234) Sale of Gibson businesses & assets 13,496 Sale of investments in securities 5,000 Other, net (157) (1,218) (1,240) --------- -------- --------- Cash used for investing activities (116,476) (140,020) (276,717) --------- -------- --------- FINANCING ACTIVITIES Notes payable 63,781 26,254 9,280 Long-term debt borrowings 73,740 1,000 117,000 Long-term debt repayments (132,067) (711) (15,210) Reacquired shares (44,521) (34,367) (60,795) Cash dividends on common stock (36,702) (31,105) (41,456) Other, net 7,253 27,556 26,278 --------- -------- --------- Cash provided by (used for) financing activities (68,516) (11,373) 35,097 --------- -------- --------- Effect of exchange rate changes on cash (2,746) (403) (1,584) --------- -------- --------- DECREASE IN CASH AND CASH EQUIVALENTS (18,777) (2,303) (8,106) Cash and Cash Equivalents, at beginning of period 61,169 69,275 69,275 --------- -------- --------- Cash and Cash Equivalents, at end of period $ 42,392 $ 66,972 $ 61,169 --------- -------- --------- --------- -------- --------- </TABLE> 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 the nine months ended September 30, 1998 and 1997, reflect, in the opinion of management, all adjustments necessary for a fair statement of the results of operations for the interim periods. These adjustments consist of normal, recurring items, except for the gain from discontinued operations discussed separately herein. 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, 1997 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, 1997. PricewaterhouseCoopers LLP, the Company's independent accountants, have performed limited reviews of the interim financial information included herein. Their report on such reviews accompanies this filing. BALANCE SHEET INFORMATION <TABLE> <CAPTION> September 30 December 31 (thousands) 1998 1997 1997 ---------- --------- ----------- (unaudited) <S> <C> <C> <C> Accounts Receivable, Net Accounts receivable $273,405 $241,511 $256,919 Allowance for doubtful accounts (12,676) (10,902) (10,878) -------- -------- -------- Total $260,729 $230,609 $246,041 -------- -------- -------- -------- -------- -------- Inventories Finished goods $ 69,038 $ 54,833 $ 67,823 Raw materials and parts 93,391 81,332 89,716 Excess of fifo cost over lifo cost (2,866) (3,404) (2,708) -------- -------- -------- Total $159,563 $132,761 $154,831 -------- -------- -------- -------- -------- -------- Property, Plant and Equipment, Net Land $ 11,887 $ 7,961 $ 18,184 Buildings and leaseholds 151,534 133,908 145,021 Machinery and equipment 254,955 218,287 232,940 Merchandising equipment 425,582 362,432 379,531 Construction in progress 13,589 11,864 19,862 -------- -------- -------- 857,547 734,452 795,538 Accumulated depreciation and amortization (451,201) (387,007) (399,976) -------- -------- -------- Total $406,346 $347,445 $395,562 -------- -------- -------- -------- -------- -------- </TABLE> 8
ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) BALANCE SHEET INFORMATION (continued) <TABLE> <CAPTION> September 30 December 31 (thousands) 1998 1997 1997 -------- --------- ----------- (unaudited) <S> <C> <C> <C> Other Assets Intangible assets, net $226,947 $124,305 $217,120 Investments in securities 5,000 5,000 Deferred income taxes 25,221 26,354 23,444 Other 24,620 52,631 25,793 -------- -------- -------- Total $276,788 $208,290 $271,357 -------- -------- -------- -------- -------- -------- Short-Term Debt Notes payable $ 88,722 $ 36,778 $ 33,440 Long-term debt, current maturities 15,698 15,261 15,444 -------- -------- -------- Total $104,420 $ 52,039 $ 48,884 -------- -------- -------- -------- -------- -------- Shareholders' Equity Common stock $144,503 $ 71,340 $142,797 Additional paid-in capital 193,012 196,387 149,137 Retained earnings 611,511 476,963 494,950 Deferred compensation (12,342) (10,097) (9,160) Cumulative translation (41,285) (24,998) (28,943) Treasury stock (240,214) (174,603) (197,080) -------- -------- -------- Total $655,185 $534,992 $551,701 -------- -------- -------- -------- -------- -------- </TABLE> Interest expense related to all debt was $18,361,000 and $13,256,000 for the nine months ended September 30, 1998 and 1997, respectively, and $18,043,000 for the year ended December 31, 1997. Other noncurrent liabilities decreased from $125 million at year-end 1997 to $61 million at September 30, 1998 principally due to the resolution of a tax issue related to the disposal of a business in 1992. The Company posted a bond with the Internal Revenue Service against an outstanding tax issue related to this business in the second quarter and recognized a gain from discontinued operations as a result of the settlement of the issue in the third quarter of 1998. In August 1998, the Company issued approximately $60 million of 5.835 percent Australian dollar denominated medium-term notes that mature in November 2001. The Company also issued approximately $30 million of Australian dollar denominated commercial paper. The proceeds from these debt issuances were used to reduce debt under the Company's Multicurrency Credit Agreement, which was classified as long-term. 9
ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) GAIN FROM DISCONTINUED OPERATIONS During the third quarter, the Company resolved a tax issue related to the disposal of a business in 1992. As a result of tax losses on the disposition of this business, the Company's U.S. federal income tax payments were reduced in 1992 through 1995 by approximately $58 million. However, pending final acceptance of the Company's treatment of the losses, no income tax benefit was recognized for financial reporting purposes. During the third quarter of 1998, an agreement was reached with the Internal Revenue Service on the final tax treatment for the losses. This agreement resulted in the recognition of a gain from discontinued operations of $38 million or $0.28 per diluted share in the Company's financial statements for the third quarter and nine-month periods ended September 30, 1998. A major portion of the tax liability due was funded by posting a bond with the Internal Revenue Service during the second quarter of 1998. BUSINESS ACQUISITIONS Gibson Business Acquisition In October 1997, the Company made a public tender offer for all of the outstanding stock of Gibson Chemical Industries Limited (Gibson) located in Melbourne, Australia. Gibson is a manufacturer and marketer of cleaning and sanitizing products, primarily for the Australian and New Zealand institutional, healthcare and industrial markets. On November 5, 1997, the Company waived all of the remaining conditions to its tender offer and, effective November 30, 1997, had acquired substantially all of the outstanding Gibson shares. During the first quarter of 1998, the Company completed its plan for integration of the Gibson businesses, including the determination of which of the acquired businesses would be retained, and decisions related to certain duplicate facilities. The net assets related to these businesses and facilities, which were being held for sale, totaled approximately $25 million and were reclassified to other current assets at March 31, 1998. As of September 30, 1998, there were approximately $10 million of businesses and assets still being held for sale. The acquisition was accounted for as a purchase. The purchase price of the shares and the direct costs of the transaction totaled approximately $130 million and were financed through the Company's Multicurrency Credit Agreement. The excess of the purchase price over the tangible net assets acquired was approximately $85 million and is being amortized on a straight-line basis over an average useful life of 25 years. The Company's international subsidiaries are included in the financial statements on the basis of their November 30 fiscal year ends and, therefore, Gibson's operations were included in the Company's consolidated statement of income beginning in the 1998 10
ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) BUSINESS ACQUISITIONS (continued) Gibson Business Acquisition (continued) reporting period. The assets acquired and the liabilities assumed in the transaction were included in the Company's consolidated balance sheet as of the November 30 effective date. The following unaudited pro forma financial information reflects the combined results of the Company and the retained Gibson businesses assuming the acquisition had occurred at the beginning of 1997. Pro forma adjustments have been included to give effect to amortization of the excess of the purchase price over the tangible net assets acquired, interest expense on debt incurred to finance the acquisition and the related income tax effects. The Company expects that certain efficiencies and synergies will result from the business combination, however, in accordance with the pro forma adjustment guidelines, these anticipated cost savings have not been reflected in the information shown below. <TABLE> <CAPTION> Year Ended December 31 (thousands, except per share) 1997 ----------- <S> <C> Net sales $1,741,006 Net income 131,455 Diluted net income per common share $ 0.98 </TABLE> The pro forma results are presented for information purposes only and are not necessarily indicative of the results of operations which actually would have resulted had the combination occurred at the beginning of 1997 or of future results of operations of the consolidated businesses. Other Business Acquisitions At the beginning of the first quarter of 1998, the Company acquired a cleaning and sanitizing business in Japan from Henkel KGaA. Sales of the acquired business were approximately $10 million in 1997. In June 1998, the Company acquired certain assets of American Fluid Technologies (AFT) which is based in Hopkins, Minnesota. AFT provides cleaning and optimization products and services for membrane systems used to process water for food, beverage, pharmaceutical and industrial applications. AFT has become part of the Company's Food & Beverage division. AFT sales were approximately $3 million in 1997. Also in June 1998, the Company acquired certain assets of Puremark International, a Fairfield, New Jersey-based manufacturer of systems which help purify and condition water used in food service soda fountain dispensers, ice makers, coffee makers and similar items. The acquired business had sales of approximately $2 million in 1997, and has become part of the Company's Institutional division. 11
ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) BUSINESS ACQUISITIONS (continued) Other Business Acquisitions (continued) In July 1998, the Company issued approximately 850,000 shares of common stock to purchase GCS Service, Inc., a Danbury, Connecticut-based provider of commercial kitchen equipment repair services. GCS Service, Inc. sales were $48 million in 1997. These acquisitions have been accounted for as purchases and, accordingly, the results of operations have been included in the financial statements of the Company from the dates of acquisition. Net sales and operating income of these businesses are not significant to the Company's consolidated results of operations, financial position and cash flows. COMPREHENSIVE INCOME In the first quarter of 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." The standard requires the display and reporting of comprehensive income, which includes all changes in shareholders' equity with the exception of additional investments by shareholders or distributions to shareholders. Comprehensive income for the Company includes net income and foreign currency translation that is charged or credited to the cumulative translation account within shareholders' equity. Comprehensive income for the third quarter and nine months ended September 30, 1998 and 1997 and the year ended December 31, 1997, was as follows: <TABLE> <CAPTION> Third Quarter Nine Months Year Ended Ended Ended September 30 September 30 December 31 (thousands) 1998 1997 1998 1997 1997 ------- ------- ------- ------- -------- (unaudited) (unaudited) <S> <C> <C> <C> <C> <C> Net income $85,012 $40,489 $153,289 $99,587 $133,955 Change in cumulative translation (1,594) (10,592) (12,342) (31,785) (35,730) ------- ------- -------- ------- -------- Comprehensive income $83,418 $29,897 $140,947 $67,802 $ 98,225 ------- ------- -------- ------- -------- ------- ------- -------- ------- -------- </TABLE> 12
ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) INCOME PER COMMON SHARE The computation of the basic and diluted per share amounts were as follows: <TABLE> <CAPTION> Third Quarter Nine Months Year Ended Ended Ended (thousands, September 30 September 30 December 31 except per share) 1998 1997 1998 1997 1997 ----------- ----------- -------- -------- -------- (unaudited) (unaudited) <S> <C> <C> <C> <C> <C> Income from continuing operations $ 47,012 $ 40,489 $115,289 $ 99,587 $133,955 Gain from discontinued operations 38,000 38,000 ----------- ----------- -------- -------- -------- Net income $ 85,012 $ 40,489 $153,289 $ 99,587 $133,955 ----------- ----------- -------- -------- -------- ----------- ----------- -------- -------- -------- Weighted average common shares outstanding Basic (actual shares outstanding) 129,573 129,462 129,066 129,596 129,446 Effect of dilutive stock options 4,746 4,468 4,957 4,239 4,376 ----------- ----------- -------- -------- -------- Diluted 134,319 133,930 134,023 133,835 133,822 ----------- ----------- -------- -------- -------- ----------- ----------- -------- -------- -------- Basic income per common share Income from continuing operations $ 0.36 $ 0.31 $ 0.89 $ 0.77 $ 1.03 Gain from discontinued operations 0.30 0.30 Net income $ 0.66 $ 0.31 $ 1.19 $ 0.77 $ 1.03 Diluted income per common share Income from continuing operations $ 0.35 $ 0.30 $ 0.86 $ 0.74 $ 1.00 Gain from discontinued operations 0.28 0.28 Net income $ 0.63 $ 0.30 $ 1.14 $ 0.74 $ 1.00 </TABLE> 13
ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) INCOME PER COMMON SHARE (continued) Stock options for approximately 2.3 million shares were granted in 1998 with exercise prices substantially greater than the market value of the Company's common stock. These stock options were not dilutive and therefore were not included in the computation of diluted net income per common share for the third quarter and nine months ended September 30, 1998. Virtually all other stock options outstanding during the third quarter and nine months ended September 30, 1998 and 1997, and the year ended December 31, 1997, were dilutive and included in the calculation of the diluted per share amounts. GEOGRAPHIC SEGMENTS The Company is the leading 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. <TABLE> <CAPTION> Third Quarter Ended Nine Months Ended Year Ended September 30 September 30 December 31 (thousands) 1998 1997 1998 1997 1997 -------- -------- ---------- ---------- ---------- (unaudited) (unaudited) <S> <C> <C> <C> <C> <C> Net Sales United States $392,307 $338,764 $1,084,175 $ 949,100 $1,275,828 International 107,730 94,109 320,684 269,343 364,524 -------- -------- ---------- ---------- ---------- Total $500,037 $432,873 $1,404,859 $1,218,443 $1,640,352 -------- -------- ---------- ---------- ---------- -------- -------- ---------- ---------- ---------- Operating Income United States $ 72,033 $ 60,738 $ 176,938 $ 146,363 $ 195,630 International 8,287 7,102 23,231 19,641 26,962 Corporate (1,149) (1,044) (3,538) (2,975) (4,088) -------- -------- ---------- ---------- ---------- Total $ 79,171 $ 66,796 $ 196,631 $ 163,029 $ 218,504 -------- -------- ---------- ---------- ---------- -------- -------- ---------- ---------- ---------- </TABLE> 14
ECOLAB INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) EQUITY IN EARNINGS OF HENKEL-ECOLAB JOINT VENTURE Certain financial data of the Henkel-Ecolab joint venture and the components of the Company's equity in earnings of the joint venture for the third quarter and nine months ended September 30, 1998 and 1997 and for the year ended December 31, 1997 were: <TABLE> <CAPTION> Third Quarter Ended Nine Months Ended Year Ended September 30 September 30 December 31 (thousands) 1998 1997 1998 1997 1997 -------- -------- -------- -------- ----------- (unaudited) (unaudited) <S> <C> <C> <C> <C> <C> Joint venture Net sales $232,910 $204,454 $656,318 $626,819 $ 844,689 Gross profit 129,527 111,829 364,577 346,607 470,698 Income before income taxes 19,750 14,734 48,036 42,141 63,640 Net income $ 10,985 $ 8,770 $ 26,983 $ 24,364 $ 33,701 Ecolab equity in earnings Ecolab equity in net income $ 5,493 $ 4,385 $ 13,492 $ 12,182 $ 16,851 Ecolab royalty income from joint venture, net of income taxes 1,112 1,192 3,308 3,412 4,583 Amortization expense for the excess of cost over the underlying net assets of the joint venture (1,901) (1,920) (5,709) (6,046) (8,001) -------- -------- -------- -------- ----------- Equity in earnings of Henkel-Ecolab joint venture $ 4,704 $ 3,657 $ 11,091 $ 9,548 $ 13,433 -------- -------- -------- -------- ----------- -------- -------- -------- -------- ----------- </TABLE> At September 30, 1998, the Company's investment in the Henkel-Ecolab joint venture included approximately $140 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. 15
REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Directors Ecolab Inc. We have reviewed the accompanying consolidated balance sheet of Ecolab Inc. as of September 30, 1998 and 1997, and the related consolidated statements of income for the three-month and nine-month periods ended September 30, 1998 and 1997, and the consolidated statement of cash flows for the nine-month periods ended September 30, 1998 and 1997. 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, 1997, 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 23, 1998, 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, 1997, 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/ PricewaterhouseCoopers LLP PRICEWATERHOUSECOOPERS LLP Saint Paul, Minnesota October 20, 1998 16
ECOLAB INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides information that management believes is useful in understanding the Company's operating results, cash flows and financial condition. The discussion should be read in conjunction with the consolidated financial statements and related notes in this Form 10-Q. The following discussion contains various "Forward-Looking Statements" within the meaning of the Private Securities Litigation Reform Act of 1995. We refer readers to the Company's statement entitled "Forward-Looking Statements and Risk Factors" beginning on page 26 of this report. Additional risk factors may be described from time to time in Ecolab's filings with the Securities and Exchange Commission. RESULTS OF OPERATIONS - THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998 Net sales for the third quarter ended September 30, 1998 were $500 million, an increase of 16 percent over net sales of $433 million in the third quarter of last year. For the nine month-period ended September 30, 1998, net sales were just over $1.4 billion and increased 15 percent over net sales of approximately $1.2 billion in the comparable period of last year. Business acquisitions were significant to sales growth and accounted for approximately one-half of the Company's sales growth for both the third quarter and nine-month periods. Changes in currency translation decreased the Company's sales growth by three to four percentage points in each of the reporting periods. The growth in sales also reflected new products, a larger sales-and-service force, new customers, competitive gains and a continuation of generally good conditions in the hospitality and lodging industries, particularly in the United States. Selling price increases continued to be restrained due to limited pricing conditions in several markets in which the Company does business. The gross profit margin was 55.1 percent of net sales for the third quarter of 1998, down from last year's third quarter gross profit margin of 56.5 percent of net sales. For the nine-month period, the gross profit margin was also 55.1 percent of net sales, a decrease compared to the nine-month 1997 gross profit margin of 55.9 percent. The decrease in gross profit margins reflected comparison against an exceptionally strong third quarter 1997 margin, lower margins in the Asia Pacific region and the effects of business acquisitions. Gross margins in the Asia Pacific region were negatively affected by economic and monetary problems in the area, and by businesses the Company added to the region through acquisitions. In the United States, gross margins were also negatively affected by business acquisitions. These decreases to the gross margins were partially offset by higher sales of the higher margin products of the Company's U.S. core operations and sales volume 17
ECOLAB INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) RESULTS OF OPERATIONS - THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998 (continued) growth of new products. The benefits from selling price increases improved modestly over last year, however, continued to be limited due to market pressures. For the third quarter of 1998, selling, general and administrative expenses were 39.3 percent of net sales and decreased from selling, general and administrative expenses of 41.1 percent of net sales in the third quarter of last year. For the first nine months of 1998, selling, general and administrative expenses represented 41.1 percent of net sales, down from selling, general and administrative expenses of 42.5 percent of net sales in the comparable period of last year. Selling, general and administrative margins were down for both the Company's U.S. and International Operations with significant decreases in the Asia Pacific region. These decreases reflected the benefits of tight cost controls, the integration of businesses acquired and strong sales growth. These benefits were partially offset by investments in the sales-and-service force and additional business investments. The Company expects to continue investing in its sales-and-service force, including investments in training and productivity. Income from continuing operations for the third quarter of 1998 totaled $47 million, an increase of 16 percent over income from continuing operations of $40 million in the third quarter of 1997. Diluted income from continuing operations per share for the third quarter was $0.35, an increase of 17 percent compared to diluted income from continuing operations per share of $0.30 in the third quarter of last year. For the first nine months of 1998, income from continuing operations totaled $115 million, or $0.86 per diluted share, and increased 16 percent over income from continuing operations of $100 million, or $0.74 per diluted share in the comparable period of last year. These earnings improvements reflected double-digit growth in operating income, principally due to the stronger performances of the Company's U.S. core operations, and a higher equity in earnings of the Henkel-Ecolab joint venture. Earnings were negatively affected by increased interest expense and income taxes compared with the third quarter and nine-month periods of last year. In addition to ongoing operations, a tax issue related to the disposal of a business in 1992 was resolved during the third quarter, resulting in a one-time gain of $38 million, or $0.28 per diluted share. When the business was discontinued at the end of 1991, no income tax benefits were anticipated as part of the loss on disposition. Subsequently, the Company was able to adopt a strategy to realize some income tax benefits on the disposition. The Company's treatment of the loss for income tax purposes was resolved with the Internal Revenue Service during the third quarter. 18
ECOLAB INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) RESULTS OF OPERATIONS - THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998 (continued) Net sales for the Company's United States operations were $392 million for the third quarter of 1998, an increase of 16 percent over net sales of $339 million in the third quarter of last year. For the nine-month period, United States sales totaled $1.1 billion in 1998, up 14 percent over sales of $949 million in 1997. U.S. sales for both periods benefited from business acquisitions, a continuation of strong growth in the core Institutional and Food & Beverage operations, sales of new products, and good business trends in the hospitality and lodging industries. Business acquisitions accounted for approximately 40 percent of the growth in U.S. sales for each of the reporting periods. Selling price increases continued to be restrained due to limited pricing conditions in several of the markets in which the Company does business. Sales of the Company's U.S. Institutional Division increased 12% for both the third quarter and nine-month reporting periods with strong growth in sales of all of its business units. The Grace-Lee Vehicle Wash business, which was acquired in December of last year, added approximately 2 percentage points to Institutional's sales growth rates. Sales of the Pest Elimination Division increased 15 percent for the third quarter and 14 percent for the first nine months of 1998. Pest Elimination sales benefited from good new contract growth, continued high customer retention, additional product and service offerings and higher customer demand related to weather conditions. Kay reported sales growth of 10 percent for the third quarter and 9 percent for the nine-month period with good new customer business, continued growth of its food retail (grocery/deli) services business and additional offerings to its core quick-service customers. Textile Care sales decreased 1 percent for the third quarter of 1998 and were up 1 percent for the first nine months of 1998. Although Textile Care has a number of new product offerings, its business continues to experience pressures from plant consolidations, particularly in laundries serving the healthcare market, and challenging market conditions. Sales of the Company's Professional Products businesses were up 4 percent for the third quarter and 6 percent for the nine-month period with improved growth in sales to its core janitorial and infection prevention markets. Water Care sales increased 7 percent for the third quarter and 5 percent for the first nine months of 1998 with a continued focus on the hospitality, cruise ship, food and beverage and laundry markets. The Food & Beverage Division reported sales growth of 17 percent for both the third quarter and nine-month reporting periods reflecting the acquisition of Chemidyne in August of last year. Excluding Chemidyne, Food & Beverage sales increased 11 percent for the third quarter and 8 percent for the nine-month period with strong growth in sales to the beverage and food processing markets. 19
ECOLAB INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) RESULTS OF OPERATIONS - THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998 (continued) Operating income of the Company's United States operations was $72 million for the third quarter ended September 30, 1998, an increase of 19 percent over operating income of $61 million in the third quarter of 1997. For the first nine months of 1998, U.S. operating income totaled $177 million, up 21 percent over operating income of $146 million in the comparable period of last year. U.S. operating income reflected a continuation of particularly good growth in the core Institutional and Food and Beverage operations and also in the Pest Elimination business. As a percent of net sales, the third quarter U.S. operating income margin improved to 18.4 percent in 1998 from 17.9 percent last year. For the nine-month period, the operating income margin also improved to 16.3 percent of net sales in 1998 from 15.4 percent of net sales in 1997. These improvements in operating income margins reflected strong sales growth, particularly in the core operations and in sales of new products, modest increases in raw material costs, and the benefits of tight cost controls. Reported sales of the Company's International Operations were $108 million for the third quarter of 1998, and increased 14 percent over sales of $94 million in the third quarter of last year. For the first nine months of 1998, the Company's International Operations reported sales of $321 million, up 19 percent over sales of $269 million during the first nine months of 1997. International sales benefited from business acquisitions; however, sales were negatively affected by changes in currency translation, particularly in the Asia Pacific region. Excluding business acquisitions, sales as reported in U.S. dollars decreased 3 percent for the third quarter and were flat for the nine-month period. When measured in local currencies, International sales increased over 30 percent for both the third quarter and nine-month reporting periods, and when business acquisitions are excluded, local currency sales for both the third quarter and nine-month periods of 1998 increased approximately 11 percent. The Asia Pacific region reported U.S. dollar sales growth of 24 percent for the third quarter and 31 percent for the first nine months of 1998. Excluding business acquisitions and when measured in local currencies, sales in the Asia Pacific region increased 16 percent for each of the reporting periods with good growth in Australia and Southeast Asia. Reported sales in Latin America were up modestly, 1 percent for the third quarter and 3 percent for the nine-month period. When measured in local currencies, Latin America sales increased 8 percent for the third quarter and 9 percent for the nine-month period with double-digit growth in Mexico, Venezuela and Central America and flat results in Brazil and the Caribbean. Canada reported flat sales results for the third quarter and sales growth of 3 percent for the first nine months of 1998. Canada's local currency growth, excluding the March 1997 acquisition of Savolite, was 7 percent for the third quarter and 6 percent for the nine-month period and reflected good growth in Institutional and Food & Beverage sales. 20
ECOLAB INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) RESULTS OF OPERATIONS - THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998 (continued) For the third quarter ended September 30, 1998, International reported operating income of $8 million, an increase of 17 percent over operating income of $7 million in the third quarter of last year. For the first nine months of 1998, International operating income totaled $23 million, up 18 percent over operating income of $20 million in the comparable period of last year. Excluding business acquisitions, International operating income as reported in U.S. dollars was down approximately 1 percent for both the third quarter and nine-month reporting periods, reflecting lower income in the Asia Pacific region due to the difficult business and economic conditions in the region. Excluding business acquisitions and the negative effects of currency translation, International's operating income increased approximately 25 percent in both the third quarter and nine-month reporting periods reflecting growth in all of the Company's major regions of operation with significant growth in the Latin America region. The Company continues to be cautious about near-term growth in the Asia Pacific region due to the uncertain economic conditions in the region. The Company's equity in earnings of the Henkel-Ecolab joint venture were $4.7 million for the third quarter of 1998, an increase of 29 percent over $3.7 million of equity in earnings of the joint venture in the comparable quarter of last year. For the nine-month period, the Company's equity in the joint venture's earnings increased 16 percent to $11.1 million in 1998 from $9.5 million last year. Joint venture sales, although not consolidated in the Company's financial statements, were up 14 percent for the third quarter and 11 percent for the first nine months of 1998 when measured in Deutsche marks, with good growth across all business lines and in most geographic areas. Sales in Germany and the United Kingdom continued to be weak, due in part to government and private spending cutbacks. When measured in U.S. dollars, joint venture sales also increased 14 percent for the third quarter, however, sales increased only 5 percent for the nine-month period due to the negative effects of the strengthening U.S. dollar. Corporate operating expense was just over $1 million for the third quarter and $3.5 million for the first nine months of 1998 and represented overhead costs directly related to the Henkel-Ecolab joint venture. Net interest expense was $5.1 million for the third quarter and nearly $16 million for the nine-month period and increased more than 50 percent over net interest expense in the comparable periods of last year. These increases were primarily due to debt incurred for the Gibson and other business acquisitions and for an income tax deposit made in the second quarter of 1998. 21
ECOLAB INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) RESULTS OF OPERATIONS - THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998 (continued) For the first nine months of 1998, the provision for income taxes reflected an estimated annual effective income tax rate of 42.4 percent. The effective income tax rate for the third quarter of 1998 was 42.9 percent. These effective income tax rates were 1.0 percent higher than the comparable periods of last year, principally due to the effects of business acquisitions and higher overall effective rates on earnings of International operations. YEAR 2000 CONVERSION The Company has completed an assessment of Year 2000 compliance for its North American operations related to its critical operating and application systems, particularly customer-oriented systems such as sales and order processing, billing and collections and associated infrastructure. As a result, the Company has renovated or is replacing portions of its software and hardware. The renovation, validation and implementation processes are approximately 85 to 90 percent complete and the intention is to be completed by the end of 1998 in all material respects. The costs related to Year 2000 to complete this activity are not material and should not exceed $5 million, in both capital and expense, of which approximately $3 million has been incurred to date. Of this cost, only a small part is related to accelerated replacement due to Year 2000 concerns. With regard to operations and application systems in operations outside of North America, the Company is in various stages of assessment, renovation, validation or implementation depending on the circumstances. The Company intends to follow the same process internationally, as it has taken in North America and intends to complete the process by the end of 1998 in all material respects. Costs related to the international process are not expected to be material. As a part of its Year 2000 conversion, the Company is in the process of demonstrating its Year 2000 readiness by simulating the Year 2000 in an orchestrated manner for its key infrastructure components, critical business processes and key application systems in St. Paul. The Company expects that minor Year 2000 compliance issues will be identified as an outcome of the Year 2000 simulation test and intends to address these compliance issues in the first quarter of 1999. On a worldwide basis, the Company is 95 percent complete in the assessment stage relative to remediating its dispensing and cleaning systems and its manufacturing and building maintenance operations for date/time sensitivity and has begun the renovation, validation and implementation stages with the goal of completion by the end of 1998. The Company believes that its requirements relative to Year 2000 22
ECOLAB INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) YEAR 2000 CONVERSION (continued) remediation for its dispensing and cleaning systems and manufacturing and building maintenance operations are limited in nature and although a final cost estimate has not been determined at this time, the Company does not believe the cost will be material. The Company has contacted key suppliers and vendors in order to determine the status of such third parties' Year 2000 remediation plans. This process will be ongoing into 1999. In the Company's experience, its suppliers and vendors are still only in the process of Year 2000 renovation. Therefore, the Company will be better able to fully assess the risk and prepare contingency plans when third party processes are more complete. The Company recognizes the need for Year 2000 contingency plans in the event that remediation is not fully successful or that the remediation efforts of its vendors, suppliers and governmental/regulatory agencies are not timely completed. The Company intends to address contingency planning in early 1999. The Company intends to complete its Year 2000 remediation efforts primarily with in-house resources, but has and will continue to use consultants for specific tasks. The Company costs of Year 2000 remediation described above are funded from operations. The Company recognizes that issues related to Year 2000 constitute a material known uncertainty. The Company also recognizes the importance of ensuring its operations will not be adversely affected by Year 2000 issues. It believes that the processes described above will be effective to manage the risks associated with the problem. However, there can be no assurance that the process can be completed on the timetable described above or that the remediation processes will be fully effective. The failure to identify and remediate Year 2000 problems or, the failure of key third parties who do business with the Company or governmental/regulatory agencies to timely remediate their Year 2000 issues could cause system failures or errors, business interruptions and in a worst case scenario, the inability to engage in normal business practices for an unknown length of time. The effect on the Company's operations, income and financial condition could be materially adverse. EURO CURRENCY CONVERSION The Company's principal activities in Europe are not conducted directly, rather such activities are conducted through its Henkel-Ecolab joint venture. On January 1, 1999, 11 of the 15 member countries of the European Monetary Union are scheduled to establish fixed conversion rates 23
ECOLAB INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) EURO CURRENCY CONVERSION (continued) between their existing currencies and a new currency, the Euro. During a transition period from January 1, 1999 - 2002, the Euro will replace the national currencies that exist in the participating countries. The transition to the Euro creates a number of sales, marketing, finance and accounting issues that are currently being addressed by joint venture management. Given the nature of the Company's exposure to the change, management does not expect the transition to the Euro to have a material impact on the results of operations or financial condition of the Company. FINANCIAL POSITION AND LIQUIDITY Total assets at September 30, 1998, were over $1.4 billion, an increase of 2 percent over total assets at year-end 1997 and up 14 percent over total assets at the end of the third quarter of last year. The increase in total assets from September 30 of last year is principally due to the acquisition of the Gibson business at the end of 1997. Total debt was $296 million at September 30, 1998, and compared to total debt of $308 million at December 31, 1997, and $201 million at the end of the third quarter of 1997. The increase in debt from the end of the third quarter of last year reflected borrowings to finance the Gibson acquisition and funding for an income tax deposit made in the second quarter of 1998. During the third quarter, the Company replaced long-term debt under its Multicurrency Credit Agreement with approximately $60 million of Australian dollar denominated debt under a three and one-quarter year medium-term note agreement and approximately $30 million of Australian dollar denominated commercial paper. The ratio of total debt to capitalization was 31 percent at September 30, 1998, compared with 36 percent at year-end 1997 and 27 percent at September 30, 1997. Other noncurrent liabilities decreased to $61 million at September 30, 1998, from $125 million at year-end 1997 and $122 million at the end of the third quarter of last year. These decreases were due to the resolution of a tax issue related to the disposal of a business in 1992. As a result of tax losses on the disposition of this business, the Company's U.S. federal income tax payments were reduced in 1992 through 1995 by approximately $58 million. However, pending final acceptance of the Company's treatment of the losses, no income tax benefit was recognized for financial reporting purposes. During the second quarter of 1998, the Company reduced its noncurrent liabilities and posted a bond with the Internal Revenue Service against the 24
ECOLAB INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) FINANCIAL POSITION AND LIQUIDITY (continued) outstanding tax issue related to this business. In the third quarter of 1998, an agreement was reached with the Internal Revenue Service on the final tax treatment of the losses. This agreement resulted in the further reduction of noncurrent liabilities and recognition of a gain from discontinued operations of $38 million during the third quarter ended September 30, 1998. Cash provided by continuing operations totaled $199 million for the first nine months of 1998, an increase of 33 percent over cash provided by continuing operations of $149 million during the comparable period of last year. The comparison of cash flow from continuing operations was favorably affected by a cash outflow in 1997 due to an $18 million income tax deposit made against outstanding federal income tax issues that had been accrued for in other noncurrent liabilities. Total cash provided by operating activities was $169 million for the nine months ended September 30, 1998, and included a $30 million income tax deposit made in the second quarter of 1998 related to discontinued operations. The Company reacquired 557,500 shares of its common stock during the third quarter and 1,444,100 shares of its common stock during the first nine months of 1998 under its two authorized share repurchase programs. Under one plan, the Company reacquires shares to fund current share needs for employee incentive and benefit plans. During any fiscal quarter, the number of shares reacquired is not intended to exceed approximate plan needs for such quarter. Under a second program, established in 1995 (the "1995 Plan"), the Company reacquires shares for general corporate purposes, including certain acquisitions. As of September 30, 1998, there were approximately 3.7 million shares remaining under the 1995 Plan. The Company anticipates that it will continue to periodically reacquire shares under these two programs. NEW ACCOUNTING PRONOUNCEMENT In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, a new standard of accounting and reporting for derivative instruments and hedging activities. The Company is required to adopt the new standard in the first quarter of 2000. Although the Company has not completed a full analysis of all of the requirements of the new standard, the Company's use of derivative and hedging financial instruments is limited and therefore the Company does not anticipate the impact of the new standard to be significant. 25
ECOLAB INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) FORWARD-LOOKING STATEMENTS AND RISK FACTORS The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In this report on Form 10-Q, Management discusses expectations regarding future performance of the Company which may include anticipated financial performance, business prospects, prospects for international growth, investments in the sales and service force, year 2000 issues, Euro conversion, share repurchases, the affect of new accounting principles and similar matters. Without limiting the foregoing, words or phrases such as "will likely result," "are expected to," "will continue," "is anticipated," "we believe," "estimate," "project" (including the negative or variations thereof) or similar terminology, generally identify forward-looking statements. Forward-looking statements represent challenging goals for the Company. As such, they are based on certain assumptions and estimates and are subject to certain risks and uncertainties. The Company cautions that undue reliance should not be placed on such forward-looking statements which speak only as of the date made. In order to comply with the terms of the safe harbor, the Company hereby identifies important factors which could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. These factors should be considered, together with any similar risk factors or other cautionary language which may be made in the section of this report containing the forward-looking statement. Risks and uncertainties that may affect operating results and business performance include: pricing flexibility; availability of adequate and reasonably-priced raw materials; the occurrence of capacity constraints, or the loss of a key supplier, which in either case limit the production of certain products; ability to carry out the Company's acquisition strategy, including difficulties in rationalizing acquired businesses and in realizing related cost savings and other benefits; the costs and effects of "year 2000" computer software issues (described under the heading "Year 2000 Conversion" beginning on page 22); the costs and effects of complying with: (i) the significant environmental laws and regulations which apply to the Company's operations and facilities, (ii) government regulations relating to the manufacture, storage, distribution and labeling of the Company's products and (iii) changes in tax, fiscal, governmental and other regulatory policies; economic factors such as the worldwide economy, interest rates, currency movements, Euro conversion and the development of markets; the occurrence of (i) litigation or claims, (ii) natural or man-made disasters and (iii) severe weather conditions affecting the food service and hospitality industry; loss of, or changes in, executive management; the Company's ability to continue product introductions and technological innovations; and other uncertainties or risks reported from time-to-time in the Company's reports to the Securities and Exchange Commission. In addition, the 26
ECOLAB INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) FORWARD-LOOKING STATEMENTS AND RISK FACTORS (continued) Company notes that its stock price can be affected by fluctuations in quarterly earnings. Despite favorable year-over-year quarterly comparisons in recent years, there can be no assurances that earnings will continue to increase or that the degree of improvement will meet investors' expectations. The "year 2000" issue is the result of computer programs having date-sensitive software which may recognize a date using 00 as the year 1900 rather than the year 2000. If not detected and corrected, this can result in system failure or miscalculations causing disruptions of operations, including a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The year 2000 issue can arise at any point in the Company's supply, manufacturing, processing, distribution and any financial chains. Accordingly, the failure to resolve year 2000 issues could have a material impact on the Company. The Company has put in place plans and processes (see Year 2000 Conversion on page 22 hereof) which it believes will be sufficient to evaluate and manage risk associated with year 2000 issues and will use both internal and external resources. However, estimates of year 2000 costs, time schedules and the Company's belief that it can successfully resolve year 2000 issues are based on presently available information and are subject to certain assumptions and risks. These include the availability of necessary and trained personnel who can be hired or retained on a contract basis, the ability to locate and correct all relevant computer codes and uncertainties surrounding the ability of suppliers and vendors to resolve their year 2000 issues. The ability of governmental agencies to resolve year 2000 issues is an additional risk and uncertainty. However, although such risks and uncertainties exist, the Company believes that its exposure to year 2000 issues is not dissimilar to that of other companies engaged in similar businesses. 27
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: The Company filed on July 15, 1998, a Current Report on Form 8-K announcing completion of its previously announced acquisition of GCS Service, Inc. of Danbury, Connecticut. 28
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 10, 1998 By: /s/Michael E. Shannon ------------------------------- Michael E. Shannon Chairman of the Board, Chief Financial and Administrative Officer (duly authorized officer and Principal Financial Officer) 29
EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT NO. DOCUMENT METHOD OF FILING - ----------- -------- ---------------- <S> <C> <C> (15) Letter regarding unaudited interim financial Filed herewith information electronically (27) Financial Data Schedule Filed herewith electronically </TABLE> 30