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Ecolab 10-Q 2005

Documents found in this filing:

  1. 10-Q
  2. Ex-15
  3. Ex-31
  4. Ex-32
  5. Ex-32

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

ý

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

 

 

For the quarterly period ended March 31, 2005

 

 

OR

 

 

o

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

 

For the transition period from                                to                                

 

Commission File No. 1-9328

 

ECOLAB INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

41-0231510

(State or other jurisdiction of
incorporation or organization)

 

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

 

 

 

370 Wabasha Street N., St. Paul, Minnesota 55102

(Address of principal executive offices)  (Zip Code)

 

 

 

651-293-2233

(Registrant’s telephone number, including area code)

 

 

 

(Not Applicable)

(Former name, former address and former fiscal year,
if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes   ý          No   o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes   ý          No   o

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of April 30, 2005.

 

255,384,521 shares of common stock, par value $1.00 per share.

 

 



 

TABLE OF CONTENTS

 

PART I

FINANCIAL INFORMATION

 

 

Item 1.  Financial Statements.

 

 

 

Consolidated Statement of Income

 

 

 

Consolidated Balance Sheet

 

 

 

Consolidated Statement of Cash Flows

 

 

 

Notes to Consolidated Financial Statements

 

 

 

 

1.

Consolidated Financial Information

 

 

 

 

2.

Stock-Based Compensation

 

 

 

 

3.

Selected Balance Sheet Information

 

 

 

 

4.

Financial Instruments

 

 

 

 

5.

Comprehensive Income

 

 

 

 

6.

Special Charges

 

 

 

 

7.

Business Acquisitions and Investments

 

 

 

 

8.

Net Income Per Common Share

 

 

 

 

9.

Pension and Postretirement Plans

 

 

 

 

10.

Operating Segments

 

 

 

 

11.

Goodwill and Other Intangible Assets

 

 

 

 

12.

New Accounting Pronouncements

 

 

 

 

 

Review Report of Independent Registered Public Accounting Firm

 

 

 

 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

 

 

Overview

 

 

 

Results of Operations – First Quarter Ended March 31, 2005

 

 

 

Financial Position and Liquidity

 

 

 

Subsequent Event

 

 

 

 

 

 

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

 

 

 

 

 

Item 4.  Controls and Procedures.

 

 

 

 

 

Forward-Looking Statements and Risk Factors

 

 

 

 

PART II

OTHER INFORMATION

 

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

 

 

 

 

 

Item 6.  Exhibits.

 

 



 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

ECOLAB INC.

CONSOLIDATED STATEMENT OF INCOME

 

 

 

First Quarter Ended
March 31

 

(amounts in thousands, except per share)

 

2005

 

2004

 

 

 

(unaudited)

 

 

 

 

 

Net sales

 

$

1,069,880

 

$

979,371

 

 

 

 

 

 

 

Cost of sales (including income from special charges of $50 in 2004)

 

526,556

 

474,094

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

416,955

 

385,333

 

 

 

 

 

 

 

Special charges

 

 

3,805

 

 

 

 

 

 

 

Operating income

 

126,369

 

116,139

 

 

 

 

 

 

 

Interest expense, net

 

11,190

 

11,173

 

 

 

 

 

 

 

Income before income taxes

 

115,179

 

104,966

 

 

 

 

 

 

 

Provision for income taxes

 

40,531

 

38,960

 

 

 

 

 

 

 

Net income

 

$

74,648

 

$

66,006

 

 

 

 

 

 

 

Basic net income per common share

 

$

0.29

 

$

0.26

 

 

 

 

 

 

 

Diluted net income per common share

 

$

0.29

 

$

0.25

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.0875

 

$

0.0800

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

256,272

 

257,025

 

Diluted

 

260,044

 

260,227

 

 

The accompanying notes are an integral part of the consolidated financial information.

 

2



 

ECOLAB INC.

CONSOLIDATED BALANCE SHEET

 

(amounts in thousands)

 

March 31
2005

 

December 31
2004

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

83,447

 

$

71,231

 

 

 

 

 

 

 

Accounts receivable, net

 

767,857

 

738,266

 

 

 

 

 

 

 

Inventories

 

345,921

 

338,603

 

 

 

 

 

 

 

Deferred income taxes

 

75,821

 

76,038

 

 

 

 

 

 

 

Other current assets

 

73,962

 

54,928

 

 

 

 

 

 

 

Total current assets

 

1,347,008

 

1,279,066

 

 

 

 

 

 

 

Property, plant and equipment, net

 

838,759

 

834,730

 

 

 

 

 

 

 

Goodwill

 

1,001,794

 

991,811

 

 

 

 

 

 

 

Other intangible assets, net

 

230,700

 

229,095

 

 

 

 

 

 

 

Other assets, net

 

380,073

 

381,472

 

 

 

 

 

 

 

Total assets

 

$

3,798,334

 

$

3,716,174

 

 

The accompanying notes are an integral part of the consolidated financial information.

 

3



 

ECOLAB INC.

CONSOLIDATED BALANCE SHEET (Continued)

 

(amounts in thousands, except per share)

 

March 31
2005

 

December 31
2004

 

 

 

(unaudited)

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

Short-term debt

 

$

276,282

 

$

56,132

 

 

 

 

 

 

 

Accounts payable

 

257,933

 

269,561

 

 

 

 

 

 

 

Compensation and benefits

 

182,014

 

231,856

 

 

 

 

 

 

 

Income taxes

 

36,349

 

22,709

 

 

 

 

 

 

 

Other current liabilities

 

362,324

 

359,289

 

 

 

 

 

 

 

Total current liabilities

 

1,114,902

 

939,547

 

 

 

 

 

 

 

Long-term debt

 

566,636

 

645,445

 

 

 

 

 

 

 

Postretirement health care and pension benefits

 

296,645

 

270,930

 

 

 

 

 

 

 

Other liabilities

 

288,570

 

297,733

 

 

 

 

 

 

 

Shareholders’ equity
(common stock, par value $1.00 per share; shares outstanding:

 

 

 

 

 

March 31, 2005 – 255,313; December 31, 2004 – 257,542)

 

1,531,581

 

1,562,519

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

3,798,334

 

$

3,716,174

 

 

The accompanying notes are an integral part of the consolidated financial information.

 

4



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

 

 

 

First Quarter Ended
March 31

 

(amounts in thousands)

 

2005

 

2004

 

 

 

(unaudited)

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

74,648

 

$

66,006

 

 

 

 

 

 

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

Depreciation

 

55,953

 

53,309

 

Amortization

 

9,088

 

7,977

 

Deferred income taxes

 

(1,590

)

1,822

 

Disposal loss

 

 

3,980

 

Other, net

 

37

 

(91

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(25,556

)

(4,341

)

Inventories

 

(7,715

)

(5,170

)

Other assets

 

(7,867

)

(19,146

)

Accounts payable

 

(12,451

)

(2,863

)

Other liabilities

 

(18,954

)

(10,940

)

 

 

 

 

 

 

Cash provided by operating activities

 

$

65,593

 

$

90,543

 

 

The accompanying notes are an integral part of the consolidated financial information.

 

5



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)

 

 

 

First Quarter Ended
March 31

 

(amounts in thousands)

 

2005

 

2004

 

 

 

(unaudited)

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

(58,156

)

$

(68,454

)

Property disposals

 

234

 

3,729

 

Capitalized software expenditures

 

(2,706

)

(701

)

Businesses acquired and investments in affiliates, net of cash acquired

 

(20,980

)

(118,250

)

Sale of businesses and assets

 

800

 

 

 

 

 

 

 

 

Cash used for investing activities

 

(80,808

)

(183,676

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net issuances of notes payable

 

145,046

 

96,754

 

Long-term debt borrowings

 

1,285

 

582

 

Long-term debt repayments

 

(1,582

)

(117

)

Reacquired shares

 

(118,569

)

(34,876

)

Cash dividends on common stock

 

(22,590

)

(20,596

)

Exercise of employee stock options

 

23,804

 

11,662

 

Other, net

 

 

(37

)

 

 

 

 

 

 

Cash provided by financing activities

 

27,394

 

53,372

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

37

 

457

 

 

 

 

 

 

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

12,216

 

(39,304

)

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

71,231

 

85,626

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

83,447

 

$

46,322

 

 

The accompanying notes are an integral part of the consolidated financial information.

 

6



 

ECOLAB INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. Consolidated Financial Information

 

The unaudited consolidated financial information for the first quarters ended March 31, 2005 and 2004, reflect, in the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows of Ecolab Inc. (“the company”) for the interim periods presented. The financial results for any interim period are not necessarily indicative of results for the full year. The consolidated balance sheet data as of December 31, 2004 were derived from the audited consolidated financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America.  The unaudited consolidated financial information should be read in conjunction with the consolidated financial statements and notes thereto incorporated in the company’s Annual Report on Form 10-K for the year ended December 31, 2004.

 

With respect to the unaudited financial information of the company for the first quarters ended March 31, 2005 and 2004 included in this Form 10-Q, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards, which do not require an audit, for a review of such information. Therefore, their separate report dated April 21, 2005 appearing herein, states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied.  PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 (the “Act”) for their report on the unaudited financial information because that report is not a report or a part of a registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.

 

2. Stock-Based Compensation

 

The company measures compensation cost for its stock incentive and option plans using the intrinsic value-based method of accounting.

 

Had the company used the fair value-based method of accounting to measure compensation expense for its stock incentive and option plans and charged compensation cost against income over the vesting periods, based on the fair value of options at the date of grant, net income and the related basic and diluted per common share amounts for the first quarters ended March 31, 2005 and 2004 would have been reduced to the pro forma amounts in the following table:

 

7



 

ECOLAB INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2. Stock-Based Compensation (continued)

 

 

 

First Quarter Ended
March 31

 

(amounts in thousands, except per share)

 

2005

 

2004

 

 

 

(unaudited)

 

 

 

 

 

Net income, as reported

 

$

74,648

 

$

66,006

 

 

 

 

 

 

 

Add: Stock-based employee compensation expense included in reported net income, net of tax

 

61

 

56

 

 

 

 

 

 

 

Deduct: Total stock-based employee compensation expense under fair value-based method, net of tax

 

(5,283

)

(4,791

)

 

 

 

 

 

 

Pro forma net income

 

$

69,426

 

$

61,271

 

 

 

 

 

 

 

Basic net income per common share

 

 

 

 

 

As reported

 

$

0.29

 

$

0.26

 

Pro forma

 

0.27

 

0.24

 

 

 

 

 

 

 

Diluted net income per common share

 

 

 

 

 

As reported

 

0.29

 

0.25

 

Pro forma

 

$

0.27

 

$

0.24

 

 

3. Selected Balance Sheet Information

 

(amounts in thousands)

 

March 31
2005

 

December 31
2004

 

 

 

(unaudited)

 

Inventories

 

 

 

 

 

Finished goods

 

$

179,412

 

$

167,787

 

Raw materials and parts

 

176,674

 

176,336

 

Excess of fifo cost over lifo cost

 

(10,165

)

(5,520

)

Total

 

$

345,921

 

$

338,603

 

 

 

 

 

 

 

Other intangible assets, net

 

 

 

 

 

Customer relationships

 

$

193,718

 

$

189,572

 

Intellectual property

 

41,030

 

38,130

 

Trademarks

 

63,329

 

62,874

 

Other intangibles

 

7,532

 

17,104

 

Total

 

305,609

 

307,680

 

Accumulated amortization

 

 

 

 

 

Customer relationships

 

(47,976

)

(43,798

)

Intellectual property

 

(8,315

)

(7,726

)

Trademarks

 

(13,715

)

(12,764

)

Other intangibles

 

(4,903

)

(14,297

)

Other intangible assets, net

 

$

230,700

 

$

229,095

 

 

8



 

ECOLAB INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3. Selected Balance Sheet Information (continued)

 

(amounts in thousands)

 

March 31
2005

 

December 31
2004

 

 

 

(unaudited)

 

Shareholders’ equity

 

 

 

 

 

Common stock

 

$

317,126

 

$

315,743

 

Additional paid-in capital

 

531,996

 

501,809

 

Retained earnings

 

1,638,165

 

1,585,957

 

Deferred compensation, net

 

(392

)

(414

)

Accumulated other comprehensive income

 

75,979

 

72,160

 

Treasury stock

 

(1,031,293

)

(912,736

)

Total

 

$

1,531,581

 

$

1,562,519

 

 

Accumulated other comprehensive income as of March 31, 2005 consists of $14.3 million of net unrealized losses on financial instruments and additional minimum pension liabilities as well as $90.3 million of cumulative translation income.  Accumulated other comprehensive income as of December 31, 2004 consists of $14.9 million of net unrealized losses on financial instruments and additional minimum pension liabilities as well as $87.1 million of cumulative translation income.

 

4. Financial Instruments

 

In February 2002, the company issued euro 300 million of 5.375 percent Euronotes, due February 2007. The company has designated this Euronote debt as a hedge of existing foreign currency exposures related to net investments the company has in certain European subsidiaries.  Accordingly, the transaction gains and losses on the portion of the Euronotes that are designated and are effective as hedges of the company’s net investments have been included as a component of the cumulative translation account.  Total transaction gains and losses related to the Euronotes charged to shareholders’ equity were gains of approximately $1.8 million and losses of approximately $14.6 million for the first quarter of 2005 and 2004, respectively.

 

9



 

ECOLAB INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

5. Comprehensive Income

 

Comprehensive income was as follows:

 

 

 

First Quarter Ended
March 31

 

(amounts in thousands)

 

2005

 

2004

 

 

 

(unaudited)

 

 

 

 

 

Net income

 

$

74,648

 

$

66,006

 

 

 

 

 

 

 

Foreign currency translation

 

3,232

 

24,008

 

 

 

 

 

 

 

Derivative instruments

 

586

 

254

 

 

 

 

 

 

 

Comprehensive income

 

$

78,466

 

$

90,268

 

 

6. Special Charges

 

In the first quarter of 2002, management approved plans to undertake restructuring and cost saving actions during 2002, including costs related to the integration of the company’s European operations.  These actions included global workforce reductions, facility closings, and product line discontinuations.  These actions were substantially completed by December 31, 2003.  Remaining amounts accrued at December 31, 2003 and through December 31, 2004 primarily represented contractual periodic payments to be made over time.  At December 31, 2004, the accrued restructuring liabilities were satisfied.

 

The first quarter of 2004 includes the reversal of $225,000 of previously accrued estimated severance and lease termination costs.  Of the $225,000 reversed for the first quarter of 2004, $50,000 is included as a component of cost of sales.

 

Also included in “Special Charges” in the first quarter of 2004 is a loss related to the disposal of the grease management product line of the Institutional division of the U.S. Cleaning & Sanitizing segment of $4.0 million ($2.4 million after tax).

 

Remaining restructuring liabilities of approximately $3,705,000 at March 31, 2004 are classified as a component of other current liabilities.

 

For segment reporting purposes, each of these items have been included in the company’s corporate segment, which is consistent with the company’s internal management reporting.

 

10



 

ECOLAB INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7. Business Acquisitions and Investments

 

In January 2005, the company acquired Associated Chemicals & Services, Inc. (aka Midland Research), a water treatment business.  Midland had annual sales of approximately $16 million and their operations became part of the company’s United States Cleaning & Sanitizing and International operations.

 

In February 2005, the company acquired YSC Chemical Company (YSC) based in Bangkok, Thailand.  YSC provides floor cleaning and finishing products in East Asia.  YSC had annual sales of approximately $3 million and their operations became part of the company’s International operations.

 

The total cash paid for acquisitions and investments in affiliates was $21.0 million and $118.3 million during the first quarter of 2005 and 2004, respectively.  Cash paid for acquisitions in 2004 included payments of restructuring costs related to the integration of the former Henkel-Ecolab European joint venture that were accrued in 2002.  The aggregate purchase price has been reduced for any cash or cash equivalents acquired with the acquisitions.  The allocation of the purchase price contains adjustments to preliminary allocations from prior periods, if any.

 

Based upon purchase price allocations, some of which may have components representing preliminary allocations with respect to recent acquisitions, the components of the aggregate purchase prices of the acquisitions made during the three months ended March 31, 2005 and 2004, and the allocation of the purchase prices, were as follows:

 

(unaudited)

 

 

 

 

 

(amounts in millions)

 

2005

 

2004

 

Net tangible assets acquired

 

$

3

 

$

(6

)

Identifiable intangible assets

 

7

 

42

 

Goodwill

 

11

 

82

 

Purchase price

 

$

21

 

$

118

 

 

The changes in the carrying amount of goodwill for each of the company’s reportable segments for the quarter ended March 31, 2005 were as follows:

 

 

 

United States

 

 

 

 

 

(unaudited)
(thousands)

 

Cleaning &
Sanitizing

 

Other
Services

 

Total

 

International

 

Consolidated

 

Balance as of December 31, 2004

 

$

177,213

 

$

48,929

 

$

226,142

 

$

765,669

 

$

991,811

 

Goodwill acquired during quarter

 

9,548

 

 

9,548

 

1,244

 

10,792

 

Goodwill related to dispositions

 

 

 

 

(376

)

(376

)

Foreign currency translation

 

 

 

 

(433

)

(433

)

Balance as of March 31, 2005

 

$

186,761

 

$

48,929

 

$

235,690

 

$

766,104

 

$

1,001,794

 

 

Goodwill acquired in 2005 also includes adjustments to prior year acquisitions.  Goodwill disposed of in 2005 relates to the sale of a small business in Europe.

 

11



 

ECOLAB INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7. Business Acquisitions and Investments (continued)

 

Operations of the acquired companies have been included in the operations of the company since the date of the respective acquisition.  The purchase prices have been allocated to assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition.  These acquisitions individually and in the aggregate are not material to the company’s operations.

 

In April 2005, the company expanded its European food and beverage hygiene business through the purchase of certain operations of Kilco Chemicals Ltd. Based near Belfast, Northern Ireland, Kilco offers products, systems and services for the food and beverage processing industry.  Kilco had sales of approximately $5 million annually, and these operations will become part of the company’s International operations.

 

8. Net Income Per Common Share

 

The computations of the basic and diluted net income per share amounts were as follows:

 

 

 

First Quarter Ended
March 31

 

(amounts in thousands, except per share)

 

2005

 

2004

 

 

 

(unaudited)

 

 

 

 

 

Net income

 

$

74,648

 

$

66,006

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

256,272

 

257,025

 

Effect of dilutive stock options and awards

 

3,772

 

3,202

 

Diluted

 

260,044

 

260,227

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

Basic

 

$

0.29

 

$

0.26

 

Diluted

 

$

0.29

 

$

0.25

 

 

Stock options to purchase approximately 4.2 million and 4.7 million shares for the first quarters ended March 31, 2005 and 2004, respectively, were anti-dilutive and, therefore, were not included in the computation of diluted common shares outstanding.

 

12



 

ECOLAB INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

9. Pension and Postretirement Plans

 

The components of net periodic pension and postretirement healthcare benefit costs for the first quarter are as follows:

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

 

 

 

 

 

International

 

Postretirement Health

 

(unaudited)

 

U.S. Pension Benefits

 

Pension Benefits

 

Care Benefits

 

(amounts in thousands)

 

2005

 

2004

 

2005

 

2004

 

2005

 

2004

 

Service cost

 

$

9,737

 

$

7,863

 

$

3,379

 

$

3,356

 

$

771

 

$

799

 

Interest cost on benefit obligation

 

9,467

 

8,548

 

4,783

 

4,519

 

2,215

 

2,368

 

Expected return on plan assets

 

(13,279

)

(12,540

)

(3,011

)

(2,784

)

(443

)

(465

)

Amortization of prior service cost (benefit)

 

385

 

434

 

(1

)

30

 

(1,415

)

(1,424

)

Amortization of unrecognized transition (asset)/obligation

 

(176

)

(351

)

88

 

89

 

 

 

Recognition of net actuarial loss

 

2,507

 

1,380

 

442

 

464

 

1,434

 

1,737

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total expense

 

$

8,641

 

$

5,334

 

$

5,680

 

$

5,674

 

$

2,562

 

$

3,015

 

 

The company previously disclosed in its financial statements for the year ended December 31, 2004, that it was not required to make any contributions to the U.S. pension plan and postretirement healthcare benefit plans in 2005.  During the first quarter ended March 31, 2005, no contributions were made to those plans. The company is not required to make any contributions to the U.S. pension plan and postretirement healthcare benefit plans for the remainder of 2005.  The maximum tax deductible contribution for 2005 is $45 million for the U.S. pension plan.

 

Certain international pension benefit plans are required to be funded in accordance with local government requirements.  The company contributed $4.3 million to its international pension benefit plans during the quarter ended March 31, 2005.  The company estimates that it will contribute approximately $13 million to the international pension benefit plans during the remainder of 2005.

 

10. Operating Segments

 

Financial information for each of the company’s reportable segments is as follows:

 

 

 

First Quarter Ended

 

 

 

March 31

 

(amounts in thousands)

 

2005

 

2004

 

 

 

(unaudited)

 

 

 

 

 

Net Sales

 

 

 

 

 

United States

 

 

 

 

 

Cleaning & Sanitizing

 

$

467,179

 

$

430,734

 

Other Services

 

85,810

 

77,775

 

Total

 

552,989

 

508,509

 

International

 

505,034

 

483,807

 

Effect of foreign currency translation

 

11,857

 

(12,945

)

Consolidated

 

$

1,069,880

 

$

979,371

 

 

13



 

ECOLAB INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

10. Operating Segments (continued)

 

 

 

First Quarter Ended

 

 

 

March 31

 

(amounts in thousands)

 

2005

 

2004

 

 

 

(unaudited)

 

Operating Income

 

 

 

 

 

United States

 

 

 

 

 

Cleaning & Sanitizing

 

$

76,444

 

$

77,290

 

Other Services

 

8,471

 

5,198

 

Total

 

84,915

 

82,488

 

International

 

40,009

 

38,513

 

Corporate expense

 

 

(3,755

)

Effect of foreign currency translation

 

1,445

 

(1,107

)

Consolidated

 

$

126,369

 

$

116,139

 

 

The International amounts included above are based on translation into U.S. dollars at the fixed currency exchange rates used by management for 2005.

 

Corporate operating expense in the first quarter ended March 31, 2004 includes income from reductions in restructuring accruals of $0.2 million.  Corporate expense for the first quarter ended March 31, 2004 also includes a charge of $4.0 million related to the disposal of the grease management product line.

 

11. Goodwill and Other Intangible Assets

 

Under Statement of Financial Accounting Standards (SFAS) No. 142, goodwill must be tested annually for impairment.  The company performs its annual goodwill impairment test during the second quarter.  If circumstances change significantly within a reporting unit, the company would test it for impairment prior to the annual test for impairment.

 

Goodwill and other intangible assets arise principally from business acquisitions.  Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired.  Other intangible assets include primarily customer relationships, trademarks, patents and other technology. Other intangible assets are amortized on a straight-line basis over their estimated economic lives.  The weighted-average useful life of other intangible assets was 13 and 14 years as of March 31, 2005 and 2004, respectively.

 

The straight-line method of amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits obtained by the company in each reporting period.  Total amortization expense related to other intangible assets during the first quarter ended March 31, 2005 and 2004 was approximately $6.0 million and $5.4 million, respectively.  As of March 31, 2005, future estimated amortization expense related to amortizable other identifiable intangible assets will be:

 

14



 

ECOLAB INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

11. Goodwill and Other Intangible Assets (continued)

 

(unaudited)

 

 

 

(amounts in thousands)

 

 

 

2005 (Remainder: nine-month period)

 

$

18,962

 

2006

 

24,389

 

2007

 

24,031

 

2008

 

23,810

 

2009

 

22,317

 

 

12. New Accounting Pronouncements

 

In December 2004, the FASB issued SFAS No. 123 (Revised 2004) Share-Based Payments (“SFAS No. 123R”).  The Securities and Exchange Commission (SEC) staff issued in March 2005 Staff Accounting Bulletin No. 107 (SAB 107) to assist preparers by simplifying some of the implementation challenges of FAS 123R while enhancing the information investors receive.  SFAS No. 123R addresses all forms of share-based payment awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights.  SFAS No. 123R will require the company to expense share-based payment awards with compensation cost measured at the fair value of the award.  Based on recent guidance issued by the SEC, SFAS No. 123R requires the company to adopt the new accounting provisions beginning in the first quarter of 2006.  The company expects to restate prior period results as part of its transition to the new standard in line with the pro forma amounts historically shown in the notes to consolidated financial statements.

 

In December 2004, the FASB issued an FSP titled “Application of FASB Statement No. 109, Accounting for Income Taxes (SFAS No. 109), the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” (the “Act”) (FSP 109-1).  Under the guidance in FSP 109-1, the deduction received under the provisions of the Act will be treated as a “special deduction” as described in SFAS No. 109.  As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date.  Rather, the impact of this deduction will be reported in the period in which the deduction is claimed on the company’s tax return.  The company began including the modest benefits from this deduction in tax expense beginning in 2005.

 

In December 2004, the FASB issued an FSP titled “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (FSP 109-2).  FSP 109-2 allows the company time beyond the fourth quarter of 2004, the period of enactment, to evaluate the effect of the Act on its plans for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109.  The Act includes a deduction for 85 percent of certain foreign earnings that are repatriated, as defined in the Act, at an effective tax cost of 5.25 percent on any such repatriated foreign earnings.  Companies may elect to apply this provision to qualifying earnings repatriations in 2005.  The company has begun an evaluation of the effects of the repatriation provisions; however, the company does not expect to be able to complete this evaluation until Congress or the Treasury Department provides additional clarifying language on key elements of the provision.  The company expects to complete its evaluation of the effects of the repatriation provision within a reasonable period of time following the publication of the additional clarifying language.

 

15



 

REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and Directors
Ecolab Inc.

 

We have reviewed the accompanying consolidated balance sheet of Ecolab Inc. as of March 31, 2005, and the related consolidated statements of income and of cash flows for the three-month periods ended March 31, 2005 and 2004. These financial statements are the responsibility of the Company’s management.

 

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

 

Based on our reviews, we are not aware of any material modifications that should be made to the interim consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

 

We have previously audited, in accordance with standards of the Public Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2004, and the related consolidated statements of income, of comprehensive income and changes in shareholders’ equity, and of cash flows for the year then ended, management’s assessment of the effectives of the company’s internal control over financial reporting as of December 31, 2004 and the effectiveness of the company’s internal control over financial reporting as of December 31, 2004; and in our report dated February 24, 2005, we expressed unqualified opinions thereon (our opinion contained an explanatory paragraph stating the company changed the manner in which it accounts for goodwill and other intangible assets as of January 1, 2002).  The consolidated financial statements and management’s assessment of the effectiveness of internal control over financial reporting referred to above are not presented herein.  In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2004, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

 

/s/ PricewaterhouseCoopers LLP

 

PRICEWATERHOUSECOOPERS LLP

 

 

Minneapolis, Minnesota
April 21, 2005

 

16



 

ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis provides information that we believe is useful in understanding our operating results, cash flows and financial condition.  The discussion should be read in conjunction with the unaudited consolidated financial information and related notes included in this Form 10-Q.

 

The following discussion contains various “Forward-Looking Statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We refer readers to the statement entitled “Forward-Looking Statements and Risk Factors” located at the end of Part I of this report.  Additional risk factors may be described from time to time in our filings with the Securities and Exchange Commission.

 

Overview for the Quarter Ended March 31, 2005

The first quarter of 2005 provided another quarter of sales and operating income growth causing diluted net income per share to rise 16 percent to $0.29 per share.  The strong earnings performance leveraged continued growth in domestic and international businesses as well as favorable currency translation and lower income tax rates.

 

Operating Performance

                  Sales of our United States Cleaning & Sanitizing operations rose 8 percent to $467 million in the first quarter of 2005, showing an increase in sales in all divisions.  Kay sales were up 20 percent and Food & Beverage, including the acquired Alcide business, had sales growth of 13 percent over the first quarter of 2004.  Institutional showed steady sales growth over last year.

                  First quarter sales for our United States Other Services operations increased 10 percent to $86 million.  Both Pest Elimination, with sales growth of 12 percent, and GCS, with sales growth of 8 percent, contributed to the strong overall sales increase.

                  Sales of our International operations rose 4 percent to $505 million in the first quarter when measured in fixed currency rates.  Asia Pacific, Latin America and Canada all showed good sales growth while sales in Europe grew modestly.  At public currency rates, International sales increased 10 percent.

                  Operating income for U.S. Cleaning & Sanitizing was negatively impacted in the first quarter of 2005 by rising raw material costs.  Our raw material cost contracts and arrangements tended to post cost increases early in 2005. The company has implemented selling price increases and will continue to pursue increases as customer contracts renew during the year.

 

17



 

ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Financial Performance

                  Cash provided by operating activities for the first quarter of $66 million helped us to repurchase 3.6 million shares, make acquisitions and meet our ongoing obligations and commitments.

                  Currency translation continued to have a positive impact on our income growth during the first quarter, adding approximately $1.5 million to net income compared with the first quarter 2004 benefit of $2.6 million.

                  An improvement in our income tax rate from 37.1 percent in the first quarter of 2004 to 35.2 percent in 2005 added approximately $2.1 million to net income.  The first quarter 2005 had one-time items including a deduction for product contributed to the tsunami relief efforts and a tax credit for a state settlement.

                  Diluted net income per share was $0.29 for the first quarter of 2005, up 16 percent from $0.25 in the comparable period of 2004.  Earnings for the first quarter of 2004 included an after-tax charge of $2.4 million related to the disposal of a grease management product line.

 

Results of Operations - First Quarter Ended March 31, 2005

 

Consolidated net sales for the first quarter ended March 31, 2005 were $1.070 billion, an increase of 9 percent over net sales of $979 million in the first quarter of last year.  Excluding acquisitions and divestitures, consolidated net sales increased 8 percent in the first quarter.  Changes in currency translation positively impacted sales growth by approximately 2.6 percentage points for the first quarter.  Sales benefited from customer gains, additional sales to existing customers and investments in new products and the sales and service force.

 

The gross profit margin (defined as the difference between net sales less cost of sales divided by net sales) was 50.8 percent and 51.6 percent of net sales for the first quarter ended March 31, 2005 and 2004, respectively.  The decrease reflects higher delivered product costs and a less favorable business mix which were partially offset by selling price increases and cost savings.

 

Selling, general and administrative expenses were 39.0 percent and 39.3 percent of consolidated net sales for the first quarter of 2005 and 2004, respectively.  Selling, general and administrative expenses as a percent of sales improved primarily due to sales leverage and aggressive cost savings programs which offset business investments.

 

Net income totaled $75 million, for the first quarter of 2005 and $66 million for the comparable period of 2004.  On a per share basis, diluted net income per common share was $0.29 for the first quarter of 2005 and increased 16 percent over diluted net income per share of $0.25 in the first quarter of 2004.  Net income for the first quarter of 2004 included an after-tax charge of $2.4 million related to the disposal of the grease management product line.  Currency translation positively impacted net income growth by approximately $1.5 million for the first quarter of 2005 compared to last year’s first quarter benefit of $2.6 million.  The comparison of net income also benefited from a lower income tax rate in 2005 of 35.2 percent versus an income tax rate of 37.1 percent in the first quarter of 2004.

 

18



 

ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Results of Operations - First Quarter Ended March 31, 2005 (continued)

 

Sales for each of our reportable segments for the quarters ended March 31, 2005 and 2004 are as follows:

 

 

 

First Quarter Ended

 

 

 

March 31

 

(amounts in thousands)

 

2005

 

2004

 

 

 

(unaudited)

 

Net Sales

 

 

 

 

 

United States

 

 

 

 

 

Cleaning & Sanitizing

 

$

467,179

 

$

430,734

 

Other Services

 

85,810

 

77,775

 

Total

 

552,989

 

508,509

 

International

 

505,034

 

483,807

 

Effect of foreign currency translation

 

11,857

 

(12,945

)

Consolidated

 

$

1,069,880

 

$

979,371

 

 

The following table shows the increase or growth in sales for the first quarter ended March 31, 2005 over the first quarter of 2004 by operating segment:

 

 

 

Percent Change

 

 

 

First Quarter

 

Net Sales

 

 

 

United States Cleaning & Sanitizing

 

 

 

Institutional

 

4

%

Kay

 

20

 

Textile Care

 

10

 

Professional Products

 

11

 

Healthcare

 

14

 

Water Care Services

 

33

 

Vehicle Care

 

14

 

Food & Beverage

 

13

 

Total United States Cleaning & Sanitizing

 

8

%

United States Other Services

 

 

 

Pest Elimination

 

12

%

GCS Service

 

8

 

Total United States Other Services

 

10

%

Total United States

 

9

%

International

 

 

 

Europe

 

2

%

Asia Pacific

 

7

 

Latin America

 

15

 

Canada

 

9

 

Total International

 

4

%

Consolidated (management rates)

 

7

%

Consolidated (public rates)

 

9

%

 

19



 

ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Results of Operations - First Quarter Ended March 31, 2005 (continued)

 

Sales of our United States Cleaning & Sanitizing operations were $467 million, an increase of 8 percent compared with sales of $431 million in the first quarter of last year.  Excluding acquisitions and divestitures, sales increased 7 percent.  Sales benefited from double-digit growth in Kay and Food & Beverage as well as improving trends in Institutional.  All divisions within U.S. Cleaning & Sanitizing showed sales increases in the first quarter of 2005 when compared to the same period in 2004.  The increase in sales of our Institutional division reflects good growth in end market segments and the successful introduction of new products and program initiatives.  The hospitality and foodservice end markets continue to show good growth as well.  Excluding the acquisition of Daydots and the disposition of a grease management product line, sales growth for Institutional was 5 percent.  Kay’s sales increase reflects solid growth for the quarter in sales to quickservice restaurants as well as new account growth, better account penetration, more effective field sales coverage and new products and programs.  Textile Care sales increased in the first quarter of 2005 due to corporate account gains made in early 2004 as well as improved account retention.  Sales of our Professional Products operations increased due to strong growth in the corporate account and distributor segments.  Excluding acquisitions, Professional Product sales increased 7 percent.  Our Healthcare division reported a strong sales increase versus last year due to good sales of instrument care solids and waterless skincare products.  Our Food & Beverage operations reported a sales increase due to gains in the dairy, food, soft drink, brewery and agri markets primarily due to increased sales at existing customers.  Excluding acquisitions, Food & Beverage sales increased 3 percent.  Water Care Services had strong growth in sales to the food & beverage market which is being driven by emphasizing our Circle the Customer strategy.  Excluding the acquisition of Midland, Water Care Services sales rose 6 percent.  Vehicle Care sales increased primarily due to corporate account gains made in 2004 and improved end market conditions.

 

Sales of our United States Other Services operations totaled $86 million for the first quarter of 2005, an increase of 10 percent over net sales of $78 million in the first quarter of last year.  Pest Elimination sales increased with strong growth in core pest elimination contract services, double-digit sales growth in non-contract services, driven primarily by increases in one-shot services and termite work, and strong growth in its food safety audit business.  GCS Service sales showed a good increase over last year as both direct part sales and service and installed parts sales were higher than last year.  This sales increase was due to improved customer service satisfaction and increased technician productivity.

 

20



 

ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Results of Operations - First Quarter Ended March 31, 2005 (continued)

 

Management rate sales for our International operations were $505 million for the first quarter of 2005, an increase of 4 percent over sales of $484 million in the comparable quarter of last year.  Excluding the effects of acquisitions and divestitures, sales in our International operations increased 3 percent at management rates for the first quarter.  Sales in Europe, excluding acquisitions and divestitures, were flat for the first quarter of 2005.  Solid sales gains in eastern, northern and western Europe from new customers and new products were offset by consumption declines in central Europe.  Sales for Asia Pacific increased 8 percent for the first quarter of 2005 when adjusted for acquisitions and divestitures, led by strong sales growth in Japan and East Asia.  Excluding acquisitions, Latin America sales increased 14 percent for the quarter.  Sales were strong throughout the region with double-digit increases in Mexico, Argentina, Chile and Central America.  Sales in Canada increased 8 percent excluding acquisitions due to good results in all divisions.

 

Operating income for each of our reportable segments for the quarters ended March 31, 2005 and 2004 are as follows:

 

 

 

First Quarter Ended

 

 

 

March 31

 

(amounts in thousands)

 

2005

 

2004

 

 

 

(unaudited)

 

Operating Income

 

 

 

 

 

United States

 

 

 

 

 

Cleaning & Sanitizing

 

$

76,444

 

$

77,290

 

Other Services

 

8,471

 

5,198

 

Total

 

84,915

 

82,488

 

International

 

40,009

 

38,513

 

Corporate expense

 

 

(3,755

)

Effect of foreign currency translation

 

1,445

 

(1,107

)

Consolidated

 

$

126,369

 

$

116,139

 

 

Operating income of our United States Cleaning & Sanitizing operations decreased 1 percent from operating income in the first quarter of 2004.  Excluding acquisitions and divestitures, operating income decreased 3 percent in the first quarter.  The operating income margin for the U.S. Cleaning & Sanitizing segment decreased to 16.4 percent of net sales from 17.9 percent in the first quarter of last year.  Excluding acquisitions and divestitures, the operating income margin for 2005 was 16.7 percent of net sales as compared to 18.3 percent in the first quarter of last year.  The decrease in our operating income margin reflects the benefits of the higher sales, cost efficiencies and increased pricing being more than offset by higher delivered product costs, higher pension costs and a less favorable business mix.

 

21



 

ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Results of Operations - First Quarter Ended March 31, 2005 (continued)

 

First quarter 2005 operating income of our United States Other Services operations increased 63 percent over the first quarter of 2004. The operating income margin for United States Other Services increased to 9.9 percent of net sales from 6.7 percent for the first quarter of last year.  Other Services benefited from a $0.5 million and $1.5 million patent settlement in the first quarter of 2005 and 2004, respectively.  The improvement in operating income reflects the benefits of the higher sales volume and improved efficiency in operations.

 

Operating income of our International operations increased 4 percent for the first quarter of 2005 at management rates.  Excluding acquisitions and divestitures, operating income increased 1 percent over the comparable quarter of last year.  The reported operating income margin was 7.9 percent and 8.0 percent for the first quarter ended March 31, 2005 and 2004, respectively.  Excluding acquisitions and divestitures, the operating income margin for International decreased in the first quarter of 2005 to 7.8 percent of net sales from 8.0 percent in the first quarter of last year.  International operating income was favorably impacted by sales growth, pricing initiatives and cost efficiencies which were partially offset by higher delivered product costs and a less favorable business mix.

 

Corporate operating expense of $3.8 million for the quarter ended March 31, 2004 includes a charge of $4.0 million related to the disposal of the grease management product line offset by a reduction in restructuring accruals of $0.2 million.

 

Net interest expense totaled $11.2 million in both the first quarter of 2005 and 2004.  An increase in our U.S. interest expense due to higher commercial paper borrowings was offset by a decrease in our International interest expense as we refinanced our Australian commercial paper at the end of 2004.

 

The provision for income taxes for the first quarter of 2005 reflected an income tax rate of 35.2 percent as compared to an income tax rate of 37.1 percent for 2004.  Excluding one-time benefits, the estimated effective income tax rate for the first quarter 2005 was 36.2 percent.  The reduction in the 2005 effective tax rate is due to expected benefits provided for production activities under the American Jobs Creation Act, tax savings efforts, lower international rates and one-time benefits recorded in the first quarter of 2005.

 

Financial Position and Liquidity

 

Total assets were $3.798 billion at March 31, 2005, an increase of $82 million, or 2 percent, over total assets at year-end 2004.  A portion of this increase is due to trade accounts receivable being up $29.6 million from year-end 2004 primarily due to an increase in days sales outstanding since year-end 2004 which was caused by sales patterns, the timing of customer payments and a shift in geographic mix. We believe this increase is temporary and not indicative of a permanent deterioration in our receivables.  Also, approximately $25 million of assets were acquired in the first quarter through the acquisition of Midland Research and YSC Chemical Company.  The exchange value of currency had a minor impact on the change in assets.

 

22



 

ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Financial Position and Liquidity (continued)

 

Total debt was $843 million at March 31, 2005, up from total debt of $702 million at year-end 2004, primarily related to the planned repurchase of 3.6 million shares ($119 million) and the financing of acquisitions.  The ratio of total debt to capitalization was 35 percent at March 31, 2005 compared to 31 percent at December 31, 2004 due to an increase in total debt outstanding.  We are in compliance with all of our debt covenants and believe we have ample borrowing capacity to meet our reasonably foreseeable operating needs.

 

Cash provided by operating activities totaled $66 million and $91 million, for the first quarter of 2005 and 2004, respectively.  Operating cash flows for 2005 decreased over 2004 primarily due to the increase in accounts receivable in the first quarter of 2005 due to the higher sales volume and timing of customer payments.  Operating cash flow for the first quarter of 2005 was also lower due to increased payments for bonuses in the first quarter of 2005 over 2004 and timing of accounts payable payments.

 

We currently expect to fund all of the requirements which are reasonably foreseeable for the remainder of 2005, including new program investments, scheduled debt repayments, dividend payments, possible acquisitions and share repurchases from operating activities, cash reserves and short-term borrowings.  In the event of a significant acquisition or other significant funding need, funding may occur through additional long-term borrowing.

 

Subsequent Event

 

In April 2005, we expanded our European food and beverage hygiene business through the purchase of certain operations of Kilco Chemicals Ltd.  Based near Belfast, Northern Ireland, Kilco offers products, systems and services for the food and beverage processing industry.  Sales are approximately $5 million annually, and these operations will become part of our International operations.

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

 

We primarily use interest rate swaps and foreign currency forward contracts and foreign currency debt to manage risks generally associated with interest rate and foreign exchange rate volatility and net investments in our foreign operations.  To the extent applicable, all derivative instruments are designated and effective as hedges, in accordance with accounting principles generally accepted in the United States of America.  We do not hold derivative financial instruments of a speculative nature.  For a more detailed discussion of derivative instruments, refer to the notes to consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2004.

 

23



 

ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Item 4.  Controls and Procedures.

 

As of March 31, 2005, we carried out an evaluation, under the supervision and with the participation of our management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.  Based upon that evaluation, our President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

 

During the period January 1 through March 31, 2005, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Forward-Looking Statements and Risk Factors

 

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements.  In this report on Form 10-Q, management discusses expectations regarding future performance of the company which include improving business trends, expected strategic investments in the business, our international pension plans, favorable liquidity, and similar business and financial matters.  Without limiting the foregoing, words or phrases such as “will likely result,” “are expected to,” “will continue,” “is anticipated,” “we believe,” “estimate,” “project” (including the negative or variations thereof) or similar terminology, generally identify forward-looking statements.  Additionally, the company may refer to this section of the Form 10-Q to identify risk factors related to other forward looking statements made in oral presentations including telephone conferences and/or webcasts available to the public.

 

Forward-looking statements represent challenging goals for the company. As such, they are based on certain assumptions and estimates and are subject to certain risks and uncertainties.  The company cautions that undo reliance should not be placed on such forward-looking statements, which speak only as of the date made.  In order to comply with the terms of the safe harbor, the company hereby identifies important factors, which could affect the company’s financial performance and could cause the company’s actual results for future periods to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. These factors should be considered, together with any similar risk factors or other cautionary language, which may be made in the section of this report containing the forward-looking statement.

 

24



 

ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements and Risk Factors (continued)

 

Risks and uncertainties that may affect operating results and business performance include:

                  the vitality of the foodservice, hospitality, travel, health care and food processing industries;

                  restraints on pricing flexibility due to competitive factors and customer or vendor consolidations, and existing contractual obligations;

                  changes in oil or raw material prices or unavailability of adequate and reasonably priced raw materials or substitutes therefor;

                  the occurrence of capacity constraints or the loss of a key supplier or the inability to obtain or renew supply agreements on favorable terms;

                  the effect of future acquisitions or divestitures or other corporate transactions;

                  our ability to achieve plans for past acquisitions;

                  the costs and effects of complying with: (i) laws and regulations relating to the environment and to the manufacture, storage, distribution, efficacy and labeling of our products and (ii) changes in tax, fiscal, governmental and other regulatory policies;

                  economic factors such as the worldwide economy, interest rates and currency movements, including, in particular, our exposure to foreign currency risk;

                  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;

                  loss of, or changes in, executive management;

                  our ability to continue product introductions or reformulations and technological innovations; and

                  other uncertainties or risks reported from time to time in our reports to the Securities and Exchange Commission.

 

In addition, we note that our stock price can be affected by fluctuations in quarterly earnings. There can be no assurances that our earnings levels will meet investors’ expectations.  We undertake no duty to update our Forward-Looking Statements.

 

25



 

PART II.  OTHER INFORMATION

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

 

(c)  Issuer Purchases of Equity Securities

 

Period

 

(a)
Total
number of
shares
purchased

 

(b)
Average
price paid
per share(1)

 

(c)
Number of
shares
purchased
as part of
publicly
announced
plans or
programs(2)

 

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

 

January 1-31, 2005

 

816,178

 

$

33.8116

 

814,500

 

14,961,200

 

February 1-28, 2005

 

1,175,949

 

$

32.4196

 

1,169,200

 

13,792,000

 

March 1-31, 2005

 

1,622,821

 

$

32.5660

 

1,600,000

 

12,192,000

 

Total

 

3,614,948

 

$

32.7996

 

3,583,700

 

12,192,000

 

 


(1)          Includes brokerage commissions paid, plus the value of 31,248 shares reacquired from employees and/or directors either as swaps for the cost of stock options or shares surrendered to satisfy minimum statutory tax obligations, under our stock incentive plans.

 

(2)          On October 17, 2003 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.  On December 9, 2004, our Board of Directors authorized the repurchase of up to 10,000,000 additional shares of Common Stock, including shares to be repurchased under Rule 10b5-1.  We intend to repurchase all shares under such authorization, for which no expiration date has been established, in open market or privately negotiated transactions, subject to market conditions.

 

Item 6.    Exhibits.

 

(a)                                  The following documents are filed as exhibits to this report:

 

(15)                                                                Letter regarding unaudited interim financial information.

 

(31)                                                                Rule 13a – 14(a) Certifications.

 

(32)                                                                Section 1350 Certifications.

 

26



 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

ECOLAB INC.

 

 

 

 

 

 

Date: May 6, 2005

By:

/s/ Daniel J. Schmechel

 

 

 

Daniel J. Schmechel

 

 

Vice President and Controller

 

 

(duly authorized Officer and

 

 

Chief Accounting Officer)

 

27



 

EXHIBIT INDEX

 

Exhibit
No.

 

Document

 

Method of Filing

 

 

 

 

 

(15)

 

Letter regarding unaudited interim financial information.

 

Filed herewith electronically

 

 

 

 

 

(31)

 

Rule 13a-14(a) Certifications.

 

Filed herewith electronically

 

 

 

 

 

(32)

 

Section 1350 Certifications.

 

Filed herewith electronically

 

28


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