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Ecolab 10-K 2009

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended December 31, 2008

 

Commission File No. 1-9328

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                 to                 

 

ECOLAB INC.

(Exact name of registrant as specified in its charter)

 

Delaware

41-0231510

(State or other jurisdiction of incorporation or
organization)

(I.R.S. Employer Identification No.)

 

 

370 Wabasha Street North, St. Paul, Minnesota

55102

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code:  1-800-232-6522

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

 

 

 

Common Stock, $1.00 par value

 

New York Stock Exchange, Inc.

 

 

 

Preferred Stock Purchase Rights

 

New York Stock Exchange, Inc.

 

Securities registered pursuant to Section 12(g) of the Act:  None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

x  YES  o  NO

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

o  YES  x  NO

 

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.

x  YES  o  NO

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,”  “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x   Accelerated filer o   Non-accelerated filer o  (Do not check if a smaller reporting company)
Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o YES x NO

 

Aggregate market value of voting and non-voting common equity held by non-affiliates of registrant on June 30, 2008:  $10,606,696,000 (see Item 12, under Part III hereof), based on a closing price of registrant’s Common Stock of $42.99 per share.

 

The number of shares of registrant’s Common Stock, par value $1.00 per share, outstanding as of January 30, 2009: 236,192,852 shares.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

1.

Portions of the registrant’s Annual Report to Stockholders for the year ended December 31, 2008 (hereinafter referred to as “Annual Report”) are incorporated by reference into Parts I and II.

 

 

2.

Portions of the registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held May 8, 2009 and to be filed within 120 days after the registrant’s fiscal year ended December 31, 2008 (hereinafter referred to as “Proxy Statement”) are incorporated by reference into Part III.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I

 

 

Forward-Looking Statements

 

Item 1(a)

General Development of Business

 

Item 1(b)

Financial Information About Operating Segments

 

Item 1(c)

Narrative Description of Business

 

Item 1(d)

Financial Information About Geographic Areas

 

Item 1(e)

Available Information

 

Executive Officers of the Registrant

 

Item 1A.

Risk Factors

 

Item 1B.

Unresolved Staff Comments

 

Item 2.

Properties

 

Item 3.

Legal Proceedings

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

 

 

 

PART II

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer purchases of Equity Securities

 

Item 6.

Selected Financial Data

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

 

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

 

Item 8.

Financial Statements and Supplementary Data

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

Item 9A.

Controls and Procedures

 

 

 

 

PART III

 

 

Item 10.

Directors, Executive Officers of the Registrant and Corporate Governance

 

Item 11.

Executive Compensation

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

Item 13.

Certain Relationships and Related Transactions and Director Independence

 

Item 14.

Principal Accountant Fees and Services

 

 

 

 

PART IV

 

 

Item 15.

Exhibits and Financial Statement Schedules

 

 

 

 

SIGNATURES

 

 

 

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

 

 

EXHIBIT INDEX

 

 



Table of Contents

 

PART I

 

Except where the context otherwise requires, references in this Form 10-K to either “Ecolab,” “Company,” “we” and “our” are to Ecolab Inc. and its subsidiaries, collectively.

 

Forward-Looking Statements

 

This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operation” incorporated by reference into Item 7 of this Form 10-K,  contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements include expectations concerning items such as revenue and earnings growth, raw material and delivered product costs, currency translation, business acquisitions, system implementations, restructuring charges and cost savings, cash flows, loss of customers and bad debt, debt repayments, disputes and claims, environmental and regulatory considerations, share repurchases, global economic conditions and credit risk, pension expenses and potential contributions, new accounting pronouncements, income taxes, including unrecognized tax benefits or uncertain tax positions, borrowing capacity, and liquidity requirements.  Without limiting the foregoing, words or phrases such as “will likely result,” “are expected to,” “will continue,” “is anticipated,” “we believe,” “we expect,” “estimate,” “project” (including the negative or variations thereof) or similar terminology, generally identify forward-looking statements.  Forward-looking statements may also represent challenging goals for us.  We caution that undue reliance should not be placed on such forward-looking statements, which speak only as of the date made.  Some of the factors which could cause results to differ from those expressed in any forward-looking statement are set forth under Item 1A of this Form 10-K, entitled Risk Factors.

 

Item 1.  Business.

 

Item 1(a) General Development of Business.

 

Ecolab was incorporated as a Delaware corporation in 1924.  Our fiscal year is the calendar  year ending December 31.

 

During 2008, we continued to invest in our business to build for the future.

 

In December 2007, subsequent to our year-end for international operations, we purchased the Irish dairy hygiene business of Novartis Animal Health Ireland Ltd.  The business, which has annual sales of approximately $3 million, became part of our International operations during the first quarter of 2008.

 

In February 2008, we acquired Ecovation, Inc., a Rochester, N.Y. area-based provider of renewable energy solutions and effluent management systems primarily for the food and beverage manufacturing industry in the U.S., including dairy, beverage and meat and poultry producers.  2007 sales were approximately $50 million.    Ecovation became part of our U.S. Cleaning & Sanitizing operations during the first quarter of 2008.

 

Following the Ecovation acquisition, we combined our Water Care Services and Ecovation businesses into our Food & Beverage division.

 

We continued to make investments in Europe, including the establishment of our European headquarters in Zurich, Switzerland.

 

In November 2008, our then largest shareholder, Henkel AG & Co. KGaA (“Henkel”), completed the sale of all of the 72.7 million Ecolab shares it held.  We repurchased 11.3 million shares directly from Henkel for $300 million, reducing our shares outstanding by approximately 4%.

 

Item 1(b) Financial Information About Operating Segments.

 

The financial information about reportable segments appearing under the heading “Operating Segments” in Note 16, located on pages 49 and 50 of the Annual Report, is incorporated herein by reference.

 

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Item 1(c) Narrative Description of Business.

 

General: Ecolab develops and markets premium products and services for the hospitality, foodservice, health care and industrial markets. We provide cleaning and sanitizing products and programs, as well as pest elimination, maintenance and repair services primarily to hotels and restaurants, healthcare and educational facilities, quick service (fast-food and convenience store) units, grocery stores, commercial and institutional laundries, light industry, dairy plants and farms, food and beverage processors and the vehicle wash industry. A strong commitment to customer support and sustainable solutions is a distinguishing characteristic of our business.  Additional information on our business philosophy is found below under the heading “Additional Information — Competition” of this Item 1(c).

 

The following description of our business is based upon our three reportable segments as reported in our consolidated financial statements.  However, we pursue a “Circle the Customer — Circle the Globe” strategy by providing products, systems and services which serve our customer base, and do so on a global basis to meet the needs of our customers’ various operations around the world.  Therefore, one customer may utilize the products or services of all three of the segments and there is interdependence among the operating segments.

 

United States Cleaning & Sanitizing Segment

 

The “United States Cleaning & Sanitizing” segment is comprised of six business units which provide cleaning and sanitizing products and programs to United States markets.

 

Institutional: The Institutional Division is our largest division and sells specialized cleaners and sanitizers for washing dishes, glassware, flatware, foodservice utensils and kitchen equipment (“warewashing”), for on-premise laundries (typically used by hotel and healthcare customers) and for general housekeeping functions, as well as food safety products and equipment, dishwasher racks and related kitchen sundries to the foodservice, lodging, educational and healthcare industries, and water filters to the foodservice industry. The Institutional Division also provides pool and spa treatment programs for hospitality and other commercial customers, as well as a broad range of janitorial cleaning and floor care products and programs to customers in hospitality, health care and commercial facilities. The Institutional Division manufactures and markets various chemical dispensing device systems, which are made available to customers, to dispense our cleaners and sanitizers. In addition, the Institutional Division markets a lease program comprised of energy-efficient dishwashing machines, detergents, rinse additives and sanitizers, including full machine maintenance.

 

We believe that we are the leading supplier of chemical warewashing products and programs to institutions in the United States.

 

The Institutional Division sells its products and programs primarily through company-employed field sales personnel. However, to a significant degree, we also utilize independent, third-party foodservice distributors to market and sell our products to smaller accounts or accounts which purchase through distributors. We provide the same customer support to accounts supplied by food distributors as to direct customers.

 

Food & Beverage: Our Food & Beverage Division addresses cleaning and sanitation at the beginning of the food chain to facilitate the processing of products for human consumption. The Division provides detergents, cleaners, sanitizers, lubricants and animal health products, as well as cleaning systems, electronic dispensers and chemical injectors for the application of chemical products, primarily to dairy plants, dairy farms, breweries, soft-drink bottling plants, and meat, poultry and other food processors. The Food & Beverage Division is also a leading developer and marketer of antimicrobial products used in direct contact with meat, poultry, seafood and produce during processing in order to reduce microbial contamination. The Food & Beverage Division also designs, engineers and installs CIP (“clean-in-place”) process control systems and facility cleaning systems for its customer base. Farm products are sold through dealers and independent, third-party distributors, while plant products are sold primarily by our field sales personnel. The Food & Beverage Division also offers water care programs primarily to treat water used for heating and cooling systems and manufacturing processes. In addition, through its Ecovation business, the Food & Beverage Division offers customized wastewater treatment solutions that also can generate energy.

 

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We believe that we are one of the leading suppliers of cleaning and sanitizing products to the dairy plant, dairy farm, food, meat and poultry, and beverage/brewery processor industries in the United States.

 

Kay: Our Kay Division (which consists of certain wholly-owned subsidiaries of Ecolab Inc.) supplies chemical cleaning and sanitizing products primarily to national and regional quick service restaurant chains.  Kay’s products include specialty and general purpose hard surface cleaners, degreasers, sanitizers, polishes, hand care products and assorted cleaning tools.  Products are sold under the “Kay” brand or the customer’s private label. In addition, Kay supports its product sales with employee training programs and technical support designed to meet the special needs of its customers. Kay’s customized cleaning and sanitation programs are designed to reduce labor costs and product usage while increasing sanitation levels, cleaning performance, equipment life and safety levels.

 

Kay employs a direct field sales force which primarily calls upon national and regional quick service restaurants and franchisees, although the sales are made to distributors who supply the chain or franchisee’s units.

 

We believe that our Kay Division is the leading supplier of chemical cleaning and sanitizing products to the traditional quick service restaurant industry in the United States. While Kay’s customer base has been growing, Kay’s business is largely dependent upon a limited number of major quick service restaurant chains and franchisees.

 

In addition, through Kay’s Food Retail business, the Division supplies cleaning and sanitizing products to the food retail (i.e., grocery store) industry. Food Retail products are sold primarily through distributors and include specialty and general purpose hard surface cleaners, degreasers, sanitizers, polishes, hand care products, assorted cleaning tools and floor care products. We provide the same customer support to accounts supplied by distributors as to direct customers.

 

Healthcare: Our Healthcare Division provides infection prevention and other healthcare related offerings to acute care hospitals, surgery centers, dental offices and veterinary clinics.  The Healthcare Division’s proprietary infection prevention products (hand hygiene, hard surface disinfectants, instrument cleaners, patient drapes, fluid control and equipment drapes) are sold primarily under the “Ecolab” and “Microtek” brand names to various departments within the acute care environment (Infection Control, Environmental Services, Central Sterile and Operating Room).  Microtek Medical, acquired in November 2007, is a leader in niche branded specialty surgical drapes and fluid control products.  The Healthcare Division sells its products and programs primarily through company-employed field sales personnel but also sells through healthcare distributors.

 

Textile Care: Our Textile Care Division provides chemical laundry products and proprietary dispensing systems, as well as related programs, to large industrial and commercial laundries.  Typically these customers include free-standing laundry plants used by institutions such as hotels, restaurants and healthcare facilities as well as industrial and textile rental laundries. Products and programs include laundry cleaning and specialty products, related dispensing equipment, plus water and energy management which are marketed primarily through company-employed field sales personnel and, to a lesser extent, through independent, third-party distributors. The Textile Care Division’s programs are designed to meet our customers’ need for exceptional cleaning, while extending the useful life of linen and reducing the customer’s overall operating cost.

 

Vehicle Care: Our Vehicle Care Division provides vehicle appearance products which include soaps, polishes, sealants, wheel and tire treatments and air fresheners. Products are sold to vehicle rental, fleet and consumer car wash and detail operations. Brand names utilized by the Vehicle Care Division include Blue CoralÒ, Black MagicÒ and Rain-XÒ.

 

United States Other Services Segment

 

The “United States Other Services” segment is comprised of two business units:  Pest Elimination and GCS Service. In general, these businesses provide service or equipment which can augment or extend our product offering to our business customers as a part of our “Circle the Customer” approach.

 

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Pest Elimination: Our Pest Elimination Division provides services designed to detect, eliminate and prevent pests in restaurants, food and beverage processors, educational and healthcare facilities, hotels, quick service restaurant and grocery operations and other institutional and commercial customers. These services are sold and performed by company-employed field sales and service personnel. In addition, through our EcoSure Food Safety Management business, we provide customized on-site evaluations, training and quality assurance services to foodservice operations.

 

GCS Service: GCS Service provides equipment repair and maintenance services for the commercial food service industry. Repair services are offered for in-warranty repair, acting as the Manufacturer’s Authorized Service Agent, as well as after warranty repair. In addition, GCS Service operates as a parts distributor to repair service companies and end users.

 

International Segment

 

We conduct business in approximately 70 countries outside of the United States through wholly-owned subsidiaries or, in the case of Israel and Venezuela, through joint ventures with local partners. In other countries, selected products are sold by our export operations to distributors, agents or licensees, although the volume of those sales is not significant in terms of our overall revenues. Our largest International operations are located in Europe, Asia Pacific, Latin America and Canada, with smaller operations in Africa and the Middle East.

 

In general, the businesses conducted internationally are similar to those conducted in the United States but are managed on a geographic basis. The businesses which are similar to the United States’ Institutional and Food & Beverage businesses are the largest businesses in our International operations. They are conducted in virtually all our International locations and, compared to the United States, constitute a larger portion of the overall business. Healthcare and Textile Care are also significant businesses in our International operations, particularly in Europe. Kay also has sales in a number of International locations. A significant portion of Kay’s international sales are to international units of United States-based quick service restaurant chains. Consequently, a substantial portion of Kay’s international sales are made either to domestic or internationally-located third-party distributors who serve these chains.

 

Our Pest Elimination business continues to expand its geographic coverage. Since 2001, we have entered markets in Asia, Western Europe, Latin America and South Africa, with the largest operations in France and the United Kingdom.

 

Our other businesses are conducted less extensively in our International locations. However, in general, most of the principal businesses conducted in the United States are also operated in Canada.

 

International businesses are subject to the usual risks of foreign operations, including possible changes in trade and foreign investment laws, tax laws, currency exchange rates and economic and political conditions abroad. The profitability of our International operations has historically been lower than the profitability of our businesses in the United States. This has been due to the smaller scale of the International operations as well as the additional cost of operating in numerous and diverse foreign jurisdictions.

 

Additional Information

 

Competition: Our business units have two significant classes of competitors. First, each business unit competes with a small number of large companies selling directly or through distributors on a national or international scale. Second, all of our business units have numerous smaller regional or local competitors which focus on more limited geographies, product lines and/or end-user segments.

 

Our objective is to achieve a significant presence in each of our business markets. In general, competition is based on customer support, product performance and price. We believe we compete principally by providing superior value, premium customer support and differentiated products to help our customers protect their brand reputation. Value is provided by state-of-the-art cleaning, sanitation and maintenance products and systems coupled with high customer support standards and continuing

 

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dedication to customer satisfaction. This is made possible, in part, by our significant on-going investment in training and technology and by our standard practice of advising customers on ways to lower operating costs and helping them comply with safety, environmental and sanitation regulations. In addition to our consultative approach, we emphasize our ability to uniformly provide a variety of related premium cleaning and sanitation programs to our customers and to provide that level of customer support to multiple locations of chain customer organizations worldwide. This approach is succinctly stated in our “Circle the Customer - Circle the Globe” strategy which is discussed above in this Item 1(c) under the heading “General.”

 

Sales: Products, systems and services are primarily marketed in domestic and international markets by company-trained field sales personnel who also advise and assist our customers in the proper and efficient use of the products and systems in order to meet a full range of cleaning and sanitation needs. Independent, third-party distributors are utilized in several markets, as described in the business unit descriptions found under the discussion of the three reportable segments above.

 

Number of Employees: We had approximately 26,500 employees as of December 31, 2008.

 

Customers and Classes of Products: We believe that our business is not materially dependent upon a single customer although, as described above in this Item 1(c) under the description of the Kay business, Kay is largely dependent upon a limited number of national and international quick service chains and franchisees. Additionally, although we have a diverse customer base and no customer or distributor constitutes 10 percent or more of our consolidated revenues, we do have customers and independent, third-party distributors, the loss of which could have a material negative effect on results of operations for the affected earnings periods; however, we consider it unlikely that such an event would have a material adverse impact on our financial position. No material part of our business is subject to renegotiation or termination at the election of a governmental unit. We sell two classes of products which each constitute 10 percent or more of our sales. Sales of warewashing products in 2008, 2007 and 2006 approximated 21, 22 and 21 percent, respectively, of our consolidated net sales. In addition, through our Institutional and Textile Care businesses, we sell laundry products and provide customer support to a broad range of laundry customers. Sales of laundry products and services in 2008, 2007 and 2006 approximated 11, 10 and 10 percent, respectively, of our consolidated net sales.

 

Patents and Trademarks: We own and license a number of patents, trademarks and other intellectual property, including through a license agreement with Henkel AG & Co. KGaA. While we have an active program to protect our intellectual property by filing for patents or trademarks, and pursuing legal action, when appropriate, to prevent infringement, we do not believe that our overall business is materially dependent on any individual patent or trademark.

 

Seasonality: Overall our business does not have a significant degree of seasonality. However, we do experience variability in our quarterly operating results due to sales volume and business mix fluctuations in our operating segments. Note 17, entitled “Quarterly Financial Data” located on page 51 of the Annual Report, is incorporated herein by reference.

 

Working Capital: We have invested in the past, and will continue to invest in the future, in merchandising equipment consisting primarily of systems used by customers to dispense our cleaning and sanitizing products. Otherwise, we have no unusual working capital requirements.

 

Manufacturing and Distribution: We manufacture most of our products and related equipment in Company-owned manufacturing facilities. Some products are also produced for us by third-party contract manufacturers. Other products and equipment are purchased from third-party suppliers. Additional information on product/equipment sourcing is found in the segment discussions above and additional information on our manufacturing facilities is located beginning at page 15 of this Form 10-K under the heading “Properties.”

 

Deliveries to customers are made from our manufacturing plants and a network of distribution centers and public warehouses. We use common carriers, our own delivery vehicles, and distributors. Additional information on our plant and distribution facilities is located beginning at page 15 of this Form 10-K under the heading “Properties.”

 

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Raw Materials: Raw materials purchased for use in manufacturing our products are inorganic chemicals, including alkalis, acids, phosphates, silicates and salts, and organic chemicals, including surfactants and solvents. These materials are generally purchased on an annual contract basis from a diverse group of chemical manufacturers. When practical, global sourcing is used so that purchasing or production locations can be shifted to control product costs at globally competitive levels. Pesticides used by our Pest Elimination Division are purchased as finished products under contract or purchase order from the producers or their distributors. We also purchase packaging materials for our manufactured products and components for our specialized cleaning equipment and systems. Most raw materials, or substitutes for those materials, used by us, with the exception of a few specialized chemicals which we manufacture, are available from several suppliers.

 

Research and Development: Our research and development program consists principally of devising and testing new products, processes, techniques and equipment, improving the efficiency of existing ones, improving service program content, and evaluating the environmental compatibility of products. Key disciplines include analytical and formulation chemistry, microbiology, process and packaging engineering and product dispensing technology. Substantially all of our principal products have been developed by our research, development and engineering personnel. At times, technology has also been licensed from third parties to develop offerings. Note 13, entitled “Research Expenditures” located on page 44 of the Annual Report, is incorporated herein by reference.

 

Environmental and Regulatory Considerations: Our businesses are subject to various legislative enactments and regulations relating to the protection of the environment and public health. While we cooperate with governmental authorities and take commercially practicable measures to meet regulatory requirements and avoid or limit environmental effects, some risks are inherent in our businesses. Among the risks are costs associated with transporting and managing hazardous substances, waste disposal and plant site clean-up, fines and penalties if we are found to be in violation of law, as well as modifications, disruptions or discontinuation of certain operations or types of operations including product recalls and reformulations. Additionally, although we are not currently aware of any such circumstances, there can be no assurance that future legislation or enforcement policies will not have a material adverse effect on our consolidated results of operations, financial position or cash flows. Environmental and regulatory matters most significant to us are discussed below.

 

Ingredient Legislation: Various laws and regulations have been enacted by state, local and foreign jurisdictions pertaining to the sale of products which contain phosphorous, volatile organic compounds, or other ingredients that may impact human health or the environment. Under California Proposition 65, label disclosures are required for certain products containing chemicals listed by California. “Green” chemistry initiatives that promote pollution prevention through research and development of safer chemicals and safer chemical processes are being advanced by certain states, including California, Maine, Massachusetts and Vermont.  In 2009, green chemistry and ingredient disclosure legislation may be introduced at the federal level.  To date, we generally have been able to comply with such legislative requirements by reformulation or labeling modifications. Such legislation has not had a material negative effect on our consolidated results of operations, financial position or cash flows to date.

 

Re-authorization of the Toxic Substances Control Act (“TSCA”) and a re-set of the TSCA Inventory are being discussed in the U.S. Congress.  Ecolab anticipates that compliance with new requirements could be similar to the costs associated with the Registration, Evaluation and Authorization of Chemicals regulation recently adopted in the European Union, which is discussed below.

 

REACH: The European Union has developed a new regulatory framework for the Registration, Evaluation and Authorization of Chemicals (“REACH”). It established a new European Chemicals Agency in Helsinki, Finland, which is responsible for evaluating data to determine hazards and risks and to manage this program for authorizing chemicals for sale and distribution in Europe. Under REACH, all “new” and “existing” chemicals produced or imported into the European Union in quantities above one ton per year must be

 

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registered in a central database. Ecolab has met the pre-registration requirements of REACH, and is on track to meet the upcoming deadlines and requirements in 2009 and beyond.  To help manage this new program, Ecolab is simplifying its product line and working with chemical suppliers to comply with registration requirements. For chemicals deemed to be of most concern, industry must gain specific authorization for particular uses which have been demonstrated to be safe. Ecolab has minimized use of these chemicals which are designated as “chemicals of high concern.”  The impact of REACH will also be felt by our competitors. Potential costs to us are not yet fully quantifiable, but are not expected to significantly affect our consolidated results of operations, financial position or cash flows.

 

GHSIn 2003, the United Nations issued a standard on hazard communication and labeling of chemical products known as the Globally Harmonized System of Classification and Labeling of Chemicals (“GHS”). GHS is designed to facilitate international trade and increase safe handling and use of hazardous chemicals through a worldwide system that classifies chemicals based on their intrinsic hazards and communicates information about those hazards through standardized safety labeling and safety warnings. Individual countries and regional organizations either have begun to implement GHS or are considering what portions of it will be adopted and within what timeframe. Most countries in which we operate will adopt GHS-related legislation. The primary cost of compliance will revolve around authoring of material safety data sheets and product labeling, and we are working toward a phased-in approach to mitigate risks of GHS implementation. Potential costs to us are not yet fully quantifiable, but are not expected to have a material adverse effect on our consolidated results of operations, financial position or cash flows.

 

Pesticide and Biocide Legislation: Various international, federal and state environmental laws and regulations govern the manufacture and/or use of pesticides. We manufacture and sell certain disinfecting and sanitizing products which kill or reduce microorganisms (bacteria, viruses, fungi) on hard environmental surfaces and on certain food products. Such products constitute “pesticides” or “antimicrobial pesticides” under the current definitions of the Federal Insecticide, Fungicide, and Rodenticide Act (“FIFRA”), as amended by the Food Quality Protection Act of 1996, the principal federal statute governing the manufacture, labeling, handling and use of pesticides. We maintain approximately 330 product registrations with the U.S. Environmental Protection Agency (“EPA”). Registration entails the necessity to meet certain efficacy, toxicity and labeling requirements and to pay on-going registration fees. In addition, each state in which these products are sold requires registration and payment of a fee. In general, the states impose no substantive requirements different from those required by FIFRA. However, California and certain other states have adopted additional regulatory programs, and California imposes a tax on total pesticide sales in that state. While the cost of complying with rules as to pesticides has not had a material adverse effect on our consolidated results of operations, financial condition, or cash flows to date, the costs and delays in receiving necessary approvals for these products continue to increase. Total fees paid to the EPA and the states to obtain or maintain pesticide registrations, and for the California tax, were approximately $3,308,000 in 2008 and $2,800,000 in 2007.

 

In Europe, the Biocidal Product Directive (98/8/EC) (“BPD”) established a program to evaluate and authorize marketing of biocidal active substances and products. We are working with suppliers and industry groups to manage requirements associated with the BPD, and have met the first relevant deadline of the program by the timely submission of dossiers for active substances. Anticipated registration costs, which will be incurred through the BPD phase-in period ending in 2014, will be significant; however, these costs are not expected to significantly affect our consolidated results of operations or cash flows in any one reporting period, or our financial position.

 

In addition, our Pest Elimination Division applies restricted-use pesticides which it generally purchases from third parties. That Division must comply with certain standards pertaining to the use of such pesticides and to the licensing of employees who apply such pesticides. Such regulations are enforced primarily by the states or local jurisdictions in conformity with

 

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federal regulations. We have not experienced material difficulties in complying with these requirements.

 

FDA Antimicrobial Product Requirements: Various laws and regulations have been enacted by federal, state, local and foreign jurisdictions regulating certain products manufactured and sold by us for controlling microbial growth on humans, animals, foods and medical devices. In the United States, these requirements generally are administered by the U.S. Food and Drug Administration (“FDA”). However, the U.S. Department of Agriculture and EPA also may share in regulatory jurisdiction of antimicrobials applied to food. The FDA also has been expanding requirements applicable to such products, including proposing regulations in a Tentative Final Monograph for Healthcare Antiseptic Drug Products dated June 17, 1994, which may impose additional requirements associated with antimicrobial hand care products and associated costs when finalized by the FDA. To date, such requirements have not had a material adverse effect on our consolidated results of operations, financial position or cash flows.

 

Other Environmental Legislation: Our manufacturing plants are subject to federal, state, local or foreign jurisdiction laws and regulations relating to discharge of hazardous substances into the environment and to the transportation, handling and disposal of such substances. The primary federal statutes that apply to our activities in the United States are the Clean Air Act, the Clean Water Act, and the Resource Conservation and Recovery Act. We are also subject to the Superfund Amendments and Reauthorization Act of 1986, which imposes certain reporting requirements as to emissions of hazardous substances into the air, land and water. Similar legal requirements apply to Ecolab’s facilities globally.  We make capital investments and expenditures to comply with environmental laws and regulations, to ensure employee safety and to carry out our announced environmental sustainability principles. To date, such expenditures have not had a significant adverse effect on our consolidated results of operations, financial position or cash flows. Our capital expenditures for environmental health and safety projects worldwide were approximately $8,900,000 in 2008 and $8,100,000 in 2007. Approximately $4,200,000 has been  budgeted globally for projects in 2009.

 

Climate Change: Various laws and regulations pertaining to climate change have been implemented or are being considered for implementation at the international, national, regional and state levels, particularly as they relate to the reduction of greenhouse gas (“GHG”) emissions. None of these laws and regulations directly applies to Ecolab at the present time; however, as a matter of corporate policy, Ecolab supports a balanced approach to reducing GHG emissions while sustaining economic growth and competitiveness. Ecolab has joined U.S. EPA’s Climate Leaders program, and as part of that program we have pledged to develop a corporate-wide U.S. GHG emission inventory and work with EPA to set a GHG reduction goal.

 

Environmental Remediation and Proceedings: Along with numerous other potentially responsible parties (“PRPs”), we are currently involved with waste disposal site clean-up activities imposed by the federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) or state equivalents at 17 sites in the United States. Additionally, we have similar liability at eight sites outside the United States. In general, under CERCLA, we and each other PRP that actually contributes hazardous substances to a Superfund site are jointly and severally liable for the costs associated with cleaning up the site. Customarily, the PRPs will work with the EPA to agree and implement a plan for site remediation. Pursuant to an Environmental Agreement dated December 7, 2000 with Henkel AG & Co. KGaA, Henkel agreed to indemnify us for certain environmental liabilities associated with the parties’ former joint venture in Europe. We have requested euro 261,046 (approximately $368,000 at December 31, 2008) from Henkel for environmental costs during 2008.

 

Based on an analysis of our experience with such environmental proceedings, our estimated share of all hazardous materials deposited on the sites referred to in the preceding paragraph, and our estimate of the contribution to be made by other PRPs which

 

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we believe have the financial ability to pay their shares, we have accrued our best estimate of our probable future costs relating to such known sites. Unasserted claims are not reflected in the accrual. In establishing accruals, potential insurance reimbursements are not included. The accrual is not discounted. It is not feasible to predict when the amounts accrued will be paid due to the uncertainties inherent in the environmental remediation and associated regulatory processes.

 

Our worldwide net expenditures for contamination remediation were approximately $614,000 in 2008 and $1,060,000 in 2007. Including the ChemLawn matter described below, our worldwide accruals at December 31, 2008 for probable future remediation expenditures totaled approximately $3,751,000. We review our exposure for contamination remediation costs periodically and our accruals are adjusted as considered appropriate. While the final resolution of these issues could result in costs below or above current accruals and, therefore, have an impact on our consolidated financial results in a future reporting period, we believe the ultimate resolution of these matters will not have a material effect on our consolidated results of operations, financial position or liquidity. In addition, we have retained responsibility for certain sites where our former ChemLawn business is a PRP. Currently there is one such location and ChemLawn is a de minimis party. Anticipated costs currently accrued for these matters were included in our loss from our discontinued ChemLawn operations in 1991. The accrual remaining reflects our best estimate of probable future costs for the one remaining site.

 

Item 1(d) Financial Information About Geographic Areas.

 

The financial information about geographic areas appearing under the heading “Operating Segments” in Note 16, located on pages 49 and 50 of the Annual Report, is incorporated herein by reference.

 

Item 1(e) Available Information.

 

Our Internet address is www.ecolab.com. Copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports, are available free of charge on our website at www.ecolab.com/investor as soon as reasonably practicable after such material is filed with, or furnished to, the Securities and Exchange Commission.

 

In addition, the following governance materials are available on our website at www.ecolab.com/investor/governance and the same information is available in print to any requesting persons, free of charge, by writing to the Corporate Secretary at our headquarters address, or by submitting an e-mail request to investor.info@ecolab.com:  (i)  charters of the Audit, Compensation, Finance and Governance Committees of our Board of Directors; (ii) our Board’s Corporate Governance Principles; and (iii) our Code of Conduct and Code of Ethics for Senior Officers and Finance Associates.

 

Executive Officers of the Registrant.

 

The persons listed in the following table are our current executive officers. Officers are elected annually. There is no family relationship among any of the directors or executive officers, and no executive officer has been involved during the past five years in any legal proceedings described in applicable Securities and Exchange Commission regulations.

 

Name

 

Age

 

Office

 

Positions Held Since
Jan. 1, 2004

 

 

 

 

 

 

 

Douglas M. Baker, Jr.

 

50

 

Chairman of the Board, President and Chief Executive Officer

 

May 2006 – Present

 

 

 

 

 

 

 

 

 

 

 

President and Chief Executive Officer

 

Jul. 2004 – Apr. 2006

 

 

 

 

 

 

 

 

 

 

 

President and Chief Operating Officer

 

Jan. 2004 – Jun. 2004

 

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Name

 

Age

 

Office

 

Positions Held Since
Jan. 1, 2004

 

 

 

 

 

 

 

Lawrence T.

 

60

 

General Counsel and Secretary

 

Feb. 2008 - Present

Bell

 

 

 

 

 

 

 

 

 

 

Senior Vice President, General Counsel and Secretary

 

Jan. 2004 – Jan. 2008

 

 

 

 

 

 

 

Larry L.
Berger

 

48

 

Chief Technical Officer and Senior Vice President-Research, Development & Engineering

 

Apr. 2008 – Present (1)

 

 

 

 

 

 

 

John J.

 

43

 

Vice President and Corporate Controller

 

Apr. 2008 – Present

Corkrean

 

 

 

 

 

 

 

 

 

 

Vice President and Treasurer

 

May 2006 – Mar. 2008

 

 

 

 

 

 

 

 

 

 

 

Professional Products Vice President Distributor Sales

 

Apr. 2005 – Apr. 2006

 

 

 

 

 

 

 

 

 

 

 

Professional Products Vice President and Controller

 

Jan. 2004 – Mar. 2005

 

 

 

 

 

 

 

Steven L.

 

54

 

Chief Financial Officer

 

Feb. 2008 – Present

Fritze

 

 

 

 

 

 

 

 

 

 

Executive Vice President and Chief Financial Officer

 

Feb. 2004 – Jan. 2008

 

 

 

 

 

 

 

 

 

 

 

Senior Vice President and Chief Financial Officer

 

Jan. 2004 – Jan. 2004

 

 

 

 

 

 

 

Robert K.

 

51

 

Senior Vice President – Global Supply Chain

 

Oct. 2005 – Present

Gifford

 

 

 

 

 

 

 

 

 

 

Vice President – Supply Chain Management

 

Sep. 2004 – Sep. 2005 (2)

 

 

 

 

 

 

 

Thomas W. Handley

 

54

 

President – Industrial and Services North America Sector

 

Dec. 2007 - Present

 

 

 

 

 

 

 

 

 

 

 

Executive Vice President – Industrial Sector

 

Apr. 2006 – Nov. 2007

 

 

 

 

 

 

 

 

 

 

 

Executive Vice President – Specialty Sector

 

Jan. 2004 – Mar. 2006

 

 

 

 

 

 

 

Michael A. Hickey

 

47

 

Senior Vice President – Global Business Development and General Manager GCS Service

 

Jan. 2009 - Present

 

 

 

 

 

 

 

 

 

 

 

Senior Vice President – Global Business Development

 

Jan. 2006 – Dec. 2008

 

 

 

 

 

 

 

 

 

 

 

Senior Vice President – Global / Corporate Accounts

 

Nov. 2005 – Dec. 2005

 

 

 

 

 

 

 

 

 

 

 

Vice President – Global/Corporate Accounts, Institutional Division

 

Jan. 2004 – Oct. 2005

 

 

 

 

 

 

 

Phillip J.
Mason

 

58

 

President – International Sector

 

Dec. 2007 - Present

 

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Name

 

Age

 

Office

 

Positions Held Since
Jan. 1, 2004

Phillip J.
Mason (con’t)

 

 

 

Executive Vice President – Asia Pacific and Latin America

 

Dec. 2004 – Nov. 2007

 

 

 

 

 

 

 

 

 

 

 

Senior Vice President – Strategic Business Development

 

May 2004 – Nov. 2004 (3)

 

 

 

 

 

 

 

Michael L.
Meyer

 

51

 

Senior Vice President-Human Resources

 

Feb. 2008 – Present (4)

 

 

 

 

 

 

 

James A.

 

52

 

President – Institutional North America Sector

 

Dec. 2007 - Present

Miller

 

 

 

 

 

 

 

 

 

 

Executive Vice President – Institutional Sector North America

 

Jan. 2004 – Nov. 2007

 

 

 

 

 

 

 

Susan K. Nestegard

 

48

 

Executive Vice President – Global Healthcare Sector

 

Apr. 2008 - Present

 

 

 

 

 

 

 

 

 

 

 

Senior Vice President – Research, Development and Engineering and Chief Technical Officer

 

Dec. 2004 – Mar. 2008

 

 

 

 

 

 

 

 

 

 

 

Vice President – Research, Development and Engineering and Chief Technical Officer

 

Jan. 2004 – Nov. 2004

 

 

 

 

 

 

 

Robert P.
Tabb

 

58

 

Vice President and Chief Information Officer

 

Jan. 2004 – Present

 

 

 

 

 

 

 

James H.
White

 

44

 

President-EMEA Sector

 

Dec. 2007 – Present

 

 

 

 

 

 

 

 

 

 

 

Executive Vice President – EMEA

 

Apr. 2007 – Nov. 2007

 

 

 

 

 

 

 

 

 

 

 

Senior Vice President – Strategy and Marketing Development

 

May 2006 – Mar. 2007

 

 

 

 

 

 

 

 

 

 

 

Senior Vice President – Strategic Planning

 

Oct. 2005 – Apr. 2006 (5)

 


(1)

 

Prior to joining Ecolab in 2008, Dr. Berger spent 22 years with E.I. duPont de Nemours and Company, most recently as Chief Technical Officer for DuPont Nonwovens.

 

 

 

(2)

 

Prior to joining Ecolab in 2004, Mr. Gifford served as Vice President, World Logistics and Program Manager of Hewlett Packard Corporation for three years. Prior to Hewlett Packard, Mr. Gifford was employed by Compaq and Tandem.

 

 

 

(3)

 

Mr. Mason re-joined Ecolab in 2004, where he formerly served 23 years in various management and executive positions, most recently as Vice President – Asia Pacific. Prior to re-joining Ecolab, Mr. Mason was employed by HAVI Group, LP, serving as President, HPR Partners from 1997-2004.

 

 

 

(4)

 

Prior to joining Ecolab in 2008, Mr. Meyer was employed for 24 years by Abbott Laboratories, most recently as Vice President Vascular Business Latin America and Canada. Mr. Meyer’s management and executive experience includes 22 years in Human Resources and assignments in Canada and Hong Kong.

 

 

 

(5)

 

Prior to joining Ecolab in 2005, Mr. White was employed by International Multifoods, and served as President of its U.S. Consumer Products Division. Mr. White’s employment also includes marketing experience at General Mills, and nine years at the Pillsbury Company in a succession of management positions.

 

Item 1A. Risk Factors.

 

The following are important factors which could affect our financial performance and could cause our actual results for future periods to differ materially from our anticipated results or other expectations, including those expressed in any forward-looking statements made in this Form 10-K. See the section entitled Forward-Looking Statements located on page 2 of this Form 10-K.

 

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We may also refer to this disclosure to identify factors that may cause results to differ from those expressed in other forward-looking statements made in oral presentations, including telephone conferences and/or webcasts open to the public.

 

Except as may be required under applicable law, we undertake no duty to update our Forward-Looking Statements.

 

Our results depend upon the continued vitality of the markets we serve: Economic downturns, and in particular downturns in the foodservice, hospitality, travel, health care and food processing industries, can adversely impact our end-users who are sensitive to changes in travel and dining activities. The current decline in economic activity is adversely affecting these markets. During such downturns, these end-users typically reduce their volume of purchases of cleaning and sanitizing products, which would likely in turn have an adverse impact on our business.

 

Our results are impacted by general worldwide economic factors: Economic factors such as the worldwide economy, interest rates and currency movements including, in particular, our exposure to foreign currency risk have affected our business in the past and are expected to have a material adverse impact on our business in the future. The global economy is currently experiencing considerable disruption and volatility, and the disruption has been particularly acute in the global credit markets. While currently these disruptions have not impaired our ability to access credit markets, there can be no assurance that there will not be a further deterioration in the markets in which we operate. As a result, ongoing disruption in the global economy could adversely affect our consolidated results of operations, financial position or cash flows.

 

Our results can be adversely affected by fluctuations in the cost of raw materials: The prices of raw materials used in our business can fluctuate from time to time, and have increased significantly in recent years. Changes in oil or raw material prices, unavailability of adequate and reasonably priced raw materials or substitutes for those raw materials, or the inability to obtain or renew supply agreements on favorable terms can adversely affect our consolidated results of operations, financial position or cash flows. In addition, recent volatility and disruption in economic activity and conditions could disrupt or delay the performance of our suppliers or otherwise impact our ability to obtain raw materials at favorable prices or on favorable terms, which may adversely affect our business.

 

Our growth depends upon our ability to successfully compete with respect to value, product offerings and customer support: Our competitive market is made up of numerous national, regional and local competitors. Our ability to compete depends in part upon our ability to maintain a superior technological capability and to continue to identify, develop and commercialize innovative, high value-added products for niche applications. There can be no assurance that we will be able to accomplish this or that technological developments by our competitors will not place certain of our products at a competitive disadvantage in the future. In addition, certain of the new products that we have under development will be offered in markets in which we do not currently compete, and there can be no assurance that we will be able to compete successfully in those new markets. If we fail to timely introduce new technologies, we may lose market share and our consolidated results of operations, financial position, or cash flows could be adversely affected.

 

We enter into multi-year contracts with customers that can impact our results: We enter into multi-year contracts with some of our customers which include terms affecting our pricing flexibility. There can be no assurance that these restraints will not have an adverse impact on our margins and operating income.

 

Consolidation of our customers and vendors can affect our results: Customers and vendors in the foodservice, hospitality, travel, healthcare and food processing industries have been consolidating in recent years and that trend may continue. This consolidation could have an adverse impact on our ability to retain customers and on our margins and operating income.

 

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Table of Contents

 

If we are unsuccessful in integrating acquisitions, our business could be adversely affected: As part of our long-term strategy, we seek to acquire complementary businesses. There can be no assurance that we will find attractive acquisition candidates or succeed at effectively managing the integration of acquired businesses into existing businesses. If the expected synergies from such transactions do not materialize or we fail to successfully integrate new businesses into our existing businesses, our consolidated results of operations, financial position or cash flows could be adversely affected.

 

If we are unsuccessful in executing on business investments, our business could be adversely affected: We are making investments to develop business systems and optimize our business structure as part of our ongoing efforts to improve our efficiency and returns. If the projects in which we are investing are not successfully executed, our consolidated results of operations, financial position or cash flows could be adversely affected.

 

Our business depends on our ability to comply with governmental regulations: Our business is subject to numerous regulations relating to the environment and to the manufacture, storage, distribution, sale and use of our products. Compliance with these regulations, as well as changes in tax, fiscal, governmental and other regulatory policies expose us to potential financial liability and increase our operating costs. Regulation of our products and operations continues to increase with more stringent standards, causing increased costs of operations and potential for liability if a violation occurs. The potential cost to us relating to environmental and product registration laws and regulations is uncertain due to factors such as the unknown magnitude and type of possible contamination and clean-up costs, the complexity and evolving nature of laws and regulations, and the timing and expense of compliance. In addition, changes in accounting standards, including the adoption effective January 1, 2007 of FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109”, could increase the volatility of our quarterly tax rate.

 

Extraordinary events may significantly impact our business: The occurrence of (a) litigation or claims, (b) the loss or insolvency of a major customer or distributor, (c) war (including acts of terrorism or hostilities which impact our markets), (d) natural or manmade disasters, or (e) severe weather conditions or public health epidemics affecting the foodservice, hospitality and travel industries may have a significant, adverse impact on our business.

 

Defense of litigation, particularly certain types of actions such as antitrust, patent infringement, wage hour and class action lawsuits, can be costly and time consuming even if ultimately successful, and if not successful could have a material adverse impact on our consolidated results of operations, financial position or cash flows.

 

While we have a diverse customer base and no customer or distributor constitutes 10 percent or more of our consolidated revenues, we do have customers and independent, third-party distributors, the loss of which could have a material negative effect on our consolidated results of operations for the affected earnings periods; however, we consider it unlikely that such an event would have a material adverse impact on our financial position.

 

War (including acts of terrorism or hostilities), natural or manmade disasters or severe weather conditions or public health epidemics affecting the foodservice, hospitality and travel industries cause a downturn in the business of restaurants, motels and hotels and other of our customers, which in turn can have a material adverse impact on our consolidated results of operations, financial position, and cash flows.

 

We depend on key personnel to lead our business: Our continued success will largely depend on

 

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our ability to attract and retain a high caliber of talent and on the efforts and abilities of our executive officers and certain other key employees. Our operations could be adversely affected if for any reason such officers or key employees did not remain with us.

 

Item 1B. Unresolved Staff Comments.

 

We have no unresolved comments from the staff of the Securities and Exchange Commission.

 

Item 2.  Properties.

 

Our manufacturing philosophy is to manufacture products wherever an economic, process or quality assurance advantage exists or where proprietary manufacturing techniques dictate internal production processes. Currently, most products that we sell are manufactured at our facilities.

 

Our manufacturing facilities produce chemical products or equipment for all of our businesses, although the businesses constituting the United States Other Services segment purchase the majority of their products and equipment from outside suppliers. Our chemical production process consists primarily of blending and packaging powders and liquids and casting solids. Our equipment manufacturing operations consist primarily of producing chemical product dispensers and injectors and other mechanical equipment and dishwasher racks and related sundries.

 

The following chart profiles our main manufacturing facilities with ongoing production activities. In general, manufacturing facilities located in the United States serve the “United States Cleaning & Sanitizing” segment and facilities located outside of the United States serve the “International” segment. However, certain United States facilities do manufacture products for export which are used by the International segment. The facilities having export involvement are marked with an asterisk (*).

 

ECOLAB OPERATIONS PLANT PROFILES

 

Location

 

Approximate
Size (Sq. Ft.)

 

Types of Products

 

Majority
Owned or
Leased

 

 

 

 

 

 

 

 

 

UNITED STATES

 

 

 

 

 

 

 

Joliet, IL *

 

610,000

 

Solids, Liquids, Emulsions, Powders

 

Owned

 

South Beloit, IL *

 

313,000

 

Equipment

 

Owned

 

Garland, TX *

 

239,000

 

Solids, Liquids, Emulsions

 

Owned

 

Martinsburg, WV

 

228,000

 

Liquids, Emulsions

 

Owned

 

Hebron, OH

 

196,000

 

Liquids, Emulsions

 

Owned

 

Greensboro, NC

 

193,000

 

Solids, Liquids, Powders

 

Owned

 

San Jose, CA

 

175,000

 

Liquids, Emulsions

 

Owned

 

McDonough, GA*

 

141,000

 

Solids, Liquids, Emulsions

 

Owned

 

Eagan, MN *

 

133,000

 

Solids, Liquids, Emulsions, Powders

 

Owned

 

Huntington, IN *

 

127,000

 

Liquids

 

Owned

 

City of Industry, CA

 

125,000

 

Liquids

 

Owned

 

Elk Grove Village, IL *

 

115,000

 

Equipment

 

Leased

 

Fort Worth, TX

 

101,000

 

Equipment

 

Leased

 

Jacksonville, FL *

 

88,000

 

Medical Devices

 

Leased

 

Carrollton, TX

 

70,000

 

Liquids

 

Owned

 

Tyler, TX *

 

63,000

 

Medical Devices

 

Leased

 

Columbus, MS

 

49,000

 

Medical Devices

 

Owned

 

St. Louis, MO

 

37,000

 

Equipment

 

Leased

 

 

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Table of Contents

 

Location

 

Approximate
Size (Sq. Ft.)

 

Types of Products

 

Majority
Owned or
Leased

 

 

 

 

 

 

 

 

 

INTERNATIONAL

 

 

 

 

 

 

 

Chalons, FRANCE

 

280,000

 

Liquids, Powders

 

Owned

 

Nieuwegein, NETHERLANDS

 

168,000

 

Powders

 

Owned

 

La Romana, DOMINICAN REPUBLIC

 

160,000

 

Medical Devices

 

Leased

 

Tessenderlo, BELGIUM

 

153,000

 

Solids, Liquids

 

Owned

 

Melbourne, AUSTRALIA

 

145,000

 

Liquids, Powders

 

Owned

 

Rozzano, ITALY

 

126,000

 

Liquids

 

Owned

 

Mississauga, CANADA

 

120,000

 

Liquids

 

Leased

 

Johannesburg, SOUTH AFRICA

 

100,000

 

Liquids, Powders

 

Owned

 

Hamilton, NEW ZEALAND

 

96,000

 

Solids, Liquids, Powders

 

Owned

 

Mullingar, IRELAND

 

74,000

 

Liquids

 

Leased

 

Mosta, MALTA

 

73,000

 

Medical Devices

 

Leased

 

Sao Paulo, BRAZIL

 

62,000

 

Solids, Liquids

 

Leased

 

Shika, JAPAN

 

60,000

 

Liquids

 

Owned

 

Santiago, CHILE

 

60,000

 

Liquids, Powders

 

Leased

 

Revesby, AUSTRALIA

 

59,000

 

Liquids, Powders

 

Owned

 

Cheadle (Hulme), UNITED KINGDOM

 

53,000

 

Liquids

 

Leased

 

Guangzhou, CHINA

 

50,000

 

Liquids, Powders

 

Leased

 

Baglan, UNITED KINGDOM

 

50,000

 

Liquids

 

Leased

 

Noda, JAPAN

 

49,000

 

Solids, Liquids, Powders

 

Owned

 

Siegsdorf, GERMANY

 

42,000

 

Equipment

 

Owned

 

Zutphen, NETHERLANDS

 

41,000

 

Medical Devices

 

Leased

 

Mexico City, MEXICO

 

40,000

 

Liquids, Powders

 

Owned

 

Maribor, SLOVENIA

 

39,000

 

Liquids, Powders

 

Owned

 

Pilar, ARGENTINA

 

30,000

 

Liquids, Powders

 

Owned

 

Shanghai, CHINA

 

27,000

 

Solids, Liquids, Powders

 

Owned

 

Perth, AUSTRALIA

 

27,000

 

Liquids, Powders

 

Owned

 

Singapore, SINGAPORE

 

25,000

 

Liquids, Powders

 

Owned

 

Dar es Salaam, TANZANIA

 

23,000

 

Liquids, Powders

 

Leased

 

Seoul, SOUTH KOREA

 

22,000

 

Liquids, Powders

 

Owned

 

Acuna, MEXICO

 

21,000

 

Medical Devices

 

Leased

 

Racibor, POLAND

 

20,000

 

Liquids

 

Leased

 

Toulon, FRANCE

 

20,000

 

Medical Devices

 

Leased

 

Mandras, GREECE

 

18,000

 

Liquids

 

Owned

 

Varssesveld, NETHERLANDS

 

17,000

 

Medical Devices

 

Leased

 

San Jose, COSTA RICA

 

11,000

 

Liquids, Powders

 

Owned

 

Bogota, COLOMBIA

 

11,000

 

Liquids

 

Leased

 

Cikarang, INDONESIA

 

10,000

 

Solids, Liquids, Powders

 

Owned

 

Bangkok, THAILAND

 

10,000

 

Liquids, Powders

 

Owned

 

Manilla, PHILIPPINES

 

8,000

 

Liquids, Powders

 

Owned

 

 

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Table of Contents

 

We believe our manufacturing facilities are in good condition and are adequate to meet our existing production needs.

 

Most of our manufacturing plants also serve as distribution centers. In addition, we operate distribution centers around the world, all of which are leased, and utilize various public warehouses to facilitate the distribution of our products and services. In the United States, our sales and service associates are located in approximately 90 leased offices. Additional sales offices are located internationally.

 

Our corporate headquarters is comprised of three adjacent multi-storied buildings located in downtown St. Paul, Minnesota. The main 19-story building was constructed to our specifications and is leased through 2013. Thereafter, it is subject to multiple renewals at our option. The second building is leased through 2011 with additional options available. The third building is owned. The corporate headquarters includes an employee training center. In 2004, we purchased a 90 acre campus in Eagan, Minnesota to provide for future growth. The acquired facility houses our research and development and data center requirements as well as several of our administrative functions.

 

Item 3. Legal Proceedings.

 

Note 14, entitled “Commitments and Contingencies” located on pages 44 and 45 of the Annual Report, is incorporated herein by reference.

 

Other matters arising under laws relating to protection of the environment are discussed at Item 1(c) above, under the heading “Environmental and Regulatory Considerations.”

 

Item 4.  Submission of Matters to a Vote of Security Holders.

 

No matters were submitted to a vote of our security holders during the fourth quarter of 2008.

 

PART II

 

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Market Information: Our Common Stock is listed on the New York Stock Exchange under the symbol “ECL.” The Common Stock is also traded on an unlisted basis on certain other United States exchanges. The high and low sales prices of our Common Stock on the consolidated transaction reporting system during 2008 and 2007 were as follows:

 

 

 

2008

 

2007

 

Quarter

 

High

 

Low

 

High

 

Low

 

First

 

$

52.35

 

$

42.52

 

$

45.37

 

$

37.01

 

Second

 

$

48.91

 

$

42.89

 

$

44.79

 

$

41.12

 

Third

 

$

52.16

 

$

42.00

 

$

47.59

 

$

39.01

 

Fourth

 

$

49.99

 

$

29.56

 

$

52.78

 

$

44.82

 

 

The closing Common Stock price on January 30, 2009 was $33.96.

 

Holders:  On January 30, 2009, we had 5,169 holders of Common Stock of record.

 

DividendsWe have paid Common Stock dividends for 72 consecutive years. Quarterly cash dividends of $0.115 per share were declared in February, May and August 2007. Cash dividends of $0.13 per share were declared in December 2007, and February, May and August 2008. A dividend of $0.14 per share was declared in December 2008.

 

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Table of Contents

 

Issuer Purchases of Equity Securities:

 

Period

 

(a) 
Total number of 
shares 
purchased (1)

 

(b) 
Average price paid 
per share (2)

 

(c)
Number of shares 
purchased as part of 
publicly announced 
plans or programs(3)

 

(d) 
Maximum number of 
shares that may yet 
be purchased under 
the plans or 
programs(3)

 

October 1-31, 2008

 

     376,190

 

40.5126

 

375,700

 

3,945,862

 

November 1-30, 2008

 

11,347,098

 

26.5327

 

11,346,098

(4)

3,945,862

 

December 1-31, 2008

 

0

 

$0

 

     0

 

3,945,862

 

Total

 

11,723,288

 

26.9813

 

11,721,798

 

3,945,862

 

 


(1)

Includes 1,490 shares reacquired from employees and/or directors as swaps for the cost of stock options, or shares surrendered to satisfy minimum statutory tax obligations under our stock incentive plans.

 

 

(2)

The average price paid per share includes brokerage commissions associated with publicly announced plan purchases plus the value of such other reacquired shares.

 

 

(3)(4)

As announced on October 26, 2006, our Board of Directors authorized the repurchase of up to 10,000,000 shares of Common Stock, including shares to be repurchased under Rule 10b5-1. We intend to repurchase all shares under this authorization, for which no expiration date has been established, in open market or privately negotiated transactions, subject to market conditions. As announced on November 10, 2008, our Board of Directors authorized the purchase of $300,000,000 of stock from Henkel AG & Co. KGaA and its affiliate. The authorized repurchase was completed on November 19, 2008, with the purchase of 11,346,098 shares.

 

Item 6.  Selected Financial Data.

 

The comparative data for the years ended December 31, 2008, 2007, 2006, 2005 and 2004 inclusive, which are set forth under the heading entitled “Summary Operating and Financial Data” located on pages 54 and 55 of the Annual Report, are incorporated herein by reference.

 

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operation.

 

The material appearing under the heading entitled “Financial Discussion,” located on pages 21 through 30 of the Annual Report, is incorporated herein by reference.

 

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk.

 

The material appearing under the heading entitled “Market Risk,” located on page 30 of the Annual Report, is incorporated herein by reference.

 

Item 8.  Financial Statements and Supplementary Data.

 

The financial statements and material which are an integral part of the financial statements listed under Item 15(a)(1) below and located on pages 31 through 55 of the Annual Report, are incorporated herein by reference.

 

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

 

None.

 

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Table of Contents

 

Item 9A. Controls and Procedures.
 

Disclosure Controls and Procedures: As of December 31, 2008, we carried out an evaluation, under the supervision and with the participation of our management, including the Chairman of the Board, President and Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 as amended). Based upon that evaluation, our Chairman of the Board, President and Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective.

 

Internal Control Over Financial Reporting: Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  Under the supervision and with the participation of our management, including our Chairman of the Board, President and Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under this framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2008.

 

The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008. Their report, and our management reports, can be found in our Annual Report, the relevant portion of which has been filed as Exhibit (13) to this Form 10-K and is incorporated into Item 8 of this Form 10-K.

 

During the period October 1 - December 31, 2008, there were no changes in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART III

 

Item 10.  Directors, Executive Officers of the Registrant and Corporate Governance.

 

Information about our directors is incorporated by reference from the discussion under the heading “Proposal to Elect Directors” located in the Proxy Statement. Information about compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is incorporated by reference from the discussion under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” located in the Proxy Statement. Information about our Audit Committee, including the members of the Committee, and our Audit Committee financial experts, is incorporated by reference from the discussion under the heading “Corporate Governance,” and sub-headings “Board Committees” and “Audit Committee,” located in the Proxy Statement. Information about our Code of Conduct is incorporated by reference from the discussion under the heading “Corporate Governance Materials and Code of Conduct” located in the Proxy Statement.  Information regarding our executive officers is presented under the heading “Executive Officers of the Registrant” in Part I on pages 10 through 12 of this Form 10-K, and is incorporated herein by reference.

 

Item 11. Executive Compensation.

 

Information appearing under the headings entitled “Executive Compensation” and “Director Compensation” located in the Proxy Statement is incorporated herein by reference. However, pursuant to Instructions to Item 407(e)(5) of Securities and Exchange Commission Regulation S-K, the material appearing under the sub-heading “Compensation Committee Report” shall not be deemed to be “filed” with the Commission, other than as provided in this Item 11.

 

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Table of Contents

 

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

Information appearing under the heading entitled “Security Ownership” located in the Proxy Statement is incorporated herein by reference.

 

A total of 541,813 shares of Common Stock held by our directors and executive officers, some of whom may be deemed to be “affiliates” of the Company, have been excluded from the computation of market value of our Common Stock on the cover page of this Form 10-K. This total represents that portion of the shares reported as beneficially owned by our directors and executive officers as of June 30, 2008, which are actually issued and outstanding.

 

Equity Compensation Plan Information: The following table presents, as of December 31, 2008, compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance.

 

Plan Category

 

(a) 
Number of securities 
to be issued upon
exercise of 
outstanding options,
 warrants 
and rights

 

(b) 
Weighted average
exercise price 
of outstanding options,
warrants 
and rights

 

(c)
Number of securities 
remaining available
for future issuance under 
equity compensation plans 
(excluding securities
reflected in column (a))

 

Equity compensation plans approved by security holders

 

22,832,401(1)(2)

 

$ 34.51(2)

 

4,746,982

 

Equity compensation plans not approved by security holders

 

-0-

 

 

-0-

 

Total

 

22,832,401(1)(2)

 

$ 34.51(2)

 

4,746,982

 

 


(1)

 

Includes 137,276 Common Stock equivalents under our 2001 Non-Employee Director Stock Option and Deferred Compensation Plan. These Common Stock equivalents represent deferred compensation earned by non-employee directors and are excluded from the calculation of weighted average exercise price of outstanding options, warrants and rights in column (b) of this table.

 

 

 

(2)

 

Includes 3,349 shares of our Common Stock subject to stock options with a weighted-average exercise price of $30.09, which we assumed in connection with our acquisition of Alcide Corporation effective July 30, 2004. These assumed options are deemed exempt from shareholder approval under Rule 303A.08 of the New York Stock Exchange in accordance with our notice to the NYSE dated August 18, 2004. The respective Alcide plans were amended to prohibit future grants.

 

Item 13. Certain Relationships and Related Transactions and Director Independence.

 

Information appearing under the headings entitled “Director Independence Standards and Determinations” and “Related Person Transactions” located in the Proxy Statement is incorporated herein by reference.

 

Item 14.  Principal Accountant Fees and Services.

 

Information appearing under the heading entitled “Audit Fees” located in the Proxy Statement is incorporated herein by reference.

 

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Table of Contents

 

PART IV

 

Item 15.  Exhibits and Financial Statement Schedules.

 

(a)(1)

The following financial statements of the Company, included in the Annual Report, are incorporated into Item 8 hereof.

 

 

 

(i)

Consolidated Statement of Income for the years ended December 31, 2008, 2007 and 2006, Annual Report page 31.

 

 

 

 

(ii)

Consolidated Balance Sheet at December 31, 2008 and 2007, Annual Report page 32.

 

 

 

 

(iii)

Consolidated Statement of Cash Flows for the years ended December 31, 2008, 2007 and 2006, Annual Report page 33.

 

 

 

 

(iv)

Consolidated Statement of Comprehensive Income and Shareholders’ Equity for the years ended December 31, 2008, 2007 and 2006, Annual Report page 34.

 

 

 

 

(v)

Notes to Consolidated Financial Statements, Annual Report pages 35 through 52.

 

 

 

 

(vi)

Report of Independent Registered Public Accounting Firm, Annual Report page 53.

 

 

 

(b)(2)

All financial statement schedules are omitted because they are not applicable or, the required information is shown in the consolidated financial statements or the accompanying notes to the consolidated financial statements. All significant majority-owned subsidiaries are included in the filed consolidated financial statements.

 

 

 

The following documents are filed as exhibits to this Report. We will, upon request and payment of a fee not exceeding the rate at which copies are available from the Securities and Exchange Commission, furnish copies of any of the following exhibits to stockholders.

 

 

 

(3)

A.

Restated Certificate of Incorporation of Ecolab Inc., dated as of February 27, 2006, effective as of March 13, 2006 – Incorporated by reference to Exhibit (3)A of our Form 10-K Annual Report for the year ended December 31, 2005.

 

 

 

 

 

B.

By-Laws, as amended through August 1, 2008 – Incorporated by reference to Exhibit (3.1) of our Form 8-K dated November 10, 2008.

 

 

 

 

(4)

A.

Common Stock - see Exhibits (3)A and (3)B.

 

 

 

 

 

B.

Form of Common Stock Certificate effective February 28, 2007 – Incorporated by reference to Exhibit (4)B of our Form 10-K Annual Report for the year ended December 31, 2006.

 

 

 

 

 

C.

Rights Agreement, dated as of February 24, 2006, between Ecolab Inc. and Computershare Investor Services, LLC, as Rights Agent, which includes the following exhibits thereto: (i) Exhibit A – Form of Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock and (ii) Exhibit B – Form of Rights Certificate – Incorporated by reference to Exhibit (4)C of our Form 10-K Annual Report for the year ended December 31, 2005.

 

 

 

 

 

D.

Amended and Restated Indenture, dated as of January 9, 2001, between Ecolab Inc. and The Bank of New York Trust Company, N.A. (as successor in interest to J. P. Morgan Trust Company, National Association and Bank One, NA) as Trustee - Incorporated by reference to Exhibit (4)(A) of our Current Report on Form 8-K dated January 23, 2001.

 

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Table of Contents

 

 

 

E.

Officer’s Certificate establishing terms and conditions of 6.875% Notes due February 1, 2011 - Incorporated by reference to Exhibit 4(B) of our Form 8-K dated January 23, 2001.

 

 

 

 

 

 

F.

Form of 6.875% Note due February 2, 2011 - Incorporated by reference to Exhibit 4(C) of our Form 8-K dated January 23, 2001.

 

 

 

 

 

 

G.

Supplemental Indenture, dated as of February 8, 2008, between Ecolab Inc. and The Bank of New York Trust Company, N.A., as Trustee — Incorporated by reference to Exhibit 4.2 of our Current Report on Form 8-K dated February 8, 2008.

 

 

 

 

 

 

H.

Form of 4.875% Note due February 15, 2015 — Included in Exhibit (4)H above.

 

 

 

Copies of other constituent instruments defining the rights of holders of our long-term debt are not filed herewith, pursuant to Section (b)(4)(iii) of Item 601 of Regulation S-K, because the aggregate amount of securities authorized under each of such instruments is less than 10% of our total assets on a consolidated basis.  We will, upon request by the Securities and Exchange Commission, furnish to the Commission a copy of each such instrument.

 

 

 

(10)A.

(i)

Multicurrency Credit Agreement, dated as of September 29, 1993, as amended and restated as of June 1, 2006, among Ecolab Inc., the financial institutions party thereto as Banks from time to time, the financial institutions party thereto as Issuing Banks from time to time, Citibank, N.A., as administrative agent for the Banks and Issuing Banks thereunder, Citibank International PLC, as agent for the Banks in connection with certain of the Eurocurrency Advances, and JPMorgan Chase Bank, N.A., as syndication agent — Incorporated by reference to Exhibit (10) of our Form 8-K dated June 1, 2006.

 

 

 

 

(ii)

Extension Confirmation Notice, dated May 14, 2007, under the Multicurrency Credit Agreement, dated as of September 29, 1993, as amended and restated as of June 1, 2006 — Incorporated by reference to Exhibit (10) of our Form 8-K dated May 14, 2007.

 

 

 

 

(iii)

Increase of Commitments Agreement dated as of October 29, 2007 by and among Ecolab Inc., Citibank, N.A., JPMorgan Chase Bank, N.A., Credit Suisse, Cayman Islands Branch, National Association, Wells Fargo Bank, National Association, ABN AMRO Bank N.A., Bank of America, N.A. and Barclays Bank PLC, as increasing banks, and Citibank, N.A., as agent — Incorporated by reference to Exhibit (10) of our Form 10-Q for the quarter ended September 30, 2007.

 

 

 

B.

Documents comprising global Commercial Paper Programs

 

 

 

 

(i)

U.S. $200,000,000 Euro-Commercial Paper Programme

 

 

 

 

 

(a)

Amended and Restated Dealer Agreement dated 2 December 2005 between Ecolab Inc. (as Guarantor), Ecolab B.V. and Ecolab Holding GmbH (as Issuers), Ecolab Inc., Credit Suisse First Boston (Europe) Limited (as Arranger), and Citibank International plc and Credit Suisse First Boston (Europe) Limited (as Dealers) — Incorporated by reference to Exhibit (10)B(i)(a) of our Form 10-K Annual Report for the year ended December 31, 2005.

 

 

 

 

 

(b)

Amended and Restated Note Agency Agreement dated as of 2 December 2005 between Ecolab Inc., Ecolab B.V. and Ecolab Holding GmbH (as Issuers) and Citibank, N.A. as Issue and Paying Agent — Incorporated by reference to Exhibit (10)B(i)(b) of our Form 10-K Annual Report for the year ended December 31, 2005.

 

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Table of Contents

 

 

 

(c)   Deed of Covenant made on 2 December 2005 by Ecolab Inc., Ecolab B.V. and Ecolab Holding GmbH — Incorporated by reference to Exhibit (10)B(i)(c) of our Form 10-K Annual Report for the year ended December 31, 2005.

 

(d)   Deed of Guarantee made on 2 December 2005 — Incorporated by reference to Exhibit (10)B(i)(d) of our Form 10-K Annual Report for the year ended December 31, 2005.

 

 

 

 

(ii)

U.S. $600,000,000 U.S. Commercial Paper Program

 

 

 

 

 

(a)   Form of Commercial Paper Dealer Agreement for 4 (2) Program.  Agreements have been executed with Salomon Smith Barney, Inc. and J.P. Morgan Securities Inc., Wachovia Securities, LLC and Banc of America Securities LLC - Incorporated by reference to Exhibit (10)A(ii)(a) of our Form 10-Q for the quarter ended June 30, 2003.

 

(b)   Issuing and Paying Agency Agreement dated as of July 10, 2000 between Ecolab Inc. and Bank One, National Association as Issuing and Paying Agent - Incorporated by reference to Exhibit (10)A(ii)(b) of our Form 10-Q for the quarter ended June 30, 2003.

 

 

 

C.

(i)

Ecolab Inc. 1997 Stock Incentive Plan, as Amended and Restated as of August 18, 2000 - Incorporated by reference to Exhibit (10) of our Form 10-Q for the quarter ended September 30, 2000.

 

 

 

 

(ii)

Non-Statutory Stock Option Agreement as in effect for grants through May 12, 2000 — Incorporated by reference to Exhibit (10)B(i) of our Form 10-Q for the quarter ended June 30, 2004.

 

 

 

 

(iii)

Non-Statutory Stock Option Agreement as in effect for grants beginning May 13, 2000 through May 10, 2002 — Incorporated by reference to Exhibit (10)B(ii) of our Form 10-Q for the quarter ended June 30, 2004.

 

 

 

D.

(i)

1995 Non-Employee Director Stock Option Plan — Incorporated by reference to Exhibit (10)D(i) of our Form 10-K Annual Report for the year ended December 31, 2006.

 

 

 

 

(ii)

Amendment No. 1 to 1995 Non-Employee Director Stock Option Plan effective February 25, 2000 - Incorporated by reference to Exhibit (10)E(ii) of our Form 10-K Annual Report for the year ended December 31, 1999.

 

 

 

 

(iii)

Amendment No. 2 to 1995 Non-Employee Director Stock Option Plan effective May 11, 2001 - Incorporated by reference to Exhibit (10)G(iii) of our Form 10-K Annual Report for the year ended December 31, 2002.

 

 

 

 

(iv)

Amendment No. 3 to 1995 Non-Employee Director Stock Option Plan, adopted October 31, 2008.

 

 

 

E.

(i)

Ecolab Inc. 2001 Non-Employee Director Stock Option and Deferred Compensation Plan as amended effective May 1, 2004 — Incorporated by reference to Exhibit (10)H(ii) of our Form 10-K Annual Report for the year ended December 31, 2003.

 

 

 

 

(ii)

Amendment No. 1 adopted December 15, 2004 to Ecolab Inc. 2001 Non-Employee Director Stock Option and Deferred Compensation Plan, as amended and restated effective May 1, 2004, with respect to the American Jobs Creation Act of 2004 — Incorporated by reference to Exhibit (10)F(ii) of our Form 10-K Annual Report for the year ended December 31, 2004.

 

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Table of Contents

 

 

 

 

 

(iii)

Master Agreement Relating to Options (as in effect through May 7, 2004) — Incorporated by reference to Exhibit (10)D(i) of our Form 10-Q for the quarter ended June 30, 2004.

 

 

 

 

(iv)

Master Agreement Relating to Periodic Options, as amended effective as of May 1, 2004 — Incorporated by reference to Exhibit (10)D(ii) of our Form  10-Q for the quarter ended June 30, 2004.

 

 

 

 

(v)

Amendment No. 2 to Ecolab Inc. 2001 Non-Employee Director Stock Option and Deferred Compensation Plan, as amended effective May 2, 2008 — Incorporated by reference to Exhibit (10)A of our Form 10-Q for the quarter ended September 30, 2008.

 

 

 

 

(vi)

Amendment No. 1 to Master Agreement Relating to Periodic Options, as amended effective May 2, 2008 — Incorporated by reference to Exhibit (10)B of our Form 10-Q for the quarter ended September 30, 2008.

 

 

 

 

(vii)

Amendment No. 3 to Ecolab Inc. 2001 Non-Employee Director Stock Option and Deferred Compensation Plan (as Amended and Restated Effective as of May 1, 2004).

 

 

 

F.

Note Purchase Agreement, dated as of July 26, 2006 by and among Ecolab Inc. and the Purchasers party thereto — Incorporated by reference to Exhibit (10) of our Form 8-K dated July 26, 2006.

 

 

 

G.

Form of Director Indemnification Agreement.  Substantially identical agreements are in effect as to each of our directors — Incorporated by reference to Exhibit (10)I of our Form 10-K Annual Report for the year ended December 31, 2003.

 

 

 

H.

(i)

Ecolab Executive Death Benefits Plan, as amended and restated effective March 1, 1994 — Incorporated by reference to Exhibit (10)H(i) of our Form 10-K Annual Report for the year ended December 31, 2006. See also Exhibit (10)N hereof.

 

 

 

 

(ii)

Amendment No. 1 to Ecolab Executive Death Benefits Plan — Incorporated by reference to Exhibit (10)H(ii) of our Form 10-K Annual Report for the year ended December 31, 1998.

 

 

 

 

(iii)

Second Declaration of Amendment to Ecolab Executive Death Benefits Plan, effective March 1, 1998 - Incorporated by reference to Exhibit (10)H(iii) of our Form 10-K Annual Report for the year ended December 31, 1998.

 

 

 

 

(iv)

Amendment No. 3 to the Ecolab Executive Death Benefits Plan, effective August 12, 2005 — Incorporated by reference to Exhibit (10)B of our Form 8-K dated December 13, 2005.

 

 

 

I.

Ecolab Executive Long-Term Disability Plan, as amended and restated effective January 1, 1994 — Incorporated by reference to Exhibit (10)I of our Form 10-K Annual Report for the year ended December 31, 2004. See also Exhibit (10)N hereof.

 

 

 

J.

Ecolab Financial Counseling Plan (Effective January 1, 2005).

 

 

 

K.

Ecolab Supplemental Executive Retirement Plan (Amended and Restated effective as of January 1, 2005).

 

 

 

L.

Ecolab Mirror Savings Plan (Amended and Restated effective as of January 1, 2005).

 

 

 

M.

Ecolab Mirror Pension Plan (Amended and Restated effective as of January 1, 2005).

 

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Table of Contents

 

N.

Ecolab Inc. Administrative Document for Non-Qualified Plans (Amended and Restated effective as of January 1, 2005).

 

 

 

O.

(i)

Ecolab Inc. Management Performance Incentive Plan, as amended and restated on February 28, 2004 — Incorporated by reference to Exhibit (10)A of our Form 10-Q for the quarter ended March 31, 2004.

 

 

 

 

(ii)

Amendment No. 1 adopted February 26, 2005 to the Ecolab Inc. Management Performance Incentive Plan — Incorporated by reference to Exhibit (10)O(ii) of our Form 10-K Annual Report for the year ended December 31, 2004.

 

 

 

P.

Ecolab Inc. Change in Control Severance Compensation Policy, effective as of January 1, 2005, adopted December 19, 2008.

 

 

Q.

Description of  Ecolab Management Incentive Plan.

 

 

R.

Stock Purchase Agreement, dated November 10, 2008, among Henkel AG & Co. KGaA, Henkel Corporation and Ecolab Inc. — Incorporated by reference to Exhibit (10.1) of our  Form 8-K dated November 10, 2008.

 

 

S.

(i)

Ecolab Inc. 2002 Stock Incentive Plan — Incorporated by reference to Exhibit (10) of our Form 10-Q for the quarter ended June 30, 2002

 

 

 

 

(ii)

Non-Statutory Stock Option Agreement as in effect for grants beginning May 11, 2002 through August 12, 2003 — Incorporated by reference to Exhibit (10)A(i) of our Form 10-Q for the quarter ended June 30, 2004.

 

 

 

 

(iii)

Non-statutory Stock Option Agreement as in effect for grants beginning August 13, 2003 — Incorporated by reference to Exhibit (10)A(ii) of our Form 10-Q for the quarter ended June 30, 2004.

 

 

 

T.

2009 Named Executive Officer Summary of Base Salary, Bonus Award Opportunities, and Executive Benefits and Perquisites.

 

 

 

U.

Non-Employee Director Compensation and Benefits Summary.

 

 

 

V.

(i)

Ecolab Inc. 2005 Stock Incentive Plan — Incorporated by reference to Exhibit (10)A of our Form 8-K dated May 6, 2005.

 

 

 

 

(ii)

Amendment No. 1 to Ecolab Inc. 2005 Stock Incentive Plan, adopted October 31, 2008.

 

 

 

 

(iii)

Sample form of Non-Statutory Stock Option Agreement under the Ecolab Inc. 2005 Stock Incentive Plan in effect for grants prior to October 31, 2008 — Incorporated by reference to Exhibit (10)B of our Form 8-K dated May 6, 2005.

 

 

 

 

(iv)

Sample form of Non-Statutory Stock Option Agreement under the Ecolab Inc. 2005 Stock Incentive Plan in effect for grants after October 31, 2008.

 

 

 

 

(v)

Sample form of Restricted Stock Award Agreement under the Ecolab Inc. 2005 Stock Incentive Plan — Incorporated by reference to Exhibit (10)W(iii) of our Form 10-K Annual Report for the year ended December 31, 2006.

 

 

 

W.

Policy on Reimbursement of Incentive Payments adopted December 4, 2008.

 

 

(13)

Those portions of our Annual Report to Stockholders for the year ended December 31, 2008 which are incorporated by reference into Parts I and II hereof.

 

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Table of Contents

 

(14)A.

Code of Conduct — Incorporated by reference to Exhibit (99)A of our Form 10-K Annual Report for the year ended December 31, 2003.

 

 

(14)B.

Code of Ethics for Senior Officers and Finance Associates — Incorporated by reference to Exhibit (99)B of our Form 10-K Annual Report for the year ended December 31, 2003.

 

 

(21)

List of Subsidiaries as of January 31, 2009.

 

 

(23)

Consent of Independent Registered Public Accounting Firm at page 29 hereof is filed as a part hereof.

 

 

(24)

Powers of Attorney.

 

 

(31)

Rule 13a-14(a) Certifications.

 

 

(32)

Section 1350 Certifications.

 

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EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS

(Mark One)

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended December 31, 2008

 

Commission File No. 1-9328

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                 to                 

 

ECOLAB INC.

(Exact name of registrant as specified in its charter)

 

Delaware

41-0231510

(State or other jurisdiction of incorporation or
organization)

(I.R.S. Employer Identification No.)

 

 

370 Wabasha Street North, St. Paul, Minnesota

55102

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code:  1-800-232-6522

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

 

 

 

Common Stock, $1.00 par value

 

New York Stock Exchange, Inc.

 

 

 

Preferred Stock Purchase Rights

 

New York Stock Exchange, Inc.

 

Securities registered pursuant to Section 12(g) of the Act:  None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

x  YES  o  NO

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

o  YES  x  NO

 

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.

x  YES  o  NO

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,”  “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x   Accelerated filer o   Non-accelerated filer o  (Do not check if a smaller reporting company)
Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o YES x NO

 

Aggregate market value of voting and non-voting common equity held by non-affiliates of registrant on June 30, 2008:  $10,606,696,000 (see Item 12, under Part III hereof), based on a closing price of registrant’s Common Stock of $42.99 per share.

 

The number of shares of registrant’s Common Stock, par value $1.00 per share, outstanding as of January 30, 2009: 236,192,852 shares.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

1.

Portions of the registrant’s Annual Report to Stockholders for the year ended December 31, 2008 (hereinafter referred to as “Annual Report”) are incorporated by reference into Parts I and II.

 

 

2.

Portions of the registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held May 8, 2009 and to be filed within 120 days after the registrant’s fiscal year ended December 31, 2008 (hereinafter referred to as “Proxy Statement”) are incorporated by reference into Part III.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I

 

 

Forward-Looking Statements

 

Item 1(a)

General Development of Business

 

Item 1(b)

Financial Information About Operating Segments

 

Item 1(c)

Narrative Description of Business

 

Item 1(d)

Financial Information About Geographic Areas

 

Item 1(e)

Available Information

 

Executive Officers of the Registrant

 

Item 1A.

Risk Factors

 

Item 1B.

Unresolved Staff Comments

 

Item 2.

Properties

 

Item 3.

Legal Proceedings

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

 

 

 

PART II

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer purchases of Equity Securities

 

Item 6.

Selected Financial Data

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

 

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

 

Item 8.

Financial Statements and Supplementary Data

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

Item 9A.

Controls and Procedures

 

 

 

 

PART III

 

 

Item 10.

Directors, Executive Officers of the Registrant and Corporate Governance

 

Item 11.

Executive Compensation

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

Item 13.

Certain Relationships and Related Transactions and Director Independence

 

Item 14.

Principal Accountant Fees and Services

 

 

 

 

PART IV

 

 

Item 15.

Exhibits and Financial Statement Schedules

 

 

 

 

SIGNATURES

 

 

 

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

 

 

EXHIBIT INDEX

 

 



Table of Contents

 

PART I

 

Except where the context otherwise requires, references in this Form 10-K to either “Ecolab,” “Company,” “we” and “our” are to Ecolab Inc. and its subsidiaries, collectively.

 

Forward-Looking Statements

 

This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operation” incorporated by reference into Item 7 of this Form 10-K,  contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements include expectations concerning items such as revenue and earnings growth, raw material and delivered product costs, currency translation, business acquisitions, system implementations, restructuring charges and cost savings, cash flows, loss of customers and bad debt, debt repayments, disputes and claims, environmental and regulatory considerations, share repurchases, global economic conditions and credit risk, pension expenses and potential contributions, new accounting pronouncements, income taxes, including unrecognized tax benefits or uncertain tax positions, borrowing capacity, and liquidity requirements.  Without limiting the foregoing, words or phrases such as “will likely result,” “are expected to,” “will continue,” “is anticipated,” “we believe,” “we expect,” “estimate,” “project” (including the negative or variations thereof) or similar terminology, generally identify forward-looking statements.  Forward-looking statements may also represent challenging goals for us.  We caution that undue reliance should not be placed on such forward-looking statements, which speak only as of the date made.  Some of the factors which could cause results to differ from those expressed in any forward-looking statement are set forth under Item 1A of this Form 10-K, entitled Risk Factors.

 

Item 1.  Business.

 

Item 1(a) General Development of Business.

 

Ecolab was incorporated as a Delaware corporation in 1924.  Our fiscal year is the calendar  year ending December 31.

 

During 2008, we continued to invest in our business to build for the future.

 

In December 2007, subsequent to our year-end for international operations, we purchased the Irish dairy hygiene business of Novartis Animal Health Ireland Ltd.  The business, which has annual sales of approximately $3 million, became part of our International operations during the first quarter of 2008.

 

In February 2008, we acquired Ecovation, Inc., a Rochester, N.Y. area-based provider of renewable energy solutions and effluent management systems primarily for the food and beverage manufacturing industry in the U.S., including dairy, beverage and meat and poultry producers.  2007 sales were approximately $50 million.    Ecovation became part of our U.S. Cleaning & Sanitizing operations during the first quarter of 2008.

 

Following the Ecovation acquisition, we combined our Water Care Services and Ecovation businesses into our Food & Beverage division.

 

We continued to make investments in Europe, including the establishment of our European headquarters in Zurich, Switzerland.

 

In November 2008, our then largest shareholder, Henkel AG & Co. KGaA (“Henkel”), completed the sale of all of the 72.7 million Ecolab shares it held.  We repurchased 11.3 million shares directly from Henkel for $300 million, reducing our shares outstanding by approximately 4%.

 

Item 1(b) Financial Information About Operating Segments.

 

The financial information about reportable segments appearing under the heading “Operating Segments” in Note 16, located on pages 49 and 50 of the Annual Report, is incorporated herein by reference.

 

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Item 1(c) Narrative Description of Business.

 

General: Ecolab develops and markets premium products and services for the hospitality, foodservice, health care and industrial markets. We provide cleaning and sanitizing products and programs, as well as pest elimination, maintenance and repair services primarily to hotels and restaurants, healthcare and educational facilities, quick service (fast-food and convenience store) units, grocery stores, commercial and institutional laundries, light industry, dairy plants and farms, food and beverage processors and the vehicle wash industry. A strong commitment to customer support and sustainable solutions is a distinguishing characteristic of our business.  Additional information on our business philosophy is found below under the heading “Additional Information — Competition” of this Item 1(c).

 

The following description of our business is based upon our three reportable segments as reported in our consolidated financial statements.  However, we pursue a “Circle the Customer — Circle the Globe” strategy by providing products, systems and services which serve our customer base, and do so on a global basis to meet the needs of our customers’ various operations around the world.  Therefore, one customer may utilize the products or services of all three of the segments and there is interdependence among the operating segments.

 

United States Cleaning & Sanitizing Segment

 

The “United States Cleaning & Sanitizing” segment is comprised of six business units which provide cleaning and sanitizing products and programs to United States markets.

 

Institutional: The Institutional Division is our largest division and sells specialized cleaners and sanitizers for washing dishes, glassware, flatware, foodservice utensils and kitchen equipment (“warewashing”), for on-premise laundries (typically used by hotel and healthcare customers) and for general housekeeping functions, as well as food safety products and equipment, dishwasher racks and related kitchen sundries to the foodservice, lodging, educational and healthcare industries, and water filters to the foodservice industry. The Institutional Division also provides pool and spa treatment programs for hospitality and other commercial customers, as well as a broad range of janitorial cleaning and floor care products and programs to customers in hospitality, health care and commercial facilities. The Institutional Division manufactures and markets various chemical dispensing device systems, which are made available to customers, to dispense our cleaners and sanitizers. In addition, the Institutional Division markets a lease program comprised of energy-efficient dishwashing machines, detergents, rinse additives and sanitizers, including full machine maintenance.

 

We believe that we are the leading supplier of chemical warewashing products and programs to institutions in the United States.

 

The Institutional Division sells its products and programs primarily through company-employed field sales personnel. However, to a significant degree, we also utilize independent, third-party foodservice distributors to market and sell our products to smaller accounts or accounts which purchase through distributors. We provide the same customer support to accounts supplied by food distributors as to direct customers.

 

Food & Beverage: Our Food & Beverage Division addresses cleaning and sanitation at the beginning of the food chain to facilitate the processing of products for human consumption. The Division provides detergents, cleaners, sanitizers, lubricants and animal health products, as well as cleaning systems, electronic dispensers and chemical injectors for the application of chemical products, primarily to dairy plants, dairy farms, breweries, soft-drink bottling plants, and meat, poultry and other food processors. The Food & Beverage Division is also a leading developer and marketer of antimicrobial products used in direct contact with meat, poultry, seafood and produce during processing in order to reduce microbial contamination. The Food & Beverage Division also designs, engineers and installs CIP (“clean-in-place”) process control systems and facility cleaning systems for its customer base. Farm products are sold through dealers and independent, third-party distributors, while plant products are sold primarily by our field sales personnel. The Food & Beverage Division also offers water care programs primarily to treat water used for heating and cooling systems and manufacturing processes. In addition, through its Ecovation business, the Food & Beverage Division offers customized wastewater treatment solutions that also can generate energy.

 

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We believe that we are one of the leading suppliers of cleaning and sanitizing products to the dairy plant, dairy farm, food, meat and poultry, and beverage/brewery processor industries in the United States.

 

Kay: Our Kay Division (which consists of certain wholly-owned subsidiaries of Ecolab Inc.) supplies chemical cleaning and sanitizing products primarily to national and regional quick service restaurant chains.  Kay’s products include specialty and general purpose hard surface cleaners, degreasers, sanitizers, polishes, hand care products and assorted cleaning tools.  Products are sold under the “Kay” brand or the customer’s private label. In addition, Kay supports its product sales with employee training programs and technical support designed to meet the special needs of its customers. Kay’s customized cleaning and sanitation programs are designed to reduce labor costs and product usage while increasing sanitation levels, cleaning performance, equipment life and safety levels.

 

Kay employs a direct field sales force which primarily calls upon national and regional quick service restaurants and franchisees, although the sales are made to distributors who supply the chain or franchisee’s units.

 

We believe that our Kay Division is the leading supplier of chemical cleaning and sanitizing products to the traditional quick service restaurant industry in the United States. While Kay’s customer base has been growing, Kay’s business is largely dependent upon a limited number of major quick service restaurant chains and franchisees.

 

In addition, through Kay’s Food Retail business, the Division supplies cleaning and sanitizing products to the food retail (i.e., grocery store) industry. Food Retail products are sold primarily through distributors and include specialty and general purpose hard surface cleaners, degreasers, sanitizers, polishes, hand care products, assorted cleaning tools and floor care products. We provide the same customer support to accounts supplied by distributors as to direct customers.

 

Healthcare: Our Healthcare Division provides infection prevention and other healthcare related offerings to acute care hospitals, surgery centers, dental offices and veterinary clinics.  The Healthcare Division’s proprietary infection prevention products (hand hygiene, hard surface disinfectants, instrument cleaners, patient drapes, fluid control and equipment drapes) are sold primarily under the “Ecolab” and “Microtek” brand names to various departments within the acute care environment (Infection Control, Environmental Services, Central Sterile and Operating Room).  Microtek Medical, acquired in November 2007, is a leader in niche branded specialty surgical drapes and fluid control products.  The Healthcare Division sells its products and programs primarily through company-employed field sales personnel but also sells through healthcare distributors.

 

Textile Care: Our Textile Care Division provides chemical laundry products and proprietary dispensing systems, as well as related programs, to large industrial and commercial laundries.  Typically these customers include free-standing laundry plants used by institutions such as hotels, restaurants and healthcare facilities as well as industrial and textile rental laundries. Products and programs include laundry cleaning and specialty products, related dispensing equipment, plus water and energy management which are marketed primarily through company-employed field sales personnel and, to a lesser extent, through independent, third-party distributors. The Textile Care Division’s programs are designed to meet our customers’ need for exceptional cleaning, while extending the useful life of linen and reducing the customer’s overall operating cost.

 

Vehicle Care: Our Vehicle Care Division provides vehicle appearance products which include soaps, polishes, sealants, wheel and tire treatments and air fresheners. Products are sold to vehicle rental, fleet and consumer car wash and detail operations. Brand names utilized by the Vehicle Care Division include Blue CoralÒ, Black MagicÒ and Rain-XÒ.

 

United States Other Services Segment

 

The “United States Other Services” segment is comprised of two business units:  Pest Elimination and GCS Service. In general, these businesses provide service or equipment which can augment or extend our product offering to our business customers as a part of our “Circle the Customer” approach.

 

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Pest Elimination: Our Pest Elimination Division provides services designed to detect, eliminate and prevent pests in restaurants, food and beverage processors, educational and healthcare facilities, hotels, quick service restaurant and grocery operations and other institutional and commercial customers. These services are sold and performed by company-employed field sales and service personnel. In addition, through our EcoSure Food Safety Management business, we provide customized on-site evaluations, training and quality assurance services to foodservice operations.

 

GCS Service: GCS Service provides equipment repair and maintenance services for the commercial food service industry. Repair services are offered for in-warranty repair, acting as the Manufacturer’s Authorized Service Agent, as well as after warranty repair. In addition, GCS Service operates as a parts distributor to repair service companies and end users.

 

International Segment

 

We conduct business in approximately 70 countries outside of the United States through wholly-owned subsidiaries or, in the case of Israel and Venezuela, through joint ventures with local partners. In other countries, selected products are sold by our export operations to distributors, agents or licensees, although the volume of those sales is not significant in terms of our overall revenues. Our largest International operations are located in Europe, Asia Pacific, Latin America and Canada, with smaller operations in Africa and the Middle East.

 

In general, the businesses conducted internationally are similar to those conducted in the United States but are managed on a geographic basis. The businesses which are similar to the United States’ Institutional and Food & Beverage businesses are the largest businesses in our International operations. They are conducted in virtually all our International locations and, compared to the United States, constitute a larger portion of the overall business. Healthcare and Textile Care are also significant businesses in our International operations, particularly in Europe. Kay also has sales in a number of International locations. A significant portion of Kay’s international sales are to international units of United States-based quick service restaurant chains. Consequently, a substantial portion of Kay’s international sales are made either to domestic or internationally-located third-party distributors who serve these chains.

 

Our Pest Elimination business continues to expand its geographic coverage. Since 2001, we have entered markets in Asia, Western Europe, Latin America and South Africa, with the largest operations in France and the United Kingdom.

 

Our other businesses are conducted less extensively in our International locations. However, in general, most of the principal businesses conducted in the United States are also operated in Canada.

 

International businesses are subject to the usual risks of foreign operations, including possible changes in trade and foreign investment laws, tax laws, currency exchange rates and economic and political conditions abroad. The profitability of our International operations has historically been lower than the profitability of our businesses in the United States. This has been due to the smaller scale of the International operations as well as the additional cost of operating in numerous and diverse foreign jurisdictions.

 

Additional Information

 

Competition: Our business units have two significant classes of competitors. First, each business unit competes with a small number of large companies selling directly or through distributors on a national or international scale. Second, all of our business units have numerous smaller regional or local competitors which focus on more limited geographies, product lines and/or end-user segments.

 

Our objective is to achieve a significant presence in each of our business markets. In general, competition is based on customer support, product performance and price. We believe we compete principally by providing superior value, premium customer support and differentiated products to help our customers protect their brand reputation. Value is provided by state-of-the-art cleaning, sanitation and maintenance products and systems coupled with high customer support standards and continuing

 

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dedication to customer satisfaction. This is made possible, in part, by our significant on-going investment in training and technology and by our standard practice of advising customers on ways to lower operating costs and helping them comply with safety, environmental and sanitation regulations. In addition to our consultative approach, we emphasize our ability to uniformly provide a variety of related premium cleaning and sanitation programs to our customers and to provide that level of customer support to multiple locations of chain customer organizations worldwide. This approach is succinctly stated in our “Circle the Customer - Circle the Globe” strategy which is discussed above in this Item 1(c) under the heading “General.”

 

Sales: Products, systems and services are primarily marketed in domestic and international markets by company-trained field sales personnel who also advise and assist our customers in the proper and efficient use of the products and systems in order to meet a full range of cleaning and sanitation needs. Independent, third-party distributors are utilized in several markets, as described in the business unit descriptions found under the discussion of the three reportable segments above.

 

Number of Employees: We had approximately 26,500 employees as of December 31, 2008.

 

Customers and Classes of Products: We believe that our business is not materially dependent upon a single customer although, as described above in this Item 1(c) under the description of the Kay business, Kay is largely dependent upon a limited number of national and international quick service chains and franchisees. Additionally, although we have a diverse customer base and no customer or distributor constitutes 10 percent or more of our consolidated revenues, we do have customers and independent, third-party distributors, the loss of which could have a material negative effect on results of operations for the affected earnings periods; however, we consider it unlikely that such an event would have a material adverse impact on our financial position. No material part of our business is subject to renegotiation or termination at the election of a governmental unit. We sell two classes of products which each constitute 10 percent or more of our sales. Sales of warewashing products in 2008, 2007 and 2006 approximated 21, 22 and 21 percent, respectively, of our consolidated net sales. In addition, through our Institutional and Textile Care businesses, we sell laundry products and provide customer support to a broad range of laundry customers. Sales of laundry products and services in 2008, 2007 and 2006 approximated 11, 10 and 10 percent, respectively, of our consolidated net sales.

 

Patents and Trademarks: We own and license a number of patents, trademarks and other intellectual property, including through a license agreement with Henkel AG & Co. KGaA. While we have an active program to protect our intellectual property by filing for patents or trademarks, and pursuing legal action, when appropriate, to prevent infringement, we do not believe that our overall business is materially dependent on any individual patent or trademark.

 

Seasonality: Overall our business does not have a significant degree of seasonality. However, we do experience variability in our quarterly operating results due to sales volume and business mix fluctuations in our operating segments. Note 17, entitled “Quarterly Financial Data” located on page 51 of the Annual Report, is incorporated herein by reference.

 

Working Capital: We have invested in the past, and will continue to invest in the future, in merchandising equipment consisting primarily of systems used by customers to dispense our cleaning and sanitizing products. Otherwise, we have no unusual working capital requirements.

 

Manufacturing and Distribution: We manufacture most of our products and related equipment in Company-owned manufacturing facilities. Some products are also produced for us by third-party contract manufacturers. Other products and equipment are purchased from third-party suppliers. Additional information on product/equipment sourcing is found in the segment discussions above and additional information on our manufacturing facilities is located beginning at page 15 of this Form 10-K under the heading “Properties.”

 

Deliveries to customers are made from our manufacturing plants and a network of distribution centers and public warehouses. We use common carriers, our own delivery vehicles, and distributors. Additional information on our plant and distribution facilities is located beginning at page 15 of this Form 10-K under the heading “Properties.”

 

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Raw Materials: Raw materials purchased for use in manufacturing our products are inorganic chemicals, including alkalis, acids, phosphates, silicates and salts, and organic chemicals, including surfactants and solvents. These materials are generally purchased on an annual contract basis from a diverse group of chemical manufacturers. When practical, global sourcing is used so that purchasing or production locations can be shifted to control product costs at globally competitive levels. Pesticides used by our Pest Elimination Division are purchased as finished products under contract or purchase order from the producers or their distributors. We also purchase packaging materials for our manufactured products and components for our specialized cleaning equipment and systems. Most raw materials, or substitutes for those materials, used by us, with the exception of a few specialized chemicals which we manufacture, are available from several suppliers.

 

Research and Development: Our research and development program consists principally of devising and testing new products, processes, techniques and equipment, improving the efficiency of existing ones, improving service program content, and evaluating the environmental compatibility of products. Key disciplines include analytical and formulation chemistry, microbiology, process and packaging engineering and product dispensing technology. Substantially all of our principal products have been developed by our research, development and engineering personnel. At times, technology has also been licensed from third parties to develop offerings. Note 13, entitled “Research Expenditures” located on page 44 of the Annual Report, is incorporated herein by reference.

 

Environmental and Regulatory Considerations: Our businesses are subject to various legislative enactments and regulations relating to the protection of the environment and public health. While we cooperate with governmental authorities and take commercially practicable measures to meet regulatory requirements and avoid or limit environmental effects, some risks are inherent in our businesses. Among the risks are costs associated with transporting and managing hazardous substances, waste disposal and plant site clean-up, fines and penalties if we are found to be in violation of law, as well as modifications, disruptions or discontinuation of certain operations or types of operations including product recalls and reformulations. Additionally, although we are not currently aware of any such circumstances, there can be no assurance that future legislation or enforcement policies will not have a material adverse effect on our consolidated results of operations, financial position or cash flows. Environmental and regulatory matters most significant to us are discussed below.

 

Ingredient Legislation: Various laws and regulations have been enacted by state, local and foreign jurisdictions pertaining to the sale of products which contain phosphorous, volatile organic compounds, or other ingredients that may impact human health or the environment. Under California Proposition 65, label disclosures are required for certain products containing chemicals listed by California. “Green” chemistry initiatives that promote pollution prevention through research and development of safer chemicals and safer chemical processes are being advanced by certain states, including California, Maine, Massachusetts and Vermont.  In 2009, green chemistry and ingredient disclosure legislation may be introduced at the federal level.  To date, we generally have been able to comply with such legislative requirements by reformulation or labeling modifications. Such legislation has not had a material negative effect on our consolidated results of operations, financial position or cash flows to date.

 

Re-authorization of the Toxic Substances Control Act (“TSCA”) and a re-set of the TSCA Inventory are being discussed in the U.S. Congress.  Ecolab anticipates that compliance with new requirements could be similar to the costs associated with the Registration, Evaluation and Authorization of Chemicals regulation recently adopted in the European Union, which is discussed below.

 

REACH: The European Union has developed a new regulatory framework for the Registration, Evaluation and Authorization of Chemicals (“REACH”). It established a new European Chemicals Agency in Helsinki, Finland, which is responsible for evaluating data to determine hazards and risks and to manage this program for authorizing chemicals for sale and distribution in Europe. Under REACH, all “new” and “existing” chemicals produced or imported into the European Union in quantities above one ton per year must be

 

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registered in a central database. Ecolab has met the pre-registration requirements of REACH, and is on track to meet the upcoming deadlines and requirements in 2009 and beyond.  To help manage this new program, Ecolab is simplifying its product line and working with chemical suppliers to comply with registration requirements. For chemicals deemed to be of most concern, industry must gain specific authorization for particular uses which have been demonstrated to be safe. Ecolab has minimized use of these chemicals which are designated as “chemicals of high concern.”  The impact of REACH will also be felt by our competitors. Potential costs to us are not yet fully quantifiable, but are not expected to significantly affect our consolidated results of operations, financial position or cash flows.

 

GHSIn 2003, the United Nations issued a standard on hazard communication and labeling of chemical products known as the Globally Harmonized System of Classification and Labeling of Chemicals (“GHS”). GHS is designed to facilitate international trade and increase safe handling and use of hazardous chemicals through a worldwide system that classifies chemicals based on their intrinsic hazards and communicates information about those hazards through standardized safety labeling and safety warnings. Individual countries and regional organizations either have begun to implement GHS or are considering what portions of it will be adopted and within what timeframe. Most countries in which we operate will adopt GHS-related legislation. The primary cost of compliance will revolve around authoring of material safety data sheets and product labeling, and we are working toward a phased-in approach to mitigate risks of GHS implementation. Potential costs to us are not yet fully quantifiable, but are not expected to have a material adverse effect on our consolidated results of operations, financial position or cash flows.

 

Pesticide and Biocide Legislation: Various international, federal and state environmental laws and regulations govern the manufacture and/or use of pesticides. We manufacture and sell certain disinfecting and sanitizing products which kill or reduce microorganisms (bacteria, viruses, fungi) on hard environmental surfaces and on certain food products. Such products constitute “pesticides” or “antimicrobial pesticides” under the current definitions of the Federal Insecticide, Fungicide, and Rodenticide Act (“FIFRA”), as amended by the Food Quality Protection Act of 1996, the principal federal statute governing the manufacture, labeling, handling and use of pesticides. We maintain approximately 330 product registrations with the U.S. Environmental Protection Agency (“EPA”). Registration entails the necessity to meet certain efficacy, toxicity and labeling requirements and to pay on-going registration fees. In addition, each state in which these products are sold requires registration and payment of a fee. In general, the states impose no substantive requirements different from those required by FIFRA. However, California and certain other states have adopted additional regulatory programs, and California imposes a tax on total pesticide sales in that state. While the cost of complying with rules as to pesticides has not had a material adverse effect on our consolidated results of operations, financial condition, or cash flows to date, the costs and delays in receiving necessary approvals for these products continue to increase. Total fees paid to the EPA and the states to obtain or maintain pesticide registrations, and for the California tax, were approximately $3,308,000 in 2008 and $2,800,000 in 2007.

 

In Europe, the Biocidal Product Directive (98/8/EC) (“BPD”) established a program to evaluate and authorize marketing of biocidal active substances and products. We are working with suppliers and industry groups to manage requirements associated with the BPD, and have met the first relevant deadline of the program by the timely submission of dossiers for active substances. Anticipated registration costs, which will be incurred through the BPD phase-in period ending in 2014, will be significant; however, these costs are not expected to significantly affect our consolidated results of operations or cash flows in any one reporting period, or our financial position.

 

In addition, our Pest Elimination Division applies restricted-use pesticides which it generally purchases from third parties. That Division must comply with certain standards pertaining to the use of such pesticides and to the licensing of employees who apply such pesticides. Such regulations are enforced primarily by the states or local jurisdictions in conformity with

 

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federal regulations. We have not experienced material difficulties in complying with these requirements.

 

FDA Antimicrobial Product Requirements: Various laws and regulations have been enacted by federal, state, local and foreign jurisdictions regulating certain products manufactured and sold by us for controlling microbial growth on humans, animals, foods and medical devices. In the United States, these requirements generally are administered by the U.S. Food and Drug Administration (“FDA”). However, the U.S. Department of Agriculture and EPA also may share in regulatory jurisdiction of antimicrobials applied to food. The FDA also has been expanding requirements applicable to such products, including proposing regulations in a Tentative Final Monograph for Healthcare Antiseptic Drug Products dated June 17, 1994, which may impose additional requirements associated with antimicrobial hand care products and associated costs when finalized by the FDA. To date, such requirements have not had a material adverse effect on our consolidated results of operations, financial position or cash flows.

 

Other Environmental Legislation: Our manufacturing plants are subject to federal, state, local or foreign jurisdiction laws and regulations relating to discharge of hazardous substances into the environment and to the transportation, handling and disposal of such substances. The primary federal statutes that apply to our activities in the United States are the Clean Air Act, the Clean Water Act, and the Resource Conservation and Recovery Act. We are also subject to the Superfund Amendments and Reauthorization Act of 1986, which imposes certain reporting requirements as to emissions of hazardous substances into the air, land and water. Similar legal requirements apply to Ecolab’s facilities globally.  We make capital investments and expenditures to comply with environmental laws and regulations, to ensure employee safety and to carry out our announced environmental sustainability principles. To date, such expenditures have not had a significant adverse effect on our consolidated results of operations, financial position or cash flows. Our capital expenditures for environmental health and safety projects worldwide were approximately $8,900,000 in 2008 and $8,100,000 in 2007. Approximately $4,200,000 has been  budgeted globally for projects in 2009.

 

Climate Change: Various laws and regulations pertaining to climate change have been implemented or are being considered for implementation at the international, national, regional and state levels, particularly as they relate to the reduction of greenhouse gas (“GHG”) emissions. None of these laws and regulations directly applies to Ecolab at the present time; however, as a matter of corporate policy, Ecolab supports a balanced approach to reducing GHG emissions while sustaining economic growth and competitiveness. Ecolab has joined U.S. EPA’s Climate Leaders program, and as part of that program we have pledged to develop a corporate-wide U.S. GHG emission inventory and work with EPA to set a GHG reduction goal.

 

Environmental Remediation and Proceedings: Along with numerous other potentially responsible parties (“PRPs”), we are currently involved with waste disposal site clean-up activities imposed by the federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) or state equivalents at 17 sites in the United States. Additionally, we have similar liability at eight sites outside the United States. In general, under CERCLA, we and each other PRP that actually contributes hazardous substances to a Superfund site are jointly and severally liable for the costs associated with cleaning up the site. Customarily, the PRPs will work with the EPA to agree and implement a plan for site remediation. Pursuant to an Environmental Agreement dated December 7, 2000 with Henkel AG & Co. KGaA, Henkel agreed to indemnify us for certain environmental liabilities associated with the parties’ former joint venture in Europe. We have requested euro 261,046 (approximately $368,000 at December 31, 2008) from Henkel for environmental costs during 2008.

 

Based on an analysis of our experience with such environmental proceedings, our estimated share of all hazardous materials deposited on the sites referred to in the preceding paragraph, and our estimate of the contribution to be made by other PRPs which

 

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we believe have the financial ability to pay their shares, we have accrued our best estimate of our probable future costs relating to such known sites. Unasserted claims are not reflected in the accrual. In establishing accruals, potential insurance reimbursements are not included. The accrual is not discounted. It is not feasible to predict when the amounts accrued will be paid due to the uncertainties inherent in the environmental remediation and associated regulatory processes.

 

Our worldwide net expenditures for contamination remediation were approximately $614,000 in 2008 and $1,060,000 in 2007. Including the ChemLawn matter described below, our worldwide accruals at December 31, 2008 for probable future remediation expenditures totaled approximately $3,751,000. We review our exposure for contamination remediation costs periodically and our accruals are adjusted as considered appropriate. While the final resolution of these issues could result in costs below or above current accruals and, therefore, have an impact on our consolidated financial results in a future reporting period, we believe the ultimate resolution of these matters will not have a material effect on our consolidated results of operations, financial position or liquidity. In addition, we have retained responsibility for certain sites where our former ChemLawn business is a PRP. Currently there is one such location and ChemLawn is a de minimis party. Anticipated costs currently accrued for these matters were included in our loss from our discontinued ChemLawn operations in 1991. The accrual remaining reflects our best estimate of probable future costs for the one remaining site.

 

Item 1(d) Financial Information About Geographic Areas.

 

The financial information about geographic areas appearing under the heading “Operating Segments” in Note 16, located on pages 49 and 50 of the Annual Report, is incorporated herein by reference.

 

Item 1(e) Available Information.

 

Our Internet address is www.ecolab.com. Copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports, are available free of charge on our website at www.ecolab.com/investor as soon as reasonably practicable after such material is filed with, or furnished to, the Securities and Exchange Commission.

 

In addition, the following governance materials are available on our website at www.ecolab.com/investor/governance and the same information is available in print to any requesting persons, free of charge, by writing to the Corporate Secretary at our headquarters address, or by submitting an e-mail request to investor.info@ecolab.com:  (i)  charters of the Audit, Compensation, Finance and Governance Committees of our Board of Directors; (ii) our Board’s Corporate Governance Principles; and (iii) our Code of Conduct and Code of Ethics for Senior Officers and Finance Associates.

 

Executive Officers of the Registrant.

 

The persons listed in the following table are our current executive officers. Officers are elected annually. There is no family relationship among any of the directors or executive officers, and no executive officer has been involved during the past five years in any legal proceedings described in applicable Securities and Exchange Commission regulations.

 

Name

 

Age

 

Office

 

Positions Held Since
Jan. 1, 2004

 

 

 

 

 

 

 

Douglas M. Baker, Jr.

 

50

 

Chairman of the Board, President and Chief Executive Officer

 

May 2006 – Present

 

 

 

 

 

 

 

 

 

 

 

President and Chief Executive Officer

 

Jul. 2004 – Apr. 2006

 

 

 

 

 

 

 

 

 

 

 

President and Chief Operating Officer

 

Jan. 2004 – Jun. 2004

 

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</

Name

 

Age

 

Office

 

Positions Held Since
Jan. 1, 2004

 

 

 

 

 

 

 

Lawrence T.

 

60

 

General Counsel and Secretary

 

Feb. 2008 - Present

Bell

 

 

 

 

 

 

 

 

 

 

Senior Vice President, General Counsel and Secretary

 

Jan. 2004 – Jan. 2008

 

 

 

 

 

 

 

Larry L.
Berger

 

48

 

Chief Technical Officer and Senior Vice President-Research, Development & Engineering

 

Apr. 2008 – Present (1)

 

 

 

 

 

 

 

John J.

 

43

 

Vice President and Corporate Controller

 

Apr. 2008 – Present

Corkrean

 

 

 

 

 

 

 

 

 

 

Vice President and Treasurer

 

May 2006 – Mar. 2008

 

 

 

 

 

 

 

 

 

 

 

Professional Products Vice President Distributor Sales

 

Apr. 2005 – Apr. 2006

 

 

 

 

 

 

 

 

 

 

 

Professional Products Vice President and Controller

 

Jan. 2004 – Mar. 2005

 

 

 

 

 

 

 

Steven L.

 

54

 

Chief Financial Officer

 

Feb. 2008 – Present

Fritze

 

 

 

 

 

 

 

 

 

 

Executive Vice President and Chief Financial Officer

 

Feb. 2004 – Jan. 2008

 

 

 

 

 

 

 

 

 

 

 

Senior Vice President and Chief Financial Officer

 

Jan. 2004 – Jan. 2004

 

 

 

 

 

 

 

Robert K.

 

51

 

Senior Vice President – Global Supply Chain

 

Oct. 2005 – Present

Gifford

 

 

 

 

 

 

 

 

 

 

Vice President – Supply Chain Management

 

Sep. 2004 – Sep. 2005 (2)

 

 

 

 

 

 

 

Thomas W. Handley

 

54

 

President – Industrial and Services North America Sector

 

Dec. 2007 - Present

 

 

 

 

 

 

 

 

 

 

 

Executive Vice President – Industrial Sector

 

Apr. 2006 – Nov. 2007

 

 

 

 

 

 

 

 

 

 

 

Executive Vice President – Specialty Sector

 

Jan. 2004 – Mar. 2006

 

 

 

 

 

 

 

Michael A. Hickey

 

47

 

Senior Vice President – Global Business Development and General Manager GCS Service

 

Jan. 2009 - Present

 

 

 

 

 

 

 

 

 

 

 

Senior Vice President – Global Business Development

 

Jan. 2006 – Dec. 2008

 

 

 

 

 

 

 

 

 

 

 

Senior Vice President – Global / Corporate Accounts

 

Nov. 2005 – Dec. 2005